Wednesday, July 19, 2006

The Battle is Joined

My view of Henry Paulson's appointment as Treasury Secretary was an expansive one, that Paulson is not merely Bush's TreasSec for what's left of his presidency, but he will be the quarterback of what will be the Republican Establishment's battle against the economic vision of the Democratic Establishment. Bob Rubin and his Hamilton Project is the locus of that vision. In today's WSJ, in lieu of Holman Jenkins, we get the battle cry of the Hamilton Project and Rubinomics via Steven Rattner. (Rattner is yet another limousine liberal sent over from Central Casting to pound the Hamilton Project/Rubinomics vision home.)

The battle cry is income inequality, on a par with global warming for deadly serious business in Rattner's mind. It is apparently an outrage of biblical proportions that some people's incomes are growing faster than others in this country. Aside from the fact that income inequality is perfectly consonant with the founding ideals and longstanding cultural heritage of the US, it is only the most outlandish economic theories that purport income inequality to be damaging to society. Furthermore we seem to know what is causing income inequality in this country, increasing economic returns to education and specialized, technical skills and decreasing returns to lack of skills and minimal levels of education. So the root of this putative problem is something that for decades we have all agreed is a good thing - more knowledge. Rattner admits this and incongruously, at least to me, calls for more education and training. Why he would advocate more of something that contributes mightily to his ultimate societal bane is a curious thing. So in addition to being a non-problem (in the sense that it is neither incongruant with American ideals, not economically damaging, nor caused by pernicious forces) it is a political loser. An enduring political strategem of presidential electoral politics is to ask voters if they are better off than they were four years ago. Note it is not to ask voters if they are better off relative to other people, because people don't evaluate their lot realtive to others ("Sure it was a good year, we took that vacation and got a new flat screen but that sonofabitch down the street took TWO vacays and bought a wider screen than me. Revolt! Throw the bums out" I don't think so.). While people may bristle at the thought of $3 gasoline while Exxon's CEO makes tens of millions or recurl at underfunded pensions while corporate execs get somewhat lavish payouts, they don't internalize it into loathing and contempt for the system, but mostly see it rationally or fatalistically. Most people don't make serious attempts to gauge their well-being relative to others, but hear of it only during election cycles from those who want their vote.

So beyond these fatal flaws, what are the policy responses that are required to combat income inequality? Beyond education and training, there are only three other policy planks mentioned in Rattner's editorial: wage insurance, higher minimum wages, and repealing the 2003 tax cuts.
This is pretty thin gruel for the economic celebrity chefs of the Democratic Establishment to be pumping out. Wage insurance? We have wage insurance for things like suffering a disability, but the reason we don't have wage insurance for, say, your job getting outsourced or made obsolete by the Internet is because nobody will insure the risk of the world changing. Wanting this type of wage insurance is akin to yelling, "stop the world I want to get off." The world changes and technological advanements continue apace. How can you insure a travel agent's wages if nobody could possibly foresee Expedia? You can't and that is why nobody will. Thus wage insurance of this kind is charity, taxpayer-funded charity because government will be the only provider.

Higher minimum wages as a policy plank goes against the overwhelming consensus of economic thought. Sure, once in awhile a study will come out that rattles the consensus momentarily, but the prevailing view seems to persist, higher minimum wages are more damaging than beneficial. Bottom line, it is a hard sell and not entirely innovative.

Repealing the tax cuts? Well, the case for the tax cuts is better made elsewhere and more than I have space for here, so let me just say that this is a hard sell too. The economy is in good shape and whether the tax cuts helped get us there (they did) or not, the solons of Rubinomics are asking Americans to take a flyer. If people intuitively know that X, Y, and Z got them somewhere but don't know the magnitude of contribution of any of X, Y, or Z, asking them to continue forward doing only X and Z is to propose a risk. People will not choose that path. So, while my personal view is that repealing the tax cuts is terrible economic policy, I think it is also bad political strategy.

I would think that smart chaps like Rubin and Rattner could at least come up with policy planks that are either good economics or good politics (maybe even both) but to go 0 for 2 is a little underwhelming given the brainpower brought to bear here. But therein lies the rub, I don't think the brainpower is really being brought to bear. People apply the utmost of their skills to reach their own goals and meet their own needs. This is a collolary to Milton Freidman's hierarchy of care in spending money. Aside from power over your life, Rubin and Rattner's needs have been met, their personal goals have been achieved; their best thinking has been brought to bear for them, lesser thinking is inevitably being brought to bear for society.

UPDATE: Wow, to further illuminate my argument, Larry Kudlow obligingly posts a fuller description of Uncle Milty's four types of spending. Thanks LK.


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