The Economy

Today Ben Bernanke called for Congress to intact a fiscal stimulus plan, this is in line with traditional Keynesian programs to “correct” economic downturns and in theory it sounds good, but in practice they rarely work out as well as they should. The first reason that it will probably not have much effect is the size of the package, 150 billion dollars, while that sounds like a lot of money one has to remember that the total size of the United State economy is around 13 trillion dollars, so this package would only be the equal to slightly more than 1.1 percent of the US economy. The next problem is that the package calls for tax rebates; a tax rebate is when the government gives a person an advance on future tax refunds, it’s not a decrease in tax rates. In Keynesian economic this short term increase in people wealth will cause them to spend more and increase economic activity, the problem with this that people are not stupid and they realize that they will have to pay back this tax rebate or it will be taken out of there future tax refunds, so they realize that they have not had a real increase in there income and they do not increase there spending. Empirical evidence from President Bush earlier 300 tax rebate, in 2001, and from when the first President Bush reduce tax withholding to try and encourage spending, show that a large portion of the American public did not increase there spending any in response to short term tax rebates or reduction in tax with holding that were not accompanied by real cuts in the tax rates. Along with this the Fed should quite cutting interest rates, interest rates in the United State are already quite low and there already some evidence of rising inflation. On the plus Bernanke called to have the earlier Bush tax cuts made permanent.

Instead of short term fiscal stimulus package, the Government should be working on correct the action that it has made that has harmed the United States’ economy. First the United States Congress and the President needs to bring its spending under control and balance the budget, reducing the deficit and in the long term keeping the debt under control. Secondly by keeping spending under control, the Government should then move on to keeping taxes low and improving the country’s infrastructure. Doing these in the long run would do far more to improve the US economy and the lives of the common person than short term stimulus package. The United States needs to move beyond the failed Keynesian policies of the past.

Capital Projects

This is my first post of the New Year and much over due. Another year has gone by with out the Illinois State General Assembly approving a Capital Improvement program for the State of Illinois. While the problems with the Chicago area mass transit system, which was largely caused by mismanagement on the part of the officials, appointed to run it, the poor state of Illinois capital infrastructure has gotten less attention. Keeping up and improvement of the State’s Capital Infrastructure is one of the most important things that the state can do to promote economic growth. A good capital infrastructure program would increase the quality of the transportation network in the state and its schools. The improved transportation network in Illinois would make it easier and less expensive to ship goods with in Illinois and to ship goods into and out of Illinois making Illinois a more attractive place for business to locate. Illinois declining capital infrastructure has already cost the state a thousands of jobs and prevented some companies for locating here, including at least one major Japanese car company.

TIF Abuse in Chicago

Over the last few years, the amount of money that Chicago has brought into the tax increment financing district has increased to over a half billion dollars this year, TIF districts use current tax revenue to finance economic development that is suppose to later on repay itself through improvement in property values. The money is suppose to be used to increase economic growth and if often used to make pay out to private companies that will then use the money to create new jobs. While this sounds good in theory, in practice it rarely accomplish what it promises to, first of all the money usual ends up going to companies that do not need, companies that can easily raise any capital that they might need in the private investment markets. For the most part any business idea that is a good idea and economically viable will be raise the capital that it needs to get started and to run its operations. For this idea to work the government would have to have a better ability to decide what companies are economic viable than the market place does.
In Chicago you have the add problem that the TIF revenue is off budget so the Mayor Chicago has the ability to do pretty much what ever he wants with it and channel it to the projects he deems best. For example 40 million dollars went to the CME inc, the company that came into existence when the Chicago Mercantile Exchange bought out the Chicago Board of Trade, this merger also result in the company eliminating 400 jobs, so the city ended up paying the company about 100,000 dollars for each job it eliminated, and CME is easily a company that could easily raise all of its capital requirements in the securities market and has zero need for state subsidization.

Reforming Federal Government spending

As I stated in my last post, I intend to talk about ways the the Federal Government could reduce spending, cut taxes and benefit the economy.
End Farm subsidies, as I mentioned in one of my previous post, farm subsidies are bad for the economy and environment, ending the farm subsidy program would save taxpayers around 38 billion dollars a year.

Terminate the International Trade Administration, this department is suppose to promote US Exports, but most evidence indicates that it has little or no effects on the amount of goods and services that the United States exports each year, ending it would save tax payers around 400 million dollars a year.

Terminate the Federal Technology and Industry programs, these program are suppose to subsidize the development of new techonologies by private firms in the economy to make the American Economy more competitive, but in reality they have little effect and the 400 million dollars a year spent on this program is a drop in the bucket compared to the 100 billion spent private investors and organizations on the same thing. These programs sever little practical purpose and should be ended.

Privatize the four Federal Power Market Administrations, these agencies have the job of marketing power from the 120 federally owned power damns, privatizing these agencies would save the taxpayers several billion dollars a year and could raise 10 billion dollars in funds. Sell 3 of them was original proposed by President Clinton in 1996.

Terminate the Community Development Block Grants, these grants were designed to provide help to low income areas, but for the most part these grants are ineffective and produce little in the way of improvement in low income ares. Far more of the money ends up going to wealth neighbor, often funding thing like malls and shopping developments that should be paid for with private funds. End these programs or substantially cutting and reforming them could save the taxpayers up to up 5 billion dollars a year.

Terminate the operation of the Bureau of Reclamations, the job of this agency is to run operations to provide power and water to area in the west. Its operations make little economic sense and the projects that are under taken by it often damage the environment and the subsidization of the water and power that the taxpayers pay for through this agency is helping to cause the water problems in the American West by encouraging more people to move to the area than it can support. This agencies should be privatized and government subsidization ended, this would save the tax payers 1-2billion dollars a year.

Terminate the Bureau of Indian Affairs, this agency is a remnant of by gone age that needs to go, the management of Indians lands should be turned over to the tribes and subsidization should end. Terminating this Bureau would save the taxpayers around 5 billion dollars a year.

In my next post I will continue talking about programs that can be terminated or privatized and other fundlemental government reforms.

The Wrong mindset in Washington

While listening to speech given be a candidate to replace Congressmen Ray Lahood at Saturday morning Tazewell County GOP breakfast it struck my that many Republicans also share the wrong kind of mindset with Democrats, and that mind set is that everything will be ok if can just get more back from Washington D.C., part of the problem with Government right now is that to many members of Congress share this mind set. Instead of trying to find ways to reform Government, reduce it size and make it more efficient, they just want to get more pork for their district. So that when election time comes around again they can say look how much money I have brought back home and use projects to bribe support for interest groups, like business or unions that stand to benefit from pork projects. Each year the Government spends bills on pork projects that produce little in the way of actual benefits for the economy. Instead of Republican candidates talking about how they are going to bring more money back to there districts in the forms of new projects, we need ones talking about how they are going to leave more money in there districts by reducing unneeded government spending and reducing taxes.
In way it is weird that the biggest supporters of tax and spend, or borrow and spend, policies tend to be in political blue states, because these states tend to pay more money into the government than they receive back from it and red state that tend to have fewer supporters of these policies when they receive a disportant about the benefits from government spending. So when it comes to government spending, blue states tend to be net loser and red states net gainers. Over my next few post, I plan to talk about ways to reduce the amount that goverment spends each year.

The Great Farm Subsidy Scam

It’s the time again when the United States government is debating farm policy and agricultural subsidies and once again instead of focusing on bringing an end to the agricultural subsidies and making the farm sector a fair and free market, they are talking about how to reform them. Agricultural subsidies benefit a small portion of the population, the farm sector, and cost the rest of us.

There is a lot of myth out there about farm subsidies and how they affect the public and a lot of them that claim they benefit the public, so lets look at a couple of these myths. The first is that farm subsidies are needed to protect small family farmers, the first problem with this statement is that most farm subsides do not go to small family farms, around 70 percent of all subsides flow to the largest 10 percent of producer. So this means instead of helping the family farms like some proponents of subsides claim, they are really helping larger producers and actually hurt small farms because the value of future subsidies are capitalized into the values of land and other farm inputs, like machinery, raising there prices and making it more costly for small farmers to purchase more land and equipment and difficult for new farmers to enter the market because of the high cost, reducing competition in the long run. Since farm subsides are tied to production and size of the farm, increasing as the amount of output produced by farms increase, farm subsides actually encourage large farms to buy up small farms and land and price small farmers out of the market.

The next myth is that with out farm subsides the price of food in the United State would sky rocket and the general public would be hurt. This is just plain wrong and misconception on the part of many in the public because it ignores that right now there are two prices the public pays for farm goods. The first is the one that most of us know about which is the price we pay at the store, but there is a second hidden price, and that is the price we pay in higher taxes in order to fund the farm subsidies program. If farm subsides were to end, yes the market price would probably rise some but there is no reason that it would rise above true cost that we pay for farm goods, to be exact the cost to the public would probably be less since right now we are paying subsides for far more farm goods that are consumed. The other factor that people ignore is that only select groups of farm products are subsidize and many do not receive any at all, farmers that receive subsides are actually forbidden from growing certain crops, and ending farm subsides would have little effect on the price of these goods. The biggest change is that right now people have no choice on how they spend money that goes to hidden cost of farm products, but with out subsidies they would have a choice since they would be able to decide which items they purchase.

One other point about farm subsides are that are bad for the world economy and they are bad for the environment. They are bad for the world economy because farm subsides in developed countries, the United States far from the worse offender in this case, because they cause farmers in these countries to over produce, in some cases to the put that countries end up giving away some of these products because product is greater than world demand, this over production because of subsidization artificial lowers the prices of these crops in the world markets making it impossible for many farmers in underdeveloped countries to compete in one of the few industries that would have an advantage in and that could be produce an export good that would bring in hard currency, like dollar, euros, yens, ect, that could be used to help fund development in these countries. The over production of farm subsidies also hurts the environment because it leads to the over use of pollutants like fertilizers and pesticides and the over use of farm land with depletes it over time.

It would be better off for everyone in general, excluding of course subsidized farms, if farm subsidies were complete ended and the farm sector returned to a competitive free market. The free market would make farming a more competitive industry; it would create prices that reflect the true market cost and the values of the consumers and it would end the current practice were both the working and middle class are taxed to benefit large corporations.

Parecon

It been a while since I have posted, but for my first post back I am going to do something a little different and talk about a purely economics issues, instead of political or political economy one. I am going to talk about a relatively new form of left wing economics, which has in particular shown up in the Green Party, Participatory economics(Parecon). The information that I am going to be using for this comes mainly from the wikipedia entry on participatory economics, http://en.wikipedia.org/wiki/Parecon.

First here is the definition that wikipeida has for participatory economics. “often abbreviated parecon, is a proposed economic system that uses participatory decision making as an economic mechanism to guide the production, consumption and allocation of resources in a given society. Proposed as an alternative to contemporary capitalist market economies and also an alternative to centrally planned socialism or coordinatorism, it is described as "an anarchistic economic vision"^[1]. It emerged from the work of activist and political theorist Michael Albert and that of radical economist Robin Hahnel, beginning in the 1980s and 1990s.”

First lets look how production decision are made under Parecon

“To implement the decision making principle, a parecon would be organized in consumers' and producers' councils. Many individuals would participate in both types of councils. These would be the respective equivalent of workers' councils. Geographically, these councils would probably be nested with neighborhood councils, ward councils, city or regional councils and a country council. Decisions would be achieved either through consensus decision-making, majority votes or through other means compatible with the principle. The most appropriate method would be decided on by each council. Local decisions like the construction of a playground might be made in the ward or city consumers' council, probably interacting with both city and countrywide producers' councils. Countrywide decisions, like the construction of a high-speed mass transportation system, would be discussed by the country consumers' council, possibly interacting with a city producers' council in the city where the materials are produced, or countrywide or international producers' councils. The producers' councils would probably correspond to workplace councils in each workplace and similar workplaces would group into nested councils on successively larger geographical and linguistic scales.”

The problem that this system has it the same that all command economic have in that they really on a relatively small group of people to decided what should be produced, how it should be produced and how much should be produced. Robin Hahnel on of the developers of Parecon has argued that since the decision making process is distributed among a number of decision making bodies that it is not central planned, and he is right that technically its not but the problems that face planned economics are the same regardless of whether or not they are centralized or decentralized, they still produce economically inefficient distributions of economic resources relative to market economics. In the market the distribution of resources is decided by the interaction of a large number of producers and consumers, in many case one individual or group is both a producer and consumer. While no single entity in the market has complete or perfect information, they do all have some information and the market combines that information and then produces a set of prices for goods and services and then consumer use this information to decide what they want to buy and how much and producers decide what to produce, how much to produce, and what inputs to use, worker decided how much they want to work, ect. The problem is that since no single group has complete information and the set of information is constantly in flux, centralized planners are unable to make economic efficient allocations of resource.

Next we will look at the problem with wages under Parecon:

“Promoters of participatory economics hold that it is inequitable, and also ineffective, to remunerate people on the basis of their birth or heredity, their property, or their innate intelligence. Therefore, participatory economics advocates as a primary principle reward for effort and sacrifice. Therefore someone who works in a mine — which is dangerous, uncomfortable, and confers no power whatsoever on the worker — would get a higher income than someone who works in an office the same time, thus allowing the miner to work fewer hours and the burden of highly dangerous and strenuous jobs to be shared among the populace. Additionally, participatory economics recognizes a certain leeway for exemptions from the remuneration for effort principle. It is suggested that people with disabilities who are unable to work, children, the elderly, the infirm and workers who are legitimately in transitional circumstances, can be remunerated according to need. This said, participatory economics posits an obligation for every able adult to perform some socially useful work as a requirement for receiving reward, albeit in the context of a society providing free health care, education, skills training, and the freedom to choose between democratically structured workplaces with jobs balanced for desirability and empowerment. The starting point for the income of all workers in participatory economics is an equal share of the social product in the form of equal consumption rights for private and public goods and services. From this point incomes for private expenditures and consumption rights for public goods can be expected to diverge by small degrees reflecting the choices that individual workers make in striking a balance between work and leisure time, and reflecting effort ratings assigned by their immediate peers”

The first problem with this is that assumes the value of good is derived from how much effort by labor goes into production, when in reality the value of all goods is subjective and derived from what consumer are willing to pay for good at each quantity that is produced, water while extremely important for life is relatively cheap because there is a lot in most areas and precious gems that often have limited uses are relatively expensive because they are rare. Labor like all other inputs derives it value from its share of the value of the good produces, ie it’s the value of labor or any other input comes from the role it plays in producing a good or service. The only role that danger plays in the value of labor is that a dangerous job will have to pay some kind of premium over jobs that require a similar skill set but are less dangerous in order to attract workers. For the example of the miner and the office worker, while the job of the miner is undoutably far more dangerous than that of the office worker, in many cases the value of the product produced by the office worker is more valuable than that of the miner, so the value of the labor of the office is worth more than that of the miner in this case.

The second problem that Parecon faces when it comes to wages is that ignores that wages play in producing an incentive for people to pursue higher levels of education. Education is costly, not just in money, but also in time, mental stress, ect, and the opportunity to gain higher wages is one of the reason that many people undertake additional education. Under the Parecon system there would be little incentive for people to pursue additional education since wages are linked to effort of labor, its danger and how uncomfortable it is, since highly educated jobs tend to be less physically strenuous and less dangerous they would not command the same wage premium that they do under market economics and the long run effect would be fewer people pursuing higher levels of education.

Now let’s look at how Parecon would destroy many of gains from the division of labor:

“Some tasks and jobs are more comfortable than others, and some tasks are more empowering than others. To achieve an equitable division of labour, it is therefore proposed that every person must do different tasks, which, taken together, bring an average comfort and an average empowerment. For instance, someone who works in a facilitation board for one year might then have to work in a steel plant, or in another uncomfortable workplace of his or her choice, for a year, or else would not get a higher salary than the standard for everyone. This assures that no class of coordinators can develop.”

The division of labor means that people specialize in one particular area of work, by doing so they gain expertise and experience in it and become more productive and people tend to be attracted to jobs in areas was that they are naturally good at. Historically the division of the labor has been one of the major factors that have driven economic growth and this economic growth has been the main reason that people now have a far higher standard of living than in the past, and the continued specialization of labor has helped to increase productivity in many industries, benefiting the economy and society in general. The Parecon system by forcing people to rotate jobs would eliminate many of the gains from the division of labor, people would have little incentive to gain expertise in a particular job since they are just going to be rotated to another one in a year or so and even if they wanted to gain expertise in one particular field by rotating people in and out of vastly different jobs it would be impossible to gain the experience necessary to increase their productivity.

Secondly it would discourage people from pursuing high levels of education since what is the reason to give up the time and energy to obtain a specialized level of education when you are just going to be rotated between jobs?

In conclusion Parecon face most if not all of the same problems that traditional forms of socialism/communism do, the inability of economic planners to produced a distribution of resources that is as economical efficient as the market economy, but also it feature serve to discourage people from pursuing higher levels of education.