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Keynes Twists in His Grave



For weeks now, I've been rolling around a lot of ideas in my head about the connection my views on the economy in general should have to my ideas about transportation. Then, on January 3rd, as if to taunt me, someone on NPR's Tell Me More, said this:
This whole issue of income inequality has really picked up a lot of steam lately...[I]f the lowest wage is $7.25, there are an awful lot of people - about 15 million - who make $8, $9, $10 an hour. They're low-wage workers, but they're key to what the minimum wage is. So if you were to raise that from $7.25 to $8, $9, whatever you want to set it at, that would push a lot of people up. 

The people who currently are making $8 an hour, they would get a raise, too. They would ratchet up as that floor goes higher. (my emphasis)
This is exactly how we talk about transportation planning, and it's incorrect.

To start off, let's get some things straight. We need to address the gaping income (and especially wealth) gap in this country. One need only look so far as education to see why this is important. You may believe--as I do--that having a competitive market for many of the things we used is a good thing, but when people are left out to the point that they're in a state of stress-induced shock, no one learns. This is why countries like Finland, which have highly unionized societies with expansive social safety nets have such consistently impressive educational results. They provide things like non-means-tested health and dentistry checkups for all students, so that there's none of that sitting in the classroom with a toothache business that goes on here.

Apples to Oranges
What strikes me about the statement that we all benefit from respectively getting a dollar extra an hour is not that its values or wrong, but that its understanding of economics is. Money is fundamentally different than physical goods.

So, for instance, if you have one orange to start, and I have two, and a third person has one hundred, getting you to have two oranges, me three, and the third person one hundred and one respectively is an improvement for everyone. It may not address the underlying unfairness of the fact that person number three was born to someone who owns an orange grove, and that you were born in a cardboard box and stole your orange for bare sustenance, but it does improve everyone's situation. You would be happy to have your extra orange. This is called a Pareto Optimal.

But with money, it's not so. If I'm making $9 an hour before your minimum wage gets lifted to mine, and I decide I want $10 an hour instead to make up the difference, that ripples all the way through the market until the money has been inflated. The basic relationship of inequality is preserved: you've got very little stuff, I've got slightly more, and the third guy's got enough oranges to toss a couple rotten ones at us and laugh. We're treading water.

Treading water is exactly what the minimum wage has done. In 1968, it was just $1.60, but counterintuitively, that was its high water mark. Since then, despite updating it from time to time, it has fallen in value. $1.60 was nearly $11 in today's money. During the 2008 campaign, President Obama said that he would raise the minimum wage to $10 an hour. The discussion going on about $9 an hour is a considerable backsliding from that. It's not wrong for progressives to expect that the minimum wage should keep up with general inflation. But in order for the minimum wage to really mean something, there has to be a maximum wage. So long as there isn't, we're always going to be playing catchup, and never progressing.

Road Inflation
The inflation of the minimum wage is much like the inflation of our roads. Nearly everyone in the U.S. drives to work alone, meaning that we have tremendous populist pressure behind an erroneous idea that we can alleviate that traffic through road widening. Road widening, like adjustment to the minimum wage, actually does work in the shortterm, but within a few years a road will return to its unpleasant-enough equilibrium of congestion. Jarrett Walker of Human Transit (and see also here) points out three situations in which this is not true:
  1. Economic collapse.  Traffic congestion tends to drop during economic slowdowns, because fewer people have jobs to commute to, or money to spend on discretionary travel.  A complete economic collapse, which causes people to move away from a city in droves, is always a lasting fix for congestion problems!
  2. Reduction of road capacity.  Ever since the demise of San Francisco's Embarcadero Freeway, it's been pretty clear that if you reduce road capacity for private vehicles, traffic will drop in response.  Destroying the Embarcadero Freeway didn't reduce congestion on the parallel surface streets, but it didn't increase it much either.  If you reduce road capacity, the remaining capacity is still congested, but this can still be called a reduction in congestion -- especially if you use standard highway metrics like "lane miles of congested roadway."
  3. Correct pricing of road space.  Congestion is the result of underpricing.  If you give away 500 free concert tickets to the first 500 people in line, you'll get 500 people standing in line, some of them overnight.  These people are paying time to save money.  Current prevailing road pricing policy requires all motorists to act like these frugal concertgoers.  Motorists are required to pay for road use in time, rather than in money, even though some would rather do the opposite and our cities would be safer and more efficient if they could.  Current road pricing policy requires motorists to save money, a renewable resource, by expending time, the least renewable resource of all.  
Road widening is like inflation, because our use of roads is like money. People rarely travel for travel's sake. True, you may take a bike ride or even a Kerouac-style cross country car trip from time-to-time with the process of getting to a place in mind more than the destination. But most of the time, even when we're on vacation, and certainly when we're on our way to work, we're all about the destination not the journey. 

When you start with a narrow road, and dense development, it may be okay that you only can travel conveniently a mile from you house. You might not need a car, or even a bicycle, to live happily. 

Building a wider road suddenly makes travel more possible. Adding tax credits for car ownership and single-family home-building even more so. And soon the convenience of travel means that businesses that don't want to pay taxes in the town can accept the benefit of taxpayer-funded mobility to escape their responsibility to the community. So now you can travel far and wide, but you almost have to. There's nothing near you that you'd want to walk to anyway. The numerical value (in this case in length and width rather than dollars) has increased, but the actual value of your travel has decreased on a per-mile basis. You've inflated the road.

Inflation is a problem even if everything else stays the same, but it's even worse if the cost-of-living changes due to some other non-monetary cause. Building a wide road doesn't just inflate your journey through loss of stuff-per-mile. It also means that now you have to own a car. This is making your life expensive! Progress seemed like such a great idea, but you can't even choose to live on less now. You've got to take a second job to pay for the junky piece-of-shit you drive around in.

The Ghost of John Maynard Keynes
Keynes though that governments should borrow and spend from time to time, in order to create a countercyclical growth pattern to stave off depressions (or panics, or recessions, crises, or what-have-you). Keynes thought that unemployment due to a depression was a serious enough problem that borrowing to create investment was worth going against classical ideas about balanced budgets. On its own, this is a valid idea.

The problem is that it has slipped into everything we talk about. Progressives say they hate trickle-down economics, but Keynesianism misused is like the flip-side of that coin. We've so confused our notions of value that we no longer can keep straight what a public good is from a private one. We want to "create jobs" with opportunity corridors. We describe our support for the bailout of the auto industry in terms of the union jobs it will save, rather than with any reference to whether it's appropriate for a private company to be upheld by government action (progressives do not all support the bailout of the auto giants, but have been as a group more forgiving of the idea than they were of the bank bailouts). In Rhode Island, someone I otherwise usually agree with, Bob Plain, came out in support of a fairly gratuitous tax loophole in favor of wine purveyors and "ordinary" artists. Some version of this criticism is also behind progressive objections to the Affordable Care Act.

The fact that we've so torn apart the distinction between private and public means that we reach for reasons why we support a particular (actually good) policy position when debating our conservative relatives at Thanksgiving, and can't. My cousin in the exurbs of Philadelphia, for instance, felt pretty sure that investing city money into a new stadium for the Eagles was no waste at all, even considering the poor state of the Philly schools, because after all "it builds jobs" and "brings people into the city". It's become the kind of phrase that one says without irony to support one's own policy proclivities, while dismissing others.

Keynesianism is all about growth. And growth is fine enough, but in a society that has limited resources, what we need to think about is how to best get wealth from the relatively flat-lined supply of stuff we've got to work with. The allusion that we'll all get an extra dollar ad infinitum only makes sense in this context of ever-expanding growth.

Riding the Curve
The issue is not that there's something wrong with having a hand in the market to limit income and wealth disparities, to regulate for safety or environmental safety, or build needed public projects. What's really at stake is that we've let this idea become flabby. Raising the minimum wage is a fine enough thing to start out with, but without an upper limit on income it's really just an inflationary Keynesian reach.

In the 1950s, we had a good tool for maintaining a modest gap between incomes. We had a 90% top tax bracket.

Any conservative will tell you (correctly) that a 90% tax bracket will yield very little revenue. The reason for this, described in the Laffer Curve, is kind of simple to understand. If you ask someone to give you nearly all their stuff at a certain income, they'll choose to have a lower income where they can keep more of their earnings. This is another conservative talking point that I feel that progressives misunderstand to their detriment.

We didn't have a 90% tax bracket to get revenue. The idea behind a 90% tax bracket (and to a lesser extent, 80%, 70%, and so on) was to create a barrier to excessive pay. The beauty of this system was that it simultaneously left companies open to decide how to invest any money they chose to keep out of executive salaries. A company might decide to hire more people, or make capital improvements to its facilities, etc. The government really had no hand in deciding what the company did with its money. 

One of the problems you encounter with minimum wages is that unemployment is sometimes affected. If you have an upper limit on income so that a company has an incentive to reinvest in itself in ways to mitigate this effect. Now when you say that someone's minimum wage is going to be $9 an hour, that increase means something. The power of working people to stand up for themselves with other improvements, like a decent-length lunch hour or safety improvements, also increases when you create an economy closer to full employment, because now the boss' threat to toss you out has much less power.

The 90% top tax bracket is occasionally discussed, but almost always the wrong way (just like the minimum wage). Take this exchange between Jon Stewart and Charles Krauthamer. I think this says something about our fundamental lack of financial literacy, that we don't understand the difference between a tax that is primarily for revenue collection and one with is primarily there to put a civilizing effect on the gap between rich and poor.

If a 90% tax bracket sounds vaguely Bolshevist, let's take into account the words of Adam Smith:

It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.
The beauty of Smith's ideas were not that they were some kind of Ayn Randian embrace of tossing the poor under the bus. What Smith really said was that we should have a decentralized method of choice through individuals' varied preferences to decide what we want in a market. It was this distaste for centralization that made Smith such a critic of limited-liability corporations, while Karl Marx was off writing optimistic pamphlets about how corporations were going to build a fundamental change is society (see Ha Joon Chang's book 23 Things They Don't Tell You About Capitalism, Bloomsbury Press). Progressives need to be able to set about forcefully eliminating the absurd wealth gap, but without indulging in silly ideas about what "ordinary" people need.

It's easy to see why giving lower taxes to rich people might seem kind of conservative. But then again, the more you think about it, the argument that lowering taxes will increase revenue is kind of absurdly un-conservative. What you're left with is a central government with a lot of cash to spend on stupid things, like a nuclear weapons program or a highway expansion. Better to try to deal with inequality at a macro level, and limit all this crappy spending to real public needs.

Bottom Line

Stop Building Expensive Crap: Progressives need to seize upon the appropriate conservative attitude that just because you can build it, doesn't mean you should. It doesn't matter what "job" or "growth" you can get in some perverted Keynesian spiral. We've got to be fiscally responsible.

Start to Re-imagine Limits: Concepts like the minimum wage do not mean anything if they are not joined by something like a maximum wage. Let's go back to the radical days of Eisenhower to make that happen again.

Stop Micro-managing: This idea of "ordinary" is dangerous, because it can be turned around on us. It's "ordinary" to my cousin that he should have a taxpayer-funded place to drink beer and watch football. In a less silly way, it's "ordinary" to most people to drive to work (after all most do). Until progressives disassociate themselves sharply from this idea of the "ordinary" ensconced in subjective value judgments about whether people should drink beer or wine, watch a football game or go to an art museum, we'll not be able to stand against Tea Party-style populism. This also essentially embraces that which is best about a market system, while allowing ourselves to go for the jugular on the social democratic goals we want to see flourish.

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