Saturday, May 22, 2010

Populist Economics

I have a quick note today on populism and economics in the aftermath of the Senate's passage of financial reform. The reform law, as an aside, is stronger than I thought it would be, but still weaker than the structures in place through the mid-1990's. The reason we the people did not get real reform of the financial marketplace is because of our general confusion. See if you can follow this logic:
  1. The government deregulates much of Wall Street, and fails to enforce the regulations left
  2. As a consequence, Wall Street takes actions that threaten survival of nation
  3. President Bush pushes for and gets Congressional actions necessary to save the nation
  4. President Obama distributes the second half of the bailout under stricter conditions for payback than originally passed
  5. People take to the street to protest the "Obama Bailouts" and "Socialism"
  6. People take to the streets to protest government involvement in the markets designed to prevent all of the above from happening again (i.e. stricter regulations)
We the people need to have a discussion about what financial steps are in our best interests, and which ones serve only to enrich a select few. While some steps serve both Wall Street and Main Street, most do not.

The current financial environment, even with the fixes from a finished reform law, still allow Wall Street insiders to redistribute your earnings into their pockets. Let's be absolutely clear here friends, it is working class Americans who create wealth, not Wall Street. The financial markets are instruments designed to help companies connect with individuals looking for a good investment. Stocks and bonds are good investments when they are issued/sold/backed by solid entities over the long term (that means longer then yesterday's news about Greece). We should be concerned about markets with less discipline and common sense than our teenagers. Unfortunately, we are distracted by another tale entirely.

Today's flavor of the day is the groundless notion of American bankruptcy. "Slash government spending, end deficits, or else..." Or else what? Government deficit spending in a recession, by definition, has only positive effects on the economy. All of that spent cash goes to Americans who spend it on homes, cars, appliances, and groceries. All of the people who sell/make/build homes, cars, appliances, and groceries then get to keep their jobs and buy stuff also.

The risk of debt issuance and money printing is always the same; excessive inflation followed by increasing interest rates. Unlike collapsing bridges, tainted water supplies, and potholes, macroeconomic problems come on slowly, and are controllable. The people screaming at you on television want you to believe that China is going to hire Dog the Bounty Hunter to go to Andrews Air Force Base and tow away Air Force One.

So let's summarize; the people driving the message want you to demand less regulation of Wall Street and large industrial concerns, and they want you to demand major cuts to the federal budget. But why would they want these steps? First, understand that major cuts to the military and homeland security structure will not happen, then see what is left. 80% of what remains is Social Security and Medicare; the two programs that they want to see cut. They can't directly attack them, so they move in through the back door euphemistically called fiscal discipline. Social Security and Medicare privatization are the themes you will almost certainly hear over the next couple of years; and we the people need to be absolutely clear about what that means.

Better than $1.3 trillion is spent on Social Security and Medicare annually,with more than $1 trillion collected in the form of payroll taxes in support of the measures. Please friends ask yourself three questions:
  1. If you did not have to pay FICA taxes, would you (or anyone you know) be able to save enough for your medical expenses throughout your retirement?
  2. Is your current 401k or other retirement plan going to be enough to retire on; if not, would you be able to save enough if, again, you didn't have to pay FICA taxes?
  3. How much money do you think Wall Street interests will be able to make on your $1 trillion (annually) that won't be harvested in FICA if Social Security and Medicare are killed or "privatized"?
My bet is that they do better than us. There is nothing wrong with success, and there will surely be losers in our system of capitalism...I think that is fine. Capitalism, however, does not exclude the members of a democracy providing for her retirees. The market used to provide for retirements, in the form of pensions, but those benefits are long gone in most firms. By all means demand that your representatives be disciplined with the purse-strings of the nation, but think first about the motives of those now driving the discussion in our democracy.

The Rational Middle is listening...

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