Tag Archives: economics

The ‘Myth’ of Taxpayers’ Rights

In April, US Representative Markwayne Mullin (R-OK) had a tough town hall.   Upset about the Trump legislative agenda, constituents called Mullin to task as a public employee.  His unscripted response was to complain about their questions and to argue that the idea that taxpayers pay his salary was ‘bullcrap’.   He went on: “I pay for myself…I pay enough taxes where before [sic] I ever got there, and continue to for [sic] my company and pay my own salary.” Mullin further claimed that his job as a public servant was an ‘honor’ and that his wealth and position as a business leader gave him a special freedom and independence from government.  This independence from financial ties, in turn, bolsters his credibility as a critic of government encroachment.

Is Public Service a Contract?

His argument opens an intriguing window on the way that public service (and, by extension, government) is being recast.   While there is a striking & stark contradiction between claiming to both represent taxpayers and to be free from accountability to them, Mullin kind of had a point—–Do ‘taxpayers’ (as a group, and aside from ‘citizens’) actually have rights? Is public service a kind of contract of service, in which representatives agree to provide a necessary ‘good’ in exchange for a fee (salary paid by taxpayers)?

I want to say no, that is not the essence of public service. Public service should not be reduced to little more than a commercial exchange or contractual relationship, it is also a relationship of trust.  Logically, then, to some extent I (gulp) agree with Mullin that it is a service and a privilege.  This is not to say that there is no contractual dimension to public service, however.  Ever since Rousseau wrote about the Social Contract in the 18th century, governments and citizens have expected a relationship of mutual accountability.  For Rousseau, however, the social contract was a metaphor for the larger relationship of mutual obligation that government rested upon; in particular the obligation of the state to its citizens. Therefore, the relationship between the public and public servants does have a contractual dimension. So, if it is not only a contract, what else is it?

The Origins of Taxpayers’ Rights

Prior to the widespread institution of income taxes as a primary revenue source for modern administrative governments, most governments gained the vast majority of their revenue from taxes on trade.  The famous Boston Tea Party protest was against the unfair tax rate on a commodity (tea) and the legitimacy of the Crown’s right to tax commerce without accountability to traders.   Eventually, of  ourse, taxes became imposed on other dimensions of economic activity, include labour and capital gains.  What drove governments to reach beyond trade to enrich their treasuries was war. War required governments to raise funds to field military forces at a competitive level to other states.  War also brought conscription, wherein the sons of the poor were required to invest their lives in the security of the state.  Conscription without representation was just as untenable as taxation without representation, however. With new demands from the state, the state also had to provide new opportunities for returning veterans, which in turn necessitated higher taxes to provide housing, care, education and a safety net.  In truth, the extension of the tax base to all income earners relieved business of the bulk of the tax burden, and business benefited from the security provided by the state.  Security provided great opportunity for economies to grow and globalize.

Paying taxes does and should produce a set of obligations on the part of the government to respect the public interest

Asking the people to expend blood and treasure on war meant that there was an implied responsibility on the part of the state to provide social services to the people.  Taxpayers could expect that public servants would expend public treasure for the public good, not for the interests of business alone.  Underlying the arrangement was a semi-contractual kind of language: taxpayers could expect to be able to exercise their democratic rights to ‘check’ irresponsible governments; and governments could expect citizens to be devoted to the support of the state in war, and in peace.

Clearly, this calculus has changed.  The reasons for this are numerous, not least that conscription has been eliminated and war is fought very differently, but it is still undeniably the case today that paying taxes does and should produce a set of obligations on the part of the government to respect the public interest.

Taxpayer Rights Versus Taxpayer Interests

Paying taxes does not only create a contractual relationship, it also binds taxpayers to their community, giving them a stake in a common future and ensuring thier engagement in public life.

This is not, however, the same as saying that taxpayers per se have rights, over and above their interests as members of the public.   A ‘right’ implies a claim to greater respect and recognition over and above the interests of other groups.  A ‘right’ is a trump card that all other interests, and government, must respect.   Taxpayers as a group are entitled to a voice and to express their interest as a group.  An ‘interest’ implies a competition in the marketplace of ideas in which any one group’s desires may reasonably and fairly be considered over and above others, within the framework of laws that otherwise encourage respect for fundamental rights. Taxpayers, like retirees, patients, business owners, students, workers, and other groups, have interests, but not rights. Ethnic minorities, religious minorities, the disabled, the press, and the public, on the other hand, have rights that may override taxpayers’ interests, and that may necessitate that government prioritize these considerations over others.

The Recasting of Government in the New Agenda

What the new agenda overlooks is that paying taxes does not only create a contractual relationship, it also binds taxpayers to their community, giving them a stake in a common future and ensuring thier engagement in public life. This is what makes Mullin’s position so problematic. Mullin is not making his defence from the standpoint of a citizen with a common stake in the public good, nor even as a servant (despite his calming words about ‘service’ and ‘honor’). His defence is one of a taxpayer, and more particularly, as a business owner.  Ultimately the whole conversation ends up being an argument between taxpayers, not citizens.  Arguing that taxpayers have unique contractual rights essentially gives them permission to disengage from the social contract as a whole, especially those parts of it that don’t directly serve their interests.  In turn, and by extension, governments are then relieved of their obligations to the public, including the provision of security and welfare.  While taxpayers have the democratic right to defend their interests, they do not have the right to disrupt the social contract to this degree. When The Fraser Institute and the Canadian Taxpayer’s Federation argue that taxpayers either work for themselves or for the govenment, they feed in to the idea that taxpayers have special rights.

When citizens at the Town Hall demand that governments should respect taxpayers, then decision makers should listen. However, taxpayers should not have a louder voice than citizens.  Taxpayers ‘rights’ should not be extended to the degree they disrupt the larger social contract.  If they do, then the democracy is at risk of eliminating itself by undermining the contract of service and trust, and, incidentally, by bankrupting the state.  There is some evidence that the US has already begun to do this.  Since the language of taxpayers’ rights essentially marginalizes any public interest from the conversation, it is incapable of constructing a new social contract.  The language of taxpayers’ rights then becomes essentially self-destructive, since taxpayers will end up undermining, in the end, their own claims to the rights and benefits of citizenship.

The Sources of Inequality: Why Globalization Matters

1Photo Credit: Rangan Halder 500px “Materialism Versus Materialistic Capture” http://500px.com/photo/8540236

In his speech to the Rock ‘n Roll Hall of Fame, Chairman of the Council of Economic Advisers Alan Krueger offered up some food for thought regarding the sources of inequality in American society, and globally. Krueger focused on four factors that help to explain income inequality: technology, scale, luck, and the erosion of social pressures for fairness. In this post, I want to focus on scale, and I’m going to also refer to the Atlantic’s reprint of the key points of Krueger’s talk to expand on a factor that Krueger mentions but does not develop in enough detail, in my view: globalization.

The authors discuss the music industry as an example. As they point out, the music industry creates a ‘star economy’ focused on a few ‘winners’ or ‘stars’ who are able to drive growth in the system. The ‘star economy’ in music has produced a skewed income curve. If you look at incomes across the industry, the greater benefits are concentrated at the top. However, if one considers not just the artists (who are essentially the workers producing the product) but the entire ecosystem of label CEOs, CFOs, managers, R & R people, the marketing department, etc. then one gets a better idea of the scope of the real economy of music. In fact, music industry bloggers and observers have been criticizing the inequality in the music industry for a long time: As Bob Lefsentz points out in a recent post, the corporate labels, the entertainment mega-giants like Sony and Universal, are the real structural beneficiaries of the sharper inequalities imposed upon all musicians, just as the fat cats in the garment or manufacturing industry are the real beneficiaries of inequality in those economies.

The power of the music industry has grown in lock-step with globalization, offering command of larger and larger shares of music consumption. The incomes of the music industry managers have survived the recent purge caused by the technological challenges. They have survived for a reason: it is their machines that generate the wealth, rather than the luck or talent of the artists. Ultimately, as Krueger suggests, ‘luck’ and the perception of popularity have a huge impact on success in the music industry, but ‘luck’ is not some impartial uncertain or random arbiter of fortunes, since success comes through the perception of popularity, which is heavily influenced by these industrial complexes.

As Salganik et. al. have discovered through experimenting with a controlled ‘music market’, social perceptions of the popularity of songs increase the degree of inequality among them (although they don’t make it any easier to predict success). Frankly, no matter the uncertainty caused by the internet or disruption of the industry by downloading, any artist that can command the attention of the marketing machine and the vast resources of a label can succeed beyond their wildest dreams through these social effects. Many high-quality and deserving artists don’t succeed, while a few poor quality and undeserving artists succeed beyond their wildest dreams. Youtube doesn’t ‘make’ you a star, but the attention that Youtube brings can make you popular. Attention from the music elite (increasingly, from successful artists) or from a label with a hyper-marketing machine behind it makes you a star, since you can then marshal the resources necessary to maintain that attention.

Globalization has had one important impact on the 1% that should not be downplayed: it has vastly expanded the freedom to disengage from local economies and impose conditions upon all other economic activities. What matters is the decisions made by the elite to affect the market, and these decisions are not based on luck, fairness, or even on quality. In political science this is termed ‘structural power’: the ability to not only win the game, but to affect the rules of the game for all other players. The inequality of today arises from specific decisions made by earlier masters of the universe in the 1980s to protect the interests of their class. Krueger hints at some of these decisions in his article: the demise of labour unions, the deliberate erosion of the minimum wage policy, and changes to taxation. These factors cannot be explained by the impartial workings of a global market or by luck, rather, these are conscious government policies aimed at expanding the scope and freedom of movement for the wealthy.

I would allow that there is some room in this analysis for what might be termed ‘unexpected’ consequences in the form of a severe recession and political backlash against perceived unfairness. Krueger’s analysis seems to suggest that the erosion of a social commitment to fairness in income distribution is some kind of ephemeral byproduct of historical forces and global and cultural change. However, I would argue that society has always appreciated the importance of fairness. Indeed, when elites overreached in their efforts to influence the public’s perception of fairness, it created the present global backlash and protests against inequality.

Given the true nature and extent of the cultural power that elites have garnered over the last 50 years, their expectation of being able to manage the change to a more unequal society was not unrealistic. And they may still succeed! Leaving out the element of cultural power, and the broader impact of corporate globalization and the effects of structure, neglects one of the key explanations for the continuation of inequality. The perception that success comes from luck or from effort, and not from the structure, is central to the perception of inherent fairness in the system that allows inequality to persist.

So, Krueger’s piece gives us much to think about: technology, scale, luck and the erosion of fairness have played their parts in the rise in inequality. I would put the focus on scale and the rise of globalization, which has fundamentally altered not only the rules for economic acquisition, but also the rules for social, political, and technological relationships. The change in these rules has helped to produce the profound social and economic inequalities we see today.

Can currency wars lead to real wars?

Are we in a potential inflationary moment?

Imagine the following:  China secretly buys up gold futures in the hopes of stockpiling a war fund to fight inflation caused by US ‘quantitative easing’.  If the US goes too far in trying to fund its stimulus by debasing the dollar, China triggers a crisis by buying up gold.  The ultimate statement of lack of confidence in the US dollar (which is the key currency for all international trade and capital reserves) leads to a catastrophic run on the dollar and a collapse of globalization as each country tries to ‘beggar’ its neighbour with cascading tit for tat devaluations.  In his book Currency Wars: The Making of the Next Global Crisis, Jim Rickards presents several scenarios by which the world could come to the brink of collapse as a result of governments’ efforts to manipulate their currencies, thereby stimulating their economies at the expense of their trading partners.  Indeed, it is not hard to imagine how the monetary underpinnings of globalization could easily come crashing down given the wobbliness of the top currency, the high level of US debt, and the lackluster response of the US consumer, traditionally the world’s growth engine, in recovering from the 2007 recession.  Indeed, one could argue that even a much less complicated scenario might lead to crisis:  what if China simply decided to use it’s so-called ‘nuclear option’ and stop buying US treasuries, triggering a cascading dive of confidence in the world’s reserve currency?  What if politics really did take over economics?

The alarmism over a coming hyperinflationary crisis appears to be growing, and it’s not without some foundation.  Fiscal stimulus appears to have met its match in the global system of monetary exchange, where politics and economics do not just interact, but essentially meld.  However, at least some of the alarmism should be taken with a grain of salt.  The calls for curbing the US fiscal deficit (quite apart from the debt) are at least in part motivated by an ideological discomfort with government’s influence on the market as well as a moral panic over Americans’ dependency and perceived complacency.  This view tends to see the world as a dangerous, zero-sum place where countries await any and every opportunity to force an advantage over their competitors.  However, economic competition is not exactly the same as political rivalry, and should not be equated.  While it is not impossible for countries to mutually try to obliterate each other (see the Great Depression) it is not likely given the availability of much more palatable options.

Economic and political 'wars' should not be equated
Economic and political ‘wars’ should not be equated

It is important to remember that unlike real wars, currency wars that result in hyperinflation are not really deliberate—they result from governments’ fumbling and lack of effort to cooperate or lead rather than from single-minded plans to dominate the world.   They are tragedies (or tragicomedies) rather than evils.  They are not so much caused by politics as by a lack of politics.  Because of the uncertain results of currency manipulation, it is a very blunt and unpredictable instrument of policy indeed.   As with nuclear deterrence, mutual deterrence is more likely than not to push countries to cooperate and to head off crises before they get out of hand.  Indeed, this is exactly what has been happening for the last (almost) 42 years.   The players may change, but the game will remain: keep the poker face on and ensure the world continues to have a world reserve currency with some usefulness to everybody.   The alternative is just too awful to contemplate.

Entanglement: The Enmeshment of the Economy and the Government

In quantum physics, there is the idea that a single particle can have an effect on a different particle many light years away.  Einstein called this ‘spooky action at a distance’.  In today’chicken_or_egg_400_clr_10064s globalized world, economic activity shows similar ‘spooky’ characteristics, indeed, it is virtually a truism to say that what happens in one industry or segment of an economy will inevitably affect others at great distances.   What is often overlooked in ideological debates between the right and the left, however, is the entanglement of the free market economy with the activities of government.  They are separate, just like particles separated by great distances, but they are so closely entangled. Action in one sphere will unavoidably affect the other. arrow_halves_join_400_clr_9621

Take, for example, the encroaching effects of the ‘fiscal cliff’.  An increase in taxes coupled with spending cuts, could potentially cause a drop of as much as 1% of GDP growth in the US.  The resulting reduction in economic activity would then impact government revenues, cutting into revenues just as measures to reduce the deficit kick in.  This makes these measures, therefore, essentially self-defeating.  Even a more measured response to deficit reduction that allows for some spending increase could potentially trigger inflation, since it will unavoidably give the impression that the government will just keep printing money to pay its debt. Inflation could also reduce economic activity and jeopardize growth, although it seems unlikely in the short term, by undermining investor confidence and leading to capital flight.  The result, as with the fiscal cliff, is the same: a hit to government revenues and a self-defeating policy.

The first step to breaking the cycle is to recognize that the favoured solutions of both the right and the left are both inappropriate in the present context.  Reducing taxes to stimulate the economy without accompanying measures to induce spending and investment just doesn’t work, there is no evidence of it ever having worked, and it does severe damage to the government’s ability to raise revenue.  At the same time, government spending does not have the growth-inducing impact as in the past because thuncle_sam_holding_money_pc_400_clr_1727e implied willingness to spend and borrow undermines investor confidence.

The solution lies in the awareness that government is both an economic actor and an economic hedge.  Contrary to the arguments on the right, government cannot just ‘get out of the way’ and let the market grow.  For one thing, it might grow somewhere else.  For another thing, markets need government to backstop their activities and stop them from imploding on themselves.  The sooner that people stop thinking of governments as part of the problem, and realize that free markets require governments to make decisions for the common good, the better off both the economy and the government will be.  Governments and markets are not the same thing, their purposes are different and their instruments are different, but they are irrevocably enmeshed together. 

A Leaner, Meaner Politics in the US: What About Canada?

In his book The Age of Austerity: How Scarcity will Remake American Politics Thomas Byrne Edsall argues that shrinking public and private resources will make politics leaner, meaner and less civil.  It’s not just that right and left disagree on how to distribute resources, it is a fundamental rift in the understanding of the purpose of the state itself.   It’s also not just a fight over ideas:  it is a battle for survival.  The supporters of the right, to pearth_tighten_belt_800_clr_7668araphrase Edsall, are ageing, embattled, middle to upper class whites living in decimated and depopulated suburbs who are increasingly bitter about the direction of the redistributive state.  In the past, the right’s call to arms was a kind of negative freedom (‘Don’t Tread on Me’) which fought to preserve the individual’s ability to choose their own forms of happiness unimpeded by state regulations.  The premise of this, we know now, was the expectation that everyone could gain from a growing pie.  No more.  Programs for which supporters of the right are the primary recipients (including Medicare and social security) are considered sacrosanct.  Programs from which others benefit (read black, immigrants, poor or public sector workers) like Medicaid, the Patient Protection and Affordable Care Act, or income supports, are untenable ‘entitlements’.  On the left, there is a counter-move to protect the public sphere from erosion while simultaneously trying to remain coherent in the face of a fiscal crisis and an unrelenting personal attack on Obama during an election year.  The left is increasingly turning to middle class minorities, immigrant and young voters who are far less steady in their support and are on the whole less well-established and more vulnerable both economically and politically.

These kinds of politics reveal rifts that have historically deep-soil_money_canada_pc_800_clr_2385eated roots but which linger below the surface until austerity and crisis reveal them.  What rifts lie below the surface of Canadian society that have been eroding the social consensus gradually and unrelentingly?  Could Canada go down a similar route?  Recent battles paint a picture of the possibilities.  With vitriolic flourishes the Harper government and environmentalists are fighting an increasingly pitched battle over oil resources.   The push for a pipeline to expand foreign markets for oil, whether through a Northern route or Keystone, has as its root a long-standing fear that overproduction of oil will drive the price down and shrink profits.  This is a real fear, since the flattening of oil prices will make the billions of dollars already invested uneconomic, and capital will flee.  On the one hand, it seems more like an embarrassment of riches than a problem of austerity: oil consumption is maintaining a steady stiff pace overseas and is set to grow, along with its negative climate impacts.  On the other hand, it has all of the set piece features of a zero-sum fight over a shrinking resource.  As anti-fossil fuel efforts grow, and as more bitumen-type oil production facilities are being developed in Latin America and more unconventional oil is prospected in the Arctic and other areas, the chances of oil revenues becoming restricted in the future is higher and higher.  If this happens, look for politics here to follow a similar path to those in the US, with the centre of the storm being the role of shattered_dollar_coin_800_clr_8730the state as a (re)distributor of resources.  With potentially shrinking state revenues due to tax reductions and few other signs of growth outside the resource sector, the temptation to retrench at the expense of the poor, immigrants, the disabled and other marginalized groups may well be irresistible.  On the other hand, another fight between regions in true Canadian fashion may be brewing.  I want to end on a positive note here.  Everything I’ve learned in teaching young people about politics in the last 15 years has taught me that if anything, youth are more accepting, welcoming, compromising and diverse than ever.  I can only hope that these qualities will enable the cultivation of a middle ground in the future in Canada that seems increasingly elusive in the divisive and paralyzing politics down south in the US.  If we are to believe Edsall, however, austerity could bring out the worst in all of us.