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.  

         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.

         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.

         Microchips are incorporated in nearly every good and service these days, as well as the processes by which they are made.  A short list includes major appliances;  heating and air conditioning systems;  electric, internal combustion, and hybrid vehicles; waste disposal; and of course cell phones and computers.  A shortage of chips during the pandemic led to a shortage of all of those products, as well as slowing the effort to renovate the electricity grid, an essential step in addressing climate change.   The shortages also led to higher prices for those products and processes, contributing to the supply-side part of the inflation now disrupting the United States.

         With bipartisan support, the "Chips and Science" bill is working its way to President Biden's desk after the Senate passed the bill on July 27 by a margin of 64 to 33.  Officially known as Creating Helpful Incentives to Produce Semiconductors or CHIPS, this bill will allocate $52 billion to chip manufacturing within the United States, and $200 billion to research in the ongoing improvement of chips plus education and training programs to increase the number of chip-manufacturing employees.

         The CHIPS bill is designed to foster discoveries made in the USA that contribute to the ongoing improvement in speed, accuracy, durability, and capacity of chips.   To stay on the "cutting edge," microchip manufacturing requires ongoing research by firms in the private sector, by university technicians and professors as well as scientists at national and private labs.   The aim is to assure that conceptual breakthroughs and their applications take place in the United States, including in the advanced manufacturing sector of the State of Wisconsin with its 187,000 employees.   

         Wisconsin Senator Johnson voted against CHIPS. He labeled CHIPS "corporate welfare," and "socialism."  He also declared that the bill would be "inflationary."  These charges reveal economic misunderstanding that is harmful to the nation and to Wisconsin.     

         The core concept behind CHIPS is that these improvements in the US semiconductor industry are a public responsibility.  The alternative is unregulated market activity, or "free markets." As previous essays in this Econ4Voters series have argued, that free-market default is superior only when the pre-conditions for market efficiency, including competition, are present; microchips are a textbook example of the opposite.   In the worldwide market, the manufacturing of chips gravitated toward countries like China, where their highly precise labor input can be hired for very low wages. This natural result of market activity left the US vulnerable to cut-offs, whether due to the pandemic or to military threats.

         Similarly, the notion that the CHIPS bill would be inflationary has it backwards. An increased supply of microchips reduces the cost of producing the modern goods and services that require microchips and the production processes that supply them. Both economic principles and empirical evidence show that productivity and cost are inversely related; increasing the supply and quality of microchips will fight inflation, not cause it.  Moreover, making the US economy more competitive globally will strengthen the dollar as an international currency which in turn would also fight inflation by making foreign goods cheaper.

         Johnson’s "socialism" charge reveals a particularly worrisome misunderstanding of economics. A capitalist system requires an efficient public sector to support the market system,  providing those things that the market system needs but will not produce for itself. Market activity requires streets, roads, sewer, water services, the legal system, police and fire protection, national defense, and a host of other public services. It is also a public responsibility to support specialized research that produces very uncertain investor return, as in the case of advanced semiconductors.  To conflate capitalism's public sector with socialism is a demonstration of incapacity to evaluate public policy.   It is not conservatism. It is confusion.

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

         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. 

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.