The Dirty Secret of Inequality: The Middle Class

Discussions on income inequality always drive me insane.  Inequality is a serious issue, but the dirty little secret is that the wealthy aren’t the problem (and increased personal savings, not redistribution, is the answer).  The upper-middle-class (and, to some extend, the middle-middle-class) is where all the money is.  This is why President Obama is resisting Democrats like Chuck Shumer, who want to raise his 250,000-and-above limit on tax hikes to one-million-and-above.

“The wealthy” are not responsible for the distorted price structure in our economy, or its nasty effects on the poor.  The middle class is; it went into debt, created a huge trade deficit, and responded to stagnant wages (an unavoidable side effect of trade deficits) by borrowing even more (creating the housing bubble).  All of this had a nasty effect on the standard of living of the lower-middle-class and the poor, neither of which benefitted much from the national borrowing binge.

There are two camps on how to solve this problem: one is to increase the middle-class saving rate (the conservative position), possibly by privatizing Social Security; the other is to redistribute the “excess” purchasing power through taxation (the left-liberal position).  The middle-class is very powerful in most developed countries, and liberals are hesitant to discuss this in public; that’s why they scapegoat “the rich”.  Conservatives, on the other hand, have a much more positive message; why we aren’t shouting it from the rooftops is a mystery to me.  Americans may be suspicious of class warfare, but if it’s the only game in town they may go for it.

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Why Religion Should Matter To Secularists

I’ve been pondering the necessity of religion and law.  Both apply past principles to new, changing circumstances.  They create predictability, encourage a strong civic skillset, and they support social trust.  And, I would argue, they are co-equal.   In America, you need both religion and law for healthy communities.

Law is a complicated rulemaking process that balances interests and maximizes legal principles that are, ultimately, discretionary; religion is a process where individuals maximize their adherence to what they understand to be God’s eternal principles and His purpose for their life.  Religion is to morality as law is to commercial life.  Like law, an important purpose of religion is resolve disputes (in the case of religion, moral disputes).

There is an alternative to religion: ethnic groupthink.  Monoethic communities seem to engage in a form of groupthink that (imperfectly, in my opinion) replaces the functions of religion.  Has anyone ever heard of a healthy, secular community that was diverse?  And I don’t mean the simplistic racial divisions of white, black, and Hispanic, but also the ethnic subgroups within these traditional categories.

It is a fantasy of much of our elite–across the political spectrum (including secular libertarians)–that you can have healthy, diverse communities that are secular.  I would argue there are two paths to strong communities with high social capital: segregation and religion.  There is no third option.  It is my belief that this contradiction explains much of the social breakdown across the Western world.

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Death of the Fiscal Free Lunch

Ever since the Great Depression, American presidents–regardless of party–have had a religious belief in the beneficial effects of deficit spending.  They abuse whatever economic theories are currently fashionable to justify a very simple narrative: that deficit spending pays for itself by growing the economy and increasing tax revenue.

The simple insight of Keynes–that economies should save during good times and spend during bad–was twisted into “vulgar Keynesianism,” the view that savings is inherently bad and the government should run permanent deficits.  The supply-side insight–that taxes rates above 40-45% lead to lower growth–was twisted into supply-side populism, the view that taxes are inherently bad and the government should run permanent deficits to avoid them.

Both sides have subscribed to the “ratcheting” theory, that spending must be ratcheted ever higher (Democrats) or taxes must be ratcheted ever lower (Republicans).  The resulting structural deficits are good for the economy, because (again) “the economy will grow more and produce more tax revenue”.

This has finally ended.  The debt deal marks a new shift in U.S. fiscal policy.  Permanent deficits are no longer accepted by both parties.  No longer is government borrowing viewed as benign.

The belief that deficit spending pays for itself through higher GDP growth is dead.  The Keynsian multiplier doesn’t exist.  The supply-side tax-cut multiplier only exists if tax rates are already high.  In essence, there is no such thing as a free lunch, and the federal government has finally woke up to this simple fact of life.

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The Coming Collapse of the American Civil Rights Model

We need a new model for civil rights politics.  Americans are deeply motivated by our ideals of freedom, liberty, and civil equality before the law.  We breathlessly hear Dr. King’s “I have a dream” speech and feel the future he painted deep in our souls.  The progress of society in accepting blacks, Asians, gays, women, etc, affirms our optimism that liberty and freedom has arrived for all.  The Founding ideals and the society the Federalist papers spelt out has finally been achieved.

Of course, Dr. King is dead, and the civil rights model has lead most minority groups–except Asians–into horrific social breakdown; a breakdown that is steadily infecting the majority.  Single motherhood has skyrocketed not just among the poor victims of Al Sharpton, but also among European-descended whites.

The civil rights model has failed.  Are blacks better off then they were?  Is growing up without a father in crime-ridden neighborhoods really better then Jim Crow?  Have we simply swapped one form of inequality for another?

Gay activists are often as bigoted as their opponents, discriminating against gays and bisexuals who do not conform to self-inflicted stereotypes.  The African-American “race man” Al Sharpton has led anti-Semitic mobs that killed people.  We all know how Islamists (not to be confused with Islam) take advantage of Muslims, especially the women.  Identity politics claims the lives of innocent people every day: in crime-ridden black slums, where those who attempt positive change are demagogued as “acting white”; in northern Mexico, where the desire of illegal immigrants for an open border has resulted in billions of dollars freely flowing into Mexican drug cartels, organizations that have killed tens of thousands of Mexicans.

People died in Israel for decades from a stream of terrorism that finally came to an end with the construction of a security barrier–but when Hamas lobs rockets over the barrier and the IDF retaliates, somehow it is the IDF’s fault.  Extremists the world over have learned to use the civil rights model too.

We need a new civil rights model.  Classical liberal theory works–my own Mormon ancestors used it to build their society.  We conservatives have the answer.  But how do we share it?  How do we reach out to communities in social breakdown?  How do we create civic organizations that can effect real change–whether it’s repelling Islamisization in Muslim communities, reversing single black motherhood, or creating a safe space for morally-minded conservative non-heterosexuals?

Our nation’s future depends on finding the answer.

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Gold Standard Is Government Intervention

Recently there’s been a revival of interest in the gold standard on the American right.  As fixed exchange rates inevitably lead to massive government intervention in the economy, I cannot understand why any conservative would get behind the idea.

Under fixed exchange rates, governments must intervene (with taxes, regulations, tariffs, etc) to maintain price stability.  Only under floating exchange rates can the central bank alone fulfill this role.  Ask yourself, why did Milton Friedman oppose fixed exchange rates?  Why did the greatest proponent of sound money of the 20th century oppose fixed rates, when they deliver perfect price stability?

Under fixed exchange rates, the government is forced to use taxes to do what a floating rate would.  With market forces in the currency markets suppressed, the government must use taxes to maintain economic balance.  If consumption (and GDP growth) is too high, the government must raises taxes.  If a trade deficit develops, the government must levy a VAT to curtail consumption.  Fixing exchange rates removes a key market force from the economy–and forces the government to replace it with tax policy.

That is what the gold standard is.  Keynesians in the 1960s were pro-gold precisely because it leads to greater government intervention in the economy.  They opposed floating exchange rates for the same reason.

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Beyond Social Security: Public Penison Policy For Economic Success

America faces a difficult debt problem, mostly driven by decades of trade deficits.  Our lack of a strong domestic savings base requires us to borrow from abroad, which the trade deficit reflects; even the savings by the public sector during the Clinton/Gingrich years were not enough to change that.

I propose a new, forced-contribution retirement scheme, to supplement Social Security.  It would replace the “pensions” leg of the three-legged retirement stool: Social Security, pensions, and private savings.

Guiding Principles

What is it we want out of such a system?  What should it do for our economy?  I propose the following guiding principles for the system:

  1. Increase private savings, to promote external trade and the manufacturing sector (less foreign borrowing means cheaper dollar and cheaper U.S. goods).
  2. Encourage financial literacy.
  3. Encourage small-scale investment by new entrepreneurs and small/micro businesses (investment by large corporations is not a bad thing, but it cannot provide economic security for all Americans).
  4. Lean against speculative bubbles.

Number one is obvious: we need more manufacturing jobs if we’re ever going to pay off our national debt.  Without a trade surplus, net debt reduction is impossible. Number two is also important with our large immigrant population, many of whom may not be financially literate.

Number three is especially important.  We have wrung all the benefit we are going to get out of large corporations, and our society needs to admit that we cannot rely on big business to provide for all Americans.  Large corporations are no longer the backstop for the poor they once were, and in modern times the savings of poor people have an uncanny tendency to flow completely outside their communities.  We need to encourage small-scale local investment; not at the expense of companies like GE or Ford or Boeing, but in addition to the financing those companies need.

Point four is a common response of the American Left, who fear feeding yet more boom-bust cycles.  It would be wrong to completely deny the higher returns of Wall Street, but that doesn’t mean investment houses should be given free reign, either.

Basic Structure

The basic structure is a two-part system, that complements the existing Social Security program rather than replacing it.

Individual Retirement Accounts

Part one consists of a forced contribution system based on private, IRA-like accounts.  Investment in stocks would be limited to 35%, with the rest invested in government-guaranteed debt (like mortgages, bank CDs, high-rated municipal bonds–and, yes, U.S. Treasury securities).

Microfinance That Works

Part two is an advanced version of a microfinance scheme.  Every American citizen would become entitled to $1000 in annual payments (financed by either a simple tax withholding scheme, essentially a 1-year deposit, or a redistributive national sales tax), which they can use to secure a $4000-limit credit card.  The interest payments would be negligible, probably in the range of 3-4%.

While many would undoubtedly use their $1000 for consumption, a significant number of people would not.  Cars, kitchen appliances, home improvement, and other such investments do matter to the well-being of local communities, and improves the productivity and social capital of residents.  There would be a strong incentive to use the low-interest credit card for such investments, especially among poor people of bad credit, who need cars and appliances every bit as much as other Americans but struggle to find affordable financing.

Why use such a complicated scheme, when microfinance is used all over the world?  In truth, microfinance has not been a resounding success.  The greatest problem is the lack of collateral; “solidarity lending” has not worked.  Interest rates are so high, only the truly desperate make use of it.  This discourages local investment and encourages debt-fueled consumption.  Microfinance is generally not funded by local savers, which makes local businesses and producers uncompetitive relative to outsiders.   The same forces that send American jobs overseas (lack of savings) apply to regional communities, too, though not to the same degree (inter-regional governmental tax transfers will even things out a bit).

The goal is to convert a small portion of current consumption into local investment, while fostering social capital in communities that need it.  Even if only a small percentage is used for local investment, it could still make a big difference.  By limiting the secured credit card to the four times the annual payment the system discourages unsustainable borrowing.

How Big?

One of the biggest problems with forced-contribution savings and investment schemes is that private actors tend to save less in response.  America’s personal savings rate is very low, and this might not be a problem.  However, there is historical reasons to believe that businesses might respond by reducing profits and increasing borrowing, again offsetting the net gain to national savings.

As a guesstimate, I would say the contribution rate for the individual accounts should be set at 12-15% of income, initially ramped up in 2% yearly increments. The microfinance scheme, not being based on a percentage of income, should be indexed to inflation (or possibly wage growth, given the imperfect nature of measures of inflation).

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Minority Exploitation In Action

Michael Cohen of Politico recently wrote a piece about the racist code language of Donald Trump and Tea Party sympathizers (polling has shown Tea Party activists are not racist, so liberals report the racist leanings of people who merely sympathize with them).

Cohen is engaging in a time-tested tactic. The Democrats benefit from racism, and will occasionally intervene if the levels of racism fall too low.  For example, quoting from the article:

Trump…is aiming his rhetorical guns on those he describes as scheming foreigners as well…Republican Party increasingly dominated by, and dependent on, white voters.

Cohen is saying in essence, “if you are white and feel threatened by outsourcing, you are racist; and if you are not racist, what is wrong with you?” By insisting that certain reasonable fears must be racist, Cohen’s framing pressures people to be racist.

This paragraph is where the real magic happens:

…represents a concerted effort “to arouse a fear of the Other.” It is an unsubtle effort to foster the notion that the president, a black man born of an African father, is somehow not “one of us.

Many Independents voted for Obama confident that he was, in fact, one of them. Their disillusionment has been profound, as Obama has clearly shown he isn’t on the same page as other Americans. Trump has greatly benefited from this disillusionment. But Obama’s alienness is not the alienness of racial differences, and the reaction of Independents is not one due to racism.

This threatens Democrats. Racism is a powerful motivating force for the Democratic base. The more racism, the better. If social bigotry falls too low, they lose minority votes. This is why Democrats like Cohen are resorting to such disgustingly racist framings; by stating that opposing points of view must be racist, they are, in effect, trying to quasi-shame their opponents into being racist.

To be fair, I should note that Obama himself makes little use of these tactics, a very welcome development.  However, like all Democrats he turns a blind eye to “useful idiots” like Michael Cohen.

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