William Holahan 113pc

William Holahan

William Holahan's activity stream


  • published CULT BELIEF VERSUS ECONOMIC FACT in Econ4Voters 2024-05-07 16:23:08 -0500

    CULT BELIEF VERSUS ECONOMIC FACT

              Many   prominent Republican party members have  made  vicious statements about how unfit -- even dangerous -- Trump would be if re-elected. Then they flip to say they will vote for him!    

             Case in point: Bill Barr, one of the Attorneys General during Trump's presidential term, resigned rather than support Trump's assertions that the 2020 election was stolen. In fact, he has testified under oath that before resigning he had told Trump that his assertion of voter fraud was "bullshit."  More recently, Barr has asserted that Trump is a "consummate narcissist," and that voting for Trump in 2024 is "like playing Russian Roulette;" that Trump would return chaos to the White House; it would be a "horror show." 

             Still, he claims he would vote for the "republican ticket" in 2024. Why? To avoid the "Progressive Agenda."   

    The Reigning Flip-flop Champ: Chris Sununu

              But, high atop this year's flip/flop leaderboard  is New Hampshire Governor Chris Sununu who chose to flip on national television when he appeared  on the ABC Sunday show This Week, with George Stephanopoulos.  Stephanopoulos summarized  a long list of  past statements that Sununu had made to describe Trump as  unfit for office:  he has been continually lying about the election;  he is incapable of a coherent thought once he looks  away from the teleprompter;  he took classified  government documents and would not return them when ordered to do so; he was convicted of business fraud in the State of New York; played a major role in calling for the insurrection of January 6th, 2021;  and refused to call   off that insurrection when lives of members of Congress were in danger and his own vice president was being threatened with hanging.

               Sununu agreed with Stephanopoulos that he had made this incredibly damning list of statements but nonetheless would vote for Trump.  What would motivate such a prominent individual to hold such contradictory positions?

     Personal Incentives to Flip

              In addition to a strong incentive to maintain opportunities within the party, as well as social connections with colleagues, at clubs, and at dinner-party circuits, there are monetary rewards to flip-flopping.  This is no accident; the plan to discourage strays and to welcome back those who repent is spelled out well in the Powell Memo of 1971, written by Virginia business attorney Lewis Powell (https://scholarlycommons.law.wlu.edu/powellmemo/1/).  (Powell was later appointed by President Nixon to the US Supreme Court.)   

             The Powell memo laid out a strategy to maintain the party loyalty of prominent republican office holders long after the end of their terms.  The plan includes a continuance of financial and prestigious rewards, including  paid positions on boards of corporations and think tanks, endowed positions on  university faculties and think tanks, lucrative speaking fees offered by conservative  speakers bureaus and book deals with conservative publishing companies, ghost-co-authored to reduce the burden of writing.  This array of awards awaits the flip-flopper; the alternative is oblivion back in the home district running the aluminum siding company.   The plan was to harness the interests of the donor class; the money they save through lower taxes and less regulation of businesses greatly outweighs the cost to them of financing the Powell plan.  

     How to explain to the public

             Of course, it is best not to state in public the personal rewards of  flipping; better to pretend it’s for the good of the nation!   Accordingly, this preference for the "Republican ticket" and against the "progressive agenda"  exploits the long-held common misconception that the economy performs better when a Republican, rather than a Democrat, holds the White House/administrative branch.  

                As if on cue, a new paper (April 2, 2024) is circulating by Josh Bivens, the chief economist at the Economic Policy Institute.  Bivens has undertaken the huge task of assembling government data on the economic performance, using standard categories of comparison, for each administration going back to 'Give'em Hell Harry.' 

             In the summary of the paper, Economic performance is stronger when Democrats hold the White House (https://www.epi.org/publication/econ-performance-pres-admin/), Bivens states: "The economy performs much better during Democratic presidential administrations than during Republican ones.  

     Since 1949, there has been a Democratic advantage in the average performance of key macroeconomic indicators measuring economic health, including: Gross Domestic Product (GDP) growth; Job growth; Unemployment rate; Growth in inflation-adjusted wages; Growth of market-based incomes per capita; Inflation; Interest rates. This Democratic advantage is across the board in all variables we measure but strongest in private-sector outcomes—notably, business investment, job growth, and the growth of market-based incomes."

             Bivens anticipates a complaint:   inclusion of data all the way back to Harry Truman's first elected term in 1949 would dilute the data from the purported dynamism of the Reagan Revolution. The Gospel according to Reaganomics is that those policies  produced economic performance superior to both prior Democratic and Republican administrations. Therefore, Bivens provides  a second pair of charts which differs from the first by omitting the years 1949 - 1980, i.e., omitting the data from Republicans Eisenhower, Nixon, Ford, as well as Democrats Kennedy, Johnson, and Carter.  (See all four charts in the Appendix below.)

             The incredible result is that for both pairs of charts the economic performance in each category is superior for Democrats as compared to  Republicans.  Household income growth (adjusted for inflation) was faster on average during Democratic administrations, and the Democratic advantage shows up for every income decile.

             These results are not a trade-off where Democrats better serve certain income categories while the Republicans better serve others: Democrats perform better for all income deciles, even after taxes and transfers are accounted for. This applies even to the "one percenters," i.e., the top ten percent of the top decile.  Result:  The second pair of charts show no change in the overall result: in each of the categories income earners still do better when Democrats hold the White House.   

     

     

     

     

     

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  • published PAYING FOR THE BRIDGE in Econ4Voters 2024-04-08 16:57:12 -0500

    PAYING FOR THE BRIDGE

             The collapse of the Francis Scott Key Bridge in Baltimore closed one of the largest ports in the world, with important implications for world trade and for rubber tire vehicle traffic in the Baltimore area.  For example, it is both an import platform for car and farm equipment parts headed for assembly plants in the Midwest, and a platform for coal exports to Europe, particularly vital while Putin uses Russian energy as leverage.         

             The bridge itself was one of three ways to drive through the Baltimore area for the high-volume traffic from Washington DC to New York City and on up to Boston.  On a typical weekday, the bridge carried 34,000 cars and trucks that must now be jammed onto the other two arteries.   

             The initial cost estimate of the disaster is 15 million dollars per day in lost economic activity plus three billion to replace the bridge.  Although the ship owner will likely be liable to contribute to cost recovery eventually, settling such a claim will take years.  Therefore,   President Biden announced that he will direct the federal government to immediately commit to covering all costs, including salary replacement for the estimated 8,000 port workers who are temporarily without work.

             Some entity has to bear the cost in the interim pending settlement with the ship owner.  The federal government has a comparative advantage in paying up front and attempting future reimbursement. But how will it get the money for immediate spending? Answer: where it gets all its money: taxes and borrowing.  The loss of those two productive assets -- the bridge and the port -- made the country poorer.  The borrowing enables recovery of that loss. 

             But why the federal government? Why not states or private entities?  First, the shutdown of the Baltimore harbor has national implications.   The federal government can recognize those national benefits and costs and spread the costs of the bridge collapse across each citizen. Essentially, through its taxing authority, the federal government is the insurer of last resort. In this role of insurer, the federal government has another advantage: lower interest rates.  The cost of the bridge is massive,  only the federal government can borrow such sums at reasonable interest rates and terms. Since the federal government has taxing authority that states do not have, and has never been in default on its debt, the citizens/taxpayers have earned this advantage. On behalf of those citizens, the government uses the resulting cost advantage when paying the costs of accidents and natural disasters such as earthquakes, tornadoes, hurricanes, floods, pandemics, as well as  the Key Bridge collapse.

             In its customary reflex against federal spending, the congressional "Freedom Caucus" responded to Biden's recovery plan by pointing out that the government is already $34 trillion in debt, 120 percent of national income.    They propose that rather than borrow, adding to debt, the government should find ways to cut  somewhere else in the budget.  But is extracting money from previously enacted legislation really better than borrowing?

                Does that debt balance -- 34 Trillion dollars in debt due to past borrowing -- change the decision to borrow or cut other spending?    Actually, the debt is a "sunk cost."  Future borrowing decisions should depend on a comparison of the additional future benefit net of the additional future cost of the additional borrowing.

             In other words, the decision to borrow extra money does not depend on total borrowing done in the past.  The decision to borrow for additional investments depends on a comparison of additional liabilities to additional asset values obtained by that borrowing.    The bridge and port are assets.  They will be enjoyed for years to come, and passed on to future generations, with value  many multiples of the costs to restore them after this accident.     


  • FAIR LEGISLATIVE MAPS: CONTIGUITY AND PARTISAN PRIVILEGE

             In the Wisconsin gerrymandering case, Rebecca Clarke v. Wisconsin Election Commission, the Wisconsin Supreme Court ruled that the current map of state assembly and state senate district boundaries violates the constitution because it contains a large number of districts that are not "contiguous."  That is, some districts contain parts disconnected from other parts.      

             Although contiguity was the key constitutional issue, the additional motivation for the lawsuit was to change those legislative district boundaries that systematically lead to   non-representative government: the ratio of legislative seats held by the different political parties is wildly out of proportion to the ratio of voter preferences for candidates from those parties.   Over the past four election cycles, for example, the voters expressed a preference for Democrats by over 50%,  but Democratic party candidates held a mere 36% of the Assembly seats, and had no chance of gaining a majority of seats in the state legislature.  Ideally, the district boundaries of the 99 assembly seats  and the 33 state senate seats would be neutral, i.e.,  directly reflecting the statewide party make-up of the voting electorate.  With neutral district boundaries, elections would be determined by  candidate  quality, voter policy preferences, and the energy and commitment of the supporters.     

     

     Now for the Hard Part:  Choosing the Map

                The court offered the parties to the lawsuit  the opportunity to submit remedial  maps that cure the contiguity  problem.    The court will sift through submitted maps while bearing in mind this key sentence that appears within the majority opinion:    "We do not have free license to enact maps that privilege one political party over another."     Accordingly,  the task is to choose the map with minimum -- ideally zero -- "privilege" of one political party over another.  

    Outside Expertise and Technical Requirements

              For technical assistance, the court has appointed two experienced consultants:  Dr. Bernard Grofman of the University of California at Irvine, and Dr. Jonathan Cervas of Carnegie-Mellon University.     They list seven technical requirements for map proposals:  districts must have  nearly equal population; have minimal splitting of existing political subdivisions, such as county and city lines;   display complete contiguity; have acceptable compactness;  comply with federal law of equal protection and voting rights;  consider communities of interest; and address political neutrality. 

             The consultants  require that proposed maps be submitted to DavesRedistricting.org, a website established to add transparency to the redistricting process.   DavesRedistricting.org  provides a place to compare maps both visually and with numerical scores for each of the criteria listed by the consultants.      

     Demystifying Modern Map-making

              The high-tech methodology being used by the mapmakers and the consultants can be puzzling. That puzzlement can be alleviated somewhat by reading the Amicus Brief submitted on November 8, 2023 by Professor Matthew Petering of the UW-Milwaukee College of Engineering. In that brief, Petering described a complex computer algorithm he designed to create a map that optimizes the seven criteria.  

             Because Petering  is not a party to the lawsuit, his maps are not being considered by the court or its consultants. Nonetheless,  he submitted a map to DavesReedistricting.org so it could be scored and displayed alongside  the six maps submitted by the parties.  In turn, Urban Milwaukee's Bruce Thompson has  greatly simplified the job of comparing the seven maps by reducing the numerical scores to colored bar charts.  

    Data

             As Dr. Petering explains, his  algorithms must be programmed    using voting data from recent statewide elections in Wisconsin, i.e., data not affected by the gerrymandering.  Petering has also shown that because Democratic voters are more clustered in urbanized areas than the more widely-dispersed Republican voters, the algorithms must use ward-level election data from recent statewide elections to get a fair map. be programmed with data on  voter residential patterns.  (Of course, data on individual voters is not used and is not available.)   This use of data is in agreement with the opinions expressed by Judge Adelman and Fred Kessler, two learned scholars of the problems of map making (see Further Readings below). 

       

              To illustrate numerically the importance of using ward-level data, Petering provides maps with and without using that data from recent statewide elections.  To compare the results,  he plugged both maps into the DavesRedistricting.org scoring system.  With that data, the DavesRedistricting.org estimates that Petering’s map provides Democrats with 51 seats in the Assembly, proportional to their statewide share of votes.  Without the data, that drops well below their proportional share to about 43  seats with a very low likelihood of a legislative majority, a result that locks in the partisan privilege the Republicans have enjoyed.  In other words, the use of election data to make maps does not introduce partisan bias; it is the failure to use that  data that results in partisan bias. 

     "Natural Gerrymandering" Debunked

             It is a statistical fact that Dem voters live in a more concentrated residential pattern than Republican voters.  This has led to a plausible but wrong notion called  "Natural Gerrymandering"  i.e.,  because of the greater concentration of Democrats, partisan privilege cannot be eliminated.    If true, this hypothesis implies that Democratic Party  policies and proposals will forever be in the minority. Dr. Petering has debunked this defeatist notion in the best way possible: counter example. He produced a map with proportional representation, the equivalent of zero partisan privilege.  As the bar graphs in Bruce Thompson's article so vividly show,  Petering's map is better on minimizing partisan privilege than any  map under consideration by the court.  His maps earn especially strong scores of 99 and 100 (100 is best) for proportionality in the Assembly and Senate, respectively,   indicating  virtually no privilege FOR EITHER PARTY.  Although for  procedural reasons his map cannot be included among those considered by the court, Petering's achievement shows that  neither the Court nor its consultants should accept incomplete solutions of the partisan privilege problem.

    Further reading   

     "Political Fairness in Redistricting: What Wisconsin’s Experience Teaches," The University of Memphis Law Review, Vol 49, 2019, Judge Lynn Adelman

     "How to Draw Fair Maps in Wisconsin," Capitol Times, Nov 14, 2020. Fred Kessler, former legislator and re-districting expert.

    "Ranking the 7 Proposed Legislative  Maps" by Bruce Thompson, Urban Milwaukee, Jan 17,  2024.

    District Solutions LLC  www.districtsolutions.net, Amicus Briefs of Matthew  Petering, Clerk of Wisconsin Supreme Court 11-08-23 and 01-22-24.

     


  • published Fiscal Insurrection in Econ4Voters 2024-01-25 08:58:02 -0600

    Fiscal Insurrection

             As the nation approached it's 31.4 trillion dollar debt limit, Steve Scalise (R-LA) House Majority Leader and leading figure in the "Freedom Caucus," stepped up to a bank of microphones and in 90 seconds  demonstrated dangerous economic misunderstanding about borrowing and the debt.   He asserted that the nation must stop borrowing money it does not have; it must live within its limits like a family with a credit card limit; and that somehow Joe Biden is the one responsible for the size of run-away deficits.

             Because failure to raise the debt ceiling would cause a worldwide economic disaster, ceilings  have always been raised, sometimes with 11th-hour deals.  However, this time seems different:  never before have such ignorant legislators,  with such powerful anti-government reflexes, wielded such strong influence.   Perhaps a fail-safe exists among the 18 republican members of Congress who won their elections narrowly in districts that Joe Biden carried in 2020. Perhaps enough of these members – – it would only take six – – could be persuaded to vote with the 212 democratic members to pass legislation to raise the debt ceiling. 

    Its About Time

             Scalise exhibited no understanding of the debt ceiling, nor any understanding of the role of borrowing in a market economy.  He announced that the country must stop spending money we don't have. This statement reflects  a fundamental misunderstanding of what borrowing is! All borrowed money is money the borrower doesn't have; the lender has it.  If the borrower is willing to pay the lender a price   – – called interest – –  for the privilege of using the lender's money for an agreed amount of time, then the borrower can spend that amount much earlier  than would be possible without the loan.   The "capital market" enables borrowers and lenders to create a mutually advantageous trade, e.g., when a borrower purchases a home or a car and the lender earns interest payments and the eventual return of the borrowed money. Borrowers borrow precisely because they don't have the money but do have an important investment opportunity.  

    Credit card balance limits are raised all the time

             Scalise also sought an analogy in the limit on credit card balances as if they serve as immutable limits on consumer credit. They don't; credit card limits are raised regularly for the very important reason that lenders want to earn more within reasonable risk. When family incomes grow,  the total credit available in the banking system can be increased, especially to borrow money for long-lived productive assets like houses, cars and educations. Such assets enhance borrower productivity and income, raising living standards as well as the ability to repay the loan.

             Among all the advanced economies, often referred to as the Group of Seven, or "G7," the United States has the lowest post-pandemic inflation rate, the highest economic growth rate,  the lowest unemployment rate and a robust  rate of innovation in such key areas as computer  software and  mRNA vaccines.  Consequently, like the household that earns increases in its credit card limits, the United States government regularly demonstrates its credit worthiness around the world, as is reflected in the low interest rate it is now paying in order to borrow; a condition that would be reversed should the US breach the debt ceiling.

              To curtail spending, Scalise and the Freedom Caucus want to cut the "runaway spending" of the Biden administration, including the $1.7 trillion infrastructure spending over 10 years.    However, borrowing to finance the building, maintenance, and repair of long-lived productive assets -- e.g.,  streets roads, sewer water, public buildings, ports harbors, bridges --   makes a great deal of sense. Such productive public assets will last a long time and, when in good repair, they add to the national productivity, income and wealth.  It makes sense to borrow and let future generations  help to repay the cost of the infrastructure as they use it.   

     

               

    Blaming Biden for Deficits while Ignoring Trump's much larger deficits.   How convenient!

             Contrary to Scalise's assertion, the Biden administration has brought the deficit down by a greater amount and faster than any administration in history. Of course, that is because Trump drove up the debt by a greater amount and faster than any administration in history.   Trump added over $8 trillion to the national debt in just four years. Trump's pre-pandemic deficit was $3.1 Trillion for Fiscal Year 2020 (10/1/2019 to 9/30/2020; Federal Fiscal Years run from October 1 of the preceding calendar year to September 30). His final budget  included   his final deficit of $2.8 Trillion for FY 2021.  The first Biden budget resulted in a FY 2022 deficit of only $118 Billion dollars,  cutting it by more than half in just one fiscal year, just what the Freedom Caucus claims it wants.    

      


  • published NOTES ON FAIR MAPS in Econ4Voters 2023-11-21 11:18:36 -0600

    NOTES ON FAIR MAPS

              Ever since the district boundaries for the assembly and state Senate districts were devised in 2011,   Wisconsin Democrats have been complaining about the unfairness of the district boundaries and their influence on the makeup of the state assembly and senate.   Prior to that republicans complained about the reverse unfairness imposed by Democrats.  Clearly, the state needs a fair procedure;      Step one is an examination of key terms.  

    Influence of District Boundaries

             The district boundaries have great influence over not one but two outcomes.  First, they influence the competitiveness within a district, and can even be crafted to make a district "safe" for a candidate of the favored party.  Second,  they influence the statewide array of wins and losses, which determines how many seats each party wins within the 99 seats of the  Assembly and the 33 seats in the State Senate.  Shifts in district boundaries can influence which party will gain a majority in the Assembly or the Senate or both. In turn,  majority status provides access to the tools of legislative power, i.e., committee assignments, the flow of legislation, as well as whether to open or close a legislative session and to permanently "table" legislation. The majority can also determine what can go on the advisory ballots so the voters can express a more direct opinion.  

             In the current case,  the legislature seat count is far less than proportional to the Democratic vote count in statewide elections.  The Democrats hold 36% of the Assembly seats while in state-wide elections -- i.e., those that cannot be gerrymandered  -- the voters expressed a preference for Democrats by over 50%. 

             Non-representative government has led to unrepresentative policy:  Post-Dobbs reversion to the antiquated 1849 state law on reproductive rights; blocking a referendum to let the voters express their preferences on reproductive law as did the voters in Kansas and Ohio; reducing state funding per student in the UW system to 46th in the nation,   including refusal to fund the much-needed Engineering building for the UW-Madison campus; and continuing to  reject federal money for railroads and Medicaid,  thereby costing Wisconsin taxpayers billions.

    Standard requirements of fairness

              Modern design of district boundaries must meet a complex array of requirements.  The districts must have roughly the same population;  they must be compact (not stretched out like a salamander);  they must be contiguous;  and they must adhere to the requirements of the federal voting rights act.  To simultaneously meet all these requirements requires use of computer algorithms.  Fortunately, there are experts in the design and use of these algorithms at Duke, Princeton, and University of Wisconsin - Milwaukee where Professor Matthew Petering has established District Solutions LLC to house his efforts to create fair maps through his FASTMAP algorithm.

        

    Tools of Gerrymandering.  Packing and Cracking

              Fair maps would reverse the anti-representative effect of gerrymandering. Therefore, to understand fair maps requires understanding the two key tools of gerrymandering:   packing and cracking.  Both of these strategies involve shifting district boundaries that affect the margin of victory within a district, and consequently affect the proportion of legislative seats for each party.      

             Packing refers to opportunistically shifting some district boundaries to corral an excess of Democratic voters, ensuring that within that district the Democratic candidate will win far more votes than needed to win that seat, thereby "wasting" the unnecessary votes.  Cracking refers to shifting some Democratic voters into districts where Republican candidates typically win by large margins.  The idea here is to subtract Dem votes from a district to convert it from a win to a loss and to spend those votes for the Democratic candidate in a district the Republican is expected to win, making sure that the shifted votes are not enough for the Dem to win there. Instead, the Republican candidate still wins, albeit by a smaller margin, "wasting" fewer Republican votes and more Democratic votes.   

    Achieving  Proportionality

             First, a simple definition of proportionality. Proportionality in the design of district boundaries yields a party a 50-50 chance of the same proportion of seats in the Assembly and State Senate as that party's proportion in statewide elections. Under this definition of fairness, a party with, say, 30 percent of the state-wide vote should have a fifty-fifty chance at 30 percent of the seats.  Or, as in the present case, since the Democrats typically earn around 51 -54 percent of the state-wide vote, they should have a fifty-fifty chance of that proportion of the legislative seats.

               Second,   algorithms can construct maps on the basis of the usual requirements plus proportional representation. Its maps project a fair outcome with Democrats having a 50-50 chance of earning a majority in either chamber, or both, in proportion to the statewide vote.  Moreover,  the algorithm can rate other maps on the basis of the proportionality standard, as well as any of the other necessary requirements.  For instance,  the District Solutions algorithm analyzed the map proposed by the Wisconsin Senate Democrats in November 2021 and projects that map would provide the Democrats with just a 1.7% chance of winning a majority in the Assembly and an 18.9% chance of a majority in the state Senate.

             Third, two learned scholars of the problem of fair maps, Judge Lynn Adelman and Fred Kessler,   have opined that any construction of fair maps must include the use of data on where voters live. (see Further Readings below). Why?  Democratic voters are more clustered in cities than the more widely dispersed Republican voters. Consequently, if the algorithm is not provided residency data, it will operate as if voters had random locations and would perform its task of overlaying district boundaries only according to the other requirements of fairness. District Solutions LLC provides quantitative demonstration of the political and legal conclusion of Kessler and Adelman: Without residency data, readily available from recent state-wide elections, the algorithm cannot be calibrated to construct maps that produce proportional representation for voters of both parties. 

              To highlight the importance of using residency data,  District Solutions has used its algorithm to estimate results obtainable without using the data.  They show that, despite winning roughly 53% of the statewide vote, the most likely outcome for Democratic voters would be to win about 45% of the seats with very low likelihood of a majority in either chamber. While that is better than the current allocation of 36% of seats, it falls well short of "fair."

    In other words, the use of voter data is not partisan; it is the failure to use voter data that results in partisan bias.  Proceeding without such data would yield maps biased in favor of Republicans and would preserve most of the imbalance now built into the current array of maps, as we see in neighboring Iowa (see Thompson in the "Further Readings" below).

    FURTHER READING:  

    "Political Fairness in Redistricting: What Wisconsin’s Experience Teaches," The University of Memphis Law Review, Vol 49, 2019, Judge Lynn Adelman

     "How to Draw Fair Maps in Wisconsin," Capitol Times, Nov 14, 2020. Fred Kessler, former legislator and re-districting expert.

    "Why That 'Iowa Redistricting Plan Was Unfair" by Bruce Thompson, Urban Milwaukee, Oct 4, 2023.)

    District Solutions LLC  www.districtsolutions.net, Amicus Brief of Matthew          Petering, Clerk of Wisconsin Supreme Court 11-08-23

     

     

     

       


  • published WHICH MARKETS SHOULD BE “FREE” in Econ4Voters 2023-08-24 10:35:06 -0500

    WHICH MARKETS SHOULD BE “FREE”

              Since just about every public policy issue of our age has an important economic component, surely upcoming debates will feature differing opinions about how to organize the economic interests of 330 million people. Office seekers will take sides on key questions, such as when government should be involved in the production and distribution of certain goods and services, versus when private markets be relied upon.  This is a good time to review some basic economic concepts and demand that office seekers understand them.

                Any such review could begin by examining a  core teaching of economics: that competition among profit-seekers leads to the betterment of society as a whole, even though it is profit, not serving the larger society, that motivates the decision-makers in the market.    It is this belief in “free markets” that forms the basis for much of public policy, the rebuttable presumption that markets are superior to government in the production and distribution of goods, services and assets. But it is in the rebutting that the conflict lies: when the pre-conditions for competition do not exist,   markets will not self-regulate for the public good. Without keener knowledge of how markets work, politicians can’t propose efficient regulations, including when to leave markets alone to self-regulate.  

      Exceptions to Free Market Efficiency

     Initiated by Adam Smith,  a large body of knowledge has been developed to describe the circumstances under which market allocations driven by profit-seekers are superior to government programs and when they are not. Examples of the latter include:

     Monopoly power: some of our most important services are sold to us by public utility monopolies - distribution of electricity, natural gas, water, cable TV, internet connectivity, sewer services.  Although the competitive process cannot work for these incredibly important goods and services, the properties of the market can be used to guide their regulation.  For example, the price of these services is usually regulated to provide the same sort of competitive rate of return on investment that one would find in a competitive market.  

     Patents: the government grants inventors temporary protection from competition so that, during that temporary period, monopoly profits are the reward for inventive and creative activity. When that period is over, the secret behind the invention is supposed to become public knowledge so that competitive markets can bring the benefit of the invention to consumers at prices that better reflect costs.  When this doesn't work, as in the case of insulin, the government can step in and regulate the price. For example, President Biden's Inflation Reduction Act includes a $35 per month price cap on insulin.

     Information asymmetries: when buyers or sellers can be taken advantage of because they are acting with different information about the safety, durability, or performance characteristics of a product, regulation is required to bring markets to the level of efficiency a free citizenry expects. For example, the Food and Drug Administration tests food for safety and drugs for efficacy, tasks well beyond the expertise of consumers. 

    Risk Spreading: primarily this is done through insurance, mostly through private insurance companies who charge a premium to pool the premiums of a very large number of people. This pool enables the insurer to write checks for those who suffer insured-against events -- car accidents, home fires, burglary -- out of the money gained by the premiums of those who have better luck.   The premiums of the accident-prone are higher than the premiums of those without a record of problems. Hence, lousy drivers pay higher premiums than safer drivers, and sick people pay higher premiums than healthy people. The Affordable Care Act is a regulatory response to this latter example: the perversion of pricing the sick out of access to the medical care they need to get healthier.

      Public goods: goods that the unregulated market cannot allocate well because profit-seeking firms cannot expect to earn a profit by providing the efficient amount of them. Examples range from public parks to police and fire protection to national defense, and they are paid for with taxes. Also included are public infrastructure assets that enable the private market to work more efficiently but which the market will not produce for itself.  Included in this category are streets, roads, highways, bridges, tunnels, water and sewer systems, harbors and airports, and many others.

       External costs: These are costs not paid for by the buyers or sellers in a market exchange, and there is no market-driven incentive to control them; they require regulation. Pollution is an example; the market actively encourages pollution because it reduces costs to the polluter. To address climate change while growing the economy, the power of the market to produce wealth must be harnessed and redirected to produce wealth with fewer emissions of greenhouse gases.  The tools for doing this include taxes on those activities that produce emissions, emission quotas or bans, or subsidies for those producers whose activity results in fewer emissions.

    Moderation of the Business cycle:  A key role of government policy is to manage total spending so as to keep the economy running at full employment without inflation. During recessions, for example, the spending of the nation’s consumers and business investors is too small to employ all those who want to work. Government spending can fight a recession with investments that build and maintain government-owned productive assets -- streets, roads, broadband, police stations, ports, communication satellites, etc. -- and employ people in the process.  Society can use these long-lived productive assets for many decades.  Of course, government should avoid spending on goods that produce little of lasting value, such as weapons systems that the Pentagon does not want or “bridges to nowhere.” 

     Using Prices in the Public Sector:    the public sector can achieve greater efficiency by implementing some free-market principles. Chief among these is to use prices when enabling people to use public assets such as highways and airport landing rights. For example, gasoline taxes require road users to pay for the roads.  Similarly, carbon taxes can be used to require carbon emitters to pay for their harm to the environment. Both of these taxes use the price system in the same way price is used in private-sector markets: to organize incentives and to require people to pay for what they use.  

    Epilog:  The country needs its office-seekers to compete in the marketplace of ideas, especially about economics.  Our politicians should be conversant in the basic ideas of economics, starting with those illustrated here. Voters should root out and replace members of state legislatures and Congress who are ignorant of these principles in economics to help ensure that public policy best serves the majority of our citizens.

     

     


  • published BIDENOMICS IS PRO-MARKET in Econ4Voters 2023-08-12 11:46:18 -0500

    BIDENOMICS IS PRO-MARKET

                Joe Biden is finally touting his accomplishments: record-breaking job "creation," a drastic reduction in the annual deficit,  a long streak in reducing the inflation rate, and heavy investment in infrastructure.  Finally, billboards are going up at federally funded infrastructure projects around the country, explaining to passersby that these much-needed construction repair and replacement projects supporting local and state economies are due to the bi-partisan infrastructure bill promoted by President Biden.   In other words, voters are finally being alerted to how Bidenomics is benefiting them personally.  

    Backlash Litany

                Much of what has become known as "Bidenomics" involves direct involvement of the government in the workings of the economy.  This has prompted Republican pundits and politicians to bemoan the expansion of government, reflexively using the standard litany: wasteful government spending, tax and spend liberalism, and, when they're really lathered up, "Socialism."   And yet they are first in line when the ribbon cuttings are in their state!

                Because this reflexive litany, particularly the socialist label, is so prevalent in republican discourse, we can infer that it must earn substantial acceptance in focus groups.  Actually, however, Bidenomics is pro-capitalism.  Modern capitalism requires an efficient public sector.  Bidenomics invests in public sector projects designed to aid the functioning of the private market system; these are investments the private market won’t make on its own.    

     Consider a few examples of how Bidenomics complements the market.       

                 Streets, roads, and bridges.    Transportation networks complement the market system by enabling the movement of goods, services, and people.  Society has chosen in nearly every case to have these transportation elements provided by government.  Moreover, unlike market goods that typically are financed with revenue from prices buyers pay, these transportation elements are paid for by taxes.    Unlike President Trump, who kept promising -- but not delivering -- "infrastructure week," President Biden has begun to deliver an infrastructure decade.

                Broadband internet service.  The result of providing Internet by private firms was predictable: putting people in rural areas as well as poor people in urban areas at a great disadvantage in business competition and educational achievement. In rural areas there are typically great distances between people; the market "cost-recovery" price would have to be very high to stretch the service to them.  Although urban citizens live more compactly, for many affordability is still a problem.  

                Under Bidenomics, serving all these people becomes a public responsibility.  The largest asset the nation has is the talent of its people, and internet access is crucial to the development of that talent. 

                Wind and solar energy.  The "free market model" developed over 250 years beginning with Adam Smith makes it clear that competitive firms have an incentive to reduce the cost of production and distribution of their products by emitting greenhouse gases.   A competitive free market will not control emissions;  just the opposite.  The quality of the atmosphere is a public good; preserving it becomes a public responsibility.

                Those same principles of economics suggest two ways to address the emissions problem, either by taxing emissions to reduce their profitability or by subsidizing substitute cleaner forms of energy.   The first option meets with public hostility, so Bidenomics addresses the emissions problem by subsidizing the installation of wind and solar energy sources in order to speed up the transition away from fossil fuels.  

                Battery Technology.  One part of the Bidenomics project is to subsidize US firms to speed up the discovery and rapid development of battery technology.  The policy aim is to permit a motorist to charge the EV battery in a matter of minutes and to get a much longer range between charges. Why won't the free market produce batteries for the increasingly popular electric vehicles, or "EVs?"   A couple of reasons. First is the emergency nature of the effort to reduce carbon dioxide emissions by fifty percent by 2030.  Secondly, some of the rare earth metals necessary to make batteries come from unstable and hostile parts of the world. Consequently, what is needed is an effort the scale and scope of the Manhattan Project.    There will be plenty of work for the firms in a competitive marketplace once the battery discoveries are made available.  

                On shoring and "Friend shoring" of MicroChips.   Most modern appliances and heavy equipment -- washing machines, refrigerators, new cars, and farm equipment -- are controlled by microchips.   The Peoples Republic of China is capable of providing all the chips to meet the US Industry and military needs and do it at lower costs than other trading partners.   However, as was demonstrated during the pandemic, microchips from China are vulnerable to cut-off.  Such cutoffs would recur in a new pandemic, and certainly if hostilities broke out.   As free-market principles demonstrate, we cannot leave such strategic matters up to the free market.   Consequently, part of Bidenomics includes expanding the manufacturing of chips within the United States.

                $35 Price cap on insulin.  Insulin is a lifesaving drug for diabetics. Despite being invented over 100 years ago, contemporary variants of insulin are patented, providing producers with protection from competition.  Before Bidenomics, the price of insulin was very high, often $1000 a month, well above what's necessary for a fair rate of return.  Diabetic patients clearly do not enjoy the benefits of a free market, competitive ideal.  Instead, a government-imposed price ceiling of $35 per month can produce the ideal outcome when the monopolized market mechanism will not. 

    Bidenomics is Pro Market

                The United States economy has always been an interrelationship between the public and private sectors. As the free-market principles of economics demonstrate, one cannot rely on free markets when the preconditions for efficiency do not exist. Much of the public debate is over how economic responsibilities are divided between the two sectors.

                As the above examples show, Bidenomics blends the powerful forces of the market with government investment in the provision of physical and social infrastructure, as well as regulations that redirect these market forces to the common good.  This happens best when the public sector is directed by representative government, while the private sector is directed by the price system.

                 

     


  • INVEST IN UW; INVEST IN WISCONSIN'S FUTURE

                 The University of Wisconsin-Madison is recognized throughout the world as a premier research university.  Sixty years ago, to serve the growing post-WWII demand created by a more complex economy, this grand university was joined by two- and four-year college campuses to form the UW System of universities that also became one of the best in the United States.   Now  State Assembly Speaker Robin Vos has declared that he is "embarrassed" to be a graduate of the UW system. His reason: DEI, the system’s extraordinary efforts to attract, retain and educate students from deprived backgrounds  through its program of "Diversity, Equity, and Inclusion."  The goal of DEI is to increase access and achievement through targeted advising on courses, study skills, tutoring, opportunities, and skills for thriving in the huge, unusual environment of a modern research university.    

                 What the Speaker should be embarrassed about is the state's underfunding of the faculty and facilities of the system.   Funding per student in the UW System now ranks 43rd in the nation with no relief in sight in the recently-passed state budget.  Moreover, despite the pandemic-induced inflation of roughly 13% over 18 months, the faculty and staff were awarded a mere 2% salary increase in the current budget, even after a decade without any salary increase.   Chronic underfunding will continue to cause serious damage to the competitive position of the University in the academic world. In turn, it will diminish the opportunities for the business community to hire highly-educated graduates, and  to engage in collaborative projects with university personnel.   

    Two Episodes of Disinvestment

                Two recent episodes illustrate this hostility to the UW system and its missions of research, teaching, and service:  denial of funding for the proposed UW Madison  Engineering Building, and the deteriorating budget for UWM.                         

                Proposed UW Engineering Building  

                Despite the state’s current surplus of $7 billion, the gerrymandered, non-representative legislature has failed to include in the current budget UW-Madison’s proposal to construct a new state-of-the-art engineering facility.     Currently, Wisconsin has hundreds of students in the queue seeking training in engineering, and employers wanting to hire them; this new facility would add significantly to the capacity to meet that demand.

                UWM

                Meanwhile,  UW Milwaukee is one of the greatest institutions in the country for the upward mobility of its graduates.   Moreover, the Carnegie Foundation now ranks UWM Research Tier One, the top ranking  (aka "R-1").   Despite its success,  UW – Milwaukee’s budget is being seriously neglected.  Between 2015 and 2020, its main-campus faculty numbers dropped by 24%.     One consequence:   the highly productive Milwaukee Institute of Drug Discovery once had a seasoned, full-time leader with expertise in translating bench research into new drugs.  Today,  an excellent faculty member struggles part-time to lead the Institute.  Another:  the space-strapped University received no support for its plan to renovate a vacant former hospital as new space for its College of Health Sciences. 

                    Former UW-System President Ray Cross once observed that the future of Wisconsin runs through UW-Milwaukee, recognizing the centrality of Milwaukee in Wisconsin’s economy.  That future seems a long way off unless the University receives needed funding. 

     Research multiplier

                Often overlooked:  because  UW research professors collaborate with researchers around the world, they provide a kind of multiplier effect supporting the local and regional economy.     These relationships expand the scale and scope of the knowledge resources available to the home state university and its stakeholders, including the business community that wants and needs to hire its graduates.    Cutting-edge education is particularly important for advanced manufacturing and technology firms that want to locate within the state but to do so require a robust supply of engineering and science graduates.   

                The 21st-century economy is a knowledge-based economy in which universities and colleges play the central role in preparing the future workforce.  Competition within this global economy certainly does occur between nations.  But it also takes place between states and communities within nations. Wise investments in vocational and technical schools has brought that spending up to 4rth in the nation on a per student basis. State Investment in the UW should be brought up to the same standard:  up from 43rd to 44th.

                Another facet of the competition:  universities elsewhere have made sustained, cutting-edge investment in their engineering & science programs, an attractor of top students from Wisconsin.    Once top students earn degrees in other states, they seldom return to Wisconsin to pursue their careers, raise families, and contribute to local economies.

     Surplus is transitory; invest in educational assets

                  The state  $7 B budget surplus was due to the in-pouring of federal stimulus money in response to the pandemic.  Surpluses generated by such emergencies are unlikely in the future.      Fortunately, a transitory surplus can be converted to a more permanent economic benefit by investing in long-lived productive assets.   The proposed engineering school at Madison and a restored and expanded UWM are just such investments.     

                 

      


  • published Fiscal Insurrection in Econ4Voters 2023-01-22 16:11:50 -0600

    Fiscal Insurrection

             

    As the nation approached it's 31.4 trillion dollar debt limit, Steve Scalise (R-LA) House Majority Leader and leading figure in the "Freedom Caucus," stepped up to a bank of microphones and in 90 seconds demonstrated dangerous economic misunderstanding about borrowing and the debt.   He asserted that the nation must stop borrowing money it does not have; it must live within its limits like a family with a credit card limit; and that somehow Joe Biden is the one responsible for the size of run-away deficits.

             Because failure to raise the debt ceiling would cause a worldwide economic disaster, ceilings have always been raised, sometimes with 11th-hour deals.  However, this time seems different:  never before have such ignorant legislators,  with such powerful anti-government reflexes, wielded such strong influence.   Perhaps a fail-safe exists among the 18 republican members of Congress who won their elections narrowly in districts that Joe Biden carried in 2020. Perhaps enough of these members – – it would only take six – – could be persuaded to vote with the 212 democratic members to pass legislation to raise the debt ceiling. 

              

    It's About Time

             Scalise exhibited no understanding of the debt ceiling, nor any understanding of the role of borrowing in a market economy.  He announced that the country must stop spending money we don't have. This statement reflects a fundamental misunderstanding of what borrowing is! All borrowed money is money the borrower doesn't have; the lender has it.  If the borrower is willing to pay the lender a price   – – called interest – –  for the privilege of using the lender's money for an agreed amount of time, then the borrower can spend that amount much earlier than would be possible without the loan.   The "capital market" enables borrowers and lenders to create a mutually advantageous trade, e.g., when a borrower purchases a home or a car and the lender earns interest payments and the eventual return of the borrowed money. Borrowers borrow precisely because they don't have the money but do have an important investment opportunity.  

    Credit card balance limits are raised all the time

             Scalise also sought an analogy in the limit on credit card balances as if they serve as immutable limits on consumer credit. They don't; credit card limits are raised regularly for the very important reason that lenders want to earn more within reasonable risk. When family incomes grow,  the total credit available in the banking system can be increased, especially to borrow money for long-lived productive assets like houses, cars, and education. Such assets enhance borrower productivity and income, raising living standards as well as the ability to repay the loan.

             Among all the advanced economies, often referred to as the Group of Seven, or "G7," the United States has the lowest post-pandemic inflation rate, the highest economic growth rate,  the lowest unemployment rate, and a robust rate of innovation in such key areas as computer software and mRNA vaccines.  Consequently, like the household that earns increases in its credit card limits, the United States government regularly demonstrates its credit worthiness around the world, as is reflected in the low-interest rate it is now paying in order to borrow; a condition that would be reversed should the US breach the debt ceiling.

              To curtail spending, Scalise and the Freedom Caucus want to cut the "runaway spending" of the Biden administration, including the $1.7 trillion infrastructure spending over 10 years.    However, borrowing to finance the building, maintenance, and repair of long-lived productive assets -- e.g.,  streets roads, sewer water, public buildings, ports harbors, bridges -- Home figure quit fucking around send it borrowing makes a great deal of sense. Such productive public assets will last a long time and when in good repair, they add to the national productivity, income, and wealth.  It makes sense to borrow and let future generations help to repay the cost of the infrastructure as they use it.   

     

    Blaming Biden for Deficits while Ignoring Trump's much larger deficits.   How convenient!

             Contrary to Scalise's assertion, the Biden administration has brought the deficit down by a greater amount and faster than any administration in history. Of course, that is because Trump drove up the debt by a greater amount and faster than any administration in history.   Trump added over $8 trillion to the national debt in just four years. Trump's pre-pandemic deficit was $3.1 Trillion for Fiscal Year 2020 (10/1/2019 to 9/30/2020; Federal Fiscal Years run from October 1 of the preceding calendar year to September 30). His final budget included his final deficit of $2.8 Trillion for FY 2021.  The first Biden budget resulted in an FY 2022 deficit of only $118 Billion dollars,  cutting it by more than half in just one fiscal year, just what the Freedom Caucus claims it wants.    

     

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

      


  • INSTANT RUN-OFF VOTING IN PRESIDENTIAL PRIMARIES: A PATH TO MAJORITY RULE AND INOCULATION AGAINST TRUMP

              As the 2024  presidential primary season approaches, we can anticipate a large number of  Republican presidential hopefuls will declare their candidacy. This will be reminiscent of the 2016 primary season which began with 17 candidates.   Meanwhile,  should President Biden decide not to run for re-election -- perhaps even if he does! --   Democrats will also have a primary season beginning with several hopefuls, if not in 2024 then certainly in 2028.  Neither party has a rational procedure for choosing the final winner in multiple candidate primary seasons.    

             If the current primary election rules apply, the 2024  primaries will be conducted as a series of state elections over many months, each decided by plurality rule, not majority rule.   Instead, plurality rule in a series of primaries among a large number of contestants is highly likely to prevent majority rule as a matter of simple arithmetic; each individual primary in the sequence being essentially a plurality vote process of eliminating candidates. This effect is especially acute in the Republican primary system which awards delegates on a winner-take-all basis, permitting huge leads to develop very quickly, speeding the process of elimination. 

             In other words, a repeat of 2016 looms.  During that Republican primary season, Donald Trump won early primaries with only 25 to 30% of the vote. Meanwhile,  while the more traditional established vote was split among several more candidates including Jeb Bush, Chris Christie, Carly Fiorina, and John Kasich. Because Trump retains solid support among at least 30% of Republicans,  he is primed to do that again in 2024.

             The problem facing Republicans in 2016 serves as a rough numerical illustration of the problem in 2024. The party had a core constituency of roughly 60% of its members. These are Republicans who yearn for a return to the often-recited "principles:"  free markets; individuality; personal responsibility; law and order, de-regulation, lower taxes, smaller government, and so on.  Another 30% are fringe voters who grieve for an imagined past,  and a candidate who will  vaguely promise to shake things up, protect unregulated gun ownership,  freedom from vaccine and mask mandates, and bans on accurate history taught in schools.    "Undecided" made up the other 10%.

             Now suppose that the 60% core voters are split among five candidates, averaging 12%  apiece. With the core vote split among the several candidates, a fringe candidate with only 30% of the vote can defeat the other candidates and the 60% core voter policy preferences they represent.    

    The Essence of the Problem

             The presidential primary season culminates in a convention to nominate the final winner as the candidate for the fall general election. The prize in each primary consists of delegates to the convention.  But each primary influences the next one in the sequence; the winner gains not only that election victory, including the associated delegates,  but also an advantage in the next election in the sequence, growing donor support,  improvement in the polls, media reports on the candidate's momentum, and priceless television interview time.   

             One by one,  contenders who lose in the early primaries drop out as their poll numbers fall and donors cut them loose.  As the candidate pool shrinks,   winners of contests later in the series will get larger vote percentages, perhaps even greater than 50%.  But even 50+ margins should not be interpreted as a majority-rule result since they were made possible by the elimination of contenders in plurality-rule contests.

    Toward Majority Rule:  Ranked Choice Voting  (aka Instant Runoff Voting)

             Instant runoff voting (IRV) results in majority rule in each contest in the series, regardless of how many candidates enter those contests.  IRV increases the likelihood that the winners of early primaries will represent the preferences of the majority of voters.    

             Here's how it works: instead of voting for just one candidate,  the IRV ballot permits the voter to vote for several contestants, ranking them in their order of preference.  After the polls close computers tally the first-choice votes. A winner is declared only if the top vote-getter has a majority of all votes cast. Otherwise, a new round of calculation ensues in which the last-place finisher is eliminated and the voters'  lower-ranked votes are redistributed to their other candidates.   If this second-round calculation produces a majority vote-getter, that candidate is the winner.  If not, additional rounds are calculated until a candidate does get a majority.

              Conventional runoffs are time-consuming, expensive, and inconvenient for the voters.  Consequently, neither party uses them.  The default has been to designate the plurality vote-getter as the winner and move on to the next primary contest.    By contrast, IRV is conducted by computer and results can be established very quickly after the polls close.[1],[2]

               The current procedures for presidential primaries threaten a repeat of 2016, including the nomination of Donald Trump as the presidential candidate in the Republican party. To safeguard against such a biased process,  the Republican Party should implement ranked choice voting.  

             Similarly, the next time the Democratic Party faces a presidential primary season -- whether in 2024 or 2028 – – it will no doubt attract a large number of hopefuls, and therefore face the same challenge of selecting the nominee by a majority-vote process; Democrats should implement rank choice voting.  Moreover,  if the Republicans use IRV  they are likely to put up a more competitive candidate; the Democrats should use IRV as a defensive response.

     

    [1] Instant runoff voting does not delay reporting election results. Delays are due to the collection of data from the individual precincts and regions of a state. Once the data is collected, the calculations employing that data are nearly instantaneous.

    [2] Wisconsin's own Katherine Gehl provides an excellent description of how rank-choice voting works.  https://www.youtube.com/watch?v=YvjfMTlefc8&t=23s

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.


  • DOES SUCCESS IN BUSINESS PROMISE SUCCESS IN PUBLIC OFFICE?

    Ron Johnson, running for reelection to a third term as Senator from Wisconsin, and  Tim  Michels, candidate for Governor,  are proud of their achievements as business people.  But when they claim to be "job creators" they run afoul of economic principles discovered by Adam Smith and refined by 250 years of rigorous economic thought.  

     Entrepreneurs invest in and organize the production and sale of goods and services. They build their enterprises with a combination of ingenuity, vision, smarts, risk-bearing, and often with great personal sweat. Theirs is a key role in a complex market process that creates jobs, but they do not act alone, creating jobs out of nothing in a modern-day version of the biblical parable of the "loaves and fishes."   

        Since the time of Adam Smith, the economics profession has explained that entrepreneurs are interdependent, not independent. They rely on the actions of a host of others to provide many of the inputs they need to both build and operate their enterprises.  Economics explains how markets employ the decentralized price system to coordinate the interdependence of entrepreneurs with other elements in the economy.

    In a market system, entrepreneurs do not have job creation as a primary objective; they are profit-seekers. If it is profitable to add employees, they will do that.  But if it is more profitable to outsource jobs, or substitute capital equipment for labor, entrepreneurs will do those things instead of increasing employment.   

    Moreover,  entrepreneurs demonstrate their need for infrastructure services when they locate near them. They do not have to build the infrastructure their firms use. If they need freeway access,  they locate near one. If they need internet access, they make sure that the broadband is competitive where they locate.  The public sector is responsible for those goods and services that must be shared, such as bridges, streets and roads, sewer and water, computer superhighway, barge lanes, and school buildings,  paid for with taxes and user charges. Other infrastructure, such as internet service and utilities, are a combination of public enterprises and regulated private enterprises.

                Business firms also require market-provided resources, such as capital and labor, which must either be made or bought by the firm.  What the worker brings to the job – experience, literacy, manual or computer skills, punctuality, education – are the product of countless activities that took place in the time before the worker was hired.  Even the high school and kindergarten teachers play a role in the sequence of investments that formed the "human capital" possessed by an employee.   These essential ingredients are not created by the entrepreneur, they are purchased by the entrepreneur through the employment contract.

     Entrepreneurs are necessary for job creation; they are not sufficient. No one is sufficient; the elements of the market process -- entrepreneurs, workers, education, training, experience, infrastructure, the legal system, etc. – – together are necessary and sufficient to create jobs. So who creates jobs? Not any of the necessary but not sufficient elements acting independently; all of the necessary elements together are sufficient.  

               So the real issue is whether success in business connotes a transferable skill that will lead to success in leadership positions in the public sector such a senator or governor. Johnson and Michels assume that the transferability of their business acumen is self-evident. Not so. The same market forces that foster interdependence also incentivize people to specialize,  not generalize;  entrepreneurs are encouraged to deepen their knowledge of their own business -- including the markets that serve that business --  but not the economy generally.  Yes, it’s important for Governors and Senators to have intuition and instincts to understand the private sector but that's no guarantee that they will understand the public sector.  

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

     

     

     


  • WE NEED A CLOSER LOOK AT SOCIAL SECURITY

              Senator Ron Johnson claims Social Security is Ponzi scheme, that it is broke, and that in order to "save it" the program should be re-evaluated and re-authorized annually. Actually, it is this set of assertions that needs a closer look.  

    THE BEST DEFENSE IS UNDERSTANDING HOW THE PROGRAM WORKS

             To defend Social Security it is essential to know how the amount of individual retiree benefit checks are determined and how they are paid for.  Two published formulas (at ssa.gov)  constitute very specific promises  of Social Security benefits made to workers in exchange for very specific tax payments.    

     The Benefit Formula

             The  retiree benefit formula determines the amount of the retiree's first monthly check; all subsequent checks are equal to that  amount,  adjusted annually for  inflation, with monthly payments continuing until death of the retiree or the end of eligibility of a designated beneficiary.  The formula that  determines the amount of that first check adds the individual's  payroll tax payments made during the top 35 earnings years, then adjusts for past inflation since those years, labor productivity growth, and a means-test factor (an upward adjustment of the payment to the lowest-income contributors).   

    The Financing Formulas

             The revenue to pay for those Social Security benefits comes from two sources. The first is the familiar payroll tax, or FICA  (Federal Insurance Contribution Act)  withholding from earnings up to a cap (which this year is $147,000).

             The second source of revenue is proceeds from the sale of Social Security bonds.   This source is more complicated than the first and designed to address the financial burden of the baby-boom retirement.  The "Post-War Baby Boom" was 77 million people born in the 18 years between 1946 and 1964. In the subsequent 18 years only 47 million people were born, a  "Baby Bust."  Because of this population boom and bust sequence, an undue burden would have been  imposed on the "busters" if the sole source of revenue for boomers' retirement benefits had been the payroll tax on worker income.  

             To prevent that burden, the baby boomers were forced during their working years, beginning in 1985,  to pay a higher payroll tax rate than required at that time to pay the retirement benefits of those then retired.  That difference, or  " surplus" cash,  was invested in Social Security Bonds bought from the Treasury.  These special bonds are not issued to the world financial markets but instead are   traded back-and-forth between the Social Security Administration and the Treasury Department. In those years when the payroll tax generates a revenue surplus net of retiree benefits, bonds are bought from Treasury by Social Security; in those years when there is a revenue deficit, bonds are sold by Social Security back to Treasury.

    FOLLOW THE MONEY AND FOLLOW THE BONDS

             In effect, these special bonds act as a loan mechanism. During their working years, the boomers were forced to loan money to the country and the country would repay the loan with interest during their retirement years.  This loan mechanism was a savings vehicle for the boomers and a debt obligation for the country. The Social Security Administration acted as agent of  the workers while Treasury acted as agent for the country; the electronic record of these bonds is known as the "Social Security Trust Fund." 

    Are the Bonds "Worthless" or "Pro-growth?"

             Senator Johnson has asserted that the bonds are "worthless" because they are traded between one branch of government and another.   The economic concept behind this financial mechanism proves otherwise.  The plan was to boost savings by the boomers and invest  in the public-sector assets of the economy and then pay a portion of retirement benefits out of that enlarged productivity. In other words, it relied on a reciprocal relationship between generations: the young would pay for the retirement benefits of the old out of the greater wealth made possible by the old when they were young.  The Treasury Department, at the direction of the Congress,  would invest in long-neglected  public sector assets including bridges, roads, harbors, clean-up of chemical dump sites, broadband, research and development, and other public-sector complements to the market economy.   The plan rested on one of the most important and least understood principles of economics: a market system requires a strong public sector to do those things that the market needs for optimum performance but will not produce for itself. 

             If all that had worked out as planned the bonds would have run out in 2060, 75 years after the boomers began their forced savings.  Because the economy grew more slowly than planned there was a slower growth of the surplus and of the bond purchases  by Social Security on behalf of the boomers. Consequently, the bond fund will not run out in 2060, when all but the most persistent boomers will be dead,  but instead, under current estimates, will run out in in 2035, when nearly half of the boomers would still be very much alive. 

    WHAT HAPPENS WHEN THE BONDS RUN OUT?

             After the bonds run out -- i.e., after Social Security has sold all of its bonds back to the Treasury in exchange for cash --  the payroll tax revenue will be enough to pay 75% of the scheduled benefits.  When that happens, Congress will face two choices. The first choice is to reduce benefits by 25% so that payroll tax revenue would be sufficient to cover that level of expense. This is unlikely because   Members of Congress like to keep their jobs; it would be very difficult to explain to retirees and workers close to retirement that Congress plans to renege on the annually published promises of benefits they earned by paying FICA taxes during their working years.    

             The second choice is to continue honoring the benefit schedule in full,  deriving the 25% supplement from general taxes and borrowing, i.e., the same place where Treasury  got the money to buy back the Social Security bonds before the bonds were all gone.  Moreover, the amount required will be determined the same way: the supplement needed to meet the scheduled benefit formula.  Since the amount of money needed is equal to 25% of the retiree benefits whether there are bonds to be redeemed or not,  no increase in taxes or borrowing will be required for Treasury to provide the  supplementary funds to Social Security. 

              Social Security is not a Ponzi scheme;  it is not broke;  it is not facing bankruptcy when the bonds run out; the bonds not worthless because one agency of government exchanges the bonds with another agency.   Moreover, the system has been reviewed regularly and an annual report issued to  the Congress and the public.  In addition to the large change made due to the Baby Boom, this long-standing process of steady review and reevaluation has led to several  other changes.  For example, because life expectancy has increased,  the age of eligibility has been increased; in 2027 that gradual increase will settle at age 67 for full schedule benefits (lesser benefits available at age 62).  Finally, the benefits schedule includes a means test. 

             The arithmetic is in sharp contrast to the notion that Social Security is in deep trouble  and in need of major overhaul.  The greatest threat to Social Security is misunderstanding how it works.

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

            

     

     

            

     


  • GERRYMANDERING, DONOR-DRIVEN ELECTIONS, AND SOCIALISM FOR THE RICH

             In their arsenal of campaign rhetoric, Republicans affix the "Socialism" label to the candidates of the Democratic Party and their policies.  This stratagem is a lazy substitute for thought but it has the added advantage that it works. The assertion is repeated so frequently that many voters have come to regard it as the truth, and so it is an effective vote-getter.  And, in a curious way, the Democrats seem defenseless in the face of this scare tactic, even though readily-understood economics would provide a rigorous and vigorous response: the economic distortions commonly attributed to socialist systems are also produced by unrepresentative government in service to the donor class, as here in Wisconsin.

    The Socialist Label is Powerful

             It works because some socialist countries have failed in spectacular ways to address the economic wants and needs of their populations. For those who have immigrated here from socialist European countries, as well as those who remember 1950s cold war newsreels, "Socialism" carries with it a particularly powerful imagery. The label brings to mind long lines for food, involuntary job assignments, and gulags and disappearance for those who complain too much.  More recent immigrants from Venezuela or Cuba react viscerally to the label. 

             The core definition of socialism is advocacy for social organization around public ownership of the means of production and distribution, and centralization of their management. This is in stark contrast to the market system in which decentralized management is guided by a price system.   Confusion arises when Socialism is conflated with government activity.  This is odd since capitalism requires a well-functioning public sector. Capitalism must provide those goods and services that the market system needs but does not produce well or does not produce at all.     The modern economy can be thought of as comprised of the public and private sector, sectors that must work together to optimize overall economic performance.   

    Brief Look at the Private Market Sector

             The United States economy is at its core a highly successful market system.  (For an earlier essay in this series on market economics, see https://www.grassrootsnorthshore.com/20220722_mt).  One of the great strengths of a market system is its responsiveness to individual willingness and ability to spend money according to one’s preferences.  People earn money in the "job market" and spend their income according to their preferences in the "goods and services market."   In the standard conception, all these exchanges are guided by decentralized prices and wage rates, and are made without coercion, prompting Adam Smith to refer to the market as a "system of perfect liberty."

             But this market responsiveness to consumer preferences does not always work; there are important preconditions.  Chief among these is competition which imposes on sellers the incentives to serve informed buyers.  This interplay between buyers and sellers independent of government is labeled the "private sector."  In important and familiar sectors of the economy, those preconditions for market efficiency do not exist.

    Brief Look at the Public Sector  

              The absence of these preconditions leads to two roles for government.      First, the public sector has the responsibility to regulate markets that are non-competitive but still produce very important products. Examples include the public utilities that produce and distribute electricity, natural gas, and cable television.   Also included are firms that produce valuable products but which, if unregulated, would impose the spillover costs of pollution, noise, or danger, e.g., carbon dioxide emissions.

             Second, if, through representative government, the people express a preference for certain goods and services that the market will not provide, some level of government – – state, local or federal – – could step in and provide it.   Examples include national defense, police and fire protection, health insurance,   essential insurance programs such as Social Security and disaster relief, as well as  the legal system that enforces contracts, addresses crime and adjudicates accident costs.

              To best serve society, a capitalist system requires the right mix of private and public activities.   The ideal combination of public and private rests on the simultaneous achievement of efficient prices guiding exchanges in the private sector and representative government guiding decisions in the public sector.    In the private sector, the price system is the mechanism for responsiveness to constituents by coordinating the incentives of buyers and sellers in the market. In the public sector the mechanism for responsiveness to the constituents is representative government.  Distortions from this ideal combination -- for example by producing in the public sector products better left to the market -- diminish the income and wealth of society.

               In his defining work, The Road to Serfdom, Friedrich Hayek further warned that inefficient concentration in one sector would spread to other sectors, and with each step down this "road" increasing centralized political control, diminishing economic performance and personal liberty.    In the paradigm case, Vladimir Lenin foresaw the spread of political power through the spread of economic power. He envisioned certain vital sectors that could have been served by the private sector, including agriculture, utilities and transportation, banking, and communications as "commanding heights" of the economy; control these and you control the society generally, leading to the "serfdom" that  Hayek feared.   

              So the fundamental problem of socialism is not that there is a public sector --  public sectors are a requirement of any economic system including capitalism -- but the distortion away from the right mix of reciprocal complementary public and private sector activity.  

              Just as the private sector is weakened when decentralized prices are distorted, a public sector is weakened when representative government is distorted by a gerrymandered non-representative legislature or discriminatory limits on voting rights.   Donor-driven legislative decision-making combined with gerrymandering that leads to non-representative government yields economic distortion comparable to Socialism.   

              We see one of the worst examples of this distortion right here in Wisconsin where voters gave Democrats 52% of their vote count but received only 39% of the legislative seats. In other words, the people with a slim majority preference are relegated to a powerless minority position in the legislature.  That means that their preferences for public goods and services are bypassed in favor of the preferences of a donor-driven minority among the citizenry.    

              This distortion by nonrepresentative government plagues decision-making of all kinds.  For example,  should the state build new roads or repair existing roads; rural roads versus suburban roads versus urban roads;  cut taxes versus increase spending on math education; reproductive rights versus the 1849 law that banned those rights; convenient voting in numerous polling places and drop boxes versus restricted access to voting and relentless unproven claims of voter fraud.

             Unrepresentative government was on full display on October 4th when they refused to hear a proposal to place a referendum on reproductive rights before the voters to permit them to express their preferences. The effort to put the referendum on the ballot was made in reaction to the overwhelming vote in Kansas to reject a change in the state constitution that would have banned abortions.  The referendum would test whether the voter preference in Wisconsin is about the same as in Kansas. 

              The gerrymandered legislature prevented Wisconsin residents from voting on the matter. Instead, after the governor convened the non-representative legislature to consider the matter, it "gaveled in" the beginning of the session and then immediately "gaveled out" the end of the session without considering the motion. This voter by-pass is little different from that in a socialist state.    

             A Republican foray into actual socialism is the Foxconn fiasco that taxed successful business and residential economic activity in order to subsidize a private foreign firm that has proven to be notoriously incapable of fulfilling promised product and jobs on the valuable land cleared for the purpose.     It is amazing that the Dems have not applied the socialist label to this misplaced Republican investment.

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

     

            

     


  • ENGLISH AND MATH PREP CAN CUT COLLEGE COSTS

              ENGLISH AND MATH PREP CAN CUT COLLEGE COSTS

              In discussions of college costs  --  the high and rising price tag, the necessity of taking out student loans and the burden of repaying them,  the fairness of forgiving some or all of those loans, the foregone opportunity to work and earn instead of going to college  --  an important element is often left out:  how to maximize the long-term personal and financial benefit from those college years. A college education is a lifelong asset requiring investment of both time and money.  There is a lot riding on how those investments are made: earning good grades in a rigorous course of study, discovering and developing talent and passion into lifelong learning, lifetime friendships, and associations, and increased lifetime income.  

    To Reduce College Costs, Students Should Enter Prepared in Math and Writing Skills

             The difference between what is expected in high school versus what is expected in a rigorous college program can come as quite a shock to entering students.  Good colleges require students to organize and develop a large amount of work product and to record and communicate their findings in written and oral form.   English and math are the two languages in which this requirement is met; students should use the time in high school to deepen their working knowledge of them.  This preparation enables students to progress from passive to active learning, from routine derivative thinking to inventive thinking, from working with materials created by others to more actively creating their own work product.  Prepared students have the foundation to earn higher grades in more rigorous disciplines, allocate their time efficiently, reduce the burden of student loans, and maybe even reduce total cost.  

    Emphasizing  High School Writing    

       Opportunities to improve writing skills while in high school occur most obviously in English classes.  Students should be smart consumers, enrolling in courses where a dedicated teacher will assign writing regularly, impose strict deadlines, and, most importantly, mark up draft essays and -- because advanced writing involves multiple revisions -- provide an opportunity to revise and resubmit the draft written work.   Applying this pattern to increasingly complex topics enables the student to take organization and communication skills to a much higher and more innovative level and become a more analytical thinker and writer.  All this effort also instills time management, starting projects as early as possible to permit those productive revisions. 

    Elective courses in history and social studies will solidify this discipline if they include additional written work and the opportunity to revise after teacher feedback.       

    Emphasizing  Math Word Problems

              A working knowledge of math is acquired through diligent, steady work of two kinds: working through routine exercises and solving word problems. Exercises challenge the student to use well-known steps or algorithms to solve arithmetic calculations or algebraic equations.  In contrast, word problems require the student to set up an exercise by reading a problem description, separating the germane from the irrelevant, developing a math model and solving it, and then writing a short statement explaining their results.  The importance and applicability of math can be conveyed in word problems derived from a wide range of real-world topic areas such as business, engineering, sports or personal finance.   Examples could include the power of compound interest and the importance of saving when young; how to choose a car and pay for it with a car loan; navigating an airplane or ship in strong wind and water currents; calculating the time required to travel to Mars and return;   how to decide whether to kick a field goal or run the ball on fourth down; and perhaps the most immediate word problem: how much to borrow to pay for college.

    Finally, the high school years are a good time to hone computer skills needed in college. Requirements for essay writing and math problem-solving,  complemented by computer skills, appear in virtually all disciplines across any college campus from science and engineering to social science humanities and fine arts.  In many instances, electronic textbooks have replaced physical books. E-books and their electronic ancillaries are festooned with electronic problem sets and video clip tutorials. Students are expected to use their computer skills to enhance communications with professors, teaching assistants, and other students.  

     OK, But How Does Such Preparation Ease the Financial Burden? 

      Once in college, prepared students can produce written work with greater speed and sophistication.  For them, college work is more time-manageable as well as higher quality.   The prepared students can therefore choose from a much wider selection of majors, and enjoy a greater chance of discovering what they love, both for personal pleasure and to earn a living.   They save money when they enter a rigorous major earlier, select more advanced courses in that major, and graduate in the traditional four years rather than the five or six years that too often results from insufficient planning.  The prepared student can justify borrowing for their education, bypassing low-paying part-time jobs that add very little to their human capital. They can devote more of their time to investing in the durable asset of an education of greater value.  

                  

       


  • JOE BIDEN ENDORSES LARGE  TUTORING PROGRAM

             On the steps of the Lincoln Memorial that sweltering afternoon of August 28, 1963, Martin Luther King told the nation of his dream, and how long his people had been waiting. Seared into that speech was "the fierce urgency of now."

             "Now" was 59 years ago. Much progress has been made on voting, housing, and employment, but not in many high-paying occupations.  Among the remaining barriers to opportunity that has been getting far too little attention: gaps in math education and attainment across the social and economic spectrum. 

             Those deprived of solid math preparation are denied entry into many highly paid occupations.  The lack of diversity in high-paid and rewarding professions, including the obvious ones  – – engineering, science, IT,  medicine, business analysis and finance,  economics -- and, in this high-tech age, even history, political science, journalism, and the arts -- has lasted generations, reinforcing the income and wealth gap across race, ethnic and gender lines.

    Investments

              Unlike subsidies for rent, utilities, food, and other important assistance, a working knowledge of math cannot simply be transferred.  Instead, that knowledge must be learned through an organized time commitment, involving both instruction and practice.   For most of the math deprived, circumstances prevent them from making the necessary investment themselves. If the investment is to be made, and latent talents developed for the benefit of the individual and society as a whole, it must be done at public expense.  

    Investment in the Math Teacher Corps

             Teaching math requires an educational background, experience, and love of the subject.  These attributes are transferrable to many employment options; teaching is only one of them.  To attract more highly qualified individuals to the teaching profession, pay them more and invest in smaller classes.  

    Invest in Tutoring

             Many students find it difficult to get accurate and timely help with homework. One way to reduce this math-help gap is to offer online tutoring through virtual meeting technology like Zoom or Google Meet.  To reverse this gap, widened even further by the Covid pandemic, researchers at Johns Hopkins and Brown University propose a massive increase in tutoring online. They outline a tutoring service staffed by 300,000   college students and other community members who could interact with students struggling with their math and reading:

     "What we and many other researchers have found is that the most effective strategy for struggling students, especially in elementary schools, is one-to-one or one-to-small group tutoring. Structured tutoring programs can make a large difference in a short time, exactly what is needed to help students quickly catch up with grade level expectations."

             Matthew A. Kraft, and Grace Falken of the Annenberg Institute at Brown University,  set forth a ten-point  "blueprint" for implementation.  They propose that tutoring, greatly scaled up, could become a permanent feature of the U.S. public education system.  "Tutoring is among the most effective education interventions ever to be subjected to rigorous evaluation."  (https://www.edworkingpapers.com/sites/default/files/ai20-335.pdf)

    Biden Tutoring Plan

             Joe Biden endorses the plan to engage such a large number of tutors.  Under the plan,  "peer" tutoring be organized where successful students, properly trained, would provide the service for struggling students a few years younger: with high-schoolers earning class credit for tutoring elementary school students; college students earning work-study pay or course credit or partial loan forgiveness for tutoring high school students; and college graduates tutoring in high schools under the AmeriCorps program.  Biden is including such a massive tutoring plan as part of his administration’s support for student success (https://www.whitehouse.gov).  Finally, the state of modern technology should compel state and local governments to provide all students with laptops and WIFI hotspots so that students and school systems can take advantage of this tutoring option.  

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

     


  • SENATOR JOHNSON STEPS ON THE POLITICAL "THIRD RAIL"

             The third rail of subway systems provides high-voltage electricity to the subway cars; anyone who touches it is likely to be burned to a crisp.  The analogous "third-rail of politics" is Social Security, and yet Senator Johnson of Wisconsin seems willing to risk political electrocution.  Famous for recommending Listerine for Covid, and claiming that climate change is a hoax, he now claims Social Security is bankrupt, and to cure this alleged fiscal condition he wants Congress to adjust Social Security payments annually.   In other words, rather than use the system formulas for determining retiree benefits, Johnson would substitute congressional "discretion," shifting the Social Security program to an annual budget item rather than a permanent program.  Before assessing Johnson's proposal, voters should be aware of how the Social Security system determines benefits now.

             The program works under two arithmetic formulas,  first, to generate revenue via the payroll tax, and second to calculate the benefits that workers receive upon retirement.   These two formulas determine the obligations income earners have and the earned entitlement during their retirement.   

    The Payroll Tax

                In 1935, President Franklin Roosevelt designed Social Security as a government-mandated retirement insurance program to reduce poverty in old age. He chose to finance the program with a payroll tax as a kind of insurance premium.  This had the effect of stabilizing the system in the face of strong "conservative" opposition.   Because program benefits are tied to worker earnings, voters do not perceive Social Security as “welfare." Roosevelt said:   “We put those payroll contributions there to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.”  To this day, any “damn politician” who proposes to curtail any aspect of Social Security can expect to encounter opposition from a huge majority of the electorate.  

             There is no mystery about the payroll tax withheld from earnings: it appears right on a worker's pay stub as the FICA (federal insurance contribution act) tax. This year, for example, the FICA tax rate is 7.65 percent (on the first $147,000 of earnings for the 6.2% deducted for Social Security; no income cap for the 1.45% deducted for Medicare).  Both the employer and the employee pay this amount for a total of 15.3% (The self-employed pay both halves).  In effect, this is an insurance premium.

    The Benefit Formula  

              In addition to the payroll tax, the benefit formulas also add to the stability of the system. The method for calculating benefits is described at the website ssa.gov.     In a series of steps, the method leads to the retirees' Primary Insurance Amount (PIA), i.e., the amount of the retiree's first monthly check.   That monthly amount is adjusted for inflation to provide a rough estimate of a constant level of purchasing power.  The United States of America has not missed one payment in the 82 years of the program.

    Arithmetic details

             Step one in the calculation of the PIA is the determination of the average indexed monthly earnings, or AIME.  This is a tabulation of the worker's earnings during their top 35 earning years, up to a maximum amount designated for each year  ($147,000 for 2022).

      These past earnings are then adjusted via a wage index to reflect the average worker's contribution to the nation's productivity.   This adjusts the past dollar earnings not only for inflation during the period between the performance of the work and the present, but also for productivity growth. In other words,  the prosaic arithmetic is designed to reflect the worker's participation in the steady growth of labor productivity, which has averaged 1.5%  annually.  Using this wage index ascribes to past work the same purchasing power as if the work were produced in the current year.  

    The next step in establishing the PIA is a three-part summation. In the first part, each dollar of the average indexed monthly earnings up to the first $1,024 adds 90 cents to the benefit check; in the second part each dollar between $1,024 and $6,172 adds 32 cents; and finally, in the third part, each dollar above $6,172  adds a mere 15 cents. Note that while the benefit amount rises with earnings, the rate of increase drops very fast at the $1,024 and the $6,172 “bend points."  The result of adding these three parts is the amount of the retiree's monthly check.  This amount is adjusted for inflation beginning each May, and checks are sent for the remainder of the retiree's life.

      Roosevelt's reliance on the payroll tax formula and the benefit formula manifests a social contract with carefully specified contractual terms.  The payroll tax formula and the benefit formula are conditions of employment in the United States. They are part of what workers agree to when they accept their terms of employment.

    For Johnson's proposal to have any meaning, he must be talking about reducing the benefits below the benefit formula that people have relied upon for their entire work life.   In effect, Johnson would have the benefits reduced long after the work that earned those benefits had been performed and accepted by employers. The worker cannot reclaim the value of that work if the terms of the benefit formula are reneged upon after the work is performed, a portion of the value of that work will have been stolen.

               William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

     


  • If You Have a Business, Who Built What?

             The fall election season will bring the familiar type of campaign ads accusing Democratic Party candidates of fiscal irresponsibility and wasteful government spending, even on infrastructure spending that will boost productivity and competitiveness. Expect to hear an old favorite: the story of how  President Obama stumbled into a rhetorical thicket when he said, “If you have a business, you didn’t build that. Someone else did that.”    

             Standing alone, these two sentences are outrageous. Accordingly,  by omitting the immediately preceding sentences, these words became part of Republican campaign ads,  declaring that they showed Obama’s socialist tendencies.  

    The Importance of Interdependence   

             In his 2019 book, The Conservative Sensibility, George F. Will does his readers a great favor: he includes the entire paragraphs of Obama’s quotation, words that demonstrate that Obama was speaking about the role of government in providing public infrastructure essential to the business sector but which businesses do not provide for themselves.  Immediately preceding the famous quotation above, Obama said, Somebody invested in roads and bridges.” He was making a case for increased government investment in the nation’s deteriorated infrastructure, claiming such spending would improve business profits. His point was that firms do not have to build the entire infrastructure they use, that they can focus on what they do well and support government efforts to provide such public assets as bridges, roads, water, sewer, and police and fire protection.

             Obama further noted that firms need not build many of the other assets they need and can simply buy or rent them in the marketplace. He was appealing to bedrock economics which for 250 years has demonstrated how markets guide the inter-dependence of the citizens in a market economy. He further said, Somebody helped to create this unbelievable American system that has allowed you to thrive,”   emphasizing the importance of this interdependence in enhancing the firm’s pursuit of profit.

    Instructional Episode in The Role of Government in a Market System.

             Two lessons can be drawn from the episode. First, without streets and roads,   reflexively anti-government "free market" advocates would have a hard time moving their goods and services to market and having their employees show up for work. These complements to business are built by government and paid for by taxes. 

             Second,  an important lesson for political speech writers: don’t use pronouns with an antecedent that lies in another far-off sentence! A lot of ad-writer opportunism would have been avoided if Obama had simply said, “If you have a business, you didn’t build the streets, roads, bridges, water and sewer systems that you rely on to run that business. Some level of government did each of those things,  and we all paid taxes to enable them to make that happen.” That’s it: no pronoun, no link to an antecedent that can be de-linked.  

             Rhetorical vulnerability aside, Obama’s meaning is essential: the private enterprise sectors of the economy depend strongly on the public sector. Reciprocally, the various levels of government rely on market activity to generate the value added to the economy from which the resources are drawn to finance the public goods.  Markets rely on government and vice versa. 

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.

     


  • THE FREE MARKET MODEL, "A SYSTEM OF NATURAL LIBERTY"

    Webster’s Dictionary defines a “conservative” as someone who adheres to established beliefs and practices,  adopting new ideas for long-held views only if rigorous examination compels that change.   Consequently, the dictionary definition of the word “conservative” suggests a principled approach to thinking about public policy.  By comparison,  if you ask a self-described conservative what the word means, you are likely to get a response that includes slogans like: individualism; personal responsibility, smaller government, limited government, liberty, freedom, and fiscal responsibility. Moreover, there is a headliner attribute -- "free markets"  -- that they confidently claim assures that all these goals can be met within a robust economic system where self-regulating markets can better serve the public than if the government intervened.  

    Economists refer to markets favorably too; they conclude that under certain preconditions, markets expand individual access to resources,  contributing to greater economic freedom from Nature's scarcity.  But, this "pro-market" preference comes with a warning: for markets to function in the public interest, certain prerequisites must be met.   

    The Free Market Model

    To understand complex systems like markets it is common to build "models." These are detailed descriptions of an idealized version of a real thing. Building models is a centuries-old art; Archimedes (287BC - 212BC) taught engineering by explaining frictionless "natural machines," including pulleys, levers, inclined planes, etc.   Although there is no such thing as a frictionless machine, engineering students from Archimedes' time to the present begin their study of real machines by first studying imaginary frictionless machines. Economists do the same thing with "the free market model," a set of principles describing how a market would function under idealized conditions.  

    The Free-Market Model

    In the free-market model, business and private investors base their decisions on their expectation of profits and losses.  They invest, invent, innovate, buy equipment and hire people, all free of government direction or interference.    Firms seek profit by selling to buyers. The process of competition among profit-seeking firms establishes market prices that eliminate shortages and surpluses: the amount buyers want to buy equals the amount sellers want to sell.   

    The model describes how markets adjust to change; for example,  if demand for an industry’s goods and services increases, price and the expected profits will rise, encouraging the expansion of supply via the participation of more profit-seeking investors.  This inflow of new competitors increases the choices available to consumers, driving down prices until it is no longer attractive for additional profit-seeking suppliers to flow in.  This process of entry and exit transforms the  original profit potential into a benefit to consumers, reducing  price to the level that covers  production and distribution costs including a "fair rate of return to investors."  

    If demand decreases, the system works in reverse;  price falls, threatening losses and encouraging some firms to leave the market. This outflow of some firms reduces supplies of goods, causing prices to rise for the remaining firms until once again price covers cost including a fair rate of return to investors. Through this process of profit and loss, prices are determined not by the individual firm but by the interplay of all market buyers and sellers.  The final results of these competitive pressures are lower prices, improved products, innovative ways to produce products, and control costs, ultimately for the benefit of consumers.

    This model reflects the keen insight of Adam Smith, the Founder of Modern Economics: in competition, profit-seeking firms serve the public interest even though the firms do not have public interest in mind as they seek profits; that “is no part of their intent.” Because there is no coercion, these are called "free markets." Investors are free to add or withdraw their investment and free to expand or contract their offerings of products and services to buyers. Firms are free to innovate, i.e., to change those products or the way they are made, sold, warranted, or financed.    Meanwhile, buyers are free to buy the quantity they prefer, provided they have the ability to pay. They earn the ability to pay in another free market: the market for their uncoerced labor.  All of this operates without government interference.  Smith referred to this description as a “system of natural liberty.” 

    Product warning: If the preconditions for competition do not exist in a particular sector of the economy, the beneficent outcome ascribed to the free-market model cannot be expected.    For example, the pre-conditions for competition are not present if firms collude, i.e., obstruct the process of competition by forming agreements to reduce total output to force prices up. The anti-trust laws are designed to protect the competitive process by criminalizing such collusion.

    Contradiction: Markets cannot exist without government.

              Real markets cannot function without certain foundations provided by government, including rule of contract law, property rights law, ownership rights law, and other sectors of the law that form the “rules of the game.” There are no investor returns to these laws or their enforcement.  Although they are prerequisites for markets, markets cannot provide these laws.    Those who favor market allocations over central planning allocation of resources must still favor complementary government activity.

    Strictly speaking, there is no such thing as a free market.  However, the free-market model has broad applicability not only as a preliminary tool of analysis and critique but also as a guide to public policy. The model captures the role of competition and the role of the price system in the coordination of the economic affairs of independent-minded people in a free society.   

    Future essays in this series on Econ4Voters for Grassroots North Shore will explain the compatibility of regulated markets with representative government;  how the powerful forces of markets can be used to address climate change;   regulate utilities such as electricity, natural gas, cable TV; and guide the construction and operation of infrastructure such as streets, roads, bridges and airline flight-paths.   Examples such as these, and more, will show the importance of economic understanding in the development of public policy and in the evaluation of politicians at election time.

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.


  • Will Social Security "Go Broke" in 2035? No.

             Every year the Social Security Administration issues a trustee report stating the condition of the system, including the "bond fund," or, as it is officially known,  the "Social Security Trust Fund." This year the trustees estimate that the bonds in the trust fund will "run out" in  2035. (Find the report summary here:  https://www.ssa.gov/oact/TRSUM/)  And every year there is confusion about what it means for the trust fund to be exhausted.  Will retiree payments be cut? Will taxes have to be raised? 

             Soon after the Social Security Administration trustees report landed, the Washington Post ran opinion-writer Megan McArdle's June 9, 2022, front-page article under the screaming headline:  "As Our Entitlements Crisis Gets Closer, A Solution Moved Farther Away." She describes the pending "insolvency" of Social Security and the fraught choice that will face the Congress at that time.

             This commonly-held description implies that the country’s most popular government program is in serious trouble. Current retirees, as well as current workers who've paid into the system during their entire work life and who anticipate reliable payments during their retirement, all have reason to be alarmed when such reports appear in leading newspapers.

             Moreover, there is no doubt that this issue will play a role in the election season.  For instance, in the race for the US Senate seat in Wisconsin, two-term incumbent Ron Johnson, now seeking a third term,  has claimed  that Social Security is a "Ponzi scheme" and it's  pending "insolvency" is just another example of "democrat (sic) socialist programs bankrupting the country."

    Follow the Money. Follow the Bonds

               Fortunately, the system is not going broke. The correction of this common misunderstanding and the political opportunism derived from it must begin with a review of how the social security system gets its money. As designed in 1935, the chief source of revenue for Social Security is a designated tax: the payroll tax on earned income.   Originally this payroll tax was to be "pay-as-you-go," workers paying for retirees in a rolling obligation, each generation of workers paying for the Social Security benefits of the retirees. But it is easy to overlook this economic reciprocity: each generation of workers inherits the knowledge and physical capital produced in the past, resulting in an average growth of productivity of roughly 1.5% per year.

             No one could have predicted in 1935 that the hugely disruptive World War II would be followed by an 18-year "baby boom" of 77 million people, in turn, followed by an 18-year "baby bust" of 47 million people.          This pattern of boom and bust birth rates predetermined a boom of retirees collecting benefits and a bust of workers to finance those benefits. This meant that the pay-as-you-go system based on payroll tax revenue would place a financial strain on workers when the baby boomers retired.  To avoid this excess burden, beginning in 1985, President Reagan raised the payroll tax above the amount needed to meet the retirement benefits year by year.  That "surplus" amount was used by the Social Security System to purchase special Treasury bonds on behalf of the boomers.  In effect, this combination of taxes on boomer income and investment in bonds forced the boomers to invest in partial payment of their own retirement benefits.  The reserve of those bonds is known as the "Social Security Trust Fund."       The plan was to build up this fund during the working life of the baby boomers, using the cash for the good of the country during those years, and then return the cash with interest during their retirement years.    The sale of the bonds would be the accounting transaction in exchange for the cash.

             The revenue gained from this sale of bonds would be added to the payroll taxes paid by the workers during those years. As a result, the payroll tax rate paid by workers would be set lower than if the workers had to finance the entirety of baby boom retirement benefits.   The System would sell bonds from the Trust Fund back to the Treasury in exchange for cash sufficient to pay for about 1/4 of the retiree Social Security benefits;  the payroll tax paid by workers would pay the other 3/4.

    Crisis? What Crisis? 

             According to estimates made in 1985 when the bond reserve was established, the boomers would be forced to save enough to pay their share until the year 2060, and accordingly, the bonds would be sold out by the year 2060.  By then all but a few persistent boomers will be gone and no longer collecting retiree benefits.    As the trustees now report, however, the bonds will run out in 2035 when over half of the boomers will still be very much alive and collecting retirement benefits. Where will that money come from when the bonds are gone?

             The great fear presented by the predicted exhaustion of the bond fund by 2035 is that Congress will have to choose between cutting benefits by 1/4 or raising taxes to pay 1/4 of the benefits. Fortunately, the math shows that fear is unfounded: the retention of the planned benefits schedule will not require an increase in taxes or borrowing after the bonds run out.

             If after 2035 Congress orders the Social Security Administration to maintain scheduled benefits, the amount required will be the financial difference between retirement benefits and worker payroll tax revenue.  The retirement benefits schedule depends upon the summation of the individual retiree's highest 35 years of earnings during their working years. The payroll tax revenue depends upon worker earnings. Neither of these two formulas depend upon past savings; the exhaustion of the bond fund does not affect the difference between them.

              The bonds are going to run out sooner than expected because the savings were offset by expenditures not anticipated in 1985, including cuts in general taxes; increased defense costs; the multi-trillion-dollar response to the economic downturn of 2008/9;  the pandemic–induced economic downturn of 2020.  But such diversions should not be paid for by boomers in the form of reductions in their retirement benefit checks. Like all citizens, they will pay their share of those government expenditures through their general taxes.  They should not have to pay twice; i.e., once through their general taxes and a second time through reductions in their retirement checks.  

                Because the amount to be supplemented is not dependent on the existence of bonds, neither the rate of taxation nor the rate of government borrowing will have to change after the bond fund is exhausted. If in 2035 Congress orders the Treasury to continue to supplement Social Security retirement checks, the Treasury can provide the required supplementary money without raising tax rates or borrowing.   

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee

        


  • URGENT: MAKE A CARBON TAX PART OF CLIMATE CHANGE POLICY NOW

             The latest UN annual report on climate change issues the sternest warning yet that climate change due to human activity is accelerating. This series of reports has triggered two types of responses. The first type calls for government command and control measures that would phase out all fossil fuel-based energy by 2030; this has gained a great deal of attention with the introduction of the Green New Deal.  The second favors the carbon tax, a pro-market approach that would use price incentives to induce market participants to reduce their greenhouse gas emissions. Both strategies will be needed, but the carbon tax is misunderstood and needs further explanation. 

       The atmosphere is a “common access resource.” Consequently, an unregulated “free market” does not require payment when polluters emit CO2 into the atmosphere.  They have an incentive to save abatement costs by using the atmosphere as a free disposal site.  The implementation of a tax per unit of carbon emitted into the atmosphere would insert the missing price per unit of CO2 emission. Profit-seeking firms would be incentivized to direct their engineers and scientists to seek emission-reducing methods that are cheaper than paying the tax.

     Reducing carbon emissions costs money. In an unregulated "free" market, a firm that voluntarily incurs abatement costs places itself at a competitive disadvantage relative to competitors that do not abate their emissions.   The carbon tax applied to all emitters levels the playing field by eliminating the emitters’ advantage:  without the carbon tax, a firm can gain a competitive advantage by emitting more carbon; with the carbon tax, a firm can gain a competitive advantage by emitting less carbon.  

     As the carbon tax is passed on to consumers, they will perceive a change in the relative prices of different energy sources. For example, due to coal's relatively high carbon content per unit of energy, the carbon tax for coal would be roughly twice that for natural gas, providing coal users with a strong incentive to switch to gas. Energy buyers would perceive even lower relative prices for non-fossil energy, like wind and solar, provided they can work around natural interruptions of those sources.  

    The Bipartisan Approach

    Recognition of the potential of this tax to curtail climate-altering CO2 emissions is growing, and support for it is gaining ground on both sides of the aisle. Recently, Senators Whitehouse (D-RI) and Schatz (D-HI) proposed charging polluters $49 per ton for their carbon emissions. Meanwhile, the Climate Leadership Council (CLC),  a "conservative" organization,  endorsed a fee of $40 per ton. 

    This measure would generate considerable revenues (e.g., the CBO estimates that the Whitehouse/Schatz proposal would generate over $2 trillion per decade).  The money could be spent partially offsetting the increase in the national debt resulting from the 2017 recent debt-financed tax cut. Or, the money could be spent to beef up safety net programs for the poor, shore up the national retirement and health programs, and fix the nation’s crumbling infrastructure. Or, it could be spent on speeding up the development of alternatives to fossil fuels. After all, if the scientists are right, we need to make up for lost time.  Finally, the CLC has proposed that the money could be returned to the public in the form of an equal per-person “citizen dividend.” At $40 per ton, that annual dividend is estimated at roughly $2,000 per family of four.  

    The Carbon Tax Complements Other Government Regulation.

     Many “small government conservatives,” who recognize the need to reduce CO2 emissions, over-estimate the effectiveness of a “free-market solution” offered by the carbon tax. It has great appeal for them because, as a complement to market forces, they regard it as a substitute for the "heavy hand" of government command and control actions (quotas, bans, equipment requirements, measurement techniques, inspections, and compliance rules that restrict managerial prerogatives). However, while a carbon tax reduces the scope of the required regulatory oversight, it does not eliminate the role for regulation.  The regulatory authorities still will be required to continually monitor carbon emissions to determine how high to set the tax - the higher the tax, the lower the emissions. Moreover, the government must also monitor compliance. So, while the carbon tax creates compatible incentives to reduce emissions, it is not sufficient to absolve the government of all its responsibilities.  

    The Carbon Tax is a Start on Net Zero CO2 Emissions by 2050

     According to the CLC, such a hefty tax would induce investment in abatement methods that would keep our emissions far below the 2030 target levels agreed to in the Paris accords. That would be a good start on the "net zero" by 2050,   regarded by scientists as a necessary condition to keep global temperature increase to 2°C. So the carbon tax is a good component in the large set of proposals that must work to re-organize the incentives of 340 million ideologically mixed citizens. The carbon tax gives all decision-makers an incentive to act in ways that save the planet, even if that is no part of their intent.

    William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.