Inequality and Democracy

A comment I wrote on another blog about this subject:

There is a negative cycle at work. Politicians need two things, money and votes. As government checks out more and more from helping ordinary people, they become disillusioned and just stop voting. That leaves all politicians, including the Democrats who may actually be inclined to do good things for ordinary people, at the mercy of money.
If progressives are ever going to make headway, they need to demonstrate to disillusioned potential voters how they are digging their own graves by staying away from the polls and conceding control of government to money. Standard get-out-the-vote campaigns are important but not sufficient. A massive campaign to make people understand they need to vote if the power of money is going to be reduced is necessary. They also need to understand that it's going to be a long slog, and must persist in the face of inevitable disappointments. Massive turnouts, besides turning Republicans out of office, will also tend to make Democrats live up to their name.

There is more to say about this, but one thing at this particular point in our history is that we have to hold our noses in many cases and vote for Democrats simply because they are Democrats. Republicans now are forced to vote as a bloc, so there is simply no such thing as a good Republican. Democrats are at least committed to listening "to the people," and if progressives are successful in putting more of them in office by turnning out more people, they will listen even more. It is simply false that there is no difference. Look at the many, many liberal bills passed by the House when Nancy Pelosi was the Speaker that were stooped by the filib uster in the Senate.

The fiction is not the Social Security Trust Fund, it's the “Unified Budget”

When anyone suggests that we could help reduce the deficit or lower the national debt by cutting Social Security benefits, and, yes, that includes the "chained CPI" of President Obama -- who seems to care more about his legacy among DC centrists as a genius of bipartisanship than keeping his promises or doing what's right for the American people -- they are operating under the concept of a "unified budget" that combines Social Security finances with those of the general fund. 

The problem is, under the law, there is no such thing as a "unified budget." As a matter of law, Social Security revenues may not be diverted into the general revenue fund, and except for the amount that was necessary to cover for the now-expired tax holiday, general revenue may not be put into the Social Security Trust Fund. As a matter of law, the revenue received under the FICA tax is invested in special Treasury bonds that, as a matter of law, earn interest. It is the safest investment in the world. By definition, that is lending money just as investing in just about any other fixed income investment would be. In this case, however, the money is lent, not diverted, to the U.S. Government general fund. That obligation of the government to pay the Social Security Treasury bond when it comes due (when it is needed to pay benefits) is backed by the Full Faith and Credit of the United States Government.

Law matters. That's why people like Krauthammer who talk about "mere IOUs" and "fiction" are wrong -- and so are the people who say the Trust Fund has been "raided." As a matter of law, the Trust Fund is completely separate from the on-budget funds. It would take an Act of Congress signed into law by the President to undo that law. Any obligation in the form of a Treasury Bond or Treasury note is subject to repayment and payment of interest only because the law says so.

Here is the testimony of Nancy Altman, head of the organization Social Security Works, which opposes cuts to the program, at a 2011 Senate chaired by Max Baucus: 

"The law is unambiguous. So let me read it: Social Security ‘shall not be counted for purposes of the congressional budget'. . . [W]ith Social Security, by law, there is no unified budget.

Social Security is not part of the budget. 

So that $14.3 trillion debt that we are at, the limit that you are going to have to raise -- or at least have to vote on whether to raise in a few months -- if you cut Social Security, that $14.3 trillion does not change. It does not put any room into the debt limit."

Dr. Charles Blahous, a Social Security trustee who is also with the conservative Hoover Institution, was asked by Baucus if he agreed with Ms. Altman.

"I do agree with that," he said.

Let's say it again. Law matters. Under the law, it is the so-called "unified budget" that is a fiction. It's a convenience, and maybe not a good one, for those, mostly economists but also derivatively for gullible business journalists, who want to analyze aggregate tax revenue and spending AS IF there were a unified budget. But that doesn't make it real. Senator Richard Durbin's statement that Social Security has nothing to do with the budget is correct. 

The Krauthammers of the country need to learn to respect the law.

Minimum wage increases as self-executing fiscal stimulus

All the usual suspects are crawling out of the woodwork to attack the President's State of the Union idea of raising the minimum wage. Their reasoning is always based on the most infantile use of economic theory as one can imagine. Sometimes simplicity is the best answer. This is not one of those times. Below is a comment I made on another site reacting to the quoted sentence.  

". . . yes the higher pay for minimum wage workers comes mostly out of other workers' pockets." 

Is there any empirical evidence for this at all? I doubt it. If there is any competition in an industry, employers have to compete for talent. It is far more likely that a minimum wage increase pushes wages up generally in a reverse cascade effect, because to compete for talent a premium over the minimum for higher-level jobs is necessary. The impact on the employer is moderated if not eliminated by (1) the fact that for most employers their competitive position will not be affected at all, since it applies to all their competitors as well (who most likely have a similar level of dependence on low-wage labor); (2) morale and productivity will improve at the bottom of the scale, with turnover and training costs reduced and benefiting the employer; and (3) the people with the highest marginal propensity to spend (and the least propensity to spend it outside the country on ski trips to Saint Moritz and condos in Nice) will have more money to spend, thereby increasing demand for many of the employers' goods and services and protecting their profit levels and top-executive compensation.

Applying Econ 101 analysis to the complex effects of requiring all employers who use low-wage labor to pay them more than a race-to-the-bottom wage is simple-minded in the extreme.

Forget being nice or ethical. Raising the minimum wage, at least at the very low, below-poverty-line levels that we have had for many years, should be every bit as stimulative to an economy as a tax reduction for lower-wage workers only. The President 's proposal to go to $9.00 from $7.25 over a couple of years means a minimum wage worker's wages will go from $14,500 to $18,000. That's not going to be stimulative? 

The libertarian argument against the minimum wage as a matter of principle fails of its own logic. It is based on  a state intervention that attributes complete legal control over all revenues gained employing labor to the employer. If the employer can find someone of limited capacity and desperate enough circumstances to do the work at 50 cents an hour, hey, that's freedom, baby. The minimum wage applies only when the employer has prevented workers the freedom to organize so they can equalize the bargaining power between employer and worker. Besides the fact that it is the state that assigns legal control over the revenues requiring labor and creates the form of organization, the corporation, that allows amalgamation of the employer's power, it is also the state that assists with the power of force the employer in resisting collective bargaining.

Who knew libertarians have such a weighted view of when the state can intervene and when it cannot?

Yes, $9.00 per hour.