The Journal’s article (6/26/06, A1) comparing Warren Buffet to the nineteenth century Robber barons was an injustice to Buffet. Buffet worked for his money, managed his money and lives in the same 31,500 house he bought in 1958. The Robber Barons (Carnegie, Rockefeller, Vanderbilt and Morgan) were men who created monopolies, used predatory pricing, dumped products to drive competitors out of business and then felt guilty… so they funded universities, libraries and other worthy charities. If I were Buffet’s lawyer, I would encourage him sue for defamation of character for comparing him to the Robber Barons.
To trade or not to trade, that is the question. In answering the question, domestic politics and agribusiness are the two dominant issues of the free trade debate. While there are many other issues (such as tariffs, quotas, non-tariff barriers (NTB), technology, IMF/WBO loans, worker rights, and other specific sectors such as the garment industry and services), domestic politics and agricultural trade have consistently been dominant issues in the entire history of free trade.
Historically, whether it be the mercantilism of the colonial period or the tariff wars of the early twentieth century, nation-states managed their trade with other countries in order to protect domestic production and make foreign products comparatively expensive. As a result of the economic and political isolationism of the Interwar Period, the US sought to integrate the world after WWII. The American government used economic policy as a tool of foreign policy by buttressing weaker nation-states; such support for Western Europe and Japan aided the American goal of providing an integrated front against the Soviet Block. The US also believed that “open trade would lead to economic prosperity and [thus] world peace” (Spero & Hart, 67). A key part of this new economic system was free trade. Free Trade is the idea that products can flow from country to country with no discriminatory regulation based on country of origin. Free trades sought to eliminate tariffs, quotas, and customs discrimination. The argument for free trade is best summed in the proverb “A rising tide raises all ships.” In the best case scenario, free trade allows developed nation-states to specialize their economies in what they do best, allows emerging economies to grow through the infusion of foreign capital and business, and aids the world consumer by lowering prices. The argument against free trade is that it hurts the consumer where they work: developed country workers will loose their jobs to the Least Developed Countries (LDCs) and developing country workers will be abused by multinational corporations who will pillage LDC’s resources and use their relative strength to manipulate employment regulations (or the lack there of).
The evolution of free trade and the international economic system has been marked by three distinct phases. The dominant issues in each of these phases continue to be significant issues in the debate today. The General Agreement on Trade and Tariffs (GATT) was created The Havana Conference in 1947. This became the first international economic regime. GATT encouraged open trade, specialization (or comparative advantage), non-discrimination of products by country of origin (the most-favored nation principle) and attacked dumping and predatory pricing policies (Spero & Hart, 69). The most controversial aspect of GATT was the agricultural exception to the ban on quantitative restrictions. Simply put, while the world took several steps forward on open trade, it did not move far on agricultural trade issues.
The second phase of the international economic system, Interdependence, was actually caused by the success of the first phase. The liberal trade policy led to the rise of newly industrialized countries (NICs) such as Taiwan, South Korea, Mexico and Brazil (Spero & Hart, 75). In addition, the generous economic support and polices of the US allowed both Japan and Western Europe to rebound quickly from the destruction of WWII. As a result, the American economy in particular, and the developed economies in general, all began to have significant competition from the rest of the world. Domestic politics raised its head again and many countries sought to impose protectionist barriers to free trade in order to favor their domestic industries and labor.
Finally, the world economy has entered a third phase, known as Globalization, in which nation-states have moved past the knee-jerk reaction to integration and are seeking to make the most of regional and worldwide free trade. As always the dominant issue is domestic politics. Let us put domestic politics in context: in “The Politics of International Economic Relations,” Joan Spero and Jeffery Hart point out that Smoot-Hawley (the most protectionist tariff in American history) was the result of special interests influencing Congress. The Congress is extremely vulnerable to special interest pressures that advocate protectionist policies. The executive branch, on the other hand, is a little freer and uses trade policy as a foreign policy tool. Therefore, there has been a lot of clash between the legislative and executive branches on the issue. The classic example is the NAFTA debates in which a Democratic president pushed through a Republican president’s free trade concept against vast resistance by both Democratic and Republican members of Congress. The debate is not as much between about political affiliations (though there are differences), but between branches of government.
Each phase of the international economic system can also be aligned with a change in domestic American politics. GATT was the result of the emergence of America from isolationism as the US took the lead role in the world. After the chaos of the domestic debates ranging from race, war, oil dependency and economic decline, the US became more protectionist in the eighties. Finally, it would be hard to ignore ‘Roaring Nineties’ as a factor in the renewed and refreshed emergence of the US as a leader and proponent of open trade. When business and labor are content, the US is more interested in free trade; when the domestic economy shrinks and the American self-confidence is shaken, the US retreats from the world.
In addition to domestic politics, though, there are other key issues in the debate on free trade. Agriculture has been a consistent issue for the past sixty years. Even as the American economy has moved from production to services, the US has continually sought to protect American agriculture. Part of this may be the mythology of the American farmer and its iconic role in idyllic American culture, but it is also related to domestic politics. The electoral value and the bell-weather role of the farming states are a key concern of American politicians. Iowa’s importance, due to the first presidential caucuses, has artificially made Iowa’s issues into America’s issues. Politicians who question agricultural subsidies and trade benefits do not win Iowa caucuses. The affect of agriculture and domestic politics on trade is similar in the peanut growing parts of the United States as well as the sugar producing states of Florida and Louisiana.
There are other issues too. In “International Trade,” Arvind Panagariya, points out that macroeconomic/political stability and world poverty are also key issues in free trade today. Of growing importance is also non-tangible trade such as intellectual property rights, insurance, and out-sourcing of customer support. In every piece on international trade, however, one is certain to find references to domestic politics and agriculture.
Barker, Debi and Jerry Mander. (2000) “The WTO and Invisible Government.” Pearce Review. 12 (2): p251-255.
Panagariya, Arvind. (2003) “International Trade.” Foreign Policy. Nov/Dec (139): p20-28.
Spero, Joan and Jeffrey Hart. (2003) The Politics of International Economics. Wadsworth: Belmont, CA.
In regard to President Bush’s proposal for the Border Patrol, I think Bush might be missing the point. Bush wants to increase the number of officers, but it is the mission of the Border Patrol itself that needs the most tweaking. At a workshop I attended in El Paso on Border Economics and Migration, I had several encounters with Border Patrol and former officers. The issue seems to be contradictory missions: one night at a migrant halfway house, the Border Patrol stopped a teenage throwing out the trash and when he ran, he was shot (http://www.rtfcam.org/report/volume_23/No_1/article_4.htm). Just four days later, Border Patrol brought an illegal teenager to the halfway house, told the director that the catch-and-release cells were full and asked if the child stay at the halfway house. How can one agency be in charge of both apprehending illegal aliens and participating in their release into society? This divided approach takes its toll on the Border Patrol agents as well. Meeting with a former officers, we were told of overwork, stress, and depression. More than half of the officers I met were of Mexican decent. One freely admitted that his grandfather was an illegal immigrant and yet, his job is to arrest other men for doing exactly what his family had done. Fixing the complicated situation on the US-Mexican border is not a simple feat of adding more agents and building a wall.
How do I react to idea that the US is headed for trouble? It strikes me as sad that this very important and very real debate is being had between economists while our politicians dodge the conversation. There is a transcript of a round table discussion among economists at the end of this posting. The choice of the three economists is interesting in and of itself. All are making very political arguments, but trying to hide the politics…Most obviously Hubbard is a Bush (43) guy, neoconservative, trickle-down economics person. Krugman is a liberal, pro-tax and pro-social net person and Peterson is an old school Republican, a Ford-Rockefeller guy whose wind of the party is very uncomfortable with the direction the party took with the Reagan-Bush2 types. I think its imperative to view their comments with that very political lens.
For example, Hubbard begins by saying don’t worry we’ll always have the dollar. He doesn’t want people to worry because if he were to admit that there is an impending disaster, then he would be partly to blame for it because he was Bush’s head econ advisor. In the eighth paragraph, as I said, he says we’ll always have the dollar, but he ignores the growth of the euro as the world’s reserve currency (later pointed out by Lapham).
[To me, what I learned and didn’t know was that the PRC is buying a significant number of T-Bills…this dependency might soon affect policy.]
I think the first section (Adrift in International Waters) sets the stage very well. We are facing a major crisis soon. Peterson sums up the likely series of events in the last paragraph of the section: 1) initial bad news; 2) foreign investors loose confidence; 3) steep fall of the dollar; 4) a huge spike in interest rates; and 5) crisis.
In terms of “righting the ship of state,” Peterson lays out the three solutions: raise taxes, cut benefits, borrow money. The problem is Hubbard and his type of people will never acknowledge the need to raise taxes (even though Lapham identified the questionableness of the policy of 1.5b in new spending and 1.7b in tax cuts). Hubbard thinks everything should be benefit cuts. At the same time, Krugman and his type of people put a lot of value in raising taxes and don’t really talk enough about possible benefit reduction…Peterson, as the centrist, does what centrists do and proposes a mix of taxes and benefit trimming.
I found Hubbard to just be, for lack of a better word, cranky. When he was pushed on the idea of taxes and that it could work, he switched the argument and said “Our political system would not likely tolerate increases of that size and I think its naïve to suggest them…” Rhetorically he changes the argument –that’s not fair- and then he insults people who disagree with him by calling them naïve. And for what its worth, I think he’s wrong on the merits anyway: if the US has an economic disaster of the proportions which they’re talking about, then the US would try anything…look at the Great Depression –FDR introduced solutions (WPA) that no one would have considered except with the gravity of the situation.
Back to Hubbard’s rhetoric, he also attacks Krugman by building straw soldiers and then knocking them down by putting words in Krugman’s mouth (“you want to trade US healthcare for the British health service”).
Another personal attack is when Krugman is talking about the percentage that taxes make up of GDP, Hubbard corrects him and says “you ought to know that.”
Hubbard also alludes to “a substantial body of economic research” to back up supply-side economics, but in my limited reading I’ve never seen any studies that backed up this claim that weren’t funded by conservative think tanks…is there OBJECTIVE research?
Another faux pas is the discussion of personal savings accounts. Yes, they all agreed they were good, but then Hubbard turns it back into a political debate by connecting the idea of just savings accounts into the type of accounts that were proposed to replace Social Security. Personally, I never heard any politician or economist deal with the most basic problem of the proposal –what would the government do if someone managed their saving account poorly, is a penniless person then picked back up by the Welfare State or is that person left to die on the streets. Neither sounds viable.
An issue in the healthcare debate that wasn’t talked about enough is the idea of widening the base of the covered people. United Health and Blue Cross make their money by having the widest number of members that then lets them cushion the expense of sick people by having a large number of paying healthy people. Essentially, that’s one of the cost-benefits of a national health care system and yet the economists spent most of their time debating other points such as innovation and pharm-research.
One the other hand, I was fascinated by the point brought up that American belief in medical entitlement to newest gadgets and the idea that its not just an issue of old people living longer but the expense across the board of what medicine can do for everyone that drives up cost.
I’ve done a good amount of reading on social security and one of the things I rarely hear people talk about is the social security fund raids in the 1980s. In order to cover budget short falls (because of a Republican Presidents budget and a Democratic Congress’ acquiescence) the federal govt raided money in the Social Security Fund and plugged that money into the general fund. If that money was never taken out or if the money was returned with appropriate interest, then there would not be as big of an issue now as there is. When this is pointed out, inevitable someone says, but there’s nothing we can do now so it’s not constructive to bring it up. My point is that perhaps the people who did it or created the financial situation that necessitated the action should loose a little credibility when they partake in the debate today. Why are they allowed to sit at the table as equal partners when they failed the country once already? Why should we believe them this time?
In conclusion, I think Krugman was correct when he said “the real problem today is we have political polarization and no middle ground.” Peterson was also correct when he said “You don’t hear much truth coming out of either political party.” We are on the proverbial Titanic and no one will do anything until its too late because any real remedy will be painful and no politician wants to do anything painful, even if it’s the right thing.
THE ICEBERG COMETH
Can a nation of spenders be saved?
If we can believe what we read in the newspapers, the American economy, formerly believed to be as unsinkable as the Titanic, appears to be steaming toward an iceberg. Most of the experts and nearly all of the navigational aids point in the direction of catastrophe–a $666 billion deficit in international transactions last year, a 24 percent increase over the prior year; a federal budget deficit of more than $400 billion; a dollar that has lost more than a third of its value against the euro since 2001. Not too long ago, America was the world’s largest creditor; today it is the world’s largest debtor, our solvency dependent upon the benevolence of foreign banks. Meanwhile, belowdecks, the cost of maintaining our rapidly rising number of elderly people threatens over the next few decades to overwhelm the federal budget. A respected credit agency recently noted that by 2026, barring a change in our fiscal policy, U.S. Treasury bills once the world’s de facto gold standard–will be classified as junk bonds.
How do we save the ship? Even if the American people mend their spendthrift ways, will our politicians be able to confront the necessity for restraint? To speak to these questions, Harper’s Magazine brought together three of our nation’s most notable economic thinkers and charged them with charting a new course toward financial safety.
The following forum is based on a discussion that took place at the offices of The Blackstone Group, in New York City. Lewis H. Lapham served as moderator.
LEWIS H. LAPHAM is editor of Harper’s Magazine.
GLENN HUBBARD is dean of the Graduate School of Business at Columbia University. From 2001 to 2003 he was head of the Bush Administration’s Council of Economic Advisers.
PAUL KRUGMAN is an op-ed columnist for the New York Times and a professor of economics at Princeton University. He is the author of, among other books, The Great Unraveling (Norton).
PETER G. PETERSON is senior chairman of The Blackstone Group and chairman of the Council on Foreign Relations; from 1972 to 1973 he served as U.S. Secretary of Commerce. His most recent book is Running on Empty (Farrar, Straus and Giroux).
I: ADRIFT IN INTERNATIONAL WATERS
LEWIS H. LAPHAM: Apparently there are so many angles from which to look at the iceberg that it’s hard to know which ones matter and which ones don’t. Let’s begin with our borrowing from overseas. How grim is the view from the crow’s nest?
PETER G. PETERSON: We reached the previous record “current account deficit” in the 1980s, in the Reagan years, when it was running at 3.5 percent of GDP. This deficit is now edging upward toward 6 percent, and many people at the Federal Reserve Bank of New York, which I used to head, think that it will move toward 7 percent or even higher–a level that is roughly twice, in terms of the GDP, anything we’ve ever experienced before.
LAPHAM: What, exactly, do we mean by the “current account deficit”? And why has it increased so sharply in the past decade?
PAUL KRUGMAN: It’s basically the trade deficit–exports against imports–but it also includes interest that we’re paying on debts, the earnings of U.S. corporations abroad, etc. Think of it as the trade deficit broadly defined. It’s the difference between the total amount Americans spend–including things like interest payments to foreigners–and their total income–including things like the profits of American multinationals operating in other countries.
GLENN HUBBARD: Remember, though, that the mirror of the current account is what’s called the “capital account,” which tracks funds flowing in or out for investments and loans. Another way to look at the current account deficit is that there’s substantially more investment being done in the United States than there are savings.
KRUGMAN: Yes, the current account deficit is a capital account surplus. The question is, does that make it okay? We can consider some examples from recent history: our current account deficit is bigger as a share of GDP than Indonesia’s, or Argentina’s, before their respective financial crises. When the money was flowing into Argentina during the nineties, people said, “Oh, no problem. Look, it’s a great business environment, high growth rate. That’s why the money is flowing in.” But in the end, it all went to hell pretty spectacularly, in a span of only about eighteen months. By 2002, Argentina looked like old newsreels from the Great Depression, with angry former members of the middle class rummaging in garbage cans for food, and housewives banging pots and pans outside the presidential palace demanding that the government resign–which it did.
HUBBARD: I agree that the size of the current account deficit is very troublesome. Most of our major trading partners–all besides China–are not growing as rapidly as the United States. With the U.S. growing so fast, and our major, non-China trading partners growing so slowly, it’s inevitable that in the near term we would have a large current account deficit. But the current account deficit as a share of GDP cannot continue to expand in the way that it has.
Having said that, we don’t really know how the adjustment will take place. We can’t extrapolate easily from the experience of other countries. The United States dollar is the reserve currency for most of the world, and we’ve never seen a reserve-currency country in this position.
KRUGMAN: That’s true. America is not Argentina. What turned the plunge of the peso into an economic collapse was the fact that Argentina’s debt was held in dollars. When the peso fell, banks and businesses found their debt in pesos exploding, and pretty much everyone went bankrupt. We hold our foreign debt in our own currency, so the immediate capital loss from a weakened dollar falls not on U.S. businesses but on foreign central banks–mainly the Bank of Japan and the People’s Bank of China, which finance almost all of our current account deficit.
That’s a big change. In the nineties, foreign capital was Daimler buying Chrysler. Today, it’s the People’s Bank of China buying U.S. Treasury bills.
PETERSON: The economist C. Fred Bergsten puts it pretty well. He says, “I finally understand supply-side economics. They supply the goods, and they also supply the money.” This dysfunctional dependence, over time, is clearly unsustainable.
HUBBARD: It may be dysfunctional, but it’s a dysfunction of symbiosis. China’s mercantilist trade policy is just the flip side of our own. The People’s Bank of China is certainly not likely to adjust its policies tomorrow, because to do so would confer huge capital losses on China’s economy: their currency would rise significantly against the dollar–reducing the value of their dollar holdings–and their exports would decline.
Nothing in this story suggests to me any kind of imminent crisis. It is really a question of how quickly we adjust, and what the right remedy is. I don’t hear any disagreement with the notion that what the U.S. economy must do is raise national savings. But I think it’s extremely unlikely that there’s going to be any calamitous collapse. It’s not in the interest of our trading partners. In my view, the adjustment will take place through gradual increases in domestic demand in Asia and gradual increases in national savings here.
KRUGMAN: I would say that there is a 50 percent chance that the outcome is pretty calamitous. Partly that’s just career bias, since I spent many years as an economist studying crises. And too many times I saw examples of finance ministers saying, “Of course we can’t do this forever, but in the near term it’s perfectly sustainable.” The fact is that every time a country runs a large current account deficit for a sustained period of time, explanations emerge of why this one isn’t a problem. The scariest words you can hear about financial markets are, “It’s different this time.”
PETERSON: There’s also a big long-term risk that we need to consider: many of the foreign countries we’re depending on have far more daunting demographic issues and benefit levels than we do. Birth rates in Europe and Japan are down at 1.2 to 1.5 babies per couple, way below the replacement rate. Italy’s going to lose 45 percent of its workforce in the next thirty years. How can we continue to depend on these people to lend so much of their savings to this country? Remember, they, too, have retirement programs that will need to be funded by a rapidly shrinking number of younger taxpayers.
At the Council on Foreign Relations I had a discussion with Haruhiko Kuroda, Japan’s former vice minister of finance. The discussion went as follows. “Mr. Kuroda,” I asked, “are you going to have significant problems with an aging society?”
“Oh yes, Mr. Peterson. Very, very big problem.”
“Mr. Kuroda, you’re on a pay-as-you-go basis. How are you going to finance your deficits?”
“Well,” he says, “unlike you, we have a big savings rate and a big current account surplus, and so forth. We can use that for a while.”
“Mr. Kuroda, but you’re financing 25 percent of our current account deficit. Have you figured out how to spend the same money twice?”
He said, “Ah, serious problem.”
LAPHAM: Clearly our profligacy will have to be paid for eventually. But when? On the evidence of the dollar’s decline against the euro during the past four years, it seems as if the foreclosure proceedings may have already begun.
HUBBARD: But remember that the exchange rate is simply a price. When I observe that the price of something is high, I don’t necessarily think things aren’t well. If you look at the underlying fundamentals, I don’t think you would trade the underlying fundamentals of the American economy for the underlying fundamentals of the Eurozone, despite the dollar’s recent loss of value. So I would caution you about looking at prices of things when making observations about economies. My own prediction is that over the long term, America’s relatively high productivity and low inflation will keep the dollar’s exchange value strong.
KRUGMAN: But even under the happy scenarios in which the current account deficit fades away, and we don’t have a financial crisis, and we balance the budget, and the domestic savings rate goes up–the dollar would still have to fall. The fall of the dollar is the transmission mechanism through which the elimination of the current account deficit occurs. That is, American companies have to be given an incentive to export more, and American consumers have to be given an incentive to buy fewer imports, and a falling dollar is how that happens. The big question is whether the inevitable fall of the dollar takes place in a way that causes a lot of harm.
PETERSON: Paul Volcker, the former chief of the Federal Reserve, went so far last year as to do something he rarely does in life: he was constructively unambiguous. He said there was a 75 percent chance in five years of a dollar crisis, or a “hard landing.” And Robert Rubin, the former treasury secretary, is more or less in that school–he speaks of a “day of reckoning.”
LAPHAM: By the phrases “hard landing” and “day of reckoning,” you mean exactly what?
PETERSON: The particulars would be difficult to predict. Such a landing could be touched off by an imprudent comment by a treasury secretary, or by some bad economic news, or by some geopolitical event–a situation in which, for some reason, foreign investors lose confidence in America’s financial stability. Then a steep fall of the dollar, a huge spike in interest rates. This kind of landing would have a variety of very damaging effects on the economy. To take one example, just imagine the effects on real estate and on real-estate financing costs. Thirty-five percent of new mortgages in the United States today are on floating rates, so an interest-rate spike would cause mortgage payments to skyrocket. These are risks a great country should not be taking.
II. RIGHTING THE SHIP OF STATE
LAPHAM: An American who aspires to save rather than spend will find no role model in his federal government, which during the past four years has approved some $1.5 trillion in new spending while also handing out $1.7 trillion in tax cuts. The extravagance seems all the more irresponsible because of the reconfiguration of the country’s demography: three decades hence, the elderly, today only 12 percent of Americans, will make up a full fifth of the population.
PETERSON: Clearly, as you look at the numbers, the great perils we face are in the growth of entitlements–Social Security, Medicare, Medicaid. That’s where the huge increases are occurring in terms of percent of GDP. Over the next forty or fifty years, the costs of these programs are expected to go up by about 9 percent of GDP, or nearly three times what we’re spending on defense.
KRUGMAN: Even if, in the next decade or so, we get through our near-term budget problems–which I think will be very severe–then we’re left with the problems of Social Security and, especially, Medicare. Although we have the least generous welfare state in the Western world, this isn’t true when it comes to old people.
LAPHAM: Then how can we possibly solve the problem?
PETERSON: You’re going to solve that in only three ways. First, you can increase revenues by increasing taxes. Second, you can cut benefits. Third, you can go out and try to borrow the money, but it’s one hell of a lot of money that you’re talking about borrowing–tens of trillions of dollars over the next fifty years.
HUBBARD: The size of that number suggests why tax increases can’t be the major part of the solution. According to the Congressional Budget Office, assuming no change in policy, Social Security and Medicare a generation from now will consume 10 more percentage points of GDP than they do today. Just for reference, the entire federal tax share of GDP is traditionally a number like 18 percent. So you would be talking about a 50 percent increase in all taxes, across the board.
LAPHAM: Didn’t we have a 70 percent tax rate as recently as 1980?
HUBBARD: Yes, we did. When President Reagan came into office, 70 percent was the top marginal rate.
LAPHAM: So we can live with a higher tax rate.
HUBBARD: Well, there’s a substantial body of economic research to suggest that the lower marginal tax rates since then have stimulated savings, investment, entrepreneurship. And to solve .our entitlements problem with tax increases, it would not just be a matter of restoring 1970s tax rates. It’s not just that top rates would have to go up. I am describing a tax increase of 50 percent. And I don’t mean for the rich. I mean every tax collected in America.
KRUGMAN: Every federal tax.
HUBBARD: You could not raise that amount of money on a soak-the-rich strategy.
PETERSON: A tax increase can’t provide the bulk of the solution.
KRUGMAN: I don’t see why not. Even if we raised it all through taxes–something I wouldn’t support, by the way–the total tax take in America would go from roughly 27 percent of GDP, including state and local, up to 35 percent. In many advanced countries, the take is close to 40 percent.
HUBBARD: That’s about a 50 percent increase in federal taxes. You ought to know that.
KRUGMAN: That’s what I just said. The federal government takes around 17 percent of GDP now; a hike that big would take it up to 25 percent.
HUBBARD: That wouldn’t strike you as a large departure in fiscal policy? The best estimates from the research suggest that tax increases of that size would reduce the economy’s potential growth by as much as a percentage point. That is a huge hit to future standards of living.
KRUGMAN: I would dispute that. Look, Sweden is actually doing pretty decently these days–their economy grew at 3 percent last year, far more than Europe as a whole–despite a tax rate that nobody would consider having here. It does matter how the taxes are done: you can do a lot of damage to incentives with a poorly designed tax system, without even raising all that much money. But I don’t believe that the size of the tax increase needed to sustain the welfare state is a crippling objection.
PETERSON: I suppose I’m a centrist on this subject—
HUBBARD: That’s why you’re at the center of the table.
PETERSON: –because I take issue with the supply-side wing of the Republican Party, which asks one to believe that any increase in marginal tax rates results in very serious problems. Well, Bill Clinton raised marginal tax rates, and the net effect was still positive, because the raises were in the context of an overall package that was fiscally responsible. So I wouldn’t say that any tax increase is out of the question. We may well have to have some tax increases. But trying to solve most of the entitlement-problems with tax increases is, I think, doubtful.
HUBBARD: Our political system would not likely tolerate tax increases of that size, and I think it’s naive to suggest them as the major part of the solution.
KRUGMAN: I agree that it’s not going to happen. None of this is going to happen.
PETERSON: Paul, I don’t hear you saying much about what you would do on the benefit-reduction side. What about Social Security?
KRUGMAN: I think we tinker at the edges with the benefits. Early retirement is a big cost. I think that if we make some adjustments, we can probably reduce the path of benefits, depress it a little bit from what it is on the current trajectory. I think that if you do that, and you can control the medical costs, which are huge, then the balance can in effect be covered by tax increases. To do anything more drastic, such as switch the system to price indexing–i.e., link benefit levels to growth in prices rather than wages, which grow more quickly–it would turn Social Security into just a poverty program.
PETERSON: What do you mean it would become a poverty program? People would have the same real benefits, even after inflation.
KRUGMAN: Think about what society would be like if we had had price indexing since 1950. The elderly today would be expected to make do on a standard of living comparable to the one we had in place when a third of U.S. households didn’t have indoor plumbing.
HUBBARD: Here is what I don’t understand. Moving to price indexing–and then shoring up benefits for lower-income people–would force the burden of the adjustment on high-income people without diminishing Social Security’s role as a safety net. Presumably you would agree with that goal. And yet you reflexively gravitate toward raising taxes to fund the size of the existing system. Why do you want to restore fiscal balance by maintaining a large government share? Why not just reduce subsidies at the high end, which would-encourage wealthier individuals to save more on their own?
KRUGMAN: Switching to price indexing would not make a bit of difference to high-income people. We’re talking about middle-income people. It would mean a gradual suffocating of middleclass and ordinary working people’s Social Security program.
HUBBARD: But your plan would require raising taxes on those same people.
KRUGMAN: I believe in the social-insurance paradigm. Europe clearly has too much of it–in Germany, for example, I think they have to cut benefits. But I don’t think that the United States should be substantially reducing the current amount of social insurance we provide. To make just Social Security good for seventy-five years would take only about a 5 percent increase in federal taxes.
PETERSON: But, then, I don’t see how you fix Medicare. That fiscal problem is much, much larger, and the political and ethical issues are much more daunting. Medicare really is the elephant in the boudoir–everybody is hoping no one else is rude enough to mention it. There is endless talk by the President on the unfunded liabilities of Social Security, which in the indefinite future are about $10.5 trillion. For Medicare, they’re $61.6 trillion.
HUBBARD: The problem is rising relative prices of health care; compared to other goods and services, health care is becoming more expensive.
KRUGMAN: It’s also the widening range of what medicine can do–not just for the elderly but for everybody–that makes it more expensive. Health care was pretty cheap back when heart disease was mostly untreatable. Now we have drugs, surgeries. In 1984 the average treatment for a heart attack cost $12,000 in today’s dollars; by 1998 it was $22,000. We have an ever-larger number of treatable conditions.
HUBBARD: Which is why Medicare is far more difficult to repair than Social Security. Medicare is a budget problem, but it also concerns societal values, and defining the state’s role in determining who gets access to all the available healthcare services.
KRUGMAN: Having your mother’s Social Security check cut by 5 percent is going to raise far fewer howls than having her turned down for a triple bypass.
PETERSON: Paul, you say we should fix Social Security by raising taxes, but what would you propose for Medicare?
KRUGMAN: Primarily I want to see us move to a rational health-care system.
LAPHAM: By rational you mean what? Single payer? Everything paid for by the government?
KRUGMAN: Single payer, with probably a fair bit of actual government intervention. I think that on this question we have put on ideological blinders. We’re incapable of seeing that the solution is not markets. All indications are that health care is in fact a part of the economy in which markets do not work well. The way to go is to take a lot of it out of the market. Of course, this idea is so unacceptable in our current ideological climate that we are probably incapable of having a rational debate on health care.
HUBBARD: I don’t know about the ideological climate. I just disagree with the proposition as a matter of economics. In fact, along with two co-authors, John Cogan and Daniel Kessler, I’ve just finished a book that makes precisely the opposite point: the real problem with health-care markets is that they haven’t been allowed to function properly. Five” out of every six dollars spent on health care today are paid by third-party insurers, which means that doctors and patients can decide on expensive care while bearing almost none of the immediate cost. The patients, of course, bear the cost in the long ran, because high insurance premiums become a drag on their wages. If we really allowed market forces to work–by, for example, reforming tax policy, which right now penalizes Americans for purchasing health care and health insurance on their own–then consumers would incorporate more of the true costs into their decision-making.
KRUGMAN: I’m not an antimarket guy at all, but I’ve reluctantly come to the conclusion that what we’ve got is the worst of both worlds. We have a system on which we spend enormous amounts of money trying not to cover people, because that’s what private insurance companies do. Private health organizations do not have a sustained interest in the health of the people they treat.
HUBBARD: You want to trade the quality, and innovation, of U.S. health care for the British health service?
KRUGMAN: No. The British spend way too little. But I think if we could trade for the French health-care system–a more or less publicly run system, but much better funded than the British system–I would do it in a heartbeat.
HUBBARD: I disagree. The United States is the innovator in treatment techniques, pharmaceutical development.
PETERSON: Whether or not we should trade for anyone else’s system, there’s the problem of how to get the American people to accept such a trade. Some people say, gee, let’s have the Canadian system. But we have eighteen times more MRI units than the Canadians. Americans have gotten used to the idea that if any high-technology gadget exists, they are “entitled” to it. If you look at the global use of health care, you’ll find that we use much, much more high-tech, high-cost stuff, including at the end of life: if you go into an intensive-care unit, you’ll find all kinds of very expensive and heroic intervention techniques that other countries use far less of.
KRUGMAN: As the possibilities for medical care expand, and if you don’t have public provision for everything that can be done, you’re returning to a Victorian environment in which the children of the working class are four inches shorter than the children of the elite.
PETERSON: I do think it’s important to look at what other countries do. Some other countries simply have spending limits on health care.
LAPHAM: Why isn’t that sensible?
PETERSON: Let’s be sure we understand what the implications are. Oregon in the late eighties was going broke with Medicaid. The state took an amazingly communitarian approach, appointing a panel of businesspeople and doctors and unions and churches that broke down healthcare problems and prioritized them. As for lower-priority problems, the panel recommended, the state would cap the amount spent; after a point, funds would simply not be available for these lower priorities. Oregon sent this plan to the White House, and the first Bush Administration called it “rationing.” To which the obvious response was, hello–of course it’s rationing! What do we think we’re talking about? You can use any word you wish, but somebody is going to have to give up some treatment, even if it may have some health benefit.
LAPHAM: Assuming that we can steer the federal budget through our demographic straits, we’re still left with the problem of our overseas deficit, which hinges on Americans’ failure to save. At any given point in time, more than 70 percent of the world’s total savings is being lent to Americans, while our own savings rate–the amount by which our savings exceeds our spending and debt–is effectively zero.
HUBBARD: I don’t hear any disagreement around this table on the need to raise national savings.
KRUGMAN: Where we disagree is on the urgency.
PETERSON: In the nineties, as part of a White House and congressional effort, I chaired a bipartisan committee on savings–half a dozen experts, left, right, and center. Much to my amazement they were unanimous, or virtually so, that the effects of voluntary tax incentives for savings–on 401(k)s, etc.–were limited and ambiguous. How, then, did they propose to encourage savings? They, and I, think we have reached a point in this consumption-obsessed country where if we want people to save, we’re going to have to make it mandatory. This, I know, is very controversial. We’re going to have to do what Singapore and Chile and Australia did. The notion really offends some of my Republican friends, but I have come to the conclusion that if you want to increase personal savings, you’re going to have to think seriously about such a program.
HUBBARD: It might surprise you, but I would agree: forced savings is the right answer. Personal accounts.
LAPHAM: Would that be a law?
KRUGMAN: Well, it would amount to a kind of tax. You’d be forced to put money into it.
HUBBARD: And the government could subsidize contributions for low-income people.
KRUGMAN: So we are saying that we can’t close the budget deficit through tax increases but we’re going to pass a forced-savings plan?
PETERSON: If you’re going to save more, you’re going to have to consume less.
KRUGMAN: Of course. My point is about the politics.
PETERSON: You can call It a tax if you wish, but I think there is a huge difference between writing a check to the government and letting it be spent on other people’s consumption, and taking money and putting it in your own account. I call that real savings, not taxes. But if you put a word like “taxes” on a plan, it immediately would lose support.
KRUGMAN: Someone will put that word on it.
PETERSON: This is one reason why I’m not opposed to personal retirement accounts as part of Social Security. What I can’t support is the idea to “fund”–I put that in big quotes–the accounts by borrowing trillions of dollars. If the administration would fund them, personal accounts would help to solve our savings problem. These really would be a genuine “lockbox,” in that they would keep the money out of the hands of Congress.
HUBBARD: Exactly. And personal accounts could also serve as an example. The reason to fix Social Security first, I think, even though Medicare is by far the more important problem, is that Social Security reform would help set up a mechanism. Once we had Social Security personal accounts, and they were successful, we could use personal accounts to fund Medicare as well.
III. THE ICEBERG IS US
KRUGMAN: The real problem today is that we have political polarization and no middle ground. Major tax increases and major cuts in entitlement spending both appear to be politically impossible. We have the recipe for catastrophe.
LAPHAM: So the question becomes: Do we have the political will to avoid what we know to be certain doom? Pete wrote a book in 1996 entitled Will America Grow Up Before It Grows Old? The answer is: Apparently not. If I hear you gentlemen correctly, we’re aboard the Titanic, but even if you three were in the crow’s nest together, you’d be unable to agree on which way to steer. We don’t seem to have a politics capable of reaching agreement on what is valuable.
PETERSON: We’re somehow in a political system that is all gain and no pain, all get and no give. Anybody who suggests that we should give up something is immediately attacked. So first, the American people must be told a lot of hard truths so that they understand what the problem is.
HUBBARD: I’m more optimistic than that. If we reform our entitlements, and shore them up more as safety-net programs, then higher-income people–everybody around this table, for example–would get lower subsidies. But I suspect we all would support, very strongly, such subsidies for low-income households. That kind of compromise seems to me politically possible.
PETERSON: You don’t hear much truth coming out of either party. We seem to have reached a point at which we can deal with a problem only when we’re confronted with a palpable crisis. Anything that is long-term and silent, where there are no palpable symptoms, we ignore. We will have to raise taxes, or we will have to cut benefits, or both. But can you name one politician who is saying either of those things at this point? I’m not aware of any. We don’t have a political system that really works.
HUBBARD: You can’t have a debate over tax increases versus program reforms if we can’t agree on the math. Some political leaders are actually saying we don’t really have a serious budget problem with Social Security and Medicare–that nips and tucks will fix this. But that is simply not true. Paul, earlier you spoke of a crisis; but then you flip and say there is not much of a problem with entitlements.
KRUGMAN: No, I didn’t flip. I believe that Social Security is a basically trivial irritation. There is a potential Social Security problem, but our truly large twenty-year fiscal problem is driven much more by medical costs than by demography. Meanwhile, there is an immediate budget deficit, which the Bush Administration has done its best to run up. Having rammed through an incredibly badly designed addition to the entitlements programs in 2003, the administration then said we had a crisis in Social Security and put forward a “fix” for this crisis that would, so far as we have any information on it, decrease the cash flow of the system for the next forty-five years. So how are we going to have a rational discussion here? It is true that Democrats are attacking the crisis language of the administration because it’s applied to the wrong program and because it’s being used as a cover for a “solution” that would actually make things worse.
HUBBARD: The Democrats would be happier to cut Medicare than Social Security?
KRUGMAN: Given what we think the President’s plan is going to be, it actually doesn’t even start to cut Social Security benefits significantly until a couple of decades out. It doesn’t do anything for the entitlements problem in the next several decades.
HUBBARD: We do need to act quickly. The problem will only grow if we continue to delay. The current Congress should be able to work with President Bush to come up with an answer. If they don’t, I would worry more about our long-term fiscal outlook and how the capital markets will respond to it.
PETERSON: The administration certainly hasn’t made much progress during the last four years. It was the Republican Congress, remember, that got rid of the spending caps. They got rid of pay-as-you-go. Suddenly we had a big tax cut, and discretionary spending went up sharply. As a Republican it troubles me a lot.
KRUGMAN: Looking at it from the other side, it seems as if everything has been calculated to increase political dominance. Just look at the way the Social Security campaign has been conducted, with the closed events and the hand-picked audiences and the pseudo-citizen questioners. This has not been a serious attempt to solve the Social Security problem; it has been an attempt to sell a vision, a partisan vision, of what we should do to the system. This is a president who is not prepared to do any reaching out for true bipartisanship. You have a party that has achieved control of all three branches of government through a policy of demonizing people on the other side, no matter how much they tried to reach out.
HUBBARD: Like John Kerry? I didn’t hear him trying to find much middle ground during last year’s campaign.
KRUGMAN: No. Like Max Cleland. Like the other centrist Democrats who have been made into convenient targets of partisan opportunity. There is no room for compromise. I used to say until a few months ago that the country wasn’t as polarized as Washington. I think that is still true, but we’re getting there.
HUBBARD: I disagree. The American people, I think, are far more thoughtful and mature than their political leaders imagine.
KRUGMAN: That’s true. But to solve our deficit problems, there would have to be a politician grown-up enough to sacrifice something.
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In regards to the debate on immigration, no one has pointed out that US government policy has directly caused an increase in Mexican immigration: in the interests of NAFTA, the US forced Mexico to remove Article 27 from their constitution. Article 274 had guaranteed that rural and indigenous Mexicans could never loose their land. Since NAFTA and the destruction of Mexican communal ownership (similar to what the US did domestically to Native Americans through the Dawes Act), Mexican farmers have been driven off their land (often by American agribusinesses) and have sought economic opportunities in Mexican and American cities. Maybe we shouldn’t have demanded the end of Article 27?
Are there ‘universal human rights’ that transcend all cultures, religions and national boundaries?
Yes, there are ‘universal human rights.’ By definition, these are laid out in the UN Declaration of Human Rights (1948). This document was unanimously passed (but Five Soviet states, Saudi Arabia and South Africa abstained).
The universal civil and political rights are:
· right to life, liberty, and security of the person;
· the right to leave and enter one’s own country
· freedom from slavery and torture
· freedom from discrimination, arbitrary arrest, and interferences with privacy
· right to vote
· freedom of thought, peaceful assembly, religion, and marriage.
The economic, social and cultural rights are:
· the right to own property
· the right to work
· the right to maintain an adequate standard of living and health
· the right to an education
Having said that there ARE universal rights, let me fire a couple of shots across the bow:
First of all, and this was keeping me up a little last night, why are the “universal rights” actually western rights? Specifically, let’s look at the whole concept of individuality. I love the western model, but it seems like cultural imperialism to force that on East Asian cultures. In Eastern, Southeastern (except AU and NZ), and Subcontinental Asia, the culture places more value on the whole and harmony than the individual and uniqueness. While the Asian beliefs can be dehumanizing in some ways (mandatory sterilization in India in the early 1980s or one-baby policies in China), in other ways there is a beauty to it. Asians often feel that Western views of individualism are selfish and egotistical. Both models have benefits and detriments but are incompatible at a certain level and yet the international community has ‘chosen’ one model and seeks to impose it on others.
Secondly, while it’s easy to put your name on a piece of paper, its harder to walk-the-walk… there are a plethora of exceptions to these Universal Human Rights. Are these exceptions truly exceptions or are they the tip of the iceberg and, in fact, the norm? Most dangerous, again, are the twin issues of hypocrisy and consistency. Are the signatories of the UNDHR walking-the-walk? Let me relist the rights and some possible exceptions (please forgive me):
Part I: The civil and political rights are:
· right to life, liberty, and security of the person
A) liberty and security are often opposites, not complimentary: the more liberty, the less security and the more security, the less liberty
B) Canada is known for their strong voice in international law and they are a signatory to the UNDHR, but have a pattern of failing to protect indigenous women:
C) How about Mexico’s women of Juarez?
· the right to leave and enter one’s own country
A) Educated Russians are not allowed to leave their country, even on vacation, because Russia fears they won’t come back. Cubans can’t leave their country. North Koreans can’t leave theirs.
· freedom from slavery and torture
labor Benin, Haiti, Togo, Nigeria, Gabon, Sudan, India, Pakistan, Saudi Arabia
B) sex slavery in Southeast Asia, Nepal, India, Korea, Eastern Europe, Russia
American sex slavery: Americans buying Mexican sex slaves and American women being kidnapped and turned into sex slaves in Asia
Hmm…Guantamino Bay, Bagram and Abu Ghraib prisons…?
· freedom from discrimination, arbitrary arrest, and interferences with privacy
hello? umm…Jose Padilla anyone? How about Humberto Alvarez-Machain? Let’s not even start on the Patriot Act…
· right to vote
A) With no ‘universal’ age of majority, there is an issue. In addition, in the US there are some that are calling for the voting age to be lowered to 16. The US has long had a problem with consistency in terms of age of majority (voting, drinking, joining the military, renting cars, etc –these are all separated). In addition, with the lowering of the age in which a person can be jailed for life (under 18 now in many states), shouldn’t the age of voting be lowered to correspond.
B) States like Germany and Israel (ironic, huh?) who define citizenship by religion or ethnicity. In Germany, multigenerational Turks can’t vote and yet a German-American can move to Germany and become a citizen/vote the next day. In Israel, Christian, Druze, and Muslim Palestinians have to jump through almost impossible hoops to become citizens of the very country that their families have lived in for thousands of years. In many cases, these disenfranchised peoples have more claim to the land than the Sephardic and Russian Jews who have immigrated to Israel in just the last few decades.
· freedom of thought, peaceful assembly, religion, and marriage.
How can you impose freedom of marriage on societies that are still governed by the economic system created by arranged marriages?
Part II: The economic, social and cultural rights are:
· the right to own property
In and of itself, this is again Western cultural imperialism: What about indigenous peoples who don’t want the right to individually own property? Maoris and Aborigines who had their land taken in the name of property ownership? What about the people of Mexico? When the US forced Mexico to change Article 24 of their Constitution, in the name of owning property, it destroyed rural Mexican society (and directly led to the displacement of Mexican people and thus contributed to a dramatic increase in immigration)
· the right to work
Just as one example, North Africans in France and issue of job discrimination
· the right to maintain an adequate standard of living and health
Does this necessitate a national health system (like Medicare/Medicaid) for every nation-state in the world? Does it necessitate, not just a ‘right to work,’ but a guarantee to work (because otherwise how do you guarantee an adequate standard of living without income?)
· the right to an education
The Taliban government in Afghanistan is now well known or their failure to recognize women’s right to an education.
Here’s a piece on educational discrimination in Liberia:
In Saturday’s edition (Feb. 25, 2006, A2), the Providence Journal chose to run a Knight-Ridder news article on the recent terrorist attack in Saudi Arabia. The article stated that the price of oil rose by more than $2 per barrel to reflect “how seriously oil traders fear a successful” attack. This is more weak conjecture, then true journalism. Several times over the past few years we have seen the oil industry take advantage of natural and man-made events to artificially raise prices for profit. Each time legislators vow to investigate price gouging and, after the hype subsides each time, the committee is disbanded or a generic report is issued that laments not having enough information. Knight-Ridder should know better than to do journalism from the desk, instead of the field. The Providence Journal should do better in selecting articles to reprint.