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May 1, 2011
David Warsh, Proprietor


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The Smartest Guy in My Room

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.

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7 Comments

  1. Denis Drew wrote:

    Re: Economics Principals

    Here we go again. David Warsh — a commentator whose breadth of understanding normally dazzles me — quoting this as a good summary of what to do about so called “inequality”: “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.”

    If, first, our progressive elite understood that it is not about wan “inequality” but more like what the Palestinians call the “Disaster”, they would understand that what American workers need is not a guaranteed floor under inadequate incomes but the median wage to double over time whenever average income doubles, not grow only 25%, for the minimum wage not to drop in half (by early 2007) over the same doubling per capita span.

    We, American workers, would like to earn $25/hr on the average with a $15/hr minimum wage in the poorest parts of the country (the latter with all of 2% direct inflation*). We American (Chicago) cab drivers do not want the mile rate on our meters to get one (1!) 30 cent increase over the course of 16 years (81-97) period, at which mid point the city began adding 40% more cabs while cutting the business nearly in half with subways to both airports, unlimited limos and (the coup de grace) free trolleys between all the hot spots downtown (fine transportation progress, but what’s with 40% more cabs?!).
    * http://ontodayspagelinks.blogspot.com/2008/08/3-cost-of-gdp-output-and-inflation.html

    What American workers need is the power to protect themselves in the market place — and in the legislature. Of course nobody in America from cab drivers to dazzling progressives has any idea anything is so fundamentally out of whack.

    I caught the answer to the Disaster (A.K.A., Great Wage Depression) — assuming anybody in apparently brain isolated America knows there is a question — the first time I saw it; wondered why I never thought of it myself, so obvious from the purely theoretical point: legally mandated, sector-wide labor agreements. The one and only answer to the race to the bottom. Canada has a lite version right next door: is Canada like the South Pole?

    See these two books for how it works so well in Germany, undoubtedly the leading example of a successful capitalist economy:
    “Were You Born on the Wrong Continent?: How the European Model Can Help You Get a Life” by Thomas Geoghegan. http://www.amazon.com/Were-You-Born-Wrong-Continen/dp/159558403X
    Union of Parts: Labor Politics in Postwar Germany (Cornell Studies in Political Economy) by Kathleen Ann Thelen
    http://www.amazon.com/Union-Parts-Politics-Postwar-Political/dp/0801425867/ref=sr_1_3?s=books&ie=UTF8&qid=1304343097&sr=1-3

    PS. I don’t know what an RSS feed is so I guess I wont get to see the other comments.

    Monday, May 2, 2011 at 1:44 pm | Permalink

  2. Denis Drew wrote:

    Reply to myself — just another insight of a sort, not yet sorted out itself:

    The presumably (supposedly?) avant guarde Berkeley economics faculty feels no personal responsibility at all (as far as I know) for the violent goings on at their public schools. If they don’t feel any personal responsibility for making Berkeley public schools safe (attended mostly by poor minorities?) — especially safe — good learning places we cannot in the least expect them to take serious responsibility for the poor side of town(s) across America.

    OTW, if you are from the poor side of town where you live we can expect you to be seriously anxious about what is going bad in Berkeley public schools thousands of miles away.

    It’s not what you know — that makes you useful — it’s apparently who you identify with — that makes you useful — think LBJ v. Obama. Did someone say, “Smartest Guy In the Room?”: forebrain or midbrain? :-)

    Monday, May 2, 2011 at 2:51 pm | Permalink

  3. dilbert dogbert wrote:

    Darn! I hate to see us giving up on the “poor”. In many ways the poor are culturally poor. Or as my mom would say; The poor have poor ways. I don’t know how you change cultural viewpoints and expectations but we would get a lot of bang for the buck if we could.
    The thing about adding money to the bottom of the pile is that it gushers up. Money added at the top may or may not trickle down.

    Monday, May 2, 2011 at 3:57 pm | Permalink

  4. David,

    Well, we do have the Earned Income Tax Credit, which is a version of the negative income tax, and at least inspired by it, although it only applies to people who earn enough income to file for income tax.

    Monday, May 2, 2011 at 5:17 pm | Permalink

  5. Dale wrote:

    I’ve copied this column into my calendar for 2012.05.01. It will be interesting to see how it reads then!

    Thursday, May 5, 2011 at 3:25 am | Permalink

  6. gappy wrote:

    This column seems to have been written in a hurry, and in my opinion is not carefully argumented. My qualms:

    1. “Global warming is going to be affirmed by experience.” I think evidence — and impact — will appear over a longer time period. This will shape policy more gradually, and more profoundly, than this article presupposes.

    2. “inequality that is growing all around the world.”

    This is really a non sequitur, since the discussion focuses on redistributive justice in the US; however inequality is growing *within* developed countries, but is actually shrinking within some developing countries, namely Brasil, and most importantly is shrinking *among* countries.

    3. “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 am curious to learn how this instant acknowledgement that this is the right policy prescription will be rationalized. I am willing to accept consequentialist arguments, since this is all economists understand. But from the article one could infer that an intelligent Republican is one who agrees with the (moderate) democrat author.

    A useful exercise is to try to formulate policy alternatives, even if we don’t agree with them. I can think of a few. Will check this site to see any of them is mentioned.

    Thursday, May 5, 2011 at 5:47 am | Permalink

  7. sophia p wrote:

    thanks for another interesting post david. i wholeheartedly agree that we haven’t in any way got to grips with the depth and scale of the problem that america (and increasingly other anglo-saxon economies) faces in terms of wage inequality and the long-term decoupling of pay and productivity.

    i also agree that raising taxes is an important part of the answer – particularly taxes on wealth and unearned income. but the scale of the problem is so great that there is no silver bullet – taxation will only be part of a much more systemic approach which takes account of public/govt action AND private/firm behaviours and norms.

    but just to zone in on your investment manager’s sidewalk point about taxation – raising tax rates isn’t the only way of increasing yield. check out Lane Kenworthy’s work – he makes a strong case for increasing the quantity of taxation through focusing on full employment instead. http://lanekenworthy.net/

    Thursday, May 5, 2011 at 4:20 pm | Permalink

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