Who exactly are the “job creators”?

If you follow American politics, you’re probably familiar with the term “job creators”. This term, which is essentially a euphemism for the wealthy, is used to argue that taxes on the top income earners should remain low (or even be lowered further). As the argument goes, rich people are society’s innovators, investors, and business owners. If we take away their capital or reduce their incentive to earn, then this class of individual will stop producing jobs for the rest of us.

As is often the case, it is convenient for the news media to frame the argument in adversarial terms for the purpose of entertainment. For example, a couple of weekends ago CNN pitted two individuals against each other to debate whether the wealthy or the middle class were the ones responsible for job creation.

On the one hand:

[The world] is awash in capital. What we lack today are consumers. The only reason any company invests, the only reason any company hires someone is because they believe they’re going to have a customer for that. Look. Anyone who’s ever run a business knows that a capitalist hires more people only as a course of last resort when there are no options available other than meeting increasing demand from customers.

And on the other:

[I]f you don’t have the investment in place first of all you don’t get the consumption after the fact… what matters is how much income you’ve created. And we are creating way more income at the median than Europe and Japan are creating. And that is because innovation is driving our economy.

But there is no class conflict here, and no legitimate intellectual debate as to who creates jobs. That’s because everyone does; the economy is an ecosystem made up of various people who come together and play different roles. One individual invents a product. Another individual puts forth the capital for its production. Another lends his labor towards building it. Someone else distributes and sells it. And at the end of the supply chain, someone must be there to buy it.

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Democracy can not save you now

From the famous film “Mr. Smith goes to Athens, Subsequently Disappointed by Lack of Governing Coalition in Favor of Austerity Measures”

(I was going to add a “muhahaha” to the end of the title of this post for dramatic effect, but figured that would be overkill.)

One of the excellent news shows on TV here in the US is Fareed Zakaria GPS, which airs on CNN on Sunday mornings. I don’t always agree with Fareed on everything, and a couple of his regular guests make me want to throw the remote at the TV sometimes, but more often than not the show tackles important global issues better than any other on American TV.

Last Sunday Fareed started off the show talking about the European sovereign crisis. One thing he said in particular caught my attention:

This is a sad state of affairs because what many people are worrying about, at root, is whether democracy has become part of the problem. After all, politicians have gotten elected over the last four decades in the West by promising voters more benefits, more pensions and more health care. The question is can they get elected offering less? That’s what stops many Europeans from abandoning austerity and embracing another round of stimulus spending. And I think these worries are shared by many in the United States as well.

This is basically a reaction to the French and Greek elections from a couple of weekends ago. If you’re not up to speed, here’s the gist of what happened: Recently the most seriously indebted European country, Greece, was granted a write-down of its debt financed in large part by the other Eurozone economies, notably Germany and France. In exchange, the Greeks were required to write into their constitution certain painful “austerity” measures, basically aggressive tax hikes and budget cuts that are making the current recession there worse. This is in hope that Greece will be able to, down the line, pay the portion of debt it still owes after the write-down.

So what happened? Earlier this month French President Nicolas Sarkozy, who along with German Chancellor Angela Merkel made up a powerful political duo in favor of keeping the Eurozone together via this sort of austerity-for-bailouts strategy, failed in his reelection campaign against the Socialist challenger, Francois Hollande. Meanwhile, the governing coalition in Greece which originally agreed on the painful austerity measures as part of the debt deal lost a significant number of seats to parties which openly reject the plan, and the coalition in favor of staying on course has fallen apart for now.

This is a long-winded way of explaining what Fareed means: In Western democracies, politicians get elected and stay in office by offering more, not less. So even if harsh austerity measures enacted in hopes of getting a country’s fiscal house in order are the right way to go, they may be politically impossible to see through to the end. (Whether or not such austerity will in fact allow countries like Greece to achieve a sustainable debt path is subject to it’s own debate.)

The broader point about democracy’s inadequacy to deal with these problems is extremely valid, and that’s the whole point of this post. There’s a key flaw in the argument above, however.

Here it is: Greece was pretty much the only Eurozone country where politicians lavishly showered voters with goodies in hopes of getting re-elected, at the cost to the nation’s balance sheet (and hiding the extent of debt with the help of a major US investment bank). The other countries were not in bad shape prior to the 2008 crisis; it was the crisis and the subsequent recession that caused the debts of these countries to explode via lost government revenue, automatic payments to the swelling ranks of the unemployed and the poor, and bank bailouts. I get the point that no politician wants to pull the plug on the party, but the rest of Europe is very different from Greece.

This is an important point, and the reason why is not because, outside of Greece, democracy has functioned well. It’s that what occurred in Greece pre-crisis — dishonest, reckless spending for the purpose of political gain — is not the only type of democratic failure that has gotten us into this mess, and is making the apparent prospects of digging ourselves out of the hole so dismal.

This whole European sovereign saga makes more sense (and is unfortunately more depressing) when you recognize what it really is: a horrible aftershock of the 2008 banking crisis. And that crisis tells us a lot about where democracy went, and is still going, wrong.

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Towards a unifying theory of why we stink

The great "Migrant Mother" photo... I wonder if she's pondering the same question that I am

A couple of months ago one of the economics blogs I follow opened up a sounding board for its readers to answer the question: What’s the most important problem the US faces? There were some interesting opinions, but the most remarkable thing I noticed was the variety of topics that people brought up. Debt, unemployment, technological change, war, the erosion of manufacturing, climate change, ideological narrow-mindedness — these were among the many explanations for what’s wrong with America right now.

My view on this is that nearly every major problem the US faces right now can be traced back to a single phenomenon: coordination failures. “Coordination failures” is a term used by economists and political scientists (known by many other labels) that simply means that it’s relatively hard for large numbers of people, each with a relatively small stake in a decision, to coordinate into one political voice; while it’s relatively easy for a small groups of people, each with a relatively large stake in a decision, to coordinate into a political voice. The result is that the outcome of important decisions are often skewed towards the interests of the few, even though that outcome is not the optimal one in terms of maximizing the well-being of all the stakeholders.

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Business Week officially endorses selfishness, surprises no one

Business Week's recent cover story, "How to Pay No Taxes"

You’ve got to give some credit to Business Week for their recent cover story, “How to Pay No Taxes”. After all, who else has the blazing audacity to publicly endorse our rarely discussed national pastime: complete selfishness when it comes to one’s  fiscal responsibilities to the state.

Let there be no mistake: Business Week has not  invented this idea. Every year, particularly around tax time, we do everything we can to “maximize our deductions”, basically a cleaner way of saying “minimizing our contribution to public expenses”. You do it. I do it. In a sense there’s not much to feel too guilty about; public finance rests on the principle of self interest. The government wants more from you, and you want to give less to the government.  Private markets work the same way, after all, and most of the time do a good job of distributing resources.

It’s just odd that this model of selfish behavior would govern something so explicitly related to the common good. I think this is something that should change, and (surprise!) I think this has a lot to do with what the Baha’i Faith has been designed to do, specifically to raise the level of spiritual consciousness and uprightness to the benefit of both our spiritual and material well-being.

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The world needs honest experts

I recent got around to reading Matt Taibbi’s Griftopia during a recent vacation. My sister is a huge Matt Taibbi fan and implored me to read it, so I gave it a shot. Truth be told, I find his writing for Rolling Stone pretty entertaining and to the point most of the time, despite the fact that he’s often just profane and mean. A guilty pleasure if there ever was one in journalism.

But you can usually find some very good points in Taibbi’s writing, and this book is no exception. One of the highlights of the book is how Taibbi explains the Tea Party movement. We’ve heard various commentators’ opinions over the past several months as to what the Tea Party actually is: disguised racism and xenophobia, concern for rising national debt levels, a purist interpretation of the constitution, etc. To Taibbi, however, the Tea Party is mostly a legitimate reaction to a world that is quickly becoming more and more complicated and difficult to understand. Rather than take on the very difficult (and in some cases impossible) task of trying to understand these increasingly complicated aspects of life, we human beings prefer instead to cling to simpler, old-fashioned explanations and solutions that are much more palatable. One of his best passages is this one:

Our world isn’t about ideology anymore. It’s about complexity. We live in a complex bureaucratic state with complex laws and complex business practices, and the few organizations with the corporate willpower to master these complexities will inevitably own the political power. On the other hand, movements like the Tea Party more than anything else reflect a widspread longing for simpler times and simpler solutions — just throw the U.S. Constitution at the whole mess and everything will be jake. For immigration, build a big fence. Abolish the Federal Reserve, the Department of Commerce, the Department of Education. At times the overt longing for simple answers you get from the Tea Party leaders is so earnest and touching, it almost makes you forget how insane most of them are.

Now, I am not bold enough to say most of these people are “insane” as Taibbi does, but that’s not really the point. The point is that I have not encountered anyone else who describes how hopeless it is for anyone to understand all the complexities of everything at once in this day and age, such that he/she can understand fully whenever anything in the world goes wrong, and know the best way to fix it. You can work your whole life and become an expert in climate patterns, or complex financial markets, or geopolitics, or whatever. Each of these takes a lifetime to properly understand, and even still there’s no guarantee that you’ll really understand what’s going on. The reality of today’s world, which some of us are ready to admit and others aren’t, is that it’s so darn complicated and in need of complex solutions that you have to put your trust in experts who really understand each individual topic.

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