The two parts of deficit reduction

Deficit reduction needs to address two distinct issues that seem to often get fuzzed together in current media and politician speak.

1.  How to do it - what mix of taxes and spending cuts can accomplish the desired reduction.

The Bi-Partisan Simpson-Bowles Commission Report published in December 2010, after extensive study concluded the budget could not be balanced on spending cuts alone.  A problem is many Republican's have signed a no new taxes pledge.  So their deficit reduction plans have refused to even consider revenue increases of any kind.  

But the bigger problem is issue 2.

2.  What will be the economic impact of the particular mix chosen.

The Republican bottom line non-negotiable position of no new revenues is economic suicide.  It would have been great if they were this serious about cutting spending in 2003 or so when they were cutting taxes and the economy was reasonably healthy.  But their current obsession with big cuts in spending with no new taxes is like breaking a leg to cure a limp.   

The Economist July 16 issue, page 79, has a survey of what has happened historically when big cuts in public expenditures are made during a period of economic weakness.   The article discusses a recent study that looked at 173 policy changes in rich world economies between 1978 and 2009.  The study found cutting budgets consistently resulted in a drop in GDP and a rise in unemployment.  Is that really what we want to accomplish at the current time?   The few rare occasions where the cuts in government spending were followed by an economic upturn were in countries with really high interest rates - the exact opposite of our current situation.  It makes sense in that situation because when Government stops borrowing it lowered demand so interest rates drop - making money more available to business and consumers.  Couldn't be more inapplicable to our current situation where our interest rates are practically at zero.   

A classic example that it is a poor idea to start chopping at Government spending during serious downturn is the Great Depression.  In the mid-1930's as the US was beginning to crawl out of the worst depths of the depression deficit hawks talked Congress into big cuts in Government spending.  The stock market crashed again and the economy stalled.  Luckily (?) WW II came along a few years later to jump start our climb out of our economic doldrums with massive amounts of Government spending..

How our brains react to cities

Interesting article in the June 25 Economist (p.94) looking at a study just published in Nature about MRI studies of the brains of people raised in the city, in towns and in the country.  The study involved deliberately raising stress levels by giving subjects difficult problems and then chiding them for failure.  The study found varying responses in only two parts of our brain, both of which deal with emotion.   One part was in the "instinctual" part of the brain that is similar to the structure of animal brains.  This "instinctual" brain area deals with interpreting what we are experiencing right now.  The other part of the brain was in our cortex, the part of our brain that is so characteristically human, and seems to control whether our immediate experience alters our underlying willingness to change our learned behavioral responses.


With regard to activity in our "instinctual" brain, City folk experienced the most immediate stress, town folk less and country folk were the most relaxed.  In general the "thoughtful" brain reflected the amount of activity in the "instinctual" brain, city folks thought the most, country folk the least.  


In a way the first part of this finding is a no-brainer.  In cities you are constantly in contact with many people, and little potential conflicts arising over little things like vacant bus seats, or space to walk on a sidewalk  Those conflicts are far less frequent in towns, and even less frequent in the country.  City folk are forced to get smart about human interactions to a degree country folk are not.  The country folk seem to regard the fact the folks doing the study are criticizing them as unimportant in the grand scheme of things.  The city raised folk care.  That is a two edged sword - seems like the overall level of anxiety in the city raised folk is probably higher, but another word for anxiety is vigilance, so they are also probably becoming more capable of finding adaptive strategies to avoid the stress in the future.


The exception to the tendency for both parts of the brain to exhibit similar levels of activity was for people who grew up in the city.  There was sometimes a disconnect - either the "instinctual" brain could be buzzing away with the "thoughtful" brain much less active, or vice versa.   (The authors of the study note this sort of disconnect is characteristic of schizophrenia).  


It seems like as a result of the sheer level of stress people who are raised in the city experience some learn to tune the stress out from either the"thoughtful" brain or the "instinctual" brain.  It probably allows them to lower their overall anxiety level, but at the cost of giving up a degree of their ability to learn from experience.


I find my thoughts going to a completely unrelated bit of information I ran into, some research from the Pew Foundation that found that New York and Florida, in 2000, incarcerated the same amount of people, about 70,000 persons.  Today Florida has increased their prison population by an additional 30,000, while New York has added only 10,000.  Crime has fallen in both states about the same, slightly more in New York.


I assume a larger percentage of the population of New York state have more heavily urban life experience than in Florida, and more Floridians come from a more small town or rural environment.  That makes me wonder it this particular statistic reflects the fact New Yorkers are a bit more savvy about human behavior, about when incarceration is necessary and useful and when it is just wasted public money.

How do we arrive at our political beliefs? - Part 2 - emotions and politics

Why are we so emotional about our political beliefs?  Brain science has recently been finding that all our decisions are grounded in emotions.  We would be frozen with indecision choosing the color socks to buy if we don't have some emotional response to rescue us.

For most of us, once we adopt a particular political ideology and incorporate it into systems of thought to enable quick decision making we, in effect, dump that ideology into a bin in our emotions labeled "this is true."  Intellectual growth is largely about testing and revising those emotional responses in our "this is true" bin.

We often have our prototype political views in place late in childhood.  Then puberty hits and for decades thereafter our time and attention is monopolized by relationships, careers, families.  So we seldom have time to go through the process of really analyzing whether what we are emotionally attached to makes sense.  So we make our political decisions by just dipping into our "this is true" bin.

The "this is true" bin items get tested only when some strong negative emotion gets identified with the particular belief or it contradicts some other idea for which we have a strong emotional attachment.

My anecdotal experience suggests that our choice of career can effect the degree to which we challenge the political beliefs in our "this is true bin".   Some move into people oriented careers where the knowledge they depend on to make their living will from time to time contradict their political ideas, so the emotional attachment to making a living provides the emotional impetus we need to revise our political ideas.  But in my experience it seems like folks that move into careers that are not people oriented - hard science, Doctors, Dentists, Chemists, or business careers like farming or manufacturing, seldom have the sorts of people oriented experiences that provide the emotionally charged contradictory ideas that would jolt them out of their political emotional comfort zone.  The most politically ideological people I have known in my life have usually been from some career that is focused on understanding things, not people.   However I have never encountered any data to verify or contradict this tentative observation.

If the observation is true it raises the chicken or egg question.  Do people choose the career depending on whether they are more comfortable with the definitive nature of things or the ambiguity of human interaction?  Are we back to the impact of Oxytocin?

Where do our political beliefs come from?

Here is at statement I believe almost all of us would find to be true:  Most the people we know believe their political beliefs are correct and to the extent that other people don't share their beliefs the other people are wrong.  I know that I experience a visceral emotional reaction when someone contradicts some political belief I hold.


How can I (and most other people) feel so certain about our ideas when people who are just as certain hold contradictory ideas.  Perhaps our certainty reflects our emotions rather than reality?  How can we know if our political beliefs reflect real truths?  Where do our beliefs come from?


I started wondering about that a couple decades ago.  Here are some things I have learned:


Probably for many of us our initial political beliefs come from our upbringing.  When we register to vote we don't have to know anything (we humans have no problem manufacturing opinions out of thin air).  We don't take a test to prove we have some level of competency the way we do to get, for example, a drivers license.  So we adopt the ideology we have been exposed to from our parents, (or the opposite of our parents in some cases) or our peers. 


Some of our political beliefs derive from biology.  One example of a biological influence is the nuerotransmitter Oxytocin.  What the brain science says is lots of Oxytocin inclines us to submerge our self interest to the community interest, while low levels of Oxytocin makes us more self absorbed and oblivious to community interests.  Contemplate for yourself how that correlates to political ideologies.  Would it be an exaggeration to say that having lots of Oxytocin in our brains makes us Socialists, while low Oxytocin makes us barbarian Capitalists?


We also know from the biologists that women tend to have more Oxytocin, men less.  From political science we know women are more likely to be Democrats and men more likely to be Republicans.  Hmmmm.   Think this says something about Oxytocin influence in our choice of political ideologies?


I'm not aware of any studies on the topic, but I would imagine where our Oxytocin inclination matchs up with the ideology of our upbringing we are probably very certain our ideology is right.  Where our Oxytocin inclination is contrary to our ideology of upbringing we may be less dogmatic and more open minded.


Regardless of the particular mix of upbringing and biology that produces our political beliefs once we have started making decisions based on our adopted ideology we start casting our beliefs in stone.  Our brain is designed to avoid relearning things for efficient decision making.  When we make a decision once, unless there is some bad result, our emotions send us down that same mental path in the future.  This works well in day to day life because we get feedback.  Ooops, my girlfriend dumped me, time to rethink the decisions I made in that relationship.  Oooops, I got fired, time to rethink the decisions I made in that job.


But politics seldom gives us the kind of feedback about the wisdom of our decisions that we get in normal life.  When our candidate loses an election we don't question our ideology, we question the intelligence of the people who voted for the other candidate.  Since politics and economics are so complex, and everyone is pointing at the other guy as the problem, it is often really hard to sort out who is right and who is wrong, so we stay with the emotional comfort of our ideological leanings.


I concluded some years ago if I wanted my political decisions to really contribute to the kind of future I want for me and my loved ones I needed to get beyond the beliefs to which I am emotionally attached.  I need to step outside my emotions to understand where my beliefs came from and find a way to constantly test the truth of my beliefs with facts and data.  


I try hard but as with most people, life often gets in the way.  There are only so many hours in the day.  Jobs, family, friends, exercise and just having some fun take a lot of time.  Fairly regularly I find myself getting ready to vote and having to fall back on ideology because I haven't had time to research beyond sound bites and assertions.  


Replacing emotion and ideology with facts and data is a not easy.  The temptation to go the easy route - follow some sound bite that appeals to our emotions - is always an option for a quick decision that protects our time to do other things.  But I have found not testing emotional beliefs can have a price.  A lot of people relying on ideology got blindsided by the housing collapse and economic meltdown of a few years ago, and are getting whacked again by the sagging economy and stock market.  Because for the last decade or two I have been testing the ideological fads of the moment against history and common sense about economics and human behavior I was able to dodge some of the worst effects of the recent downturn(s).  But a number of bright, educated and hard working younger people I care about in that young families stage in life got caught up in it and now face daunting financial challenges. 


Sadly, it was avoidable if we had been better, more educated voters.

An alternative to Unions

In most human endeavors the successful enterprises are teams.   Yet in most business relationships the basic nature of unions and management relations is adversarial.  This is partly historical accident, partly a result of the ideological notion held by some people that unfettered free enterprise always produces the best result.


How could we make enterprises operate more as a team, and less as adversaries?  Sometimes hard times forces that kind of behavior, as we have seen in the auto industry, but that only happened when the industry was on the verge of collapse and both sides perceived that a big part of the industries problems was the adversarial nature of the relationship that inhibited innovation.


What if we could make enterprises work as a team before they are facing a disaster?  If we aligned the factors motivating people to make enterprise goals everyone's primary goal.


What if we made Corporate tax rates a sliding scale.  The flatter a corporations pay structure, the lower the corporate tax rate.  Measure the average rate of compensation from the deviation from the mean of the top and the bottom.  As the tide rises all boats do actually rise.  Exclude dividends from the computation if they are paid to someone not involved in management of the corporation, (or held in trust until some years after an employees tenure with the corporation ends).


If someone wants to run their corporation as their fiefdom, pay employee's as little as possible and take as much as possible, they are imposing real costs on society - from health care costs, to reducing the number of consumer dollars available to support the greater economy.  When workers have money to spend the economy grows, when management hoards money the economy suffers.  We should reward companies that share the risk and reward with workers without forcing employee's to band together to demand it..

The future of the Free Market and Unions

Unions exist to counter one of the most pernicious side effects of a free market.  Free markets are price driven, and without morality.  If we can buy something cheaper the fact it is produced by people in slavery or something a step or two above doesn't matter to many of us.  We go for the cheapest goods with the level of quality we seek.  


Early in the development of the market this may not be a problem, but in any successful niche as more companies move into the niche, the harder it becomes to maintain market share.  If you aren't clever enough to find significant improvements in the product or the production process, or if the product is so well developed there is no room for improvement, your only strategy is to cut cost and wages are usually the place you can cut the most costs.  


Once one company has taken this step it forces others to do the same.  Companies are in a race to the bottom - so see who can come the closest to treating their employees as slaves.


It is sort of working right now, because the income disparities around the world are so enormous their are populations who are happy with even a slavish job, and the rich world has the wherewithal to minimize the impact on their workers, believing they are just experiencing a down part of the business cycle and unemployment will go down and everything will be wonderful once the business cycle picks up.  Maybe.  But what happens as the expectations of workers in poor countries rise?  What happens when all workers expectations reach parity?  And there are no more countries to export jobs to at lower wages?


If we continue to build our hopes on the unfettered free market are we are setting the table for enormous, world wide strife in the future?  Worldwide Unions clashing with governments and companies?  If we are so smart can't we find a system that avoids the sorts of clashes we have seen repeatedly down through history?

Tax cuts and creating jobs

Presidential contenders are talking a lot of how they can create jobs out of one side of their mouth (including the incumbent) and talking major cuts in government spending out of the other side of their mouth.

It is fantasy to think you can have both.  A recent study that looked at 173 government policy changes  between 1978 and 2009 found that overwhelmingly cutting government led to a drop in GDP and a rise in unemployment (as  summarized in the Economist July 16, p.79).  Beyond the data it is simple common sense.  Cutting government means depriving businesses of contracts, and employees of jobs.  If you are need to do it you do it in a healthy economy, not an ailing economy.

Major cuts in government spending seem imminent, maybe as part of a Government debt ceiling deal.  Obama feels raising the debt ceiling is crucial to our good name as a creditor, Republicans have demanded major cuts in exchange, Republicans seem to have won that battle.

If we are lucky the cuts will be spaced over a long period of time, but given the scale of the proposed cuts, there is probably going to be a pretty big hit within the next year or so.

Here is what is going to happen. The cuts in government spending will mean contracts with private companies will be cancelled.  Those companies will lay off the workers they hired to work on that project.  Cuts in government spending mean government workers will be laid off, contributing to few consumer dollars to prop up the economy, and perhaps adding a little fuel to the ongoing foreclosure problem.  In short any cuts in Government spending right now will give a big boost to the possible relapse into recession and higher unemployment.   And next year both Presidential candidates will be pointing the finger of blame at the other for higher unemployment.

I am calendering this blog to revisit it during the heat of primary season next summer - Aug 15, 2012.  If I am wrong, if the economy picks up, I will tip my hat to Republicans.   If I am right I am hoping my Republican friends will acknowledge that maybe the hard core of the Republican party needs to rethink their economic notions a little bit.