The Smartest Guy in My Room

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Posted in Uncategorized

Every once in a while, it’s useful to write down what you expect to happen over a long period of time – say, a decade.

I was reminded of this by the news last week in The Wall Street Journal that several prominent hedge-fund operators were ramping up their donations to the Republican Party. They included Steven Cohen, of SAC Capital Advisers; Kenneth Griffin, of Citadel Investments; and Bruce Kovner, of Caxton Associates. “Hedge fund kings have feelings, too, and the president appears to have hurt them” wrote a trio of WSJ reporters, Brody Mullins, Susan Pulliam and Steve Eder.

Granted, dumb people sometimes make lots of money (think of Henry Ford).  And making lots of money often makes smart people dumb.

But the time-horizons of hedgies are notoriously short.  They make their money in the brief interval between the moment that they understand something and the hour when everyone else understands it, too. The turn-around artists and restructuring specialists known as private equity financiers, for all their skills, are only a little better.

The Koch brothers, David and Charles, who built an excellent firm, Koch Industries, knew how to construct a lobbying organization, as well. They started their political adventures twenty years ago. Today their calls to Republican governors go through. But does anybody seriously think they’re winning the overall argument?

So what is a smart Republican, one who has lots of money, and who still wants to look smart ten years from now, thinking about today?

He or she is not investing in Congressman Paul Ryan, author of the “Roadmap for America,” that’s for sure.  A quick look at Ryan’s resume tells you that he is steering into the future with his eye on the rearview mirror.

A college intern who went to Capitol Hill on the eve of Newt Gingrich’s “Contract With America,” Ryan has been there ever since.  He graduated from Miami University, in 1995, and worked for three years as a staffer for Jack Kemp and others until he was elected to Congress himself, at 28, from Wisconsin’s First District.  He’s still living in Gingrich’s “Opportunity Society.”  Good luck with that!

Some of what is going to happen over the next ten years is obvious. Global warming is going to be affirmed by experience. Human embryonic stem cell research will go forward, despite challenges in the courts.

Some is only slightly less obvious.  Social Security will be restored to actuarial balance through a mix of mild tax increases and benefit cuts.  Medicare will be preserved and, perhaps, extended through a second health-care statute.  The 15-member Independent Payment Advisory Board, established by the Affordable Care Act, will gradually morph into a Health Care Fed, a geographically decentralized organization with provider input engineered into the system at every level.

The harder problems that will become apparent in the next ten years have to do with the inequality that is growing all around the world. That’s what The Economist’s cover story was about this week (What’s Wrong with America’s Economy?), though it didn’t go far enough.  “Technology and globalization are remaking labor markets across the rich world, to the relative detriment of the lower-skilled,” noted the editorial.

True, as The Economist says, trade barriers and industrial policy won’t solve the problem. But increasing employers’ incentives to hire the low-skilled (along with better training, the editorialists preferred solution) won’t do it either. Boning up on Dutch disability insurance is a good idea for policy wonks (the Netherlands has increased levels to at least twice as high as its neighbors, with good results for its smooth-running economy), but it is not yet a political platform..

I belong to a luncheon club whose smartest member is a longtime investment manager whom I have observed for many years, He walked out of the room after a global tour d’horizon talk the other day and said on the sidewalk in front of the building, “The only things that can possibly address inequality of a magnitude that will soon be judged to be unacceptable in this country are much higher levels of taxation on the well-to-do and a negative income tax for the poor.”  I hadn’t heard it put so simply or succinctly before, but in the circumstances I was convinced instantly that he was right.

A “negative income tax” is a euphemism designed forty years ago to avoid what otherwise might have been called a “guaranteed annual wage,” when even Milton Friedman endorsed the idea.  Call it a “disability benefit” if you prefer.  We’ve learned a fair amount since then about how to entice workers to take low-paying jobs through earned income tax credits.

Some income floor beneath which citizens are not permitted to fall is the next frontier of social policy. Universal health care was the most recent skirmish in an ongoing campaign. The US will do fine in its economic competition with the newly industrializing world as long as its social fabric doesn’t become irreparably frayed. This is the world for which we are heading, and the sensible thing to do is to prepare for it.

How is it likely to play out politically? That’s the topic here next week.