View 540 October 13 - 19, 2008 (original) (raw)
Wednesday, October 15, 2008
Dragging McCain across the finish line?
The debate is tonight. McCain has one chance to make it clear that Obama is indistinguishable in policies from McGovern. Obama's "Tax cut" will actually be a payment to a rather large number of "taxpayers". That is, anyone who sends in an income tax form is considered a taxpayer; but about 40% of those pay nothing. Some number of that 40% actually receive a "refund" although they didn't actually have taxes withheld; it's called "earned income credit" although how that income was "earned" is not clear to me.
It doesn't take a Ph.D. in political science to realize that those getting an earned income credit "refund" are likely to vote for those who offer to increase that payment. Obama's exact plan is a bit hard to discern, but from everything he has said, his tax cut would send checks to 40% of the taxpayers. At that point we may be beyond recovery: we will become a one party state.
Now I suppose the United States can survive as a federalized unitary socialist state built on class warfare lines, with the very wealthy who don't pay much in the way of taxes, those on the dole, and the unionized public service employees, teachers, and lawyers entirely dominating the political systems. It won't be the same country I grew up in, but then we don't now live in the country I grew up in. Alas, I suspect that's what's at stake here.
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Does Size Matter?
This isn't an essay, it's just speculation.
The justification for enormous payments to management in financial services is that it takes extraordinary talent to run those huge financial empires. This is likely to be true. Unfortunately, the net result in most cases is about 20 years of prosperity, with the management geniuses able to get 1/2% more return than a less able manager -- then the whole thing collapses. The managers of the big investment banks managed to lose more in the last crash than all investment banks have made cumulatively since investment banks began. Many walked away with big parting bonuses, too, since they were too smart to have all their savings in their own institutions. It turns out that some of the managers weren't smart enough to get into mortgage swaps and complicated derivatives they didn't understand, and their banks only lost maybe half their values. Of course they don't get paid as much as the super smart guys who were able to shave that extra gain from derivatives for a few years. They aren't the smartest guys in the room.
Now every political theorist who ever lived -- well perhaps I exaggerate, but very nearly every one of them -- has been certain that enormous differences in wealth between the richest and poorest are not good for Republics. Aristotle said that rule by the middle class (what he called democracy) works pretty well and that the middle class are those who possess the goods of fortune in moderation. Other political theorists have pointed out that having a few very wealthy people in a middle class society isn't harmful, although it's usually better if the wealthy don't flaunt it: note that in Zurich there are very few mansions even though some people are a lot richer than others. Today in the US the very rich really aren't even as you and I, and some of them are very glad to make that clear to all of us.
But it isn't the existence of the wealthy (who have money, and whose manner of making more is usually pretty invisible) that infuriates people, it's the existence of those who make more in a year than most of us will make over our lifetimes, and make it by moving money around in circles. Few envied Jack Welch his enormous pay when he was running GE. The managers of Fannie Mae and Freddie Mac, even before they collapsed, were making more than Welch while setting things up to ruin the whole game. Incidentally, I have heard that about 1/4 -- 25% -- of all the sub-prime mortgages were to speculators, second and third houses bought for flipping -- and Fannie Mae and Freddie Mac were buying those mortgages up to repackage and sell just like they were buying up mortgages for first time home buyers and other owner-occupied houses. Since the purpose of Fan and Fred was, according to the legislation that set them up, to increase the number of people owning homes -- a noble and laudable goal, which increases the numbers of people who have a stake in the Republic, and become part of the middle class -- since the purpose of Fan and Fred was to increase the number of people who owned homes, and a good quarter of the sub prime mortgages they were financing were to speculators, it's pretty clear that Fan and Fred exceeded their charters, and their executives were guilty of exceeding their authority. I doubt that was technically a crime, but it sure looks fishy.
Many economists, notably including David McCord Wright, have studied Marx. Marx predicted the division of the population of the earth into two classes, the bourgeoisie who owned everything and the proletariat who owned nothing; and that the ownership class would shrink to tiny, and the proletariat would grow and grow; the owners would hire soldiers and police (the running dogs of the bourgeoisie) to suppress the proletariat, and might even experiment with socialism and doles, but eventually they were doomed. Wright speculated that this didn't happen to the US because of the anti-trust acts: industries weren't permitted to coagulate into one great big industry and then combine with other monopolists into cartels.
Now that observation needs refining -- all models do -- but there's something to it, and the increasing concentration of wealth into bigger and bigger companies with less and less competition has been accelerating. The financial collapse makes that even more likely with banks and financial institutions.
Perhaps what we ought to do in bailing out the economy is to break these things up into smaller outfits. This has the advantage that there's no sane reason to pay someone a hundred million dollars a year to run an enormous company if the company has been broken up into a hundred companies that each pay a million a year to their manager. It also has the advantage that some of those companies may actually have sane management that doesn't jump on the band wagon for derivatives and mortgage swaps and making loans that no one in his right mind would make, or whatever new scheme comes along that will bring about a slow increase in value followed by a collapse that wipes everyone out.
Another alternative is regulation. That says that a GE-12 under the general direction of a political appointee would do a great job of setting the rules for financial management. If you believe that I'd like to sell you some derivatives cooked up by a quantum physicist.
One of these days I'll have to write an essay on this stuff.
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