Saturday, August 3, 2013

Deer in the Headlights III: Accountability

After the Black Death had killed half of his peasants, one of the French dukes of that time found that his hearth taxes had also been cut in half. Collecting even that much might seem cruel given the horrors and social dislocations of the time. Still, it is mathematically reasonable to collect only half the previous taxes since there were only half the workers left to earn them.

Governments are not even that reasonable, however. It is said that in order to maintain his income, the duke simply doubled the hearth taxes. At the very time that the people had lost half their parents, half their children, and half their communities to the Black Death, they were ordered to pay twice as much in taxes. Governments can rarely resist trying to put the tax boot in when one is down.

This kind of government "reasoning" still goes on today, even in the U.S. Banking analyst Meredith Whitney covers this ground in her 2013 book Fate of the States. (We also mentioned this book in our previous companion post, Deer in the Headlights II.)

See her Chapter 5, "The Negative Feedback Loop From Hell." She explains that the economic crisis has led to lower house prices and therefore to lower tax revenue. Lower tax revenue has led to budget deficits. Then can come that hellish feedback loop: "... budget deficits beget tax hikes and spending cuts, which drive away jobs, further eroding the tax base and deepening the budget crisis that the hikes and cuts were intended to fix. Look at what happened in the actual Greece."

Some states have indeed raised taxes. Illinois raised its income tax by 66%. It is not clear whether the French duke actually maintained his income by raising taxes and it is not clear yet whether the State of Illinois will be able to gain significantly more tax income by raising taxes, either. Ms Whitney does say what happened in Greece when it raised income taxes. Unemployment went up to over 24% and GDP declined 6% a year for two years. Now Greek individuals and businesses who can do so are leaving Greece and taking their economic activity to friendlier economic environments.

The same kind of thing can happen even if governments do not raise taxes, however. State governments have to make their bond and pension payments before any others. Therefore if state revenue cannot be raised enough, budget deficits have to be paid for by cuts in services. As Ms Whitney says, the money comes out of education, libraries, parks and recreation, trash collection, and fire and police protection. As we said above, higher taxes will drive out invididuals and businesses, but so will poor education, trashy neighborhoods and parks, and poor public safety. As much as anything else, these things sank Detroit.

While we appreciate Ms Whitney's analysis, her thinking remains stuck firmly on the old, outdated side of capitalism. She does not really have solutions because she accepts poverty and accepts the fate of the states that have suffered from poor financial decisions. Just like she accepts the fate of Detroit. Aside from privatization, which has its own problems, her basic solution for our financial problems appears to be smarter decisions, time, and hard work. At most what she does is just describe the differences between the states that she thinks are improving versus those she thinks are declining. She is very smart, but as far as our current financial troubles are concerned, she is just as a much a "deer in the headlights" as any other person in business, or politician. does not find financial instability and poverty acceptable as "just the way things are." Ms Whitney says in chapter 2 of her book that people in 1940 were "... motivated by the goal of moving up the ladder of financial stability." We may have gained national wealth since then, but we have made no progress on national financial stability. For rich individuals, their wealth has meant individual financial stability, but national wealth has not meant national financial stability. National financial stability now should be the goal.

Ms Whitney also takes for granted the new, increased velocity of capital (or money). The advantage of it is that resources can be allocated more quickly to more productive uses. The danger is that people can be impoverished faster than ever before. That means that capital controls are more important today than they were in the past when it was quite difficult to move capital around the world. Yet we have fewer capital controls now than in the past.

We need more capital controls, but we should be careful with them. The advantages of rapid capital flows must be preserved as much as possible. Capital controls cannot be blunt instruments like they have been in the past. We need to distinguish between capital flows that have positive effects and those that have negative effects.

Capital controls today should focus on the effects of job movement. As things change, jobs will be lost and others created. Take Detroit for example. If automobiles can be manufactured cheaper elsewhere, then there is no point in investing in Detroit. It would be wasting capital. In fact, capital should be moved out of Detroit. The employees of auto manufacturers in Detroit will and should lose their jobs. In fact, they did lose their jobs.

The problem is not so much the job loss but the instability that comes with it, financial and otherwise. Houses were lost, communities were destroyed, families broken up, and worst of all, a culture of poverty was created. When money stops working for you, you stop using it.

Things would have been different if the employees had been members of a less competitive internal market and if they were paid in an internal currency. Under the full tosoc program, their homes would have been guaranteed as well as the other basic living requirements. There would have been jobs available, if not as good as the auto manufacturing jobs. Plenty of internal money would have been available to keep Detroit's local markets going.

Note that the regulation of the relationship between the different currencies in the tosoc program automatically imposes capital controls. The rich could not so quickly impoverish an area by moving capital around because they could not own the internal currencies.

Therefore under the tosoc program, many people in Detroit might have lost their higher auto manufacturing incomes and become poorer, but no one would be in poverty. Society would still have revolved around making money and choosing how to use it rather than living on welfare benefits. In the culture of poverty, most everyone is a loser with no real hope for the future. In the market culture, the attitude is about winning. That is why even the worst job that earns any kind of money is better than living off of charity.

Finally let us take a look at Walmart in relation to the tosoc system. Walmart is a huge disruptive influence in local markets because it displaces local businesses. Our critique of Walmart is not precisely that, however. It is that Walmart suppresses the local entrepreneurial spirit. Small communities with a Walmart find it harder to retain talent because a Walmart store restricts the kinds and quantities of business opportunities and jobs available. A rural town can be a nice place to grow up, but it has nothing to offer its brightest offspring. That is true to some extent of all small towns, but the problem is worse with a nearby Walmart.

One way to view Walmart's role in a community is that Walmart sucks dollars out of the community. The money is not invested locally. That is the point, after all, because each store is supposed to make a profit that is controlled by the company leadership and invested elsewhere. Everybody in the community knows that they cannot compete with Walmart, so they do not even invest in one another. Many townspeople work outside of town. The town sees only a very little of the money they earn because the workers shop at Walmart, too.

There is a risk in this trend, and not just because of Walmart, that wealth in the lower population areas of the country will be "strip-mined" away to the point where what remains is essentially valueless in price terms, even the land. At that point, when local prices have deflated enough, the rich will start buying everything in the rural areas and creating latifundia in the nation's heartland, displacing everyone else into the big cities. This might be similar to what happened in the Ancient Roman Republic, and it is not consistent with the survival of freedom and democratic institutions.

In the tosoc system, Walmart as a whole would definitely fall in the category of an external business and be required to use the external currency. Many Walmart customers today would be converted over to an internal currency. Presumably the local Walmart stores would also be converted and incorporated differently than the main company. Much like AT&T, Walmart would be broken up. The core company would be a large-scale buyer in the external markets, getting the best deals and distributing the results to internal markets under government supervision.

It might be that all of the core Walmart's sales income would come from selling goods to local, internal-market Walmart stores at a profit. However, under government supervision, it might be that some profit would also come from conversions of internal currency profits into the external currency. However, since the point would be to keep Walmart from unbalancing local markets with its enormous economic power, then its ability to "strip-mine" an area of cash would be regulated. The difference between the external currency and the internal currencies in the tosoc system provides a natural way to do this.

To the extent that Walmart has unbalanced local markets it has been a source of financial instability and poverty. That is, large companies can create urban pockets of poverty like Detroit, but they can also create rural pockets of poverty. Walmart contributes to that using our single currency and the free flow of capital, limiting the growth of small communities by transporting their wealth out.

Therefore stopping the process of poverty creation necessarily requires that a minimum of local wealth be retained locally rather than transported to areas where it will be used "more efficiently." The case can be made that we are recommending our own creation of poverty in the tosoc system by not supporting the most efficient use of capital. The problem with this opposing view is that one's view of economic efficiency depends on the breadth of one's vision. Since the automobile companies do not have to pay for the cost of Detroit, then they feel that they were quite efficient in their use of capital and that they are not connected with Detroit's problems.

Similarly Walmart sees itself as just an economic competitor, and if small-town businesses cannot keep up in the free market, that is their problem.

This denial of accountability for the messes the rich make or the messes that are made for them is no longer acceptable. We no longer accept that pollution is an acceptable public cost in the pursuit of manufacturing efficiency. We are coming to the point where we will no longer accept that mountains of eternal trash are an acceptable public cost in the pursuit of packaging efficiency. We must come to the realization that financial messes are no longer acceptable public costs in the pursuit of maximum private economic efficiency.
In each case above we have been or ultimately will be willing to hold private businesses accountable for the public messes they leave behind. Strip-mined areas and peoples of any type must be restored. That must become a cost of doing business, too. has some of the tools we need to make that work and is devoted to solutions, not just hand-wringing descriptions of the problems.

The way capitalism should be.

Socialism for the socialists and capitalism for the capitalists.

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