Musings on Social and Political Policy

The issues of "values" have become of great concern to many people in the US over the past twenty years or so. In most cases what is meant by this are those lifestyle choices that affect family and personal relations.

It is instructive to see how similar concerns in the past turned out and what this may mean for the US and the world.

Here are two.

Slavery in the US

During much of the period of slavery there was considerable support for the practice in many mainstream Christian churches. Various passages from the Bible were used to support this. Eventually, after the rise of the Abolitionist movement in the North, there were theological battles being waged on both sides of the issue. The theological basis given to slavery was probably part of the mind set that informed the Supreme Court's Dred Scott decision.

Iran's 1979 Islamic Revolution

In 1979 a religious Islamic group overthrew the secular, Western oriented, government headed by the Shah. Most secular institutions were shut down or severely limited in scope. Religious practices which had been ignored in the secular society were reinstated. This regime has now been in place for twenty five years and, since half the population is between fourteen and twenty-five, this is the only type of society that they have known.

So how did things turn out when a religious basis was used for civil society?

In the US we, of course, had the civil war with its horrific damage. But, this was not all. For about fifty years before the start of the war much of civil society was involved with the slavery issue. The increasingly hardened positions on both sides poisoned the relationships between North and South and resulted in the failure of the South to industrialize. After the war there was the Reconstruction period where the attempt to remove lingering effects of slavery by government action was tried. Once again this led to poor results. One can plausibly make the case that the different world views that exist between the South and other areas of the country are still a residue of this history.

In Iran, after 1979, the development of industrialization effectively ceased, the middle class almost disappeared and international trade declined. In addition the standard of living declined, unemployment reached 50% in some sectors. Recent polls show only 19% now support an active clergy while 68% say their family's situation has gotten worse since 1979. There have been a succession of attempted counter revolutions in the past seven or eight years and there is a good chance that one will succeed sometime in the next few years. So the legacy of a theocratic take over of government has been a loss of social progress for an entire generation.

In both examples the excessive mingling of particularized religious beliefs with the function of government had disastrous economic and personal consequences. What has this to do with the US today?

We are on the verge of having a particular religious faction determining large aspects of public policy. By most accounts this group amounts to about 20% of the population. So what might the consequences of this be?

Let's see what has happened so far. Firstly, important issues of public policy have been pushed aside while the government shifts its focus to "values" based issues. Just to give a single example, the development of a new comprehensive energy policy has been delayed for three years already. What affect this is having on foreign policy and the environment is of immense importance.

Secondly, "values" inspired beliefs have started to have effects on the physical and economic health of the country. The current debates about stem cell research, for example, may risk the US losing its dominant position in life science research and innovation. Rather than being a world leader in medical advances we may find ourselves at the mercy of some foreign company or government when new treatments are developed. With the developer setting the price and conditions for distribution what sort of position might we find ourselves in?
Similarly, policies about reproductive information are having affects on the spread of AIDS and other STDs in the US as well as in third-world countries. Mingling this with beliefs about abstinence, abortion and birth control is having unforseen consequences on the birth rate as well.

I think it is important to discuss this, especially on conservative forums. The people who predominate these are politically active, better read, and perhaps more passionate that the average person. As such, they have the prospect for thinking through the long-range consequences of the US becoming theocratically managed.

As the examples above illustrate the results may not be what is desired, even by those pulling the strings.

Be careful what you wish for

Judging from the choice of topics on most blogs it would seem that most participants are middle class, better educated, majority-ethnic persons. Thus the choice of topics reflects their concerns and interests. Everyone is concerned with aging and health, for example.

However, much of the tensions in the US can be traced back to ethnic intolerance.

I was brought to these thoughts by having just finished reading "My Bondage, My Freedom" by Frederick Douglass. This, combined with two books by James Weldon Johnson: "The Autobiography of An Ex-Colored Man" and "Along the Way" provide a good historical framework for examining discrimination in the US.

For those not familiar with these works, Frederick Douglass was a slave who escaped to the North in 1838. He became an important abolitionist, speaking and writing about the topic of slavery for the next 30 years.

James Weldon Johnson was a multi-talented man whose interests ranged from writing Broadway musicals in the early 20th Century, to being a US consul in South America, to an important official in the NAACP.

They both had extremely insightful things to say about discrimination in the "liberal" North as well as in the South. These were based upon personal experiences and their unyielding attitude towards accepting a second class citizen status.

It is common nowadays to assume that since the laws concerning discrimination have been removed from the books the problem must be over. However, this would not seem to be the case.

For example, the Dixicrats that resisted integration, voting rights and other civil rights issues in prior days have now morphed into Southern Republicans with practically the same social attitudes as previously.

The attitude towards drug offenses has led to the disproportionate punishment of minorities for similar acts. As a consequence we have a very large black and latino prison population with the associated societal issues of single moms and unemployable ex-felons.

Even the changes in the welfare system seem motivated by the unspoken discrimination against minorities: the prototypical black, inner city, single mom. This, even though most poor people in need of assistance are white.

During the slavery period the attitude of the Southern churches was to lend support to the slave system. This is extensively documented in Douglass's book. How many of these churches are now fundamentalists with the authoritarian outlook transformed to new social issues?

Discrimination is still a factor in the US. Tests of employment and housing availability consistently reveal that minorities are turned away in favor of whites. Without bringing these issues back into the light we leave the political dialog open to the coded appeals to racism that are suspected, but hard to prove.

The push for higher returns on investment, especially in the short term, has wide-reaching affect on many sectors of society.

Here is an example where a proposed merger was stopped by hedge fund managers.
The Deutsche Borse wanted to buy the London Stock Exchange.

Regardless of your opinion of the merits of the transaction, hedge funds are not shareholders in the traditional sense. They don't plan on holding the underlying stock for extended periods of time and they have very little interest in the underlying business. They are solely interested in make money from offsetting one gamble against another.

The key quotes from the March 8, 2005 NY Times article:

'But when Mr. Seifert, the chief executive of Deutsche Börse, finally withdrew his bid on Sunday night, it was the resistance of his own shareholders, not the elusiveness of his quarry, that doomed the campaign.

In the process, these investors - mostly but not only hedge funds - sent a signal across the German corporate landscape that they were a muscular new constituency that would demand to be heard in boardrooms.
"We believe the proposed transaction would have been value-enhancing for Deutsche Börse shareholders," Mr. Seifert said in a statement.

"At the same time, we recognize that a significant portion of our shareholder base is focused on return of capital in the short term."'

Investors in hedge funds, mutual funds, retirement plans and the like have been led to believe that they should expect high returns. Many polls indicate that average investors think yields should be in the 10-30% range per year. Funds which fail to deliver are rapidly dropped by investors.

Part of the underlying Social Security privitization scheme is based upon the assumptions about the expected returns on equity investments.

Rather than repeat all my arguments here I refer interested readers to my short essay:
Taking Responsibility

For the impatient, the conclusion is that expecting more than 2-3% above the rate of inflation is not borne out by history. And it our own greed that has led to outsourcing and other ills as business is forced to sacrifice everything to satisfy the investing public.

In the words of the immortal philosopher, Pogo 'Possum: "We have met the enemy and he is us."

One solution to funding Social Security that has not been suggested is to eliminate the payroll tax completely. This is a regressive tax and only captures money from wage income. A large number of low wage workers pay more in payroll taxes than in income tax. Many pay no income tax at all, but still pay payroll tax. Eliminating it would help those at the bottom of the economic ladder the most.

Here's how to do this and fix Social Security at the same time:
It must be remembered that the payroll tax is paid equally by both the employee and the employer, so if we drop it we need to replace it with two income streams. I propose eliminating the payroll tax as a separate tax item and replacing it with an adjustment to the income tax rates. If we take the payroll tax rate as currently in the 8 to 9% range than adding about this amount to the tax rates will generate a similar amount of funds from workers. Thus the 10% tax bracket would become 18% and so on. If desired the increases don't have to be strictly linear, but could be scaled so the income tax brackets become more progressive as in the past. Thus the lowest rate might increase 5% and the highest might be 12% or so.

This also has the effect of eliminating the cap on the payroll tax which is currently a popular suggestion. Careful selection of the new tax rates and brackets can eliminate the Social Security "shortfall".

Doing this would have the effect of improving the standard of living of the poorest workers and would cut down on the need for other compensating public programs such as the earned income tax credit and food stamps. By careful adjustment of the rates and eligibility levels the poorest workers would come out ahead and the total government payments would remain about the same or, perhaps even drop slightly.

We still need to address the loss of income from the elimination of the employee contribution to Social Security. This revenue loss has to be covered as well. As I suggest in my essay on corporate taxes this collection system needs to be overhauled as well.

By substituting a transaction based tax on business the lost revenue can be recaptured. Spending on payroll is just another business expense and would be subject to the same sort of taxation as any other business purchases. By covering all business expenses a transaction tax would also capture revenue from employee expenses which are currently escaping direct taxation such as stock options, personal perquisites like private jets and company paid club memberships, etc. Thus the overall business would be taxed rather than just specific activities. This will also help to reduce planning distortions since a dollar spent on salaries will have the same tax consequences as a dollar spent on contracting out a service.

So for this plan to be fiscally sound it needs a change in the way personal and business income taxes are collected. Who would benefit and who would lose out? The richest workers will see their taxes increase. Depending on their present income and the balance between wages and other forms of compensation their marginal rate might increase as much as 10% or so. This would still be much less than in prior periods of our history when the rate reached into the 70-90% range. It's seems only fair that those who enjoy the largest benefits from our society be prepared to pay the most. Other potential losers are those companies which have arranged their business so as to underpay taxes compared to their peers. Moving nominal operations offshore, for example, would be less favorable since buying from a foreign subsidiary at an inflated price so as to shift the profit to an offshore entity would no longer work. The transaction tax would be based upon the amount paid. We see variations of this type of taxation in the VAT (value added tax) used in Europe and Canada.

The gainers would be low wage earners who would see their taxes decrease. In addition those companies that play by the rules and pay their taxes would be at a more competitive position than presently since their competitors would no longer be able to game the tax system. This would decrease the unfair advantage given to those companies from escaping taxes.

In order to achieve these bold steps we need to get away from the current misleading rhetoric about the "Social Security Trust Fund" and look at the bottom line. It's up to us.