Sunday, February 03, 2008

The dangers of "reform" as an unquestioned goal

Ian Welsh questions to the apparent demand for "reform" when no one bothers to understand why things were initially set up the way they are now. Here are some of his really excellent examples:
You should never, ever, make a policy change unless you can say why the policy was enacted in the first place. You should never, ever, make a policy change unless you are able to make the argument for not changing it.

This is a constant problem. People want “reform” (the most debased word in the political lexicon, since most reforms aren’t) but they never seem to understand the costs of change.

When you reduce capital gains taxes you push money into the secondary securities markets and reduce consumption demand. You make the rich richer, and people who work for a living comparatively poorer.

When you get rid of estate taxes you will increase the amount of money that living people have to pay in taxes and help create a class of rich people who never earned their own money.

When you reduce the progressivity of the taxation system overall you reduce growth in demand for general goods and services and increase the demand for financial products and luxury goods.

When you reduce funding for public health you increase the spread of STDs and you create a pool of people who will act as carriers for infectious diseases, thus making even rich people more likely to suffer from and die from disease.

When you make it impossible for rich people to cut large checks to politicians, and don’t allow public funding, you make fundraising take up much more of the time of politicians and require many more compromises, not fewer compromises. They wind up owned by more people, not fewer people.

Examples are endless.
Reagan came into office by blaming government for all the failings of America, economically, socially and in Vietnam, up to that point. He was also riding on a wave of right-wing resentment about the massive defeat of Goldwater in 1964 and what they considered then (and still do) a coup de etate that removed Richard Nixon from office. Reagan's classic sound bite line "Government is not a solution to our problem, government is the problem." encapsulated all the resentment felt by the American right wing while offering the solution. Eliminate government.

The conservatives didn't want to hear disagreement or defenses of government. They just wanted "reform." They considered the explanations to be nothing more than opposition to the great, simple, solution they had to offer and they didn't want to hear it.

Well, the examples above were all predictable. An experiment wasn't needed to show that increasing the reward to investment would damage consumption, and that our economy is over 70% based on consumption demand. That's logic, and the conservatives base their "great ideas" on feelings and simplicity. But Ian has more:
The rule of “reform” is that it moves in cycles. First the rich are taxed lightly. Money concentrates in their hands, the economy financializes, real economic activity grows more slowly than before, the poor and middle class borrow themselves into bankruptcy. The economy crashes. Taxes are shifted to being highly progressive, demand improves. Once things are good for long enough that those who remember are dead or retired (once the Lost Generation lost power) it begins to seem “unfair” to tax the rich so heavily. They get rid of most of it. The economy financializes, real economic activity grows more slowly than before, etc…

In businesses the same things happen. Some manager decides costs are too high and outsources operations. Costs are reduced, and he gets a promotion. The new manager discovers service is worse and that anything extra he wants done costs a lot of money and requires contract renegotiation. He decides that the loss of control is costing them more money than its worth. He brings the operations back inside the company. Control increases, the amount of money being generated increases, but costs also accelerate. He gets promoted. A new manager comes in. He notices that costs are too high….

Those were cyclical examples. Sometimes things aren’t cyclical. Sometimes they’re just bad and lead to bad places. When Spain financialized its economy, it never recovered, because by the time it was clear that there was a problem that the next treasure ship wouldn’t solve, the middle class had been destroyed to the point where it couldn’t be rebuilt. All that was left were poor people and rich useless people living on “incomes.”

When GM and Ford decided that they were finance companies, when they decided to stop being controlled by men who had been engineers, and have suits control them, they let their engineering cultures decay. Now, building lousy cars that aren’t worth what they cost to build, they keep trying to dig themselves out by new financing schemes, by promotions, by cost cutting… But the problem isn’t their financing, the problem isn’t their sales force, the problem isn’t primarily their costs (they could get rid of their pension obligations, their health obligations and cut wages in half and they would just go bankrupt slower), the problem is that they have a lousy engineering culture. And none of what they’re doing is designed to fix that - it’s all spreadsheet management, running around trying to change the numbers in the cells on management’s excel sheets. Which doesn’t make better cars.
Developing nations train and reward engineers, not financial experts and bankers as the U.S. has done for over a generation now. I know a number of engineers, and almost all of them at about age 40 went back and got MBA's instead of advanced engineering degrees.

Bankers don't create new products that matter, nor do they increase economic productivity. Engineers do that. But the American economy has been financialized, and not longer can compete internationally.

It's time to dismantle the disastrous Reagan Revolution reforms and get the engineers back into running American companies with advice from financial experts and economists.

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