The Lessons of Czar Nicholas II

Critics of the "Occupy Wall Street" (OWS) protests and similar actions around the country and around the world use the term "class warfare" to describe the objectives of the protesters. These critics use terms such as "socialist", "communist", and "anarchist" to dismiss the protesters and their concerns. Supporters of OWS spend too much time is spent arguing against these irrelevant points—it just doesn't matter whether their characterizations are true or false.

Let's then grant the following premise (which aren't actually true): OWS is nothing more than a bunch of communists intent on class warfare against the established power structures of the West. Does this premise mean their concerns should be readily dismissed?

Whether or not you want to grant those assumptions, communism is bad for many reasons not worth discussing in this blog. Any idea that you will address society's current ills by implementing Communism is, at best, misguided and, at worst, a recipe for the Soviet States of America. So, if we grant the absurd premise that the OWS protesters all are trying to overthrow American capitalism for Soviet communism, we're also granting that the protesters' solutions to our ills might be as bad or worse than the disease.

The Russian Revolution (the short version)

Nearly 100 years ago, Russia faced a real class war between real communists and a real ruling elite in the form of the feudalist Russian monarchy led by Czar Nicholas II. The world of early 20th century Russia was a political system based on a largely absolute monarchy with a feudalist economic system. Under feudalism, the "means of production" are controlled by land owners who make up a hereditary aristocracy. If you did not own land, you were at the mercy of your landlord for your economic well being. You essentially worked his land in exchange for protection, housing, and basic sustenance.

It's worth noting that Marx really didn't see communism as a replacement for feudalism. He believed societies needed to go through a progression from feudalism to capitalism to socialism and finally to communism. He also believed that these changes did not occur naturally—they required revolutions.

In other words, the status quo in Russia was a really bad thing with horrible injustices in place. Furthermore, that society did not provide any means for the disadvantaged to alter those injustices. A number of groups nevertheless attempted to make things better, including the Bolsheviks* (aka the Communists). The Bolsheviks were governed by an ideology based on the writings of Karl Marx—Communism. Communism sounds like a great idea in theory. It is an economic system that distributes goods and services based on need. Who wouldn't want a utopia in which everyone gets what they need?

Well, I don't. But that's beside the point and an argument for another time. The point is that Marx painted a very compelling picture to a people abused by a corrupt and unfair economic and political reality. Regardless of how silly or dangerous that picture was, it didn't change the reality that the people of Russia were being harmed daily by an unjust system.

Would anyone today seriously defend feudalism because some of the people protesting it were misguided in the solace they sought from communism?

Even if you would, there's no denying they were seriously pissed off and the result was the Soviet Union.

Having the Wrong Solution Doesn't Mean There's No Problem

We can learn two lessons from Czar Nicholas II and the Russian Revolution:

1. Because the people who see a problem have the wrong answer to a problem doesn't imply that there's no problem.
2. If the people capable of providing a just answer don't provide one, then the people with the wrong answers will ultimately force those wrong answers on everyone else.

The second lesson is much more dire than the first. Russia suffered through 70 years of authoritarian communist rule because the people who solved the problems of czarist feudalism were the Bolsheviks.

The voices of OWS are growing louder because there is a real problem. We've created false democracy in which political speech is equated with wealth and corporations are treated as persons. The result of this situation is the appearance of democracy when in reality only corporations and the people who govern them have any voice in how we are governed. The way Wall Street has behaved since the de-regulation of the late 90's has helped it do serious damage to the world economy and the companies that make up Wall Street have been immunized from those with political power from the capitalist forces that have traditionally make the US economy such a significant success.

The United States is no longer a capitalist democracy. It's a corporatist oligarchy with shades of democracy.

Some of the loudest people among the "Occupy Wall Street" crowd have the wrong solutions to this unsustainable situation. Some of them, however, might have the right answers. Ignoring all of them and pretending they are all Bolsheviks only increases the chances of real class conflict and, perhaps, real class warfare.

A Proposed Solution

I have a simple proposal for a solution that should address the valid objectives of the various OWS interests in the United States while not damage the fundamental values of our capitalist democracy. It's a Constitutional amendment that restructures the way campaigns are financed in the USA.

When you listen to the different voices of OWS, one theme emerges: People are tired of a nation in which wealth determines political voice. When spending money is considered free speech, those with more money will always have more speech. When corporations are considered persons, the considerations of large businesses will always outweigh the concerns of the small business or the individual. Let's end the idea of money as speech and corporate personhood through a Constitutional amendment that restructures the financing of political campaigns.

That means the public financing of all campaigns and elections. All candidates of significance should have equal amounts to spend on elections for public office. All entities with licenses to broadcast over public airwaves (radio, television) must be required to grant candidates equal time to make their case for election. Congress could be allowed to define what "candidates of significance" means, but it should be sufficiently lower to allow for multi-party elections.

Perhaps something like (I am not a lawyer, so this is obviously not bullet-proof legal wording):

The Campaign Finance Reform Amendment

1. Public funding. Elections for public office shall be funded entirely through public funds with the level of such funding determined from time-to-time by actions of Congress for federal elections and the States for state and local elections. All candidates of significance for public office shall have access to equal funds where "candidates of significance" may be determined by acts of Congress and the States. Definitions of "candidates of significance" must include at least three candidates for any office unless there are fewer than three candidates running for the office in question.

2. Independent groups. Congress may establish laws allowing for private citizens to form political groups that may act independent of candidates, but funding for those political groups must come from individuals and not many other kind of entity. Any monies in excess of $100 to a political group must be made public.

3. Use of public airwaves. All entities granted specific licenses over public airwaves must provide access to at least 5% of their total airtime to candidates free of cost in a manner equal in quality and quantity.

* Fun fact: The term Bolshevik comes from the Russian word for majority (the 99%?).

 

Economics, Not Ideology

The battle cry of the Tea Party and so-called "fiscal conservatives" is "Households balance their budgets, why can't the federal government?" It's a nice slogan designed to support a strong anti-government ideology, but it has no basis in economics.

Let's do a simple thought experiment.

Imagine a government with a $100B/year revenues from various taxes and spending appropriations of $100B/year to match. This is a government with a balanced budget. The spending equals the revenues and no debt is created. In addition, no free cash is created.

The problem with this scenario is the nature of the revenues. The revenues are directly dependent on the overall health of the macro economy. If the economy grows, revenues grow and we get excess cash (surplus). If the economy shrinks, revenues drop and we either a) fail to pay the bills for our appropriations or b) borrow money to cover the shortfall (deficit).

Obviously, with a growing economy, this isn't so bad. We have a surplus and don't have all of these discussions about deficits and bond ratings. With a legislated balanced budget, we either give that money back to the tax payers or increase spending (or, possibly, simply make an appropriations for a "rain day" fund).

The problem is the shrinking economy. In a shrinking economy, you have a private sector that is pulling back from investing in growth to a more defensive strategy oriented around cutting costs and gaining efficiencies. Companies stop cutting costs when the economy hits rock-bottom and they are operating at maximum efficiency. They begin hiring again when they see predictability in the economy and feel they safely can begin investing in growth.

When the government cuts spending to match lost tax revenues, it does two things:

1. It creates greater recessionary pressure on the economy because government spending is part of the economy. When you remove that spending, you by definition shrink the economy.
2. It adds to economic uncertainty. Under this scenario, forcing a balance budget means that government spending is no longer a fixed, predictable part of the economy. It instead becomes another downward trending point of uncertainty.

When government cuts spending (or raises taxes) during a weak economy, it takes money out of the economy and creates economic uncertainty. It makes the problem worse.

To be fair, running a deficit doesn't come without cost. Every dollar the government borrows today is a potential tax increase tomorrow of $1 plus interest. Let's continue the thought experiment.

Our $100B tax base drops to $75B in the recession. It lasts one year, and then we recover to normal levels. Our spending is now $100B plus debt service on the $25B from the recession. We have to raise taxes at this point to get the money for debt service or hope the economy grows to match.

In short, it's just not as simple as "balance the budget". Running a deficit is bad for long-term economic growth. Cutting spending and raising taxes address the deficit, but they are bad for short-term economic growth. Increasing spending and cutting taxes are good for short-term economic growth, but they create a deficit.

The narrow-minded focus on the deficit as the problem facing the US is causing us to ignore the real problem: jobs. The reason this recovery is so weak is because companies just aren't hiring right now. They aren't hiring because there's so much uncertainty from the government right now. And the uncertainty from the government is almost entirely a result of the bickering in Washington right now because no one really knows what way Washington is going to go on August 2 and even beyond.

Policy certainty is what we need from Washington right now, not balanced budgets or spending programs or tax cuts or tax increases or spending cuts.

Spending as a Stimulus

It's very hard for conservatives to consider the possibility that government spending can stimulate the economy. Any Economics 101 text will illustrate that spending pushes the economy forward no matter who does the spending. The reason we debate tax cuts versus spending is not because one is inherently better than the other (if that were true, we should either stop taxing completely or let government do all spending), but instead because of the long-term impact of the spending versus the long-term impact of the tax cuts on a case-by-case basis.

If you gave each member of Congress $1B to go to their local casino and put it all on a single hand of blackjack, that would stimulate the economy. The problem with that approach is that we likely would not see much of an impact beyond the initial spend—it would be close to pure consumption. Similarly, we could give a 10% tax cut to every person in the country, but if all anyone is going to do is save that money, it will be completely wasted. 

All spending is not equal. When you spend money building a new transportation that enables workers from an area with excess capacity to an area requiring labor, you do a lot more for the economy than if you were to spend that money studying cow farts. When you drive tax cuts to small businesses who tend to re-invest excess cash as opposed to big companies who tend to pocket that cash, you do a lot more for the economy.

When comparing a tax cut versus a spending increase, you need to look at the big picture impact of the tax cut versus the spending increase. 

The best way to judge the impact of spending is on the macro-economic impact. Is the thing being spent on something that has limited or negative ROI for an individual business yet has a significant impact across society? Any program fitting this description is a good program for government to spend money on (and thus tax the populace OR borrow money).

The best way to judge the impact of a tax cut is to understand what the beneficiaries of a tax cut are likely to do with the money. If the tax cut is likely to go directly into investment vehicles, it's a good candidate for a targeted tax cut. To pay for a tax cut, you either need to cut spending OR borrow money.

The worst time to increase taxes or cut spending is during an economic downturn. During a recovery period, cutting taxes tends to be most effective in fueling a recovery because the recipients tend to be most interested in investing their windfalls. On the other hand, spending is much more effective in the middle of a pronounced downturn since individuals and businesses are shy about investing any excess cash during a downturn.

In fact, the current economic crisis is a perfect example of why tax cuts don't help as much during an economic downturn. There is plenty of capital to loan and invest in the market, but no one is doing it. There is too much fear and it is impacting investment. If we give a 10% tax cut right now to anyone, they will almost certainly pocket that savings. If, on the other hand, we spend $500M on a roads project, that will create a demand for capital from construction which will free up investment from banks and inject money into businesses serving the project and create jobs. That will in turn create confidence in the market and make it possible for capital to flow more freely.

For the long-term, hopefully the roads project is on a road we actually need and that will fuel long-term economic growth. Even if it is on a "Bridge to Nowhere", however, it will create a short-term stimulus that can hopefully create enough market confidence to free up capital and enable the free market to do its job.

The impact on the current debate on the stimulus plan is simply this: under the current circumstances, all else being equal, $1 in government spending will have a greater short-term economic impact than $1 in tax cuts. If spent on the right things, those spending increases should also have a greater long-term economic impact. Furthermore, the best place to cut taxes right now is on small and medium-sized businesses who are likely to re-invest whatever the economic circumstances. The closest thing we have to this mix is the Senate bill. It's not perfect. It has a lot of "sending Congressmen to the casino" crap in it, but it also has a lot of critical infrastructure spending in it. Under the current circumstances, almost anything is better than nothing.

Reign in the House Democrats

We all know that Republicans don't get the concept that you need to spend money on infrastructure and that spending facilitates economic growth.

What we have learned in the past two weeks is just how incompetent Democrats in the House are. I have always felt that Nancy Pelosi is the worst House speaker of my lifetime. Both in her failure to exercise the rights of Congress as an equal branch of government when she led the opposition party and now in her petty attempts to further liberal pet projects under the guise of a stimulus bill now that she is leading the majority party.

In the big picture, I think it's time for Democrats to kick her out of a leadership role. For today, however, it's time for the House Democrats to take their leadership from the Senate and pass the Senate bill as is. The objective right now is to kick into gear programs that will increase economic growth in the short term (now through 24 months), not to take care of all the problems we have in a single bill.

Let's look at the education component that has been removed from the Senate bill. House Democrats are all up in arms about this. If we were talking about an education bill, I would be upset. We're not. We're talking about a stimulus bill. Education is one of the most important things we can spend money on, and it's long-term ROI is unmatchable by any other spending or tax cut.

But it is very long-term. The only reason you try to force it into an economic stimulus plan is because the specific education spending you are proposing is questionable and cannot withstand scrutiny in an education bill. I fear that's what House Democrats are doing with many of these non-stimulus items.

The Rev. Warren Fiasco

For eight years, the United States has been ruled on ideological grounds by a President who promised to be "a uniter, not a divider". Instead of being a uniter, he consistently put ideologues in positions of power and actively sidelined anyone with divergent views. President Bush was not the President of the United States of America—he was the President of NeoConservative Americans and left the rest of us without any leadership at all.

President-elect Obama has chosen a man with views I cannot stand to perform the invocation at his inauguration. Many on the left are outraged at this selection. I think it's a great selection. President Obama is showing that he will be a Democratic President of America, not a President of Democratic Americans.

This inauguration does not belong to Obama or those who voted for Obama. It belongs to every single American, from progressives like myself to fundamentalist evangelicals like Rev. Warren. Everyone has a place at this inauguration.

Liberals who are outraged at the selection are no better than George Bush and Dick Cheney.

Proposal for GM

So I am against a bailout. What's the solution to the problem?

Those supporting a bailout are right about one thing: GM is too big to fail.

The bailout is wrong because it is not a mechanism for keeping GM from failing, only for putting off the failure and dragging out the pain of failure.

GM is a bad company run by incompetent management and burdened by absurd union contracts. It needs to shed its management, rip up its union contracts, and be broken into smaller pieces to succeed.

Bankruptcy won't make that happen. This situation is not the kind of situation in which a company enters bankruptcy, reorganizes, and comes out leaner. This situation is a liquidation event. Either way, good companies that have been serving GM will be put out of business because they won't see a dime of money that GM honestly owes them.

A bailout, however, has two equally bad paths:

1. It will perpetuate bad management practices and leave in place labor contracts that make no market sense. 
2. The government will put strings on the bailout. You know what's worse than bad businesses people managing a company? Government managing a company. 

There is an alternative. A bailout of the workers and vendors that have done nothing wrong while throwing out the management and bad corporate structure that made this situation possible. Here's how we do this:

1. Let GM enter Chapter 11 or Chapter 7. 
2. Any vendor or other creditor who is validly owed money at the time of bankruptcy will receive a government backed loan for all amounts owed by GM to them.
3. Any GM worker laid off will receive 6 months severance from the government.
4. Any GM worker without a college education or who has worked for GM more than 10 years will receive government paid education to re-skill themselves.

As a result, vendors and workers will receive reasonable protections against the bankruptcy, but the company itself will be broken up and its assets restructured in accordance with the market. The market-based restructuring will enable new companies to emerge than can make the US automative industry competitive again.

Let the Big Three Die

All of the consequences of GMs failure that proponents of a bailout use to argue support the bailout idea are true. If GM fails, people are out of jobs, good companies that have done nothing worse than offer services to GM will suddenly be saddled with bad receivables and the prospect of not making payrolls, and the state of Michigan will plummet in despair. 

But those arguments do not justify a bailout. Ford, GM, and Chrysler are poorly run companies with bad products. They have not continued to operate over the last 20 years by innovating and meeting consumer demand; they have remained in business by chaining the state of Michigan to their well-buying and spending money lobbying the US government for regulations that favor the folly of their product offerings.

Few industries have the luxury of seeing a trend coming for 30 years. The auto industry has had that luxury. We have all known that the price of gas would eventually go through the roof (and it will again). Japan, Germany, and the other auto-making countries recognized this and have a number of different products on the road today to match that need.

But not Detroit. 

In the past election, we had a number of silly discussions about "socialism" and "capitalism"—as if a 4% difference in tax rates on the highest 5% of income earners was somehow that dividing line. Bailing out the Big Three, however, is actual socialism. The worst of socialism. It says that employing people is more important than the value they add to our society. It also ignores what we know is a failure of socialism: if you save a job today that should not be saved, you will have to save it again tomorrow, and the next day, and the next day. And they will become less and less worthy of having a job as time goes on.

So, the bailout people have clearly illustrated a short-term impact. It's devastating and real.

Here's the long term outlook:

GM fails and sells off its assets, probably to a foreign car marker or a silicon valley company. Ford fails and sells off its assets. Chrysler sneaks by. Michigan goes into a severe depression and hordes of people leave Michigan for good. The auto-makers no longer control Michigan politicians and, amazingly enough, Michigan finally diversifies its economy. It learns how to survive without the auto-makers and eventually starts to see a prosperity that is actually earned prosperity. Detroit is no longer the cesspool of the nation.

On the other hand, if the Big Three are bailed out, we will save some jobs (there will still be a lot of layoffs), executives will get their golden parachutes, and we will be back in this position again in the future. You know why? Because these are bad companies. They must fail.

And if they truly are too big to fail, they must be broken up.