The Problem with Keynesian Economics

The problem with Keynesian economics, sad to say, is that it's incompatible with democracy. Ordinary citizens of a democracy — or of any other political system, for that matter — always like more, and never like less. Hence, only half of the Keynesian formula ever is implemented. (Well, maybe "ever" is a slight overstatement, because Bill Clinton sort of moved in the right direction during the boom years of the nineties.)

Until very recently, Keynesianism was almost an automatic response to recession: cut taxes and increase government spending to stimulate the economy. The problems always arose during the good times — the boom times. That's when, according to Keynes, we're supposed to raise taxes and cut government spending, to keep things from overheating and build up a reserve to see us through the next recession.

Unfortunately, that second part of Keynesianism is the hard part. When incomes and profits are up, and lots of tax money is flowing into government coffers, the suck-up politicians of democratic governments say, "Hey! We've got the money! Let's make the voters happy by cutting their taxes and tossing lots of bucks around! While we're at it, we can toss even more bucks at the special interests who pay for our election!"

Everybody's doing better (except for those "fixed income" suckers and the minimum wage crowd, who can't handle the inflation), so everything goes swimmingly until the next recession. It's been going on for about eighty years now.

Note, however, that during those boom times the big benefits go to the special interests — and the most special of those interests, at least since Reagan was president, have been the very rich.

Yeah, I know — if you read this blog, it's not exactly news to you.

So now we're at a point when Keynes (like most contemporary economists) would recommend stimulus. Thanks to eighty years of getting Keynes wrong, though, our national debt is a bit on the high side. The "democratically elected" pols — Republicans, especially, but plenty of Democrats as well — are righteously demanding austerity. But why, especially when we need stimulus so badly, and interest rates are so low?

The answer, of course, goes back to those extra-special interests — the people and institutions that own that debt. They can never be losers, of course, so the rest of us have to pay.

I'm too old and lazy to start a revolution and, frankly, I wouldn't know even where to begin now that revolutions seem to start on Facebook and Twitter. I have to tell you, I'm not optimistic. Any suggestions?

Deficit cutting?

It's hard to stay mad at the guy -- although I'm sure our new president will find yet another way to get me flying off the handle in short order. Nevertheless, today, I like what I'm reading.

Mind you, I don't see much chance of cutting the budget deficit in half over the next four years, since I honestly don't believe the current stimulus is large enough to jumpstart the economy. What is making me happy today is the means Obama proposes to reduce the deficit.

The 39.6% top marginal tax rate was, in my opinion, Bill Clinton's greatest accomplishment. No matter what the Republicans insist, it never seemed to slow economic growth in the slightest -- and the elimination of that tax category under Bush accounts for a good chunk of the Bush deficit. Yes, Mr. President, by all means -- let's bring that back again.

Even more encouraging, to me, is the plan to tax the investment income of hedge fund and private equity partners at income tax rates rather than capital gains tax rates. I honestly don't know how much extra money that will put into government coffers, but if it happens, I will happily take back everything I've said (as in my previous post) about Obama being a Clintonesque stooge of Wall Street.

To conflate Rahm Emmanuel and the United Negro College Fund, a good crisis is a terrible thing to waste -- so let's get out there and soak the rich. Now, that's change I can believe in.

"Half-assed" defined: "compromising" with assholes

So much for the definition -- on to the case in point: Obama's economic recovery plan.

Let's say you're a hospital administrator. A majority of the doctors at your hospital think patients with infections should be treated with antibiotics. A minority -- a loud minority -- believe those patients should be leached or, better yet, bled. Only in that way, they maintain, will the foul humours be released. (Note: they recommend bleeding no matter what the patient's condition, from robust health to death rattle.)

"I know," you proclaim, "let's compromise! We'll cut the dose of antibiotics in half, and we'll placate the minority with some bleeding! That way everybody will like me, and the bleeders won't shout quite so loud when they go on Fox News."

Listen, Barack, stop being such a goddamned pansy. A half dose of antibiotics (spending) and a half dose of bleeding (tax cuts) ensures that the patient dies. If you're re-elected in four years, it won't be because you knuckled under to a pack of loud-mouthed Republican troglodytes. You don't have to compromise, because if they won't go along with a real stimulus package, it simply means that they hate America. You are the goddamned popular president (albeit not yet especially popular with me), so use the goddamned popularity you worked so hard to win and get us out of this mess.

Tax cuts -- $500 for individuals and $1000 for couples -- will not stimulate anything. The money will go straight to the banks to pay down debt, which was exactly what was done with the last stimulus package. There is NO economic reason to promulgate stupid little tax cuts, except to push more public money at the very same people who created the current crisis. Did a Republican ever espouse bipartisanism? Even when goddamned Bush lost the popular vote, did it ever occur to him to compromise with Democrats?

I'm not saying helping people get out of debt is a bad idea, but a tax cut is the wrong way to do it. The average household owes over $9000 in credit card debt, with interest rates from the mid to high teens. Those who have missed a payment or two may find themselves paying interest rates in the upper twenties.

Once upon a time -- that is, before 1978 -- rates that high were illegal in every state but Delaware and Nevada. All the other states protected their residents with anti-usury laws. Then came the Marquette decision, in which the Supreme Court ruled that banks could charge borrowers in any state whatever interest was legal in the state where the bank was based.

As you might expect, banks from all over the country started relocating their corporate offices to Delaware and Nevada; then, so as not to lose their banking industries, all the other states overturned their anti-usury laws. If the new administration wants to help people get out of debt, trying to get a federal anti-usury law through Congress would be a great way to do it. At the very least, there should be a limit on interest charged by banks taking federal bailout money.

The money that Obama wants to blow in tax cuts would be much better spent in direct aid to the states. State tax revenues are crashing, and state governments are responding with budget cuts. That means job losses for workers in state and local government -- clerks, secretaries, teachers, fire fighters, librarians, social workers, trash collectors and, if things get bad enough, police. Thirty-seven states are required by their constitutions to balance their budgets, so governors will have no choice if they don't get help right away.

Yes, money for infrastructure projects is a fine thing, and should help put many of those in the construction trades back to work, but helping to support state payrolls should not be ignored -- and the twenty-two Republican governors will appreciate it every bit as much as the twenty-eight Democrats.

The right stimulus

It's time for another stimulus package, and this time, it looks like the Democrats, at least, have it right -- extended unemployment insurance, increased food stamps, and direct aid to the states. The states are in bad shape, particularly those required by their state constitutions to have balanced budgets. In New York, Governor Patterson called for $2 billion in cuts just for the current fiscal year, which ends April 1. Most of the money would come from hospital and school budgets, primarily in the form of lay-offs.

While it's true you can't solve American education's endemic problems by "throwing money" at them, budget cuts will make schools a lot worse. Cut staff and schools become genuinely intolerable. The puddle of vomit stays on the floor all day, the decibel level in the cafeteria goes into the danger zone, and the bullies rule the hallways. In overcrowded classrooms, teachers spend more time on discipline and less on instruction. In some classrooms, that means there's no instruction at all.

The only students who seem to be able to learn under these conditions are the children of recent Asian immigrants. Before you call me a racist, let me call your attention to two recent articles in the New York Times.

In the first of those articles, we learn that Asian students are the group most likely to qualify for New York City's elite high schools, "including the storied triumvirate of Stuyvesant, Bronx Science and Brooklyn Tech." At Stuyvesant, 72% of those admitted, by competitive exam, are Asian. The second article is about the efforts of Long Island's well regarded Jericho school district to get the parents of Asian students to show up at school activities. They don't join PTA and don't attend concerts (even though the orchestra is 70% Asian.) Somehow their kids keep getting into top colleges even though they don't attend college nights.

Apparently, whatever Asian parents are doing to help their kids succeed is happening at home. If we really want to improve the results we get from American schools, we may have to replace some doctors of education with anthropologists.

Some say Asian parents put excessive emphasis on test scores (and violin?), but I don't see that as the reason their children tend to be so much more successful. I think the secret is that they care about accomplishment rather than "effort" -- that their kids never hear, "Don't worry, you tried your best." They trust teachers to do their jobs, but recognize that the student, not the teacher, is responsible for learning. It follows that Asian-American students actually find it necessary to work hard to gain parental approval. How innovative!

In his most recent column, Times contributor Nicholas D. Kristof calls on Barack Obama to make sure education isn't on the "back burner," and to make improvement of urban schools a primary concern. That, he says, is the "most effective anti-poverty program." Most would agree, but the difficult question is, how do we go about it? Nothing tried so far seems to have worked especially well.

Well, here's my idea. Let's replace all the administrators, guidance counsellors, and school psychologists with Asian immigrants. They know how to apply the right stimulus -- the one that gets results.