MMT 3: National Income and its Allocation

July 5, 2018

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This is the third in a series of posts about Modern Monetary Theory, based on the text by Mitchell, Wray and Watts. If you have not seen the earlier posts, I recommend that you start at the beginning.

Here we take a closer look at the economy from the income side, considering the various uses of income and how they interconnect.

Gross National Income (GNI)

Because the discussion centers on income received by residents of the United States, the focal point will be Gross National Product and income instead of Gross Domestic Product, as in the previous post. Don’t let the distinction concern you too much, since the two are very nearly the same, both around $20 trillion dollars a year. But to be precise, we need to adjust GDP by adding Foreign Net Income (FNI), including income that Americans earn from investments overseas and excluding income that foreigners earn here. Currently Foreign Net Income is positive, and that makes GNP a little larger than GDP.

GNP = GDP + FNI

Using the components of GDP covered in the previous post (Consumption, Investment, Government Spending and Net Exports), we can also describe GNP this way:

GNP = C + I + G + NX + FNI

The combination of NX and FNI is also known as the Current Account Balance (CAB), which is the difference between money flowing into the country and money flowing out of the country, taking into account both trade and investment income. So it is also true that:

GNP = C + I + G + CAB

In macroeconomics, output equals income, and so Gross National Income equals Gross National Product.

GNI = GNP

These equations describe where the national income comes from, but where does it go?

Allocation of national income

Income can be used in three basic ways: to pay taxes, to consume goods and services, and to save.

GNI = T + C + S, in which:

  • T = Taxes net of transfer payments. That includes all sorts of taxes paid to government, minus any payments from government like Social Security checks or veterans benefits.
  • C = Household spending on goods and services, as before.
  • S = Private sector saving, whether by households or businesses. Businesses account for about three-fourths of it.

Consumer spending uses about 68% of GNI, about the same percentage it contributes to GDP. The next largest use is Saving (19%), followed by Taxes net of transfers (12%).

I have already been using the concept of Disposable Income, which is simply income after taxes and transfers, or GNI – T.

I have also discussed the Marginal Propensity to Consume (MPC or c), which is the portion of each additional dollar of disposable income that is devoted to Consumption. Its counterpart is the Marginal Propensity to Save (MPS or s). Although we are often interested in the average propensities for the economy as a whole, households at different income levels have different propensities. Wealthy households can afford to save more of each additional dollar, while poorer households need to spend more of it.

Leakage and injection

Although Gross National Income = Gross National Product, we have separate formulas for them whose equivalence is not obvious. Let’s see what happens when we try to reconcile the income side (GNI) with the spending or output side (GNP):

GNI = T + C + S

GNP = C + I + G + CAB

Well, C in the first formula is C in the second formula; that much is clear.

Let’s assume that T goes into G, since taxes go to the government.

Then we encounter an apparent discrepancy. We might like to think that all of Saving goes into Investment. But the Investment category in national accounting only includes real assets like plants, equipment and new inventory. Some of saving goes to acquisitions of financial assets (cash accounts, stocks, bonds) that are not financing new acquisitions of real assets. Currently S is about $4 trillion, but I is only about $3.4 trillion

Another difference is that the GNP formula includes the Current Account Balance (CAB), which is currently negative because Americans spend more on imports than foreigners spend on our exports. (Foreign Net Income from investments is positive, but it isn’t large enough to offset Net Exports, which is a big negative.)

So some of the national income in GNI isn’t showing up in national spending in GNP. The gap is about $1 trillion, attributable to the excess of Saving over Investment and the negative Current Account Balance. The text calls these “leakages” from GNP. In order for GNI to equal GNP anyway, there must be some offsetting “injection” of spending. That is, there must be some other form of spending going into national product and income, but not coming from national income. And of course there is; it’s the deficit spending by government.

What makes everything balance is that government spending exceeds taxation. G is greater than T by an amount equal to the missing $1 trillion. Most of that is the federal deficit, although G and T take into account spending and taxes at all levels of government. The sovereign government uses its unique position as the issuer of currency to create money when it spends, and that increases national output and income. The deficit spending helps drive the economy, accounting for about 5% of GDP and GNP.

The consequences of trying to balance the federal budget should now be even clearer. It would require some combination of spending cuts, which would reduce national output and income, and tax increases, which would reduce disposable income. Either way, consumption would be negatively impacted to a degree governed by the marginal propensity to consume. The negative impact would be compounded by the consumption multiplier discussed previously. After the multiplier effects ran their course, the economy would find a new equilibrium, but at a lower level of national output and income.

As long as hundreds of billions of national income are going into financial assets but not investments in real assets, and additional billions are going to buy imports instead of American products, the country relies on deficit spending by government to sustain national output and income. The alternative is recession. And in fact, the authors report that balanced federal budgets have usually been followed by periods of recession.

Paradoxes of thrift and spending

Most people consider thrift a virtue. In his classic The Organization Man, William H. Whyte described it as one of the three traditional values of the “Protestant Ethic.” (The other two were hard work and self-reliance.) But in the aggregate, too much saving can be a problem. Not all saving is matched by investment, and what isn’t is a drag on current GNP. Keynesian economists call that the “paradox of thrift.”

If all households would start being thriftier at the same time, consumption would drop, forcing businesses to scale back production and employment. Saving would increase, but not all of the increase would go into the acquisition of productive assets. In fact, investment would likely go down, since businesses see less profit in investing in new plants and equipment when consumer demand is falling. A lot of the new saving would go to buy financial assets, especially safe ones like cash accounts and bonds. The bottom line is that households would ultimately be punished for their thrift by a decline in their own incomes as the economy contracted.

On the other side of the ledger we have what we might call the “paradox of excess spending” (my term). What might be considered a vice on the individual level actually helps sustain or increase output and income on the aggregate level. The sovereign government is the entity with the power to make that happen.

Why tax?

If deficit spending is so good for the economy, then “why not just eliminate taxes altogether?” the authors ask.

One reason is that the power to tax is the main thing standing behind the currency. If people didn’t need to pay their taxes in dollars, the demand for dollars might fall, weakening its exchange value on currency markets and its purchasing power.

Another reason is that the public and private sectors are somewhat in competition, especially when the economy runs at higher capacity. If taxes go too low, private consumption goes too high, commanding too many resources, especially labor. If all the most qualified workers are comfortably employed in the private sector, government agencies have trouble finding talented people. Taxes divert spending from private to public uses, enabling society to create public goods and services. “Taxes create real resource space in which the government can spend to fulfill its socio-economic mandate. Taxes reduce the non-government sector’s purchasing power and hence its ability to command real resources.”

A related reason is that by reducing private-sector spending, taxes also help control inflation. Disposable income is now about 88% of Gross National Income. If taxes would move closer to zero, disposable income would move closer to 100%. The increase in aggregate demand could put a big strain on supply, pushing prices up.

The conclusion is that deficit spending is economically useful, but so are taxes.

Income redistribution

An additional effect that government has on income is to redistribute it. One way it does that is through mildly progressive taxation, taxing high incomes at higher rates than low incomes. The other way it does it is by spending more on low-income households through such transfer programs as Medicare, unemployment insurance, veterans benefits, food stamps and family assistance.

For the aggregate effects, I will refer to the study by Thomas Piketty, Emmanuel Saez and Gabriel Zucman for the Washington Center for Equitable Growth. The researchers divided the U.S. population into three broad income groups, and then compared their shares of national income before and after taxes and transfers. Here’s what they found for 2014:

  • Top tenth: 47.0% of income before taxes and transfers, 39.0% after
  • Next two-fifths: 40.5% of income before taxes and transfers, 41.6% after
  • Bottom half: 12.5% of income before taxes and transfers, 19.4% after

Overall, 8% of the national income was reallocated downward from the top tenth of the population, with 1% going to the next two-fifths and 7% going to the bottom half. That reallocation had a big impact on those who received it, boosting the average income of the lower half of the population by 54%. Since the top tenth already had so much, what they gave up only amounted to 17% of their income.

Redistribution from the haves to the have-nots tends to boost consumption and aggregate demand. Lower-income households have a higher propensity to consume; they consume most of any additional dollars they receive. “This arises because lower-income families find it harder to purchase enough goods and services to maintain basic survival given their income levels.” Wealthier families have a higher propensity to save. They “not only consume more in absolute terms, but also have more free income after they have purchased all the basic essentials.”

Continued


MMT 2: GDP and Government Spending

July 3, 2018

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This is the second in a series of posts about MMT, Modern Monetary Theory.

I will now proceed to describe some of the fundamental principles of Modern Monetary Theory, as explained in the text by Mitchell, Wray and Watts. These may seem a little dry and abstract at first, but how they apply to real-world issues should become apparent very quickly.

GDP and its components

Since macroeconomics is interested in aggregate outcomes, especially the goal of using the available labor and other resources to the limit, its central concept is Gross Domestic Product. “GDP is the measure of all currently produced final goods and services evaluated at market prices.” It represents a country’s entire domestic output.

Economists measure GDP in several different ways, the easiest of which is to add up the various kinds of expenditures on goods and services. These fall into several categories:

  • Consumption (69%): spending on new goods and services by households. That does not include personal financial investments, which are considered savings and not goods or services; and it does not include new home purchases, which are part of Investment below.
  • Investment (17%): spending on plants, equipment and new inventory by firms, and real estate investment by households. It includes only real assets, not financial assets like stocks and bonds.
  • Government spending (17%): spending by all levels of government, including investments in long-term real assets like highways. It does not include transfer payments like Social Security checks or food stamps, which are counted in Consumption when they are spent.
  • Net exports (-3%): spending on exports minus spending on imports. Foreign spending on the products we export contributes to our domestic output, while spending on products we import contributes to foreign output. It is negative because our imports exceed our exports.

The percentages indicate the current contribution of each component to U.S. GDP. The first three add up to 103% because the last subtracts 3%.

This is summarized in the formula  GDP = C + I + G + NX

Domestic output and domestic income are two sides of the same coin, since every expenditure by one economic unit is income for another. “The basic macroeconomic rule then is that, subject to the existing productive capacity, total spending drives output and national income, which, in turn, drives employment.”

Modern monetary theory looks at the economy primarily from the demand side. It assumes that supply is usually pretty responsive to demand. If the government wants to order more airplanes, Boeing will be happy to fill the order. Increases in demand can boost GDP as long as the economy is not already running at full capacity, which it rarely is.

Government spending and GDP

Government spending accounts for 17% of U.S. GDP, not nearly as much as consumption but just as much as business investment and new home buying.

The potential benefits of government spending are twofold: first, it creates public goods and services like highways and public education; and second, it provides employment and profits for private sector enterprises, such as construction companies that build the roads and schools.

Although reducing the size of government is a popular conservative goal, cuts in government spending can be expected to reduce GDP because they are not offset by increases in other components of GDP. Reductions in highway construction are unlikely to be offset by increases in automobile purchases. Quite the contrary, since the spending cuts represent lost income to someone, and lower incomes reduce consumption, which is the biggest part of GDP. Spending increases, on the other hand, can increase GDP both directly and indirectly through their positive effects on income and consumption.

Multiplier effects

The indirect effects of spending changes on GDP are called “multiplier effects,” and they have a precise mathematical description.

Let’s say that for every additional dollar of disposable (after-tax) income, people devote 80 cents to consumption. The technical term for that .80 is the “marginal propensity to consume,” designated by c. Some people consume a larger proportion of their income than others (especially if they don’t have very much), but as usual we are interested in aggregating and using an average.

Thus if $1 was injected into the economy, through additional spending, total income would initially rise by $1. If the marginal propensity to consume was 0.8, then this initial rise in income would induce a rise in consumption of 0.8 x $1 or 80 cents in period 1. This initial $0.80 rise in induced spending would further induce a rise in income of $0.80 which would induce additional consumption in period 2 of 0.8 x 0.8 or 64 cents and so on.

The sequence of 1 + .8 + .64 + .512 is called a “power series” in mathematics because each number is a power of c. The sum of all the numbers comes out 1/(1-c), which in this case is 1/(1-.8) = 1/.2 = 5. In theory, a $1 increase in spending could result in a $5 increase in GDP. In practice, there are other variables that complicate things a bit. But in essence, this is the basis for expecting government spending to stimulate and grow the economy. We are asserting that real output has room to grow, that growth in output generates growth in income, and that consumer demand then drives further growth in output and income, in a virtuous circle.

Does that sound too good to be true? If you want to know where that first $1 came from, or whether there’s a catch somewhere, you are asking the right questions. But if you are sure that you can’t grow an economy by increasing spending, the modern monetary theorists have something to tell you.

What’s the limit, tax revenue?

Let’s play devil’s advocate. If growing the economy were so simple, why not let government spending go sky high? The obvious answer is that like a household, the government shouldn’t spend more than its revenue. That’s the wrong answer, as far as MMT is concerned, but let’s go with it for a moment.

If government has to raise taxes to pay for any spending increases, that wipes out the multiplier effect. That’s because the calculation of increases in consumer spending are based on disposable income, after taxes have been removed. If the government increases spending by $1 billion, but raises taxes by the same amount, gross income goes up $1 billion but disposable income doesn’t go up at all. (Of course it goes up for those who got jobs as a result of the spending, but in the aggregate that’s offset by the tax increase.) The increase in spending will expand the public sector and employ some people there, but there won’t be any further expansion in the economy as a whole.

Still, even that is something. G is part of GDP, so if the government can make good use of otherwise underutilized resources, that in itself adds to GDP. If the private sector is under-investing and under-employing, why shouldn’t the public sector take up the slack, especially if it can give people public goods and services that are otherwise lacking?

Suppose you live in a development with some common amenities and a homeowner’s association. The association raises everyone’s dues in order to hire an additional work crew to spruce up the common areas. That adds a service to aggregate output and new income to aggregate income. Your income remains the same, but part of it is allocated to supporting a common good instead of a private good. Aggregate disposable income is unchanged, because the new “tax” reduced yours, but the wages of the work crew increased theirs. The lesson is that reallocating income and labor to a sphere where it can be more fully employed can add wealth. Substitute government for the homeowner’s association, and you have a case for government spending.

Spending beyond revenue

The case for public spending goes beyond the previous example, into the realm of deficit spending. MMT questions the basic assumption that a sovereign government is like a household in needing to limit its spending to its revenue. That’s where aggregate thinking becomes crucial. Assuming that what is true at the individual level is also true at the aggregate level is known as the “fallacy of composition.”

At the individual or household level, living within one’s means is a cardinal principle of financial planning. If you spend less than you make, you can save and invest the surplus. The money you make adds to your income, setting up a virtuous circle that leads to higher net worth and financial security. Spend more than you make and you run up debt. That debt burden on your future income can then send you into a downward spiral of lower net worth and even insolvency.

MMT maintains that a sovereign state that issues its own currency never has to run out of money, although it does have to manage the currency so that it retains its value. Currencies such as the dollar are “fiat currencies,” no longer backed by any finite commodity, such as gold. The dollar’s value depends on the promise of the federal government to accept dollars in payment of taxes, and on the demand for dollars on world markets.

When the federal government spends, it injects money into the economy; when it taxes, it removes money. There is no economic law that prevents the government from injecting more money than it removes, and in modern times that’s what it usually does. The deficit spending boosts the economy by allowing the multiplier effect to work. And as we’ll see later, the excess money spent ends up as a financial asset in the private sector.

Governments without the power to create their own currency, such as state and local governments, or the homeowner’s association thought of as a kind of government, are much more limited in their capacity to stimulate their economies. They have to operate more like households, spending only what they’ve already received in revenue or cautious borrowing.

The real limit–productive capacity

The real limit on spending is not tax revenue, but the productive capacity of the economy. That is limited by the available resources and technologies. It does expand, but not as fast as we would like. Sometimes shortages of specific resources contract it, as in the case of the OPEC oil embargo of 1973.

If aggregate demand increases so rapidly that it starts to strain productive capacity, then the sustained price increases known as inflation can occur.

Once the capital stock is in place, firms will respond to increases in spending for the goods and services they supply by increasing output up to the productive limits of their capital and the available labour and other inputs. Beyond full capacity, they can only increase prices when increased spending occurs.

So when the government wants to build a highway, it may have to bid more for the job because construction companies already have as many jobs as they can handle. Or when it wants to staff a new department, it may have to hire workers away from other jobs by offering higher wages.

Deficit spending when the economy is at or near capacity may end up boosting prices more than GDP. Even if the spending produces a short-term increase in aggregate disposable income (because it wasn’t offset by tax increases), the increased consumer demand will push up prices rather than real private-sector output. A price increase is not the same thing as a multiplier effect on output and real income.

While acknowledging this limit to effective government spending, MMT theorists are far more interested in what can be done when the economy is operating below capacity. They believe that it is usually possible for the sovereign government to stimulate the economy, create employment, and increase domestic output and real income, while at the same time using monetary policy to control inflation and protect the dollar’s purchasing power. They do not believe that inflation fears justify tight monetary and fiscal policies that keep the economy and its workers from achieving their real potential.

Continued


Modern Monetary Theory and Practice

July 2, 2018

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William Mitchell, L. Randall Wray and Martin Watts. Modern Monetary Theory and Practice: An Introductory Text. Callaghan, Australia: Centre of Full Employment and Equity: 2016.

Blogging about a textbook is not something I normally do. This text represents a perspective that is especially relevant to current economic policy discussions, and the proposal for a “job guarantee” in particular. That’s been getting a lot of attention both on Wall Street and in progressive policy circles, two realms that don’t usually find much common ground. Here’s a short Huffington Post article on that issue.

Most people are vaguely aware that there are theories underlying the various policy proposals they hear, but they have trouble connecting the dots between theory and policy in any explicit way. We have all heard politicians say that cutting taxes will stimulate the economy, raising interest rates will control inflation, putting high tariffs on imports will save American jobs, or that allowing higher government deficits will impoverish future generations. We need to know how many serious economists agree with such claims.

This is a textbook on macroeconomics, the study of the workings of the economy as a whole, as opposed to microeconomics. the study of economic units like business firms or households. “Macroeconomics focuses on a selected few outcomes at the aggregate level and is rightly considered to be the study of employment, output and inflation in an international context.” I can’t cover this whole textbook–and I’m sure my readers don’t want me to–but I will try in this and the next few posts to explain how a contemporary group of economic theorists arrive at their policy recommendations.

The neoclassical orthodoxy

Let’s begin with a few basic assumptions. The authors describe two broad approaches to macroeconomics. They distinguish the more orthodox tradition, commonly called “neoclassical,” from a heterodox tradition with no single agreed-on name. They call it the “Keynesian/Institutionalist/Marxist approach. In this text, I see a lot more Keynes than Marx.

Keynesian and institutionalist perspectives were very popular in the early twentieth century, but the more orthodox approach had a resurgence in the 1970s as economists and policymakers shifted their focus from boosting employment and wages to fighting inflation. Theories in the neoclassical tradition have dominated public policy since then, but the authors of this text are among those trying to change that.

The neoclassical orthodoxy defines economics as “the study of the allocation of scarce resources among unlimited wants.” The non-government sector of the economy, which neoclassicists like to call the “free market,” has a natural, rational way of functioning that is both efficient and fair. Individuals pursue their self-interest, trying to maximize their utility–their use of the things they want. They compete in the market for various resources, goods and services, exchanging the things they have for the things they don’t have, using money as a medium of exchange. As they do so, they arrive at price points where supply meets demand and everything is efficiently allocated. If the price of a welder’s labor is too low because the supply of welders exceeds the demand, then that encourages workers to enter occupations where their labor is needed. In the end, what you get will reflect the market value of what you give.

Neoclassical theories acknowledge the role of government but limit it. Government has to perform certain basic functions like protecting national security and enforcing law and order. But when it intervenes in the market to set wages or promote one industry over another, it’s more likely to produce distortions and inefficiencies than to make the economy work better.

Although neoclassical economics provides an elegant model of how an idealized, perfectly-competitive economy might work, less orthodox economists question how well it applies to any real economy, especially a modern one:

Claims are sometimes made that a “free market” economy comprised of individuals seeking only their own self interest can operation “harmoniously” as if guided by an “invisible hand.”…In fact, economists had rigorously demonstrated by the 1950s that the conditions under which such a stylised economy could reach such a result couldn’t exist in the real world. In other words, there is no scientific basis for the claim that “free markets” are best.

In any case, these claims, even if true for some hypothesised economy, are irrelevant for the modern capitalism economies that actually exist. This is because all modern capitalist economies are “mixed”, with huge corporations (including multinational firms), labour organisations and big government.

Modern monetary theory

Modern monetary theory (MMT) relies on a less orthodox definition of economics: “the study of social creation and social distribution of society’s resources.” It does not assume any one natural way to run an economy, since economic organization depends on variable cultural norms and social institutions. Right away, this way of thinking makes more sense to sociologists like me.

Societies haven’t always favored self-interested competition over social cooperation, as the neoclassicists consider natural. That assumption may reflect the preferences of early English capitalists who wanted to pursue their self-interest unencumbered by traditional constraints imposed by English kings and their “feudal lord cronies.”

In the modern economy with its large and dominant organizations, prices are not set through free competition among many small economic actors, but mostly by big players with superior market power or political clout. The price you can get for your labor, for example, is not necessarily the price that will employ it most productively. It may be the price fixed by powerful employers who profit by keeping wages low, or by agreeing to devalue certain classes of workers, such as women or minorities. That leads to unnecessarily low incomes, low aggregate demand, and an underutilization of labor that hurts both the economy and society in general.

People working together in society can cooperate to create resources such as a skilled and fully employed labor force. And people can also influence how social benefits are to be distributed among employers, workers, and others, such as by supporting collective bargaining rights. Government is a major player in these decisions, not as some alien force that interferes with the economy, but as a means of taking collective action to influence economic outcomes. Collective action can produce aggregate outcomes more favorable than self-interested individuals could have achieved working independently.

The “key goal of macroeconomics” is “using the available macroeconomic resources including labour to the limit.” The authors relate the value they place on labor to the United Nations Declaration on Human Rights, which asserts that “everyone has the right to work, to free choice of employment, to just and favorable conditions of work and to protection against unemployment.” Lack of access to employment impedes full participation in society and undermines many of the other rights asserted in the Declaration. It is also associated with a long list of personal and social pathologies, such as physical and mental health problems, crime, and drug abuse.

From this perspective, macroeconomics and enlightened public policy are inseparable. Policymakers need to get it right because the stakes are very high.

Coming up…

What I will be trying to do in the next few posts is describe in fairly plain English how modern monetary theorists think the economy works. I will emphasize, as the authors do, the many forms of government influence: spending and its impact on output and income; taxation and transfer payments; the creation and management of money; and financial balances interconnecting government and non-government sectors. What I like about macroeconomics is that a few fundamental principles yield surprising insights.

Then I will turn to the the authors’ critique of recent public policy and their recommendations for new directions.

Continued


How Democracies Die (part 3)

June 29, 2018

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In the last chapter of their book, Levitsky and Ziblatt discuss the prospects for sustaining democracy in the face of the threats from Donald Trump and other such demagogues. They think it can be done, but it will take a lot of work.

The global challenge

The impression one gets from recent news is that democracy is in retreat all over the world. The authors do not think that the evidence supports that pessimistic conclusion.

The number of democracies rose dramatically in the 1980s and 1990s, peaked around the year 2005, and has remained steady ever since. Backsliders make headlines and capture our attention, but for every Hungary, Turkey, and Venezuela there is a Colombia, Sri Lanka, or Tunisia—countries that have grown more democratic over the last decade.

The bad news is that the election of Donald Trump appears to be a setback for democracy not only in the United States but around the world. The Western powers under the leadership of the United States have played a role in encouraging democratic principles and institutions since World War II (although I would add that our pro-democracy principles have often been compromised by self-serving economic policies). Trump’s “America first” nationalism is weakening the Western alliance and strengthening the position of undemocratic countries like Russia and China. I find it especially ironic that Republicans who in the past demanded unwavering opposition to our Cold War adversaries now look the other way while Trump offends our democratic allies and cozies up to dictators.

The future at home

The authors describe three possible futures for the United States after the Trump phenomenon runs its course. The most optimistic is that our democratic norms and institutions quickly recover from whatever damage his presidency does to them. That might be realistic if Trump alone were the problem. But as the authors have discussed, the deeper problem is the polarization of our politics arising from deep disagreements over race and religion, compounded by an economic system that is leaving too many people behind.

That raises a second and more troubling possibility, that the Republican party, having become the party of Trump, maintains its power with a white nationalist appeal. That would entail running the country primarily for the benefit of a shrinking population of white Christians, and resorting to undemocratic means of suppressing the more diverse majority. “Such a nightmare scenario isn’t likely, but it also isn’t inconceivable.”

The most likely future is “one marked by polarization, more departures from unwritten political conventions, and increasing institutional warfare–in other words, democracy without solid guardrails.” The authors point to the state of North Carolina as the best example of “what politics without guardrails might look like.” For those who don’t live here, I’ll just say that Republican legislators gerrymandered the state so that they could win 10 of 13 Congressional seats with only 53% of the vote, passed voting laws that targeted black voters with “almost surgical precision” according to a federal court, and reduced the powers of the governor right after a democrat was elected to that position. The state is hardly a dictatorship yet, however, since Republican efforts at one-party domination have been vigorously resisted by the opposition party and the courts.

Reducing polarization

Political leaders will either have to learn to cooperate and compromise despite the polarization, which the authors think is doubtful, or they will have to move beyond the polarization. Although the authors call on both parties to reconsider what they stand for, they put the main responsibility for change on the Republican party, since they consider it “the main driver of the chasm between the parties.” They see more of the obstructionism, partisan hostility, and extremism on that side of the aisle.

For Republicans, they recommend changes in both organization and constituency. The leadership will have to regain some control, relying less heavily on outside donors and right-wing media. And the party must become more diverse:

Republicans must marginalize extremist elements; they must build a more diverse electoral constituency, such that the party no longer depends so heavily on its shrinking white Christian base; and they must find ways to win elections without appealing to white nationalism, or what Republican Arizona senator Jeff Flake calls the “sugar high of populism, nativism, and demagoguery.”

As for the Democrats, they should resist calls to focus on white working-class voters at the expense of their black and immigrant constituencies. But what they can do is address economic concerns that cut across race and religion. As I have argued before, they can emphasize universal benefits programs such as universal health insurance, basic income guarantee, job training, paid parental leave, subsidized child care and prekindergarten education.

Now I think I’ve been reading and writing enough for a while about the culture wars and the partisan divide. What I’m thinking about lately is the fiscal problem of how the country might pay for the more progressive public policies many Democrats advocate. Stay tuned.


How Democracies Die (part 2)

June 28, 2018

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Steven Levitsky and Daniel Ziblatt have described Donald Trump as a demagogue with authoritarian tendencies. He has not yet done serious damage to our democratic system, but the threat is definitely there.

That’s only part of their story, however. Democracy was already under stress well before Trump’s election. “Not only did Americans elect a demagogue in 2016, but we did so at a time when the norms that once protected our democracy were already coming unmoored.”

Democratic norms

It takes more than a well-designed constitution to sustain a viable democracy. After the decline of colonialism in Latin America, many of the newly independent states based their constitutions on ours, but that didn’t stop them from falling into civil war and dictatorship. “All successful democracies rely on informal rules that, though not found in the constitution or any laws, are widely known and respected.”

Two very general political norms are fundamental. “Mutual toleration” acknowledges the right of rival factions to compete for political power and achieve it, as long as they do so through constitutional means. “Institutional forbearance” is a commitment to abide by the democratic spirit of the laws, not just the letter of the laws. When those two norms break down, one or more parties may use the laws in ways that were never intended, to destroy their opposition instead of competing with them fairly.

Political polarization

What is most likely to weaken or destroy the norms is political polarization based on socioeconomic, racial or religious differences.

In the history of U.S. democracy, the most polarizing issue has been race, but racial polarization has not been a constant. Race has been most polarizing at times when one major party has taken up the cause of racial justice, as opposed to times when both parties have been tolerant of racial injustice.

In the nineteenth century, it was the Republican rejection of slavery that brought the issue to the forefront, “investing politics with what one historian has called a new ’emotional intensity.'” (I find the reference to emotionalism interesting, considering that in our current era of polarization, social scientists have been “discovering” that politics is more emotional than rational.) After the Civil War and Reconstruction, some political peace was restored, but at the expense of the rights of the newly freed slaves. In one of the greatest assaults on democracy in our history, southern whites got away with restoring white supremacy.

Between 1885 and 1908, all eleven post-Confederate states reformed their constitutions and electoral laws to disenfranchise African Americans. To comply with the letter of the law as stipulated in the Fifteenth Amendment, no mention of race could be made in efforts to restrict voting rights, so states introduced purportedly “neutral” poll taxes, property requirements, literacy tests, and complex written ballots….Black turnout in the South fell from 61 percent in 1880 to just 2 percent in 1912. The disenfranchisement of African Americans wiped out the Republican Party, locking in white supremacy and single-party rule for nearly a century.

By keeping race off the agenda at the national level, the two major parties were able to find more common ground. For most of the twentieth century, they were both “big tents” that included many of the same kinds of people. Married white Christians constituted a majority of both parties. The Democrats had the southern white conservatives, but the Republicans had midwestern and western white conservatives. The Democrats had working-class New Deal liberals, but the Republicans had educated middle-class liberals.

Democratic support for civil rights legislation in the 1960s did more than anything to re-polarize the parties, as people of color embraced the Democratic Party but southern whites abandoned it. Declining support for traditional religion among Democrats contributed as well. “The two parties are now divided over race and religion–two deeply polarizing issues that tend to generate greater intolerance and hostility than traditional policy issues such as taxes and government spending.”

As for being “big tents,” the parties have moved in opposite directions. The Democratic Party has become more diverse, being a party of white and black, native-born and immigrant, religious and secular, gay and straight. The Republican Party has become less diverse, the home of the embattled white Protestant minority, the people who used to run the country but have been losing power recently. Levitsky and Ziblatt believe that the Republican party has led the way in weakening democratic norms in order to maintain their social and cultural dominance. Ironically, it is now the Republican party that is noted for trying to lock in single-party rule by suppressing the black vote.

While the authors focus mostly on race and secondarily on religion in this story, gender is also important. The Democratic Party has also become the party of women’s rights, while the Republican Party has become the party of angry men. That also is a reversal, since it was northern Republicans who originally supported the Equal Rights Amendment.

Erosion of democratic norms

Even in the twentieth-century period of relative political cooperation, democratic norms were challenged or violated by some leaders. Franklin Roosevelt exercised unusual power during the crises of Depression and war, running for president four times (legal but unprecedented), issuing over 300 executive orders a year, and trying unsuccessfully to expand the Supreme Court so he could appoint more justices. In the 1950s, attacks on Democrats by militant anti-communists like Joe McCarthy helped Republicans win the presidency and control of Congress. One of those red-baiting anti-communists, Richard Nixon, went on to use the presidency to attack the people on his “enemies list” in illegal ways.

The authors see a more ominous “unraveling” of democratic norms beginning in the 1990s. Newt Gingrich set the tone as he rose to the position of Speaker of the House, presenting a hostile, hard-line, no-compromise front against the moderate Democrat Bill Clinton. One sign of deviation from traditional practice was a dramatic increase in the use of the Senate filibuster to block majority-supported legislation. Democrats also made heavy use of it during the George W. Bush administration, while Republicans stopped following the practice of “regular order,” which had given the opposition a chance to speak on legislation and propose amendments. During the Obama years, so many of the President’s appointments were filibustered that Senate Democrats changed the rules to disallow the filibuster for appointments other than to the Supreme Court.

Until relatively recently, Supreme Court appointments by the President have rarely been rejected by the Senate. When President Reagan appointed arch-conservative Antonin Scalia, Democrats could have blocked it with a filibuster but instead supported it unanimously. But when President Obama appointed the moderate and highly qualified Merrick Garland, Republicans took the unprecedented step of refusing to consider the nomination at all. Then they changed the rules after the 2016 election to keep the Democrats from filibustering President Trump’s appointment of Neil Gorsuch to the open seat, insuring that conservatives would keep their 5-4 majority.

So now we have a potential autocrat in the White House, leading a party of embattled conservatives desperate to maintain their hold on power. The “devil’s bargain” between this man and this party could be bad news for democracy.

Continued