vibinc
What did I mean by ‘value’?
At the end of my last post I talked about value. Specifically I said:
In the mean time, the Council needs to think long and hard about their ideas of revenue, expenditures, long-term liabilities, rate and most importantly, value.…phrases used in this and previous budget negotiations are empty political rhetoric unless they include specific proposals backed by accurate data that adds real measurable value to the citizens of Memphis, not conventional wisdom or ideological flights of fancy.
What did I mean by that?
The short answer is, does the proposal fulfill some kind of need in a meaningful way that adds value to the community without causing undue harm?
That probably seems like a long answer, but the truth is, there are many considerations that must be taken into account to determine ‘value’.
For instance: Some feel that outsourcing certain City functions would reduce spending, and thereby create ‘value’. At the top line level, this may be true, a private contractor may cost less to provide a service, and that may seem like value creation.
However, that savings on the top line comes with a cost…usually to employee pay, which means less income for the family, which translates to less spending and ultimately less revenue for the city in a heavily property and sales tax dependent environment.
The “value” is determined by a formula that looks at both savings to spending and reductions in revenue as a result of the proposed plan.
You can’t cut a number of employees and pay the rest less privately without a hit to your revenue collections. The families impacted will have to react to the new conditions. They may have to sell or otherwise lose their home. They probably will have to cut back on spending themselves…which in turn means less revenue and perhaps an empty house. The amount per person may seem negligible, but multiplied by tens or hundreds of employees, it can turn into an awful lot of lost revenue.
Whats more, the reduction may not be just a portion of the revenue collected. Depending on the job, the person may have to move away to find work, meaning that revenue is gone until the economy organically produces a job of equal value…which in a slow economy could take a while.
If that top line savings is then offset by a tax rate reduction, you’ve just cost yourself rather than saved anything other than a few pennies on the dollar dispersed across the economy in a way that will never create a return. This not only doesn’t solve long-term budget issues it most likely leads to more problems in the future.
Short answer: You cannot cut your way to prosperity or health. That’s why we stopped the practice of bloodletting.
The danger of easy words seeking difficult deeds
There are a bunch of words that are easy for people to say in political rhetoric. “Cut spending” or “cut taxes” are two of the most popular, especially now in the wake of 30+ years of Neoliberal economic policy. This idea basically says that cutting spending, and seeking savings from privatizing public functions creates intrinsic value.
Adherents of this neoliberal economic ideal aren’t restricted to a specific party or ideology. Both sides have used the argument to further political aims, primarily to reduce spending for things they don’t like as a part of their ideology.
The chorus of conventional wisdom has become so loud, the notion that cutting spending/taxes is a good thing is largely unchallenged in the media or by the electorate, even if the ultimate outcome is negative.
The net negative literally slides by most people, completely unnoticed. When it is discovered the problem remains, faith in government and civic institutions erodes. – Wash. Rinse. Repeat.
When looking at the top line math of policy, spending alone has no value. Increasing or decreasing spending alone has no positive or negative value. The ultimate effect of that increase or decrease is where the positive or negative value lies. And that is the part of the conversation conventional wisdom that has become popular mythology ignores.
Neoliberal economic policy assumes it is correct to reduce spending without proving it. Now, some 30+ years after the wholesale adoption of such policies, there’s a great deal of evidence to suggest harm. Since the dawn of wholesale neoliberal economic policy during the Nixon administration, wages have been stagnant or decreased across nearly all sectors. Income inequality has skyrocketed creating more have nots than haves.
I should note, one of the conditions that allowed this economic philosophy to so enthrall the conventional wisdom of the nation is the ease with which it is spoken. Presented as “kitchen table” discussions, when budgetary issues on even a local level bear no resemblance to said discussions does a disservice to us all.
Further, the conditions present at the inception of this economic philosophy…in a time where there were few controls for efficiency, helped expedite the adoption of this philosophy.
Rather than a simple +/- math question, we need to be willing to explore the overarching, and underlying math that determines the value of economic decisions.
No one seems to be really asking those questions or even acknowledging they are valid…which is a very large part of the problem with the long-term outlook of the City of Memphis budget.
How do we create ‘value’?
Value doesn’t have to cost more. It doesn’t have to cut spending. It just has to have a net benefit to the community.
It has to be as efficient as possible (though some things are inherently inefficient but vital, like education, and plumbing). It has to seek to meet a need. It has to work. It should have sound metrics and math, rather than belief or mythology regurgitation at its core.
The items that one seeks to address cannot be looked at from the simplest levels. The equivalent of an economic MRI is required…to see what’s happening on the inside, to get to the things people immediately see on the outside.
There’s a great deal of data available at your fingertips for people with the knowledge and willingness to use it. Not all of it is specific to Memphis, but we can and should work to use it to inform our decisions and try to get ahead of the challenges we face as a community.
It has to be comprehensive. You can’t look at one piece of the pie to get to the number of cherries in the whole pie. You have to look at all of it, honestly, dynamically, with an eye toward solutions that last longer than political fortunes. With a commitment to presenting those solutions to the public, not overselling them, and seeking a commitment in return.
It is neither politically expedient, nor easy, but that’s how you get true value, true growth, and eventually, community buy in.
If that’s happening, I’m not seeing the effects which means we’re either not talking about it, not talking about it effectively, or we’re just doing it wrong.
We create value both by doing this kind of honest and deep investigation, and finally, by seeking to enrich our community by investing to reduce the impact of our net negatives…knowing we will never fully eradicate them.
Instead, we’ve chosen to be paralyzed by our challenges. We speak of them as existing in perpetuity…as impossible problems to tackle.
When we do that, we place our community in a position where nothing is possible but decline…decline in wages, and property values are the result…decline in spending is heralded as the only solution to jumpstart the economy.
But that’s not the case here, or anywhere else. Just as blind additional spending isn’t the answer.
The answer is to stop focusing on the top lines or the beat up exterior and start seriously looking under the hood. That’s where you find the tools to build value…both in a budget, in an economy, and in a community.
The Looming Republican Recession
The architect of the upcoming recession.
Even those who are doing better than average are nervous about the economy.
What we’ve learned in the past several years is that no one is immune from the poor decision making of others…and when those poor decisions involve billions of dollars, the impact is far reaching.
But the money I’ve been thinking about has less to do with my personal financial situation (decrepit as it is) and more to do with the impact of the sequester, which is predicted to send the economy into another recession if it goes into effect.
I’m not really interested in going into the guts of the cuts involved in sequestration. Rather, I’m more interested in looking at the impact on all of us, beyond the D.C. rhetoric. Even further than that, I want to look at the impact of government spending on our economy.
Understanding Spending
Total government spending in the US economy (Federal, State and Local) is about 35% of our GPD. This includes everything from Social Security to Defense spending to road construction. That number has steadily increased from 17.1% in 1948.
There are a lot of people who feel this spending is bad. They believe that private enterprise can put this money to more efficient use.
I’m not sure that many private businesses are interested in building roads or providing for defense and history has shown us that private business will raid pension funds when times are tough. With those realities in mind, the thought of private business providing for anyone but private business is laughable.
But there’s another thing to consider…we haven’t really been spending all that much more on stuff. We’re just getting older.
Where we’re spending
In 1948 government spending accounted for 17% of GDP. Social Security, which was in its infancy, accounted for .2% of that.
In the 65 years since, we, as taxpayers, have been paying into Social Security and later Medicare for our entire working lives. We did this because the government decided, on our behalf, that by doing this we would not be left destitute in our older years. We would have something…though not that much, but better than nothing.
Since 1948 Social Security and Medicare spending has increased from .2% of GDP to 8.6%. And rightfully so. We’ve had two whole generations of workers who put money into the system…many of whom are now getting that money back.
This is how it was supposed to work…and, it’s working.
The truth is, government spending outside of Social Security and Medicare have only increased about 3% to 19.7% of GDP. Considering how much we’ve grown in stature and reach over the past 65 years, this meager increase doesn’t seem like a whole lot.
Is it more money than before? Sure it is. A lot more. But a soda also isn’t a nickel and gas isn’t a dime a gallon anymore.
Why We Can’t Renege on Our Promise
When we talk about cutting Social Security and Medicare, we’re talking about breaking a promise to people who paid into the system their entire lives.
Many of these people are low income workers. That doesn’t mean they worked any less…in fact, they probably worked more and did harder work. It just means they made less money.
Cutting money from Medicare, which stands to lose 2.5% of its budget under sequestration, will mean that hundreds of thousands of older Americans will have their one link to healthcare cut.
That hardly seems like a way to reward someone for a life of hard work.
Its Not Just Medicare
The vast majority of the cuts under sequestration are not to Medicare, but considering the amount of money we’re talking about, it does mean a loss of jobs.
Job losses impact Social Security and Medicare because it means fewer people paying into the system.
This situation also basically ensures that government spending…of the kind most Republicans abhor, will have to be ramped up at an alarming rate as 1 million workers lose their jobs (bringing more unemployment claims) and the economy goes into recession (which will cause even more unemployment claims).
Make no mistake about it, this increase in the very spending they seem to hate the most will be their fault. They wanted this. They pushed for it. If the sequester holds, they’ll be getting it.
A Real Solution
If Republicans really want less spending, they should be working diligently to improve the economy. They should stop blocking legislation in search of a political win. They should come with real solutions other than tax cuts that haven’t worked for 40 years.
More people working means fewer people needing unemployment and other things they deem “entitlements”.
But real solutions aren’t on the menu. Gamesmanship is. Until that changes, the “out of control spending” that Republicans keep complaining about will continue.
There’s plenty of time to talk about whether or not the Government (at all levels) should play this much of a role in the GDP. Truth be told, businesses of all shapes and sizes benefit from it.
Business doesn’t want this spending to stop…they just want a bigger piece of the pie. That’s where cuts to “entitlements” go if the GOP Congress from the first 6 years of the Bush 43 administration is any indication, and even that didn’t pull us out of a slowing economy. It just created a jobless recovery and stagnating wages.
If Republicans are really interested in reduced government spending at all costs, I suggest they strike it from their districts. Refuse it. Put their money (of absence of money) where their mouth is. The only Republican I’ve ever seen do this is State Senator Brian Kelsey. Good on him. He’s sticking to his ideology at all costs.
For the rest of the Republicans in office it will never happen. Because the true GOP mantra is government money for me, and not for thee.
Gobsmacked
In an article in the Chattanooga Times Free Press, Governor Phil Bredesen is quoted about the current healthcare debate in Congress and President Obama’s reported decision to shift priorities to job creation:
“I think it had gotten a little off track, with the public being very, very concerned about the economy and jobs and the prospect of losing jobs, and the Congress off designing health reform to take place in the latter part of the next decade,”
This is relatively unsurprising considering the Governor’s past as a health insurance executive and his previous statements regarding the bills currently before Congress.
What is surprising is that the Governor, a Democrat, would find something positive in the Senate’s recent loss of a Democratic super-majority. I don’t care how “liberal” a Republican Scott Brown claims to be, it’s not a “good thing” for the party or the millions of people who are both currently without healthcare, or those who are in danger of losing their healthcare.
What I don’t get is why Governor Bredesen doesn’t see the imapct that Healthcare has on the job market or the economy at large. GM’s bankruptcy was due, in large part, to the weight of decisions about providing healthcare for it’s employees that were made decades ago, when insurance was a much smaller part of the economy.
In 2006, heathcare consumed 16% of the nation’s economic output. That’s a huge segment of the economy, and the costs effect the availability of jobs negatively. Even though employers have been shifting much of the burden on employees, most can ill afford the rising costs that are outpacing inflation at an alarming rate.
By focusing on healthcare, the Congress and President Obama WERE focusing on the economy and jobs. In fact, they were focusing on one of the most out of control parts of the economy.
Think about it like this. Few would argue that we live in a global economy. Most industrialized nations have some sort of national healthcare strategy. If we are to COMPETE on a global scale, we cannot expect our businesses to carry the load of out of control healthcare costs.
Both the House and Senate bills have a means to control costs, though in very different ways.
To be honest, I don’t give a DAMN which one gets passed, but it is critical that something get passed to slow down the rising cost of healthcare now. Not only for the health and welfare of our people, but also for the health and welfare of our economy.
That Phil Bredesen doesn’t see this just baffles me.
As Rep. Jeanne Richardson (D-89, Memphis) noted:
“I think the Democrats need to do whatever they need to get health care reform passed. Period. The end,” she said.Rep. Richardson said having the U.S. House pass the U.S. Senate bill is “the right thing to do. I mean, look, this state is cutting quadriplegics out of TennCare.”
Maybe it’s not so baffling. Any administration that can propose to cut quadriplegics off TennCare, and any legislative body that thinks that’s ok, obviously has some kind of serious problem.
I guess they just don’t get it. From the looks of it, they never will.
Bank Nationalization
Barry Ritholtz over at The Big Picture, debunks the arguments against Bank nationalization.
Ritholtz and company have been arguing for nationalization for some time now, as an alternative to the current “Bad Bank” scenario that Treasury is pursuing.
I don’t know enough about the Macro effects of this, but I agree with the basic premise; if we’re going to spend our money stabilizing institutions that have made a multitude of bad choices, we might as well benefit from that investment in some REAL way. This is currently not happening.
If you don’t read Ritholtz regularly, and are interested in an insider’s view on what’s happening with the economic crisis, I suggest you add him to your RSS feed.
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