Monthly Archives: August 2007

opportunity economics and civic participation

The Hope Street Group is an organization founded by young business people who believe in growth, innovation, and opportunity, but do not believe that the current economic system provides opportunities either adequately or fairly. They favor more investment in human capital, reform of taxation and financial markets, and programs to give people second chances at entrepreneurship. Hope Street Group has laid the groundwork for effective political action and will soon be better known thanks to a $1 million Omidyar grant.

I am a member of HSG. I know there are debates about whether GDP growth is an adequate measure of progress, and about whether we can achieve social justice through investments in human capital (rather than changing the bargaining power of labor versus capital). I have nothing original to contribute to those debates, and I’m agnostic about some of the key questions.

But I believe that democracy and civic participation work better when people have a sense that the pie is expanding, and specifically, when people believe that there can be more for all if we cooperate voluntarily. There is a powerful, optimistic kind of populism that says: We can make wealth, and everyone can be better off, but we need to make sure that everyone is included in productive work. This is much better than the kind of populism that presumes there is a fixed quantity of goods, of which the powerful have taken more than their fair share. Optimistic populism promotes public investments in education and infrastructure, whereas resentful populism assumes so much distrust that it ultimately undermines public programs. Resentful populism also generates bad politics: division, hyper-partisanship, retreat into interest groups, and ultimately demobilization; whereas a populism of abundance encourages dialogue, participation, innovation, and creativity.

Saigon/Baghdad

Americans may be bracing themselves for a replay of 1975, but the conclusion of the US war in Iraq will be quite unlike the debacle that ended our involvement in Vietnam.

Some in the Bush camp like to revive the specter of ’75 because it makes any withdraw from Iraq seem disastrous. Surely we cannot once again allow Americans to be airlifted off the roof of our last stronghold in a key country. If Democrats cause such a withdrawal, they can be blamed for the defeat–that is the implicit threat. For some opponents of the Administration, the idea of Vietnam redux also has appeal: it associates George W. Bush with the ultimate kind of failure, a battlefield defeat.

But it won’t be like that. In Vietnam, our sworn enemy–the Viet Cong–overran the whole country in which we had been fighting for more than a decade, established an effective but repressive central government, completely banished us and our allies, aligned the country with our global rival, and sent many of our former clients fleeing onto the high seas in tiny boats. This was a textbook example of the end of a war. We were the losers; they were the winners.

In Iraq, after major US combat operations cease, the flag will still fly over the US Embassy. The Embassy will probably remain one of the most important power centers in the country, disbursing billions in aid and coordinating various military operations for years to come. There will likely be whole brigades of US soldiers stationed “in country,” at least in the Kurdish north. The national government may lack effective control over its territory or may tilt to Iran, but in either case I’m sure it will keep lines open with the US and Europe. Meanwhile, our sworn enemy, al Qaida in Iraq, will face serious challenges. The Shiite majority will do its best to wipe al Qaida out–with the help of Iran and some ruthless Shiite militias. Most of al Qaida’s foreign jihadists will move on to countries where they can get an easier shot at the US, Europe, or Israel. Iraq may be in a desperate condition, but it will not be in the hands of our enemy.

If the US reduces its presence dramatically and a new administration directs its attention elsewhere, the Western press corps will pay diminished attention to the internecine conflict and humanitarian disaster that drags on in Iraq. That means that the domestic political consequences of withdrawing are smaller than people imagine–much smaller than the consequences of Vietnam. The moral stain of the War is enormous, but it won’t play out as a military defeat unless our politicians collude in portraying it that way.

“vertical farms” and the new political economy

Since the Industrial Revolution, fossil fuels have reduced human–and animal–drudgery. This has generally been a blessing, although we are now in danger because all that burned carbon is messing up the global climate. (And wars have been fought over oil.)

The blessing of carbon is certainly a mixed one nowadays for older industrial cities like Baltimore, Detroit, or my hometown of Syracuse, NY. You can think of a city as an economy, with imports and exports. Energy is a major import; and we should count not only the electricity, oil, and gasoline that is literally moved into the city, but also the energy components of food, clothing, waste processing, and other necessities.

Fossil fuels have replaced work, but there is not enough rewarding work left in our older cities. The cities have to pay, somehow, for the fuel they import. The best way would be to produce exports, but manufacturing is cheaper in the developing world, and the knowledge economy belongs to people with excellent educations. The old plants lie empty–like Sparrows Point, near Baltimore, which once employed 30,000 people in steel and shipbuilding. The biggest employers in Baltimore City today are the government and private health and education facilities: together, they provide 165,000 out of 350,000 total jobs. Those positions are subsidized by state and federal taxes, but at insufficient rates. You could almost say that Baltimore purchases its fossil fuels and other necessities using Medicare, Medicaid, Title One Education funds, and state aid to schools–all funded by taxpayers who have little love for the inner cities. (I mention Baltimore because it’s nearby, but the same is certainly true of Syracuse, New Haven, and other cities in which I have lived.)

The most appealing alternative I can think of is to replace fossil fuels with rewarding human labor that must be done on-site and cannot be outsourced. That is a tall order, especially if we expect the labor to be both rewarding and accessible to people without college degrees. But there are glimmers of hope. I love the idea of vertical farms that would produce hydroponic fruits and vegetables right in the city, using solar power, waste water, and skilled human labor instead of fossil fuels. Think of the nutritional, environmental, educational, social, and even aesthetic advantages if we could pull this off. (The picture is a design by Chris Jacob.)

the ethics of taxing hedge funds

The debate about taxes for hedge fund managers is an opportunity to consider the rationale for taxing various kinds of income at different rates. The narrow issue is that hedge fund managers pay capital gains taxes instead of income taxes on their earnings, even though their livelihood comes from managing other people’s investments. The broader issue is that we tax income, capital gains, consumption, property, and various imports at different rates. I’m inclined to say:

1. The degree to which we deserve the money we make and spend varies enormously, depending on risk, effort, and especially the public impact of what we do. You can work hard producing a product that is bad for other people’s security or health (or for nature), and in that case, I hardly think you “deserve” your income–in the moral sense of desert. Or you can sit back and accrue interest on your trust fund, in which case I am unmoved by your claim to deserve what you have. However …

2. It’s problematic for the government to tax at different rates depending on the moral value of people’s work. I don’t deny that moral distinctions can be made, but can we trust the legislature to make them? Can Congress manage to make distinctions across the whole of a modern economy, without lumping behavior into crude categories? And do we want the government to collect all the information it would need to make really wise judgments?

At best, Congress would have to review all kinds of private behavior and readjust taxation constantly. In fact, that’s what it does, and the result is a tax code that hardly fits in one bookcase and that shifts every year. As Hamilton wrote in Federalist 62, “a mutable policy … poisons the blessing of liberty itself. It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow. Law is defined to be a rule of action; but how can that be a rule, which is little known, and less fixed?” Hamilton understood the kind of “liberty” that Friedrich von Hayek championed–the ability to plan without having to guess what some other power will do. For Hayek, the rate of taxation was not as important as its stability and transparency–and he had a point.

3. But the government needs money. In fact, it needs more money than it collects. It’s a terrible waste to borrow almost $9 trillion, on which we must pay $400 billion in annual interest. It is immoral to pass that debt to our kids. No one really argues that we can cut federal spending deeply enough to close the annual deficit, let alone pay off the debt. And society would work better if the government actually picked up an additional expense (paid by our taxes): universal health insurance. Even if you disagree with the last point, you pretty much have to concede that the government needs somewhere in the neighborhood of $2.5 trillion per year to operate.

3. If the government needs money, it ought to take it from the people who will miss it least. Losing one dollar matters a lot more to someone who lives on the minimum wage than it does to a hedge fund manager.

Thus I’m for raising taxes on hedge fund managers. There’s an argument that we ought to “incentivize” risk-taking, but I suspect that managing a hedge-fund would be adequately rewarding even if the effective tax rate were 15 percentage points higher. As for the argument that risk-taking is virtuous, I think that’s quite beside the point. Any urban public school teacher exhibits a lot more courage than a hedge fund manager, but we don’t and can’t tax income in proportion to personal virtue.

A better system would actually tax wealth (not annual income) at one smoothly graduated rate, regardless of the source. That’s the fairest way to raise funds, given the declining marginal utility of money. But I’m not sure how we could measure accumulated wealth well enough to tax it.

looking for a Nabokov heroine?

Since yesterday afternoon, about 300 people have reached this site after searching on Google for the words “Nabokov” and “heroine.” They are reaching an old post of mine about Lolita. I can’t find any website that links to that post; all the visitors are coming straight off Google. Their IP addresses indicate that they live all over the English-speaking world, from Cape Town to California. Something must be prompting interest in this combination of two words; my wife suggests it’s a crossword puzzle clue.

I often receive visitors looking for “Lolita,” thanks to my article on Nabokov and various posts about him. I don’t think most of these visitors are expecting to find what I provide. No pictures or videos here, just a stern reminder that Dolores Haze, Nabokov’s great heroine, is an orphan child taken prisoner and raped by a middle-aged pervert. There is no evidence whatsoever that she wants to have sex with Humbert Humbert, but plenty of signs that he physically abuses her. She is remarkably resilient; Nabokov once said that he admired her more than any of his creations. It is amazing that this scion of the Russian aristocracy, educated at Cambridge, multilingual and erudite, could have made a gum-popping suburban American “tween” into his tragic heroine. Stereotypes dissolved in Nabokov’s acute and humane vision.

[8/17/2009: Several people have emailed to confirm that the occasional popularity of this post is due to crossword puzzle clues that seem to pop up in different newspapers every few months. By the way, if you need a Nabokov heroine with a three-letter name, try “Ada.”]