100 Treatises

Why the Goldman Sachs Fraud Case Doesn’t Matter

It was bound to happen. Goldman Sachs was far too successful and prominent to avoid an investigation by regulators in the aftermath of massive financial crisis. And since nobody considers that the economic system itself might be to blame for the crisis, what better scapegoat is there? Surely, there’s nothing systemically flawed with the economy, and so the only rational explanation is some wrongdoing at the highest echelons of Corporate America, right?

Americans, from the average joe to the political power brokers to the corporate honchos, were and are far too attached to the economic status quo to even entertain the notion that significant reform of the economic and financial system is warranted. In place of a reasonable analysis by an informed understanding of economics, Americans have chosen to find scapegoats everywhere imaginable: irresponsible debtors taking on more loans than they could afford, idealistic politicians pushing home ownership in spite of financial unsoundness, the big banks, financial speculators, Democrats, Republicans, Alan Greenspan, Ben Bernanke, Barney Frank, Tim Geithner, and more. Surely, all of these parties bear a fraction of the blame, some more than others.

But to blame any of these individuals or entities misses the larger issue. Most of these actors were–and, more importantly, still are–in hock to the critically flawed economic regime of neoliberalism/ market fundamentalism/ neo-laissez faire and the simplistic assumptions and models underlying it. This includes countless “leaders” in the government, some of the most important businesspeople and, most importantly, the large majority of Americans. Thankfully, there are some prominent individuals who have chosen to take a second look at the old conventional wisdom, but they are few and far between, and have yet to formulate a new intellectual regime that can replace the existing one, decrepit though the latter may be.

It’s very possible that Goldman did something unethical or illegal. But if the SEC or other regulators think that litigating powerful people and firms will even begin to solve anything important, they’re dreaming. They could cripple every major successful firm in the country, and it still wouldn’t get to the underlying problems. We can’t know whether the investment bank will beat the allegations, but we can be confident that it doesn’t mean much. Whatever anybody’s opinion of Goldman Sachs, the SEC’s time and energy would be put to better use rolling up their sleeves and helping to restructure the economic system.

Inequality in America, the Saga Continues

A recent piece on Business Insider displayed a slew of interesting charts detailing different aspects of the rise in inequality in the US in the recent decades. The state of American inequality is either a shocking revelation or a banal cliche, depending on your point of view. All of the stats displayed were interesting, but I want to share three in particular that caught my eye.

Half of America has 0.5% of the stocks and bonds:

Anyone who pays attention to right-of-center thinking knows that one of the biggest economic myths, particularly in the investor community of economic conservatives, is that “everyone is in the stock market.” And since everyone is in the markets (through their pension funds and other retirement funds or investments), policies that help the stock market grow, help large corporations be more profitable, and make financial investing easier and more lucrative do not beneficial the rich at the expense of everyone else. Since everyone benefits when the markets and corporate America benefit, such policies are beneficial to a large segment of the society. Well, there goes that idea. Clearly such policies will disproportionately benefit one tiny segment of society over and above the rest.

Poor Americans have a SLIM CHANCE of rising to the upper middle class:

This chart puts in stark visual form the evolution of inter-class mobility in the US in the second half of the 20th century and beyond. The dramatic nature of the change is indeed striking. The US certainly was a very different kind of country in the aftermath of World War II than it is today, judging by the enormous differential between the probability of moving up, and of moving down at that earlier time. The much greater chance of moving in either direction–up or down–in the 1940s and 1950s is also fascinating. It indicates that the US was a much more fluid and dynamic society a half-century ago. Today, by contrast, whatever your lot in life, chances are that you’ll be there for a while. And this is precisely the stuff of which social cleavages and class warfare is made. A permanent elite and a permanent underclass are typically seen as the domain of third world countries.

America spreads the wealth FAR LESS than other developed countries

The interesting part of this graph is the significant difference between inequality reduction through taxes and inequality reduction through transfers. Taxes in America reduce inequality about as much as they do in other countries, but the transfers accomplish much less. I see two major conclusions to draw from this: (1) the US government spends a lot of money on things other than transfers, the biggest of which is defense spending, on which the other countries spend almost nothing in comparison, and (2) the money that is spent on transfers–and there is a lot of it, to be sure–does not accomplish very much, or nearly as much as it could.

The latter point is why many like myself believe that one of the keys to reducing inequality in the US is not necessarily more money, as liberals tend to believe, but simply better managing the money that is already being spent, as well as improving the incentives involved. Also, higher taxes in and of themselves are not needed, as the chart indicates. Better to rework the tax system by, for example, shifting the total burden away from the lower and middle classes, and toward the mega-rich. This can be helped by closing loopholes and exemptions that are disproportionately exploited by the rich, and which result in a largely regressive tax structure. Some more interesting thoughts on how American inequality compares with developing countries can be found on the Map Scroll blog. (Hint: it’s not good for the US.)

The Socialist Sandwich

Close, but not quite...

One of the most brilliant characterizations I have yet heard of the American economic system was given by Stephen Bannon (director of the recent documentary “Generation Zero”), on Sean Hannity’s show: “we have socialism for the very poor, and we have socialism for the wealthy; we have capitalism for the middle class.” It is brilliant because it is succinct, straightforward and spot on. (I nevertheless find the general thrust of that documentary ridiculous, but I will address that in another post.)

The unsustainable nature of the economic system, even accounting for the sorry and incomplete state of the socialist programs for the lower class, is clear. And it is becoming clearer every day, as banks continue to lavish bonuses on their star performers even as they suckle the public teat, while through corruption, waste or fraud, many able-bodied, self-sufficient individuals take advantage of public monies intended for those truly in need.

So what has caused this state of affairs? In short, liberal success combined with conservative success. In many general respects, the socioeconomic story of the US over the last 30 or 40 years has been one of the ascendance of right wing, laissez-faire policy regimes. However, at a less general level conservatives, beginning with and including Reagan, have consistently failed to significantly roll back key socialist-inspired programs like medicare or social security. In addition, important parts of the state interventionist welfare regime have remained solidly in place, enjoying broad support, to say nothing of such thorns in the libertarian side as the Department of Education. Left-wing success.

Nonetheless, with the aforementioned rightist ascendance, public handouts aren’t just for liberals anymore. One of the main ideas independents like myself believe is that both parties favor wasteful big spending, just on different things. Sure enough, Republicans and conservatives have spent liberally (pun intended) on Big Business, the rich and foreign entanglements during their time in power.

And so we have socialism for the rich and the poor, and capitalism for the middle class. That is, while the rich have enjoyed a free lunch at the public trough, and the poor have gotten by with ill-managed, but still significant, programs of their own, the middle class has been stuck with the bill on both sides. In a normal universe, progressive taxation-and-redistribution systems would mean, by definition, that it is mostly the rich that pay for the benefits of the less well-off. But with the oligarchic character of so much of American politics (on both the Democratic (think Wall Street) and the Republican sides), we have a system in which the most productive component of society—and, many argue, the most important component of a democracy—is also the least represented when it comes to policy. And as political wisdom will tell us, if you’re not at the table, you’re on the menu.

Obama Starts to Get It

President Obama recently announced new banking and financial reforms that indicate that while he clearly still doesn’t quite grasp the underlying economic and financial structures that fostered the crisis, he’s getting there. The Economist reports:

Though not a full return to Glass-Steagall, the law that separated commercial banking and investment banking in the wake of the Great Depression (and was repealed in 1999), [the new reform] is at least a return to its “spirit”, as one official put it. Reflecting the possible dent it could put in profitability, bank shares tumbled, pulling stockmarkets down sharply around the world.

Nowadays, if the big bank shares are tumbling, chances are you’re doing something right. That’s because their business models are shot through with flaws, and the kinds of things that benefit them (like unlimited state subsidies) are precisely the kinds of things that are anticompetitive and harmful to a well-functioning economic and financial system. Moving on, the Economist writes:

The first half of the plan concerns restrictions on the scope of activities. Banks that have insured deposits, and thus access to emergency funds from the central bank, would not be allowed to own or invest in private equity or hedge funds. Nor would they be able to engage in “proprietary” trading—punting their own capital—though they could continue to offer investment banking for clients, such as underwriting securities, making markets and advising on mergers.

The second part focuses on size. Banks already face a 10% cap on national market share of deposits. This would be updated to include other liabilities, namely wholesale funding. The aim is to limit concentration, which has increased greatly over the past 20 years, accelerating during the crisis as healthy banks bought sick ones. The four largest banks now hold more than half of the industry’s assets.

The first part has the right spirit—to limit the scope of activities, what a given institution can and cannot do. Here’s the problem: it’s backward-looking, not forward-looking. Note that institutions with insured deposits “would not be allowed to own or invest in private equity or hedge funds.” That seems perfectly reasonable, and it is, except for the inconvenient truth that in 20 years’ time, “hedge funds” may very well be obsolete. Financial and economic innovation ensure that over time, regulations that are tailored too closely to current conditions, current paradigms and current business models are inevitably rendered impotent. Given the relative infrequency of this kind of financial crisis, by the time something comparable is capable of occurring years from now, we can rest assured of two things, (1) that the character of finance, and of banking and investment practices, will have changed significantly, and (2) that the character of regulation will not have changed meaningfully at all.

That’s why a more explicit return to Glass-Steagall or something like it—which would deal with the basic kinds of activities (taking commercial deposits versus playing the stock market, for example), rather than the kinds of firms that do those activities (your local bank versus a Greenwich hedge fund)—would be much more effective and long-lasting. Indeed, Glass-Steagall seems to have been a quite successful piece of legislation, remaining relevant for many decades (from the 1930s until the turn of the century), despite the obvious changes in finance during that time.

In addition, the continued ability for deposit-taking institutions to engage in investment banking (precisely one of the hallmarks of Glass-Steagall was to separate the two) is troubling, because investment banking is not a particularly low-risk activity.

***

Some of the biggest problems with the Obama and Democratic reform plans currently in play have to do with a knee-jerk reaction toward bigger government, new agencies, more regulators and increased power. As Nicole Gelinas of the Manhattan Institute has argued, the best ideas for regulation are often the old ones that have been around for a while, and that simply need to be updated, reinforced or just plain executed for once.

Some of her reasonable suggestions include the following:

… the government must once again insulate the core economic functions of long-term borrowing and lending from potential short-term excesses. The government can do this by requiring financial institutions to hold uniform levels of capital against all of their investments — cushioning them from some losses — so that firms cannot game the system by structuring some securities to avoid robust capital requirements. Government regulators should also require financial firms that depend disproportionately on short-term lenders for their own funding to hold more capital.

Note that this kind of an approach would be ingenious in the sense that it would allow government officials to adjust the percentage level of capital requirements in the same way they adjust tax rates, for example. Depending on new analysis or changing priorities, regulators could quickly, efficiently and straightforwardly alter the capital requirements. Just as tax rates are tied to the amount of income or the type of activity, the capital requirements could be tied to the amount of assets or the type of investment or financing activity, rather than what the firm is called or how its business model or prospectus reads. Remember that we already have a strong precedent for management of capital requirements: the central bank already imposes such rules on commercial banks as a tool of monetary policy.

Consistent with activity-based rules, as opposed to firm-based rules, Gelinas says:

… the government must re-impose clear, well-defined limits on activities such as borrowing for speculation. Financial firms should not be able to make hundreds of billions of dollars in promises with negligible cash down, as the insurance giant American International Group did through unregulated financial instruments called credit-default swaps. Nor should regular Americans be able to purchase homes with zero cash down, leaving them — and their lenders and the economy — unduly vulnerable to declines in the values of those homes.

So it looks like straightforward, common-sensical rules for lenders and borrowers of all sizes and scopes can be found being discussed on both sides of the political divide. One hopes that the powers that be are listening. Otherwise, we can all safely rest assured that a new, equally destructive financial crisis is looming on the historical horizon.

A Tragedy Within a Tragedy

A neighborhood in Port au Prince

In light of the ongoing recovery efforts in Haiti, David Brooks offers several observations regarding Haitian development as well as development in general. I certainly don’t agree with all of his analysis, but he makes some important and thought-provoking points. One is that development aid, which has amounted to trillions of dollars over the past several decades, has failed to deliver on its promises:

The countries that have not received much aid, like China, have seen tremendous growth and tremendous poverty reductions. The countries that have received aid, like Haiti, have not… There are no policy levers that consistently correlate to increased growth.

There is no question that the whole approach to development aid needs to be rethought. The many millions of dollars the US has spent on Haiti in the last 20 years alone demonstrate that. But that does not mean a William Easterly-style approach of doing away with it altogether is the proper solution. The key is not to stop investing, but rather to radically change the priorities of the investment. Brooks, for example, points out that small-scale development projects are necessary, but clearly insufficient by themselves: Haiti may have the highest number of NGOs per capita on the planet.

Another issue he raises is culture:

Why is Haiti so poor? Well, it has a history of oppression, slavery and colonialism. But so does Barbados, and Barbados is doing pretty well. Haiti has endured ruthless dictators, corruption and foreign invasions. But so has the Dominican Republic, and the D.R. is in much better shape… Haiti, like most of the world’s poorest nations, suffers from a complex web of progress-resistant cultural influences. There is the influence of the voodoo religion, which spreads the message that life is capricious and planning futile. There are high levels of social mistrust. Responsibility is often not internalized. Child-rearing practices often involve neglect in the early years and harsh retribution when kids hit 9 or 10.

Now, these are tough words, and he does not cite any sources for these claims. Brooks has also demonstrated a pretty simplistic attitude toward culture in the past (for example, on China). However, he makes a salient point that forgives the lower-level inconsistencies, and that is the importance of seeing culture as an active component of the development process, not a neutral non-issue that has no consequences on the fate of a people. Witness, for example, the dramatic changes in English culture and social dynamics from the 16th century to the 19th century. In some ways, of course, this is a chicken-and-egg problem (does development cause changes in culture, or do changes in culture cause development?). But more attention and appreciation for culture and cultural attitudes would do a great deal of good as Haiti is rebuilt.

Finally, and equally politically incorrect as culture, is the importance of “locally led paternalism”:

…the programs that really work involve intrusive paternalism.

These programs, like the Harlem Children’s Zone and the No Excuses schools, are led by people who figure they don’t understand all the factors that have contributed to poverty, but they don’t care. They are going to replace parts of the local culture with a highly demanding, highly intensive culture of achievement — involving everything from new child-rearing practices to stricter schools to better job performance.

A tough, no-nonsense and results-oriented approach has been lacking from most approaches to international economic development, Brooks argues. I would add that this is related to the overall lack of accountability and responsibility that is by now a cliche in most development efforts. If a given NGO helps to improve people’s lives somewhere, that’s great. But if they spend millions of donated dollars, recruit dozens of locals into some project and get the seal of approval from the UN, but ultimately contribute absolutely nothing to anyone’s life, what happens? Do any heads role? Is anyone held responsible? Is there any guarantee that this expensive mistake is not repeated?

In addition to these issues of cultural, social and financial strategy, large-scale economic realities need to be taken into account. Unfortunately, as I have mentioned in the past, the Obama administration does not seem to be taking the opportunity of the economic crisis to revisit some of the fundamental assumptions surrounding economic policy, either domestically or developmentally. How about protectionism vs free trade? How about infant industry protection? How about outsourcing cheap labor and the false doctrine of “comparative advantage” (which, in many ways, has the effect of perpetuating underdevelopment and dependence)? Brooks, being a conservative, is not allowed to raise these issues (if he even sees them as issues at all). But the destructive historical impact of economic policies pushed by the rich countries on the poor are extremely important to consider in Haiti going forward.

So these are unusual ideas, to be sure. Certainly unusual as far as traditional development strategies are concerned. And that is precisely the point. No one can reasonably argue that the traditional approaches to development and poverty elimination have been a success. They have helped to alleviate some of the harshest suffering, they have been effective (as they are now) at managing crises and calamities, and they have enabled average people to keep their heads above water generation after generation. This is not success, and this is not development. This is life support. It is obviously vital in emergency situations, but it has proven to be profoundly insufficient for actually transforming societies, which should be our real ultimate goal from a moral, financial and logical point of view.

Economics: The Dismal Profession

Arvind Subramanian writes recently in the FT that the field of economics has “made amends” for failing to predict the economic crisis by producing effective solutions for managing it. The fact that a depression was avoided indicates that, for all its flaws, economics has contributed positively.

For sure, we have not learnt all the lessons; we may even have learnt some wrong ones. It is also probable that we are setting the stage for future crises, not least because we are still groping for ways to tame finance. So, economics is bound to fail again. But the avoidance of the Greatest Depression that could so easily have happened in 2009 is an outcome the world owes to economics; at the least, it is the discipline’s atonement for allowing the crisis of 2008 to unfold.

So in other words, economics has been harmful, except it has been beneficial. Only an economist (or, maybe better, an academic) could make illogic seem so logical. It is, after all, “probable that we are setting the stage for future crises,” but hey, “the avoidance of the Greatest Depression… is an outcome the world owes to economics.”

I am reminded of the line that many have used to criticize Ben Bernanke’s recent elevation in stature: the arsonist is rewarded for putting out his own fire. Just replace Bernanke with the entire economics profession over the last 40 years, and you can’t tell the difference. To be sure, there are many brilliant economists who have enhanced knowledge to various degrees in recent decades. And not all economists have subscribed to the neoliberal, neoclassical orthodoxy that laid the foundation for this crisis. But enough did that we can characterize the overall field as deeply flawed.

As I have said, this field has thus far demonstrated little to no propensity to change its tone. We see no meaningful shift in the debate between left-of-center and right-of-center economists; so far, they are debating the same old issues they’ve been debating for years. Large figures like Paul Krugman have, as expected, begun to ask the hard questions and think outside of the box. But where are the rest of them?

In a way, this lack of sufficient self-reflection is understandable in any academic field that is dominated by pride, tenure, seniority and elitism. Despite this, one would expect a massive, intellectually unavoidable disruption to the status quo and the established “models” to prompt some real, solid soul-searching in any such discipline.

The fact that there has been no such soul-searching is troubling, to say the least. These are, after all, the same people who are spinning the intellectual yarn from which an extremely fundamental component of our social order is made, and will continue to be made.

The global economic system came to the brink of collapse. And yet, the same, tired old rightist and leftist politicians are having essentially the same, tired old debates they were having 1 or 2 years ago about state involvement and welfare checks. Surprise, surprise, they are prescribing the same, tired old policies (Lower taxes! No, more regulation!). Meanwhile, the supposed intellectual keepers of the system are asleep at the wheel.

So the economic system came close to collapse. And Jimmy cracked corn, and they don’t seem to care. Subramanian’s pride in his field is misplaced. It is far from clear that the crisis is really “over.” If he really wants to help avoid the next crisis, and do something good for the world, he would do better by getting out his pen and paper and reconsidering the Theory of Consumer Choice, rather than writing opinion pieces about how great his failed profession is.

An Economic Car Crash in Slow Motion

Fareed Zakaria writes recently in Newsweek that maybe the economic situation is not so bad after all. The financial system has calmed down and government intervention has helped with economic stability over the last year.

Severe problems remain, like high unemployment in the West, and we face new problems caused by responses to the crisis—soaring debt and fears of inflation. But overall, things look nothing like they did in the 1930s. The predictions of economic and political collapse have not materialized at all.

This triumphalist tone is easy enough to neutralize. For example, Dan Agin (who is not even an economist—although that is probably a good thing) in the Huffington Post wrote in November that

The reality is that since our Great Recession is only a year old, it may be silly to interpret every upward blip as a sign that it’s almost finished…What was the situation, the mood, and the prognosis in 1930, during the year following the Great Crash? In 1930, the population of the United States was 122 million, and evidently hardly anyone in the country understood the hardships that lay ahead of them. Certainly, American culture and innovation were booming… Early in the year, a minor bull market drove up stock prices of U.S. Steel, General Motors, and General Electric, which led to a wave of optimism among political and business leaders. (Sound familiar?)… The unemployment figure was 4.5 million and slowly rising…

Turns out that “things look [something] like they did in the 1930s,” Fareed. Many people seem incapable of taking a longer-term view of things, of understanding short term, month-to-month developments in the context of the larger, year-to-year processes that are unfolding. This is unfortunate.

Do Changes in the Global Order Render History Moot?

More importantly, though, Zakaria notes three major changes in the global order today that render analogies between this historical moment and the Great Depression illegitimate:

The first is the spread of great-power peace. Since the end of the Cold War, the world’s major powers have not competed with each other in geomilitary terms. There have been some political tensions, but measured by historical standards the globe today is stunningly free of friction between the mightiest nations.

But the same could be said on the eve of World War I! Obviously, there is no conflict in the world… until there is. The Cold War ended in about 1990. So it has been 20 years. That is a very long time from the standpoint of a single human life, but inconsequential in the scheme of history. First of all, during these 20 years there have been plenty of wars, battles, campaigns and skirmishes, and they have indeed involved the major powers, even if those powers have not engaged each other directly. Second of all, what does Zakaria make of the rising tensions of various kinds involving Iran, Russia, China and the United States? Finally, remember that 20 years was also the stretch of time between the two World Wars. On the eve of World War II, one could have easily made the same exact statement about global stability and great power peace. What else has Zakaria got?

The second force for stability is the victory—after a decades-long struggle—over the cancer of inflation. Thirty-five years ago, much of the world was plagued by high inflation, with deep social and political consequences. Severe inflation can be far more disruptive than a recession, because while recessions rob you of better jobs and wages that you might have had in the future, inflation robs you of what you have now by destroying your savings. In many countries in the 1970s, hyperinflation led to the destruction of the middle class, which was the background condition for many of the political dramas of the era—coups in Latin America, the suspension of democracy in India, the overthrow of the shah in Iran.

Like conflict, inflation was never a problem before… until it was. There is nothing inherently unique about our current historical moment when it comes to inflation. Yes, effective monetary policy has helped keep inflation down. But this is by no means a structural phenomenon that is baked into the economic system, and therefore a change of fiscal or monetary policy, or in macroeconomic conditions, in one or more countries may very well change the behavior of prices over both the short and long term.

Furthermore, recent inflation rates in the US are not meaningfully different from inflation rates decades ago. See the chart below, from Inflationdata.com. Yes, there was an uptick in the 1970s and 1980s, but how does Zakaria’s inflation argument square with the fact that average inflation over the last 20 years is entirely comparable to that during the 1950s and 1960s? One could say that the overall trend in inflation over the last century has been down, but that is only technically true. Who is to say that our current low-inflation environment is simply a matter of historical luck, and that soaring inflation is right around the corner? That argument would be just as legitimate as Zakaria’s, based on the data.

Zakaria’s third and final point is the following:

And the third force that has underpinned the resilience of the global system is technological connectivity. Globalization has always existed in a sense in the modern world, but until recently its contours were mostly limited to trade: countries made goods and sold them abroad. Today the information revolution has created a much more deeply connected global system… This diffusion of knowledge may actually be the most important reason for the stability of the current system. The majority of the world’s nations have learned some basic lessons about political well-being and wealth creation. They have taken advantage of the opportunities provided by peace, low inflation, and technology to plug in to the global system. And they have seen the indisputable results.

The first part of this one is simply incorrect. Technological globalization has been occurring for decades. It was paltry compared to today, of course, but 100 years ago they had the telephone, telegraph and international travel by steamship. The second part relies on the assumption that current neoliberal economic regimes are basically good for developing countries. That is a dubious idea, at best. In addition, he assumes that almost all countries are basically using similar economic regimes. This is manifestly untrue.

The More Things Change…

Yes, in the broadest terms, almost everybody accepts the necessity of property rights, the profit motive, and trade organized by markets. But beyond that, there remain huge differences when it comes to social welfare, the strength of labor unions, government intervention in private industry, state regulation of various sectors, the proper mission of the central bank and currency valuation, just to name a few. Papering over these important differences results in a narrative about as useful as saying “although different countries have different political and economic orders—some communist, some capitalist, some dictatorial, some democratic—everybody agrees on the need for a government.”

Zakaria makes some interesting points, and it is necessary to remember that as bad as things may seem, the total economic system is complex, and we can never know what the future may hold. But it seems that the more salient argument is that fundamental characteristics of the current economic system of countries like the US and the UK—abundant reliance on debt, public fiscal incontinence and mismanagement, excessive deference to consumption over saving and investment, etc—have led and will continue to lead to major problems, unless they are addressed.

Female Quotas for the Board of Directors?

This topic is raised by a recent article in Forbes reporting on a proposal in France to mandate that half of the boards of directors of publicly listed companies be women. Norway and Spain have already passed similar laws, and other European countries are moving in that direction. The article raises the possibility that the US may follow suit.

So is this a brilliant and obvious strategy to force the much-needed advance in corporate gender equality which, as is mentioned, has frustratingly stagnated? Or is it a surefire way to unfairly promote the talentless while solidifying a sexist tokenism that will only make things worse for women in the long run?

Traditionally, I have been against all affirmative action at the university level other than economic (i.e. financial aid), for a number of reasons, and I can talk about that another time.

But I can appreciate arguments that this is different. For example, the population of women that would be considered for such board positions is already generally well-qualified and well-accomplished (we’re talking about academically accomplished women who have worked for years in managerial positions), mitigating the potential outcome of unfair promotion. In addition, it’s not as if the high-level corporate world has done a terrific job in recent years, so no need to worry about declines in performance.

So those would be arguments in favor of quotas. On the other hand, there are classic arguments against it: if diversity is forced on people, instead of happily accepting a new way of doing business, they may very well be bitter and resentful of those who have gotten an “easier” ride. Also, what kind of a signal does it send to younger workers when those who work hard and play by the rules of the meritocracy won’t necessarily be the ones who win?

For this particular brand of affirmative action, I can see legitimate arguments on both sides.

Texas or Taxes?

The economic crisis has highlighted the distinction between Texas and California in the area of financial management and governmental priorities. Lower taxes, greater emphasis on assimilation and easier regulation on companies are typically among the major factors credited to Texas’ outperformance in recent years, while the Golden State has pursued a not-so-golden path marked by fiscal waste and mismanagement. Because of their size, influence and ideological slants the two states can be seen as the paragons of modern American liberalism and conservatism, respectively. And this is happy news for the right, particularly in the age of the big-spending Obama Democrats. California’s economic crisis and fiscal debacle is seen as a sign of things to come for the country as a whole under Democratic leadership.

There is no question that unchecked progressive idealism, agnostic to the harsh realities of limited public resources is a recipe for disaster. But how is unchecked conservative idealism any less of a threat? Whether in the form of wars in the name of “national defense,” tax breaks for the richest, or subsidies to large corporations, Republican waste is necessarily just as bad.

And here is where we uncover the real story. As some have noted, Texas outperforms California in many respects even according to the goals of the high-tax, high-benefit model. Therefore, in many respects, right-of-center economic policies work. But we know that in many respects they do not. As I recently noted, the laser-focused concern with lowering income tax rates by conservatives is wrongheaded, with data backing me up. In addition, blind deregulation and trust in rational markets was a major contributing factor to the economic crisis.

We can conclude, then, that while a robust social safety net is a must for prosperity growth, other, unequivocally right-of-center approaches are vital as well. Common sense welfare and transfer payments are obviously necessary, but low taxes and light regulation for small businesses themselves constitute extremely powerful “welfare” policies insofar as they help lower- and middle-class people to start a company, run it profitably, and employ two or three other people.

The Texas-California divide brings to light some important distinctions between liberalism and conservatism, but it would be a mistake to see it as final proof that conservatism works and liberalism does not. Aside from the fact that the Texas government just seems to work better than the Californian, we must remember that, being a state, Texas benefits from many left-of-center policies and programs that are national in nature. And, again, we know that many economic assumptions of the right have been proven false.

Higher Taxes, Less Prosperity?

If only it were true. Unfortunately, the reality of the matter is much more complex. There is tons to be said on this issue. For now, take a look at this chart, released today by the OECD, and reported in the New York Times:

Relative to the US, there are higher taxed countries that are poorer, and higher taxed countries that are richer. And this, of course, is because the relationship between taxes and income, and between taxes and income growth, is more complicated than many or most would like to think. Higher taxes (1) are not necessarily bad in and of themselves, and (2) can actually be positive if they result in the state being able to provide more and/or better quality services for its people. The recently proposed war tax indicates the potential for higher taxes to result in more prosperity, assuming the war effort results in more security and peace for the country, and therefore more economic activity and growth (this particular Afghan conflict will not remotely result in that kind of thing, but that’s another topic).

We can conclude that the real issue is not the amount of taxation, although that is important, but rather what the government does with that tax money. It can foster an environment of economic prosperity through strategic investment, improving infrastructure, etc, or it can squander and mismanage the money. The preoccupation with the tax rate stems from the fact that it constitutes a number that is (1) simple and straightforward (at least on the surface), (2) extremely easy-to-understand by everybody, (3) affects everybody in an important way to some degree, (4) easily concentrates the angst and vitriol of a large number of people. Very few other phenomena share these characteristics. And that’s probably a good thing.