Saturday, July 30, 2016

How Will the One Percent React?

Since I go to bed so early these days, I watched (selectively) speeches from the Democratic National Convention online and only after the fact.  I was listening mostly for the macroeconomic policy content of the speeches.  What I say below looks only at that.

In this regard Michael Bloomberg's speech was interesting.   He gave a shout out to infrastructure spending as a legitimate government activity.  He did say that he and Hillary Clinton sometimes disagree, but he didn't elaborate on that.  Is there any disagreement on infrastructure investment?   At first pass one would think not, based on the two speeches.  Both speakers are for it.  But how much infrastructure?  How rapid will the investment take place?  And since infrastructure is not the only part of Clinton's Progressive agenda, how much will taxes on the rich be raised to support the full agenda?

Let me put this a different way. There has been much written and said about the symbolism of Hillary Clinton's nomination. From my point of view that symbolism is an asset as it will help to gravitate support for the cause.  But on the policy front, we really don't want symbolism.  We want substance. So one needs to ask, how substantial will the policies actually be?  Will they be mere window dressing, nothing more?  If it were left to the wizards of Wall Street alone, I believe that's what would happen.  Here is an example of that, one I critiqued in a tweet.   The underlying criticism of Hillary Clinton is that she is too much in cahoots with Wall Street, as evidenced by the speaking fees she collected there after she stepped down from her Secretary of State job.  Let's think this one through a little.

The high rollers are the major contributors to the political campaigns, not just the race for President, but the Congressional races as well.  It seems that they have the potential to exert a lot of influence down the road.  But the high rollers are not all of one mind and perhaps the threat of Donald Trump and Trumpism, which clearly motivated Michael Bloomberg in his speech, may have chastened enough of the high rollers that the group preference now is to accept substantial tax increases for the good of the order.

Just to review the positions of some prominent very wealthy people on taxes, Warren Buffet is known to compare his tax rate with that of his secretary's and advocating for greater taxes on the rich even after the Bush tax cuts expired and after Medicare taxes on the wealthy expanded as part of the Affordable Care Act.  Bill Gates is lukewarm on Buffet's idea, but wouldn't openly oppose it.  He also says, unlike what Hillary Clinton indicated in her speech, that you can't do it all merely by taxing the one percent.  Then there's Tim Cook, Apple's CEO, who testified in front of Carl Levin's committee a few years ago that he would not repatriate Apple's profits, currently in Ireland because U.S. corporate profit taxes are too high.  More recently, Cook has hosted a fundraiser for Paul Ryan, which aims to support Republicans campaigning for Congressional races this fall. Their main agenda seems to be to cut taxes on the rich.

Underlying this is the perception about the macro economy, now and in the future.  Are we at capacity at present or is there ample room to grow without a need to increase productivity?   In the old days, (meaning when I was in graduate school in the late 1970s) the unemployment rate was the principal measure of how close the economy was to capacity.  As some unemployment is frictional, meaning that in any economy there will always be some vacancies and some people who are out of work looking for jobs, an economy that operates at full capacity will nonetheless have a positive unemployment rate.  By that particular measure, when considering historical norms we're pretty close to full capacity now.  And if that's true it makes much of what Clinton proposed on economic policy a zero-sum game in the Robin Hood mold.

There are other measures, however, which suggest that we are far under capacity.  One of those is the labor force participation rate, which is at a historic low.  People who are out of the labor market are not counted as unemployed, though many of them could be working.  Another set of measures characterize the woeful state of capital investment.  This is captured in the graph below, taken from this paper by Jason Furman, Chairman of the Council of Economic Advisors.

If we are operating substantially under capacity, this suggests a failure in aggregate demand.  Then, the policies that Hillary Clinton advocated have a chance to increase economic growth in the near term, making the game positive-sum, because the rich have a low marginal propensity to consume so that taxing them and giving the proceeds to those less well off should raise aggregate consumption.  In turn, this should encourage people to return to the labor market and increase business investment.   This is what I took to be the Bill Gates position given in the video linked above. The question is how many others of the uber rich view the world similarly.

It is my opinion that Hillary Clinton made a mistake in the speech by insisting that her policies be deficit neutral.  This, I believe, is a holdover from the Bill Clinton days, who was the last President under whom a budget surplus was generated.   But the economic conditions are quite different now.  The economy is sluggish, in slow growth mode.  Substantial deficit spending might be a very good thing now, with taxes raised only after the economy has reached full capacity.

Further, if you view a President Hillary Clinton as implicitly bargaining with the very rich through their proxies in Congress, it might be easier to pass legislation with the spending that Clinton wants if this spending was partially deficit financed.  In particular consider debt relief for college student loans.  Unlike infrastructure investment, which would occur in the future, here we're talking about human capital investment that has already taken place.  The issue is about who should bear the cost of that investment.  Deficit financing is a punt on that matter.  Sometimes you don't go for it on fourth down and that's the prudent thing to do, even when you are trailing in the contest.

Let me close on the question of sustaining these macroeconomic policies and how that might be done and/or if that is possible.  A recent column by Elizabeth Drew argues that the Democrats dropped the ball after the 2008 election, leaving open the path for the Tea Party and the Republicans to take over many state legislatures and governorships, giving the hard right disproportionate representation and the ability to block Presidential initiatives at the national level.  Even if much of the one percent goes along with Clinton now, mainly motivated out of fear of Trump rather than as a true embrace of the Progressive agenda, where will these people be 2 years hence?  Unless our politics changes substantially between now and then (i.e., universal voting, voting districts set on a nonpartisan basis to avoid gerrymandering) to keep up populist pressure during the off-year Congressional election, one might guess it will be near impossible to accomplish much with macroeconomic policy unless the very rich are on board with that.

If Hillary Clinton can manage that while sustaining a macroeconomic policy of substance she will be a great President.  However, let's all recognize that's a very big if.

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