Between Hell and High Water

By Mike Koetting March 14, 2023

A couple weeks ago, one of the twenty-year old elevators in our building began stopping at random floors unbidden. The maintenance company addressed it. Two days later, it started again. They replaced the entire control panel. That worked—for three days. They replaced the entire panel once more and that seems to have done the trick. For now.

It’s certainly fair to question the overall condition of our elevators or the competence of the maintenance company. But I wonder if there are bigger issues lurking.

Two years ago, as part of changing billing parameters, our mobile phone company stopped sending us hard copy bills. As I was working on this year’s tax return, I needed to see the details of our billing. I couldn’t figure out how to do so from the phone company’s web so I called them. I bounced around for over an hour, the last half of which was with someone who always seemed to be on the verge of getting me access to my bills. But I eventually gave up and the next day took it to one of the provider’s stores. The sales representative spent almost half-an-hour and had literally given up, complaining that he couldn’t keep up with the changing systems. Fortunately, he had one more idea and that worked.

Certainly annoying, but no risk to life or limb.

Much more consequential issues were the meltdown of Southwest Airlines just before the holidays and problems in the Federal Aeronautics Administration pilot notification system in January. Both of these events scrambled airline travel for many thousands of customers. And both of these messes were due to aging computer systems.

The ground stop called by FAA in January–the first since September 11, 2001–was a result of the failure of the system that flags potential hazards, such as impending bad weather or local system glitches. Flights were suspended for only two hours, but the resulting chaos rippled throughout the day. More than 1,300 flights were cancelled and over 11,000 were delayed.

This fragility of this system was not a surprise. As long ago as 2008, the FAA started planning to replace it. The project has sputtered over the years as funding waxed and waned. Enhancements have been made to the system, but at bottom it is fundamentally outdated technology. In the meantime, new systems were added around it. The FAA was trying to maintain a mélange of systems that been developed over 45 years. It was, and remains, a recipe for disaster.

This is similar to the situation I found when I started at the Illinois Medicaid program in 2010 with the charge of expanding eligibility to comply with the Affordable Care Act. The core eligibility system dated from the 1970s. Technologically, it was generations behind the evolution of computer technology. Keeping it running relied on an aging cohort of programmers who understood all the ways the ancient COBOL system interacted with the newer systems that had been grafted on over the years. It would have been literally impossible to complete the ACA enrollment with that system. Our initial intention was to completely replace it, but we found there was no way that could be done and comply with the statutory start-date. So, relying on the same handful of programmers, we jerry-rigged a new system for processing applications on top of the existing system. It mostly worked, but also got the agency further out on the limb.

Illinois Medicaid continued with plans to completely replace the underlying system. That was largely completed about four years later, although the actual cut-over was accompanied by a period of extended frustrations for workers and clients alike. Of course, the “new” system is now six years old, which is a lifetime on the technology scale. The State of Illinois has neither the funds nor the workforce—not to mention the stomach– to replace that again. I no longer work there, but I have to believe the patchworking has already started.

Okay, some will say, what do you expect of government agencies? Maybe. (And that doesn’t make the consequences of those decisions disappear.) In any event, the epic Southwestern Airlines meltdown shows private entities make the same mistakes. When a major snowstorm hit parts of the country just before the peak Christmas travel period, the portion of their systems that scheduled crews was completely overwhelmed. For several days around Christmas, Southwest cancelled about two-thirds of its flights and another 20% were significantly delayed. Insiders were not surprised. For some time now, analysts and unions have lamented the state of their computer systems. Parts of it were almost as old as the FAA systems; the pieces didn’t work well with each other.

Here’s the Point

While it’s true these are a random collection of computer malfeasance, they point to common warnings. For openers, as we weave computers more and more into our lives, we are more dependent on them, for things small as well as large. There are advantages to that. We can do some things that were not easily possible before. For instance, we almost all take for granted the convenience of on-line banking and ATMS. I remember when you needed humans to cash a paper check if you wanted cash—which was virtually the only way to pay for things. We also take for granted the advantages of these possibilities and construct more and more complicated systems, embroidering them into global supply chains. And we get lower prices on some things because it’s typically cheaper to replace or supplement people with computers. This creates other problems, but in the meantime, consumers are happy to take advantage of the lower prices.

But with these advantages, we get vulnerability.

We can’t completely guard against this vulnerability—a major solar flare, sure to happen sooner or later, will cause massive computer outages—but on a day-to-day basis, individual systems are better protected if they stay current. And here’s the rub. It takes a lot of resources to stay current and maintenance doesn’t have nearly the pizzaz of new technology. (“We want to spend a lot of money to keep doing what we’ve always been doing” doesn’t have a particularly inspiring ring in a world where the ”new” is what gets attention.) Nor is it just money. It requires executive focus and willingness to risk business disruptions as changes are made, even if the “change” is just to keep the same functions running.  And it not simply keeping individual systems current, but keeping an entity’s entire suite of systems working together consistently and coherently.

And that perspective is within individual entities, be they corporations or governments. Operationally, society is a tangled knot of these entities working together. Individual entities need to keep current internally, but also need to stay more or less coordinated with the other entities with which they interact. A new technology anywhere in this broader network has the potential of introducing broader disequilibrium. In one sense, the pace of technological innovation is as much a function of the slowest adopter as the quickest. (A spokesperson for the airlines commenting on the FAA problems allowed it was hard to justify airlines spending more on new technology if the FAA wasn’t keeping up.)

There are two bottom-lines here.  First, I suspect we will be beset by increasing numbers of annoying to really difficult computer failures because as technology proliferates promiscuously there were will be more and more cases where the old and new technology don’t work together. (The U.S. Navy has come to this realization, concluding that putting too much new technology into ships leads to functional disasters because they couldn’t make it all work together.)

The second implication is that we have to spend enough on unglamourous maintenance if we are going to keep our systems functioning. In truth, the systems, mostly, still function exactly as they were intended to. The problem is that so much has changed around them that the systems are no longer compatible with the on-the-ground needs. Attention to maintaining systems is particularly difficult for governmental systems. Keeping current requires funds, legislative will, and effective longer-term executive leadership for something that has little voter appeal. But corporations face similar problems.

The future might be a lot messier than we are imaging.

By Mike Koetting February 28, 2923

In 2002, Ruy Teixeira, along with John Judis, wrote The Emerging Democratic Majority in which they forecast the dawn of a new progressive era—something to rival the 40-year run of neoliberal hegemony.

These days neither sees circumstances the same way. In a recent Washington Post article, Teixeira expressed concern that the Democrats are losing ground among the entire working-class, not just the White working class. He ascribes this to the Democratic party’s insensitivity on cultural issues, which are how voters assess who is really on their side and who isn’t.

While Democrats still maintain a very large percentage of the non-White working class, there is abundant evidence that a material portion of the population is alienated by what they see as excessive “wokeness” from Democrats.

I think this evidence is sufficient that we can’t flick it away as more MAGA-foolishness. There are voters who broadly agree with most policies of the Democrats, but who just feel unsympathetic to what they see as “extreme” viewpoints. Some of this, of course, is more a reaction to the way Republicans have exaggerated and twisted what was in fact said. But, either way, it’s a real problem for Democrats.

A September poll by The New York Times reported that 59% of White working class respondents said Republicans were the party of the working class. A survey of voters that significantly oversampled self-proclaimed “swing voters” found that while most respondents agree with Democrats on many critical issues, they still found the Democratic Party as “extreme” as the Republican Party. (And, by the way, both parties too extreme for their tastes.)

I don’t know what exactly is cause and what is effect, but there are two shifts that have transformed the Democratic Party over the recent past. It has become more liberal, more than Republicans have become more conservative. And it has become more educated, dramatically switching positions with the GOP in the last 25 years. These shifts have created the conditions in which these tensions grow.

The problems get manifested in many ways. Some of it is about ‘language purity”—which is as annoying to many Democrats as it is to Republicans. And, while this fuss over words can be frustrating, is readily open to ridicule and generally adds fuel to the cultural wars, I think the issue goes much deeper.

It is the underlying question of who do people think share their core values—who is more like them. Policies are transactional; the core problem is at the meta-policy level, if you will. The sense people have, rightly or wrongly, that in the crunch you are either “like” them or “not like” them.

Take, for instance, the debate over renaming schools in San Francisco. A large number of schools—including those named after Abraham Lincoln and George Washington—were slated to be renamed because of connections to slavery, oppression of indigenous people, or other issues. The entire project was eventually set aside but it left a sour taste with the majority of Americans.

Let’s face it. It is hard to understand how the manifest accomplishments of these American icons could be dismissed on the basis of standards that did not apply at the time. I am part of the majority of Americans aggravated by this. Almost any historical evaluation of Washington or Lincoln leaves one with the unmistakable conviction that these men were remarkably positive forces in America’s uneven ascent along the moral arc of the universe.

By the same token. there is in fact a real issue there. These great men had blind spots that reflected foundational problems in the creation of America that continue to be problematic. Which is the real nub of the issue.

Democrats are losing support among working class voters because those voters don’t feel “sympatico” with the current center of the party. On the one hand, what is being raised involves issues that are truly unresolved. This goes way beyond an argument of whether to talk about pregnant women or pregnant people. Those wording issues are skirmishes at the edge of the real conflicts. While there has been important (and decidedly not trivial) progress, there is still systematic racism against Blacks in America and women are still demeaned in countless ways. And while not every claimed incident is an actual problem, there are plenty that are all too real.

On the other hand, given the state of political division, the consequences of ignoring the disaffection of parts of the population—particularly those with whom there are many possible areas of agreement—are potentially huge.

This is not a new issue. From the inception of the country, there has been a rift between those who wanted to go faster on social issues and those who weren’t ready to move so far beyond the status quo. By the way, crude Marxism aside, this is distinct from the struggle over the economic rewards of the nation’s bounty. Some times these struggles have overlapped, but as often as not they proceeded on different fronts. That is how we get the seemingly anomalous circumstance of working class alliance with a Republican party that clearly does not have their economic interests at heart—indeed, anywhere on their horizon.

And so….

The obvious question for Democrats is how to approach this conundrum. The threat of a DeSantis presidency looms large. And, even if Democrats prevail in the presidency, it is also the case that governance does not rest solely on who occupies the presidency. In America’s federated system, there are many contests that make a difference and cultural issues are salient from local school boards to state legislatures to the Senate.

If I had any great answers, you would probably have heard them by now. But I am pretty sure simply insisting that members of the working class who are voting Republican are “wrong” is not going to get anyone’s vote. And, general pleas to progressives to reconsider some language haven’t proved effective.

Maybe a couple thoughts

One thing that would help is more people in leadership positions on the political left taking a stance against “maximalist” positions. In this I’m harkening to an essay last summer by Maurice Mitchell, National Director of the Working Families Party. Reacting to a truly disconcerting wave of progressive organizations being hobbled by internal disputes, he urged leaders to redouble efforts to get staff and supporters to focus on organizational “North Stars” and understand that compromise and coalition are an essential part of progress. He suggested that at times the pursuit of a perfect world was standing in the way of significant progress—or even allowing retrogression–on our broader goals.

Leaders of those organizations that provide the critical energy for progressive causes are of course caught on the same conundrum, perhaps worse because their organizations depend on people who are there because they are devoted to these causes. But, by the same token, perhaps there is some leverage through these organizations precisely because they are aggregations of people devoted to the broader goals.

A second consideration is to think of policy proposals that are specifically designed to moderate divisions. My two previous blogs proposed a focused change in the income tax toward that end. I was also impressed by the action of Governor Shapiro of Pennsylvania to eliminate the requirement for “a college degree” for most state government jobs, calling it an “arbitrary requirement”. This is politically attuned to the bigger issue and puts in action his sentiment that unless everyone is treated with respect, faith in government erodes. There are no doubt other potential policies that can soften the impression that somehow people without a college degree are not as important.

Which brings me to my last—and impossibly difficult—point. Donna Hicks, who has spent most of her career negotiating major conflicts, has concluded that the fundamental issue in these deep and apparently irresolvable conflicts is dignity. She says that, in her experience, negotiations can proceed and it appears there are logical solutions, but then they hit a wall because, she asserts, one side or the other, or both, feel their essential dignity has been violated.

This seems to describe the problem of Democrats and the working class.

I don’t know what to do about this. I work very hard at trying to understand the nuance in positions and why people have principles I find wrongheaded. I think I’m pretty good at it. But I’m not sure whether understanding how people get to positions I completely disagree with constitutes validating their dignity. Moreover, I am not sure whether these individual attempts at understanding make a real difference in the context of the cultural and media divides that currently afflict the country, many of which, deliberately or unconsciously, are being fostered for personal gain.

Still, I suspect that in the absence of getting a handle on that problem, it will be difficult for the Democratic party to develop a convincing majority no matter the degree of agreement on specific issues.

By Mike Koetting February 14, 2023

In my last post, I suggested that a substantial revision of America’s tax code might be a meaningful step towards bridging our national divides. Today’s post proposes one specific change in the federal income tax. There are several other critical tax issues that need to be considered, but those are for another day.

The essence of today’s proposal is to materially expand the use of the Alternative Minimum Tax against a different definition of income than is currently the case. The resulting tax laws should be able to be clearly explained and understood by most people as actually collecting higher taxes from those who are better off. More concretely, the goal is to increase the total income tax collections, with all of the additional revenue coming from people who earn more than 250% of the median income and use all the proceeds to reduce the deficit. (In 2022 a family income of $200,000 or above is roughly 250% of the median income, approximately the top 10% of incomes.)

A reminder. This proposal is about increasing social solidarity through modest fiscal sobriety. At bottom, I believe the lack of social solidarity may be the country’s biggest problem. This distrust is brought on by a large number of social changes that are not likely to be reversed. So we must find a way to rebuild trust in the collective using a different model than we find in our history.

This is not meant to address all the serous issues the country faces. In particular, my proposal is not specifically aimed at addressing income inequities–although it would have a favorable impact in that direction. The degree of inequality is a very serious problem and certainly contributes to our national malaise. But its causes are multiple and complex. Even a more radical overhaul to our tax structure cannot by itself solve that. I would like to see those changes, but while I am waiting, I am proposing a change in our income tax that is within the current framework.

Background

While the total tax structure encountered by citizens is very barely progressive, the Federal income tax is relatively progressive. It is not as progressive as one might expect from the nominal tax rates by bracket. But even when looking at the effective rate, it is clear that on average the more income you have, the higher your taxes. The tax rate for the highest 1% is six times the rate for the middle quintile of taxpayers and 3.5 times more than the next quintile. (The effective tax rate for the bottom two quintiles is negative—that is, they receive more credits than any taxes they might owe.)

Source: Tax Policy Center (Urban Institute -Brookings Institution)

On the other hand, the actual income taxes paid can vary quite bit from individual to individual, even if they have the same basic income. This is because, for reasons good and bad, some kinds of income have received special treatment in the tax code. These provisions are why some individuals with high incomes have low taxes.

The Alternative Minimum Tax (AMT) is found in the complicated thicket sprouting in these provisions. It was created in 1969 as a Congressional reaction to evidence that some wealthy people were able to string together various deductions and pay no taxes. The AMT works by requiring tax payers with income over a certain threshold to make a second calculation. The second calculation is made by adding back some of the otherwise allowable deductions and then multiplying by the AMT rate. The tax liability is the higher of the two. The AMT rate has only two brackets–one at 26% and the other at 28%.

How much difference this makes to tax receipts depends on what deductions are returned to the base before calculating the AMT. After the Trump tax cuts of 2017, the AMT applies to only 0.1 percent of taxpayers, and is particularly weak against the highest incomes. Under current law, those changes will expire in 2025 but even so, the Tax Policy Centers projects that fewer than 4% of taxpayers will have their liability calculated in this manner.

Proposal

My proposal has three parts.

1. Returning more possible liabilities to the base for calculating the AMT. All things being equal, that would lead to higher tax liability because the base against which the AMT was calculated would be higher.
2. Setting a rate for the AMT which would result in aggregate tax revenues from those with incomes over $200,000 to be roughly 50% more than they are now. Getting to a specific aggregate amount is a key part of the proposal.
3. Using all additional proceeds to reduce the deficit. (Using them for other things would inevitably pit various groups against each other.)

Explication and Complications

The most obvious is that a 50% tax increase for the richest 10% of Americans would most likely create a truly spectacular political firestorm. I am not sure how much of a disadvantage this is if one of the goals is to further the cause of increasing social solidarity. Support for this proposal would not be simply along party lines. People are uncomfortable with the size of the national debt. Despite their ongoing saber rattling about the size of the deficit, Republicans are proposing a range of income tax changes that will be make the deficit even larger.  Similarly, as was starkly clear at the State of the Union address, proposals to reduce the deficit by cutting Medicare and other social programs have no political traction. Viewed in contrast, an explicit proposal to attack the deficit by taxing the rich makes it crystal clear what are the actual motivations.

Moreover, it is equally clear that in the years since the Bush tax cuts of 2001 and 2003, income inequality has spiraled. Since 2000, median income (adjusted for inflation) has risen by 6.7%. But the income of the top 10% has risen by more than 20% and the top 5% by more than 25%. Income for the top one percent, which has a huge share of potential tax liability, has grown still more.

My back-of-the-envelope calculations suggest a 50% increase in tax liability would increase the effective tax rate for the top 10% of incomes to somewhere just below 40%. This is very similar to the current nominal tax rate. There will still be enough difference between the after-tax income of people in these brackets and the rest of the population that it will be hard to stomach the inevitable argument that it will stifle ingenuity. (The difference between the top and middle in the American income distribution is colossal; anything short of outright confiscatory taxes can’t erase that canyon.) To be sure, if enacted, there will be some people with high tax liability leaving the country. But it will raise the question of just what do individuals who succeed fabulously in the United States owe to the country.

Another whole line of consideration is the question of which existing deductions to use in the calculation of the AMT. It is possible to achieve a particular aggregate amount in a multitude of ways. But each of those routes will create different winners and losers. Some of the changes could be dramatic. Accordingly, it is fair to assume, in addition to a general opposition to this proposal, there would be bloody internecine war among the rich to keep their favorite deductions outside the AMT calculation. I don’t see any reason to pick favorites in that contest. Although advocates for one or the other will surely find a disabled veteran farmer in Nebraska who would be adversely impacted by some provision, it is clear that most of these special deductions are for the better off. By making the target an aggregate amount, these arguments make a difference only to high tax payers

Source: Tax Policy Center (Urban Institute-Brookings)

My proposal would not “solve” the deficit. By another of my rough calculations, this will raise about a trillion dollars annually (based on the 2021 tax revenue). Over 10 years this will make a meaningful dent. While it will still be necessary to police the size and direction of the deficit, we could be less hysterical about it.

More important, in my view, is that it will send two useful messages:

• Government can work to make changes that advance the whole society, not just special interests.
• There is a commitment to fiscal sobriety. This should provide some modest comfort to people approaching retirement age and to young people, who are concerned about the fiscal mess we are leaving them.

Perhaps I am overly optimistic, but I think these two messages would be a meaningful start in improving trust in government. They certainly wouldn’t solve many of the problems facing America. With no other changes, the impact on economic inequality would be modest. And many of the other divisive issues facing the country are cultural and will require changes much broader than can readily be achieved through policy tinkering.

Even if this proposal is just a spit in the bucket of our national problems, it is a bold step in the right direction. And it just might be possible.

By Mike Koetting January 31, 2023

A couple posts back, I wrote that it was hard to imagine what could bridge the divisions in our country. The issues are only occasionally, and usually incidentally, about policies. Tom Nichols, in The Atlantic, opines that there is no principle dividing the country. He contends that although people will say the issue is “liberty” or “freedom, ” those are merely smokescreens for racial and class resentments, personal grudges and a generalized paranoia that dark forces are manipulating their lives. These, I believe, have come to play such an outsized role in our politics because there has been a profound loss of societal coherence.

I don’t want to idealize a past that never was. Our society has always had warts a plenty. And some of them were generated by the foundational principle of individualist striving. The emphasis on individual freedom and the ability of people to have mastery of their own destiny made America both a unique place in the world and uniquely successful as a country. But, for individualism to work its magic, it needs to be balanced by strong local ties and a generalized sense of social solidarity. Without those guardrails, the logic of individualist striving corrodes any larger scale sense of well-being. And without that, society disintegrates. We turn into a nation of Marlboro cowboys riding the range by ourselves—carrying guns and chasing dreams that can never be realized.

I honestly don’t know if that balance can be re-created. I could offer a broad set of prescriptions as to what might do it, but most them are well beyond what can be managed through politics or policy. But let me propose a modest starting spot: a change in our tax system.

Probably not what you expected. Fair enough. It’s not the first thing that leaps to mind. And there’s a good argument that we could never get to a different tax system without a broader sense of social cohesion.

Perhaps, but what would we want in any policy to help heal the national divides? Here’s my list:

• It could be readily understood
• It could be easily seen as a policy for the entire society
• It would have substantial impact
• It should be possible to get there

It could well be that a proposal to make major changes to our tax system in the current political climate is political daydreaming. Still, it just might be that the first three are sufficiently powerful that it might not be impossible. Even if the effort failed, it might facilitate more focused discussions on what as a society we want for ourselves.

Basic Context

Before sailing into more controversial matters, I will assert two facts that are non-assailable.

First, relative tax collections in the United States are materially lower than other developed countries.

Source: Hamilton Project at Brookings Institution, 2020 (Data from OCED, Revenue Statistics, 2018)

Second, the United States government is running a substantial and growing deficit. To put this in perspective, the deficit is more than 31 trillion, but the entire amount collected by Federal Income Tax in 2022 was only 2.6 trillion.

Broader Context

Of course, as soon as we start to assess these facts, the going gets somewhat stormier. For instance, there are those who argue that the U.S. is stronger by collecting fewer taxes. And those who say “Deficits aren’t important.” There is some degree of argument among economists about the latter. Although there is a strong consensus that time-to-time deficits, particularly countercyclical, are no problem, but persistent and growing deficits sooner or later cause trouble. Most economists, for instance, agree that it was cause for concern when we had a strong economy in the first part of Trump’s presidency, but the deficit continued to increase under the influence of major Republican tax cuts this century.

Setting aside the minority opinions, these two facts alone suggest we need to address the deficit and, if we are going to continue to provide the services we are providing, we will need to increase taxes. I would go further and suggest that we should increase our taxes enough to provide social welfare benefits closer to other countries. I think America’s historical orientation toward letting individuals solve their own problems is an important part of the centrifugal force that is disintegrating our society.

But expanding government responsibilities would jump right into the heart of the partisan debates. (If we can’t make a child tax credit permanent, it’s hard to imagine something even bigger.) Instead, I’m talking about something much more modest: whittling away at the deficit in a way that adds to social solidarity rather than tears at it. The general sense of the unfairness of our tax system exacerbates a deep resentment about the large and growing income and wealth disparities. About 60% of Americans are concerned that wealthy people and corporations do not pay enough in taxes, although there are substantial differences among Democrats and Republicans. No one likes paying taxes, but there is strong sentiment that the current system has way too many ways for the wealthy to avoid paying their fair share.

A Gallup poll from last year found that support for higher taxes on the wealthy has been growing fairly consistently since the end of the Great Depression. Analysis accompanying this poll listed seven other polls that found substantial support (over 60%) for higher taxes on the wealthy, leading Money magazine to start an article with the headline “Most Americans Want the Rich to Pay Higher Taxes, According to Every Poll Everywhere.” Granted, it is a long way from headlines or poll findings to a tax increase on the rich, who unsurprisingly have disproportionate political power. Still, it is an argument that builds on a significant base of support.

Why Start with Taxes

As radical as my proposal would be portrayed, in truth they are radical mostly in labeling and process rather than truly radical. I will be a little specific about what exactly I have in mind in my next post—I am sure that will keep most of you on the edge of your seats until then. But mostly what I am proposing is substantially increasing income taxes on the top 10% of the income distribution specifically to reduce the deficit. Given the extremity of wealth differences that have developed in recent years, even materially higher taxes on the wealthy will leave plenty of differences between them and the rest of the country. Arguments that it will kill the American entrepreneurial spirit will simply be hogwash.

Remember again that I am proposing this change in taxing explicitly as a means to increase social solidarity. If my changes could be enacted, they would make the distribution of wealth and income somewhat more equitable. But major progress on that important goal will require much more change than can be accomplished with the income tax alone.

However, increasing income taxes on the wealthy and making the tax system clearer to reduce the deficit makes sense for several reasons:

• As these things go, it starts off with a strong base of support. It has the advantage that a great many of the people who will oppose it most strenuously are arguing from the obviously self-interested position of having won the wealth lottery.
• Done right, it can be made to be easily understood. And on its face, it can be seen as a meaningful attempt to balance the scales. Most Americans have an innate discomfort with both the extremes of wealth and the size of the deficit. They will be supportive of efforts to address both without raising their taxes.
• This is a particularly good position for Democrats. It has overwhelming support among Democrats, well into the 70% range, and it is a direct counter to the Republican rhetoric that Democrats represent “the elites”.
• It would also make it more difficult for Republicans to hide behind the idea that they are the only ones who care about the deficit. (And while, as a factual matter, Democrats have been more fiscally responsible than Republicans for the last 40 years, few people realize this.)
• Republicans will counter anything along these lines, first, with the claims it is “socialism.” Along side this, they will imply (or simply assert) that Democrats just want more money to give to “minorities and immigrants”. The factual arguments against these positions are strong. Hopefully, they will be enough to allow the focus to be shifted to why rich people oppose them, particularly if the proceeds remain narrowly focused on deficit-reduction.

Almost 100 years ago, Oliver Wendell Homes, Jr, wrote that “Taxes are what we pay for a civilized society…”  I am arguing we can better preserve that civility with a tax system that generally balances the budget, is more transparent, and has the better off paying a fairer share.  This will not be a politically easy lift, but no one ever said democracy was easy.

By Mike Koetting January 17, 2023

Having neither a degree in economics nor a crystal ball, I lack the proper credentials to post a blog on inflation and the Federal Reserve Board. But the issue is very important to the well-being of the society—probably more than most of us acknowledge–so I will take my chances.

The Issue

The Federal Reserve Board has evolved the responsibility of steering the national economy between two potential disasters, runaway inflation and recession, another hell or high water situation.

Runaway inflation is deeply corrosive of society. If your income—be it paycheck or pension—suddenly stops supporting the life you expect, you get grouchy. Majorly. It seems like the fundamental contract between you and society has broken down. Chaos often ensures.

But cracking down too hard on inflation can create a recession. Unemployment grows, workers no longer feel empowered to ask for raises and sellers are wary of raising prices. Less chaos, unless the recession becomes too steep. But as much—maybe more—human suffering.

As a practical matter the Fed has only one tool for steering, tightening or loosening credit. There are multiple factors that determine inflation in the economy so ratcheting credit up or down is kind of a blunt instrument. As a consequence, it has to be used very judiciously if it is to reduce inflation without creating a recession.

Regarding the country today, it seems that the Fed has been threading this needle pretty well. Inflation is moderating and the labor markets are still strong, as evidenced by the unemployment rate edging down last month to its lowest post- pandemic level. Central to this navigation has been a series of interest rate increases, seven raises since March, 2022 from 0.25% to 4.5%. The question now confronting the Fed is how to extend their success thus far in reining in inflation without inducing a recession– and what course of interest rate adjustments can achieve this end.

I will not be so foolish as to pretend to know what the Fed should do. This is their day job. But there are a number of considerations that might be of interest.

How High Is Inflation?

The measure of inflation that gets the most press is year-over-year inflation. That is, how much higher are prices today than they were a year ago. As useful as this is, like most statistical measures, it has limitations.

In particular, if there is a singular price spike in a short period and the prices established that month stay at the higher level, the annual measure of inflation will be influenced for the entire year. The economy may be stuck with that inflation, but there is no ongoing problem that needs to be blunted.

The below graphs show two hypothetical courses of inflation on a month-by-month basis for a year. Both these imaginary economies reflect a one-year inflation rate of 7.4%. But the patterns are very different. One shows a generally consistent upward inflation rate. The other shows a strong inflationary shock at the beginning of the year, with very little inflation the second half of the year. The more consistent pattern suggests a generalized “overheating” of the economy (disposable income driving up demand beyond the economy’s ability to keep pace). The second suggests a more discrete event or set of events that created price spikes that may well be resolving themselves.

Needless to say, reality may not sort itself into such obvious buckets. Reality is further complicated as various sectors of the economy can be inflating (or deflating) at different rates. But these illustrate the issue in choosing what inflation to consider.

Again, I am not licensed to offer an assessment that you could take to the bank of what the current situation more closely resembles. Indeed, there is a fair amount of debate among those people who are appropriately licensed. But after reading a bunch of these arguments, it sure looks to me more like our inflation spiked last winter/spring. From June, 2022 to December 2022, the month-over-month inflation rate was at the low end of the range of pre-pandemic normal. So when the New York Times reports the annual inflation in December at 6.5%, it is not wrong. But it is also not necessarily complete.

The Fed needs to be very careful if it is to avoid nudging the economy into an unnecessary recession.

Implicit Biases

Federal Reserve Board Chairman Powell is very fond of saying that the Fed is above politics. In the narrower sense of the term, that is absolutely the case. Even with a slightly broader definition, he has been willing to take positions without regard to partisan considerations. But politics doesn’t stop at the border of partisan differences. Making decisions about which risks to prioritize over other risks inherently reflects politics in the broadest sense of the term—how as a society we make contested decisions that impact the entire society.

Neither excessive inflation nor a recession is in anyone’s interest. But slowing down the economy by making credit more expensive will inevitably “soften the labor market,” as Chairman Powell concedes.

We should ask who takes the brunt of the hit when the labor market cools off? Every one suffers but those who lose their jobs or forego increases in income suffer the most. For the last couple months, I have been fascinated that the stock market retreats when continued job growth is reported. The standard line is that is a consequence of Wall Street fearing another rate hike by the Fed. But it occurred to me, there may be a more parsimonious explanation: a tight labor market means workers have more bargaining power, which will put pressure on company profits.

For the last 40 years, wages for most workers have grown more slowly than the overall economy. Right before Covid and as we have been coming out of the Covid period, worker salaries have made some real gains. To be sure, some of those have been undermined by inflation. But given that the bargaining power of unions has been so badly undermined during those 40 years, the vision of collective bargaining inflaming inflation by holding out for anticipatory price increases—a real problem in the 80’s—may be largely outdated.

We may be facing a very different problem. Sources as divergent as the Economic Policy Institute and Bloomberg have pointed a finger at the role of corporate profits as a major factor in contributing to inflation. Oil companies, for instance have posted record profits while Republicans made blaming Biden for high gas prices the centerpiece of their midterm campaign.

U.S. Bureau of Economic Analysis, Statista 2023

To the extent cranking up profits is a culprit in inflation, increasing interest rates will have less effect on the rate of inflation. But a softer labor market will certainly reduce worker leverage.

How Much Inflation Is Too Much

For the last several decades, the Fed has had a target inflation rate of 2%. Economists Robert Pollin and Hanae Bouazza have suggested that this target may be overly aggressive and we may be paying a considerable cost in terms of lost economic activity to bring inflation down that low. Their chart, shown below, suggests that real GDP growth has been highest in years with an inflation more in the 2.5 – 5% range. This is consistent with the same analysis for 37 high income countries.

I am relatively sure there is other economic literature that takes issue with these numbers. Although virtually all economists recognize that there are real trade-offs between growth and controlling inflation, a target rate this high is certainly not in the mainstream of economic thinking. Still, it is worth considering on what basis the 2% target is determined.

What to Do

I can’t think of much that the average person can do. While I am currently worried that the Fed may be too focused on controlling inflation, I am also aware that once inflation really takes hold, it can be hard to stamp out. Stopping an antibiotic prematurely leads to more potent infections. I just don’t know enough to have a strong opinion.

I certainly don’t think the situation would be improved by making interest rate decisions overtly political. Although it is without question that the decisions are profoundly political in their impacts, I would still rather have the relatively impartial Federal Reserve Board—implicit biases and all—making the decisions.  So far, at least, they seem to be doing a reasonable job.

I think the best we can hope for is that academics keep debating the issues. They need to make sure that they listen to arguments outside whatever orthodoxy is reigning at the time. Thoughtful and lucid journalistic coverage helps, but am not sure that the mainstream media has done as good a job as possible making these issues clear. Robust and open debate will improve the odds of avoiding a huge mistake.

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NOTE: Thanks to Ira Kawaller for reviewing an earlier draft of this blog. His advice was very useful, but he can’t be blamed for my opinions or errors. If you are interested in a blog that offers political economic analysis in a short, lucid and intelligible format, I highly recommend his work. Read him at igkawaller.medium.com.

By Mike Koetting December 18,2022

Today’s post goes deep into the reaches of the American Political Way-Back Machine. Yup, more than two weeks ago! Back then there was widespread panic about the consequences of a rail strike. Then, poof, all gone, like a very early snow.

Before it drifts completely out of our consciousness, it is worth reminding ourselves how we got to that pass and the implications therefrom.

The Clear but Inchoate Culprit

I believe this event was a nearly perfect microcosm of what is wrong with the way America organizes, to use the term somewhat loosely, its economy.

Continue reading “The Rail Strike That Didn’t Happen”

By Mike Koetting December 6, 2022

One of the interesting themes in MAGApublican thought is “America First”. Commentators have identified this as a major belief for those inclined to vote Republican. It is hard, however, to know exactly what this means in the current context. Traditionally, the sentiment has been primarily a foreign policy instinct to keep America away from wars that don’t affect them directly and from treaties that have the risk of getting them involved in such wars.

While the contemporary use includes the traditional sense, it also seems much broader. For sure, it is a thinly veiled protest against diversity. And it is obviously an objection to the outsourcing of jobs. But it is equally obviously a primal scream of anger at “the elite” who have more of a global outlook–which has coincided with their economic outlook improving exponentially better than that of the working class. Never mind that the actual cause-and-effect model is murky.

If “America First” is used in the narrow, historical sense, one can imagine the policy implications. But in the vaguer, more amorphous use, it is not at all clear what an “American First” agenda would look like.

Continue reading ““America First”—A Possible Area for Collaboration?”

By Mike Koetting November 20, 2022

Democracy had a pretty good election. Not an unbridled victory, but particularly when compared with our worse fears, pretty good.

The connection between real problems and real solutions, however, took its usual pummeling. In fact, I think it was little worse than historically, despite several unalloyed bright spots.

Let’s consider three important issues where governance reality took a beating.

Continue reading “A Nation Divided by Its Divisions”

By Mike Koetting October 25, 2022

Much of the discourse on environmental issues is at the level of kindergarteners arguing over toys. In reality, these are the most complex problems ever faced by human beings because, as we have painfully learned, everything is connected to everything. And the issues need be addressed at a scale never before contemplated in human history. They are not simply a series of tricky technical problems. The problems are political, psychological, even religious. And every technical problem must be addressed with some consideration of how the alternative solution interacts with all the technical problems around it—literally to the ends of the earth.

Continue reading “The Most Essential Missing Ingredient in Addressing Climate Issues“

By Mike Koetting October 11, 2022

I generally consider what David Brooks has to say interesting. We share enough basic values that I can imagine a discussion with him, but we disagree enough around the edges that I frequently find his perspective usefully different. But one of the dangers of being interesting is that you occasionally uncork something that is completely off base, even if it has a good size grain of truth to it.

Such was the case when, on the PBS Newshour a couple weeks ago, he started talking about the Republican Party being in transition to a working class party. Seriously?

Continue reading “Republicans as Working Class Party?“