Maxine Udall (girl economist)

Kucinich Does the Right Thing

Dennis Kucinich (D-OH) does the right thing and for the right reasons (IMHO). 

“In the past week, it’s become clear that the vote on the final health care bill will be quite close…. I know I have to make a decision -- not on the bill as I would like to see it, but as it is.”

But we aren't "home" yet. Now would be a good time to write your representative, especially if s/he is a putative Democrat and a potential "no" and you are a firm "yes."

Health Care Reform: Is the expedient the enemy of the best?

In 1994, ABC News aired a report describing the way that tobacco manufacturers recovered nicotine from the pulp of stems and leaf scraps, concentrated it, and added it and the pressed scraps back into tobacco leaf used in cigarettes. The manufacturers knew that nicotine is addictive and they carefully controlled the amount to maintain tobacco demand (aka addiction).  For a variety of reasons, including these revelations, a few years later a majority of state attorneys general brought suit against tobacco manufacturers to recover state health care expenditures (primarily the states’ shares of Medicaid expenditures) attributable to smoking-related disease. As the process that resulted in the Tobacco Master Settlement Agreement evolved, there was an attempt to reach a global settlement at the federal level that allowed the FDA to regulate nicotine. Sponsored by Senator John McCain, it failed to pass.

Efforts to negotiate a global settlement agreement died for a number of reasons. Not least was the inability of the public health community and tobacco control advocates to coalesce to support it. The wedge issue for many was the mere idea of negotiating with the tobacco companies or doing anything that would allow them to stay in business. Particularly galling was tort reform that would have prohibited class action suits, punitive awards, and future state prosecutions against tobacco manufacturers that was included in the bill along with FDA regulation of tobacco. Many public health and tobacco control advocates took positions that were very similar to Senator Dennis Kucinich's principled stance on health reform. Here is a quote by tobacco researcher and committed tobacco control advocate, Stanton Glantz (a researcher and advocate that I very much admire and respect), from Allan Brandt’s book The Cigarette Century (p. 424): “The fundamental reality of tobacco is that the way to beat them is to beat them. I have never found a single instance anywhere, anywhere, where a compromise with the industry served the public health.” Glantz’s objection was mainly to the tort law concessions contained in the proposed global settlement agreement.

One of the most effective tools the tobacco companies had in opposing the global settlement agreement besides money and power was the emotional response of tobacco control advocates. Their righteous anger interfered with their ability to hammer out a second-best solution in a world where first-best (regulation AND beating the tobacco industry) was not an option.  

We waited another 10 years for FDA regulation of tobacco. The good news is that the tobacco manufacturers did not obtain the tort reform concessions that were in the original proposed global settlement agreement. However, they are certainly not “beaten.”  Moreover, many adolescents have become addicted and will die because of the wait. I don’t know if the wait was worth it. I suspect it was now that we know that the tort law concessions were successfully eliminated. We can’t know for sure because there is no counterfactual.

You can read the entire story of tobacco regulation in this book by David Kessler and this book by Allan M. Brandt. I highly recommend both books. You can read about the methods tobacco companies use to avoid regulation here. I also recommend a visit to Campaign for Tobacco Free Kids website. Here is a good online article about the economics of tobacco regulation by Jonathan Gruber. And here is an excellent article by Alan Blinder that provides good insight into the reality of how bills become federal law (although some of you may disagree that economists should have more voice in the process).

So why am I telling you about tobacco regulation?

The Hobson’s choice before us with regard to health care reform is to hold out for something that has fewer sops to Pharma and the health insurance industry or to accept a second-best alternative that would start the US on the road to something that delivers over time universal access to affordable health insurance and health care.  There is no reason to think that the path from this starting position could not lead where we want to go. There are countries that provide universal cover through a combination of public and private insurance with no public option, but with strict regulation of private insurers. Some who oppose the current reform bill rightly worry about the effect of the individual mandate on individuals with low incomes. My understanding (from Kaiser Family Foundation’s Website, click all 3 bills and then check "mandate") is that financial risk is limited to 8% of income above certain cut points with hardship and other exclusions and a relatively low penalty for non-compliance. This is not meant as unequivocal endorsement of the bill. It is simply pointing out that it is not draconian.

Not having a reliable crystal ball, I honestly don’t know what is the right thing to do. But I do know that in the presence of uncertainty, the optimal path is almost always from where you are, not from where you would like to be.

My fear is that a desire to stick it to pharma and private health insurers (and perhaps even Democratic lawmakers who are more center than left no matter what the right says) and the emotions this evokes  on the far left will cloud judgment, leading some to oppose a bill that is not nearly so bad as it is portrayed.  Moreover, it contains many provisions that can and will be fixed over time. There may be short-term windfall profits for Pharma and private insurers, but this is unsustainable and I believe will be remedied. The same forces that would give us a better bill 5-10 years from now will be operating (possibly faster with health care reform enacted now) to shape a more efficient system. Increasing the public share of health care finance, even if initially diverted to private insurers, is the best way to concentrate lawmakers’ attention on restructuring the system.

This doesn’t mean that disappointed voters shouldn’t let BHO and the Democrats know how badly they have failed (so far) to provide “change we can believe in.”  But is joining ranks with the Republicans to defeat the current bill the best way to do this?  I’m pretty sure that if this bill is not enacted, pharma and private health insurers will still be there and no less powerful when the battle is rejoined. Why not take the first step now with something that is “good” by most measures and leverage it to something that is best for all of us, especially the currently or soon-to-be uninsured?

PBS' Judy Woodruff Interviews Progressive Political Economist, David Coates

David Coates, political economist and Worrell Chair in Anglo-American Studies at Wake Forest University, answers questions from PBS newscaster, Judy Woodruff, about his progressive blog, Answering Back.

"Answering Back" was written, and is now maintained, to give sustenance to ordinary party members campaigning for progressive candidates and causes. It is less focused on the leadership of the party than on the movement, because it is at that lower level that so much work needs still to be done, to strengthen the progressive voice in American politics. Good ideas will not win elections unaided, but without good ideas any election won will be valueless.

David also concisely summarizes what I think are the left and right forces that are most likely to torpedo passage of a health reform bill.

The reform the president is fighting for is far from perfect, but it is worth fighting for. If we get it, it will change the architecture of health care provision in the United States, and act as the launching pad for further health care reform down the line. Conservatives know that. They know concessions made now will be hard to pull back later. They know we are in trench warfare and need to fight one trench at a time.

My main worry is that many liberals seem to think that the fight we are in is a tank battle, and that we should go for fast moving total victory and risk total defeat. Center-left forces in democratic politics are often brilliant at snatching defeat from the jaws of victory, and letting the perfect drive out the good. 

Read the entire interview here.

Health Reform: If Not Now, When?

Two recent encounters have gotten me thinking about health reform.  The first was with my hair stylist—hardworking, talented, bright—who had a bad respiratory infection. She had just finished a 7-day course of antibiotics, but still had symptoms of a secondary bacterial sinus infection. Because she has no health insurance, she was thrilled that the antibiotics had only set her back $70. She was dismayed that she was still sick after a 7-day course of antibiotics. She was terrified that it might still land her in hospital. Another stylist at the same salon with the same symptoms had ended up in hospital with pneumonia. The other stylist also did not have health insurance.

The second encounter occurred a few days later when I gave a seminar at a university in another city.  During the cab ride to the train station after the seminar, my 38 year old cab driver revealed that he had recently obtained health insurance for the first time in his life.  He was thrilled, but also concerned that his new insurance was not comprehensive and most likely would not cover a serious illness or injury.

Then he asked me THE QUESTION: What do people do who don’t have insurance?

Many if not most hair stylists and cab drivers are essentially self-employed independent contractors who “rent” the place where they stand in a salon or the cab that they drive. They receive no health insurance benefits, no sick days, no retirement benefits. If they don’t work, they lose income. If they get really sick or injured, they lose everything.

The inequalities in income distribution  that have become greater in the US over the last 30 years are nothing compared to the growing inequalities that will result from an increasingly larger pool of Americans who lack adequate health insurance cover. Each unforeseen, primary care-preventable illness, every serious injury will cause them and their families to fall further behind economically and in the quality of their lives.

Joseph Stiglitz, Amartya Sen, and Jean-Paul Fittousi recently wrote in the Report of the Commission on the Measurement of Economic Performance and Social Progress:

But while the precise list of the features affecting quality of life inevitably rests on value judgments, there is a consensus that quality of life depends on people’s health and education, their everyday activities (which include the right to a decent job and housing), their participation in the political process, the social and natural environment in which they live, and the factors shaping their personal and economic security.

The Gini coefficient captures our growing income inequality. How do we capture the inequality induced by 30 million people and growing who have no health insurance?

More importantly, why, in a nation whose national narrative extols the virtues of entrepreneurship and individual effort, are young entreprenurs who choose jobs like hair styling or cab driving penalized for that choice?  I personally know two hair stylists who started as  independent contractors and worked their way to salon owner and employers of 10 to 20 stylists, manicurists, and estheticians. A major uninsured illness could have stopped them and the contributions they made to our economy dead. Literally.

As I contemplate this, I find myself recalling one of my favorite passages from Adam Smith’s Wealth of Nations (B1, Ch 2 )

The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were perhaps, very much alike, and neither their parents nor playfellows could perceive any remarkable difference. About that age, or soon after, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents.

“...till at last the vanity of the philosopher [or banker or politician or school teacher or auto worker or college professor or physician or economist or...fill in your own occupation...] is willing to acknowledge scarce any resemblance.”

The division of labor has allowed us to enjoy the fruits of unfettered productivity and common wealth. Smith’s famous pin factory has over time given us greater output. With an assist from labor unions and the National Labor Relations Act  it has also given us higher wages, and more leisure time. In the US, the pin factory for a variety of reasons, some historical , some economic, some political, provides health insurance to its employees.  Over time, pin factories in the US have closed, replaced by large corporations that provide fewer manufactured goods and more services.  Those who do not work for large companies, including small business owners, independent contractors, and the individuals they employ, are often unable to obtain health insurance either as employer-sponsored groups or as individuals in private markets.  Yet these entrepreneurs are an important source of job creation and economic growth. Moreover, they represent the kinds of businesses we as a society should want to foster: embedded in their communities and therefore responsive to community demand and community welfare; small enough to fail and big enough to foster growth, employment, and innovation from the bottom up.

We in the US have been marginalizing the people who are the heart and soul of commercial enterprise, the small businesses and workers around which most of our communities used to be built. We are in effect segregating them based on employment status and health insurance cover. These are people who embody the values we say lie at the heart of our nation and our economic system: entrepreneurial, hard working, self-starters. By continuing to exclude them and their employees from affordable and adequate health insurance, we are in real danger of relegating them instead to a permanent underclass, a “servant” class that styles our hair, drives our cabs, cooks our food, cares for our children, and manicures our lawns. Until they get sick or have a car accident.

The divide is unsustainable. We cannot maintain economic growth and greatness with a growing proportion of US citizens excluded from one of the most basic requirements for the successful pursuit of life, liberty, and happiness.

I have written elsewhere about the efficiency aspects of a public option, but even without it Paul Krugman,  David Coates and Theda Skocpol are right.  Comprehensive, affordable health insurance must be made available to everyone. Every other developed country has done it. It does not get cheaper or easier to fix as time passes. We must do it now, in a form as close to optimal as can be achieved politically, and worry about the details later.  It’s the right thing to do both economically and morally.

Bring Back the Robber Barons? I Don't Think So.

Before we take Daniel Henninger’s advice over at the WSJ and Bring Back the Robber Barons, let’s consider the proposition more fully by reflecting on an alternative view of corporate “entrepreneurship” offered by Barry C. Lynn and Phillip Longman at Washington Monthly.

And while we're at it, let's perform this thought experiment: imagine all the entrepreneurship that is effectively squelched by locking potentially entrepreneurial people into corporate jobs in order to maintain health insurance cover for themselves and their families.

Yeah...that's the ticket...robber barons.

(Thanks to my friend, Obey, for the link to Lynn & Longman’s piece and my friend, Ecrive, for the link to the wsj piece.)

The Market for Morals

Lately, I’ve been thinking about what we obtain from markets: obvious things like goods and services, wages and output, credit and interest. But we get much more than these. Here’s Aristotle in Ethics, Book V:

 “Money is a sort of medium or mean; for it measures everything and consequently measures among other things excess or defect, e.g., the number of shoes which are equivalent to a house or a meal. As a builder then is to a cobbler, so must so many shoes be to a house or a meal; for otherwise there would be no exchange or association. But this will be impossible, unless the shoes and the house or meal are in some sense equalized. Hence arises the necessity of a single universal standard of measurement, as was said before. This standard is in truth the demand for mutual services, which holds society together.”

Markets are places of reciprocity, of fair exchange, of a sort of equalizing justice. Without money or markets, there would be “no exchange or association.” The demand for services that are mutually beneficial is part of what holds society together.  In Aristotle's time, markets drew people out of their homes and into the marketplace to interact with their neighbors and townsmen and women; to observe the behavior of merchants over time; to develop sympathy for the individuals that they traded with; and to become invested in the welfare of their community. Markets were the warp upon which was woven the social fabric that binds us into community.

In Adam Smith’s time, markets had expanded beyond the Agora and the village square, but the social by-products of market transactions were not much different. The oft-repeated transactions of market exchange and trade provided opportunities for the development of individual virtues such as temperance and prudence as well as the social glue of mutual sympathy, trust, loyalty, and justice.  Unfortunately, Smith’s thoughts (in Theory of Moral Sentiments) on the moral glue that binds us have been largely ignored, while a very few passages from Smith’s Inquiry into the Nature and Causes of the Wealth of Nations have become the scaffolding in support of extremely dysfunctional markets and the rhetoric that promotes them.

Here’s Smith saying something similar, but more nuanced than Aristotle above:

 Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

Of course, Smith’s conceptualization of “self-love” was much broader than the narrow “self-interest” that is often confused with it. Self-love hearkens back to Smith’s Impartial Spectator in TMS, the moral arbiter within:

 “It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct...who calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves. It is this impartial spectator . . . who shows us the propriety of generosity and the deformity of injustice; the propriety of reining the greatest interests of our own, for the yet greater interests of others . . . in order to obtain the greatest benefit to ourselves. It is not the love of our neighbor, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, the love of what is honorable and noble, the grandeur, and dignity, and superiority of our own characters.”

Notice that Smith’s “self-love” had a long-term perspective where the preservation of market relationships whether as owner, customer, manager, or shareholder went beyond the next quarterly report. It is a broader form of self-interest, one that rationally recognizes that the greatest benefit to ourselves and our loved ones may accrue from restraining narrowly conceptualized, short-term self interest.

Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.

Please don’t get me wrong. If injustices in the form of, say, racism, sexism, xenophobia, or homophobia are entrenched in a society, market forces alone cannot be relied upon to eliminate them. In fact, market forces may reinforce injustice if a dominant majority “votes” always with its dollars to penalize the businesses  and individuals and institutions that attempt to remedy discrimination or injustice. (As a thought experiment, imagine yourself as a small business person trying to serve both blacks and whites at the same lunch counter in the US south prior to 1965 even in the absence of Jim Crow laws.) However, even in such a society,  well-functioning markets should reinforce trust, loyalty, and sympathy, at least among the dominant, unjust majority.

For a variety of reasons, the modern marketplace no longer promotes and reinforces moral behavior and moral sentiments as effectively as when firms were smaller, markets were local, most products were simple, and most transactions were transparent. Instead, complex and opaque financial “innovation” has allowed capital to be siphoned off into speculative and unproductive uses. The same “innovation” is now allowing bets to be made against troubled countries and currencies to the detriment of those countries. At the same time, taxpayers have been asked to finance bailouts for banks too large to fail and apparently also too large to be required or regulated to be competent or trustworthy while at the same time they are allowed to wield unfettered political power.

The danger here is that weak, ineffective political responses to such market and moral failures create new market and moral forces that undermine the social fabric that binds us and supports future economic growth and welfare.  We have created in the no-strings attached bank bailout and the failure to regulate against future finance-induced crises a very public example of how vice (or the absence of wisdom and prudence) is rewarded at the expense of the virtuous because vice is too big to fail. We have created a very public example of how hard work, showing up on time every day, doing what you’re supposed to do, raising your kids, going to PTA meetings, pursuing the prudent American dream of owning a home can evaporate almost overnight along with health insurance cover. There is no justice in this. The provision of a safety net and access to affordable healthcare for unemployed and displaced families remains an apparently insurmountable political and economic challenge, while the bailout of unwise and imprudent financial institutions that were the cause of the injustice was accomplished quickly and easily with bonuses for all.

If market transactions are the warp, then moral sentiments and a well-developed sense of justice are the weft of the social fabric that binds us together and supports economic growth and prosperity. When the social fabric tears, when firms dominate markets, the economy, and the political system; when the resulting distribution of goods, services, and wealth become very unequal; when individuals begin assuming that no one is trustworthy so they might as well be untrustworthy too; we will lose all the things that markets have traditionally given us:  economic growth; cooperation and coordination; and efficiency. The rule of law can only do so much and the costs of policing and enforcing rules far exceed whatever costs are associated with a fundamentally moral and just society.

I’m not sure any of us, especially economists, fully understand the extent to which market transactions produce and reinforce the moral conditions that allow us as a nation to flourish economically or to decay.  Large businesses may be too big to fail, but they are also too big to be allowed to be immoral , unjust, and unpunished. If they are, I fear it will produce a contagion of mistrust and injustice that will spread to the detriment of us all.

Rap Video: Keynes v. Hayek

From OpenEconomics:

Should Economists Be Sued for Malpractice?

(This is for my friend, Obey, in partial fulfillment of his request.)

From Paul Krugman yesterday in an article about Fiscal Scare Tactics:

 The trouble, however, is that it’s apparently hard for many people to tell the difference between cynical posturing and serious economic argument. And that is having tragic consequences.

How did it come to pass that many people cannot tell the difference between cynical posturing and serious economic argument? I lay much of the blame at the feet of my own discipline, but how did the discipline of economics manage to accomplish this potentially tragic result?

Many years ago my working hypothesis assigned blame to Paul Samuelson (may he rest in peace) and the Cowles Commission on Research in Economics (1951); Paul because he was among the first to use the calculus of optimization to describe economic theory and formulate testable hypotheses about relationships among economic variables (in Foundations of Economic Analysis, 1947); the Cowles Commission because it seemed to be the most obvious point at which the physicists moved into economics and mathematized it. Hicks’ Value and Capital (1939) preceded Samuelson, but the post-WW II timing of Samuelson and Cowles (when military interests were dominant and operations research methods were the newest and next best thing to sliced bread) represented a powerful confluence of method and madness.

I absolved Samuelson rather quickly. One has only to read him to know that he was about way more than the math. And eventually, I realized it was silly to think that mathematizing what had once been a major component of moral philosophy would be enough to render economics insular and, to many, uninteresting or incomprehensible. Of course, it helped that economics became incomprehensible to anyone scoring less than 700 on the math GREs. It was necessary, but not sufficient. One has also to divorce economics from moral content to arrive at a state where “cynical posturing” is indistinguishable from “serious economic argument.”

So how did that happen?

I think we can lay some of the blame for the excision of economics from the body of moral philosophy at the feet of Lionel Robbins (may he rest in peace), who asserted that “economics is fundamentally distinct from Ethics” in his Essay on the Nature and Significance of Economic Science published in 1935.

Economics is neutral between ends. Economics cannot pronounce on the ultimate validity of judgment between ends....[Economics] is incapable of deciding as between the desirability of different ends.

It was a position taken earlier by John Neville Keynes (Maynard’s father) and by Pigou, but Robbins influence may have been greater because of the timing. The book was republished in 1948 just as mathematical momentum was building. It is probably also significant that Robbins’ pronouncement about the impossibility of interpersonal comparisons of utility gained widespread and rather uncritical acceptance among most economists even today. But that is a technical point better left to another blog.

Of course, all of this was unfolding in a world that had come to view science and the scientific method as the sole road to Truth and Beauty. Mathematization elevated economics above the other social sciences because it rested on magical mathematical foundations. Scientific rigor was ours!

The effect of this was to relegate discussions of economic welfare to narrow corners of discourse grounded in desolate Edgeworth boxes where the emphasis was on relative prices, trades to zero sum optima, and convex preferences with little or no attention paid to why person A started with so few resources relative to person B. The joys of being in the “core of the economy” were celebrated even if being situated at that efficient bliss point left person A holding only a few percentage points of total output while person B held all the rest.

Within the ever-popular Paretian framework, there was no possibility that person B might care about person A’s relative lack of resources, that B might be willing to give up something, transfer it to A to make A materially better off, while allowing B to become (at least in moral utility space) much better off. Or that B might be willing to tolerate some inefficiency in order to make A better off. Kaldor-Hicks introduced even more profound and possibly unjust principles, but that is another blog, too.

Back to my somewhat simplified story: economics was mathematized and divorced from moral philosophy, but it was the timing that mattered. The Great Depression had concentrated both policy and political interest on distributional aspects of allegedly efficient allocations. The events leading up to the Depression demonstrated the lie of market efficiency, at least in financial markets. And it showed that what happened at the top of the economic and social pyramid had dire consequences for the bottom of the pyramid and for the wealth of the nation as a whole (something that apparently would not have surprised Adam Smith). The Great Depression caused many to doubt the value of capitalism, except, of course, investment bankers who knew that speculation (as opposed to long-term investment) was quite lucrative as long as they got out before the crash or, as they have recently learned, as long as they can induce the taxpayers of the US to provide single-payer credit default insurance.

Because of the Depression, John Maynard Keynes’ (at the time) rather radical thoughts on employment, money, and interest increasingly gained acceptance. World War II provided the massive Keynesian stimulus needed to haul us out of depression and to cement Keynes ideas about the roles that government could and should play both during economic downturns and to prevent them. Of course, the increased regulation and taxation that accompanies such policies represented a major threat to business as usual particularly in financial markets where the lure of speculative gains is always irresistible.

Keynes, who advocated that government play a role in moderating the effects of peaks and  troughs in the business cycle through regulation of investment banking and automatic demand stabilizers (for example, unemployment compensation and jobs creation through public works) became conflated (perhaps intentionally) with “socialism” and “communism.” When Lauri Tarshis tried to write about Keynesian economics in his 1947 textbook, he was effectively silenced in much the same way and by many of the same people who were so effective at silencing Samuelson on military spending. Samuelson’s text “contained no more than a few words on American defense spending, and none on its size in relation to the federal budget or its effect on the economy.” The Right would paint them as “red” and the Board of Regents of their universities would bring pressure to bear for writing subversive textbooks. 

Economics, mathematized and divorced from moral philosophy, was effectively neutered after WW II, at the point when its relevance to “serious economic argument” might have been established and developed. The outcome was perfectly aligned with market forces that would continue to shift the national narrative in ways that would finally succeed in convincing people that “government is the problem”. It culminated in repeal of Great Depression era regulation, thereby freeing investment bankers for unfettered speculative gains supported by a seemingly unfettered single-payer credit default safety net.

Now add to this the promotion and tenure policies at even second rate economics departments that require and only reward publication in journals that favor morally vacant, mathematically rigorous, theoretically obtuse existence proofs that more often than not bear no relation to reality as we know it. One is then left with an economics literature that few people, including some who have majored in economics as undergrads, can truly understand, either in its content or in its relevance to the important moral and economic issues that confront us today.

It is no wonder that many people cannot “tell the difference between cynical posturing and serious economic argument.” This is a resounding indictment of economists and the economics profession. The market supported and promoted it. We as a profession benefited from it with higher salaries and consulting fees. Meanwhile, the “tragic consequences” of our failure include  a country that inefficiently spends twice as much as any other developed country on health while leaving roughly 20% of the population with no cover, a 10% unemployment rate, and a growing home mortgage foreclosure rate, all while providing single-payer credit default insurance, financed by low and middle income taxpayers, to the richest portion of the population, the guys who ran us into the ditch; the guys who cannot be taxed for fear they will cease to provide us with the dubious benefits of their financial expertise and acumen.

We appear to be at a political impasse because the idea that “government is the problem” has become entrenched. A moral philosophy pretending to be a science devoid of normative judgment has aided and abetted that idea by elevating efficiency above any other possible moral or even economic consideration. The result is that many in the US and in the world who lack the math acumen to appreciate the subtleties of economic theory stand enthralled by sound bites derived from a handful of dead economists and one dead president.

Economics provided the theory and language that supported the drive to the ditch we find ourselves in. We did it by allowing economics to become divorced from moral philosophy. Now the economy is on life support and most people in this democracy can’t tell the “difference between cynical posturing and serious economic argument,” but they can and will vote.

If economists were physicians, we would be sued for malpractice.

The Price of Principle Is Too Cheap

I have been reflecting on the men and women who laid the foundation of our Republic and the prices that some of them paid for it. (Yes, women laid the foundation and paid a price, too. Someone had to mind the farm, raise the kids, run the household while the men were off fomenting rebellion and at least one woman did jail time for her husband’s role in that rebellion.)

While visiting Monticello a few years back, I picked up a small book, “The Declaration of Independence with Short Biographies of Its Signers” published  by Applewood Books in Bedford, MA. Here is a tally of the sacrifice of personal blood, sweat, and treasure by some of the signers and their families according to the book:

William Whipple (1730-1875, New Hampshire) who resigned the Continental Congress in 1777 to become Brigadier General of the New Hampshire militia. “He recruited, equipped, and led troops against Burgoyne,” i.e., he spent his own money.

William Ellery (1727-1820, Rhode Island) “A successful lawyer [who] so infuriated the British with his patriotic activities that they burned his home and destroyed most of his property when they took Newport.”

William Floyd (1734-1821, New York) “British Troops occupied his mansion and estate for seven years while he served in federal Congress and the state senate.”

Francis Lewis (1713-1803, New York) “A wealthy businessman...when the British captured Long Island, his property was destroyed and his wife taken prisoner and confined for several months.”

Richard Stockton (1730-1781, New Jersey) “Captured by the British, he was treated harshly for having signed the Declaration of Independence and lost his health as well as his wealth.”

John Hart (1714-1780, New Jersey) “A delegate to the General Congress in 1776, he lost everything when the British overran New Jersey.”

Abraham Clark (1726-1794, New Jersey) “His two sons were incarcerated by the British on the prison ship Jersey.”

Robert Morris (1733-1806, Pennsylvania) ‘When the United States could not obtain credit, he personally secured the financing necessary to continue and complete the Revolutionary War,” i.e., he used his own money to pay Washington’s troops.

Thomas Nelson, Jr. (1738-1789, Virginia) “The first to propose a state militia to defend the rights of the people...he used his own resources to recruit troops.”

Edward Rutledge (1749-1800, South Carolina) “...returned to SC to help defend the state and was taken prisoner in 1780 during the siege of Charleston and shipped to St. Augustine (where) he was exchanged after a year.”

Thomas Heyward, Jr. (1746-1809, South Carolina) “Commissioned during the Revolutionary War, he as wounded, then later captured and sent to St. Augustine for a year.”

Arthur Middleton (1743-1788, South Carolina) “He joined in the defense of South Carolina, had his estate ravaged by the British in 1779, was taken prisoner in 1780, and sent to St. Augustine for a year.”

Lyman Hall (1721-1784, Georgia) “The British confiscated his property...”

George Walton (1740-1804, Georgia) “Walton remained in Congress until 1778 when he returned home to help defend the state as colonel of a regiment.  [He was] wounded and captured in the war.”

The point being that the individual’s price of doing the right thing for a nation can be quite high even if the individual expects to benefit, too. Moreover, the above list does not include the time and money costs for all members of Congress of the many tortuous hours spent on horseback and in carriages on bad roads traveling to and from Philadelphia at their own expense or the many months or years spent away from home, hearth and kin.

I drew two conclusions from the above: 1) Don’t live near the coast if you’re going to become openly and publicly involved in a rebellion with a major naval power and 2) the current price of principle is too low. (Thanks and credit to Scriptamus for making the latter so clear.)

Is it too much to ask that modern day politicians pay some price for obstructing or advancing major legislation? Imagine watching Frank Capra’s film, Mr. Smith Goes to Washington, only to find that when push comes to shove Mr. Smith can’t be bothered to incur the inconvenience and unpleasantness of a filibuster.

I am no political scientist, but as far as I can tell, filibusters no longer require the kind of conviction and dedication to principle that would make standing and holding the floor and one’s bladder for 24 hours a small price to pay. When I think of lawmakers I admire, Senator Strom Thurmond never comes to mind, but I have some respect for his willingness to be inconvenienced for the sake of his misguided principles.

In their truest form, filibusters impose costs on the filibusterer and on the majority party which must maintain a quorum in order to wear down the filibusterer. The costs should in some measure reflect the strength of conviction of both majority and minority. To have a real filibuster, senators have to sleep at the Capitol building; they have to give up campaign fund raising; they have to give up trips home to see their families. In short, they have to inconvenience themselves in direct proportion to their conviction and commitment to principle in order to produce laws over strong minority opposition.

Ten percent of the population is experiencing the “inconvenience” of unemployment; 52 million Americans are expected to experience the “inconvenience” of not having health insurance in 2010; 2.8 million US homeowners experienced the “inconvenience” of foreclosure in 2009 with a higher number possible in 2010. These are the real prices of unprincipled stalemate and obstruction.

The Democrats have the opportunity and the votes to deliver the rudiments of health reform, something that once in place can be modified more easily than the initial hurdle of getting it in place. If the Republicans want to block it, then MAKE THEM FILIBUSTER. Please make them pay the same high price for obstruction that many of us are paying for the resulting inaction.

There would be no United States of America if the signers of the Declaration of Independence and the framers of the Constitution had shared our current legislators’ preferences for convenience at any price. It’s hard to imagine our lawmakers paying out of their own pockets for a bumpy 10 day carriage ride to DC or writing checks on their own accounts to keep the Republic intact or risking incarceration and the loss of property to birth a nation. Is it asking too much that they occasionally inconvenience themselves, that they gladly pay a higher price in time, inconvenience and foregone campaign contributions, when they hold a majority, have a bill, and know that the right thing to do is to make it law?

Please, sir, may we have some justice?

We have just witnessed highly compensated investment bankers asserting that they are the clueless victims of an unforeseeable, unpreventable hundred year financial crisis (except when it happens every five to seven years).

Until last year, I had always assumed that at least one reason for investment bankers' high compensation was that the market had chosen to reward them for competence and knowledge about high finance, things we lesser mortals couldn’t possibly grasp with our mundane, tiny little minds. Now we find out that they apparently hadn’t even grasped the basics that my rather less well-paid businessman father drilled into me from a very early age. “Maxine,” he used to say. “The higher the returns, the higher the risk, and if the returns are high and sustained, you’re in a Ponzi scheme or a bubble. Never forget that.” And I never have.

It seems so basic and no amount of clever math and models can really change it. Say it now, all together, children: Higher returns means higher risk and if the returns are high and sustained, you’re in a Ponzi scheme or a bubble.

We and our elected representatives have a choice to make. We can continue to compensate clueless investment bankers way beyond the value of their marginal product in any domain of productivity you care to name and we can continue to allow them to cluelessly manage financial institutions for their own short-term short-sighted gains until they plunge the rest of us into serfdom or we can change how they are compensated and maybe even who is compensated (as in throw the bums out) and we can change the rules by which they are allowed to "play" with our money.

The latter shouldn’t be rocket science were it not for the wealth and power bankers are able to exert in their own interest. If the political will is not there now to do this, for heaven’s sake, when will it be????

Oh, right...after a full-blown depression, like last time.

But even then, reform and regulation will not be enough. We need a new language about business and markets that is sensible and grounded in reality. In the last thirty years, both have been elevated to near religion, with financiers and CEOs as high priests.

Something has been lost in that transformation. When Adam Smith wrote about the value and advantages of commercial society, he saw all of society (and, of course, was comparing it to the vestigial remains of feudalism which set a very low, preliminary standard). He wrote about how even those at the bottom were made better off. He appeared to care about them. He worried that because of the drudgery of the work at the lower end of society, people in those roles would require additional inputs, like education, paid for by the larger society. He viewed the entire wealth of the nation including the distribution not only of wealth but of opportunity (admittedly within the confines of a rather rigid class structure). And he was quite critical of the ne’er-do-well rich and of businessmen who colluded to extract welfare from consumers in the form of higher prices.

Perhaps most importantly, Adam Smith appears to have understood the value of the moral side effects of commercial transactions: trust, sympathy for our fellow tradesmen and women, for our customers, for our neighbors, a sense of community and of the common good, all traded in the marketplace along with the money, goods, and services that change hands. He recognized the interdependencies that markets create and reinforce, interdependencies that bind us to common objectives and that lower the transaction costs of achieving them.

So you see it isn’t just about the money. If it were, then the investment bankers who appeared before the Financial Crisis Inquiry Commission would still have much to answer for. But it’s about more than money. It’s about the moral side effects of market transactions and exchange. Morally clueless investment bankers have trashed the fabric that binds us together as a nation. They have sent a message loud and clear that short-sighted, immoral cluelessness that serves only one’s own short-run self-interest is what is rewarded. That unearned wealth, power and prestige have more political and economic currency than the hard-earned trust, confidence, and lower profit margins of honest businessmen embedded in, committed to, and serving their customers and their communities.

Remember Potterville in the Frank Capra film, It's A Wonderful Life? The movie is a capitalist morality play that explains how banking and commerce are supposed to serve the greater good and the public interest, even as they provide returns to investment and commercial endeavor. (You thought it was just a Christmas movie, didn't you?) In the movie, the problem with Potterville isn't just that it was economically unequal. It was morally bankrupt. People were ill-natured and distrustful, not inclined to help each other or to help a stranger.

The community's moral bankruptcy was a cause and an effect of the income inequality. The income inequality was a cause and an effect of the community's moral bankruptcy (combined with Mr. Potter's unfettered market and political power and his "clueless" immorality). This is how empire's fall.

Moral, socially responsible, honest (usually small) businessmen and women like George Bailey (and my father) provide some of the moral glue that holds us together. Market forces in small, truly competitive, transparent markets (which financial markets most definitely are not) often reinforce the moral glue and sometimes even provide it by reining in the Mr. Potters and the Gyges of the world.

Mr. Potter testified last week, pockets bulging with cash earned on the backs of the people of Bedford Falls, that he is clueless and incompetent and that stuff happens. He harmed Main Street, both the people who shop there and the people who own businesses there. He harmed the backbone of our democratic society. We bailed him out. Isn’t it time we held him to account?

We can reduce the moral hazard we’ve created with a no-strings bailout, we can reduce the moral side-effects of the moral hazard, and we can help Main Street. Let’s start by using all the bonus money to extend the safety net for unemployed workers, please. Then let’s tax the finance sector’s inordinate Ponzi scheme profits and use the proceeds to build new infrastructure and to retool the US workforce for the 21^st century. And for God’s sake, let's regulate Mr. Potter.  Let’s take a longer-term view of economic and societal well-being. Let’s make something good from this that will benefit our grandchildren.

Please, sir, may we have some justice?