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The Past and Future of America's Social Contract - Josh Freedman and Michael Lind - The Atlantic

http://www.theatlantic.com/business/archive/2013/12/the-past-and-future-of-americas-social-contract/282511/

Josh Freedman and Michael Lind look back to the New Deal and forward to a new social contract. Will we have a continuation of the ruinous “low-wage” social contract that is now in effect, a shift to the Nordic social state, or a third alternative?

excerpt

What, then, would a better social contract look like?

First, we could accept the basic shape of the low-wage economy while softening its edges by asking government to do even more. With higher taxes on the wealthy, Washington could use the tax code to provide poor and middle-class families more generous means-tested subsidies to pay for childcare, education, and healthcare. Since the Clinton era, much of the Democratic Party has embraced this version of the social contract. It is essentially the model behind Obamacare.

The downside, besides the challenge of raising taxes, is that subsidies don’t guarantee affordability. They can even encourage industries to raise their prices; see, for example, the proliferation of cheap student loans, which have not made college much more affordable. What’s more, means-tested programs for the poor often lack the political support needed to keep them strong.

Another possibility, which would please many progressives, would be to nudge the economy toward a social democratic model such as that of Scandinavia. This social contract would entail high wages, a high cost of living, and a universal welfare state paid for with high, relatively flat taxes.

But transplanting the Nordic model as a whole to the U.S. would be difficult in the face of fierce resistance to higher levels of spending. It would also be hard to import a system of benefits paid for by broad and flat taxes, like payroll taxes and consumption taxes, on a country like the U.S. with much greater inequality.

In our own work at the New America Foundation, we have outlined a third idea we call the “middle-income social contract.” It assumes that many service industries won’t be able to offer their workers middle-income salaries, which means that, in addition to raising wages somewhat, the government will have to take a more active role in making essential services like education, child care and health care more affordable. The best way to do this is to provide these programs directly, such as through universal Pre-K, single-payer health insurance, or subsidies to the states for taking care of the elderly. Policymakers can begin to build a middle-income social contract by raising the federal minimum wage closer to a true living wage and expanding public early education, both of which are widely popular proposals.

The current low-wage social contract between American workers, employers, and the government has been a raw deal for most Americans. Just as the New Deal contract shifted to the low wage model, we need to shift once again to a system more suited to the current economy and needs of workers and citizens. The options for the next social contract are many—we just have to choose the right one.

I believe that we are on the path toward government provided education (pre-K through college), health and elderly care, and greatly strengthened social security, all paid for through higher taxes on the wealthy and business. We will simply have to wait for the GOP to be made insignificant through changing demographics.

Of course, many libertarians — including the tech sector — will be opposed, but there is a split there for social liberalism, like education. 

But this will be the front and center political battlefield for the next presidential elections. The core question: How much does the State have to do to ensure equality, both in opportunity and in services?

The worse the economic situation, the more cooperative the relationship between political parties. In “normal” times, parties in the Eurozone countries interacted mostly in a conflictual manner. But as economic growth collapsed towards the end of the decade, the relationships between parties in countries most affected by the economic crisis became overwhelmingly cooperative, that is they moved closer together in the latent network space. This finding suggests that just like war or terrorist attacks, a severe economic crisis can lead to a suspension of the regular pattern of political interaction.

Simon Weschle, Political Parties, the Eurozone Crisis, and ICEWS Data | Predictive Heuristics

AOL's Armstrong Needs Obamacare - Ezra Klein

http://www.bloomberg.com/news/2014-02-10/aol-s-armstrong-needs-obamacare.html?wpisrc=nl_wonk

Klein makes the case that corporations should be in favor of a single payer system, financed by individual and business taxes, to diminish the risks and costs of administering their own health care policies:

excerpt

It’s never made a bit of sense for health-care benefits to be routed through employers. The system emerged in the U.S. by accident. Wage controls during World War II made it impossible for companies to attract workers by offering higher salaries. Because health benefits were exempt from high wartime taxes, companies began using them to attract talent. After the war, unions joined employers in pressuring Congress to ensure employer-based health benefits were never taxed. So the U.S. emerged with an odd system in which a dollar of untaxed employer-based health benefits was worth much more to a worker than a dollar of taxed salary. Employers became the main vehicles for insurance not because anyone thought it was a good idea, but because the tax code made it a bargain.


The great mystery of U.S. health care is why the country’s CEOs didn’t demand a single-payer system a long time ago.


The result has been a disaster for employers and workers alike. In Canada, the risk pool is effectively the entire country. Two costly pregnancies have barely any effect on aggregate costs. In Medicare, the risk pool is 49 million beneficiaries. A few patients with catastrophic health problems won’t budge those numbers much. But in our employer-based health-care system, the risk pool is often a few hundred, a few thousand or a few tens of thousands of employees. A bit of bad luck can be catastrophic.

The great mystery of U.S. health care is why the country’s CEOs didn’t demand a single-payer system a long time ago. It’s an unending distraction — and cost drag — for companies to employ expensive human-resources divisions to negotiate with insurers and hospitals, manage health-care costs, and field questions and concerns from employees. Companies that are great at making cars or buildings or accounting software can’t survive if they’re not also successful at managing health insurance.

The system persists for reasons that will be familiar to anyone watching the rollout of the Patient Protection and Affordable Care Act: Change is scary. No CEO wants to deal with the outcry from employees who are terrified that their benefits are being outsourced to the government. And few CEOs trust the federal government to manage benefits with any skill — they worry they’ll just end up paying more in taxes than they do in premiums. That worry is often particularly acute for CEOs themselves, who would pay disproportionately in any system that relied on progressive taxation. Finally, their suspicions are typically reinforced by dire predictions from their HR managers, whose jobs depend on the survival of employer-based health benefits.

The result is that CEOs hate the current system but are too fearful to move to a different one. Consequently, they’ve made themselves — and their companies — vulnerable to “distressed babies.”

The last comment a reference to AOL’s Tim Armstrong, who stepped into a sinkhole by talking about ‘distressed babies’ that caused him to propose cutting back on AOL benefits, and then to rapidly apologize and back off those cuts.

Corporations’ opposition to a single payer nationalized health care system is crazy, like poor white people being opposed to food stamps.

Brain-imaging techniques are improving our understanding of the cognitive neuroscience of attention, revealing the physical structures that allow us to process information as well as we do, and giving material form to some of the abstract notions in Mr. Sims’s theory of rational inattention. This research, identifying physical structures that underlie our thinking, has a welcome concreteness.

Neuroscience is also showing important links between people’s emotions and behavior they consider rational. In his 1994 book “Descartes’ Error,” the neuroscientist Antonio Damasio considered the admonition of the philosopher Descartes to keep emotions away from our rational thinking. Mr. Damasio examined research finding that emotional pathways in the brain are interlinked with our calculating, ostensibly rational counterparts.

The neuroeconomist Ernst Fehr at the University of Zurich — who I hope will someday become a Nobel laureate himself — has used functional magnetic resonance imaging, or fMRIs, to study people playing games involving economics and finance. His summary of his and many colleagues’ research shows unequivocally that there are links between rational and emotional decision-making. When a game player makes an apparently calculated, rational decision to take an aggressive action against his opponent, emotional and social pathways light up as well, suggesting that the decision wasn’t entirely rational.

The question is not simply whether people are rational. It’s about how best to describe their complex behavior. A broader notion of irrationality may someday be reconciled with one of rationality, and account for actual human behavior. My bet is that real progress will come from outside economics — from other social sciences, and even from information sciences and computer engineering.

Robert Shiller, The Rationality Debate, Simmering in Stockholm - NYTimes.com

When we rank the inexcusable errors that creditworthy governments in the developed world have made over the past five years, the decision to lay off large numbers of teachers, police officers, social workers, and transportation and infrastructure workers has got to rank right near the top of the list. Public education is as close as you can get to a field where there is always more useful work to be done; if you have more qualified teachers available, you would obviously prefer to have smaller class sizes, and not to eliminate music and arts programmes. America’s crime rate has not fallen so far that there are no unsafe neighbourhoods where more police would not come in handy. (Camden, New Jersey, say.) America’s highways and bridges are in lousy shape; compared to other advanced economies, America’s public transit, broadly speaking, stinks. And yet the federal and state governments have spent the past five years laying off workers in all of these areas, driving up the unemployment rate and hence their own unemployment-insurance and other safety-net spending, harming the economy’s future growth prospects, and contributing to a labour market so frightening to young Americans that they are amenable to ideas like requiring the government to find jobs for everyone.

It’s ridiculous. So, to those put off by the socialist-sounding overtones of Mr Myerson’s article, here’s a compromise solution: rather than having the government find jobs for everyone, how about we have the government not fire people from useful government jobs they know how to do well in the middle of a recession? I am sure that in the current climate of bipartisan comity, this rational compromise will be embraced by all sides.

Jobs: Should the government guarantee work for everybody? | The Economist

Jesse Myersons’s Rolling Stone piece Five Economic Reforms Millennials Should Be Fighting For, continues to draw commentary. And the Federal government should push hard to get laid off government workers — at every level — back to work through a dramatic expansion of public funding. Interest rates at an all-time low, and this is a great investment to make now for the country’s future.

Why We Are Lucky To Have Lael Brainard On Fed’s Board

I read about some appointments President Obama is making for the Federal Reserve’s Board of Governors, and I saw a female face.

image

Lael Brainard

Binyamin Appelbaum, Obama to Nominate 3 to the Board of the Fed

President Obama plans to nominate three people to the Federal Reserve’s Board of Governors, including Stanley Fischer, former head of the Bank of Israel, as the Fed’s next vice chairman, the White House said on Friday.

Mr. Obama also plans to nominate Lael Brainard, a former Treasury Department official, to an open seat on the seven-member board, and to nominate the Republican financier Jerome H. Powell, on the board since 2012, to a new term.

“These three distinguished individuals have the proven experience, judgment and deep knowledge of the financial system to serve at the Federal Reserve during this important time for our economy,” Mr. Obama said in a statement.

[…]

Another nominee, Ms. Brainard, 51, joined the Obama administration in 2010 as Treasury under secretary for international affairs — in effect a senior diplomat for the nation’s financial interests. She stepped down in November. That expertise could prove valuable to the Fed as it navigates the global impact of its actions and seeks to foster international coordination on issues of monetary and regulatory policy.

Mr. Obama praised her as “one of my top and most trusted international economic advisers during a challenging time not just at home, but for our global economy.”

I looked into her background, and she’s run the economics steeplechase: master’s and doctorate in economics from Harvard (National Science Foundation Fellow). She graduated with highest honors from Wesleyan University, White House Fellow, a Council on Foreign Relations International Affairs Fellow, a Marshall Scholar elect, and a member of the Council on Foreign Relations, and Aspen Strategy Group.

And I read a paper she co-authored in late 2005 with Robert Litan called Services Offshoring, American Jobs, and the Global Economy. This was written looking back at the 2001 recession, which was surprisingly slow to turn around, a precursor to (or earlier part of?) our current Great Recession, and as she and Liton explore its terrain we same the same inequalities and precariousness of economics that have become the foreground issues of our day.

The starting point of their discussion is that offshoring has an impact on the economy that is almost the same as technological advance:

The authors write [citations removed],

International trade works much like technological change. Economists such as Catherine Mann of the Institute for International Economics, who point to offshoring’s overall benefits to the U.S. economy, typically argue that it helps lower costs and prices. A recent study by the consulting firm McKinsey and Co. estimates that the net cost savings of moving some jobs offshore is about 50 percent. This is far lower than the sometimes 80 to 90 percent wage differential between U.S. and foreign workers (because of costs incurred for coordination and telecommunications), but still sizable. In turn, lower inflation and higher productivity allow the Federal Reserve to run a more accommodative monetary policy, meaning the economy can grow faster, creating the conditions for higher employment. Mann estimates that economic growth would have been lower by 0.3 percent a year between 1995 and 2002 without foreign outsourcing in information technology.

[…]

Offshoring, like trade and technology, is a process of creative destruction whereby workers in affected industries face the very real possibility of losing not only their jobs but also their healthcare. Even worse, some workers fall down the economic ladder when they have no choice but to take new jobs at lower pay and thus face the prospect of lower lifetime earnings. This concern is particularly acute because it comes at a moment when anxieties about jobs and wages are at fever pitch. Against the backdrop of a breathtaking acceleration in manufacturing job losses over the past few years, the jobs picture remained bleak much longer into the recent recovery than in any previous postwar recovery.

[…]

This plays into a broader set of distributive trends that have been quite negative for American workers since the end of the 2001 recession. As Federal Reserve Chairman Alan Greenspan noted in April 2004, “virtually all of the gains in productivity have ended up in rising profit margins and hence in a decline in the proportion of that national income going to compensation of employees.” Two years into the current recovery, the profit share of income grew 33 percent (on a pretax basis) compared with only 3 percent during the recovery of 1992–93; worker compensation, meanwhile, remained down 4 percent—a steeper decline than during any previous recovery in the last four decades. At the same time, the administration’s tax policies have exacerbated rather than offset these trends by shifting the tax burden away from wealth and towards earned income. 

[…]

Now that college-educated, white-collar American workers will increasingly be in competition with highly qualified workers in the developing world, won’t they be subject to the same pressures?

In his new book, BusinessWeek’s chief economist Michael Mandel worries that that the answer to this question is “yes,” and he may well be right. If Mandel’s assumption is correct, the “skills premium” that educated workers earned in the past may be pushed down in the future, thus reversing a decades-long trend. 

Things have only gotten worse, and Brainard and Liton’s policy recommendations have largely gone unimplemented: most importantly, these two (the others regulatory and data-collection oriented):

Give American workers the knowledge and skills they need to compete in the global economy. America will not be able to hold onto the world’s highest paying jobs if the number of college graduates with degrees in physical sciences, math, and engineering continue on a downward trend. This requires concerted action at all levels: strengthening the kindergarten through twelfth-grade curriculum; encouraging more American teenagers to invest in science and engineering higher education; and restoring funding to community colleges and retraining programs that have recently experienced cuts. 

[…]

Address the dislocation faced by workers in the services sector. This is the most urgent priority. Although Congress made far-reaching reforms to the Trade Adjustment Assistance (TAA) program in 2002—including adding a healthcare benefit—it ultimately rejected efforts to extend the program’s reach to services workers. Software programmers are now suing the DOL to gain access to the same extended unemployment insurance and retraining benefits long guaranteed to trade-impacted manufacturing workers. Congress could make the suit moot by making clear that service workers are covered by TAA.

Wage insurance should also be a central part of the safety net for displaced services workers. In 2002, Congress amended the Trade Promotional Authority Act to include a program providing wage insurance to workers who are over fifty and can prove that trade is a “major cause” of their displacement.Service workers displaced by offshoring should be eligible for that benefit, and it will almost surely be necessary to lower or eliminate the age requirement and raise the compensation limit (now $10,000 per year) to reflect the higher income of many dislocated service workers.

I confess that I have never heard of wage insurance, but it’s clear that not only manufacturing jobs have been lost to offshoring. I am uncertain of the status of the TAA program, but I know that the education situation in the US today is far worse than it was in 2005, given the layoffs in primary and secondary education, and the rapid increase in the cost of college and the diminishing value of a degree.

And, since her area of economics is international trade — which impacts the economy like technology — I hazard that she can see into the ways that technology is changing our world, both for good and bad. 

We are lucky to have her on the Fed Board.

Update - 6:53am 11 January 2014 — ten minutes later, I am still reading the NY Times editorial page, and see the headline No Jobs, No Benefits, and Lousy Pay, which open with this: 
There is nothing good to say about the December employment report, which showed that only 74,000 jobs were added last month. But dismal as it was, the report came at an opportune political moment. The new numbers rebut the Republican arguments that jobless benefits need not be renewed, and that the current minimum wage is adequate. At the same time, they underscore the need, only recently raised to the top of the political agenda, to combat poverty and inequality.
The rise of a populist agenda in the US has to include an understanding of impacts of international trade on the economy. A ‘flat world’ isn’t a law of the universe like gravity, but is instead the outcome of myriad policy decisions that benefit some and harm others. I hope that Lael Brainard will help in changing that headline.

Watch Out For The Bust In China, And The Domino Effect

Easy credit has led to a debt overhang in China, and it’s a dangerous game:

Neil Gough and Keith Bradsher, Markets on Edge as China Moves to Curb Risky Lending

A complex and loosely regulated network of financial go-betweens has sprung up to profit from repackaging and reselling China’s new mountains of debt, turning loans into investment products. Such products have become popular among ordinary investors in China because they pay much higher interest rates than deposits in savings accounts, where rates are capped by the government to protect the state-owned banking system from competition.

But loosely regulated financial businesses can make a dicey business model, as Wall Street learned in 2008. And they pose a particular threat in an economy where growth is slowing, as it has been in China for the last three years.

“The final users of the money will not be able to earn returns high enough to repay the money and promised interest,” said Yu Yongding, a senior fellow at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences and a former member of the monetary policy committee at China’s central bank. “The chains of lending and borrowing can be long, just like the securitized subprime mortgages. The result can be devastating.”

This is smelling like 2009, all over again.

And meanwhile, back in the States, regulators are afraind to force banks to clean out their collateralized debt obligations. Another mess waiting to happen.

Secular Stagnation, Coalmines, Bubbles, and Larry Summers - Paul Krugman - NYTimes.com

http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/

Krugman parses Larry Summers recent IMF talk, and finds at the core the hard paradoxes of the postnormal: Secular Stagnation, where the liquidity trap inverts the order of the economic universe.

If you take a secular stagnation view seriously, it has some radical implications – and Larry goes there.

Currently, even policymakers who are willing to concede that the liquidity trap makes nonsense of conventional notions of policy prudence are busy preparing for the time when normality returns. This means that they are preoccupied with the idea that they must act now to head off future crises. Yet this crisis isn’t over – and as Larry says, “Most of what would be done under the aegis of preventing a future crisis would be counterproductive.”

He goes on to say that the officially respectable policy agenda involves “doing less with monetary policy than was done before and doing less with fiscal policy than was done before,” even though the economy remains deeply depressed. And he says, a bit fuzzily but bravely all the same, that even improved financial regulation is not necessarily a good thing – that it may discourage irresponsible lending and borrowing at a time when more spending of any kind is good for the economy.

Amazing stuff – and if we really are looking at secular stagnation, he’s right.

Of course, the underlying problem in all of this is simply that real interest rates are too high. But, you say, they’re negative – zero nominal rates minus at least some expected inflation. To which the answer is, so? If the market wants a strongly negative real interest rate, we’ll have persistent problems until we find a way to deliver such a rate.

One way to get there would be to reconstruct our whole monetary system – say, eliminate paper money and pay negative interest rates on deposits. Another way would be to take advantage of the next boom – whether it’s a bubble or driven by expansionary fiscal policy – to push inflation substantially higher, and keep it there. Or maybe, possibly, we could go theKrugman 1998/Abe 2013 route of pushing up inflation through the sheer power of self-fulfilling expectations.

Any such suggestions are, of course, met with outrage. How dare anyone suggest that virtuous individuals, people who are prudent and save for the future, face expropriation? How can you suggest steadily eroding their savings either through inflation or through negative interest rates? It’s tyranny!

But in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagnation, this isn’t just a temporary state of affairs, it’s the norm. Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.

Oh, and one last point. If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost.

I could go on, but by now I hope you’ve gotten the point. What Larry did at the IMF wasn’t just give an interesting speech. He laid down what amounts to a very radical manifesto. And I very much fear that he may be right.

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