The Other Future

By Stirling Newberry
Created Nov 30 2006 - 2:38pm

I firmly believe that in the future, the person who doesn't dig deeply into
this political moment will read the essays of Krugman and Sidney Blumenthal
to find out "what it was all about". That is, that these two writers are
going to be the "voice" of this political moment in the ears of people who
live with the echos have died away. Krugman is an important thinker in his
own right, and Sidney Blumenthal has, to my eye, a prose style that is to
almost all other columnists what the iPod is to almost all other music
players - a smoothness which is perfect in its uniqueness and unique because
of its fluid perfection.

This is not to say that there are not other great writers, or that these two
writers are the drivers of the change in politics, but no other pair have so
consistently place the matters at hand before the examination of the world
so clearly. Blumenthal himself seems to be liberated by the events of the
last three years, having lost a kind of coy patience which, at one time,
seemed to bury his instincts beneath caution and a life time of nearly
flawless political surefootedness.

In recent months he has proven that he is as sure footed off of the beaten
trail as he ever was on it, and that he is a voice of a generation which has
decided to renew its credentials as being socially active, socially aware,
and seeking to find the front of the historical wave. Dylan may have urged
the young generation to "prophethize with the pen" - Sidney is on the other
side, show that his generation still can work magic with words.

His most recent Salon piece is a case in point, the velvet prose is wrapped
around a sledgehammer of statistics, which add up to a single bottom line:
the young generation has rejected Bushism, and rejected the conservative
world view. They are not only the most Democratic generation in a very long
time, but they are part of an increasing wave of activity and energy. The
apathy and cynicism of my cohort came from constricting chances and ever
higher gatekeeping barriers. In fact, that is still the experience of my
generation, as anyone on a job search will tell you. There is a company
pitching executive search services that go all the way back to childhood,
young childhood, on candidate hiring profiles. Your three year old nursey
school, for my age bracket, is on your "permanent record".

The liberation of Blumenthal's pen comes at an opportune moment, just as
Krugman, somewhere in mid 2000, was liberated from his allegiance to a
system of technocracy, and went from being a moderately obscure genius
academic, to being the first columnist to make it his job to point out that
the New Emperor had no clothes.

It is an opportune moment because it is time to dream again. I was recently
flamed by a moderately distinguished elder economist for not being realistic
about the future. I will leave aside both the flame and the historically
bungled arguments he made about the past, and take on the future. The future
of work and of a decent society is not in the government taxing corporations
to spread the misfortune out a bit more thinly, but in a society which has
dedicated itself to a continuous improvement in the quality of how we do
everything. Either we will do this, or we will not make it through the era
that is coming. Already there are going to be high costs in life and
suffering for our failure to awaken early enough to the unsustainability of
our predicament, costs which can not be avoided, and will only be
ameliorated in limited ways.

The false choice that we have is to some how juggle the books to keep things
going a bit longer, or to change our ways. The first is not really a choice,
even though it is the choice being offered to us. Bush is attempting to
juggle the books on Iraq for a bit longer, hoping to hold out and see
improvement there in time, or at the very least avoid having to actually
make the humiliating decision to leave. He is still hoping that some
friendly buyer will come along and take Iraq off his hands, as it took his
oil company off his hands.

It is also the false choice on Social Security. Social Security, we are
told, is in crisis, and we will have to do something. This is wrong, Social
Security is a pin that holds two parts of our monetary system together. It
looks like it is in trouble simply because we look at it over the distance
of two generations. If we were to look at the General Fund - that is what
all discretionary and interest payments come out of - it will be in much
worse shape in 75 years than will Social Security. Social Security is the
canary in the coal mine, if it is showing problems in the far future, it is
because we have deep economic problems in the present. It is absurd beyond
the point of reason to expect that we can tell people 75 years from now
whether they should raise taxes, cut benefits or change formulas. Those
people are your young children, you can't tell your three year old whether
he can have cookies reliably, it strains credulity to think you can, from
beyond the grave, tell him what his retirement money is going to be like.

Instead the problems in social security come from the realities of
demographics and a deep set of problems with productivity. The first is that
there is not enough productivity growth - that is, real output per worker
hour. If productivity were growing at a higher rate, then revenues would
easily cover our commitments, and a bit more. But productivity growth is not
enough, more of it must go to wages. Over the course of the last generation,
the median hourly worker has seen precisely none of the increases in
productivity as wages. Instead, his savings have gone down to buy all those
things which generated that productivity. This is a point embraced across
the Democratic Party and progressive movement - from Ben Nelson and Harry
Reid on its right flank, all the way across to Senator Sanders of Vermont.

These two parts - lower than required productivity growth, and no increases
in wages for productivity to some extent reinforce each other. After all, if
you don't pay people more, in real terms, they can't buy as much more. Also,
there is less incentive for them to improve themselves as workers - instead,
the marginal trade off is towards more leisure. We have indeed seen the
explosion of the "Hobbies are life, the rest is details" mentality. Lower
improvement in the worker base reduces productivity growth. Rob Shapiro ably
lays out why the breaking of the link between productivity growth and wage
growth is such a problem [1] both for policy and society.

If this were the extent of the problem, then the solution would be pretty
simple. Raise taxes on rich people.

However, this is not the limit of the problem, and in fact the real
underlying problem creates the slower than needed productivity growth, the
non-existent real wage growth, and prevents the simple brute force solution
of redistributive taxation or wage increases from working.

That real problem is that the quality of productivity is bad. We don't just
have too little productivity growth, and it isn't merely that companies are
keeping almost all of it as profits, but the nature of productivity growth
is narrow, and this limits both the amount, and the distribution of
productivity.

Consider if you will the American economy. During the 1990's five sectors of
the economy accounted for virtually all of the productivity growth in the
economy: wholesale trade, retail trade, investment trade, high tech and
aerospace. Or, to boil it down: Wall Street, Wal*Mart, the software they use
and the planes that fly their executives out to look at their factories in
China. If productivity growth is narrow, then it is difficult to impossible
to have broad based wage growth. This is because in most of the economy
there is no productivity increase to pass on to workers. By expanding the
number of customers one can increase salaries at the top of the pyramid -
one CEO getting some of the production of a million customers can be paid
more than one getting the production of one hundred thousand, all other
things being equal, but there is no actual improvement in productivity to
pay the workers who serve those customers more.

The narrowness of productivity growth means that even workers in most of the
productivity improving areas can't demand higher wages, because there are
dozens of people from the lower productivity areas eager for their jobs.
While unemployment might be low, the pool of low quality employment is huge.
In effect, outside of the high productivity sectors, everyone is unemployed.

The narrowness of the productivity improvements comes from a fact which is
even more bad news, namely why productivity as grown so narrowly. Retail and
Wholesale trade has improved because of consumer debt, labor land and
regulatory arbitrage, monosopy power and Wal*Mart locking people in the
building without pay until their work is done. In short, as Prof. Solow of
MIT noted - there was very little technology there, and a great deal of
market power.

Investment trade tells a different, but equally unpleasant story: much of
the improvement in productivity comes from asset inflation. While technology
has indeed had a tremendous impact, half of the improvement in productivity
over the last 25 years has come from the simple fact of investors paying a
great deal more for each dollar of future earnings.

Thus low productivity and non-wage growth are a direct consequence of the
narrowness of productivity, and the narrowness is a direct consequence of
not having a broad based technological improvement in production.

Because of this, merely taxing, or merely improving unionization would
simply dump us back into the inflationary cycles of the 1970's. We can't
just grow the economy, we can only grow it in a very few ways. While the
mantra of the last 30 years in economics has been "the free market" and
avoiding planning, the reality is that this is one of the most tightly
locked down economic eras. The winners were picked long ago.

To end this problem - the lumpiness of where productivity can be generated -
means addressing the underlying structural problems. Keynesian economics -
the tool which allows aggregates to be treated as interchangeable - does not
work if money matters, and different kinds of commodity produce different
effects on the market for interest and money against the market for goods.
The very simplicity of macroeconomics, which makes it possible to govern, is
also the obstacle. It was Brad DeLong, I believe, who said that the job of
the government was to make Say's Law apply in practice even if it does not
apply in theory. The second pillar must be that it is the job of government
to make Keynesian economics apply in practice as well as it applies in
theory. Doing this takes a large fraction of national effort, but it is so
much of an economic win, that it repays the investment many times over.
Government has to be big enough to make the economy get out of its own way.

The sources for the narrowness of productivity are known by their bumper
sticker versions, rather than their true shapes. It isn't energy per se that
is the problem, but the problem of recycling petrodollars and the marginal
profits of energy. Namely, if the last barrel of oil that keeps everyone
happy is at $64/barrel - where it is today - then the producer who has costs
of $5/barrel, which is about the Saudi cost all in - will make $59/bbl, less
the costs of the bribes. This distorts the economy. The related problem is
that the sprawlconomy relies on this energy system, and while it produces a
great deal of nominal wealth, much of that nominal wealth is really negative
savings. That is, it relies on someone in the future paying more of their
income to buy the same house.

These is 180 degrees from how we should be paying for both Medicare and
Social Security. It's a hard problem, but we have an advantage. It has been
said that Philosophy is a series of footnotes to Plato, and it can be said
that economics is a series of footnotes to Adam Smith. It was Smith who
realized that rent is inflationary, that is taxing rent does not reduce real
production, because really it was all about bidding prices of natural
monopolies up. Land is a natural monopoly, so is money, and so is oil.

It is not, therefore, profits, per se, that we should be taxing to pay for
retirement, but all of the demons of hidden loss of production: inflation,
stagnation, rent and stasis. Some of these will be taken in the form of
profits of corporations, and to the extent that they are, the corporations
should be taxed,. But far more effective is to tax stagnation and inflation
directly, and use the money created to pay for retirement.

Social Security, in fact, is designed to do just this, and, in the present,
it is doing so fairly effectively. The problem isn't that social security
taxes aren't covering costs, on the contrary, they are more than doing so.
The problem is that general income taxes are not taxing inflation and
stagnation, and government policy is not trading the benefits of stagnation
and inflation - and there are those who benefit greatly from both - and
converting them into better wages and living standards. The hidden demon of
our present economic problem is that the real economic activity that we
would like to use to improve the living standards of the majority of
people - doesn't exist in the form of money that can be taxed. We can't tax
the rich for the money we need, because that isn't where the rents live.
Instead the rents live in the structure of our economy, in the kinds of
utility we pursue, and in the control over the economy that we allow.

One of the most important skills in political economy to learn is the skill
of finding out who is really paying for something. Whose "entitlement
bundle" is being reduce to pay for whose increase in an entitlement bundle.
Adam Smith, again, noted the non-monetary nature of benefits when he
observed that those who controlled trade would engage in fraud and price
fixing. The ability to reduce the risk of competition is a benefit, one that
people want. It isn't bought directly, but instead indirectly. One can't tax
rent seeking behavior directly, because it isn't just in the profits of a
monopoly, but in the wasted activity used to get that monopoly, or to try
and get it.

I'd like to point to Iraq as a perfect example: the purpose of Iraq is to
shift the control of oil and of the consumption of its profits, from one
group to another. The war in Iraq is rent seeking behavior. Merely taxing
the profits, if any, of the companies who do business because of the Iraq
war would not recapture the real loss to the economy. Some of the economic
loss is in the form of the dead and wounded, and in the decision to build
swords rather than plowshares.

What this means is that we can't tax "profits" because the profits are
fictional, they come from inflationary assets, and from activity which is
already water over the dam. Instead, what we have to do is shift rent
seeking behavior to productive behavior, we have to remove the top down
nature of money creation, and we can then use Keynesian tools to spread
demand and prosperity. However, the order is important, as is the method.
Since profits don't represent consumption by corporations which can be
shifted as consumptio by individuals, but instead control over the economy,
the way to prevent Social Security from becoming mired in economic
difficulty is to shift control from the people who are currently running
around the world executing $50 Billion dollar buyouts, as a play against
Bernanke's inflationism - to a different group of people. Control is the
issue, not consumption surplus. One can't tax ones way into control, but,
instead, must create a mandate for change which forces those who have
control to cede that control to others. Here is where realities such as
global warming and peak oil come in, the plutocratic righ thates them,
because they are exactly the kind of national rent which the public, through
its arm, the government, can force a change in the control of investment.

The steps to fixing the wages problem, which is what is driving the long
term social security problem, comes first from admitting the reality of the
problems we are facing.

The right wing sees the coming shift from payroll tax surplus to payroll tax
deficit as a "crisis" because it implies taxing profits to pay for
consumption. Since consumption will generate inflation, it will hit them
doubly, first by taxing their profits, and then by the inflation tax hitting
their currency holdings. That's what government created inflation is - a tax
on holding currency.

The reason this is a problem is that taxing the control that American
wealthy have - since they are within reach - and turning it into consumption
will create a vicious circle. Much of that money will end up in the hands of
Saudi and Chinese wealthy, and allow them to buy control that the American
wealthy will have to sell to pay taxes. Robbing Peter to pay Paul works only
if Paul is one of your friends, and Peter isn't.

The running out of the "trust fund" is, by comparison, meaningless. This is
because we have been squandering the excess revenues of Social Security on
tax breaks for the wealthy and the Iraq War. If we had, instead, used it as
national savings to invest in production enhancing investment above and
beyond what we were otherwise spending, it would have meant something. But
as it is, all it was was an excuse for one generation of wealthy people to
loan other people's money back to them. It had a minor disinflationary
effect, and it reduced borrowing costs - which were increased by continued
deficits.

The problem then isn't that the wealthy are going to be taxed, it is that to
effectively change the dynamics of the system, there has to be a way of
taxing all of the world's wealthy simultaneously. It doesn't really matter
if that money goes to the US, though it would be nice to recapture some of
it, just so long as the total quantity of investment demand goes down, and
the total of public investment goes up.

This is where global warming and peak oil come in. Changing the energy basis
of the global economy allows this shift to take place, since it removes the
marginal barrel of oil problem, and it is something that everyone,
logically, has an interest in.. Global warming is the global rent which
allows the publics of the world to behave as one public, and demand that the
control over the global economy be shifted back to the public and away from
the globally wealthy.

So what is my policy outline?

1. Improve the quality of productivity.

Since the first problem is that there are only a limited number of
activities that improve productivity, and many of these activities are
explicitly about reducing wages, the first goal must be to broaden the
technological advantages that generate productivity,

2. Tax Rent

It doesn't get any clearer than this, as the cost for a dollar of future
earnings has gone up, there has been a demand to take revenue out of the
public domain and put it into private hands. The copyright industry's quest
to both lengthen and make more virulent the power of copyright control is a
case in point. Oil is rent, land is rent, copyrights and patents are rent,
brand names are rent, the high level of credit card interest rates are rent.
Profits that do not come from rent are not the problem.

3. Increase investment supply.

Where as for the last 25 years we have not really increased investment
supply, but, instead, have taxed the public domain to pay for the private,
we must, instead, create new categories of good that will return money.

4. Accessible money

One of the reasons for studying the late 19th century is that it featured to
non-solutions to the their problems - the gold standard and free coinage of
silver. The real problem was that money creation was centralized, it was in
the hands of those who could get gold, generally governments, and those who
could concentrate enough of it to build large, impossible to duplicate,
capital. Railroads, large mils, factories, big mines.

Free coinage of silver would have expanded the number of people who could
create money, but there is still no organic relationship between the common
good and people digging up silver. This is why asset based money - the New
Deal solution - was so brilliant, even if it was to a great extent an
accident. Anyone can build a house or a business, and as the community they
are in grows in size and prosperity, the value does. This is Adam Smith's
taxing of ground rents in reverse - give people an incentive to create
ground rents, and reward them with some of the profits of their efforts.

Our current problem is that this once democratic means of wealth creation is
becoming top down again. It relies on oil. Oil is in the hands of a few.
Instead of money going to wages, it goes to those who sell the oil to create
the asset money. This is why shifting the transportation grid to
electricity - which can be created in a host of ways - is so crucial to our
future.

-:-

With these three policy goals begun, and to the extent that they have been
accomplished, we can then engage in the secondary policies:

1. Increase worker bargaining power.

The best way to redistribute wealth isn't to tax it, but, instead give
workers parity of bargainin power. They will agitate for improvements in
wages and benefits, and companies will negotiate, finding the ways to
provide the highest utility at the lowest cost. This can only be done in
limited ways now, because of the poor quality of productivity growth. Right
now, only protectionism allows immediate increases and that will cost far
more than it gets.

However, with broader productivity, wages will rise automatically as workers
have more options, with more investment supply the very wealthy will have to
spend more on pursuing the new areas of growth. With unionization acting to
reduce systematic risk for individuals, individuals will be able to take
more personal risks.

2. Increase savings, taxed out of profits.

The simplest thing to do would be to create a progressive savings tax, which
taxes upper incomes - above their marginal propensity to consume, and plows
this money into a national portable pension system. That is, take savings
from those who have a lot of savings, and give it as savings to those who do
not save. Taxing profits to provide consumption does not work because it
shifts control to commodity. This would shift control to control. National
401k plans have been proposed, but the returns on 401k investing can only be
described in terms that a South Park character would use. Thus both
Sperling's plan [2] and Max Sawicky's [3] lack key ingredients. Max would
end up falling into the grain of producitibity problem, and Sperling would
end up creating a glut of the dummest money imagineable to be pillaged.

People don't make better investment decisions than the market, by
definition, since the market is the sum and total of the decisions of
people. Since retirement savings carries a lack of moral hazard - that is if
people screw up they will vote for higher public retirement - there is no
incentive to allow people to play with their retirement money. This knocks
out national 401k as the mechanism.

Since we are not trying to fund consumption here, which is social security's
basis in demand spreading, but investment to lower future costs - that is
the goal is to produce enough additional increase in production to pay for
the consumption that will come - regressivity is of no use. This knocks out
simply removing the social security cap to pay for future benefits. It also
knocks out the idea that taxing profits is the way to fund social security.

This mechanism is strictly about moving control from a very small group of
executives and investors to the public at large. Thus it would be steeply
progressive, and tax the top, rather than the bottom, dollar of income.

3. Recapture

One of the most important concepts for policy in the future is the
realization of government recapture and time arbitrage as the important
tools of political economy. Governments outlive people, and even
corporations. Governments do not have to figure out how to make people pay
for a product, only that someone will make money from a product that can be
taxed.

-:-

With these policy directions, over time, wages, real wages, will rise, and
with them Social Security revenues. Medicare is a different problem, since
it slams into us much sooner and much faster. In order to deal with Medicare
we must realize that medicine is a protected industry - that is it deals
primarily in a non-tradeable - and it must have its profits matched to the
profits of tradeable goods, and it's labor must be globalized as fast as is
possible.

Social Security does not need to be changed, instead, if Social security
shows either a wage deficit, or an inflationary falling behind of benefits,
then it is a clear mandate to change the economic policy to alter the inputs
from which those projections are derived. Social Security is not the engine,
but the thermometer, and fiddling with the thermometer will not stop the
engine from stalling or overheating. Social Securit works by increasing
total real demand, that is it gives an incentive to economies of scale,
which taxes stagnation, and it regressively acts as disinflation. It thereby
serves the humane purpose of reducing the number of people too poor to
afford to eat and heat their homes and generally meet the basic expenses of
life. Accomplishing this is not difficult, as can be seen from the extreme
distance that social security problems occur in projections, and the easy
with which they disappear if we can simply increase productivity and wages
by relatively modest amounts.

However, the above plan of action addresses a far more real problem, and
that is the collapse of the current retirement system - the collapse of
corporate defined benefit pensions, after all, no productivity growth, no
stream of revenue to pay pensions and medical care out of - the
disintegration of being able to cash out of homes, the poor quality of
growth in 401k plans, and the lack of control that the public has over the
national investment effort. It is these problems that show up as problems in
Social Security, and in many other parts of our budgetary future. After all,
it is very doubtful that if a generation falls into poverty upon retirement,
that we will idly sit buy and let them starve in the dark.

here seems, in the present, to be a great deal of needless jostling about
whose plan is better, or which approach is better. This is wrong. The
Rubinites of the Hamilton Project are correct that we are going to have to
do fiscal and monetary tuning and juggling to buy time and autonomy to
implement plans going forward. Bob Rubin is a genius at this. However, this
temporizing with the problem will not, alone, save the day. It is expressly
to buy time to do something else. Rubin has openly said that he feels the US
can come up with something, but he doesn't know what. On the other side of
the coin we have a generation of economic progressives who know that
returning control of the direction of the country, and reducing the
systematic risk to workers is an absolute essential - but they aren't clear
on how to do this without brute force approaches.

These two stones are on opposite sides of the same river - while
Rubinonomics revisited can buy time, that time has to be put to productive
use to get to greater autonomy and a re