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.

Why the Federal Reserve Should NOT cut the interest rate

A lot of people are pushing for the Federal Reserve to cut the interest rate in response to the problems in the sub-prime loan industry, lender want the cut in order to easy the burden of loan defaults and some in the financial sector want it to push up the values of their investments, but its my belief that cutting the interest rate at this point would be the wrong thing to do. The first reason is that the interest rate should only be change by the Federal Reserve in order to respond to changes in the economy as whole, the sub-prime loan problems are not a broad based economic problem, in real terms its only affected the still relatively small amount of home owners that are defaulting on their loans, the financial institutions that hold those loans or have invested in them, and home construction and retail industry, both of which are coming off a multi year boom that has left many housing markets in the United States over valued and correction is now need to return those houses to there true non-market bubble price. Yes the effects have spilled over into the larger stock market and depressed stock prices, including many companies that will not be directly affected by the sub-prime loan market, but as investor confidence recovers and the bad companies are sorted out from the good, there prices will recover, and until then this creates a buying opportunity for investment how will have the chance to buy stock in good companies that have been over sold and now over valued.

There is nothing fundamental wrong with the United State economy, growth in the second quarter was about 4 percent, which is very strong, and while it expected to be weaker for the rest of the year, there is no signs of recession, and expected growth is still expected to be stronger than growth in the Euro Zone, and a long with that the manufacturing sector in the US is doing well, productivity is growing, our productivity is the highest in the world, and unemployment is low.

The second reason is that cutting the interest rate at the moment would send the wrong signal to companies that engaged in making risky loans, encouraging them to continue making these loans expecting government intervention if they turn bad on them. The government needs to stay out and let the market work the problem, in the long run it will be best for everyone.

Line Item Veto and other

Governor Blagojevich used his line item veto last week to cut about half billion dollars from the Illinois State budget last week, normally I am all for cutting spending and pork, but that not what the Governor was doing, he was cutting this money with the intention of using to fund his health care program that the State General Assembly refused to pass. The Governor is attempting to do an end run around the elected representive of the people and use these cuts to fund a program that they would not pass, this shows how little respect Governor Blagojevich has for the state, its people, their representatives and its institutions, there is a reason that the budget making process is not entrusted to one man but instead negoiatated between the legislative and the Executive. Think of the reaction if President Bush tried to do the same thing. Hopefully enough of the Senate Democrats will see the light and join with there Republican counterparts and work with the House were both Democrats and Republicans seem willing to over turn the veto. If not Speaker of the House Mike Madigan has made it quiet clear that he intends to challenge the Governors ability to use the funds from the veto programs in court.

On the National side, Alberto Gonzales resigned today as United State Attorney General, not matter what you think of his policies or the Bush Administration, the way that Alberto Gonzales handled the events that happened around him showed poor judgment and it is probably best for everyone that he is gone.

The Governor loses more backers

Governor Blagojevich’s antics during the budget debates have gotten so bad that even his long time backers in the AFL-CIO no longer consider him to be trust worthy, they have gotten behind a proposal that would cut the Governor out of the decision on how school funding is distributed, instead putting it in a lock box that would be a controlled by a 3/5 super majority vote in both Houses of the State Assembly. On a similar note if there is no new budget or temporary budget that means that schools districts in Illinois will not be getting there share of state funds on time which could put a number of them in a bad position, particularly in counties like Tazewell were the county treasures has no intentions to distribute property tax revenues until September and even then he will make a only a 45% distribution at first.

This just goes to show how much the Governor’s leadership has failed that even the Unions no longer trust him. He has consistently failed to recognize the reality of his political position and give up on programs and taxes that there is little or no support for or to work with three of the four leaders of the State Houses. The only question now is how much longer can he count on the support of State Senate President Emil Jones? For this year what we need is a zero growth budget and then for next year the public needs to push it representatives in the State House and Senate to start the new budget from scratch with a zero-bases budgeting system.

More Taxes

It been proposed in the Illinois State Senate that the Government oppose a 3 percent tax on businesses that spend less than 4 percent of there payroll on health care insurance for their employees in order to pay for a stripped down version of Governor Blagojevich health care plan, this plan has a number of problems with it. First it makes the assumption that companies have a duty to provide all or most of their employees with health insurance, while in many case it is a good policy for companies to offer health insurance as a benefit in order to increase their likely hood of attractive and retaining qualified employees but its not the place of the government to decide what benefits package a company should offer and penalize them if they don’t. Also some companies may choose to pay their employees more in lieu of providing them with health care, paying them enough that they could purchase it on their own. Many smaller companies might not have high enough profit margins to be able to afford either the cost of the 3 percent tax or spending 4 percent of their pay roll on health insurance cost.

The next problem with this is that will discourage companies from high low skilled/unskilled labor because these are the employees that companies gain the least benefit from offering health insurance from and if the company has a mixture of highly skilled workers that they offer insurance and low skilled/unskilled workers, the more low skilled/unskilled labor that a company hires would increase their overall payroll and decrease the percentage of their payroll that goes to health insurance cost. This would encourage companies to hire fewer low skilled/unskilled labors in Illinois, particularly large companies that can more easily shift this kind of work out of state, and raising the unemployment rate for these groups in the state. This means fewer jobs for Illinoisans overall and slower economic growth and it will make Illinois a less attractive place for companies to do business in by raising the cost of doing business here. Final this will end up being a stealth tax on the consumer as some portion of the tax will be passed on to the consumer in the form of higher prices, as with any other taxes of this nature it will have a larger effect on the lower income groups that spend most if not all of their income on consumption and lesser effect on higher income groups that save a portion of their income.

Comes down to the crux of the problem with the Illinois State budget, that it’s not a revenue problem but a spending and management problem, some of the state leaders want to spend far more than the state can afford to spend.

On sad note former Illinois State Representative, Jay Ackerman was killed this week in a accident, I known Jay and his family for a number of years and they have my deepest sympathies during this time.

Cigarette Tax Increase

The new proposal on how to add more revenues to the Illinois budget is to double the tax on cigarettes from 98 cents to a dollar and 98 cents. The cigarette tax increase is attractive to many State Senator and Representive that don’t want to raise taxes in general because one it only directly affects a small percentage of the Illinois population and target a product that most people dislike and that many moral oppose. It far easier to sell a “sin” tax to the general public than a general increase in the sales or income tax. While I don’t smoke, dislike the habit and could care less what the prices of cigarettes are, I still oppose the increase in the cigarette tax. The first reason is that it is a highly regressive tax; the poorer in society have a higher likely hood of being smoker and would ended paying a higher percentage of the tax than the percentage of the state income that they make up. Second if the increase in the tax is large enough it would serve to encourage people in the border area of the states to travel to near by state in order to purchase cigarettes, according to some estimates if the tax increase go throu consumer in downstate Illinois would be able to save around 20 dollars a carton by buying cigarettes out of state and consumer in Chicago could save around 30-40 dollars. The other side of this is will encourage the black market sales of cigarettes and the criminal eliminates that comes with black markets and smuggling. If the tax is high enough it will allow black marketers and even more criminal eliminate, such as gangs to make money by either stealing cigarettes or smuggling out of state cigarettes and then selling them, particular in Chicago/Cook County were prices are even higher. The third problem is that there are around 8,000 jobs in Illinois that depend directly or indirectly on the sales of cigarettes, if the tax increase leads to a decrease in the (legal) sale of cigarettes in the state, these jobs will be threaten and associate income and business tax revenue from them

The Final problem is that it makes a large part of state review, around a billion dollars subject to changes in the amount of cigarettes that are sold in the state and decline in sales of state cigarettes would reduce state revenues and increase in smoking, which I am sure most people would agree is a bad thing, would increase state revenue.

Today the Governor announced plans to try and prevent insurance companies from basing increases in health insurance premiums on changes in the insure health, which is about the same as saying an insurance companies can not base auto insurance on the drivers history of accidents or tickets or housing insurance on the home location and if it in area that prone to flooding, fires, hurricanes, tornadoes, ect. Since Insurance is protecting an individual against a possible negative event from happening to them, an actuarial fair premium is equal to the cost of the negative event times the likely hood of it happening spread out over the time period of the policy. So a person with a higher likely of the negative event happening to them should pay more and some with a lesser change of the event happening would pay less. Since Insurance companies do not have access to perfect information on the likely hood of something happening they have to use information like a person health history and other risk factors to decided on the premium level, and usual people with lower risk end up paying more and people with higher risk pay a little less than they should because of the information asymmetries inherent in life forces insurance companies to pool clients together so that they can cover there pay outs with the premium coming in from a diverse group of clients some that are low risk, some that are medium risk and some that are high risk, ect, few insurance companies actually make much, if any of there profits from people paying in more in premiums than they pay out in claims, most of them make it from investing the premium during the time periods before they make pays outs.

If Governor Blagojevich gets his way and insurance companies can not use a person health history or changes in deciding premium levels the end results with be that people that are at low or medium risk will end paying an even higher rate than should to balance out people that are in higher risk groups that are no paying even less than they should. Those people that are in the highest risk groups and could benefit the most from insurance will end up having even hard time finding companies to insure them since it will be more difficult for those companies to charge them anything approaching a fair premium and most of them will not want to pass on to much of the cost to lower risk clients that may responded to large increase in their premiums by getting rid of their insurance or moving to lower premium companies and no insurance company can stay in business just covering high risk clients. While the Governor may claim that he is working to help families in Illinois, in the long run if he gets his way he will be making it hard for them to get insurance all together if they are in high risk groups.