Thursday, November 08, 2012
Scrabbling for Solutions
Scrabble, in particular, has never failed to amuse me. I still have vivid memories from when I was quite young, of playing against my grandfather (the principled one who used to send back his Soc Sec checks because he didn't need them), who while waiting for me to conjure a play, would mesmerize me by performing hesitation-less 3-digit by 3-digit multiplication in his head - without staring off into distant Andromeda or even moving his lips! Despite English being his third language, not a game would pass without his employing an elegantly obscure word, without the assistance of a dictionary, though it was always there when I went to look it up after a challenge.
I would often play against my mother, too. Unassuming though my grandfather was unassumingly competitive, by contrast, my mom appeared to just enjoy the company - never fussing over some of my more borderline creations - forays that would have sounded like Esperanto, were they to exist at all in any dictionary. As I think about it now, it had nothing to do with her lack intensity or competitiveness, or even intentionally letting me win. In hindsight, it was likely that she was just recognized that despite my precociousness, and unusual attention span for a nine year old, there were limits to how long an adolescent could concentrate, and thus the optimal thing to do was to play fast and let it pass, increasing the chance we'd complete the game to the end.
Today, I find myself playing scrabble much as I write - which is to say it is, entirely, for my own amusement. Just as some play solely to win, one could write soley in a vain attempt to bully an unfortunate reader towards one point of view. Such a player never leaves an opponent an obvious dangling triple-word score; always minimizes the freebies, rarely opens up the board unnecessarily, and when losing, typically blames his letters. These people are painful to play against, (as well as being tedious to read). Though I like the thrill of a victory as much as the next girl, I do just enjoy the journey, patiently awaiting that precious opportunity to construct an unlikely, yet elegant, crossword-like play that simultaneously creates 5 or 6 different words - even better when one uses all of one's letters in the process. It is an uncommon moment scrabble perfection.
Public policy, like simple scrabble play is all-too-often one dimensional. This is seemingly out of necessity, reflecting the reactionary nature of most politicians, and thus resulting legislation, as well as the lack of consensus and resolve required to agree upon a vision of foresight. And that accurately describes the process in good times. In the dualistic reality of modern America, opposing forces rarely meet in the middle excepting the most banal of legislation e.g. "Banning Assault Weapons in Public Schools" (a bill that itself presumes there remain some private schools where your sprog can tote along his or her trusty Kalashnikov or Uzi).
Wouldn't it be nice, however, if meaningful inroads were made into solving our problems whereupon looking at the final language of a bill, both partisan sides could cast aside their dogma, read it and say "That IS much better than nothing. It could work and provide positive benefits to the non-campaign-contributing majority of my constituents...I can live with that". Something that achieves the most with the least. Something that is a proverbial "Win-Win" for the Public Interest. The political equivalent of an elegant solution - that most gratifying of multi-crossword scrabble play. Could there be such a play in front of us?
Some of the most serious political-economic problems of our times are: income inequality at the upper bound; high cyclical and possibly structural unemployment (and under-employment) with consequential output gaps, diminished consumption, and ballooning counter-cyclical entitlement costs; diminshed monetary velocity and consequential distortionary monetary policy by central banking authorities; household deleveraging; decaying public infrastructure resulting from years of underinvestment; and, finally, sustainable public finance represented by both primary and cumulative government deficits at or near their upper bounds. With the exception of the Koch Bros. and a handful of Randian-Bootstrapping others, most would not find fault in the list. What if a single initiative could positively impact all these problems AND if not be wholly mutually-agreeable then be sufficiently less divisive so as to be acceptable?
We found out last month from Olivier Blanchard at the IMF that Govt spending multipliers have been seriously underestimated in most models. This has profound implications for public policy in general and fiscally-conservative solutions in particular - something about which they have been eerily silent. In a nutshell, spending cuts, rather than narrowing budget gaps, just seemingly exacerbates deficits. And this realization occurs at a time when demand for expenditures - whether for countercyclical policy measures or stabilizers, or for nationwide investment in crumbling infrastructure is critically-elevated.
With spending cuts not viable, perhaps we should raise taxes - and - if so, which ones? Japan, as Richard Koo has pointed out, made a grave error in raising taxes in 1997, extinguishing an otherwise nascent recovery. But admittedly, they were highly regressive consumption taxes. And their GINI was nothing like the US today. It seems that with income inequality so great in the US, the Govt could significantly raise marginal rates (in whatever form) on the wealthiest without effecting consumption in the slightest since the marginal propensity to consume for this strata is so low. In fact, one might argue, marginal income is pooling in ever-larger eddies of safety, concerned not-in-the-least about returns, but just preservation. Yet WE NEED TO SPEND in order to keep the balls of the macroeconomy in the air (i.e. blood of the economy adequately circulating) so as to not induce economy-wide liquidation at a time of high aggregate indebtedness - a event that would cause irreparable and irrecoverable economic losses in output, skills and invested capital - all which are likely to be largely unnecessary. To summarize, we need to spend, but can't, and even though we have the means (in aggregate), we won't (or they who have the means won't), whether out of fear, moral turpitude, or just plain greed, and politically, cannot arrive at a place to mobilize the resources, to invest in what's needed, which creates the virtuous circle of keeping the economy humming by better distributing income, reducing Govt expenditure by reducing the need for countercyclical stabilizers and distortionary monetary policies. Whew.
Now, heartier peoples on the planet, during times of financial crises, have inhaled deeply before paying-up as the Koreans did in 1998 contributing family silver to national treasury for the greater good. Or, like the Germans, during good times, increasing the VAT to increase the likelihood of sustainable public finance. But in America, for whatever reason, contemplating such demands causes one to be associated with Mao and Stalin, rather than Gandhi, Rowntree, Cadbury or Raiffeisen. This, in itself shouldn't prevent the better policy from being pursued. Undoubtedly, too much blood-squeezing demands for revenue (as with draconian cuts in expenditure) are likely to yield negative returns (remember that "50% of a goldmine is better than 100% of nothing"). And there ARE negative wealth effects even if this is a Miser's illness, as well as potential emigration outflows and diminished immigration even before considering the possibility of virtue in Libertarian philosophical opposition to higher taxes. Yet where-ever one falls in this debate, this MUST be reconciled with the above if we are to begin to make inroads towards a viable and sustainable solution - and have that solution be generally considered just and fair by most citizens - including sufficiently large numbers of wealth creators.
To break the impasse between the means and the will, I propose that we mandate that some reasonable percentage of marginal income be mandatorily "invested" in a non-political non-governmental investment company that funds/invests in infrastructure and infrastructure renewal across the entire capital structure. The resulting debt, equity, leaseholds, revenue therefrom, or claims on resulting or related revenue streams that result will accrue to the contributors. Mandated investment might for example begin at 5% above $200,000 rising to say 20% above for example $500,000 - on a scale eventually governed by Schiller's suggestion of tying marginal rates to the GINI itself). Importantly, by design, these "investments" would have a broader mandates, longer time-horizons, lower hurdle rates of return - much lower than ludicrous PFI schemes in the UK, but which nonetheless are analysed and vetted as investments and not gifts, or transfers, resulting in an asset - be it a school, a bridge, urban subway system, housing, claims on future road or gasoline taxes, smart-grid, etc. It effectively forces recirculation without outright sequestration, while respecting accounting conventions.
This is structurally important, and would contribute towards solving (though obviously not completely solve) all the aforementioned problems simultaneously. Some key features are that it would:
(1) recognize that the eddying pools of capital, with lowest MPC, seeking safety are, beyond a point, stultifying to the economy;
(2) that by spending it or more accurately, forcibly investing it, creates skilled jobs with virtuous multiplier effects throughout public and private sectors;
(3) In the process, presumably creates long-life asset values to which value will be preserved (and grow) over the longer term since many quality infrastructure investments have productive lives much longer than their depreciated values (just look at the embarrassment of cash flows of NY Port Authority or NJ Turnpike Authority);
(4) through the creation of employment and productivity-enhancing infrastructure constructively REDUCES the Govt deficit by reducing the demand for countercyclical stabilizers;
(5) maintains integrity of property rights as ultimate ownership interests in the resulting asset values, potential future cash flows and/or return of invested capital, remains with the investor, resembling a closed-end fund.
(6) such interests could (and should) be traded in a secondary market. The market would discount these - at times heavily - but they remain an asset for patrimony and NOT a tax sequestration making them philosophically more palatable and diminishing potential negative wealth effects.
(7) Management should be beyond BOTH politicians, and investors control. Think Bernard Baruch. Investment and funding goals should be codified and agreed by the board of trustees - itself appointed from multiple constituencies else it be captured by Govt OR Investors. All investments and contracts should be completely transparent. Oversight by Trustees addresses fears of government largesse or inefficiency.
(8) Investments will likely yield further taxable gains (though initial investments if/when returned could left untaxed due to the quasi-social purpose.
Now, I have little doubt there are criticisms from all sides, and many shortcomings.
The proverbial devil is always in the detail. What precise objectives? What rates of return might be acceptable? How to allocate? Who to allocate? How to negotiate? Will it not just result in further regressive transfers of wealth from poorer to wealthier when it is progressive redistribution that is called for? How would it balance the Public's interest in most benefit for least returns, with the investors' hope/desire for most return for delivering least benefit? How will elections effect outcomes? How can it avoid/escape overt political pressure? Will it just spawn self-perpetuating bureaucracy? All valid, and so many more questions. Yet, I cannot help but think it could be a "scrabble-solution" to the difficult problems confronting us, overcoming the inability of opposing forces to meet in the middle.
(I would like to thank Steve Randy Waldman for his critical thoughts in the concept)