Stuck Inside the Box


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The president’s recent economic address reveals that we’re still stuck inside the box on thinking about economic policies. The linchpin of his address was to advocate for an increase in the federal minimum wage and another 99-week extension of unemployment benefits. These are rather innocuous and bankrupt ideas – notable for their insignificant and contentious economic effects.

On the other hand, Obama (and most politicians of both parties in Washington) have tacitly approved of a monetary policy of cheap credit that has enriched the financial sector and large corporations, while penalizing savers and lenders. This has been a massive hidden tax on savers and lenders by eliminating interest income, unduly rewarding borrowers and speculators. The result has been to reflate the banks’ balance sheets while discouraging lending and turning Wall Street into a casino.

Obama’s response is to try to redistribute taxpayer revenues to his constituencies hurt by the foregoing economic policy that he supports. But raising the minimum wage and extending unemployment benefits does absolutely nothing to increase job creation and rebalance the inequalities promoted by the Fed’s monetary policy. If this sounds familiar, it should because this policy remedy is the hair of the dog that bit us with the financial crisis of 2008: cheap credit and debt used to fuel another asset bubble, while promoting bread and circuses to keep the masses complacent.

Think of what this all boils down to: enrich the 1% in order to save the economy and then try to compensate by calls to “tax the rich” in order to increase public transfers through tax and redistribution. This policy is unworkable and unsustainable, as the 1% has the power and means to shelter their assets from confiscation.

But why promote policies that enrich the 1% unjustly to begin with? Yes, it’s because the 1% include almost our entire political class. The irony is that this policy contradicts the political goal of a fair and just society based on merit. Furthermore, the policy exacerbates the problem of a winner-take-all society that is creating an über-class of one-percenters, while robbing the middle and lower classes of the dignity of meeting their own needs.

Think Outside the Box

Let’s take the example of unemployment insurance. The problem is that unemployment insurance, like all insurance, invites moral hazard, where the subsidy can reduce incentives to find gainful employment, or, more frequently, take a job at a lesser wage. (Unemployment is a market outcome that seeks to reduce the price of wages in order to reach a full employment equilibrium – this is not to suggest it is not a political and social problem.) Of course, unemployment insurance is an efficient way to absorb the transition costs of reallocating labor and jobs to more productive sectors (i.e., to turn car mechanics into tech workers). The problem for policy is to separate the true need from the moral hazard. Self-insurance is the most effective way to internalize and eliminate moral hazard costs completely (we know if and when we’re shirking and we know we’re paying the full cost of that from our own pockets). So consider economist Martin Feldstein’s recommendation below:

“Economist Martin Feldstein long ago proposed a better plan to create a self-insurance component of unemployment insurance with tax dollars going into an employee trust fund for each worker that could be drawn during a bout of unemployment. Workers could keep whatever money was left over at retirement, which would encourage workers to become re-employed more quickly after losing a job.”

Self-insurance insures that workers act in their own best financial interest that also coincides with the desired social interest. This same idea can be applied to private retirement saving in lieu of Social Security and to healthcare savings in lieu of a massive government subsidized Affordable Care Act.

More important is to reform the tax code to encourage personal savings to meet self-insurance needs. For example, those savers and lenders being decimated by the Fed’s Zero Interest Rate Policy are paying almost a 100% “tax” on savings interest. How does that square with our leaders’ supposed  desires to help the middle and lower classes meet their financial needs? Rings pretty hollow.

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