Setting a fair minimum wage for Seattle

Testimony to the Mayor's Income Inequality Advisory Committee
Submitted by Peter Costantini ~ April 2, 2014

I attended the Income Inequality Symposium on March 27 as an analyst for Inter Press Service, a global non-profit newswire based in Rome.  However, I’m submitting these comments as a citizen.

I’ve looked at work from both sides now.  Of my 40 years in Seattle, I’ve spent twenty as a blue-collar worker and another twenty as software professional.  I’ve been a union member and a manager.  I’ve done community organizing locally, nationally and internationally.  And as a journalist, I’ve covered issues of labor, poverty and economics in this country, Latin America and Europe. (See “Who is this guy anyway?” below.)

Naturally, my opinions have been shaped by these experiences.  Following are a few observations and recommendations in response to the Symposium and based on other research.

Look at total impact on affected workers’ livelihood

Many studies have examined the effects of minimum wage increases on employment in terms of job loss or gain.  The implication has been that, to the extent that raising the wage might cause job losses, it would create some losers along with the many winners.

Most researchers around the country have found no statistically significant effect on overall employment of workers impacted by minimum wage increases.  This was true even of Santa Fe, NM, which mandated an increase of 65.0 percent in 2004 (from $5.15 to $8.50), a higher percentage increase in the minimum wage than the 60.9 percent increase that $15.00 would represent for Seattle in 2014.

However, the relevant measure is not whether a minimum wage causes any net loss of jobs.  From the point of view of wage earners, the question is whether their total income in the course of a year is reduced or increased.

Most low-wage jobs already have variable hours and high turnover: many people do not work a full 40 hours and many lose or leave jobs in the course of a year.  Labor “flexibility” has brought us far from the mid-20^th Century manufacturing jobs that offered workers with a high-school diploma long-term full-time employment at union wages sufficient to support a family and even buy a house.

For low-wage workers today, employment effects show up primarily in average hours worked weekly and total time out of work yearly.  As a hypothetical case, if my hourly wage goes up 50 percent from $10.00 to $15.00, but my average weekly hours worked drop from 36 to 32 and I’m out of work for 4 weeks instead of 2 weeks, I’m still considerably ahead of the game with a 28.0 percent increase in my yearly income.

year	average wage	average hours/week	weeks unemployed	total hours worked	yearly income	yearly increase
2014	$10.00	36	2	1,800	$18,000
2015	$15.00	32	4	1,536	$23,040	28.00%

If I qualify for unemployment insurance for the weeks out of work, my situation is even better.  Even if I were no longer eligible for food stamps at the higher wage, my wage income replacing them would now be paying into unemployment insurance, Social Security and Medicare.  And that food-stamp funding would now enlarge the pool for others.

Making more money for fewer hours worked also frees up other possibilities off the job, such as spending more time taking care of my family.  In the job market, it would create space to take training courses, change careers, look for a better job in the same industry, or get a second part-time job.

Alternatively, let’s say I’m making $12.00 when my wage rises to $15.00, a 25 percent increase. Assuming my average weekly hours worked drop from 36 to 34 and I’m out of work for 3 weeks instead of 2 weeks, my yearly income would still be 15.69 percent higher.

year	average wage	average hours/week	weeks unemployed	total hours worked	yearly income	yearly increase
2014	$12.00	36	2	1,800	$21,600
2015	$15.00	34	3	1,666	$24,990	15.69%

These examples intentionally use improbably large reductions in hours and increases in unemployment, despite strong evidence that cities that have implemented substantial wage increases have seen no significant employment effects.  Even if there were some reduction of total yearly hours for workers who got the full 60.9 percent raise from $9.32 to $15.00, the loss of hours or increase in unemployment would very likely be smaller for workers now making $11.00, and smaller still for those now making $13.00.  This is because the percentage of their wage increase, and thus the increased costs they represent to their employers, would be much smaller.

Similarly, if the minimum wage were raised in steps, for example to $11.00, then $13.00, then $15.00, any employment effects would likely be much reduced, based on the experiences of other localities.

“What will be the impact on total yearly incomes of the workers involved?” rather than “Will any jobs be lost?” is the first question we should be asking when considering raising the minimum wage.[1]

Link future increases to productivity growth, not just inflation.

There seems to be wide agreement that any minimum wage ordinance should be adjusted for inflation.  It is merely “truth in advertising” to specify wage levels in real terms for year-to-year comparisons.  Nominal wage values are not meaningful over time because they are constantly eroded by inflation: $7.25 per hour today is worth less than $7.25 in 2009. What matters is the use value of a wage – how much it can actually buy – and this is captured only when changes in the wage are stated in terms of constant dollars.

The Washington state minimum wage is inflation-indexed, but the federal minimum wage is not.  This has meant that the latter has stagnated, but each effort to raise it has ignited political trench warfare.

Example of a $15 wage linked to inflation over 6 years.
 

year	real minwage	inflation
2015	$15.00	2.00%
2016	$15.30	2.00%
2017	$15.61	2.00%
2018	$15.92	2.00%
2019	$16.24	2.00%
2020	$16.56

Using the Bureau of Labor Statistics estimate of 2 percent average inflation for the next five years, $16.56 in 2020 dollars would have the same purchasing power as $15.00 in 2015 dollars.

However, indexing the minimum wage only to inflation would not help those who work for it to maintain their standard of living over time, relative to the rest of society and the economy.  Productivity growth raises the general standard of living each year, and business owners along with higher-paid employees have usually been able to hitch their wagons to it.  But most middle and low-wage workers have long since fallen behind.

Productivity is a measure of total outputs created per unit of input.  A yearly productivity increase represents the growth of economic efficiency over that year, and the fruits of it are usually divided between labor in the form of income and capital in the form of profits (except during the recent recession, when a sizeable portion was offered as a sacrifice to Mammon).

Fox News commentator Bill O’Reilly was scandalized to discover that 99 percent of poor people have refrigerators and 81 percent have a microwave.[2] Imagine his outrage if he ever learns that the same thing has happened historically for indoor toilets, televisions, and cell phones: what was once seen as a luxury has become a necessity for nearly everybody. 

A major culprit is decades of productivity growth – and the ability of wage workers to capture a fair share of it.

Prior to around 40 years ago, hourly wages in this country were roughly coupled to productivity and the benefits of economic growth were shared more proportionately across society. Since then, a central failure of our economy has been that, while productivity has continued to grow steadily, real wages have stagnated and become decoupled from it, in large part because of policies of business and government.  This wage/productivity gap is particularly damaging for low-wage workers, but in Seattle we’ve recently seen a vivid example of how it can bite even Boeing machinists.

Graph: John Schmitt, CEPR

If the minimum wage had been indexed to productivity in 1968, by 2012 it would have been $21.72, according to economist John Schmitt of the Center for Economic and Policy Research.

Tying the real minimum wage to productivity growth would help to incrementally reduce the wage/productivity gap for workers at the bottom of the wage scale. It would set a precedent for moving towards an economy where all workers can once again share more fully in the fruits of their labor, or, as we like to say in the software industry, their value-add.

Example of a $15 wage linked to current inflation and productivity over 6 years.
 

year	productivity minwage	inflation	real minwage	productivity growth
2015	$15.00	2.00%	$15.30	2.00%
2016	$15.61	2.00%	$15.92	2.00%
2017	$16.24	2.00%	$16.56	2.00%
2018	$16.89	2.00%	$17.23	2.00%
2019	$17.57	2.00%	$17.93	2.00%
2020	$18.28

U.S. Bureau of Labor Statistics studies estimate that inflation will average 2.0 percent and that productivity growth will average 2.0 percent for the rest of the decade through 2020.[3]

Provide incentives for employee-employer negotiations.

One value that minimum wage ordinances ought to encourage is the active involvement of workers in their workplaces.

For example, SeaTac’s minimum wage ordinance offers a waiver for unionized employees, allowing them to modify provisions of the law in a bona fide collective bargaining agreement.  San Francisco’s minimum wage law has a similar provision.

Critics of the SeaTac law said it was merely a ploy to give unions a foot in the door of the affected industries.  So far there has been no indication that this is true.  But even if it were, for anyone concerned about reducing income inequality, encouraging workers to form labor unions and to bargain collectively for their interests is an indispensable policy tool.  It is also one that does not involve public expenditures.

The decline of labor unions has been a major factor in the stagnation of real wages for workers in this country over the past few decades.  Overall union membership has dropped from over 30 percent in the 1950s to 11.3 percent in 2013, with only 6.7 percent unionized in the private sector.

Some parts of the U.S. labor movement shared responsibility for this decline: certain strains of unionism were known for looking out mainly for the narrow interests of their own members, and some were infiltrated by organized crime.  In the 70s and 80s, I belonged to the Laborers International Union of North America, a construction trade union that I later learned was associated with La Cosa Nostra in some areas (though not Seattle).  Today, after a consent decree with the U.S. Justice Department and a period of de-mafiafication, LIUNA has become one of the more democratic, progressive and dynamic unions in the country, and a leader in organizing low-wage workers.

Overall, though, the near-death experience of organized labor has been mostly due to unremitting attacks by big business in partnership with the Reagan and later administrations, and labor laws increasingly hostile to the interests of workers.

Despite their shortcomings, unions in any industry or business are nearly always more democratic and transparent than their employers.  By definition, businesses are plutocratic: even if they have shareholders, the reality is typically one million dollars, one vote.  A labor organization, by contrast, is a very direct kind of democracy, and its local leaders are often held accountable by members who are well versed in the issues they are confronting.  It follows that public policies that seek to reduce inequality and increase democracy should encourage worker involvement in labor organizations and workplaces.

Nevertheless, not all low-wage workers may want to join a union.  So any minimum-wage ordinance should encourage involvement in all kinds of employee activity, including less-formal associations.  One successful model of this is the non-profit workers centers in many cities - such as CASA Latina in Seattle - that provide support, training, information and a hiring hall to mainly immigrant workers, but don’t formally represent them in collective bargaining.

On an individual level, a higher wage gives each worker more power and flexibility to bargain informally with their employer about their job.  Individual workers who are not economically squeezed are more likely to negotiate with their employers on things like raises, promotions and working conditions, and if dissatisfied to vote with their feet and seek employment elsewhere.  This is obviously the case in high-paying, dynamic industries like software, but it applies in low-wage industries as well.

In addition to employee benefits, there are benefits for employers in this as well: workers who are more involved in their workplace and better paid often become more productive and dedicated to the business and its customers, reducing turnover and improving business processes.

All these levels of employee involvement are not merely economically and politically desirable.

The right of workers to organize derives from the freedoms of speech and association.  Some see the hours spent working for someone else as exempt from the civil rights we expect in the rest of our lives, but we do not have to check these protections at the workplace door.  Workplace freedoms are among the economic freedoms guaranteed by Universal Declaration of Human Rights of the United Nations, the highest authority of international law.

Article 23 Section 3 reads: “Everyone has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.”  Article 23 Section 4 reads: “Everyone has the right to form and to join trade unions for the protection of his interests.”  These rights are spelled out in more detail in the UN’s International Covenant on Economic, Social and Cultural Rights.

Beyond guaranteeing basic rights, the minimum wage ordinance offers an opportunity to recognize the agency of the workers involved and to offer them a chance to increase their capabilities.  Nobel-laureate economist Amartya Sen conceived of agency as the ability of each member of society to become “someone who acts and brings about change” rather than a “motionless patient”.  Capabilities, he says, “enable people to lead the kind of lives they value.” Public policy can not only enhance these capabilities, but in turn “can be influenced by the effective use of participatory capabilities by the public.” In effect, capabilities are interactive and can create virtuous circles.[4]

City policies should provide incentives for workers to become active protagonists in their worklife and to acquire effective voices in resolving issues that affect them.  Workers’ activism in the minimum-wage campaigns has already been an important step in this direction.  The Seattle minimum wage ordinance should further recognize the agency of the workers it covers by encouraging their active involvement in determining their levels of compensation and conditions of employment.  An exemption for collective bargaining agreements would be one small, practical way to accomplish this.

Create a mechanism for fairly resolving contested cases.

Minimum-wage ordinances have often had to confront questions of how to deal fairly with special cases, such as small businesses and non-profit organizations.  Some laws exempt or phase in increases for non-profits or small businesses with fewer than a certain number of employees: 25 in Santa Fe, 10 in San Francisco, and numbers varying by industry in SeaTac.[5]

Some participants in the Seattle discussion have proposed that small businesses, which employ only a small percentage of the total Seattle workforce, should be exempted from the ordinance or phased into paying the full wage.  Even if the net effect of the ordinance on the labor market would produce no job losses, it is credible that some small businesses that employ a large percentage of low-wage workers might have to cut their payroll significantly or even go out of business if forced to pay the full increase immediately.[6]

Non-profit organizations present similar issues. Many get funding on a yearly or biennial basis, and pay salaries well below the private sector all the way up to the top. By definition, all make no profits.  To avoid forcing them to lay off employees and leave low-income people without vital services, some have proposed that the ordinance give such non-profits exemptions or more time for them and their funders to adjust to new wage levels.[7] Should the minimum wage be raised, the city and state should quickly respond by raising funding proportionately for any affected non-profits.

Even if small businesses and non-profits were exempted or phased in, they would most likely still feel strong pressure to raise their wage floor towards the full minimum wage.  Most of the low-wage labor market in which they compete for workers would be paying the new minimum, and as a result many organizations not legally required to would probably need to raise wages to keep and attract workers.

If Seattle creates exemptions or phase-ins, one way to handle questions and conflicts that arise around them would be to create a hearing mechanism for dispute resolution.  This could be a new or existing permanent board, or contracted arbitrators or mediators, who would be empowered to collect data on the organization in question, establish its financial position, take public testimony from owners, managers, employees and customers, and decide issues.  To reduce costs, enforcement could be complaint-based, initiated by employers or employees.  If an organization were found to be a bona fide small business or non-profit, and its books and testimony of employer and employees established legitimate hardship, it could be granted relief or deferment.

Such a hearing mechanism would have the added virtue of encouraging employees to participate in the hearings.  The panel could independently verify the legitimacy of the issues raised by the employer, allowing its workers to evaluate their employer’s petition and support or oppose it.  The process could become another incentive for worker agency.

Who is this guy anyway?

I’m a native New Yorker, raised in New Jersey and schooled in Ohio, who came to Seattle in 1973.

Since then, I’ve participated in the labor market in a variety of roles.  For twenty years I did blue-collar work in construction, shipyards, light manufacturing, gardening and office equipment repair.  I worked out of a union hall and also in non-union jobs.  For the following twenty years, I retrained and became a technical professional in the software industry, including a number of years as program manager and people manager.

For those first twenty years I also volunteered a lot of time as a community organizer.  I worked for the Cascade Community Council, co-founded the Seattle Tenants Union, served on the executive board of the National Tenants Union, and represented it to community organizations in Europe. I also co-founded Seattle Central America Media Project and Northwest-Nicaragua Electoral Watch, and was active in the opposition to the Central American wars of the 80s.  I’ve also had the privilege of working with Nicaraguans and Haitians as a technical volunteer.

In a parallel career as a journalist and analyst, I’ve written about international economics, democracy, technology, labor, migration, popular movements, and poverty.  My reporting on these issues has taken me to Mexico, Nicaragua, Haiti, Italy, France, Ireland, China and Nepal.

I earned a Bachelor of Arts degree from Antioch College, and a Master of Unintended Consequences from the University of Hard Knocks.

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References

Dean Baker. “Robert Samuelson's Arithmetic Challenged Economics”. Washington, DC: Center for Economic and Policy Research, Feb. 23, 2014. http://www.cepr.net/index.php/blogs/beat-the-press/robert-samuelsons-arithmetic-challenged-economics

Dean Baker & Will Kimball. “The Minimum Wage and Economic Growth”. Washington, DC: Center for Economic and Policy Research, Feb. 12, 2013. http://www.cepr.net/index.php/blogs/cepr-blog/the-minimum-wage-and-economic-growth

Kathryn J. Byun & Christopher Frey. “The U.S. economy in 2020: Recovery in uncertain times”. Washington, DC: Bureau of Labor Statistics - Monthly Labor Review, January 2012. http://www.bls.gov/opub/mlr/2012/01/art2full.pdf

Sylvia Fuerstenberg. “Guest: How raising the minimum wage to $15 would hurt a nonprofit”. Seattle Times, March 22, 2014. http://seattletimes.com/html/opinion/2023193234_sylviafuerstenbergopedminimumwage1523xml.html

Media Matters for America. “Fox Cites Ownership Of Appliances To Downplay Hardship Of Poverty In America”. July 22, 2011. http://mediamatters.org/research/2011/07/22/fox-cites-ownership-of-appliances-to-downplay-h/148574

Anne Minard. “Small Businesses Are Not the Enemy”. The Stranger, March 12, 2014. http://www.thestranger.com/seattle/small-businesses-are-not-the-enemy/Content?oid=19052563

Robert Pollin, Mark Brenner, Jeannette Wicks-Lim & Stephanie Luce. A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States. Ithaca, NY: Cornell University Press, 2008.

San Francisco Administrative Code. Chapter 12R: Minimum Wage. http://www.amlegal.com/nxt/gateway.dll/California/administrative/chapter12rminimumwage?f=templates$fn=default.htm$3.0$vid=amlegal:sanfrancisco_ca

John Schmitt. “New CEPR Issue Brief Shows Minimum Wage Has Room to Grow”. Washington, DC: Center for Economic and Policy Research, March 19, 2012. http://www.cepr.net/index.php/blogs/cepr-blog/new-cepr-issue-brief-shows-minimum-wage-has-room-to-grow

John Schmitt. “Why Does the Minimum Wage Have No Discernible Effect on Employment?” Washington, DC: Center for Economic and Policy Research, February 2013. http://www.cepr.net/index.php/publications/reports/why-does-the-minimum-wage-have-no-discernible-effect-on-employment

John Schmitt. “CBO and the Minimum Wage”. Washington, DC: Center for Economic and Policy Research, February 19, 2014. http://www.cepr.net/index.php/blogs/cepr-blog/cbo-and-the-minimum-wage

John Schmitt. “CBO and the Minimum Wage, PT 2”. Washington, DC: Center for Economic and Policy Research, February 20, 2014. http://www.cepr.net/index.php/blogs/cepr-blog/cbo-and-the-minimum-wage-pt-2

Amartya Sen. Development as Freedom. New York, Alfred A. Knopf, 1999.

Dixie Sommers & James C. Franklin. “Employment outlook: 2010-2020. Overview of projections to 2020.” Washington, DC: Bureau of Labor Statistics - Monthly Labor Review, January 2012. http://www.bls.gov/opub/mlr/2012/01/art1full.pdf

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Footnotes

[1] Schmitt 2/20/2014; Baker 2/23/2014; Pollin et al 2008

[2] Media Matters for America 2011

[3] Byun & Frey 2012, p. 6; Sommers & Franklin 2012, p. 1

[4] Sen 1999. Pp. 18, 19 & 137

[5] Pollin et al 2008; San Francisco Administrative Code

[6] Minard 3/12/2014

[7] Fuerstenberg 3/22/2014

What's the denominator?

In response to “Zerophobia and minimum wages”, Lynn Thompson, the Seattle Times reporter who wrote the story I was commenting on, replied with an e-mail that made a good point:

“Other readers also suggested that I put the amount in the context of the city budget. $1 billion is actually the amount of the general fund from which any $15 an hour pay increase will come. The other $3.4 billion is in City Light and SPU [Seattle Public Utilities] revenues—utilities that get their money from rate payers and are operated as independent business lines.”

In broader terms, when you’re calculating a fraction it’s important to get the denominator right. This is another major piece of making budget figures meaningful.

With an estimated $1 million price tag for the minimum wage increase, or $1.5 million if summer youth programs are included, that still makes the proportion of the available budget 0.1 percent, or 0.15 percent with the youth programs. This does not include any effects of bumping up pay levels that were close to the new minimum wage. On the other hand, neither does it include potential increases in city revenues from the multiplier effects of the wage increases.

In any case, it still appears overall that the raises will have a very small impact on the city budget.

Zerophobia and minimum wages

 

In reporting on economic issues, numbers often lie.
 

Well, OK, let’s not blame the numbers themselves.  Let’s not even assume that the intent of those who deploy them is to deceive.
 

We’re still facing a pervasive problem: numbers and especially dollar figures without context – the fraction of the larger numbers of which they are a part, and the time period over which they apply – leave most consumers of economic reporting without points of reference in understanding what these numbers mean.
 

In that weakened condition, zerophobia, which often manifests as an involuntary rapid intake of breath sometimes followed by expletives inspired by large numbers of zeroes following a dollar sign, can lead stricken citizens to misunderstand the import of quantities central to economic issues.
 

Quick, how big is the total budget of the City of Seattle?  I doubt many of the Seattle Times’ readers can answer that off the cuff.  But the otherwise informative story it published January 28, “$1M price tag tied to paying Seattle city workers $15/hr”, seems to assume that most readers know that figure.  Otherwise, how would they have any idea whether $1 million is a lot or a little relative to city expenditures?  They need a fraction or percentage to put it in some larger context.
 

For the record, the total 2014 budget of the City of Seattle is $4.4 billion. That makes the cost of the minimum wage increase 1/4,400, or 0.023 percent, of the budget.  As the piece reports, the city believes it can cover that mostly from increases in general fund revenues due to the growing economy.
 

Another way to report this sort of figure would be the cost per capita to Seattleites.  For an estimated 2013 population of 626,600, the $1 million dollars compute out to $1.60 per person per year.
 

In evaluating Mayor Ed Murray’s proposal to pay all city employees at least a $15 minimum wage, it would also be nice to know a related economic effect: the multiplier created by the increase.  How much further economic activity and tax revenue will be generated by city employees spending their wage increases?
 

Of course this is not just a local Seattle problem.  Economist Dean Baker of the Center for Economic and Policy Research has raised the profile of this issue nationally and internationally.  CEPR offers a budget calculator that can help put numbers in the context of the total Federal budget.  In response to him and other critics, Margaret Sullivan, the New York Times Public Editor, has acknowledged the need to make the economic figures it reports clearer and more meaningful.

Zerophobia can be cured.  It need not condemn sufferers to a lifetime of economic cluelessness.  With the caring support of fellow sources, journalists, editors and readers, afflicted citizens can recover and make valuable contributions to public discourse once again.

 

References

Dean Baker. “Mindless Budget Reporting: Fooling Some of the People All of the Time”. Washington, DC: CEPR, August 14, 2013. http://www.cepr.net/index.php/blogs/cepr-blog/mindless-budget-reporting-fooling-some-of-the-people-all-of-the-time

Dean Baker with Paul Solman. “Mindless Budget Reporting: Fooling Some of the People All of the Time”. Washington, DC: PBS Newshour, August 14, 2013. http://www.pbs.org/newshour/making-sense/mindless-budget-reporting-fool/

Center for Economic and Policy Research. “The CEPR Budget Calculator”. Washington, DC. Accessed Feb. 14, 2014. http://www.cepr.net/calculators/calc_budget.html

Center for Economic and Policy Research. “Responsible Budget Reporting”. Washington, DC. Accessed Feb. 14, 2014. http://www.cepr.net/index.php/responsible-budget-reporting

City of Seattle – 2014 Proposed Budget Executive Summary. Accessed Feb. 14, 2014. http://www.seattle.gov/financedepartment/14proposedbudget/documents/OVERVIEW.pdf

City of Seattle – Population & Demographics (web site). Accessed Feb. 14, 2014. http://www.seattle.gov/dpd/cityplanning/populationdemographics/default.htm

Margaret Sullivan. “The Times Is Working on Ways to Make Numbers-Based Stories Clearer for Readers”. New York Times, Public Editor’s Journal, October 18, 2013. http://publiceditor.blogs.nytimes.com/2013/10/18/the-times-is-working-on-ways-to-make-numbers-based-stories-clearer-for-readers/?ref=thepubliceditor

Lynn Thompson. “$1M price tag tied to paying Seattle city workers $15/hr”. Seattle Times, January 28, 2014. http://seattletimes.com/html/localnews/2022771198_15cityemployeesxml.html

We voted for you to protect Social Security, Medicare and Medicaid

I just sent the following letter to President Obama, Senator Harry Reid, Speaker Nancy Pelosi, and my senators and congressman:

President Obama,

I supported your campaign with money and volunteer time, and encouraged my friends to do likewise.  Some of them refused or hesitated out of fear that a second Obama administration would try to bargain with the congressional Republicans on issues where there is no room to bargain, where the Republicans are 180 degrees off course from reality and would love to sink your second term in the catastrophe of economic and fiscal austerity in the face of deep unemployment.

We are not facing a debt or deficit crisis. We are facing a tenacious crisis of unemployment and lack of aggregate demand, the Great Recession. The United States is paying the lowest interest rate on its debt in a long time, with no hint of inflation.  The fiscal imbalance is the result of the crash and deep recession, and the quickest and best way to bring down the deficit and the debt substantially is more and better-targeted fiscal stimulus measures two to three times the magnitude of your first stimulus to create the demand necessary to drive a serious recovery.  Austerity would be dangerously, tragically wrong.  Bringing unemployment down to a normal level and accelerating growth are the only sane approach to our current problems.

There is no such thing as a “fiscal cliff”.  There is a gradual ramp that would only cause damage after six months to a year.  The whole issue is simply a Republican tactic to inflate the administrative task of raising the debt limit into a political issue and hold your government hostage to it.

As you know, many in the economics profession, and even at the Fed, have clearly moved towards recognizing this reality, along with the need to look for Keynesian-inspired solutions, since the Crash of 2008.  The opinions I’m voicing here are shared by many of the economists and analysts who predicted and correctly diagnosed the bursting of the housing bubble and resulting financial crisis.

In the coming negotiations, I urge you to refuse to touch Social Security, Medicare or Medicaid benefits.

Social Security is not in crisis and does not need to be rescued: it is solvent for over a quarter-century even by the pessimistic actuarial estimates of the Trustees.  It is financed independently and does not contribute to the deficit.  It would be tragic if you allowed Republicans and Goldman Sachs / Morgan Stanley / private-equity Democrats to kill the healthiest and most successful New Deal program after all these years.  The only acceptable reform would be to eliminate the cap on income and bring the retirement age back down to 65.  The Democrats should start pushing for that, but it will probably have to wait for a more politically propitious moment.  For now Social Security must not be touched.

Medicare and Medicaid do indeed have growing costs, but the problems they face are due not to the programs themselves, but to a bloated private health care industry.  If we could reduce the costs of private health care to close to what every other industrialized country pays, Medicare would be in balance and the projected deficit would be greatly reduced.  Rather than cutting benefits, which are desperately needed, the programs should be used to help bring down excessive costs on the supply side, and to encourage good medical practice such as prevention and wellness care.  The Bush big pharma gift program would be a good place to start.  The next time political winds shift in a positive direction, we should be pushing to extend benefits down to younger and younger people to complement your health insurance reform.

All three programs are among the best-run government programs in our history, and leverage the economies of scale and efficiencies that only national public programs can provide.  This is why Wall Street insiders like Peter Peterson and Erskine Bowles have been so persistent and strategic in trying to undermine them.  They are “entitlements” only in the sense that most citizens rightly believe that they are entitled to the benefits they have paid for.  They are social insurance programs that most of us pay premiums into throughout our worklife and then receive benefits when we need them – they are not welfare in any sense, but rather citizens mutually taking care of each other.

As a result, they are incredibly popular, even among conservatives.  So it is not only good economics but good politics to defend them tenaciously.  To throw them to the sharks would not be bipartisanship; it would be abject surrender to people who are out to hurt you and the majority of our people.

But beyond economics and politics, our major social insurance programs are key elements of the foundation of a decent life for all of us.  As thoughtful economists since Adam Smith have emphasized, people do not exist to serve the economy – on the contrary, the most basic goal of effective economies is to improve the quality of life and economic security of all citizens.  Social Security, Medicare and Medicaid are critical to that quality of life for millions of elderly and low-income Americans.  They are among the most fundamental reasons why we need a government, and they need to be cherished, defended and fortified as the most basic public goods.

Only you have a bully pulpit large enough to educate Americans about this.  The Republicans are selling poisonous snake-oil to people who are hurting and ignorant.  Despite losses, they are calculating that they have the tactical means to send the economy into another recession to prevent you from strengthening our economic recovery.   If you hit back hard at them, you will find the majority of our people, including me, supporting you and cheering you on.

Hopefully yours,

J. Peter Costantini
Seattle, WA 98112

History and Economics, Tea Party Style

A recent profile of Utah Tea Party leader David Kirkham in the New York Times (“D.I.Y. Populism, Left and Right”, by Matt Bai, October 31, 2010) offers a telling detail of how Kirkham came by his worldview.

In the mid-90s, Bai writes, Kirkham visited Poland.  He was deeply affected when “the government laid off 20,000 workers, and Mr. Kirkham watched the men file out the door robotically, their faces ashen, their lives in shards. This is what happens, Mr. Kirkham thought, when the state controls the economy.”

Now the Soviet-bloc economies had many grave and well-known faults, but mass layoffs were rarely one of them. On the contrary, many Western economists and politicians criticized Communist governments for their guarantee of lifetime employment and refusal to embrace the efficiencies of a “flexible” labor market, where employers could hire and fire at will.

That changed in 1989 when the anti-communist organization Solidarity defeated the Communist Party in democratic elections. Economies in Poland and soon across Eastern Europe morphed abruptly into free-wheeling capitalist ones. In the early 90s, the new Polish government began a course of economic “shock therapy” designed by conservative Finance Minister Leszek Balcerowicz and hewing to policies proposed by the Reagan and first Bush administrations and the International Monetary Fund. Many industries were privatized and forced to compete on global markets, while formerly controlled prices were allowed to rise. As a result, many Polish workers lost their jobs and suffered serious economic hardship.

This is the backstory behind those ashen faces Kirkham saw if he was in Poland in the mid-90s.

The Tea Party leader comes off as a committed and talented man. But as a wealthy businessman who builds $100,000 Shelby Cobras at his factory in Provo, he’s a bit of a stretch as a champion of oppressed workers there or here. And it’s clear that his conception of socialism and attribution of it to President Obama are based on multi-layered confusion that leaves him 180 degrees off course.

Today, there is no such thing as pure capitalism or socialism: the interplay between corporate power and public control of economies has led to a wide range of hybrids. If Kirkham had talked to ordinary people around other parts of Europe, Asia, Africa or Latin America (and let’s not forget Canada), he would have heard many permutations of what they call socialism being advocated. And if he made the effort to actually understand what they were talking about, he might have realized that President Obama’s policies, along with our whole economic system, are far towards the market end of the global spectrum.

Globalizing Financial Follies and Reforms

"Facing mounting criticism from the public and the media, Goldman Sachs announced today that they would cancel plans to dance around a bonfire of thousand-dollar bills." Perhaps Andy Borowitz was exaggerating a tad. But the comedian and political analyst caught the essence of what drives people crazy about "Goldman Calf" and the rest of the surviving financial oligopolies.

In recent weeks, President Obama's increasingly combative tone and the elevated visibility of Paul Volcker, chairman of his of his Economic Recovery Advisory Board and former Fed chairman under Carter and Reagan, seem to signal a serious effort to harness this resentment towards Wall Street smoldering on both the right and the left into financial reform legislation. A Democratic proposal has passed the House, but Senate approval looks problematic.

However justified, though, outrage at the banks' excesses may miss some root causes of the crisis, cautions economic analyst Doug Henwood. "There is no way to separate neatly the monetary from the real. The social problem emanating from the securitization of mortgages isn't only the increasingly baroque development of financial assets but also the commodification of the house and its transformation into a speculative asset. Which is why populist financial reforms can't take you very far: they address symptoms, not pathogens."

My February 9 analysis for Inter Press Service, FINANCE: Fighting Off Looters in the Ruins, goes into more details of financial reform proposals. The piece also discusses the renaissance of Keynesian economics as an explanation of the crisis and guide to recovery.

Democratic plans, while advancing some important reforms, have so far failed to take on one key enabler of the crash: the bond-rating agencies, such as Standard & Poors, Moody and Fitch. Investment banks still routinely pay these private firms to rate their own securities, an obvious conflict of interest that has led to calls for increased regulation and even for nationalization.

Congressional Republicans seem to have few counter-proposals except for more tax cuts and letting financial markets work. Listening to the debate, you could easily forget that a meltdown of the global financial system was averted only by government action.

Bipartisan deficit hawks are circling again, ready to swoop down on re-regulation and stimulus initiatives. Wall Street insider and Nixon's Commerce Secretary Pete Peterson and his Concord Coalition are leading a bipartisan charge to slash government spending, even as unemployment remains near 10 percent and inflation is missing in action.

One encouraging development of the past year, though, has been the broadening international recognition that the global financial system has deep structural flaws and requires global approaches to repair them.

In December, Prime Minister Gordon Brown of the U.K. and President Nicolas Sarkozy published a joint opinion piece in the Wall Street Journal recognizing that "the way the way global financial institutions have operated raises fundamental questions that we must – and can only - address globally." They called for "a long term global compact that will encapsulate both the responsibilities of the banking system and the risk they pose to the economy as a whole." Measures such as resolution funds, insurance premiums, financial transaction levies and a tax on bonuses, they said, should be considered as part of the macroeconomic strategies of the IMF and the G20.

Beneath the political eruptions, as well, some major tectonic plates of economic ideology appear to be thrusting up and subducting.

The Washington Consensus, which the International Monetary Fund once invoked to impose draconian austerity plans on developing countries, is now being questioned more openly in Washington, New York and London, as it long has been in many capitals of Asia, Africa and Latin America. Perhaps the idea of having to slash social spending in the face of a deep recession doesn't look quite as attractive when your own government has to take the political hit.

And there have been some significant defections from the neo-classical orthodoxy that has dominated economics and politics for the past 30 years. And the ideas of British economist John Maynard Keynes, which provided the theoretical underpinnings of the New Deal and post-World War II prosperity, are waxing in influence.

Keynesian prescriptions on the need to create aggregate demand and the key role of government in correcting market failures now seem to make sense to more governments.

The headquarters of academic opposition to Keynes since the 1940's has been the University of Chicago, where Milton Friedman and his successors developed the laissez-faire doctrines that President Ronald Reagan and his revitalized Republican party popularized.

In a piece in The New Yorker magazine, John Cassidy found that the Great Recession has left the Chicago School of economics divided.
The most prominent dissenter, Cassidy reported, is Richard Posner, an influential Reagan judicial appointee and economic thinker who has applied free-market economics to law.

In a recent article, Posner called Keynes's 1936 opus, The General Theory of Employment, Interest, and Money, a "masterpiece" that provides "the best guide we have to the crisis." "Rational expectations and strong views of efficient markets have taken a terrific hit," Posner told Cassidy. "Keynes is back, and behavioral finance is on the march."

Another University of Chicago economist, Raghuram Rajan, told Cassidy that the failure of middle-class purchasing power to keep up with the cost of living stoked a growing demand for credit. Yet to the surprise of much of the economics profession, the side effects of the outpouring of home and auto loans in response ended up being devastating.

Economists could afford to ignore the financial plumbing as long as it didn't back up, said Rajan, who was formerly chief economist for the International Monetary Fund. "Now that the plumbing backed up, you find that loans aren't really made in a pure, pristine market. Things can break down."

Other prominent economic observers as well have set forth kindred Keynesian-tinged explanations of the underlying economic imbalances that led to the housing bubble.

Robert Reich, Secretary of Labor in the Clinton administration, blogged: "In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains." Had their share kept up with that of corporate executives, he argued, they would not have needed to borrow so much.

"As long as income and wealth keep concentrating at the top and the great divide between America's have-mores and have-lesses continues to widen," Reich predicted, "the Great Recession won't end – at least not in the real economy."

One of the most high-profile of the New Keynesians, Nobel Prize-winner Joseph Stiglitz, brings an internationalist perspective to the debate as former chief economist of the World Bank.

Calling for a larger global stimulus package to confront an international crisis, Stiglitz has proposed building stronger automatic stabilizers, such as better unemployment insurance and more progressive tax structures, back into the social safety nets of the U.S. and other countries.

"Markets are at the core of a well-functioning economy, but, by themselves, they are not enough," he wrote. "There needs to be a balance between the role of the market and the role of the government."

"The United States should go and study what good central banks do, in India and elsewhere," Stiglitz wrote recently in the review of the International Labor Organization, "because they actually did avoid the excesses that marred American financial markets. When American banks wanted to sell complex, risky derivatives, one of the central bankers in South-East Asia said, 'Can you explain that?' They said, 'No, we can’t.' She responded, 'Well, if you can’t explain it, you can’t sell it.' Thus, they were protected against the ravages of the derivatives which have had such a negative effect on the United States and Western Europe."

The economist has also broached the idea of a global tax on financial transactions, expanding on the old idea of a so-called "Tobin tax", a tiny levy of a fraction of a percent on foreign exchange transactions. Last October, he told the British paper The Telegraph that "any new tax should be levied on all asset classes – not merely foreign exchange – and would be based on the gross value of the assets, thereby helping to discourage the creation of asset bubbles." British Financial Services Authority Lord Tucker, among others, has also floated the idea of a Tobin tax as a way to damp down international financial speculation.

Stiglitz chairs the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System. The panel's 2009 report calls for understanding and responding to the financial crisis as part of a series of related crises afflicting the earth and its people, bound together by threads of aggressive market fundamentalism. Broadening and democratizing world economic governance, the study suggests, are essential to resolving the crisis.

An extended excerpt from the report follows.

Our global economy is broken. This much is widely accepted. But what it is precisely that is broken and needs to be fixed has become a subject of enormous controversy.

In the view adopted by the Commission, and broadly endorsed in the UN Outcome, the crisis we confront is systemic in the deepest sense and has many facets. On this view, the financial crisis that erupted in the United States in September 2009 is the latest and most impactful of several concurrent crises – of food, of water, of energy, and of sustainability – that are tightly interrelated, connected in important ways by an imperious economic perspective that has been implemented, often under duress, across the globe during the last 35 years.

In this perspective, market logic solves nearly all social, economic and political problems. The well-known staples of economic policy complexity such as the need to address economic and non-economic sources of economic instability (“market failure”), the need to account for costs imposed on others and to redress the unfair appropriation of social benefits (“externalities”), the need for public intervention to provide for the conditions and values of sustainable life (“public goods” and “social equity”) are all regarded as incidental rather than fundamental issues of economic management.

As the Commission stresses with considerable frequency, the present crisis demonstrates failure at many levels – of theory and philosophy, of institutions, policies and practices, and, less overtly, of ethics and accountability. The essential insight of the report is that our multiple crises are not the result of a failure or failures of the system. Rather, the system itself – its organization and principles, and its distorted and flawed institutional mechanisms – is the cause of many these failures.

It is a habit of contemporary speech to refer to the global economy that we have today as “the economy” and, more insidiously, to present it as a natural phenomenon whose putative laws must be regarded with the same deference as the laws of physics. But, as the enclosed report argues cogently, our global economy is but one of many possible economies, and, unlike the laws of physics, we have a political choice to determine when, where, and to what degree the so-called laws of economic behavior should be allowed to hold sway.

An economy is a man-made ecology, or rather the man-made part of our larger ecology of interaction between the man-made and natural worlds. Together the man-made ecology and the natural ecology sustain – or destroy – the conditions of life. It is essential today, as the UN Outcome and this Report both recognize, to view economic and ecological issues as tightly interrelated, and recognize that our global economic system must be adjusted to the requirements of an era in which the risks engendered by centuries of neglect have reached a point of extreme danger and the costs of adjustment must be borne by the present and succeeding generations. The Commission’s Report is forceful on this point: “The conjunction of huge unmet global needs, including responding to global warming and the eradication of poverty, in a world with excess capacity and mass unemployment, is unacceptable.”

As the greatest economic philosophers – whose number surely includes Aquinas, Smith, Marx, and Keynes – have all recognized, homo oeconomicus, the acquisitive, emotionally cardboard, and socially atomistic construct of academic economics is a reductio ad absurdum. They did not merely assume that the ethical vocation of human beings should inform their economic decisions and institutions; they insisted on it, and in ways that today are far out of fashion but are also therefore far more necessary today. It is difficult to read this Report and not come to the conclusion that the Commission members share this perspective.