Creative Destruction by way of Regulations

Do regulations kill jobs? On its face, it seems like a simple question that should lead to a simple answer. This is certainly how many opponents of government regulation see it…very simple, in black and white terms, often with anecdotal evidence to support folksy claims (take a look at this piece, for instance, published last week in the Wall Street Journal…see if you can find the “overwhelming evidence” that regulations kill jobs). I want to take some time here to complicate the matter for those that see it as straightforward.

When I was in graduate school, my Political Economy professor spent some time on the concept of creative destruction. My previous exposure to the term was in a Political Theory class earlier that year, defined as the sort of insidious effect capitalism has on existing social and political orders. In Political Econ, however, our professor developed a different theme: In capitalism, free markets are constantly being exposed to potentials for innovation. Sometimes, these innovations ‘threaten’ to overwhelm the existing order completely (where one sees threat, another sees opportunity), to the point where the original product is forever relegated to the museum or the vintage store. Where is my VCR anyway? In short, innovation happens, the demand for the product of innovation sometimes creates new markets, while sometimes destroying old ones in the process.

How does this relate to regulations? Let me complicate the anti-regulation argument with this scenario: For much of our modern history, coal-fired plants have produced a significant share of our electricity. Coal is a carbon-based product – when it burns, it emits gases and particulates that you wouldn’t want to spend too much time breathing directly. Older power plants, in particular, are responsible for much of the share of emissions that negatively impact air quality. For decades now, the ‘rascals’ at the EPA have issued rules meant to regulate the amount of poison these factories can emit, though some of these factories were exempted from the rules of the 1970’s for fear of adversely effecting existing jobs.

Since then, much has happened. Plants that were forced to comply with clean air rules invested in technology to keep them compliant and efficient, without the nation being thrown into a jobless depression. Why? Partly because engineers were hired to design the smokestack scrubbers which were made necessary by the regulations, craftsmen were hired to manufacture those scrubbers, new companies sprang up to service these and other needs which had surfaced…to the point, more jobs were created than were lost in the long run. An additional point not to be overlooked: coal-fired plants (cleaner coal-fired plants) remained competitive despite the ‘burden’ of regulation. Still, markets for alternative sources of energy have expanded, offering additional means of delivering power to the consumer, power that will one day be even cheaper and cleaner. In this way, regulations often reflect creative destruction tendencies similar to those celebrated by proponents of free markets…tendencies that, on balance, promote the general welfare, fulfilling one of the central tasks assigned to government by our constitution.

The current anti-regulation pitch you’ll hear in reference to the coal plants goes something like this: The Obama administration has planned or implemented an egregious number of new regulations, a hard-to-imagine (even for a Democratic administration) job-killing blitzkrieg set up to wreak havoc with private markets and industry. With these regulations, a number of plants are projected to close, costing a number of jobs, in a time when we need to worry about every job lost. Digging just slightly deeper, though, we find that most of these plants slated to shut down have been around for over 50 years, most were grandfathered out of the 1970’s regulations (therefore are the dirtiest), many were scheduled for closing in the coming years anyway, and, perhaps most telling, no plant operator surveyed say regulations are primarily to blame for the closing of these plants. Rather, the regulations seem to serve as the final bell.

In the end, the question of regulation isn’t as simple as it seems. I’ve spun it here in a particular way to illustrate that the world is indeed more complex than it is black and white. To be sure, there are plenty of regulations that show a negative cost-benefit analysis. I’ll make the case in a future post that many regulations are actually written by lobbyists to offer their industry protection against the threat of free market competition.

Election 2012 Ramping Up With Year-End Tax Fixes

The 2012 Presidential campaign is heating up, as are the politics which accompany it. It seems the Democrats want to win the battle of hearts and minds by framing this election in class warfare terms: defending the poor and middle classes against the Republican-favored rich. The Republicans, on the other hand, are in a tricky situation. In 2010 and 2011, they waged a spirited campaign against government spending, and appeared to move President Obama to the right, ruffling the feathers of many on the far left as Obama offered concession after concession. The President, reflecting his weak position at the time, even offered Speaker of the House John Boehner a deal this summer that included $3 dollars in spending cuts for every $1 in increased revenues (i.e. taxes). Ultimately, though, the Republicans may have fumbled at the goal line. The Tea Party caucus held out against ANY tax increase, Grover Norquist raised hell, and the deal fell through. Obama at that point learned he couldn't get a deal even by giving away the Democratic party's farm.

With nothing to lose, Obama has gone on the attack, emboldened with a strategy that just may extend his presidency despite conditions which predict he should lose handily (slow growth, high unemployment). The Republicans have their hands tied in allegiance to Norquist's no-tax pledge, and Obama has seized an opening by publicly framing the argument as rich versus poor. The current activity in Congress serves to illustrate: Several extensions are being taken up by Congress before the holiday recess. One involves extending the payroll tax holiday, another involves extending unemployment insurance. Allowing the payroll tax holiday to expire would primarily hit the middle class hardest, and those needing the unemployment insurance extension are, at the moment, closer to poor. Neither party can afford to be seen as neglecting the middle class or the poor, so there is broad support for both policies (though the support from republicans is grudging). The difference comes from how to pay for it. Obama has proposed a millionaire surtax to offset the costs, while Republicans look to cut government programs and freeze federal wages to finance the extension.

Rather than abandon the wealthy, Republicans hope instead to ride the wave of dissent against big government, as expressed by the Tea Party movement in 2010, but they may be counting on a wave that has flattened. Polling data consistently shows the public favors hitting up the rich to "pay their fair share". This year's Occupy Wall Street (OWS) movement introduced a discussion about income inequality, and volumes of data-sets have emerged which point out how well the uber-rich have fared recently, especially relative to the rest of us. Though the public didn't love the tactics or the image of the Occupy Wall Street crowd, they were sympathetic to the message, and it appears the President hopes to capitalize on this in the year ahead.

The policy battles set for 2012 will include the looming expiration of the Bush-era tax cuts, whose gains went disproportionately to the rich, and the continuing efforts to close corporate tax loopholes, such as those that allowed GE to pay no income tax despite clearing over $5 billion in U.S. profits. President Obama and the Democrats are seeking to extend the Bush tax cuts for everyone except those making over $250,000, whose taxes would rise from the current 36% rate back up to 39%, where it was during the Clinton years. Republicans will fight against the increase, calling it class warfare against the job creators. This at a time when corporations are experiencing record profits, holding more cash-on-hand than they've ever held before. Many naturally find this an odd homage to trickle-down economics, particularly when there's little evidence that these job creators are doing anything lately to earn that moniker. On the face of it, it seems an argument that Obama and the Democrats can win.

Tick-Tock: Time Winding Down on a Deficit-Reduction Agreement

As we approach the first of two deadlines for deficit reduction, we’re seeing increasing media focus on the Joint Select Committee for Deficit Reduction, colloquially known as the Super Committee. Some of my readers fall into the category of moderately attentive when it comes to politics, and as such this post is for them. I have a not-so-bold prediction that within the week we will all be suffering from yet another political hangover, resulting from the inability of Congress to agree on budget deficit-reduction policy. By that time we will have passed a mandated deadline in which the Super Committee must agree to at least $1.2 trillion in budget savings over 10 years, or risk a self-imposed schedule of automatic cuts involving an equal mix of domestic programs and defense spending. This was the deal hammered out in the last showdown debacle, the debt-ceiling debate. For a very informative primer on the formation and purpose of the Super Committee, see Mark Kogan's excellent analysis.

Politics turned uglier than even the recent norm some months ago, when hyper-partisanship led to brinkmanship during the debt-ceiling debates. Here’s a quick reminder – In 1917, Congress mandated a limit on the total amount of debt we can accrue at the Federal level. Every so often, as we approach that limit, Congress must either raise the limit, or enforce sizable reductions in deficit spending. This spring and summer, Democrats and Republicans engaged in a drawn out political spectacle as we approached the debt ceiling, effectively turning a non-issue into blood-sport (we had raised the debt ceiling without fail on 76 separate occasions with little pomp and circumstance. Any media coverage which followed these ceiling adjustments was often limited to mainly footnotes in Op-Ed pieces). Throughout July, with the threat of government shutdown looming (as well as the threat of losing our credit standing with agencies like Standard and Poor’s), we saw day after day of posturing on the part of our elected leaders. We saw blame levied at each side by its opponents, and ultimately we saw an embarrassing display of self-interested partisanship, at the expense of not only the people, but also at the expense of our public institutions. Since then, polling consistently has shown that public approval of Congress is at an all time low. What’s more, the solution out of the impasse was not even a solution in itself, though Congress cleverly instigated a base-level effort at compromise, developing a “super-committee” to explore options to deal with our long term debt.

In a nutshell, the super committee's purpose is to find a minimum of $1.2 trillion in deficit reduction measures by November 23…any agreement which passes through the Super Committee then makes its way to the floor of each chamber of Congress for an up-or-down vote (no amendments, no filibusters, no procedural gimmicks, just a debate and a vote). If the full body of Congress cannot pass legislation by December 23rd, a series of automatic cuts is instituted, effecting two important elements of the Federal budget system, defense spending and discretionary domestic programs.

The Super Committee consists of a total of 12 members of Congress (three Republicans and three Democrats from both the House and the Senate). Given the deep automatic cuts, there is tremendous incentive to reach a deal. This was the genius behind the Super Committee’s formation. Republicans don't want deep cuts in defense spending, Democrats don't want deep cuts in domestic spending. As a result, it seemed reasonable to assume that Congress would travel some way towards compromise. One happy consequence of such an agreement would perhaps be some restoration of faith in our public institutions.

Even with these triggers in place, however, there is great pessimism among the public, and many experts, that a deal will eventually be reached. This pessimism reflects the general tenor surrounding politics currently. Congress seems committed to the relatively new idea of abandoning compromise in favor of rigidly holding firm on partisan positions. The American political story reflects a history of compromise…yet many have expressed that there has never been a time when our politics was more polarized than today, save for perhaps the Civil War. Around 80% of current congressional members have signed pledges promising to hold strong to their partisan positions, and though some members of Congress have distanced themselves somewhat from theses pledges, many have not, leaving little wiggle room available for any agreement that involves both entitlement reforms AND revenue increases (both, most experts acknowledge, are necessary in order for any kind of meaningful solution to our deficit problems.

Second, there exists a series of outs available to the committee members, each of which amounts to kicking the can down the road for someone else to deal with (that we see the blame game developing stands as evidence that this is more likely than I would want to believe). As noted in this Washington Post piece, the general consensus is that this option seems increasingly likely.

Personally, I’m hoping we’ll see some combination policy measures which reflects the spirit of compromise. More specifically, I side with those who press on the committee to “go big” (i.e. reach a grand bargain, involving a much bigger deficit reduction plan than the current minimum requirement, resulting in upwards of $4 trillion in savings rather than the 1.2 required). Moderate, non-partisan organizations such as No Labels and the Committee for a Responsible Federal Budget have gone to lengths to make the case for going big, and their efforts do seem to have gained some traction. Over 100 house reps and 45 senators have signed on to the spirit of compromise that has eluded congress up to this point…still, the obstacles are great, the 24 hour news cycles haven’t even ramped up the dialogue as they will over the next week, and already skepticism abounds. I myself am increasingly pessimistic that any grand agreement will be reached, particularly given the recent chatter about undoing the trigger element of the Budget Control Act. I suspect that if there’s any agreement at all, it will likely be something closer to the $1.2 trillion figure, involving some small dose of deficit reduction by way of tax reforms (closing loopholes and broadening the tax base) in conjunction with a series of spending adjustments (many in the form of interpretive numbers dances). Any agreement will be with an eye to what can actually pass the full congressional body.

According to a recent poll, most Americans don’t believe any sort of compromise is likely to take place in this poisoned environment. One encouraging bit of news is this: more and more Republicans are expressing a willingness to consider revenue increases, abandoning the Grover Norquist inspired hardline taken by many in the debt ceiling negotiations, while most Democrats acknowledge the necessity of entitlement reform, so there may indeed be room to maneuver here.

Less encouraging, however, is the notion that short-term political points matter more than long-term solutions. This continues a trend over the past several years, regardless of which party is in power. To be sure, government is set up to let conflict shape policy outcomes, sometimes in the guise of doing nothing. Recently, though, it seems that parties are increasingly willing to do nothing in the hopes that points can be scored in the run-up to the next election. The Democrats hope to spin failure to their advantage, as do the Republicans. Unfortunately, the public loses in this short-sighted, faction-favoring tactic. As we approach the deadline, I look to our leaders in Congress to work together towards a solution, to not be held hostage by partisan ideologues, and to avoid missing this opportunity to stabilize the Federal deficit, which is supposed to be what this is all about.

Political Parties

Here’s a brief discussion on why political parties exist and why certain types of democratic systems (such as ours) are two-party systems. In short, political parties are useful instruments of democratic government, and our two-party system is largely a result of structural constraints which lead American voters to vote strategically, rather than waste a vote for symbolic purposes.

It should be noted that the founders did not explicitly include political parties in the Constitution. George Washington, in his farewell address, actually took timeout to warn citizens of the “baneful effects of the spirits of party”. Still, parties formed, and it is difficult to imagine a functioning democratic system that does not have political parties. This is because parties actually do serve some very valuable functions. Perhaps most importantly, political parties reduce the cost of gathering information (in time and energy, not just money) so that we can actually participate without having to immerse ourselves in politics every moment of every day. Parties serve as organizing forces that simplify the information required to make an “informed” voting decision. For example, if you know that Mrs. X is a Republican, you don’t have to do much additional research to know her views on abortion, taxes, the death penalty, government regulations, etc. This allows us as citizens to engage/participate politically with only minimal time spent gathering information on the candidates. Without parties, you would have to research each candidate’s views on each issue that matters to you, leaving less time and energy for commerce, family, or your own personal interests.

For the sake of continuing the discussion, let’s assume parties do indeed serve a central purpose in our system. Now to address the system itself. The U.S. has what is called a Single-Member-Plurality-District (SMPD) system for electing representatives to Congress. What this means is that in each district, there is only one winner. The candidate that gets more votes than any other candidate in that district wins (this is referred to as plurality, or first-past-the-post…a majority of votes is not required). There is no prize for second or third place, it is “winner-take-all”. So, if your preferred candidate is polling at 10% while the other candidates are polling at around 45% each, what are you going to do with your vote? You basically have few options. You can vote for your candidate that has no chance of winning (a symbolic vote), or you can determine which of the remaining candidates most closely represents your interests, and vote to insure that candidate beats the competitor that least represents your interests. This is referred to as strategic voting, though on the streets you hear it as voting for the lesser of two evils. The third option, of course, is to stay on the sidelines and not case a vote. Voters are, for the most part, rational, and if they choose to vote at all, they tend to vote strategically rather than symbolically. The rationalism of strategic voting over symbolic voting, coupled with the tendency for many voters to simply stay home on election day when their preferred candidate has no chance of winning, effectively marginalizes any third party movement from gaining traction in the near term.

Not all countries have this systemic pull towards two-party competition. For instance, Proportional Representation (PR) systems encourage the development of multiple parties. Here, voters choose among parties (rather than specific candidates) to represent them, and Congressional seats are allocated on the basis of the percentage of votes that the parties receive. If there are 100 seats in Congress and the Green party gets 7% of the vote, they are awarded 7 seats in Congress. This eliminates the disincentive for citizens to vote their preference, increasing party diversity AND, as a happy consequence, increasing participation (remember, third party supporters in the U.S. may choose to cast a strategic vote in place of a wasted symbolic vote, but they often simply stay home on election day). This is not to suggest that the Proportional system is better than SPMD…my purpose here is to simply explore the difference between the two systems as they relate to the presence of multiple parties. PR systems, in general, encourage multiple parties, while our SPMD system marginalizes third parties. For a detailed description, see Duverger's analysis.

For third party proponents, it is worth noting that Duverger’s Law is more a principle than a law. There are historical examples, even in this country, of third parties rising and having impact on political outcomes in SPMD systems, just as there are occasions where PR systems result in only two competitive parties. While these examples are typically exceptions rather than the rule, it is the case that systemic pressures are root-level pressures and likely must be addressed in order to make lasting change. Office-holders (i.e. those that make the rules) have little incentive to enact changes that might reduce their ability to compete for power and win. Real reform probably requires a “perfect storm” in order to overcome the slew of structural and human obstacles that are currently in place. As I’ve indicated previously, however, we may now be seeing signs of that perfect storm on the horizon.

On Education

Each election cycle comes and goes with elected officials and their challengers touting partisan solutions to national problems. In anticipation of President Obama’s education reform proposal due out tomorrow, I wanted to make the following admission: I don’t quite know what to make of education policy. Since this blog is fairly new, I thought it would be a good idea to begin outlining a position on education, assuming that additional attention, as well as your feedback, can help each of us come to terms with informed, practical solutions to what currently is a national catastrophe.

I've taught several community college courses on government over the past decade, and while my experience is mostly anecdotal (n=6, not the stuff of robust empirical analyses), I remain confident that my experience is not unique. For one thing, international students (particularly Chinese students) consistently outperform their domestic peers in my classroom. What does it say, really, about our education system when international students are outperforming American students in an American Government class? In addition, the quality of writing is on the decline – this too is an observation with limited data points, though not inconsistent with national reading/writing test scores. Worse, still, there seems to be increasing pushback from the students themselves when it comes to completing their assignments and accepting the instructor’s evaluation of their work. *on a side note, last semester I assigned Madison’s Federalist Papers 10 and 51, standard stuff for an American Government course. One student asked if there was a version that translated the works into “current” English. Seriously.

“Keep the students happy,” I hear from some on the left…I call it the Kumbaya approach: “Make them feel better about themselves, it’s not their fault if they are unable to perform to expectations.” From an admin position I can understand the viewpoint…after all, a happy student is less likely to drop out…a happy student therefore results in steady tuition revenue, along with additional money from the state.

On the other hand, the right complains about federal interference and the baneful influence of teachers’ unions. Personally, I have had my issues with unions over the years. I have not been one to lament the waning of union power and influence. Having said that, I do not believe the teachers’ unions are solely or even primarily responsible for the current state of education.

As is usually the case, the cause of the performance decline is complex and varied. For instance, certainly video games and TV play a role, as students spend less time working on their assignments and turning instead to accumulating WOW gold, or to finding out whether Snooki makes it home from her latest bar fight on Jersey Shore. In addition, we seem to be comfortable with the belief that we, as a culture, are entitled to the benefits of education, even if we do little to participate. Parents are also to blame, to be sure. I constantly see parents giving in to their kids’ demands, they seem to have lost their cajones when it comes to instilling a sense of discipline.

Those, however, are cultural issues, not to be solved by any Federal or local education policy maneuver. There are some general policy measures that warrant consideration. Here are a few that come to mind: Investing in classroom technologies, reducing class sizes, increasing the length of the school year, offering more opportunities to study abroad, limiting tenure, providing merit-based performance incentives, developing interactive community programs (yes, think PTA), and perhaps most importantly, paying educators a salary commensurate to the value that we place on education, so that the best and brightest have an additional incentive to join the ranks of this noble profession. These are some of the policy measures that CAN be addressed at the community level, the state level, AND the national level. Each deserves some additional attention, so look for this discussion to continue over the coming days. As always, your own ideas are valued, please feel free to comment if you wish.

The Middle OK with Tax on Wealthy

Bruce Bartlett accumulated some recent poll numbers which illustrate that most Americans favor a middle ground position on deficit-cutting. By a roughly 2-1 margin, respondents say they favor a mix of tax increases and spending cuts to jump start our economy and reduce the nation's debt. Even in an environment of divided government, these numbers seem to indicate a mandate of sorts from the public - in conjunction with significant spending cuts, we are willing to ask some (i.e. 'millionaires') to make an additional sacrifice (tax hikes) in order to make every effort to address critical short term and long term economic problems. Is the Federal government, in its current state, likely to respond to public opinion on this issue? That remains to be seen. However, given the inability lately of government leaders to find compromise (even when it is clear that the public demands it), it does seem unlikely.

Some indicators, though, offer hope. Lamar Alexander, a Republican senator from Tennessee, has taken a somewhat bold step towards promoting compromise by stepping down from his leadership position in order to signal a willingness to defect from hard party-line positions. Dozens of prominent political and business leaders have banded together in an effort to persuade members of Congress that working together to adopt bi-partisan policy solutions not only offers the best chance of success, but is also consistent with the wishes of the general public.

An opening for Centrists?

Here's the latest Rasmussen poll illustrating the gathering storm against all that is partisan. Where some see threat, others see opportunity. Some lament that the current state of partisan bickering reflects the failure of our political system. I see it as an opportunity to bring the silent majority back into play, to once again give voice to the political center (where many in the silent majority stand). The non-ideological political center, filled with right-leaning democrats, left-leaning republicans, and a slew of self-identified independents. This center is where compromise takes place, where pragmatism rules the day. Clearly, though, this center has been increasingly marginalized as a result of hyper-partisan politics over the past two decades.

I hope to accomplish several things over the next several months/years. First, I would like this blog to serve as a forum for identifying and discussing centrist solutions to contemporary social and political problems. Consider it a series of problem-solving exercises, drawing from reasoned assessments of premises and conclusions. Second, I would like this forum to serve as an informational and inspirational vehicle, a call to action for those (like myself) who have been sitting on the sidelines complaining about the demise of good government in the face of partisan pressures. Perhaps there really IS opportunity...indeed, the non-partisan percentage in the Rasmussen poll is roughly equal to the percentage that identify with either major party!

Certainly we can't assume that all independents are centrist. Some are so extreme that they can't find a home in either party. That being said, I suspect that some Democrats are disenchanted with their far-left comrades, while some Republicans are similarly disillusioned by the tea party movement. I believe the center can win support among partisans in the current climate. I look forward to making this and similar arguments moving forward.