Tuesday, February 10, 2015

Obama soft-focuses our domestic ills

I usually find Obama interviews, especially long ones, reassuring. His understanding of issues is nuanced and multi-tiered. But his responses to Ezra Klein's questions about domestic issues and trends struck me as disappointingly unfocused, or off-focus, on several fronts. For example:

1. Asked about the causes of growing inequality, he back-loaded labor law:
Now, there are a whole bunch of reasons for that [stagnant middle class wages]. Some of it has to do with technology and entire job sectors being eliminated — travel agents, bank tellers, a lot of middle management — because of efficiencies with the internet and a paperless office. A lot of it has to do with globalization and the rest of the world catching up. Post-World War II, we just had some enormous structural advantages because our competitors had been devastated by war, and we had also made investments that put us ahead of the curve, whether in education or infrastructure or research and development.

And around the '70s and '80s and then accelerating beyond that, those advantages went away at the same time as, because of technology, companies are getting a lot more efficient. One last component of this is that workers increasingly had less leverage because of changes in labor laws and the ability for capital to move and labor not to move.  You combine all that stuff, and it's put workers in a tougher position.
In that closing acknowledgement of the power dynamics of the workplace, he makes "changes in labor law" sound like an impersonal force and half-buries it by yoking it to another impersonal, if very real, force. He also doesn't mention tax cuts on high incomes or investment here, in his opening summary of the forces at work, though he does later.

2. He presents the imperative to tax the wealthy as essential to raising money for investments in the common welfare, which it certainly is. But he places little emphasis on increasing labor's share of corporate profits -- and so decreasing management and owners' share. It's true that he does tack round to this at the very end of the discussion of inequality:
We also still have to focus on the front end. Which is even before taxes are paid, are there ways that we can increase the bargaining power: making sure that an employee has some measurable increases in their incomes and their wealth and their security as a consequence of an economy that's improving. And that's where issues like labor laws make a difference. That's where say in shareholder meetings and trying to change the culture in terms of compensation at the corporate level could make a difference. And there's been some interesting conversations globally around issues like inclusive capitalism and how we can make it work for everybody.
That's good -- but it came across as an afterthought.  Previously, he made the reduced power of labor, and the current emphasis on juicing short-term profits, sound like forces of nature:
I think that part of what's changed is that a lot of that burden for making sure that the pie was broadly shared took place before government even got involved.  If you had stronger unions, you had higher wages. If you had a corporate culture that felt a sense of place and commitment so that the CEO was in Pittsburgh or was in Detroit and felt obliged, partly because of social pressure but partly because they felt a real affinity toward the community, to re-invest in that community and to be seen as a good corporate citizen. Today what you have is quarterly earning reports, compensation levels for CEOs that are tied directly to those quarterly earnings. You've got international capital that is demanding maximizing short-term profits. And so what happens is that a lot of the distributional questions that used to be handled in the marketplace through decent wages or health care or defined benefit pension plans — those things all are eliminated. And the average employee, the average worker, doesn't feel any benefit.
Does Obama think that the stronger unions of the early postwar era just happened, without government involvement? Or that the shift in corporate culture he alludes to had nothing to do with deregulation and tax cuts?  On the latter point, Thomas  Piketty begs to differ:
Of course changes in tax laws are themselves linked to changes in social norms pertaining to inequality, but once set in motion they proceed according to a logic of their own . Specifically, the very large decrease in the top marginal income tax rate in the English-speaking countries after 1980 (despite the fact that Britain and the United States had pioneered nearly confiscatory taxes on incomes deemed to be indecent in earlier decades) seems to have totally transformed the way top executive pay is set, since top executives now had much stronger incentives than in the past to seek large raises. I also analyze the way this amplifying mechanism can give rise to another force for divergence that is more political in nature: the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks (Capital in the 21st Century, p. 335).

Billionaire populist Nick Hanauer, more recently, has put a spotlight on a change of law enabling stock buybacks:

Over the past decade, the companies that make up the S&P 500 have spent an astounding 54 percent of profits on stock buybacks. Last year alone, U.S. corporations spent about $700 billion, or roughly 4 percent of GDP, to prop up their share prices by repurchasing their own stock.

In the past, this money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment. But today, these buybacks drain trillions of dollars of windfall profits out of the real economy and into a paper-asset bubble, inflating share prices while producing nothing of tangible value....

So what’s changed? Before 1982, when John Shad, a former Wall Street CEO in charge of the Securities and Exchange Commission loosened regulations that define stock manipulation, corporate managers avoided stock buybacks out of fear of prosecution. That rule change, combined with a shift toward stock-based compensation for top executives, has essentially created a gigantic game of financial “keep away,” with CEOs and shareholders tossing a $700-billion ball back and forth over the heads of American workers, whose wages as a share of GDP have fallen in almost exact proportion to profit’s rise...

Meanwhile, the shift toward stock-based compensation helped drive the rise of the 1 percent by inflating the ratio of CEO-to-worker compensation from twenty-to-one in 1965 to about 300-to-one today. Labor’s steadily falling share of GDP has inevitably depressed consumer demand, resulting in slower economic growth. 
I wouldn't expect Obama to focus on buybacks per se. But he might have found a way to emphasize, as Hanauer does, that corporate profits have doubled in the period when wges have stagnated and labor's share of profits has shrunk. (Hanauer does share his emphasis on gains to the wealthiest choking off public investment in infrastructure and education.)

3. Asked about the causes of the U.S.'s uniquely high healthcare costs, Obama sheered off discussing our fragmented payment system. In fact he ignored Klein's invitation to discuss an "all-payer" system, in which insurers (possibly together with government payers) collectively bargain prices with healthcare providers:
Ezra Klein

When you talk about Medicare as a lever, Medicare tends to pay a lot less per service than private insurers by a margin. Before single-payer there's also this idea you hear occasionally of letting private insurers band together with Medicare, with Medicaid, to jointly negotiate prices. Do you think that's a good idea?

Barack Obama

You know, I think that moving in the direction where consumers and others can have more power in the marketplace, particularly when it comes to drugs, makes a lot of sense. Now, you'll hear from the drug companies that part of the reason other countries pay less for drugs is they don't innovate; we, essentially through our system, subsidize the innovation, and other countries are free riders. There's probably a little bit of truth to that, but when you look at the number of breakthrough drugs and the amount of money that drug companies now are putting into research and where they're putting it, a whole lot of it is actually in redesigning, modestly, existing drugs so they can renew patents and maintain higher prices and higher profits. That's not entirely true, but there's some of that. So there is a lot of savings that could be achieved while still making sure that our drug industry is the best in the world, and will still be making a healthy profit.
I do wish Klein had pushed this point a bit, as he's done a very good job himself presenting uniform pricing as the "common denominator" of effective healthcare cost control in other wealthy countries.

4. In discussing the causes of political polarization in recent decades, Obama left out the solid South's transfer of allegiance from segregationist Democrats to Republicans and the ideological sorting driven by that transfer.

5. Obama appears not to know the scope of the ACA's Medicaid expansion or of the population frozen out of coverage by nearly half the states' refusal to expand Medicaid:
Over time, I think seeing if we can do more on delivery-system reform, making sure that we fill the gaps in those states that haven't expanded Medicaid. The big problem we have right now with Obamacare is that it was designed to make sure that some subset of people qualified for Medicaid, and that's how they were going to get coverage, and others were going to go into the exchanges because they had slightly higher incomes. And because of the decision of the Roberts court — that we couldn't incentivize states to expand Medicaid the way we had originally intended — you've got a lot of really big states, you've got tens of millions of people who aren't able to get their Medicaid coverage. And so there's this gap. And that's probably the biggest challenge for us.
It's a big challenge all right, but not that big.  When the Supreme Court made the expansion optional and states' initial choices became clear, the CBO reduced it projection of new Medicaid enrollments enabled by the ACA from 17 million to 13 million. The Kaiser Family Foundation estimated recently that 4 million have been denied coverage by states' refusal to expand -- a number that's shrinking, though too slowly.

Some of my complaints are mere matters of emphasis. Obama at least touched on most of the points that I felt got short shrift. Once a reader response like that starts, it tends to build on itself.  Perhaps the genuine takeaway, though, is that Obama her rather soft-pedals the more divisive aspects of inequality and medical cost control. I found that a bit jarring at a time in his presidency when he's become more plain-spoken and confrontational.

1 comment:

  1. Excellent post, thank you.
    I have one small quibble with Piketty et al. In my admittedly limited research, many of the top 1% are either financial superstars like John Paulson, who employ almost no one, or they are CEO's of big corporations who then and now have paid high wages to most employees.The day to day villains in most non union, cheap labor enterprises are no angels, that is for sure, but they do not seem to be the 1%. The Walmart family is an exception, of course.
    All I am trying to say is that if we came down hard with income taxes and wealth taxes on the 1%, I am not sure that the bulk of American workers would benefit much. We do need broader labor laws for that - laws which hit all business owners.