John G Bell


Winter '04 - Bohmer, Hahn & Vavrus

Economics Workshop - Take-Home Exam II

1. Based on your reading of Pollin, particularly [c]hapters 2 to 4, compare and contrast the economic policies of the [William J.] Clinton and George W. Bush administration, including but not limited to taxing, government spending, monetary policy and financial deregulation, labor policy and international economic policy. In your answer, analyze their policies in the context of performance [within] the U.S. economy for those years. What criticism do you have of Clinton's policies, Bush's?

Compared to the apparently more moderate position of Clinton, Bush's tax policy is one of rape and pillage. Bush administration's scope lock on Iraq is perhaps the only thing that trumps the focus on cutting taxes for the rich constituency of the Republican party. It's important to note that these tax cuts are going into effect during a serious downturn in the economy. During Clinton, those with money were getting a technical windfall because production was rising while real wages were at historic lows. During Bush, those with money are getting an actual windfall from huge reductions in tax burdens.

Government spending might be something to expect during a time of economic downturn to balance, in a Keynesian fashion, the loss of private economic strength. The Bush administration's policies are a kind of mutation of Keynesian policy. The government spending is all seen in huge militarization efforts, but not in programs that actual create jobs or economic recovery on the ground. Certainly, the no-bid contracts seen by the Haliburtons of the world are significant within the context of the national economy, and there's a clear agenda to syphon economic value from the Middle East, but these increases are likely to be seen by few on the ground in the United States. During the Clinton administration, there were militarization expenditures, but these were significantly on multilateral operations. The social spending of the Clinton administration was not particularly laudable, but certain not a horrific as the casual disregard for the working classes found in the policies of Bush administration.

Monetary policy under the two presidents is clearly divided over the effect of the recession. Although not strictly speaking policy of this administration, since it's the purview of the Federal Reserve, there can be no doubt that the expansive economic conditions under Clinton were met by a very permissive Fed. The recession and post-recessional periods required the Fed to frequently lower the federal interest rate. So, to some extent the interest rate has been low, compared to the condition of the economy through both administrations. The point of change is that a higher interest rate prior to the recession might have slowed speculation and prolonged the economic expansion. Of course, higher interest rates might have been a signal flare that started the crash of speculation faster. After the recessional period, lower interest rates where the Fed's response to the crisis. Unfortunately, what did not happen during this period was a matching drop in mortgage rates and other consumer financial rates. So, the rate between banks lowered, but the banks failed to reflect that change to the economy until after the crisis was already well advanced.

One fascinating point of contrast is the way in which the Clinton administration and the Bush administration on the subject of deregulation. Certainly, much of the energy crisis in this country was due to the machinations of Enron and other companies connected to the Bush administration, but it's almost funny that Bush was forced to implement tougher regulation on corporations. Somewhat like Nixon going to China, Bush was forced to do something completely unlikely. The deregulation of corporate finances was a key contributor to the way in which the stock market bubble was formed, and it was the eventual failure of this deception that created huge scandals during Bush's presidency.

Bush is clearly hostile to labor, and more significantly to unions. Similar to Reagan before, Bush policies are a kind of war on the working class. When officials within the Bush administration are heard to claim unions as terrorist organizations, there's more than just clear animosity. This is an indication of a deep intensification of anti-labor rhetoric and policy. While Clinton was nominally friendly to unions and labor, one must look at the way in which real wages were so seriously depressed during his time in office and the way in which production from speculation in the technology sector and the intensification of work all are not really labor friendly policies.

This leads to the issue of international policy and trade. Both Clinton and Bush are proponents of organizations like the IMF and WTO, but there's a clear contrast in the way that Clinton would advocate multilateralism to Bush's unilateralism. The Clinton era policy toward international relations was one of maintaining empire, to be sure, but not without the engagement with other world powers that signals the existence of a world stage. The Bush administration's policies are clearly designed by people wishing to subordinate the rest of the economic and political world to the power of unilateral hegemonic control. The world economy has been suffering from the ravages of world-wide speculative investing. These policies were not really much different between the two presidents.

2. Compare and contrast free trade vs. fair trade for U.S trade with the third world (global South). In you answer, explain what you mean by each of them, give examples. Does the World Trade Organization permit fair trade, explain? Give major arguments for and against each of these policies, and explain who is likely to benefit and be hurt by them. Under what conditions if any, do you support free trade, fair trade?

Free trade, as it currently exists, is an oxymoron. There is trade but it certainly is not free. There are significant conditions available to the most advantage players in the trade exchanges that are either not addressed at all or are brazenly advanced. Fair trade is an attempt to create a more responsible price model for international goods that as directly as possible remunerates actual producers with more reasonable selling opportunities.

Free trade advocates claim that open policies of trade result in all trading partners benefiting. The market forces involved would lower the cost to buyers and raise the price to sellers within reason to make the trade advantageous to both. However, there are structural problems with the notion of free trade. First, the partner that enters trade with the most relative power will tend to get the most value out of a trade at the expense of the partner. Further, when the trade is priced in specific currencies that are subject to speculation or change, the trade arrangements made at the table can change outside the control of the trading partners. When one partner tends to also have the most influence on currency markets, there's a clear opportunity for a bait and switch. Also, when the third world trading partners are forced into particular areas of production, that are not relevant or useful for local markets, they are at the mercy of their trade partners. Countries may be forced into certain production by conditions on international loans or in the function of internalized hegemonic control. Another significant trouble with the idea of free trade is that there's myth of unity within each country. No country is unified and there are definitely economic elite trying to create personal advantage at the expense of others. When free trade is negotiated between economic elite elements of each country, there is no representation for the economically disadvantaged. These same disadvantaged are the workers that create value for trade but seldom see the benefit of their work in their lives.

Fair trade is an attempt to remedy this to some extent not by offering the best possible trade conditions to the disadvantaged trade parters, but by offering reasonable rates of trade to the producers of goods as directly as possible. This means that the workers see more of the benefit of trade. However, in the case of coffee as an example, it should be clear that the standards of the bean required by the buyers are still so high that only the best crop get exchanged. This is to say that fair trade, as it currently exists, is still creating as much profit as possible and still only buying the best bean available. This means that the buyers do not provide all the value they could to the producer and that many producers are left with unsold crop. Fair trade is better, but still burdens the disadvantaged trade partner within the exchange.

Trade that does not take into account the systemic interconnected problems of global justice and trade advantages is not something that I would support. Therefore, it's unlikely that I would ever support trade that approximates free trade. I do support fair trade as something that's a worthy effort, but I have to recognize that it is not enough. I would go so far as to suggest that I would support “just trade” conditioned to provide reparations to disadvantaged partners within the context of exchange.

3. Explain how a Tobin Tax, and what is sometimes called a Keynes tax (although not by Pollin), i.e., a sales tax on all financial transactions (p.182, Pollin), would work. What are their supposed benefits, to whom? What weaknesses, if any, do you see with them?

The Tobin Tax would implement a sales tax on currency exchanges across borders. The Keynes tax as described is a sales tax on all financial transactions. The Tobin Tax would likely raise an estimated $100 to $300 billion dollars. Pollin gives $100 billion, but the Tobin Tax Initiative offers a range of $100 to $300 billion. Suggestions I've seen for the size of the tax range in the fractions of a percent, from 0.1 to 0.5 percent depending on the source. Obviously, there might be changes to the amount of trade undertaken if the taxes when into effect, but the small fraction of a percent taxed might be small enough to not diminish volume. While local governments might implement such taxes, it would likely require multilateral governmental agencies to implement. The costs of this might be quite large, as might be the enforcement necessary. There would be a clear benefit in revenue growth. Another benefit is that this tax might help disable some currency or financial speculation, especially short-term investments. The reason short-term investments would be more affected is that the small percentage would make a greater impact on many short, quick investments than on one long-term investment to which the tax would apply only once. The history of investments is that they tend to switch, from bonds to gold as an example, when there's greater protection from inflation or other reasons. This suggests that there might be a switch in investing strategies because of these taxes, but the point is this change in strategy is exactly the desired outcome. The effect of lower levels of speculation in world financial transaction would help to stabilize currency markets and also encourage long-term investments.

4. According to Pollin, Sept. 11, 2001 did not cause the most recent economic recession in the U.S. Define recession and then explain what caused the most recent one. Is the U.S. economy currently in a recession, officially? In your viewpoint? Why or why not?

A recession is two consecutive quarters of negative growth in GDP. The 2001 recession was caused by the collapse of the speculative bubble around the stock market, specifically the tech stocks. The economy is not officially in a recession because it does not fit the definition.

While the economy may not be officially in a recession, it's very important to recognize that most recent job growth has all been within the public sector, not in private businesses hiring. Further, the share of the recovery after the recession that is going to the cost of labor has been significantly lower than in the quarters following recessions. This means that the post-recession period can not be characterized by job growth, nor do the working people of the country share in the recovery. Officially, the economy is not in a recession, but given the fantastically low real wages that preexisted the recession and the way in which the recovery is not being felt through increased shares of growth by the working people, there are clear economic turmoil and failures.

What policies would you suggest to increase employment and economic equality?

Minimum wage is a a collectively bargained contract. If, as stated by Collins, a labor contract is a social contract, then the conditioning of the labor contract by legislation is the government enforcing a social contact. The government acts as a representative of all labor, a kind of universal union. The entire labor force, including un- and under- employed, are the rank and file of this universal union. The government should condition any and all employment contracts. This would likely require a constitutional amendment to explicitly allow the government to condition contracts, since this has been a point of serious contention since the early Republic.

I would create new deal like public works within the context of a public corporation that offered full employment. This would require companies to raise their offered wages or benefits to meet the market price for labor. This would also raise the ability of labor to negotiate with companies in exchange for their labor, since they would have a clear and available alternative to capitalist employment.

I would attempt to find a way to pay for domestic work, and to raise the view of that work as productive and necessary for the overall economy to function.

I would combine this a clarification of the 14th amendment that explicitly excludes corporations from being considered a person protected by the bill of rights. Either that, or I would hold that if corporations are to be treated as people, then so should any collective groups of individuals, such as communities and classes. I would then push for the infringement of individual or collective rights against corporations to better condition the function of the market to express approximated costs of externalities.

I would also work to re-implement the idea of corporate charters. I would re-implement the restrictions on state corporate charters that did not allow them to operate beyond state boundaries. I would the create a national corporate charter system which would make such corporations undergo direct federal oversight. I would then work to heavily condition all corporate charters with the original requirement that corporations have a socially redeeming purpose.

I would implement policy that watched and regulated both a minimum and living wage. This would publicize the level at which people are not able to earn a living wage and apply pressure to corporations to provide this living wage. To support this, I would require all firms with government contracts to provide this living wage to their employees. I would pay careful attention to the way that corporations would then hide low wage employees by outsourcing, subcontracting, etc., and attempt to condition the contract language to reflect the need for those workers to also have living wages. I would also work to link real wages to levels of productivity. Further, I would work to implement rules for controlling wage differentials between the highest earners and lowest wage employees within companies, similar to the way that the highest wages are conditioned by the lowest wages within Ben & Jerry's.

I would award government contracts to the bidder closest to the average bid. This would be an attempt to limit the way in which contracts are low-balled as a bait and switch which locks the government into contracts with companies that later come back with cost overruns.

I would work to creating a more productive economy, and to disable the rampant accumulation of wealth. I would highly tax idle wealth and non-productive capital. I would increase the amount of money to local governments to fund important projects. I would increase taxes for income over a living wage, but have no taxes on income up to the living wage, for all earners. I might investigate the possibility of repealing the income tax for earners making income plus benefits below 1 million, and instead rely on corporate taxes and fees on financial transactions.

I would work to create a federal infrastructure that included an FDIC for people's personal retirement accounts, which would rely on taxes on corporations and have the same kind of reserve requirement on corporations that is required of banks. This would likely include some level of asset requirements on all financial institutions, including the stock market. These would help protect the long-term investments of people and also avoid speculation.

Since most of my policies would be highly controversial, I would probably first implement a policy of expropriation to take back for the people the capital in which they had invested labor from companies and firms that attempted to leave the productive national economy, whether that's pulling money out or trying to relocate outside the country. I would also condition government contracts such that tax money could not be spend on goods and services outside of this country, excepting, I suppose for embassies in other countries. However, the tax money of the productive economy would not be spent outside of that economy.

I would implement price controls on essential products to avoid the inevitable inflation that would occur when incomes of working people would rise with living wages and other measures I would implement. There would likely have to be a new congressional commission or committee to set these prices and to decide what qualified as essential. As much as possible, I would attempt to ensure that the list of essentials included items that were environmentally and socially conscious, such as organic and healthy food items, and that organic wasn't considered to be a luxury version of the goods.

In order to encourage a reasonable level of inflation and an economy that widely circulates value. I would base the dollar on a flax standard. I would create another currency used exclusively for essential goods, and could not be exchanged, speculated, invested or held by foreign nationals. The flax currency would create a dollar that had a degrading value over time to encourage investments and spending, and discourage savings. The essential currency would remove the stigma from food stamps and also make a clear distinction between essential and luxury goods. The reason to discourage savings is that the economy really functions best when the money moves within it, and is not accumulated.

I think that would be a good first term in office.

5. On Feb. 25th, 2004, Alan Greenspan, the chair of the Federal Reserve, told the U.S. Congress that it should reduce the projected future government deficit, and the way to do this was to reduce Social Security and Medicare benefits. Greenspan spoke out against raising taxes and supported Bush's tax cuts of 2001-2003 and Bush's current proposals to make the tax cuts permanent. Examine the federal government deficit and Greenspan's proposals to eliminate it. Who will benefit, lose if Greenspan's proposals are passed? What would be the likely impact?

The proposal to make tax cuts permanent and reduce expenditures on social programs is the outcome of an essential viewpoint that money is best spent by people instead of governments. To reduce taxes and reduce social spending puts the choices on where money is spent back into the hands of the people with the money. Unfortunately, this exactly fails to recognize that there is a social justice issue over the distribution of that income and the hands to which it stays are essentially those that already have money. There is a fundamental belief held by many, if not all, of the people that have accumulated wealth that they earned it somehow independent of the labor and infrastructures that made that accumulation possible. The social, political and economic infrastructures responsible for the accumulation of wealth are not addressed by leaving money in the hands of those that have it. The essential contribution of labor by others in the apparent success of a capitalist is ignored or claimed outright as a kind of paternal prerogative. Oliver Wendel Holmes made the point that taxes are the price paid for liberty, therefore the constant removal of this burden is to disable the mechanisms of liberty. The Polanyi problem points out that there must be some kind of ameliorative distribution of wealth to address the social costs of capitalism, and to remove taxes from which social programs are paid is to leave injustice unaddressed. The market is an insufficient substrate to human life. Attempts by those with existing privilege to isolate either necessary or, worse, all human activity to the market is myopic, manipulative and transparently self-serving.

The deficit is a capitalist redistribution of wealth within the economy. Corporate welfare and cronyism gravitate advantage and accumulation toward those already advantaged. The deficit is a measure of value extracted from the economic system and of how much the future productivity of labor has been leveraged by the ruling class. The increased burden of productivity is placed on the laborers within the economy, like a form of indenture, by those in the ruling class without any sense of how the current economy is a form of mortgage on human lives. This increased burden takes the form of intensification and isolation. Deficit spending during times of crisis was seen by Keynes as a way to prop up the economic system that provided living wages to people. The deficit policy of the current administration is a process of creating maximal outflow of money to corporations and firms, not with the focus of helping the working classes or the poor. The reflection of this is in the way that the apparent economic recovery, for the first time in the history of recessions, has not resulted in greater shares of income for the working classes in following quarters. This recessional recovery has not resulted in more jobs nor has it resulted in a greater share of income of by the workers. The reason is clearly the policies of the current administration and Greenspan's proposals fit within that ideology framework.