Issues I have with the liberal economic platform

If there’s one thing that gets Democrats like myself riled up, it’s inequality. Solving this big hairy problem requires a big hairy strategy on who to help and how to help them. Here I think are the major philosophical tensions preventing Democrats with coming up with a such a strategy.

  1. Do you focus on reigning in big companies through regulation or lowering barriers to entry (and exit) for small businesses?
  2. Do you focus on raising incomes paid by employers or redistributing through taxes?
  3. Do you provide more government services or more open borders?
  4. Do you focus on blue collar manufacturing or the white collar service industry?
  5. Do you revitalize big cities or small cities?

Ideally, the answers to these questions result in a cohesive strategy on what to do and, equally important, what not to do. For example, if you wanted to be pro manufacturing while focusing on big city growth, look at which manufacturing industries are growing in larger cities (the answer is food manufacturing). Promising everything to everybody, as the the Democratic Party Platform currently does, ends up costing a lot of money and helping nobody.

Here’s how I come down on these tensions:

Regulating the big guys vs. helping the small guys

I think focusing on regulating large corporations has resulted in a huge decline in competition among major US companies, and that we should focus instead on lowering barriers to entry to increase equality in the US.

Democrats regulate companies usually out of fear of public safety and abuses by large corporations. A lot of regulations do a good job on both fronts. But making firms comply with a shit ton of rules limits competition because it takes a lot of time and money to jump through those hoops, and smaller firms don’t have time or money. The bigger the firm, the more regulation it can handle, so our web of regulations is leading to fewer and fewer companies winning.

A good example is banking. In 1860, every state made its own banking rules which were hardly rules to begin with, and as a result, and there were hundreds of small community banks that ruled the scene. Now, 4 banks control 52% of US financials services. This happened for a reason — the Panics of 1819, 1837, and 1866 and The Great Depression did a number on us, so we started regulating banks. But all these regulations create industry consolidation, including the latest round of regulation with the passing of Dodd-Frank in 2008. Of the top 10 US banks by market size, none was founded after 1929 — it’s simply too tough to start a new bank now.

While this makes America “safer”, it consolidates power. And while maybe some industries, like banking, require such stability that consolidation is beneficial, regulation is increasing everywhere and decreasing competition in America. Take the vaping industry. Previously it’s been a bunch of sketchy looking small-ish businesses trying to make it. New FDA regulations, which Democrats pushed, make vaping as regulated as tobacco and require the FDA to approve any product before it hits the market. The FDA estimates the cost to businesses seeking approval to be $1 million per product. The only companies that can afford that are the big tobacco companies.

A broader example of this is the increase in cost of IPOing or listing on the US stock exchange. The process has always had strings attached but financial cost doubled in the early 2000s due to increased regulation, and then increased again after more rules passed in 2008. From 1980–2000, an average of 311 companies IPO’d every year. From 2001–2011, an average of 99 firms IPO’d every year.

Chart from: https://www.sec.gov/info/smallbus/acsec/acsec-090712-ritter-slides.pdf

The ones who choose not to go public choose instead opt to get acquired by other companies, which is a way easier “exit” — a private acquisition can take a few months as opposed to over a year for an IPO due to the regulatory differences. So even though the US tech industry generates more startups, and more potential competition, than any other industry, most startups get acquired resulting in little long term competition. Five US tech companies — Amazon, Apple, Facebook, Google, and Microsoft — are worth $2.2 trillion combined. If it were easier to IPO, more companies would be willing to “go big” and challenge them given IPOs are return around 1/3 more cash to their owners than if they were acquired.

Overall, two thirds of US industries are more concentrated now than they were in the 1990s. Because it affects all geographies and (almost) all industries, I believe limiting competition is the single biggest threat to equality in the US. I also believe the best way to increase competition is to help smaller companies thrive as opposed to making sure the large companies don’t abuse their power.

Pre-tax vs. post-tax equality

Most Democratic candidates promise to solve inequality through tax cuts for the poor and providing better government services. This helps post-tax inequality, or the relative wealth of folks after you take taxes into account. Few Democratic economic policies are directly about making businesses grow in order to employ more people and at higher wages. An example is financial services in NYC. Financial services account for 10% of total employment and 29% of all wages paid in NYC — ensuring its stability and growth is crucial to the city’s success. And yet, to the best of my knowledge, no campaign pitch includes policies designed help NYC’s financial institutions compete with London and Hong Kong.

I don’t give Republicans more credit. Americans spend $86.5 billion on seafood each year and we import 90% of it. Mississippi is the third largest state for fishing and raises 94% of US catfish, despite only having 2,300 people employed in the sector. It would gain a tooonn if it developed a strategy for their fish farmers to compete with China and Thailand (which is possible — people would rather have fresh fish than frozen fish). But they don’t because that would mean the state government playing an active role in business.

I’m a bigger fan of plans to create equality through economic growth because taxes and minimum wages simply can’t put enough money in poor people’s pockets to make them middle class. For economic mobility, you need a job and you need to get promoted. That happens when the economy grows, and there are more direct ways to do that besides cutting or adding taxes. Fair tax policies are important, but they’re a small part of the problem when it comes to fixing inequality.

More open borders vs. more government services

Thanks to the EU’s struggles, it’s become clearer that having both a welfare state and open borders is unstable. People don’t want to share their government’s resources with newcomers, which means the more services the government provides, the more closed off that country becomes. Not most, but many Democrats enjoy a dream where just because you live a mile south of the border (or anywhere outside the US) your life doesn’t have to suck. You can move to the US and improve your life, just like 100% of our non-Native American ancestors did. Problem is you can’t have that dream and also believe in free college and healthcare for everyone.

If you do want more open immigration and more welfare schemes, you’re going to have to constrain both to areas where one side doesn’t threaten the other. Singapore, which depends on immigration, does this with their Social Security scheme because it’s not that social. Residents are required to save a percentage of their own income for later use on themselves. It’s social security without the redistribution, and as a result immigrants don’t threaten the government benefits of native residents. But if you’re into redistribution (and I am), that’s not your cup of tea.

You could also create a two tier citizenship structure, where immigrants don’t enjoy the same benefits as citizens. This is the premise of the DREAM Act, which I’m down for because its conditions aren’t exploitive yet it’s still a high bar — anyone who does 2 years of college or the military and has no criminal background record is probably not a freeloader. That only applies to immigrants who came in as children though — the bar for adults is likely to be much higher to be seen as free of freeloading.

Blue collar manufacturing vs. white collar services industry

It’s popular for economic “realists” to say American manufacturing jobs aren’t coming back, that we are now a service economy, and that trying to bring manufacturing back is a waste of time and money. The evidence is there — in 2009 General Motors’ labor costs per hour for the same work was $55 in America, $7 in Mexico, $4.50 in China and $1 in India. The answer: don’t do the same type of work. There are other western countries that are equally if not more expensive, and yet export way more manufacturing goods as a percentage of GDP. Germany, Japan, and Switzerland are prime examples. Their manufacturing industries don’t compete with China, because they’re too hi-tech and/or brand dominant for China to compete. If we wanted to bring US manufacturing back, we’d have to be more like Germany than China, but to say that we can’t compete with Germany in manufacturing because we’ve “moved on” is crazy.

Here’s why- the biggest cost input for many manufacturing industries is energy, and the US is one of the biggest sources of cheap energy in the world with natural gas prices at times half the cost of those in Europe. We also lead in many areas of manufacturing technology — we just don’t do the actual manufacturing here. According to the US Congressional Research Service, US manufacturing companies spend more on R&D than anyone else in the world, and yet US manufacturing as a percent of global manufacturing went from 28% in 2002 to 17% in 2015. Not only can we bring manufacturing back, we can become world leaders in it (we already are in airplanes, drilling, and Harley Davidsons). And even though hi-tech manufacturing requires lots of fancy equipment and significant research and development, it still supports blue collar jobs. No matter how fancy you are, if you’re shipping shit out the door, you need cleaners, movers, operators, security guards — people who do things besides look at computer screens — to get the job done.

The reason why Germany has relatively higher manufacturing employment and the US doesn’t is because Germany made it a priority to support manufacturers. Manufacturing depends on lots of things that are regulated by city, state, and federal governments. Energy, healthcare (10% of a company’s labor cost can be healthcare alone), zoning, customs, good highways, good ports, and a good local education system are a few of the things that can make or break a manufacturing industry — all of those are government regulated. In order to help their manufacturers compete, Germany made sure it dealt with these issues. US was more hands off. We think software companies are inherently better suited to a 21st century American economy because they’ve outperformed US manufacturers, but the reason why they’ve outperformed is because they don’t need the US government to lift a finger in order to succeed.

So far, Democratic politicians’ policies to support manufacturing mostly fall within tax incentives, job centers to help manufacturing sector workers who got laid off, and supporting the Import-Export bank which provides our biggest manufacturers with low-interest loans. These are all good ideas in my book, but they ignore all those other government regulated things that are vital to manufacturing’s success (infrastructure, zoning, schools, energy etc). Moreover, they pass thousands of manufacturing-specific regulations (2,300 since 1981) that add up to a giant pain in the butt and $500 billion a year in lost shipments.

In other words, despite the Democratic Party’s 2016 Platform having an explicit section on “Fostering a Manufacturing Renaissance”, none of its policies deal with the major items obstructing manufacturing growth in the US. A hands off approach can lead to service-industry growth, but spurring manufacturing requires a hands on government.

Big cities vs. small towns

Small towns in America are not going away. 62% of Americans live in cities with less than than 50,000 people. America might not be rural (80% of us live in towns of 2,500 or more, which is the Census’ cut off for “urban”), but we’re a long way off from all living in the kinds of supercities that support creative content, patents, and finance. For the smaller cities to thrive we gotta get good at the stuff smaller cities are good at.

Do the Democrats have a plan to help these areas? I’d say no. Lack of support for manufacturing is a big part of this — service sector jobs favor big cities (service sector jobs rely on moving people around, which is more cheaply done in cities) while manufacturing jobs tend to be located outside of cities (where moving goods and electricity is cheaper). However, a few other industries would be a boost too.Agriculture and food production is one of them, and both Democrats and Republicans support policies for exporting corn, soy, and wheat in a big way. But those industries are controlled by massive businesses — not your small town farmer. New York State has 36,000 farms. Of those, 200 have GAP certification, which is a food safety certificate enabling the farm to sell commercially to retail outlets bigger than a restaurant. While the USDA does a ton to help small farmers, there’s a lack of basic infrastructure to get small farmers’ goods to market, and so most don’t even try. A much bigger deal is fracking. Fracking is done in rural areas, and in places where it’s been implemented, real wages have grown faster than anywhere else in the US.

source: http://www.pewresearch.org/fact-tank/2016/05/31/oil-and-gas-boom-feeds-greatest-real-wage-growth-in-u-s-but-will-it-last/

However, banning fracking is a frequent talking point in local Democrat politics due to environmental and drinking water safety concerns. Those concerns were legitimate, but banning it means there’s no possible way to make fracking environmentally safe, which is unfounded. Plenty of new laws on what can go into fracking fluids, the location of sites, and enforcement of proper safety procedures have diminished the negative environmental and public health impact of fracking. If the Democratic party has no plan to help the industries that thrive outside of big cities, like manufacturing, local food production, and energy, it doesn’t have a plan to help small town and small city communities.

One clap, two clap, three clap, forty?

By clapping more or less, you can signal to us which stories really stand out.