What the Wall Street Protesters Want: An Economic Commentary on the "Contract for the American Dream."

Nearly every news story I read about the occupation of Wall Street begins by saying that the protesters are vague about what they want. Even Paul Krugman, who is supportive of the demonstrations, complains in today’s New York TImes about a lack of specific policy demands. Maybe that is a valid critique of individual protestors, but if you look instead at what some of their sponsoring organisations say the protest is about, you get a different picture—one that is not only more specific but often makes surprisingly good economic sense.

The best short summary of protesters’ demands that I have seen is the Contract for the American Dream, or CFAD as I will call it for short. It is a one-page, 10-point program that claims to be the result of a grass roots, bottom-up drafting process. It is hardly an obscure document—it carries hundreds of thousands of individual signatures plus the endorsements of a whole laundry-list of progressive organisations. I suggest clicking on the link right now and reading it. That will save the need for long quotes.

Done reading? OK, here is my point-by-point economic commentary.

1. The first point calls for expanded infrastructure spending. I like the fact that it begins, not with the sexy stuff, like high-speed rail, but with the unglamorous job of rebuilding crumbling sewers, dams, and levees. I suspect that whoever drafted this lead-off point must have read the latest Report Card for America’s Infrastructure from the American Society of Civil Engineers (ASCE), which gives most of the country’s infrastructure grades of Cs and Ds on a scale of A to F, and getting worse.

Yes, you might say, it would be nice to fix America’s infrastructure, but we can’t afford it. The federal deficit is already too big. We can’t afford more spending. In this earlier post I explained why that is not a sound argument:

Ask why we are concerned with the budget deficit in the first place. The cliché is that we do not want to be the first generation to leave our children a national balance sheet with a thinner margin between assets and liabilities than we inherited from our parents.

The trouble is, the federal budget deficit is not the only thing that shapes the national balance sheet. There is also an infrastructure deficit–the difference between what the country invests each year in new bridges, sewers, and power lines and the rate at which the old ones fall apart. If investment in infrastructure exceeds depreciation, the country is that much richer at the end of the year. If depreciation exceeds investment, it is poorer, as surely as if the Treasury sells bonds and uses the proceeds for the most shortsighted spending programs you can think of.

The fact is, we can’t afford not to maintain the country’s infrastructure, even if we have to borrow or raise new tax revenues to do it. We are behaving like someone who tries to save pennies by not changing the oil in their car until the engine freezes up. Right now, when labour markets are slack and interest rates are low is an ideal time to do some catch up work on those dams and sewers.

2. The second of CFAD’s 10 points calls for investment in alternative energy technology and energy conservation. Another good idea. CFAD is vague about how best to encourage such investment, so let me repeat a suggestion I have made many times before: A nice, substantial carbon tax. Use the revenue for whatever you want—invest it in infrastructure and education, pay down the debt, go revenue neutral by offsetting the carbon tax with cuts to payroll taxes or corporate taxes or whatever other taxes you hate most—that is not the issue here. The main benefit of a carbon tax, or similar energy tax, would be to stop giving a free lunch to the producers of forms of energy that pollute urban air, mess with the climate, and undermine national security by encouraging dependence on imports from unfriendly sources. If energy from all sources were priced high enough to cover all opportunity costs and spillover effects, alternative energy and energy conservation would become commercially attractive without the need for Solyndra-style subsidies.

3. The third point calls for increased investment in education. Here I would make exactly the same argument as for infrastructure investment: It should be our goal to pass along to the next generation a national balance sheet that is stronger than the one we inherited. Education—we economists prefer to call it human capital—is part of the asset side of the balance sheet just as much as dams and sewers are. Could we spend too much on education? Theoretically, yes, but with the news full of teacher layoffs and school closings in the face of falling test scores and falling international rankings, it is hard to believe we are spending too much right now. By depleting our human capital faster than we are replacing it, we are, again, not changing the oil. That’s bad business, bad economics, and bad public policy.

4. Point four of CFAD calls for fixing our broken healthcare system to catch up with other industrialized countries that spend far less and deliver better care. In a post earlier this year, I quoted a poll from the Harvard School of Public Health that found that 68 per cent of Republicans and 32 per cent of Democrats  think the United States already has the world’s best heathcare system. I then presented the charts and numbers that showed it does not. By any of a wide variety of measures, the U.S. healthcare system produces mediocre results at a far higher cost than that of any other country in the world.

CFAD is a little vague about what kind of a fix should be undertaken for health care. It hints at expanding coverage first and worrying about cost-cutting reforms later. Personally, I would prefer to front-load the cost control. That’s going to be hard to do, since every dollar of excess healthcare expenditure is a dollar of income for some healthcare provider, and the providers have better lobbyists than the patients. Still, I am on board with the notion that anything calling itself a Contract for the American Dream needs a good healthcare plank.

5. I am more sceptical about the fifth point of CFAD, which calls for higher minimum wages and stronger labour unions. Economists have written much on these issues, and the  profession is divided. Those who reason on the basis of a priori microeconomic theory tend to argue that both minimum wages and unions result in fewer jobs. The theorists also see them as improving wages for some workers while pushing others into dead-end jobs or out of the labour force altogether, thereby tending to create a labour elite and an underclass. On the other hand, econometricians, who try to measure things instead of theorize about them, often find that the hypothesized effects are small: Minimum wages only eliminate a few jobs and unions only increase inequality among workers by a small amount.

I can understand that these policies are popular among progressives; they play to the base and keep contributions coming in. Still, among all the proposals in CFAD, this one seems the least likely to restore the American dream of prosperity with equality.

6. Point six promotes the idea of making social security fiscally sound, in part by making the payroll tax less regressive. I don’t see much to argue with here. Isn’t that what everyone thinks? All it would take is to get Congress to do what everyone outside Congress, left right and centre, agrees should be done.

7. The next item calls for changes in the tax system that would make it fairer and at the same time raise more revenue. Nearly every serious economist who has looked at the issue agrees that medium-term fiscal consolidation will have to include an increase in tax revenue as one component. Everyone also agrees the U.S. tax system needs fundamental reform. Unfortunately, that is where there is a major flaw in the CFAD tax proposal. It puts far too much emphasis on raising marginal tax rates and far too little on structural reform. Yes, it makes a nod toward the elimination of loopholes, but it puts more emphasis on restoring pre-Bush high tax rates and then adding still higher brackets for millionaires and up.

Independent tax economists, including those at the far-from-Conservative Urban Institute-Brookings Institution centre on Tax Policy, have a different idea about how to fix the tax system. Rather than raise marginal tax rates, they see broadening the tax base as the most important objective. That means closing loopholes, not just for yachts and corporate jets, but also for sacred cows like employer-provided health insurance, mortgage interest deductions, and other items that supposedly benefit the middle class but really do not. For many, real tax reform would also mean replacing some of our least efficient current taxes, including payroll and corporate income taxes, with broader-based value-added taxes, energy taxes, and other taxes on consumption.

There is nothing impossible about tax reform that would do all four of the following at one time: Raise more revenue, encourage jobs and innovation, eliminate absurdities like CEOs who pay lower taxes than their secretaries, and at the same time reduce marginal tax rates for everyone.

8. End the wars and invest at home. If this is something that even Michael Moore and Ron Paul can agree on it, who am I to object? Enough said.

9. Considering the energy that CFAD backers are expending to occupy Wall Street, it is a little surprising to see that their ideas for financial reform are relegated to ninth place. Maybe that is because this section of the contract is so totally lacking in imagination.

The only specific proposal for financial reform is to levy a “tiny fee” of  1/20th of 1 per cent on each Wall Street trade. A transaction fee on financial trades is not, by itself, an unheard of idea, but it is hardly a panacea. There are a lot of better reform ideas out there, including many that should resonate well with CFAD’s progressive base. How about reforming executive compensation? Empowering shareholders? Ending too-big-to-fail? Erecting ring fences to segregate main-street deposit and lending activities from the hedged-structured-synthetic casino side of finance?

10. Point 10 calls for clean, fair elections where money doesn’t buy political influence, and for courts that respect the Constitution. Both wonderful ideas, but a lack of specifics on how to get from here to there makes this section seem like an afterthought.

What’s the bottom line? The impression I am left with after reading the Contract for the American Dream and stripping away some of the more colourful progressive rhetoric is that the folks demonstrating at street level and the financial professionals looking down on them from their 60th floor offices could find a lot of common ground if they tried. They all live in a country needs to invest in the future. One that needs a better health care system, a better pension system, and a better tax system. One that needs to find a way out of foreign wars, serial financial bubbles, and rent-a-representative democracy. Starting with the goals of the Contract for the American Dream and working together to develop more thoughtful and effective ways of achieving them might actually lead to some real progress.

Originally posted to Ed Dolan’s Econ Blog at Economonitor.com. Reproduced by permission.

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