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.

            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.

             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.     

           The debt ceiling issue has been resolved for now. But before we move on from this episode, let’s reflect on the recent history of the debt-ceiling law and its negative impact on rational economic policy. Perhaps a clearer understanding of the law would help us get rid of it. 

         First,  the debt ceiling law is a cap on the amount the government can borrow even when borrowing would be necessary to meet all the spending commitments Congress has made. The cap would force the government to renege, or "default," on its obligations. The nation came close to default in early June 2023, but this was forestalled by bipartisan agreement to lift the ceiling until 2025.  

         Second, the nation was brought to this crisis by Republicans. That is, the application of the law is asymmetric: Democrats do not impose pre-conditions for raising the ceiling when Republicans occupy the White House, yet  Republicans do impose pre-conditions when Democrats occupy the White House.   This practice is long-standing and has become known as "the political business cycle."

         For example, prior to this latest default threat, the debt ceiling was raised three times during the Trump administration, in 2017, 2018, and 2019, without any default threat at all. The first two of these debt-ceiling increases were approved on a bipartisan basis without any pre-conditions; the 2019 increase was approved on a bipartisan basis, offset by a $77 billion cut in administrative spending.

The Economics Behind the Strategy

          This asymmetric political business cycle strategy relies on macroeconomics, a branch of economics designed as a tool for good -- achieving full employment with low inflation – – but which, like any tool,  can be abused. 

A closer look at core economic principles will show why the political business cycle works.  First, national product equals the total value of all the goods and services that people produce and distribute. This total derives from the huge number of daily trades between foreign and domestic individuals, business firms, and government agencies.  

          Second, all spending is someone's income. When a good or service is purchased, money is exchanged to reward the people who made, distributed, and provided for the sale of that good or service.

         Third, all spending is comprised of four categories: consumption, private sector investment, government spending, and net exports. If the total of these spending categories rises, the total demand for goods and services rises, thereby generating more jobs and income for those producing the goods and services.    In this scenario, the improvement in economic conditions improves the political prospects for the party in the White House.

         If, on the other hand, the rate of total spending is decreased, then the opposite is true; demand for goods and services will decline, as will the demand for the people who produce those goods and services.  Here the political prospects worsen for the party in the White House.

         The political business cycle strategy works because government spending -- a key component of total spending – is determined by policy.  Sure enough,   during Republican presidential administrations -- Reagan/Bush '41,  Bush '43, and Trump -- the debt ceiling was raised and spending on defense and non-defense categories rose.  By contrast, during Democratic presidential administrations --Clinton,  Obama and the Biden years thus far -- we have a curtailment in the rate of spending and, in the case of Obama, an out-right decline.     Moreover, those increases in the debt ceiling during Republican administrations --  three times during the Trump administration and several times during the Reagan Bush and GW Bush administrations -- were all with bi-partisan votes.  So, the debt ceiling weapon is available to both parties, but only one uses it.

 Return to "Regular Order"

         Regular order is the systematic assembling of information prior to legislative action. During regular order congressional committees gather supporting documentation and hold hearings compiling expert testimony from specialist members of Congress, experts within the federal agencies, and from think tanks and universities.  During regular order, each bill that is considered has a fiscal note or scorecard provided by the Congressional Budget Office so Congress knows the price of what they are proposing and how it will be financed.

          The ability to impose a debt ceiling enables members of Congress with far less expertise on any given subject to nullify the more rigorous procedures of regular order. The debt-ceiling law enables less qualified members to sabotage the work of those who participate in regular order.   

         To paraphrase Henry the Second, " Will No One Rid Us of this Meddlesome Law?"        

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.

          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.

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.

          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.

         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

          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.