27 November, 2008
26 November, 2008
Police Were Summoned, and they Separated the Two
From the Star Tribune:
Precious. I wonder what the rest of Lois' and Ross' days were like.
Crowd cheered Metrodome sexcapade
While the Iowa Hawkeyes were scoring at will on the field Saturday night, two fans from the Hawkeye State were scoring elsewhere in the Metrodome.
Police say a man and woman were "having relations" in a bathroom stall as a crowd cheered them on.
Ross M. Walsh, 26, of Linden, Iowa, and Lois K. Feldman, 38, of Carroll, Iowa, were cited for misdemeanor indecent conduct. Walsh was released to his girlfriend and Feldman to her husband, police said.
A security guard came upon the scene in the handicapped stall, police said. Police were summoned, and they separated the two.
Both were intoxicated, said University Deputy Police Chief Chuck Miner.
--PAUL WALSH
How to Save Capitalism - Part 7
The final part of the series, reprinted from Harper's Magazine.
LOCALIZE
by Bill McKibben
Bill McKibben is the author of many books, including The End of Nature and, most recently, Deep Economy: The Wealth of Communities and the Durable Future.
Here’s the thing about “capitalism”: in our fixated belief that it represents the way God ordained the universe to be, we forget what powers it. I don’t mean the invisible hand—I mean the coal, the gas, and the oil.
Keynes once tried some back-of-the-envelope calculating to see how much the human standard of living had increased between 2,000 B.C. and the beginning of the eighteenth century. Maybe, he said, it had doubled over all that time, mostly because we had learned very little new—we had fire and wheels and banks and governments and livestock and sails before history was ever recorded. But then we did learn something new. We learned how to take fossil fuel buried beneath the ground and use it to create power, giving each and every one of us (in the West, at
least) the equivalent of a few hundred slaves. And so, for a time, we doubled our material standard every few decades.
That time may be coming to an end, because fossil fuel is coming to an end. We’ve got a million equations to explain how to make the economy work, but those equations rest on all that coal and gas and oil. The gas and oil are getting scarce, as anyone who drives by a gas station can see: with supply plateauing and demand rising around the world, the price just keeps shooting up. And if we’re smart, we won’t use much more of the coal, because the carbon it contains is more than enough to once and for all unhinge the planet’s climate. You can see the systems of our economy starting to shudder and lurch—the airlines, say, trying to cut the number of flights by 10 and 20 and 30 percent in a year because their oil costs are spiking much faster than they can raise fares.
It’s not just around the margins that the system is beginning to buckle. It’s right at the core, with that most important of commodities—food. We used oil to replace human labor on the farm. Instead of half of Americans growing food, we now have far more prisoners than farmers. But farming without farmers requires vast machinery, incredible amounts of naturalgas-based fertilizer, and a globe-spanning transportation system that makes sure your dinner arrives marinated in crude oil.
If the logic of a cheap-energy world has been relentless globalization and specialization, the logic of a post-oil planet points in the other direction: toward increasingly localized economies. Let’s think about the opposite of a huge corporate farm growing soybeans on massive government subsidy to satisfy its pension-fund owners and its ADM overlords. Let’s think instead about a farmers’ market. It sounds quaint, but farmers’ markets may be the fastest-growing part of the American food economy. Sales are rising by double digits every year, and the number of such markets has doubled and doubled again in the past decade (increasingly, even in northern climates, they stay open through the winter, as local farmers start growing more cold-hardy crops). For the moment, some foods are more expensive at farmers’ markets—noticeably meat, because we’ve gotten rid of all the small-scale slaughterhouses around the country. But it’s easy to imagine redirecting government subsidies away from corn syrup and toward sweet corn, away from 500,000-head swine operations (one in Utah now produces more sewage daily than Los Angeles) and toward mobile butchering units.
But already the food at the farmers’ market is fresher and tastes better than the stuff at the supermarket; already it’s better for your body (which in an era of out-of-control medical costs should count for something). And already there’s a key comparative advantage that’s related not to the product but to the process: the farmers’ market is fun to visit. A couple of years ago, a pair of sociologists followed shoppers, first around a supermarket and then around a farmers’ market. They found that at the latter, shoppers had ten times more conversations than at the Piggly-Wiggly. Which brings us to the other defect of the cheap-oil economy we’ve built: it has made us the first people on earth who have no need of one another. Everything we buy comes from an anonymous distance. We eat far fewer meals with family and neighbors than we did fifty years ago; we have on average far fewer close friends. The basic premise of the American economy—that the goal was a bigger house farther apart from other people—turns out to be mistaken, both ecologically and psychologically.
The cold economic logic of the world now dawning is that a relocalization must happen, one way or another: fossil fuels are becoming too expensive for it not to happen. But we can make this process work much more easily. We can subsidize small farms and rooftop solar panels and bus systems. More fundamentally, we can make the cost of energy reflect the damage it does. A strong cap on carbon would steadily and systematically drive up the price of coal and gas and oil, and hence hasten the switch away from them. We’d need to do it in such a way that it wouldn’t beggar the populace—indeed, wise minds have come up with all sorts of formulas to rebate the proceeds of any such indirect taxes to poor and middle-class citizens. But in essence it would drive us toward farmers’ markets, for economic reasons as well as for warm fellow feeling. To a large degree, this is exactly what European countries did after World War II when they enacted stiff and permanent taxes on fossil fuels. It helps explain why our landscapes look so different, and why Europeans perceive the quality of their lives to be higher even though they have less disposable income.
The only thing we’ve asked of our economy for a century has been growth, and it’s gotten us in a world of trouble. Now we need to demand a little durability and a little satisfaction too. We need—to spin a phrase the fantasists of endless growth abhor—a mature economy.
LOCALIZE
by Bill McKibben
Bill McKibben is the author of many books, including The End of Nature and, most recently, Deep Economy: The Wealth of Communities and the Durable Future.
Here’s the thing about “capitalism”: in our fixated belief that it represents the way God ordained the universe to be, we forget what powers it. I don’t mean the invisible hand—I mean the coal, the gas, and the oil.
Keynes once tried some back-of-the-envelope calculating to see how much the human standard of living had increased between 2,000 B.C. and the beginning of the eighteenth century. Maybe, he said, it had doubled over all that time, mostly because we had learned very little new—we had fire and wheels and banks and governments and livestock and sails before history was ever recorded. But then we did learn something new. We learned how to take fossil fuel buried beneath the ground and use it to create power, giving each and every one of us (in the West, at
least) the equivalent of a few hundred slaves. And so, for a time, we doubled our material standard every few decades.
That time may be coming to an end, because fossil fuel is coming to an end. We’ve got a million equations to explain how to make the economy work, but those equations rest on all that coal and gas and oil. The gas and oil are getting scarce, as anyone who drives by a gas station can see: with supply plateauing and demand rising around the world, the price just keeps shooting up. And if we’re smart, we won’t use much more of the coal, because the carbon it contains is more than enough to once and for all unhinge the planet’s climate. You can see the systems of our economy starting to shudder and lurch—the airlines, say, trying to cut the number of flights by 10 and 20 and 30 percent in a year because their oil costs are spiking much faster than they can raise fares.
It’s not just around the margins that the system is beginning to buckle. It’s right at the core, with that most important of commodities—food. We used oil to replace human labor on the farm. Instead of half of Americans growing food, we now have far more prisoners than farmers. But farming without farmers requires vast machinery, incredible amounts of naturalgas-based fertilizer, and a globe-spanning transportation system that makes sure your dinner arrives marinated in crude oil.
If the logic of a cheap-energy world has been relentless globalization and specialization, the logic of a post-oil planet points in the other direction: toward increasingly localized economies. Let’s think about the opposite of a huge corporate farm growing soybeans on massive government subsidy to satisfy its pension-fund owners and its ADM overlords. Let’s think instead about a farmers’ market. It sounds quaint, but farmers’ markets may be the fastest-growing part of the American food economy. Sales are rising by double digits every year, and the number of such markets has doubled and doubled again in the past decade (increasingly, even in northern climates, they stay open through the winter, as local farmers start growing more cold-hardy crops). For the moment, some foods are more expensive at farmers’ markets—noticeably meat, because we’ve gotten rid of all the small-scale slaughterhouses around the country. But it’s easy to imagine redirecting government subsidies away from corn syrup and toward sweet corn, away from 500,000-head swine operations (one in Utah now produces more sewage daily than Los Angeles) and toward mobile butchering units.
But already the food at the farmers’ market is fresher and tastes better than the stuff at the supermarket; already it’s better for your body (which in an era of out-of-control medical costs should count for something). And already there’s a key comparative advantage that’s related not to the product but to the process: the farmers’ market is fun to visit. A couple of years ago, a pair of sociologists followed shoppers, first around a supermarket and then around a farmers’ market. They found that at the latter, shoppers had ten times more conversations than at the Piggly-Wiggly. Which brings us to the other defect of the cheap-oil economy we’ve built: it has made us the first people on earth who have no need of one another. Everything we buy comes from an anonymous distance. We eat far fewer meals with family and neighbors than we did fifty years ago; we have on average far fewer close friends. The basic premise of the American economy—that the goal was a bigger house farther apart from other people—turns out to be mistaken, both ecologically and psychologically.
The cold economic logic of the world now dawning is that a relocalization must happen, one way or another: fossil fuels are becoming too expensive for it not to happen. But we can make this process work much more easily. We can subsidize small farms and rooftop solar panels and bus systems. More fundamentally, we can make the cost of energy reflect the damage it does. A strong cap on carbon would steadily and systematically drive up the price of coal and gas and oil, and hence hasten the switch away from them. We’d need to do it in such a way that it wouldn’t beggar the populace—indeed, wise minds have come up with all sorts of formulas to rebate the proceeds of any such indirect taxes to poor and middle-class citizens. But in essence it would drive us toward farmers’ markets, for economic reasons as well as for warm fellow feeling. To a large degree, this is exactly what European countries did after World War II when they enacted stiff and permanent taxes on fossil fuels. It helps explain why our landscapes look so different, and why Europeans perceive the quality of their lives to be higher even though they have less disposable income.
The only thing we’ve asked of our economy for a century has been growth, and it’s gotten us in a world of trouble. Now we need to demand a little durability and a little satisfaction too. We need—to spin a phrase the fantasists of endless growth abhor—a mature economy.
25 November, 2008
How to Save Capitalism - Part 6
REINDUSTRIALIZE
by Eric Janszen
Eric Janszen is president of iTulip, Inc., and formerly was a venture capitalist and a CEO of technology startups. His last article for Harper’s Magazine, “The Next Bubble,” appeared in the February issue.
Here, in brief, is the state of the Union. Home sales and prices have declined more in the past year than in any year during the Great Depression. Credit contraction has spread to corporate borrowing and student loans. Unemployment is rising in every state in the nation—except for tiny declines in Arkansas, Oklahoma, and West Virginia, which benefit from higher energy and food prices but together account for only one fortieth of the U.S. population. Unemployment in California, the most populous state, reached 7 percent in June, up from 4.9 percent just two years ago, at the peak of the housing bubble. Debate continues over whether the United States as a whole has been in recession since the GDP contraction during the fourth quarter of 2007. But data ranging from retail sales to declining tax revenues serve as clear warnings that the recession may be ongoing. Evidence of economic contraction has been obscured, ironically enough, by the rising inflation that has been spurred by record energy prices.
For twenty-five years, our economy has been dominated by asset bubbles in the finance, insurance, and real estate (FIRE) sector. But now the FIRE-economy era is over. Within two years, the United States will be in the grip of a modern inflationary depression. Look around and you can already get a sense of how it will go: rising unemployment, falling wages, rising prices. This is what happens to countries that become dependent on foreign borrowing to fund current consumption and the operations of government and that rely too heavily on asset-price inflation to produce income. As the system winds down, demand falls and purchasing power is lost. Consider what happened to Argentina: its per-capita income was once higher than that of Japan and Italy and comparable to that of France. But its economy collapsed, in part from the weight of decades of fiscal profligacy—in particular the country’s dependence on foreign borrowing to finance government. Fortunately for the United States, our debts are long-term and owed in our own currency; our creditors, now largely foreign central banks rather than private institutions, can merely manage the dollar down, as has happened since 2002, with the dollar depreciating more than 39 percent. Call the process Argentina Lite.
Rather than allowing our government to engineer another bubble (all our bubbles since the 1980s have involved the government creating—through tax subsidies, loan guarantees, and loose regulatory policy—an initial market for speculation that then metastasizes), we should use the government to lay the foundations for a reindustrialization of America. We can do this in two ways. First, get government out of the way of progress by removing subsidies for uncompetitive companies. We can’t expect private capital to compete with, for example, the current proposed $95 billion tax break for the dinosaurs of the American auto industry. Second, and more important, we should remove government subsidies of FIRE industries. This means not just ending the mortgage-interest deduction but also breaking up Fannie Mae and Freddie Mac into parts and selling them on the open market. By removing our structural support for the FIRE sector, we would free up billions of dollars of capital for both the private and the public sectors.
That capital, in turn, could be invested in American infrastructure. We need high-speed railways, ubiquitous high-bandwidth wireless, and nuclear energy, but we currently have a dysfunctional market dynamic that is stopping us from making these improvements. It’s a chicken-and-egg problem: private industry can’t bring more efficient cars (say) to market without significant infrastructure funding to build alternative fueling stations, but meanwhile the delay in these technologies prompts the government to lavish ever more money on the old, inefficient industries in order to preserve jobs. To break that cycle, we need government to actively envision the infrastructure projects we need and then arrange their funding by private investors as well as by public money. The right approach here is one that has already been used to great success in Europe: “public-private partnerships”; i.e., corporations owned partly by private investors and partly by the government, created for the purpose of developing and executing largescale public works. For each major project announced by the federal government, multiple public-private partnerships could bid competitively for the business (much like prospective Olympic host cities do). Progress on projects, public information reported quarterly, would create incentives for efficiency through the stock price. The best PPPs would be rewarded with the highest stock price for producing the best infrastructure “product” on time and on spec.
Once a bid was accepted, individuals could invest money in the partnerships directly, in a fashion similar to how the Treasury Department and certain states (Massachusetts and California) currently sell bonds to Americans over the Internet, cutting out rent-levying banks. Moreover, citizens’ federal taxes could be deferred, up to a limit, so that they could purchase infrastructure securities. These securities would become a bedrock investment for federal and state governments, as well as for foreign governments, which at present have trillions invested in U.S. Treasury bonds: these infrastructure securities would earn a better rate of return at only a marginally higher risk, and a shift toward them would allow the United States to pay down its debt more productively.
Finally, funding of these infrastructure projects would enable thousands of new private companies, whether bootstrapped by entrepreneurs or backed by venture capital, to develop new technologies. New, organic light-emitting diodes that produce as much illumination as current sources with one tenth as much energy; ceramics that allow next-generation nuclear reactors to run safely; biotech-modified microorganisms that convert nuclear waste into harmless materials; nanotech paints that reflect sunlight to make the insides of cars cooler—the list is endless. Such new American technologies would be in demand worldwide, exports would boom, and within ten years the U.S. current-account deficit would reverse. Instead of creating asset bubbles, the nation that invented the Internet—with the help of government,
as one must always remember—would finally invent a New Economy deserving of that name.
by Eric Janszen
Eric Janszen is president of iTulip, Inc., and formerly was a venture capitalist and a CEO of technology startups. His last article for Harper’s Magazine, “The Next Bubble,” appeared in the February issue.
Here, in brief, is the state of the Union. Home sales and prices have declined more in the past year than in any year during the Great Depression. Credit contraction has spread to corporate borrowing and student loans. Unemployment is rising in every state in the nation—except for tiny declines in Arkansas, Oklahoma, and West Virginia, which benefit from higher energy and food prices but together account for only one fortieth of the U.S. population. Unemployment in California, the most populous state, reached 7 percent in June, up from 4.9 percent just two years ago, at the peak of the housing bubble. Debate continues over whether the United States as a whole has been in recession since the GDP contraction during the fourth quarter of 2007. But data ranging from retail sales to declining tax revenues serve as clear warnings that the recession may be ongoing. Evidence of economic contraction has been obscured, ironically enough, by the rising inflation that has been spurred by record energy prices.
For twenty-five years, our economy has been dominated by asset bubbles in the finance, insurance, and real estate (FIRE) sector. But now the FIRE-economy era is over. Within two years, the United States will be in the grip of a modern inflationary depression. Look around and you can already get a sense of how it will go: rising unemployment, falling wages, rising prices. This is what happens to countries that become dependent on foreign borrowing to fund current consumption and the operations of government and that rely too heavily on asset-price inflation to produce income. As the system winds down, demand falls and purchasing power is lost. Consider what happened to Argentina: its per-capita income was once higher than that of Japan and Italy and comparable to that of France. But its economy collapsed, in part from the weight of decades of fiscal profligacy—in particular the country’s dependence on foreign borrowing to finance government. Fortunately for the United States, our debts are long-term and owed in our own currency; our creditors, now largely foreign central banks rather than private institutions, can merely manage the dollar down, as has happened since 2002, with the dollar depreciating more than 39 percent. Call the process Argentina Lite.
Rather than allowing our government to engineer another bubble (all our bubbles since the 1980s have involved the government creating—through tax subsidies, loan guarantees, and loose regulatory policy—an initial market for speculation that then metastasizes), we should use the government to lay the foundations for a reindustrialization of America. We can do this in two ways. First, get government out of the way of progress by removing subsidies for uncompetitive companies. We can’t expect private capital to compete with, for example, the current proposed $95 billion tax break for the dinosaurs of the American auto industry. Second, and more important, we should remove government subsidies of FIRE industries. This means not just ending the mortgage-interest deduction but also breaking up Fannie Mae and Freddie Mac into parts and selling them on the open market. By removing our structural support for the FIRE sector, we would free up billions of dollars of capital for both the private and the public sectors.
That capital, in turn, could be invested in American infrastructure. We need high-speed railways, ubiquitous high-bandwidth wireless, and nuclear energy, but we currently have a dysfunctional market dynamic that is stopping us from making these improvements. It’s a chicken-and-egg problem: private industry can’t bring more efficient cars (say) to market without significant infrastructure funding to build alternative fueling stations, but meanwhile the delay in these technologies prompts the government to lavish ever more money on the old, inefficient industries in order to preserve jobs. To break that cycle, we need government to actively envision the infrastructure projects we need and then arrange their funding by private investors as well as by public money. The right approach here is one that has already been used to great success in Europe: “public-private partnerships”; i.e., corporations owned partly by private investors and partly by the government, created for the purpose of developing and executing largescale public works. For each major project announced by the federal government, multiple public-private partnerships could bid competitively for the business (much like prospective Olympic host cities do). Progress on projects, public information reported quarterly, would create incentives for efficiency through the stock price. The best PPPs would be rewarded with the highest stock price for producing the best infrastructure “product” on time and on spec.
Once a bid was accepted, individuals could invest money in the partnerships directly, in a fashion similar to how the Treasury Department and certain states (Massachusetts and California) currently sell bonds to Americans over the Internet, cutting out rent-levying banks. Moreover, citizens’ federal taxes could be deferred, up to a limit, so that they could purchase infrastructure securities. These securities would become a bedrock investment for federal and state governments, as well as for foreign governments, which at present have trillions invested in U.S. Treasury bonds: these infrastructure securities would earn a better rate of return at only a marginally higher risk, and a shift toward them would allow the United States to pay down its debt more productively.
Finally, funding of these infrastructure projects would enable thousands of new private companies, whether bootstrapped by entrepreneurs or backed by venture capital, to develop new technologies. New, organic light-emitting diodes that produce as much illumination as current sources with one tenth as much energy; ceramics that allow next-generation nuclear reactors to run safely; biotech-modified microorganisms that convert nuclear waste into harmless materials; nanotech paints that reflect sunlight to make the insides of cars cooler—the list is endless. Such new American technologies would be in demand worldwide, exports would boom, and within ten years the U.S. current-account deficit would reverse. Instead of creating asset bubbles, the nation that invented the Internet—with the help of government,
as one must always remember—would finally invent a New Economy deserving of that name.
24 November, 2008
How to Save Capitalism - Part 5
PLAN
by James K. Galbraith
James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.
Can Capitalism survive? No. I do not think it can.
—Joseph Schumpeter, 1942
The problem is not how to save capitalism but how to save the unique and successful mixed economy built in the United States over the eighty-five years since the New Deal. Our system is not capitalism. Our economy has a large public sector, which at its best was competently concerned with research, defense, financial stability, environmental safety, social security, and large measures of education, health care, and housing. Today, after thirty years of attack on government, all these functions are damaged and in peril.
The rot comes from predators posing as conservatives and mouthing the rhetoric of “free markets.” They are not actually interested in free markets. Their goal is to use the government to build monopolies, to control resources, to block regulation, to crush unions, to divert as much as possible from taxpayers into private pockets. They have a reckless attitude toward war-making and they put the financial system in peril by failing to enforce standards of ethics and transparency. As a result, they imperil the country’s credit in the world. True conservatives recognize this, which is why they defected from Bush and McCain long ago.
Our postwar system was built on technological leadership, financial stability, and collective security. The world gave us credit and used our currency. Why? Because we gave it back the public goods of peace and economic progress. We were the bulwark during the Cold War. Our system wasn’t imperial: we spoke instead of community, of freedom, of common purposes and common values, and the world took us seriously because we had paid our dues.
The next successful system should be built on that model—that is, on the basis of regulated finance, collective security, and, above all, a national purpose. Since energy and climate change will dominate the global agenda for the next generation and perhaps even the following, dealing with these issues must become our generation’s purpose too. Although America is the world’s great energy wastrel, among developed countries we are the best positioned to change, to reduce our own fossil-fuel use and help the world do likewise. We have the science, the technology, the engineering, and the educational capacity to take the lead.
What we do not have is the capacity to figure out, in advance, a coherent national strategy toward this goal, and for using our government to advance that strategy. We have no capacity to plan, and that is what we need now.
“Planning” has been a dirty word in American politics for decades. For the hard-line right, planning destroyed freedom: it was the “road to serfdom.” Anti-planners also thought it a failure; for them the collapse of the U.S.S.R. was due to “central planning.” But without public planning, who is in charge? Lobbyists who represent the private planning of the great corporations. The public interest ceases to exist, and the public sector becomes nothing more than a trough at which private interests come to feed.
What the government needs most today is to regain an independent capacity to think. The government needs a way to imagine the future that is not dominated by lobbies or even by Congress so long as Congress is dominated by lobbies. Planning is a process: thinking, coordination, action. What is the long-term national interest? What specific targets must be met? What is the best way to do it, and who plays what role?
For instance, carbon prices and cap-and-trade systems will help to deal with the climate crisis, but they cannot do the whole job. Markets do not design new systems—new patterns of transport and housing, new technologies for electric power, for vehicles, for heating and cooling. To design a system, to put the pieces together, to identify the most promising lines of attack and take steps to achieve them: that is the planner’s role.
Imagine a Federal Department of Energy and Climate with real independence. It could make an honest evaluation of ethanol. It could review the prospects and assess the dangers of next-generation nuclear power. It could make a judgment on carbon capture. It could consider all the serious conservation proposals, such as Joe Kennedy’s program to retrofit housing in the snow belt. It could fund new research centers in the major universities, so that in a decade the country will have trained the experts we will need to implement the plans we make.
Planning is not coercive, but it should be privileged. Once Congress approves a plan, budgeting and appropriation rules should favor public capital spending that implements the plan. For instance, such investments would not be subject to “pay-go” restrictions; as longterm improvements, they properly should be funded by issuing long-term debt. The planning process would thus parallel the budget process, superseding it in the areas of infrastructure, technology, and environmental management that would be the main arenas for the plan. Dealing with the energy and climate crises will require direct public action and the cooperation of the private sector, which will be achieved in part by regulation and standards. Clearly, the challenge is daunting. But it’s not hopeless. If the country gets it right, all of us can have work for a generation, a better living standard afterward, and leave the planet more or less intact. And in addition, we stand a chance, otherwise improbable, of persuading the rest of the world to keep our line of credit open.
by James K. Galbraith
James K. Galbraith is the author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.
Can Capitalism survive? No. I do not think it can.
—Joseph Schumpeter, 1942
The problem is not how to save capitalism but how to save the unique and successful mixed economy built in the United States over the eighty-five years since the New Deal. Our system is not capitalism. Our economy has a large public sector, which at its best was competently concerned with research, defense, financial stability, environmental safety, social security, and large measures of education, health care, and housing. Today, after thirty years of attack on government, all these functions are damaged and in peril.
The rot comes from predators posing as conservatives and mouthing the rhetoric of “free markets.” They are not actually interested in free markets. Their goal is to use the government to build monopolies, to control resources, to block regulation, to crush unions, to divert as much as possible from taxpayers into private pockets. They have a reckless attitude toward war-making and they put the financial system in peril by failing to enforce standards of ethics and transparency. As a result, they imperil the country’s credit in the world. True conservatives recognize this, which is why they defected from Bush and McCain long ago.
Our postwar system was built on technological leadership, financial stability, and collective security. The world gave us credit and used our currency. Why? Because we gave it back the public goods of peace and economic progress. We were the bulwark during the Cold War. Our system wasn’t imperial: we spoke instead of community, of freedom, of common purposes and common values, and the world took us seriously because we had paid our dues.
The next successful system should be built on that model—that is, on the basis of regulated finance, collective security, and, above all, a national purpose. Since energy and climate change will dominate the global agenda for the next generation and perhaps even the following, dealing with these issues must become our generation’s purpose too. Although America is the world’s great energy wastrel, among developed countries we are the best positioned to change, to reduce our own fossil-fuel use and help the world do likewise. We have the science, the technology, the engineering, and the educational capacity to take the lead.
What we do not have is the capacity to figure out, in advance, a coherent national strategy toward this goal, and for using our government to advance that strategy. We have no capacity to plan, and that is what we need now.
“Planning” has been a dirty word in American politics for decades. For the hard-line right, planning destroyed freedom: it was the “road to serfdom.” Anti-planners also thought it a failure; for them the collapse of the U.S.S.R. was due to “central planning.” But without public planning, who is in charge? Lobbyists who represent the private planning of the great corporations. The public interest ceases to exist, and the public sector becomes nothing more than a trough at which private interests come to feed.
What the government needs most today is to regain an independent capacity to think. The government needs a way to imagine the future that is not dominated by lobbies or even by Congress so long as Congress is dominated by lobbies. Planning is a process: thinking, coordination, action. What is the long-term national interest? What specific targets must be met? What is the best way to do it, and who plays what role?
For instance, carbon prices and cap-and-trade systems will help to deal with the climate crisis, but they cannot do the whole job. Markets do not design new systems—new patterns of transport and housing, new technologies for electric power, for vehicles, for heating and cooling. To design a system, to put the pieces together, to identify the most promising lines of attack and take steps to achieve them: that is the planner’s role.
Imagine a Federal Department of Energy and Climate with real independence. It could make an honest evaluation of ethanol. It could review the prospects and assess the dangers of next-generation nuclear power. It could make a judgment on carbon capture. It could consider all the serious conservation proposals, such as Joe Kennedy’s program to retrofit housing in the snow belt. It could fund new research centers in the major universities, so that in a decade the country will have trained the experts we will need to implement the plans we make.
Planning is not coercive, but it should be privileged. Once Congress approves a plan, budgeting and appropriation rules should favor public capital spending that implements the plan. For instance, such investments would not be subject to “pay-go” restrictions; as longterm improvements, they properly should be funded by issuing long-term debt. The planning process would thus parallel the budget process, superseding it in the areas of infrastructure, technology, and environmental management that would be the main arenas for the plan. Dealing with the energy and climate crises will require direct public action and the cooperation of the private sector, which will be achieved in part by regulation and standards. Clearly, the challenge is daunting. But it’s not hopeless. If the country gets it right, all of us can have work for a generation, a better living standard afterward, and leave the planet more or less intact. And in addition, we stand a chance, otherwise improbable, of persuading the rest of the world to keep our line of credit open.
23 November, 2008
How to Save Capitalism - Part 4
TAX THE LAND
by Michael Hudson
Michael Hudson is Distinguished Professor of Economics at the University of Missouri–Kansas City and the author of many books, including Super Imperialism: The Origin and Fundamentals of U.S. World Dominance. His last article for Harper’s Magazine, “The New Road to Serfdom,” appeared in the May 2006 issue.
To save industrial capitalism, we might begin by looking at changes sought by classical economists. Reformers from Adam Smith to John Stuart Mill to Thorstein Veblen hoped to streamline industry and increase economic competitiveness by doing away with the special privileges inherited from feudalism; namely, “economic rents” earned from longstanding land, monopoly, and banking rights. Income from these entitlements added to the cost of doing business but neither produced anything tangible nor spurred technological innovation. Classical economists contended that the tax burden needed to be shifted off of industry and labor and onto that which was taken from nature or granted by government decree—what Mill called the “unearned increment” that landlords extract “in their sleep.”
In the United States, progressive-era reforms advanced many of these ideas, and by World War I the nation was well on its way toward achieving what John Maynard Keynes would call “euthanasia of the rentier.” The federal government passed its first income tax in 1913, at a time when even more wealth than today was either inherited or derived from insider dealings. Steeply progressive, the tax was levied on only the wealthiest 1 percent of the population (households earning more than $83,000 in today’s dollars), with their income taxed at a marginal rate of 77 percent by 1918. Capital gains were taxed at the same level, on the reasoning that they added to net worth just as earnings and savings did. These policies helped create a middle class in America, while similar measures did much the same in Europe.
But the class that Franklin D. Roosevelt called “economic royalists” fought back and over time (and particularly after 1980) reversed these progressive tax policies. The top marginal tax rate for personal income has been slashed, from a high of 94 percent in 1944 to roughly 35 percent today. Capitalgains taxes are now capped at 15 percent, and this tax is not even collected on the vast majority of real estate sales, since commercial owners are not taxed if they use their sales proceeds to buy new property. As a sop to homeowners, residential price gains have been made tax-free for the first $500,000. Rental income also has been rendered free from taxation by the accounting sophistry that property is depreciating rather than rising in value, even when actual market prices are soaring. At the state and local levels, prior to 1930 some 70 percent of public revenue came from property taxes; today, only 21 percent does, with the difference made up primarily in increased taxes on income and sales.
These tax breaks on property and capital gains, along with the tax deduction for interest payments, provide a powerful incentive for buyers to go into debt; that is, to pay mortgage interest to bankers for property they hope to sell at a gain. Thus, the income that governments have relinquished through property-tax cuts ends up being paid by new buyers to banks as interest. Rather than funding new development projects, most savings have been turned into bank loans for housing that already exists, “post-industrializing” the economy and burdening it with an overhead of non-production costs. We are far from the wealth of nations that Adam Smith imagined.
As reform-minded economists have long argued, we must tax the rentiers. Taxing their privilege would yield as much as the present income and sales taxes combined, without eating into the earned income of wages and profits. For example, roughly half of the estimated $1.4 trillion rental value of all residential and commercial real estate comes from the land on which buildings sit. The idea is to tax not the buildings but this land value—sites that are provided by nature and that increase in value incidentally when a rail line or a Starbucks is built nearby. By taxing only the land, we would no longer be penalizing new construction and would discourage speculative hoarding. Indeed, in both 2006 and 2007 the market price of land went up by $2.5 trillion. This increase in balance-sheet valuation was not earned, since landlords did not have to make an investment to create it; moreover, taxing these sites could help cover the costs of new development and would not reduce the supply of land.
A related reform would abolish the tax deduction for interest payments. In 2006, property owners paid $742 billion in mortgage interest, accounting for 84 percent of the total interest collected by the financial sector. Assuming a 33 percent overall tax rate, this deduction alone cost the Treasury a quarter trillion dollars. (By encouraging debt financing rather than equity investment, this subsidy to mortgage lenders helped fuel the real estate bubble.)
The public also should own—or at least be able to collect rental revenue on—the nation’s infrastructure and the monopolies for which only one provider makes economic sense. The broadcasting and communications spectrum is just one example of immense private wealth that has been carved out of the public domain. (As with England’s land barons, broadcasters received their right on the condition that they fulfill specific public obligations, which, over time, they came to resist.) I estimate that the broadcasting spectrum, recently valued at $480 billion, accounts for another $100 billion in free economic rent. Other privatized natural resources lose perhaps $250 billion more.
The total lost tax revenue on property, capital gains, interest, and infrastructure is likely upwards of $1 trillion, a significant share of America’s $12.4 trillion national income in 2007. Instituting these taxes on land would make it harder for property buyers to take on large loans for homes they cannot afford, a result that would ultimately drive down the cost of housing. Additionally, the money that was being funneled to banks in the form of inflated loan payments would now go to the government as taxes, thereby allowing income and sales taxes to be radically reduced. In all, a considerable net gain for Americans.
In our country and elsewhere, the transition from a feudal economy to a modern one remains incomplete. Hereditary estates and monopolies still retain huge privileges; taxes on property and rents remain at historic lows. Taxing these “unproductive” incomes would help to unburden labor and enterprise, and these changes would go a long way toward fixing what ails our economic system.
by Michael Hudson
Michael Hudson is Distinguished Professor of Economics at the University of Missouri–Kansas City and the author of many books, including Super Imperialism: The Origin and Fundamentals of U.S. World Dominance. His last article for Harper’s Magazine, “The New Road to Serfdom,” appeared in the May 2006 issue.
To save industrial capitalism, we might begin by looking at changes sought by classical economists. Reformers from Adam Smith to John Stuart Mill to Thorstein Veblen hoped to streamline industry and increase economic competitiveness by doing away with the special privileges inherited from feudalism; namely, “economic rents” earned from longstanding land, monopoly, and banking rights. Income from these entitlements added to the cost of doing business but neither produced anything tangible nor spurred technological innovation. Classical economists contended that the tax burden needed to be shifted off of industry and labor and onto that which was taken from nature or granted by government decree—what Mill called the “unearned increment” that landlords extract “in their sleep.”
In the United States, progressive-era reforms advanced many of these ideas, and by World War I the nation was well on its way toward achieving what John Maynard Keynes would call “euthanasia of the rentier.” The federal government passed its first income tax in 1913, at a time when even more wealth than today was either inherited or derived from insider dealings. Steeply progressive, the tax was levied on only the wealthiest 1 percent of the population (households earning more than $83,000 in today’s dollars), with their income taxed at a marginal rate of 77 percent by 1918. Capital gains were taxed at the same level, on the reasoning that they added to net worth just as earnings and savings did. These policies helped create a middle class in America, while similar measures did much the same in Europe.
But the class that Franklin D. Roosevelt called “economic royalists” fought back and over time (and particularly after 1980) reversed these progressive tax policies. The top marginal tax rate for personal income has been slashed, from a high of 94 percent in 1944 to roughly 35 percent today. Capitalgains taxes are now capped at 15 percent, and this tax is not even collected on the vast majority of real estate sales, since commercial owners are not taxed if they use their sales proceeds to buy new property. As a sop to homeowners, residential price gains have been made tax-free for the first $500,000. Rental income also has been rendered free from taxation by the accounting sophistry that property is depreciating rather than rising in value, even when actual market prices are soaring. At the state and local levels, prior to 1930 some 70 percent of public revenue came from property taxes; today, only 21 percent does, with the difference made up primarily in increased taxes on income and sales.
These tax breaks on property and capital gains, along with the tax deduction for interest payments, provide a powerful incentive for buyers to go into debt; that is, to pay mortgage interest to bankers for property they hope to sell at a gain. Thus, the income that governments have relinquished through property-tax cuts ends up being paid by new buyers to banks as interest. Rather than funding new development projects, most savings have been turned into bank loans for housing that already exists, “post-industrializing” the economy and burdening it with an overhead of non-production costs. We are far from the wealth of nations that Adam Smith imagined.
As reform-minded economists have long argued, we must tax the rentiers. Taxing their privilege would yield as much as the present income and sales taxes combined, without eating into the earned income of wages and profits. For example, roughly half of the estimated $1.4 trillion rental value of all residential and commercial real estate comes from the land on which buildings sit. The idea is to tax not the buildings but this land value—sites that are provided by nature and that increase in value incidentally when a rail line or a Starbucks is built nearby. By taxing only the land, we would no longer be penalizing new construction and would discourage speculative hoarding. Indeed, in both 2006 and 2007 the market price of land went up by $2.5 trillion. This increase in balance-sheet valuation was not earned, since landlords did not have to make an investment to create it; moreover, taxing these sites could help cover the costs of new development and would not reduce the supply of land.
A related reform would abolish the tax deduction for interest payments. In 2006, property owners paid $742 billion in mortgage interest, accounting for 84 percent of the total interest collected by the financial sector. Assuming a 33 percent overall tax rate, this deduction alone cost the Treasury a quarter trillion dollars. (By encouraging debt financing rather than equity investment, this subsidy to mortgage lenders helped fuel the real estate bubble.)
The public also should own—or at least be able to collect rental revenue on—the nation’s infrastructure and the monopolies for which only one provider makes economic sense. The broadcasting and communications spectrum is just one example of immense private wealth that has been carved out of the public domain. (As with England’s land barons, broadcasters received their right on the condition that they fulfill specific public obligations, which, over time, they came to resist.) I estimate that the broadcasting spectrum, recently valued at $480 billion, accounts for another $100 billion in free economic rent. Other privatized natural resources lose perhaps $250 billion more.
The total lost tax revenue on property, capital gains, interest, and infrastructure is likely upwards of $1 trillion, a significant share of America’s $12.4 trillion national income in 2007. Instituting these taxes on land would make it harder for property buyers to take on large loans for homes they cannot afford, a result that would ultimately drive down the cost of housing. Additionally, the money that was being funneled to banks in the form of inflated loan payments would now go to the government as taxes, thereby allowing income and sales taxes to be radically reduced. In all, a considerable net gain for Americans.
In our country and elsewhere, the transition from a feudal economy to a modern one remains incomplete. Hereditary estates and monopolies still retain huge privileges; taxes on property and rents remain at historic lows. Taxing these “unproductive” incomes would help to unburden labor and enterprise, and these changes would go a long way toward fixing what ails our economic system.
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