Democrats & Liberals Archives

The Entanglements of Economics

Economic is not a hard science. People speak as if the forces that exist within it are real, but they’re not. They’re more descriptions and abstractions than anything else. However, an economic system is necessary and its principles are meaningful because what economics deals with, the problem of how to get our needs fulfilled and our desires made manifest, is very real.

In hard sciences, you always have the real world around to put the brakes on bad speculation. If you keep your eyes and your mind open, you will be able to understand much, and know with at least some degree of certainty. The theories you create can be refined, reworked, as we figure what's right and what's not.

Theories in economics have to deal with that most treacherous of landscapes, human behavior. Complex, emergent, often frustratingly perverse, We both show amazing abilities to sync our activities for mutual benefit, and do collectively stupid things as well.

Some would suggest the market as a substitute for many organizing processes and principles. They fail to see that the market corrects itself only based on the experience, knowledge, and prudence of the participants. Man can be wiser in groups, wielding the parallel power of millions of brains working on a problem, creating solutions, but those heads can also work together to create bubbles that prop up bad habits, and encourage atrocious behavior.

Market rules are simply the corrections that are applied as people readjust their actions, often in the face of their consequences. Some in the market anticipate the problems, but most people simply react. This is why bubbles form. The smart or lucky people in the equation get out early. Those who watch their behavior get out next, and so on and so forth.

One big problem with making false idols of the market is that people's response in a market can make fiction reality. With Enron's energy trades, the fiction of deficient power generation allowed a real response from the market to occur that might not have otherwise happened. That same problem also occured with their accounting, and with the bank's sale of a stock whose fundamentals they knew were rotten. Conflicts of interest, predatory market practices, and good old-fashioned fraud, if permitted, can distort the market. Enron's behavior allowed the people at the center of the various scandals to make off like bandits. The market didn't care until people knew, and people didn't know until it was too late.

There is no market that functions without law, without the intervention of government. Otherwise, there is no substrate for agreements to be based on, no legal context for transactions, no set of laws for the enforcement of contracts and the settling of grievances. But even if a law isn't business-based, it can affect the market.

Theoretically, you could build houses dirt cheap if you wanted to by using substandard materials. A market maven might even claim that if the person could get away with it, then that's what should be allowed. The trick comes when some disaster comes and wipes out all those houses, or even when the costs of maintaining and living in the houses increase. The cheap housing then proceeds to suck money out of the economy, acting as a deadweight on other kinds of spending, and increasing costs like insurance premiums when neighborhoods suffer serious damage.

Of course, if you were the homebuilder, and you thought you were entitled to do things your way, you might lobby to get standards lowered, or for measures that would curtail enforcement, and appeal to the official's sense of either market fundamentalism or their sense of campaign funding. It would all be in the name of the economy, because of course, anything that harms a corporation's bottom line is bad for the economy.

Some Republicans claim credit for the 90's. Some Democrat do as well. The reality is, neither were directly responsible. It all hinged on something else, something that allowed America and other economies to work in a more efficient and fast paced manner.

Electronics and information technology. To the extent our information infrastructure has been improved by Democrats and Republicans, that is the extent to which they are responsible for the current economy. America's prosperity has increasingly been technologically based.

Right now, research is going on in quantum band gap engineering that's working yet more changes, changes we see in lasers set on chips, tunable to different wavelengths. Right now research is going on in fuel cells and hydrogen vehicles. Right now, research is going on into the use of Carbon Nanotubes and other products of the emerging field of Nanotechnology. Right now there are a thousand different technologies emerging, and what we develop ourselves and what use we put them to will be as crucial to the next few decade's growth as microchips and fiber optics have been to this decade's growth.

The economics will not always be obvious. There will be some fields, like that of space travel, where primary development will necessarily be governmental, where the first steps will be taken as a nation, and the only then the next ones by private individuals. Here's one important point, though: economy will be shaped by environment, as well as our needs and desires. Even in space, our economy will not develop in a vacuum.

Nor will it here. Nor has it. The problems of carbon emissions, alternative fuels and global warming are most definitely entangled with our with our economy.

The changes of global warming will be profound. So will be the benefits and detriments of whatever technology we pick to answer the threat.

Global warming, whose beginnings we will have to deal with regardless of whether we make it worse or stop adding to our problem ,will change viable growing patterns for crops. It will dry out certain environments, inundate others, and create situations in some places where the two extremes alternate. It will alter certain cycles like El Nino and the North Atlantic Oscillation, because they are intimately connected with the transfer of heat from atmosphere to ocean and back.

It will of course change sea levels, but that is more complex than people anticipate. Recall that in the ice age, a lowering of sea levels opened up a land bridge now submerged beneath the Bering Strait. Much of the changes that this rise in sea levels will produce in geography will be just as counterintuitive, and will affect cities and regions we might consider safe by conventional wisdom. Even before these levels inundate such geography (or even if they don't), there will be infrastructural problems as the boundaries of the sea change, and the forces of everyday wear and tear and the extraordinary disaster change with it.

As the seas rise and the patterns of tropical storms and day to day weather change, so will the patterns of viable economic development. The more we choose to ignore global warming, the more of it we have to adjust to, with accompanying expense. Eventually, the very foundations of many of our major cities will be threatened. The speed of our response may determine whether our greatest cities remain living environments or become dead monuments to today's excesses.

There is a principle in basic economics that goes thusly: "There is no such thing as a free lunch." The taxes we're not paying now are not free money. They're being paid by other nations who expect to be paid back with interest. Similarly, the economic benefits of not dealing with the potential problem of global warming will likely end up being paid back with the economic damage wrought by the conseqences. The market will not come to our rescue. it will simply be redefined into something we will not enjoy nearly as much as the situation we do now. No economic question can be looked at in merely economic terms. Questions of geography, culture, ethics, trust, religion, and other matters enter into it. Those who choose to apply economic theory in such a way as to try and force it over everything else will end up creating a dysfunctional system. That is what sunk communism.

While one can imagine any economic system one wishes, whatever system you set up in real life will be forced to deal with reality. In fact, the whole point of such a theory would be to interact successfuly with the real world, to correctly enough characterize that behavior as to make helpful predictions about it. Such a theory, by its nature, would gain its greatest power not by trying to overwhelm humanity and harder scientific theory, but instead allowing those theories and ideas to assist it in being properly used. There are some cookie jars hands will be found in if you don't put them on higher shelves. That's just human nature.

The Market devotees would like people to believe that the market, given the chance, would make the environmental problems and those of corruption go away. Our experience has been otherwise. We see companies pollute when given the chance. We see them cheat when given the chance. We see competitive market pressures encourage these behaviors. Of course, they eventually make folks very unhappy. Then and only then does the market act. By that time, though, the damage is done.

There will be some necessary changes for the greater good that will have to be imposed legally, because voluntary guidelines will be ignored by those who believe wrongly or rightly that their immediate economic interests are better served by their negative behavior.

As it is, the balances need to be struck, but those balances, if they are to be beneficial to the economy, cannot be applied strictly on economic terms. Humanity, science, and law must be woven into their structure. Our economic policies cannot be ideologically based. They must be integrated with the world. The good of the economy must be sought through the good of the people. Any other approach defeats the purpose of economics.

Posted by Stephen Daugherty at October 24, 2006 9:26 PM
Comments
Comment #190062

Stephen

I agree that the free market requires market mechanisms, rule of law and functional regulation. A market is nothing more than a series of decisions by individuals and groups. It works best when they have autonomy and when they are protected from coercion and when be reasonably certain of the future legal and regulatory environment.

Some environmental problems are caused BY regulation. Take the case of sea level rise. Government programs keep insurance premiums lower than market rates in flooding areas, which encourages development where it should not go. Government rules keep water unnaturally cheap in deserts, so people waste it.

Even your example of ENRON has government complicity. ENRON’s business was energy arbitrage made possible by regulation.

So we DO need some regulation and we need predicable rule of law. The market is like a environment. It has a certain balance. If you upset the balance, you pay the price and some things just cannot be done.

Posted by: Jack at October 24, 2006 11:30 PM
Comment #190070

Stephen,

This is another excellent article. I have also written an article on ecconomics which I will post on Friday. I think that I will add a link back to this article to expand on some of the points that I am making in that article. Thanks for the good work.

Posted by: Ray Guest at October 25, 2006 12:15 AM
Comment #190075

Stephen,

Economics is my worst subject. Aside from three failed marriages my greatest downfalls have been:

The Savings and Loan failure of the 80’s. Just google Silverado Savings and Loan or Neil Bush. BTW Neil is W’s bro.

The Krone pension debacle. It’s complicated but a German company bought out my employer and I got hosed. It’s briefly mentioned here: http://www.fas.org/irp/congress/2003_cr/s22.html

My CIGNA disability claim, sigh…………, well if not for Social Security I’d be living in a cardboard box! Private insurance sucks. Look at what the Katrina survivors are going thru!

BTW regarding Neil Bush:

http://www.upi.com/NewsTrack/view.php?StoryID=20061022-121624-6860r

Yep, that’s our tax $$$$$ at work!

The only other thing I have to add is just downright nasty. Most Americans seem to be downright scared to death about the “brown” invasion. That is the undocumented immigration of Mexicans and other hispanics.

We should be more worried about the “green invasion”! Which is those who are buying up our debt and decreasing the value of our “greenbacks”! Debt is never good. Owing a huge debt to a polical foe is insane.

I wish I could balance my checkbook!

KD

Posted by: KansasDem at October 25, 2006 12:43 AM
Comment #190076

Jack, the Enron regulation was made by people cooperating with Enron. It’s very telling in relation to so many other reforms of this particular Congress we’ve had: laws suited to corporate interest, written by legislators who see no problem with doing what’s “good for the economy”.

This fits behavior like the totally unnecessary tax breaks and subsidies given out for for the oil industry. I mean, I imagine you don’t see the point of propping up businesses that are failing, but why the heck should we give money to already highly profitable companies?

We spoil our corporations.

I do agree on the water issue. Question is, would you agree on the Nuclear issue? You should find some way of checking out the February 2006 issue of Discover Magazine. It’s got an article about energy consumption you might want to read, entitled “The Energizer.”

I’ve long read magazines about science and technology, and its given me a very moderated perspective on the needs of innovation in the marketplace, and in society. There are all kinds of hurdles that technologies deal with in development, and I think lawmakers, or those who advise them should be aware of these.

I saw a Moyers special on the other night about Telecoms falling short on their promises to deliver high-speed fiber optic broadband, and their efforts to stifle that networking in a small Lousiana town that got tired of waiting for them to deliver. In that special, one of the Republicans supporting this plan said that his support was on the ground that such high speed broadband served the same purpose as roads do, and so should be publicly supported. Now I’d just as soon see the telecoms step up to the plate and do like they were asked to originally, but if they are unable or unwilling, why shouldn’t the government do so?

Why should the government pass up the opportunity to create the Interstate version of the Information Superhighway? Whoever does it, such great bandwidth can only benefit those who would design applications for those web speeds. People overseas are already ahead of us on this, according to them. Why should we let ourselves fall behind?

One last point: The market is not merely the summation of a series of decisions, but that summation as it interacts with reality, and those decisions are changed accordingly. That interaction, the allowance of that interaction, and the decisions that come of it constitute the free market’s power. If the market develops a proven track record of dealing with a problem, its best to leave that alone.

However, if it seems to have persistent blindspots to behavior that is unethical, inhumane, or otherwise obnoxious, we should not be afraid to bring the government to intervene in the public’s interest. The cheap-bastardry of some homebuilders in constructing homes is an example.

Ray Guest-
You’re welcome. Link away.

Posted by: Stephen Daugherty at October 25, 2006 12:49 AM
Comment #190077

KansasDem-
I hear you on insurance. I know the argument is that insurance companies should be able to make whatever money they can, but the fact of the matter is, insurance companies are nothing better than protection rackets if they don’t cover people for reasonable claims. The whole raison d’etre for insurance is to give people back some of the value of what they’ve lost in the unlikely event they lose it. Unfortunately, they’ve become far too agressive in defining people out of their claims, to the point where the reasonable person might ask what good it actually does to be insured.

Your point about the dangers of being indebted to one of your political enemies is quite the concise presentation of all that is wrong about the Bush tax cuts, once all the income inequality is figured in: if we were running surpluses, and these cuts came out of them, we would be getting real money back. What we’re getting right now, though, is a structural deficit, and the Bush tax cuts only serve to generate expenses down the road that Americans will pay. There is no such thing as a free lunch. Our economic rivals are picking up the bill.

Posted by: Stephen Daugherty at October 25, 2006 1:01 AM
Comment #190080

Stephen

How does your take on the Tax Cuts and deficits balance out with the fact that in the last 3 years tax revenues are UP 15% over projections. How do increases in tax revenues tally with increases in the deficit. Actually the deficit projections have been cut in half due to the tax cuts and increases in revenues.

Posted by: Keith at October 25, 2006 1:15 AM
Comment #190085

We, the undersigned believe that we should take 75% from the wealthy, and give it to the poor.

(all those in favor, please note below)

Posted by: littlealphie at October 25, 2006 1:34 AM
Comment #190094

Stephen,

In this case I’m protected by ERISA, but I lived in Nebraska when I became ill, the policy originated in Nebraska, but Nebraska refused to hear the case because I was living in Kansas. So I filed in Kansas. Kansas said it’s a Nebraska case, so I ended up filing it in Federal court.

Four and a half and counting! My lawyer says it could take up to ten years to be heard what with legal delays, blah, blah, blah. If I’d die it’s doubtful the kids would pursue this. Insurance in America has become little more than an absolute scam.

But we need tort reform, ha……ha……..ha!

littlealphie,

No one likes to pay taxes. Right after WWII the wealthiest Americans were paying as much as 90% of their income to support post-depression recovery programs, the rebuilding effort in Japan and Europe, etc. That taxation had gone down to about 70% by the time Raygun took office.

Raygun stripped many essential programs of funds placing a greater burden on state and local governments causing them to increase, or in some cases create, sales taxes to support these essential programs.

Ever since then all we see is increased mill levy’s and increased sales taxes. Taxation is being more and more shifted onto the working class. Thirty years and running, Raygunomics ‘r gud!

KD

Posted by: KansasDem at October 25, 2006 3:07 AM
Comment #190096

“Four and a half and counting!”

Should have been:

Four and a half “years” and counting!

Posted by: KansasDem at October 25, 2006 3:12 AM
Comment #190097

KD

You’re right this looks like a demonic conspiracy of some kind

Ignite! Learning

Posted by: Keith at October 25, 2006 3:28 AM
Comment #190100

littlealphie,

Brilliant idea, there’s nothing I like more than seeing my hard earned pay taken from me by some asshole do-gooder to subsidize the laziness and stupidity of the mob. If you can’t make a living in America, you’re either lazy or an idiot, period. The problem with the budget is that we spend like drunken sailors at a whorehouse, not the revenues themselves. Hell, we brought in almost $2 trillion last year. The US government revenues alone is about 4th on the list of GDPs and is bigger than the economies of countries like Italy.

Posted by: 1LT B at October 25, 2006 3:45 AM
Comment #190122

Keith-
Bush has knowingly cut more taxes than he did spending, even going so far as to finance an expensive war and an expensive entitlement along with other spending. Do you know the last time somebody did something like that?

Lyndon B. Johnson, who tried to fight both the Vietnam War and the War against Poverty all at once. He didn’t fully inform the American people about how much he was spending on the Vietnam war, so he wouldn’t have to give up on the Great Society policies.

You’re probably older than me. Recall what happened in the aftermath of that? If history is any guide, Bush’s huge deficits, regardless of how much he’s reduced them, have gotten us much deeper in debt. Americans will pay for those tax dollars they got back; in fact, they will end up paying more for them, when all is said and done.

So you tell me: what is the point of getting all this money back, if we end up paying more for our government in the end, and at the expense of our future prosperity? Bush’s cutting his deficits, but that’s no better than your two year old only fingerpainting their room rather than the whole house.

As for Ignite!? It’s called a conflict of interest. It’s been an unfortunate feature of much of Republican policy.

littlealphie-
I think we can start with restoring the taxes as they were before Bush’s cuts. We should add just enough thereafter to break even. 75% rates would be truly excessive.

1LT B-
Watch what you say about people who can’t make a living. Many of your fellow soldiers qualify under those terms, both in the guard and otherwise. There are many people that are neither lazy, nor idiots, who are employed at less than their full capability.

So many people have been poisoned by the selfishness of the Right-Wing rhetoric on these matters, such that many cruel “reforms” have been passed, that have only served to further put the thumbscrews on our people.

I’m not for some superhero government going around and saving everybody. Truth is, the government needs to stay out of people’s way where it can, but not be afraid to help where it’s needed, or where it can make us more prosperous.

We don’t need to be balking at whatever means it takes to balance the budget. If we’re not willing to reduce spending, we should be willing to pay more taxes. That simple. If we don’t like how much we’re paying, we should ask them to cut the spending and then, and only then, give the money back. It is dysfunctional to accept tax cuts for money the government doesn’t have.

Posted by: Stephen Daugherty at October 25, 2006 8:17 AM
Comment #190127

1 LT B writes:

Brilliant idea, there’s nothing I like more than seeing my hard earned pay taken from me

Just wondering: How much of your blogging time are you on duty?

Posted by: Schwamp at October 25, 2006 8:41 AM
Comment #190160

Stephen

So what is your answer. Do you think we can tax our way out debt. That’s counter-intuitive based on the evdence. Reagan lowered taxes and got us out of the Carter debacle. Kennedy did and our economy flourished.

Remember the President doesn’t spend a thing without Congress’s approval and yes it is a Republican Congress. However if you think that spending will go down with a Democratic congress, I would like you to show me where.

Posted by: Stephen at October 25, 2006 11:47 AM
Comment #190213

Stephen-
What is your answer, dear namesake? Less spending? Well, until you folks manage to make the necessary cuts, we still have a deficit, and that’s going to cost American taxpayers more than just raising the taxes. I’d rather pay less overall than more.

As far as the economics of the Kennedy Tax cuts go, there are several factors to consider.

1)The Space Program: tens of billions of dollars pumped into the economy from the manufacture and research sectors, mostly going to Americans.

2)Military Spending: War is good business, employs a great number of people.

3)Women entering the workplace. Two incomes in that day and age could earn a lot.

4)Relatively stable economy- Vietnam induced inflation and high interest rates not yet present.

5)New technologies, especially chemical and electronic. It’s not for nothing that the one word Benjamin Braddock’s given in The Graduate is Plastics.

6)Americans more educated than ever. The GI Bill opened up positions to middle class individuals previously closed to them. Money was flowing more equitably through the economy, which is always better for growth. More people who can spend become more people who will spend.

7)High Marginal Rates. To put it quite plainly, it’s like the difference between a ball up high on a hill rolled down, and one quite low on the hill. If taxes are high, tax cuts do wonders, if not, they just deprive the government of revenues.

When Johnson failed to pay for the Vietnam war through taxes, he sealed the fate of this economic expansion. The deficit spending forced inflation up, and ran interest rates high, too.

Reagan’s attempts to stimulate the economy met with failure, mostly. The economic recessions continued despite his best efforts. In the end, Reagan would raise taxes three different times, a fact Supply-Siders conveniently forget.

Additionally, his deficits would contribute to the economic downturn of the early nineties. These would cost his successor the election.

Clinton raised taxes. He timed it well, resulting in a gradual obliteration of the deficit, culminating in the arguments in 2000 as to whether we should pay down debt or grant tax cuts.

This was Bush’s actually campaign theme. Vote for me, and you’ll get money.

I would say his deficit spending, spoiling of the corporate bottom line and failure to properly recover regions from the damage of Katrina have contributed to a drag on this economy that will continue for years.

However much it hurt, its for the best if we stop borrowing so much, since we pay it back with interest, and our debt load is so high. We’re going to pay for things one way or another. Best we pay for it by the cheapest means, rather than cause this country an economic decline at a time when it’s expecting to play a more active role in the world.

Posted by: Stephen Daugherty at October 25, 2006 2:29 PM
Comment #190331

Stephen:

Clinton raised taxes. He timed it well, resulting in a gradual obliteration of the deficit, culminating in the arguments in 2000 as to whether we should pay down debt or grant tax cuts.

That was part of it. Another part was a windfall from lowering capital gains taxes. Lowering capital gains taxes creates a short term spike in tax revenue. Basically there are those who are holding on to highly appreciated assets like real estate etc. When the capital gains rates decrease, tax revenues go up as those on the “bubble” decide to sell. Afterwards things balance out, and revenues stablize.

Another factor was the internet bubble. Mutual fund companies sold highly appreciated stocks in their portfolios and passed on the taxable transations to the shareholders.

Right now tax revenues as a percent of GDP are about the same as they were at the end of the Clinton era. It’s the spending that has increased.

Even with all of the increase in spending the current deficit is small and decreasing. It is lower than the average deficits of the 70’s, 80’s and 90’s.

I think if what is predicted to happen happens. (ie dems win the house and republicans win the senate), we could have a great set up economically because of gridlock. It is kind of strange to be a republican are really not care who wins the house.

The Republicans have been spending like drunken sailors, are corrupt and inept. The Democrats look like the biggest disfunctional family I have ever scene, led by a San Francisco Liberal and a North Eastern Liberal. I don’t think it matters who wins. There is no reason to celebrate either way.

Craig

Posted by: Craig Holmes at October 25, 2006 9:47 PM
Comment #190379

Craig-
I think the emphasis on managing tax rates to produce economic benefits is dangerous and distracting. It’s playing around with the numbers, rather than dealing with what drives those numbers.

Posted by: Stephen Daugherty at October 26, 2006 12:49 AM
Comment #190385

Wow, Excellent post Stephen. I missed this Tuesday.

I love the hardball reality that you brought to this subject. People often get caught up in this or that idealology that they lose sight of reality.

Thanks, again.

Posted by: gergle at October 26, 2006 1:15 AM
Comment #190389

Speaking of Enron, We here in Houston have nearly twice the electricity rates of the nation. Governer Rick Perry’s “deregulation” of Texas electricity has handed the monopolies like Genco, The owner of 40 power plants in the Houston area, garanteed profits and quick turn around windfalls.

So much for the Texas Republican “free markets” and competition. Funny how the Chronicle hasn’t covered this story at all.

Posted by: gergle at October 26, 2006 1:31 AM
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