What the Heck, Let's Tax the Rich

By Green Lantern on 10.4.11 @ 6:09AM

It will mean taxing New York and California -- and exposing the president's bicoastal, parasitical elite.

I'm going to make a proposal that's going to rile a lot of people but if you bear with me I think you'll see the sense of it. I'm going to suggest that we accept President Obama's offer that we "raise taxes on millionaires and billionaires" as part of a deficit-reduction agreement.

Now here's my logic. First of all, we completely take his most powerful weapon out of his hand. The President has already decided he's going to run his entire re-election campaign around the theme of "making the rich pay their fair share" while Republicans will be cast as "protecting the rich at the expense of the poor and the middle class." Take this issue out of his hands and he'll have to run on his own record, which will mean almost certain defeat.

Second, there's absolutely no chance his plan will do anything to improve the economy. Raising taxes on rich people will make a pathetically small contribution to balancing the budget and will hurt investment, which will ensure that things will be just as bad in November 2012 as they are now. There won't be any George Bush to blame this time. The electorate will can the President and Republicans can undo all the damage in a very short time.

But here's the most important thing. When Obama talks about the "millionaires and billionaires" and their $250,000 incomes, he's really talking about a class of highly professional people who are making a lot of money, not in the private sector but in high-level government jobs and non-profits. Nearly all of these people are concentrated on the East and West Coasts, particularly in New York, Washington and California. This is the core of Obama's support. He takes in more campaign contributions from one afternoon on Wall Street or in Silicon Valley than he could raise from a month doing bus tours in the middle of the country. Why are we protecting these people? Let them experience the consequences of their misapprehensions. Maybe they'll find their inner Republican and discover they're not such enthusiastic tax levelers after all.

New York in particular is filled with people making huge salaries in the educational establishment and non-profit sectors. More than 40 percent of school superintendents in New York State now make over $200,000 in salaries and benefits. The authority here is no less than Governor Andrew Cuomo, who is trying to cap them. One Long Island superintendent makes $346,000. The Governor himself only makes $179,000. The other day there was a story in the paper about some assistant to an assistant principal in New York City who was charged with beating his wife. The article mentioned his salary -- $140,000. Obviously his superiors make much more. As Fred Siegel pointed out in The Future Once Happened Here, when President Clinton raised taxes on "the rich" in 1992, "75 percent of the people who saw their taxes go up lived within sight of the Empire State Building."

The illusion Democrats are operating under is that the Tea Party somehow represents "the rich." On the contrary, the Tea Party is made up of middle class entrepreneurs and professionals from the middle part of the country. They are in rebellion against the elites of the East and West Coasts. The new issue of Spectator carries an article, "Andrew Jackson, the First Tea Party President." That is absolutely right. Andrew Jackson did not come to the White House in 1828 with the support of college students, union members, single women, African-Americans, gays, and Hispanics. Jackson's core constituency was freeholders and small business owners who were rebelling against the East Coast elites who were trying to turn American businesses into a "public-private partnership" on the model of European mercantilism. The major issue was incorporations. The East Coast elite wanted to limit incorporations to monopoly charters granted by the federal government on the model that persisted in England right through the 19th century. ("The King's ice cream maker" and so forth.) The National Bank was the perfect tool for synthesizing this crony capitalism. In opposing it, Jackson was arguing no differently than Ron Paul. Fortunately the frontier capitalists won their battle and America became a land of free enterprise.

The Tea Party is the contemporary version of this rebellion. Its strength come from Main Street -- real estate agents, shopkeepers, and small business owners who are repelled by the marriage of Washington and Wall Street they see taking shape. Obama's effort to characterize these people as "the rich" is only an attempt to divert attention from his own cozy relationship with corporate executives and Wall Street titans.

If Obama's effort to "raise taxes on the rich" ever takes shape, the first person to scream will be New York Senator Chuck Schumer, the Democratic majority leader, who realizes those $250,000 "millionaires and billionaires" are his constituents. Schumer has already complained that "$250,000 makes you really rich in Mississippi but it doesn't make you rich at all in New York. There ought to be some kind of scale based on the cost of living on how much you pay." That's a good start.

But here's the real reason for adopting Obama's plan. One of the most important "reforms" he's pushing is a limitation on itemized deductions for high-income taxpayers. This is where he rolls out the rhetoric about corporate jets. But besides mortgage deductions on homes, the most significant deduction people take -- in certain areas of the country, at least -- is state and local taxes.

Many high-tax East and West Coast states are living off these federal deductions. For decades, politicians have sold their constituents on extravagant spending-and-taxes on the grounds that "you can deduct all this from your federal income tax." New York has followed a deliberate policy of raising state and local expenditures in the confidence that these can all be foisted onto taxpayers elsewhere.

As Siegel chronicled in The Future Once Happened Here, New York developed a symbiotic relation with Washington in the 1930s when Mayor Fiorello LaGuardia was able to dump all New York City's extravagant social spending into former New York Governor Franklin Roosevelt's New Deal. The nation's first public housing project, on the Lower East Side, was started by the city but completed with federal dollars. Today New York has more public housing than the next ten cities put together -- all of it heavily subsidized by Washington.

When Medicaid was introduced in 1966, most states saw it as an added financial burden to be carefully circumscribed. California set up a state-run HMO on the model of Kaiser Permanente to keep expenses low. Arizona recently cut 250,000 people off its rolls. But New York officials decided to encourage Medicaid spending as a way of "leveraging" federal dollars.

According to the matching formula, the richest states, like New York, get a 50-50 match while the poorest, like Mississippi, get 75-25. In 49 other states, the non-federal portion comes entirely out of state treasuries. But New York has enlisted cities and counties to kick in half the state's costs on the principle that the more we spend, the more we collect from Washington. Politicians in Albany are forever proclaiming that expanding Medicaid is healthy because "every dollar we spend brings in three." As a result, New York's Medicaid expenses have ballooned to $16 billion a year, more than California and Texas put together, even though those two states both have larger populations. Cities and counties in New York are going bankrupt trying to pay the bill. A few years ago the City of Buffalo tried to disincorporate itself and join surrounding Erie County because it could no longer shoulder its Medicaid expenses.

All this spending has created a huge health/hospital industrial complex that dominates New York politics. The Greater New York Hospital Association regularly takes out full-page ads with Dennis Rivera's notorious Local 1199 of the Service Employees International Union, made up mostly of hospital workers, to encourage the state to spend more on Medicaid. Crain's New York Business recently ran the following report:

In the midst of the recession, 50 not-for-profit New York-area hospital executives and doctors raked in a combined $120 million, according to Crain's New York Business' 2009 rankings.

Just 10 doctors from Beth Israel Medical Center and St. Luke's-Roosevelt Hospital Center in Manhattan earned $30 million among them. . . [T]he highest-paid doc was the head of plastic surgery at Beth Israel, with $4.7 million in compensation in 2009.

The president of Hackensack University Medical Center… was at the top of the list with an astounding $7.3 million -- of which about $5 million came as a golden parachute after the medical center dismissed him.

All this is made possible by the constant stream of federal dollars flowing into New York -- plus the itemized deductions from federal income tax that softens the blow for high-income New Yorkers. But wouldn't high-income people in Florida and Texas take the same hit? No, because Texas and Florida have no state income taxes. They don't get the "benefits" from profligate state spending.

So here are your "millionaires and billionaires," Mr. President, sitting right in the middle of your prime fund-raising territory. Let's go get them!      

What Comes After 'Europe'?

 

The riots of Athens will become those of Milan, Madrid and Marseilles. Border checkpoints will return. Currencies will be resurrected, then devalued. 

 

By BRET STEPHENS

 

When the history of the rise and fall of postwar Western Europe is someday written, it will come in three volumes. Title them "Hard Facts," "Convenient Fictions" and—the volume still being written—"Fraud."

The hardest fact on which postwar Europe was founded was military necessity, crisply summed up by Lord Ismay's famous line that NATO's mission was "to keep the Russians out, the Americans in, and the Germans down." The next hard fact was hard money, the gift of Ludwig Erhard, author of the economic reforms that created the Deutsche mark, abolished price controls, and put inflation in check for generations. The third hard fact was the creation of Jean Monnet's common market that gave Europe a shared economic—not political—identity.

The result was the Wirtschaftswunder in Germany, Les Trente Glorieuses in France and il miracolo economico in Italy. It could have lasted into the present day. It didn't.

In 1965, government spending as a percentage of GDP averaged 28% in Western Europe. Today it hovers just under 50%. In 1965, the fertility rate in Germany was a healthy 2.5 children per mother. Today it is a catastrophic 1.35. During the postwar years, annual GDP growth in Europe averaged 5.5%. After 1973, it rarely exceeded 2.3%. In 1973, Europeans worked 102 hours for every 100 worked by an American. By 2004 they worked just 82 hours for every 100 American ones.

It was during this general slowdown that Europe entered the convenient fiction phase.

There was, for starters, the convenient fiction that if you just added up the GDP of the European Union's expanding list of member states, you had an economy whose size exceeded that of the United States. Didn't this make "Europe" an economic superpower? There was the convenient fiction that Europe didn't need robust military capabilities when it could exert global influence through diplomacy and soft power. There was the convenient fiction that Europeans shared identical values and could thus be subject to uniform regulations governing crime and punishment. There was the convenient fiction that Continentals weren't lagging in productivity but were simply making an enlightened choice of leisure over labor.

And there was, finally, the whopping fiction that Europe had its own "model," distinct and superior to the American one, that immunized it from broader international currents: globalization, Islamism, demography. Europeans love their holidays and thought they were entitled to a long holiday from history as well.

All this did wonders, for a while, to mask European failures and puff up European pride. But there is always a danger in substituting grandiosity for achievement, mistaking pronouncements for facts, or, more generally, believing in your own nonsense.

Here is where Europe slipped from convenient fiction to outright fraud.

There was the fraud of Greece's entry into the euro, a double-edged affair since Athens lied about its budgetary figures and Brussels chose to accept the lie. There was the fraud of the so-called Maastricht criteria—the fiscal rules that were supposed to govern the euro only to be quickly flouted by France and Germany and then junked altogether in the current crisis. There was the fraud of the European Constitution, overwhelmingly rejected wherever a vote on it was permitted, only to be revised and imposed by parliamentary fiat.

AFP/Getty Images

A demonstrator in Thessaloniki, northern Greece, on Sept. 10.

What is now happening in Europe isn't so much a crisis as it is an exposure: a Madoff-type event rather than a Lehman one. The shock is that it's a shock. Greece was never going to be bailed out and will, sooner or later, default. The banks holding Greek debt will, sooner or later, be recapitalized. The recapitalization will be borne by German taxpayers, and it will bring them—sooner rather than later—to the outer limit of their forbearance. The Chinese will not ride to the rescue: They know not to throw good money after bad.

And then Italy will go Greek. Europe's crisis will lap on U.S. shores, and America's economic woes will lap on Europe's—a two-way tsunami.

America will survive this because America is a state. But as Bismarck once remarked, "Whoever speaks of Europe is wrong. Europe is a geographical expression." The "fiscal union" that's being mooted will never come to pass: German voters won't stand for it, and neither will any other country that wants to retain fiscal independence—which is to say, the core attribute of democratic sovereignty.

What comes next is the explosion of the European project. Given what European leaders have made of that project over the past 30-odd years, it's not an altogether bad thing. But it will come at a massive cost. The riots of Athens will become those of Milan, Madrid and Marseilles. Parties of the fringe will gain greater sway. Border checkpoints will return. Currencies will be resurrected, then devalued. Countries will choose decay over reform. It's a long, likely parade of horribles.

Where is the Europe of Ismay, Erhard and Monnet? It's there in memory, if anyone cares to recover it. Give it another 50 years, and maybe someone will. 

Write to bstephens@wsj.com

Nostalgianomics

 

 

Liberal economists pine for days no liberal should want to revisit.

 

Brink Lindsey 

“The America I grew up in was a relatively equal middle-class society. Over the past generation, however, the country has returned to Gilded Age levels of inequality.” So sighs Paul Krugman, the Nobel Prize–winning Princeton economist and New York Times columnist, in his recent book The Conscience of a Liberal.

The sentiment is nothing new. Political progressives such as Krugman have been decrying increases in income inequality for many years now. But Krugman has added a novel twist, one that has important implications for public policy and economic discourse in the age of Obama. In seeking explanations for the widening spread of incomes during the last four decades, researchers have focused overwhelmingly on broad structural changes in the economy, such as technological progress and demographic shifts. Krugman argues that these explanations are insufficient. “Since the 1970s,” he writes, “norms and institutions in the United States have changed in ways that either encouraged or permitted sharply higher inequality. Where, however, did the change in norms and institutions come from? The answer appears to be politics.”

To understand Krugman’s argument, we can’t start in the 1970s. We have to back up to the 1930s and ’40s—when, he contends, the “norms and institutions” that shaped a more egalitarian society were created. “The middle-class America of my youth,” Krugman writes, “is best thought of not as the normal state of our society, but as an interregnum between Gilded Ages. America before 1930 was a society in which a small number of very rich people controlled a large share of the nation’s wealth.” But then came the twin convulsions of the Great Depression and World War II, and the country that arose out of those trials was a very different place. “Middle-class America didn’t emerge by accident. It was created by what has been called the Great Compression of incomes that took place during World War II, and sustained for a generation by social norms that favored equality, strong labor unions and progressive taxation.”

The Great Compression is a term coined by the economists Claudia Goldin of Harvard and Robert Margo of Boston University to describe the dramatic narrowing of the nation’s wage structure during the 1940s. The real wages of manufacturing workers jumped 67 percent between 1929 and 1947, while the top 1 percent of earners saw a 17 percent drop in real income. These egalitarian trends can be attributed to the exceptional circumstances of the period: precipitous declines at the top end of the income spectrum due to economic cataclysm; wartime wage controls that tended to compress wage rates; rapid growth in the demand for low-skilled labor, combined with the labor shortages of the war years; and rapid growth in the relative supply of skilled workers due to a near doubling of high school graduation rates.

Yet the return to peacetime and prosperity did not result in a shift back toward the status quo ante. The more egalitarian income structure persisted for decades. For an explanation, Krugman leans heavily on a 2007 paper by the Massachusetts Institute of Technology economists Frank Levy and Peter Temin, who argue that postwar American history has been a tale of two widely divergent systems of political economy. First came the “Treaty of Detroit,” characterized by heavy unionization of industry, steeply progressive taxation, and a high minimum wage. Under that system, median wages kept pace with the economy’s overall productivity growth, and incomes at the lower end of the scale grew faster than those at the top. Beginning around 1980, though, the Treaty of Detroit gave way to the free market “Washington Consensus.” Tax rates on high earners fell sharply, the real value of the minimum wage declined, and private-sector unionism collapsed. As a result, most workers’ incomes failed to share in overall productivity gains while the highest earners had a field day.

This revisionist account of the fall and rise of income inequality is being echoed daily in today’s public policy debates. Under the conventional view, rising inequality is a side effect of economic progress—namely, continuing technological breakthroughs, especially in communications and information technology. Consequently, when economists have supported measures to remedy inequality, they have typically shied away from structural changes in market institutions. Rather, they have endorsed more income redistribution to reduce post-tax income differences, along with remedial education, job retraining, and other programs designed to raise the skill levels of lower-paid workers.

By contrast, Krugman sees the rise of inequality as a consequence of economic regress—in particular, the abandonment of well-designed economic institutions and healthy social norms that promoted widely shared prosperity. Such an assessment leads to the conclusion that we ought to revive the institutions and norms of Paul Krugman’s boyhood, in broad spirit if not in every detail.

There is good evidence that changes in economic policies and social norms have indeed contributed to a widening of the income distribution since the 1970s. But Krugman and other practitioners of nostalgianomics are presenting a highly selective account of what the relevant policies and norms were and how they changed.

The Treaty of Detroit was built on extensive cartelization of markets, limiting competition to favor producers over consumers. The restrictions on competition were buttressed by racial prejudice, sexual discrimination, and postwar conformism, which combined to limit the choices available to workers and potential workers alike. Those illiberal social norms were finally swept aside in the cultural tumults of the 1960s and ’70s. And then, in the 1970s and ’80s, restraints on competition were substantially reduced as well, to the applause of economists across the ideological spectrum. At least until now.

Stifled Competition

The economic system that emerged from the New Deal and World War II was markedly different from the one that exists today. The contrast between past and present is sharpest when we focus on one critical dimension: the degree to which public policy either encourages or thwarts competition.

The transportation, energy, and communications sectors were subject to pervasive price and entry regulation in the postwar era. Railroad rates and service had been under federal control since the Interstate Commerce Act of 1887, but the Motor Carrier Act of 1935 extended the Interstate Commerce Commission’s regulatory authority to cover trucking and bus lines as well. In 1938 airline routes and fares fell under the control of the Civil Aeronautics Authority, later known as the Civil Aeronautics Board. After the discovery of the East Texas oil field in 1930, the Texas Railroad Commission acquired the effective authority to regulate the nation’s oil production. Starting in 1938, the Federal Power Commission regulated rates for the interstate transmission of natural gas. The Federal Communications Commission, created in 1934, allocated licenses to broadcasters and regulated phone rates.

Beginning with the Agricultural Adjustment Act of 1933, prices and production levels on a wide variety of farm products were regulated by a byzantine complex of controls and subsidies. High import tariffs shielded manufacturers from international competition. And in the retail sector, aggressive discounting was countered by state-level “fair trade laws,” which allowed manufacturers to impose minimum resale prices on nonconsenting distributors.

Comprehensive regulation of the financial sector restricted competition in capital markets too. The McFadden Act of 1927 added a federal ban on interstate branch banking to widespread state-level restrictions on intrastate branching. The Glass-Steagall Act of 1933 erected a wall between commercial and investment banking, effectively brokering a market-sharing agreement protecting commercial and investment banks from each other. Regulation Q, instituted in 1933, prohibited interest payments on demand deposits and set interest rate ceilings for time deposits. Provisions of the Securities Act of 1933 limited competition in underwriting by outlawing pre-offering solicitations and undisclosed discounts. These and other restrictions artificially stunted the depth and development of capital markets, muting the intensity of competition throughout the larger “real” economy. New entrants are much more dependent on a well-developed financial system than are established firms, since incumbents can self-finance through retained earnings or use existing assets as collateral. A hobbled financial sector acts as a barrier to entry and thereby reduces established firms’ vulnerability to competition from entrepreneurial upstarts.

The highly progressive tax structure of the early postwar decades further dampened competition. The top marginal income tax rate shot up from 25 percent to 63 percent under Herbert Hoover in 1932, climbed as high as 94 percent during World War II, and stayed at 91 percent during most of the 1950s and early ’60s. Research by the economists William Gentry of Williams College and Glenn Hubbard of Columbia University has found that such rates act as a “success tax,” discouraging employees from striking out as entrepreneurs.

Finally, competition in labor markets was subject to important restraints during the early postwar decades. The triumph of collective bargaining meant the active suppression of wage competition in a variety of industries. In the interest of boosting wages, unions sometimes worked to restrict competition in their industries’ product markets as well. Garment unions connived with trade associations to set prices and allocate production among clothing makers. Coal miner unions attempted to regulate production by dictating how many days a week mines could be open.

MIT economists Levy and Temin don’t mention it, but highly restrictive immigration policies were another significant brake on labor market competition. With the establishment of countryspecific immigration quotas under the Immigration Act of 1924, foreign-born residents of the United States plummeted from 13 percent of the total population in 1920 to 5 percent by 1970. As a result, competition at the less-skilled end of the U.S. labor market was substantially reduced.

Solidarity and Chauvinism

The anti-competitive effects of the Treaty of Detroit were reinforced by the prevailing social norms of the early postwar decades. Here Krugman and company focus on executive pay. Krugman quotes wistfully from John Kenneth Galbraith’s characterization of the corporate elite in his 1967 book The New Industrial State: “Management does not go out ruthlessly to reward itself—a sound management is expected to exercise restraint.” According to Krugman, “For a generation after World War II, fear of outrage kept executive salaries in check. Now the outrage is gone. That is, the explosion in executive pay represents a social change…like the sexual revolution of the 1960’s—a relaxation of old strictures, a new permissiveness, but in this case the permissiveness is financial rather than sexual.”

Krugman is on to something. But changing attitudes about lavish compensation packages are just one small part of a much bigger cultural transformation. During the early postwar decades, the combination of in-group solidarity and out-group hostility was much more pronounced than what we’re comfortable with today.

Consider, first of all, the dramatic shift in attitudes about race. Open and unapologetic discrimination by white Anglo-Saxon Protestants against other ethnic groups was widespread and socially acceptable in the America of Paul Krugman’s boyhood. How does racial progress affect income inequality? Not the way we might expect. The most relevant impact might have been that more enlightened attitudes about race encouraged a reversal in the nation’s restrictive immigration policies. The effect was to increase the number of less-skilled workers and thereby intensify competition among them for employment.

Under the system that existed between 1924 and 1965, immigration quotas were set for each country based on the percentage of people with that national origin already living in the U.S. (with immigration from East and South Asia banned outright until 1952). The explicit purpose of the national-origin quotas was to freeze the ethnic composition of the United States—that is, to preserve white Protestant supremacy and protect the country from “undesirable” races. “Unquestionably, there are fine human beings in all parts of the world,” Sen. Robert Byrd (D-W.V.) said in defense of the quota system in 1965, “but people do differ widely in their social habits, their levels of ambition, their mechanical aptitudes, their inherited ability and intelligence, their moral traditions, and their capacity for maintaining stable governments.”

But the times had passed the former Klansman by. With the triumph of the civil rights movement, official discrimination based on national origin was no longer sustainable. Just two months after signing the Voting Rights Act, President Lyndon Johnson signed the Immigration and Nationality Act of 1965, ending the “un-American” system of national-origin quotas and its “twin barriers of prejudice and privilege.” The act inaugurated a new era of mass immigration: Foreign-born residents of the United States have surged from 5 percent of the population in 1970 to 12.5 percent as of 2006.

This wave of immigration exerted a mild downward pressure on the wages of native-born low-skilled workers, with most estimates showing a small effect. Immigration’s more dramatic impact on measurements of inequality has come by increasing the number of less-skilled workers, thereby increasing apparent inequality by depressing average wages at the low end of the income distribution. According to the American University economist Robert Lerman, excluding recent immigrants from the analysis would eliminate roughly 30 percent of the increase in adult male annual earnings inequality between 1979 and 1996.

Although the large influx of unskilled immigrants has made American inequality statistics look worse, it has actually reduced inequality for the people involved. After all, immigrants experience large wage gains as a result of relocating to the United States, thereby reducing the cumulative wage gap between them and top earners in this country. When Lerman recalculated trends in inequality to include, at the beginning of the period, recent immigrants and their native-country wages, he found equality had increased rather than decreased. Immigration has increased inequality at home but decreased it on a global scale.

Just as racism helped to keep foreign-born workers out of the U.S. labor market, another form of in-group solidarity, sexism, kept women out of the paid work force. As of 1950, the labor force participation rate for women 16 and older stood at only 34 percent. By 1970 it had climbed to 43 percent, and as of 2005 it had jumped to 59 percent. Meanwhile, the range of jobs open to women expanded enormously.

Paradoxically, these gains for gender equality widened rather than narrowed income inequality overall. Because of the prevalence of “assortative mating”—the tendency of people to choose spouses with similar educational and socioeconomic backgrounds—the rise in dual-income couples has exacerbated household income inequality: Now richer men are married to richer wives. Between 1979 and 1996, the proportion of working-age men with working wives rose by approximately 25 percent among those in the top fifth of the male earnings distribution, and their wives’ total earnings rose by over 100 percent. According to a 1999 estimate by Gary Burtless of the Brookings Institution, this unanticipated consequence of feminism explains about 13 percent of the total rise in income inequality since 1979.

Racism and sexism are ancient forms of group identity. Another form, more in line with what Krugman has in mind, was a distinctive expression of U.S. economic and social development in the middle decades of the 20th century. The journalist William Whyte described this “social ethic” in his 1956 book The Organization Man, outlining a sensibility that defined itself in studied contrast to old-style “rugged individualism.” When contemporary critics scorned the era for its conformism, they weren’t just talking about the ranch houses and gray flannel suits. The era’s mores placed an extraordinary emphasis on fitting into the group.

“In the Social Ethic I am describing,” wrote Whyte, “man’s obligation is…not so much to the community in a broad sense but to the actual, physical one about him, and the idea that in isolation from it—or active rebellion against it—he might eventually discharge the greater service is little considered.” One corporate trainee told Whyte that he “would sacrifice brilliance for human understanding every time.” A personnel director declared that “any progressive employer would look askance at the individualist and would be reluctant to instill such thinking in the minds of trainees.” Whyte summed up the prevailing attitude: “All the great ideas, [trainees] explain, have already been discovered and not only in physics and chemistry but in practical fields like engineering. The basic creative work is done, so the man you need—for every kind of job—is a practical, team-player fellow who will do a good shirt-sleeves job.”

It seems entirely reasonable to conclude that this social ethic helped to limit competition among business enterprises for top talent. When secure membership in a stable organization is more important than maximizing your individual potential, the most talented employees are less vulnerable to the temptation of a better offer elsewhere. Even if they are tempted, a strong sense of organizational loyalty makes them more likely to resist and stay put.

Krugman blames the conservative movement for income inequality, arguing that right-wingers exploited white backlash in the wake of the civil rights movement to hijack first the Republican Party and then the country as a whole. Once in power, they duped the public with “weapons of mass distraction” (i.e., social issues and foreign policy) while “cut[ting] taxes on the rich,” “try[ing] to shrink government benefits and undermine the welfare state,” and “empower[ing] businesses to confront and, to a large extent, crush the union movement.”

Obviously, conservatism has contributed in important ways to the political shifts of recent decades. But the real story of those changes is more complicated, and more interesting, than Krugman lets on. Influences across the political spectrum have helped shape the more competitive more individualistic, and less equal society we now live in.

Indeed, the relevant changes in social norms were led by movements associated with the left. The women’s movement led the assault on sex discrimination. The civil rights campaigns of the 1950s and ’60s inspired more enlightened attitudes about race and ethnicity, with results such as the Immigration and Nationality Act of 1965, a law spearheaded by a young Sen. Edward Kennedy (D-Mass.). And then there was the counterculture of the 1960s, whose influence spread throughout American society in the Me Decade that followed. It upended the social ethic of group-minded solidarity and conformity with a stampede of unbridled individualism and self-assertion. With the general relaxation of inhibitions, talented and ambitious people felt less restrained from seeking top dollar in the marketplace. Yippies and yuppies were two sides of the same coin.

Contrary to Krugman’s narrative, liberals joined conservatives in pushing for dramatic changes in economic policy. In addition to his role in liberalizing immigration, Kennedy was a leader in pushing through both the Airline Deregulation Act of 1978 and the Motor Carrier Act of 1980, which deregulated the trucking industry—and he was warmly supported in both efforts by the left-wing activist Ralph Nader. President Jimmy Carter signed these two pieces of legislation, as well as the Natural Gas Policy Act of 1978, which began the elimination of price controls on natural gas, and the Staggers Rail Act of 1980, which deregulated the railroad industry.

The three most recent rounds of multilateral trade talks were all concluded by Democratic presidents: the Kennedy Round in 1967 by Lyndon Johnson, the Tokyo Round in 1979 by Jimmy Carter, and the Uruguay Round in 1994 by Bill Clinton. And though it was Ronald Reagan who slashed the top income tax rate from 70 percent to 50 percent in 1981, it was two Democrats, Sen. Bill Bradley of New Jersey and Rep. Richard Gephardt of Missouri, who sponsored the Tax Reform Act of 1986, which pushed the top rate all the way down to 28 percent.

What about the unions? According to the Berkeley economist David Card, the shrinking of the unionized labor force accounted for 15 percent to 20 percent of the rise in overall male wage inequality between the early 1970s and the early 1990s. Krugman is right that labor’s decline stems in part from policy changes, but his ideological blinkers lead him to identify the wrong ones.

The only significant change to the pro-union Wagner Act of 1935 came through the Taft-Hartley Act, which outlawed closed shops (contracts requiring employers to hire only union members) and authorized state right-to-work laws (which ban contracts requiring employees to join unions). But that piece of legislation was enacted in 1947—three years before the original Treaty of Detroit between General Motors and the United Auto Workers. It would be a stretch to argue that the Golden Age ended before it even began.

Scrounging for a policy explanation, economists Levy and Temin point to the failure of a 1978 labor law reform bill to survive a Senate filibuster. But maintaining the status quo is not a policy change. They also describe President Reagan’s 1981 decision to fire striking air traffic controllers as a signal to employers that the government no longer supported labor unions.

While it is true that Reagan’s handling of that strike, along with his appointments to the National Labor Relations Board, made the policy environment for unions less favorable, the effect of those moves on unionization was marginal.

The major reason for the fall in unionized employment, according to a 2007 paper by Georgia State University economist Barry Hirsch, “is that union strength developed through the 1950s was gradually eroded by increasingly competitive and dynamic markets.” He elaborates: “When much of an industry is unionized, firms may prosper with higher union costs as long as their competitors face similar costs. When union companies face low-cost competitors, labor cost increases cannot be passed through to consumers. Factors that increase the competitiveness of product markets increased international trade, product market deregulation, and the entry of low-cost competitors—make it more difficult for union companies to prosper.”

So the decline of private-sector unionism was abetted by policy changes, but the changes were not in labor policy specifically. They were the general, bipartisan reduction of trade barriers and price and entry controls. Unionized firms found themselves at a critical disadvantage. They shrank accordingly, and union rolls shrank with them.

Postmodern Progress

The move toward a more individualistic culture is not unique to the United States. As the political scientist Ronald Inglehart has documented in dozens of countries around the world, the shift toward what he calls “postmodern” attitudes and values is a predictable cultural response to rising affluence and expanding choices. “In a major part of the world,” he writes in his 1997 book Modernization and Postmodernization, “the disciplined, self-denying, and achievement-oriented norms of industrial society are giving way to an increasingly broad latitude for individual choice of lifestyles and individual self-expression.”

The increasing focus on individual fulfillment means, inevitably, less deference to tradition and organizations. “A major component of the Postmodern shift,” Inglehart argues, “is a shift away from both religious and bureaucratic authority, bringing declining emphasis on all kinds of authority. For deference to authority has high costs: the individual’s personal goals must be subordinated to those of a broader entity.”

Paul Krugman may long for the return of self-denying corporate workers who declined to seek better opportunities out of organizational loyalty, and thus kept wages artificially suppressed, but these are creatures of a bygone ethos—an ethos that also included uncritical acceptance of racist and sexist traditions and often brutish intolerance of deviations from mainstream lifestyles and sensibilities.

The rise in income inequality does raise issues of legitimate public concern. And reasonable people disagree hotly about what ought to be done to ensure that our prosperity is widely shared. But the caricature of postwar history put forward by Krugman and other purveyors of nostalgianomics won’t lead us anywhere. Reactionary fantasies never do.

Brink Lindsey (blindsey@cato.org) is vice president for research at the Cato Institute, which published the policy paper from which this article was adapted.

American Challenges: The Blue Model Breaks Down

Walter Russell Mead

Here in the quiet precincts of the stately Mead manor in exclusive Queens, as the dew gently falls over the mist-shrouded lawns and the pigeons coo soothingly from the historic-landmarked eaves, it is sometimes hard to believe, but out there in the workaday world the long and graceful decay of the American social model is accelerating into a more rapid and dangerous decline.  The core institutions, ideas and expectations that shaped American life for the sixty years after the New Deal don’t work anymore, and the gaps between the social system we’ve inherited and the system we need today are becoming so wide that we can no longer paper them over or ignore them.

In the old system, both blue collar and white collar workers hold stable jobs, a professional career civil service administers a growing state, with living standards for all social classes steadily rising while the gaps between the classes remain fairly stable, and with an increasing ‘social dividend’ being paid out in various forms: longer vacations, more and cheaper state-supported education, earlier retirement, shorter work weeks and so on.  Graduate from high school and you were pretty much guaranteed lifetime employment in a job that gave you a comfortable lower middle class lifestyle; graduate from college and you would be better paid and equally secure.

Life would just go on getting better. 

From generation to generation we would live a life of incremental improvements — the details of life would keep getting better but the broad outlines of our society would stay the same.  The advanced industrial democracies of had in fact reached the ‘end of history’: this is what ‘developed’ human society looked like and there would be no more radical changes because the picture had fully developed.

Call this the blue model, and the chief division in American politics today is between those who think the blue model is the only possible or at least the best feasible way to organize a modern society and want to shore it up and defend it, and those who think the blue model, whatever benefits it had in the past, is no longer sustainable.

That division is going to begin to erode in the next few years because the blue model is breaking down so fast and so far that not even its supporters can ignore the disintegration and disaster that it entails.

 

AT&T and Ford Are Blue in More Than Just Their Logo

The blue model rested on the post-Second World War industrial and economic system.  The ‘commanding heights’ of American business were controlled by a small number of monopolistic and oligopolistic firms.  AT&T, for example, was the only serious telephone company in the whole country, and both the services it offered and the prices it could charge were tightly regulated by the government.  The Big Three car-makers had a lock on the car market; in the halcyon days of the blue model there was no foreign competition.  A handful of airlines divided up the routes and the market; airlines could not compete by offering lower prices or by opening new routes without special government permission.  Banks, utilities, insurance companies, trucking companies had their rates and, essentially, their profit levels set by federal regulators.

The stable economic structure allowed a stable division of the pie.  Workers (much more heavily unionized then than now) got steady raises and stable jobs.  The government got a stable flow of tax revenues.  Shareholders got reasonably steady dividends.

There were a lot of problems with the old system.  For one thing, it rested in large part on systematic discrimination against women and minorities.  For another, consumers had very little leverage.  If you didn’t like the way the phone company treated you, you were perfectly free to do without phone service.  If you didn’t like badly made Detroit gas guzzlers that fell apart in a few years, you could get a horse.

The old system slowed innovation; AT&T had no interest in making huge investments in new and untested telecommunications technologies.  Rival companies and upstart firms were kept out of the controlled markets by explicit laws and regulations intended to stabilize the position of the leading companies in the system.

The blue model began to decay in the seventies.  Foreign producers began to erode the market share of lazy, sclerotic American firms–like the Big Three automakers.  The growth of offshore financial markets forced the financial services industry to become more flexible as both borrowers and lenders were increasingly able to work around the regulations and the oligopolies of the domestic market.  Demand for new communications services created an appetite for competition against Ma Bell.  The consumer movement attacked regulations that were clearly designed to protect companies; Teddy Kennedy was a cosponsor of the bill to deregulate the airlines.  Anti-corporate liberals rebelled at the way government power and regulation was being used to allow corporations to give their consumers the shaft.

As the old system dissolved, companies had to become more flexible.  As industry became more competitive, private sector managers had to shed bureaucratic habits of thought.  Lifetime employment had to go.  Productive workers had to be lured with high pay.  The costs of unionization grew; in the old days, government regulators simply allowed unionized firms to charge higher prices to compensate them for their higher costs.  The collapse of the regulated economy (plus the rise of foreign competition from developing countries) made unions unsustainably expensive in many industries.

Some companies (like the automakers) seemed large enough and rich enough that they clung to the blue model long after the sell-by date.  The result was a long, slow and grueling decline whose late stages are still unfolding today.  They lost market share to more nimble rivals.  Their workforce became old and expensive, and they were supporting ever larger numbers of retirees on the basis of smaller market shares and shrinking profitability.

These days, private sector blue companies can only survive with vast and continuing government support.  Government protection from foreign competition (economically wasteful and illegal under our trade agreements) is one option; direct subsidies and cash transfers (bailouts and tax breaks) is another.  Neither works very well or very long.  Both are expensive.

The blue model is clearly passing away in private industry as the conditions that made it possible faded in the past. It’s been a difficult, expensive and uncomfortable process, but our economy is more flexible and innovative than it used to be.  There are a lot of reasons to be nostalgic for the old days (especially for the white males who were, far and away, the biggest beneficiaries of the old system, sigh) but there is no going back.

 

A Blue Government

The real crisis today is the accelerating collapse of blue government.  It’s a colossal, multi-dimensional meltdown that affects our lives and our politics in many ways.  Today there are three elements of the blue government meltdown in particular worth mentioning.

The first is the government’s role in providing the benefits associated with the blue system.  When we talk about ‘runaway entitlement programs’ today we are talking about commitments by the government to provide retirement and other social benefits that originated as part of the blue system social contract.  Workers could retire as early as 62 with a combination of Social Security, private pensions and, as of the 1960s, Medicare coverage.  These costs are now exploding and it is clear that the government can’t pay them into the future.

The second crisis is that the government is now the last true-blue employer in the country.  Federal, state and local governments are often staffed by lifetime civil servants, whose jobs are protected by law and by some of the last truly powerful unions in the country.  That means it is incredibly expensive for governments to do anything at all, and they are poorly equipped to respond nimbly to the fast-changing conditions of America today.  The cost problem is aggravated because quasi-governmental sectors of the economy (like the health and university industries) are also by and large pretty blue: high wages, stable employment, cumbersome procedures — and powerful unions.  Government is simply too unproductive, too unresponsive and too expensive to do what needs to be done at a reasonable cost.  (Government also still has the anti-consumer mentality of the old blue monopolies: if you don’t like the crappy services government provides — move.) Public schools are increasingly expensive to run, and yet they do not provide improved services to match those exploding costs.

Finally, culturally and intellectually, bureaucrats and politicians often remain blue.  That is, they think instinctively in the old ways, come up with blue solutions to non-blue problems, and often fail to grasp either the constraints or the opportunities of the new era.

As long as the federal government can print money and find lenders to buy its bonds, it can bleed slowly.  It can gradually watch its fiscal position erode, it can gradually become less effective and less popular.  But state and local governments increasingly need vast transfers of cash from the federal government to keep their blue noses above the rising tide.  California and New York are headed over the cliff without federal bailouts, and others follow close behind.  Already, a substantial share of the ‘stimulus’ spending is targeted less at New Deal-style infrastructure projects than at simply keeping unsustainable state bureaucracies and systems afloat for a few months or years longer. The stock market declines wiped out huge chunks of the wealth that state pension systems needed to have a hope of paying the pensions promised to government retirees under terms more generous than virtually any private employers now provide.

 

The Blues Ahead

There are several ugly truths that the country (and especially the states whose governments are bigger and bluer than the rest) will be facing in the next ten years.

First, voters simply will not be taxed to cover the costs of blue government.  Voters with insecure job tenure and, at best, defined-contribution rather than defined-benefit pensions will simply not pay higher taxes so that bureaucrats can enjoy lifetime tenure and secure pensions.

Second, voters will not accept the shoddy services that blue government provides.  Government is going to have to respond to growing ‘consumer’ demand for more user-friendly, customer-oriented approaches.  The arrogant lifetime bureaucrat at the Department of Motor Vehicles is going to have to turn into the Starbucks barista offering service with a smile.

Third, government must reconcile itself to its declining ability to regulate a post-blue economy with regulatory models and instincts rooted in the past.

The collapse of a social model is a complicated, drawn out and often painful affair.  The blue model has been declining for thirty years already, and it is not yet finished with its decline and fall.  But decline and fall it will, and as the remaining supports of the system erode, the slow decline and decay is increasingly likely to bring on a crash.

As I continue blogging about the American future, one of the subjects that will come up again and again will be the blue crack up–we are all going to be singing the blues as the process moves on.

Stupid Is As Stupid Does

 

My dear fool, I hope that you tattooed that on your forehead in the orgasmic aftermath of Obama electoral sex.  It will be a wonderful reminder to your grandchildren when they are living in cardboard boxes.  

Allah knows, the sex wasn't any good for you.  Certainly, he didn't respect you in the morning.  He wasn't then and isn't now that into you.
  

He used you.  You were nothing more than a $5 hooker, who he took on a 'round-the-world excursion and left with a wicked case of crabs and herpes; yet, you keep making excuses for him.  Soon, you will be blaming Moses or President James Polk for inventing electric stoplights for unemployment.
  

 I bet you are one of the 80% of college graduates, who have had to move back home with Mum & Dad, that is still waiting by the phone.   No money.  No job.  No car.  No future, but Mummy does still tuck you in at night.

So, tonight, when you are laying in your twin bed with the Buzz Lightyear sheets and the Tickle-Me Elmo doll, just keep saying:

"I may be unemployed, but Hopenchange is awesome!

  I may never be able to own my own home, but Obama is the one that we have been waiting for! 

I know that I can't buy a Skinny Caramel Mocha Frappuccino Grande because I'm flat broke, but Socialism is so great!  

I know that most of the Northeast got flooded, but Obama still lowered the sea levels!

  Besides, Mummy makes me Pop-Tarts and gives me a Flintstones vitamin every morning.  Plus, looking forward to premature balding, a paunch, and a full box of condoms with an expiration date of 01.01.10 isn't so bad when, at 25, I am still considered a child on my parents' health insurance policy.

Eventually, if Obama is reelected, I know he will issue an Executive Order that will force my parents to continue to pay me an allowance until I am 50.  I mean, like ya know, it's only fair.  Some of the kids that I graduated with have their own homes and businesses.  It's not like I am demanding a lot and it's not fair that they have more than me.  Anyhoo, it's the law in economically-sound countries like Italy.  Me and my chums are working on a really kewl name to call ourselves...unlike in other countries.

In Italy, people like me, ya know, twenty- and thirty-somethings, who are on an allowance, are called "bamboccioni" - "big babies!"  The utter nerve!

In Japan, grown-ups call us "parasaito shinguru."  Can you believe it?  They think we are parasitic singles.  Unbelievable.  We didn't ask to be born.  If you didn't want to take care of us in the style to which we have become accustomed, then you should have aborted us.  Take that, お爺さん!

Now, in Germany, they call people like us "Nesthockers," but what do you expect from NAZIS?  I mean, HELLOOOOOOO....

And, just who the fuck do those British snobs think they are calling their adult children KIPPERS?  After all, who calls their children fish?  

Everyone should recognise that, whether they are gutted, salted or pickled, Kids In Parents’ Pockets Eroding Retirement Savings deserve basic marine rights and, if they aren't going to be respected, then these victims need to organise and appeal to the United Nations.

KIPPERS OF THE WORLD, UNITE!
 

All of those racist, sexist, bigoted, homophobic, Islamophobic, xenophobic, flatearthes, greedy Fascists saw "Change We Can Believe In!" and they thought Obama was talking about the near-term...ya know...like the next Recovery Summer or the 8th one or something.  

Well, like I said, THEY ARE STUPID!  They didn't read the fine print on the back of the signs!   

'Change We Can Believe In' = 'Change We Hope We Can Believe Will Happen Before An Asteroid Hits And Destroys the Earth!'  

Sheesh, 'tupid 'tard!!!

Okay, I have to go to sleep now so that I can get up early and pack my Transformers lunchbox, beg Mummy for some bus money, walk 3 miles to the bus stop, and ride for 45 minutes to my volunteer job at the local Obama 2012 reelection office.

Don't you people be fooled again.  There is only one man in the world...in fact, only one man in the history of mankind...that has cared more about you than himself and that is:

Barack Hussein Obama!

O-BAA-MMM-AAA!  O-BAA-MMM-AAA!  O-BAA-MMM-AAA!"

Sophie:  So, you voted for Obama in 2008 to prove that you weren't a racist and were a hip, kewl kat.  Are you going to vote for him in 2012 to prove that you are a stupid, bloody idiot, who should just be put on the Liverpool Care Pathway a/k/a KervorkianCare?