Making Sense of the S&P Downgrade: Semantic, Performative and Reflexive Views of the Economy

This cartoon by KAL for the Economist, posted by Paul Krugman on his blog, captures the social and linguistic nature of some economic activity.

The S&P downgrade of US sovereign credit  has been heralded as both a pivotal event and at the same time an inconsequential event.  The profusion of opinions and notions about it make it difficult to evaluate in an analytically rigorous manner.  Here I hope to offer a way to “unpack” the profusion of views so we can understand them in a multi-dimensional mental model and are able to “turn them around in our mind” to see their various merits and oversights.  The point of this is not to inflate the importance of this one act but to investigate whether economic events lend themselves to an analysis that considers how language might be operating in politics and economics.  In an opinionated or simplified commentary, commentators have in my opinion collapsed these dimensions to instrumentalize this event to support their view of economics, with sometimes ethically benign and sometimes ethically suspect intentions.  However it helps for critical consumers of economic and other public utterances to be able to have “tools” to think about the “moving parts” of important events.

The co-occurrence of the downgrade with what seems to be a stock market downturn and potentially a still deeper recession in the real economy, may lead to false attributions of causality.  Nevertheless the downgrade has at least symbolic importance in an era of bad economic news.

Sociolinguistic and Semiotic Tools

Formally, in sociolinguistic and semiotic terms, the S&P downgrade is both a symbol in an ordinal scale (AAA,AA+ to D), i.e. the rating, and a text with an author or authors.  The rating is determined, simultaneously rationalized in a press release, and published by Standard and Poor’s Financial Services LLC, a division of McGraw Hill publishing.   McGraw Hill is a large publishing company with an influential board of directors.  S&P is, because of government regulation and financial industry practice, a division of that publisher with a special authority and status: S&P is one of three Nationally Recognized Statistical Rating Organizations (NRSRO) designated by the SEC, so enjoys a government mandated oligopoly.  S&P also manages a widely-followed stock index, the S&P 500 which gives it a semi-official role in the assessment of and perception of the value of the New York stock market overall.

The selection of a symbol in the ordinal scale, the rating, is used as a shortcut to evaluate and communicate the agency’s assessment of the risk of repayment for bonds and other debt obligations issued by a particular company or government. S&P shares this rating system with Fitch’s another rating agency/financial publisher.  Moody’s, a third rating agency, has a scale that is almost identical.

The rating agencies translate the fairly meaningless symbol in the ordinal scale to an English word or phrase that is slightly more meaningful to those who do not have the time to memorize symbols.  AAA is “Prime”, AA+ to AA- is “High Grade”, A+ to A- is “Upper Medium Grade”, BBB+ to BBB- is “Lower Medium Grade”, BB+ to BB- is “Non-investment grade speculative”, B+ to B- is “Highly speculative”, CCC+ is “Substantial risks”, CCC is “Extremely speculative”, CCC- to D are various grades of “In default”.   These words, if accurately applied, are meaningful to investors though as with any single word or letter grade, do not capture the specifics of any given bond issue or bond issuer.

Changing or re-affirming the rating along the ordinal scale is an event that requires the rating agency to justify their maintenance of the rating or change in the rating.  The ratings agencies produce texts which are ostensibly summaries of their numerical or qualitative analysis of the investment or the debt issuer.  These texts are issued as reports and press releases and have their highest impact and meaning at the time of their publication.

The downgrade document and rating can also being viewed as an “utterance”, as the downgrade text has been issued at a particular time and is treated by news outlets and commentators as a speech act by the corporate “person”, in this case S&P.  Unlike a work of imagination like “Hamlet” or a fact-based text like an encyclopedia, the timing of the downgrade text’s publication was a critical component of its coming into being, very much like an utterance in a conversation.  As you probably know from experience, utterances gain meaning if not their entire raison d’être from the context of a particular conversation that occurs in real time, which then quickly becomes historical time.   The text produced by S&P was timed to be issued after the markets close on Friday August 5th, 2011 after the conclusion of weeks of budget deficit negotiations involving the executive and legislative branches of theU.S. government.   There are other contextual factors in the timing of the issuance of the text which will be touched upon below.

One critical element of how people evaluate both texts and utterances is the value they attach to and relationship to who is the speaker/writer.  Views of Standard and Poor’s will range from those who accord it decisive authority on the matters of the solidity of various investments to, on the other hand, those who see the agency as a corrupt institution whose every utterance and publication is suspect.  These views and their diversity are based on a wide range of factors.

That Standard and Poor’s is considered a publisher as well as a ratings agency gives it both special authority but also invites challenges to its authority.  A “text” or publication has the appearance of independence from the speaker/author that “utterances” and “news releases” don’t have.  That S&P has additional standing as a publisher with a government mandate as well as a unique position in the financial industry adds to the at least formal perception that its publications are supposed to have standing.  However formal “publications” are supposed to be joint works between writers and independent reviewers or editors, a process which is supposed to make the contents of the publication more reliable or of higher quality.  That Standard and Poor’s is both the author and publisher of its work invites questions about the objectivity of its views.

The receiver or consumer of S&P’s utterances/texts is also a factor in the interpretation.  Whether one has a history with S&P ratings personally, an economic interest effected by the rating, or a political position that is influenced by S&P’s publications will effect how one assigns value or meaning to their utterances/ratings/texts.  This feeds into what I have called the “perspectival” nature of economics, which makes its status as a science, as well as the status of other social sciences, complicated if not problematic.   Perspectival doesn’t mean an entirely subjective model of social reality, either. If an extreme subjectivist position is taken, the whole point of communication is itself lost and leads to contentless cynicism: if reality is entirely dependent upon the receiver, there is no point in talking or uttering anything and everybody is exclusively preoccupied with private delusions.

Below I will classify interpretations according to three constellations of speaker, receiver, utterance and context that I will call semantic, performative, and reflexive.  The semantic view says that words “contain” meanings or prescribe a limited set of interpretative acts on the part of receivers of utterances or readers of texts.  The performative view says that speech acts (including transmission of and/or publications of writings) also perform actions that cannot be reduced to some exterior or pre-existing world.  The reflexive view blends performative and semantic views of the world, portraying the social and economic world as a historical series of hermeneutic (interpretive) and performative acts that have a critical dependence upon each other.

Semantic Perspectives: What Facts/Meanings does the Rating Downgrade Contain?

The simplest, most “commonsensical” view is the semantic view which says that words have meanings which are inherent in the words themselves or that words prescribe a certain constrained set of interpretative acts by readers/listeners.  Dictionaries are written based entirely on a view of language as semantics:  a word is supposed to “map to” a meaning that is explicable by reference to other words and/or by implication to a non-linguistic reality represented by those words.

A semantic view of the S&P downgrade and explanation would look at the content of the downgrade texts themselves and see if it maps to a reality that we can agree exists independently of S&P’s utterances and assumed motivations and wishes.   This view is analogous to a view of economics and business events being an “objective” reality out there in the world over which economists and business analysts make accurate or inaccurate statements, observations that do not effect the events being observed.

Standard and Poor’s, in a simplistic idealized world, would view their own rating and the justification of their rating as largely semantic or, adding a small performative dimension, as their “performance” of a semantic act, a “naming”, justified by an objective world described in their analyses and publications.   Consumers of S&P’s rating who “believe in” S&P’s view of the United States as a debtor will share this view and act accordingly if they are in a position that requires them to act based on bond ratings.  Some people would call this stance “naive realism”, the idea that representations of the world are largely transparent views onto the world as it is, objectively beyond all of our wills, of can be made so via the application of the correct semantics.

In the same simple idealized world, business people and economists will accept the representation of the world contained in S&P’s rating and will treat it as a fact, even though they must “average” this fact with other views that may contradict S&P’s view.  Nevertheless the content of the rating is supposed to predominate.  In certain social contexts, rules of the discussion dictate that one is supposed to focus purely on the semantic, intended meanings of what someone else says and not their “agenda”, tone or other non-semantic elements of their speech.  People are supposed to “mean what they say” even if you believe that they don’t mean it.

There are at least five possible positions in this, four of which are represented in the current set of reactions to the downgrade:

  1. Full acceptance of rating and propositional content of rating justification –  Those who think that S&P’s text corresponds to a real world “out there” would accept that its credit rating of the US as AA+ rather than AAA corresponds to real events that have occurred in the world since S&P’s last rating of the United States as a bond issuer.  They would take S&P’s scope of evaluation as material to the quality of credit risk that the US government represents.  A full acceptance of S&P’s “observations” about the US federal government as debtor can be used for a variety of political programs including those on the right-wing who think that this is due to federal spending programs.  Alternatively those on the left can take the report and view it as an indictment of the Right’s anti-tax program and efforts to use the debt ceiling as a political lever.  Earlier reports that S&P has issued regarding the creditworthiness of the United States favored more the Right’s anti-government spending agenda, giving the current rating justification a different and perhaps more explicable context.
  2. Critical/partial acceptance of propositional content and/or rating – Some readers/listeners may find flaws or disagree with aspects of S&P’s rating of the US and its justification.   To some it may appear that parts of S&P’s analysis is correct, while other parts are off-base.
    1. S&P may have advanced true propositions that do not impact on the creditworthiness of the US government. Many believe, and we will see this borne out, or not, by events in the next weeks and months, that US debt will continue to be treated as “Prime” by bond markets, even if it now holds the rating of AA+ from one of the three rating agencies.  The other two rating agencies still rate US debt as “prime” and even if they didn’t, if US Treasury debt remains a refuge for investors, it will still be “virtually prime”
    2. Some on the progressive or Left side of the political spectrum may find total agreement with this statement in it is causally attributed to the political Right:   “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy.”
    3. Economists, many of which are on the Left side of the political spectrum, would be critical of this statement as a rationale for downgrading sovereign credit ratings:  “By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest,Canada) and 83% (highest,France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.”  The linking of level of debt burden to GDP suggests an anti-Keynesian perspective, as Keynes recommended deficit spending during ‘liquidity traps”.  The counter-example of Japan’s very high debt to GDP ratio is overlooked.  The way to improving the financial position of the country may then be a temporary move towards MORE public debt rather than constrain public debt formation in the near term.
    4. The political Right might focus on the same critical points but using an opposing spin.  They have been claiming though, with, in my observations, a shaky basis in fact, that it is the Obama Administration’s responsibility that we have so much public debt (now a “party line” for the Republicans).  They will also assert that political turmoil around the debt ceiling is purely the doing of the Democrats, again with only slight basis in fact. Republican leader Boehner has claimed that Obama has changed his position throughout the negotiations, an observation which accords with some observations of critics of Obama on the Left that he has been using the debt crisis for political gain.
  3. Disputing Analysis or Methodology for Applying Rating– TheUS Dept. of the Treasury and others have disputed the methodology by which S&P has evaluated the US’s debt position and ability to pay.  The S&P $2 trillion dollar error is striking; an error which S&P upon accusation later admitted was justified.  Nevertheless S&P continued on with its downgrade without reference to this error.
  4. Disputing Materiality/Relevancy of Claims –  Some critics are agreeing with the propositional content of much of what S&P has written in its justification of its downgrade but have pointed out that assessments of political turmoil are not relevant to the ability of the US to pay its debts in the medium term.
  5. Total dismissal of propositional content and rating – Purely on the basis of the content alone, very few are arguing with all of S&P’s claims without reference to the overall disputed authority and politics of the rater, author itself.  Rather than viewing this as a dispute in semantics, I am categorizing this type of disagreement under performative and reflexive perspectives on the S&P downgrade below.

A purely semantic view of economic events is in agreement with a self-styled “natural scientific” view of economics and business, even though this view appears to be naïve and unrealistic. We will see below that there are a profusion of views of the S&P downgrade that plausibly include factors outside the simple truth-claims of the rating and the justification for the rating.

A Performative Perspective:  The Downgrade As Action

Linguists have differentiated semantic from performative dimensions in the generation of meaning: the semantic dimension refers to words as containers of meaning while the performative aspect of language highlights how the action of using specific words themselves in specific contexts co-creates meaning.  For instance, a minister or judge performs a marriage by stating:  “I pronounce you man and wife (or more recently, ‘spouses’, ‘husband and husband’ or ‘wife and wife’)”.  Technically the marriage did not exist prior to the pronouncement, the words which created the union.  There are many special-use language performances like weddings with designated officiators but a vast majority of language performances occur in everyday speech.  People, for instance, “promise” or “swear” that they will do something or not do something.  The promise did not exist prior to the utterance of words like “I promise” “I swear”.  A weaker form of promise is to “say that” you will do something.

Performativity is necessarily sociolinguistic, an aspect of language that is often ignored by the mainstream of linguistics, computer science, and analytic philosophy.  Sociolinguistics studies languages in their social contexts, including consideration of speech roles, i.e. “who is the speaker/writer” and “who is the listener/reader”.   A dynamic and historical perspective is possible within a sociolinguistic perspective, which is a good thing for the advancement of workable theories about how things have come to pass.

If the downgrade is considered to have a political dimension this is of necessity a performative aspect of the downgrade as well, as politics can be construed as a series of speech actions around the acquisition, exercise and maintenance of power.  Consideration of the characteristics of the rater, i.e. S&P also falls into the performative category, as when we view the performance, we attribute it often to be a characteristic of the performer of the action.  There is a school of sociology of the sciences that asserts that knowledge production and economics is a largely performative activity, i.e. the purpose of the activity is to “act as a economist” rather than to produce semantic knowledge, a position that is, in my opinion, extreme though interesting to contemplate.

I am dividing performativity regarding S&P into two categories:  Basic Ratings Performance and Additional Performative Dimensions.  Everybody recognizes the S&P’s “Basic Performance” of an investment rating but only some delve into “Additional Performative Dimensions”.

A)    Basic Ratings Performance – An S&P rating or ratings from other agencies are not just texts or utterances but involve the performance of an action with real consequences in the world.  This action is a basic naming or simple semantic act.  There are also, supposedly fiduciary as well as legal duties involved in rating investments, especially for the three NRSRO’s recognized by the SEC.  Thus, like the minister at a wedding or a judge in a courtroom, S&P whether deserved or not, has the right to take these verbal actions.  The actions also have more profound consequences because of both the sanctioned role of S&P as well as because of its high public profile.  Everybody agrees that these ratings have this minimum characteristic, including those who focus on the semantic aspects of the rating.  A bond or stock rating is not simply text- or knowledge-production.

B)     Additional Performative Dimensions – Most readers/receivers of the agency’s rating will be looking at more than just the bare minimum aspects of the rating as an action.  In general, the more critical or dissatisfied one is with the propositional content of the rating itself or the institution of the ratings agencies more generally, the more one considers the rating itself as an action by an entity in the world, with additional characteristics.

  1. Characteristics of the Rater – S&P’s action to downgrade is looked at by some in the context of Standard and Poor’s own institutional structure, business model and history.
    1. Rater’s Economic Interest/Business Model – S&P and other ratings agencies are paid to rate private issue securities from Wall Street firms by the firms themselves, from which they derive most of their income.  Thus their economic interests are aligned with neither the consumers of their ratings nor sovereign debtors like the United States government but with private Wall Street firms.
    2. Corporate Parent’s or S&P’s Political Agenda – Some commentators have pointed out that McGraw Hill publishing or its S&P division may have a political agenda because of relationships between its board of directors and the Business Roundtable.  The downgrading of US debt may serve the purpose of undermining the current Administration or the emergence of a more “Keynesian” agenda.  The downgrade justifications assumes that temporary increases in public debt will not help the economy and the US’s future ability to service its debts.
    3. Accuracy of Previous RatingsS&P has a long history of inaccurate ratings.  Consumers of its ratings as well as commentators on the downgrade have pointed out that because of the track record of S&P that one should ignore or discount the downgrade.
    4. Analytical/Mathematical Competency To Rate –  An additional line of inquiry or criticism points to the ability of S&P or S&P employees to “do the math” or research required to rate securities.  This sees the $2 trillion error in calculation as part of a pattern of sloppy research by S&P.  Some have called S&P one of the “stupidest” firms in a stupid industry.
    5. Competency to Rate Political Systems– As the downgrade rating was based on a political analysis, S&P is claiming a competency to rate political systems which is not thought to be a core competency of the ratings agencies.
    6. Habitual Fraudulence/Criminality – The harshest view of S&P is that it perpetrates fraud on a habitual basis.  Thus the downgrade of US debt is seen as part of a pattern of fraudulent ratings; critics here maintain that S&P does not attempt then to make its rating accurate, i.e. have no ethical commitment to a semantics of truth.
  2. Characteristics of the Rating-Action –  Viewed as a political-economic action, the downgrade has attracted attention that look beyond the minimum conditions for it to be a rating “event” at all.
    1. Information Value of Rating/Analysis –  The rating rests entirely on public information, all of which is political in nature.  S&P’s analysis offers no additional information nor analysis to consumers that is not accessible elsewhere.  Therefore it has questionable information value for market participants.
    2. Self-Correction/Over-compensation – Given S&P’s history of cheerleading for investments, the action may have been an effort at overcompensation for previous leniency.
    3. Economic “Cover” for Political Allies/Diversion of Washington’s Attention to Debt rather than Job Creation –  Assuming a Republican anti-welfare state bias at S&P, the timing of the downgrade suggests that the downgrade was an implicit endorsement of a still more savage cuts to social welfare spending.  This view is substantiated by earlier endorsements by S&P of $4 trillion in spending cuts which were not achieved by the deal agreed to on August 2nd.
    4. Pre-emptive Counter-attack/Distraction from own errors – S&P has been the most controversial of rating agencies and might be legally liable if prosecutions for financial wrongdoing were ever pursued.  As the US government would be the source of this prosecution, to create an environment where the US government is pre-occupied with its own liabilities is beneficial to S&P’s current management.  Furthermore, it would seem retaliatory to prosecute S&P after the downgrade.
  3. Characteristics of the Ratings Industry
    1. Ratings are Irrelevant to Treasury bonds –  As we have seen the market sell-off of August 8, 2011, there has been a “flight to quality” as investors have bought US Treasuries as they leave stocks.  Thus markets have ignored the downgrade and they may as well ignore other ratings of these financial instruments
    2. Ratings business Model is flawed – As mentioned above, many contend that all bond rating agencies have a flawed business model that doesn’t serve the public or investor interests.

These are just some of the possible interpretations and narratives that can with some justification be told about the S&P downgrade as a action in language.

Reflexive Perspectives on the Downgrade

Reflexivity is a concept that has gained currency in economics via the work of the investor and philosopher George Soros, though it has been an occasional concern in the theory of the social sciences and in other areas for several decades.  Reflexivity is not unlike the Heisenberg Uncertainty Principle in physics, in that observers and observations of social phenomena have an impact on the phenomena that they observe.  Reflexivity suggests that society and the economy are like an “echo chamber” within which single utterances and publications can have multiple effects over time.  Soros, drawing on his experience in financial markets, has pointed out how ideas about the valuation of assets can change the value of those assets, which is commonsensical to the stock trader but not to many economists and fundamentalist stock traders, who take a purely “semantic” approach.

Reflexivity depends also on the assumption of a critical intersubjectivity, i.e. that we are not isolated consciousnesses but influence each other via our communications and meaning-making activities.

For reflexivity to be analyzed empirically or at least understood in greater analytic clarity, it is my contention that it must be disaggregated into performative and semantic components.  Reflexivity represents a “higher level” concept that stands “in between” or utilizes both semantic and performative aspects of language and meaning-making activities.  As such, it also represents something of a longer historical arc, which makes it difficult to assess how the recent downgrade of US credit risk by S&P will affect this arc.

Here are a few of many possible perspectives on the downgrade informed by reflexivity:

  1. Paradoxical strengthening of treasury debt as an investment –  We have already seen that while S&P’s downgrade of treasury debt has contributed to an overall climate of economic gloom it has actually strengthened the position of Treasury bonds, as there has occurred a flight to safety, which Treasury bills represent in contrast to stocks or other securities.
  2. Reactions to downgrade as wound to American self-esteem —  I will explore this theme in greater detail in another post, but many Americans have been caught up in a decades long cultural trend of defensive self-aggrandizement.  The downgrade from “prime” to AA+ will either be perceived as a useful or a harmful slight to American self-esteem:  some politicians and political commentators might take it as a call to positive action while others may retire into a resentment-laden withdrawal from society.
  3. Market differentiation opportunity for other ratings agencies – Moody’s and Fitch’s might reassert their AAA rating of the US longer as a way to differentiate themselves versus Standard and Poor’s in the hopes of gaining market share.
  4. Political Re-definition of economic progress as recovering “AAA” rating/Narrowing scope of economic policy – The rating may itself be meaningless but some may take the recovery of a AAA rating by all three agencies as the primary goal of economic policy.

As noted above it is too early to tell whether this event will have meaningful long-term “echoes” within the economy and economic policy environments.

The Sociolinguistic Foundations of Political Economy

I’ve taken the S&P downgrade of US Treasury debt on August 5th, 2011 as an example of how meaning and communication interact dynamically with economic institutions.  Opinions about what this event should mean have been so various, often from people who are allied politically, that it provides as good as any an example of the insufficiency of our understanding of how the future is created from the present and the past.  I’ve tried to show how there is a dynamic edge to economic institutions that involves political fights over not only material resources but also symbolic terrain.

An underlying assumption here has been that viewing economics as a political economy rather than an autonomous “economy” is a truer representation of how economies move and evolve.  The contests over meaning and power that are waged through language and speech acts help shift the direction of the economy and are only thinkable if we think of how language and symbol manipulation create a variety of outcomes.  If we think of an economy shaped in part by people’s will and drives, expressed through action and language, we find interesting variations and exceptions in what were thought to be invariant laws of supply and demand.  An economy embedded in society and governmental institutions gives us a chance then at developing human self-understanding far more realistically than one which assumes an ahistorical economy.

It would seem that these language phenomena are not a superficial layer on a numerical, material economy but part of the structure and motive force of that economy.


Paradox of Thrift, the Deficit Debate and Virtue Ethics

An economist friend of mine pointed out to me that my post on the intersection of ethical dynamics and economics omitted to mention the “paradox of thrift” brought to the attention of 20th Century economists and theoretically elaborated by John Maynard Keynes.  In fact, my friend felt that the post was mostly about the paradox of thrift yet I had neglected to mention it or credit Keynes.  While it may have been a significant oversight on my part, I disagreed with his premise that that post or my position was largely about that paradox.  I explained to him and will explain here the differences between a simple observation of the paradox of thrift as it operates in contemporary economics and my approach.

The Paradox of Thrift Summarized

The paradox of thrift is a phenomenon whereby if everybody in an economy attempts to increase savings (thrift) and these savings are not in investments but in liquid assets, overall savings and economic growth goes down;  individual virtue collides with overall social well-being.  There are many good explanations of the paradox of thrift which, as Wikipedia includes in its entry on the subject, goes back to biblical injunctions against a propensity to save rather than spend.  Various pre-Keynesian economists including Bernard Mandeville commented on the paradox.  During the Depression, Keynes elaborated the paradox by introducing the notion that governments should stimulate demand by government deficit spending on projects that put money back into the economy.  The stimulation of aggregate demand would counteract the tendency of individual economic actors to save out of fear during an economic downturn.  Richard Koo’s “balance sheet recession” is an example of the paradox of thrift.

The Paradox is based on Keynes’s observation that people have a propensity to prefer liquid assets over commitment to investments that “tie up their money”.  The liquidity preference is a fundamental problem for economics, where overall wealth is based on longer-term investments in productive goods and in the demand by consumers for the products produced by capital goods.  Under conditions of uncertainty and fear including in economic downturns, this liquidity preference is enhanced.  We appear now again in a “paradox of thrift world” according to Paul Krugman and others.

Anti-Keynesians, Deficit Hawks View the Acknowledgement of the Paradox as Itself a Vice

While Keynesians accept the paradox of thrift as a fact or periodic objective condition of the economy, especially in an economic downturn, the struggle between economic schools inside economics has meant that this observation is not accepted universally as a fact of life.  From a Keynesian or Keynes-influenced perspective, the deficit hawks, who of necessity must overlook or downgrade the Paradox, are simply out to lunch, ignoring a fact of life (if everybody tries to increase savings under conditions of weak demand, total savings and wealth goes down).

However there are those anti-Keynesians of various stripes, including followers of the Austrian school, who believe that Keynesianism and its acknowledgement of the paradox are essentially incitement to violate the economic virtue of saving.  They see this, whether in honesty or as a political pose, as a moral war between two conceptions of virtue or rather to them, a war between a virtue and a vice.  Mandeville in the 18th Century and Keynes in the 20th century were faced with scandalized reactions to this observation, though in the case of Mandeville, a fairly consistent anti-moralism and commitment to self-interest helped inflame the reaction to what might have been sound economic advice.

Thrift is Not the Only Economic Virtue

While thrift is considered, in a post-Calvinist world, to be a primary economic virtue, and was praised by Adam Smith the founder of modern economics, and Ben Franklin, it is not the only virtue.  As implied above, anti-Keynesians think of Keynesians as promoting spending as a virtue, though as I will argue below this is only ambiguously the case.  Giving to charity is considered by many to be an economic virtue, and corporations and individuals often display their charitable giving to gain benefit from the perception of this virtue.  Nowadays, “going green” or efforts to work towards ecological sustainability are considered to be virtues, which many show off to others, as a means, in part, of gaining social status, as well as an educational tool.

Anything that can be said to be a stable or inherent characteristic of a person or a corporation can be taken by some economic actors to be a virtue or vice and either compel attraction or repulsion.  Thus a structure of a virtue ethics involves the evaluation of these presumed stable or inherent characteristics as either positive (promoting attraction or approbation) or negative (promoting repulsion or condemnation).  Unfortunately, and this may seem a stretch to some, the use of racial preferences and prejudices works very similarly to virtue ethics in this regard:  people do business with people from one or two ethnic groups as a preference over others or avoid doing business with one or two or more other members of other ethnic groups.  Virtues, of course, are subjectively evaluated, so for some, a preferred ethnic group may be a shunned one, but nevertheless the same structure of attaching value in both positive and negative form to an inherent, though not necessarily lifelong, characteristic of an individual or organization is occurring.

Virtue Ethics Is a Way of Seeing the World

The foregoing is an effort to show that virtue ethics is a meta-ethical way of seeing the world that in turn shapes more specifically economic paradigms and is highly influential within professional economics.  A paradigm, as defined by Thomas Kuhn the historian and theorist of science, is a way to look at the world that frames that world so as to be meaningful to scientists or other observers.  For Kuhn observations of the world entail or imply some form of a framework.  Some facts or features of the world will appear to be unimportant or even invisible from within one or another paradigm.

Those economists who see their jobs as the inculcation of virtuous habits in people and groups of people, will tend to look for and praise characteristics of people, governments or organizations that to them exemplify these virtues while criticize or even excoriate the same actors who do not exhibit these virtues or display their opposites.  They may view their task as objective observers and interpreters of the world, but where there is uncertainty, ambiguity, and the need to evaluate or project into the future they are likely to view the economy as something like a morality play between good and less good or even bad actors.

Thus in the struggle over deficit spending and the paradox of thrift, defining the economy as largely enacted by people with varying levels of virtue, especially as regards the virtue of thrift, emphasizes inherent or supposedly inherent characteristics over what might be systemic and situational issues.   The various deficit commissions and other organizations that are creating or trying to create an atmosphere in which statements of personal virtue or the economic virtue of entities (using the value of thrift and the responsible borrower as primary virtues) are signs of “responsibility”, are almost exclusively wedded to a virtue ethical way to parse the world.  Critics of their perspective usually point to a system or specific history which they are misinterpreting or missing altogether.

What Isn’t a Virtue Ethics in Economic Meta-Ethics?

As I noted in the previous post , economists have the choice of at least three meta-ethical frameworks to organize and evaluate the social data which they collect and organize into a perhaps part-scientific, discourse that applies valuations to its findings:  these valuations implicitly use some admixture of utilitarian, deontological, and virtue ethical frameworks.

Keynesianism, which is itself a broad and unsystematized climate of opinion, does not build itself up as a virtue ethics, and, in fact with Keynes’s observations of the effects of virtue ethics in the paradox, shuns the ascription of stable inherent characteristics in economic actors, to which values are attached.  The meta-ethics of Keynesianism might be construed as a “systemic, behaviorially-based utilitarianism with a varying deontological commitment to full employment”.  Keynesians attempt to weigh and measure various human attributes that effect economic behavior and attempt to figure out how economic policy can be designed to achieve full employment at any given juncture.

While the broadness of Keynesianism (if we include post-Keynesianisms, neo-Keynesians, new Keynesians, etc. in this category) is a scientific and political problem across the board, those Keynesians that remain most “technocratic” run particular political risks in avoiding the emotive cores of virtue ethics and deontological commitment to universal or popular rights.  A systemic utilitarianism based on numerical representations of utility is a particularly “dry” affair for most non-economists; in the case of the deficit debate standing up for continued deficit spending in the interests of maintaining “aggregate demand” is not particularly inspiring rhetoric.  On the other hand, a “left” Keynesianism, which is mostly absent from the center of the public debate, draws on deontological commitments to “decent jobs” or environmental integrity as a means of inspiring at least some political support for its agenda.

In the current political climate, which is dominated by neo-liberal values that tend to place responsibility on the individual rather than society, it is easier to evoke and maintain a political consensus around an individualized virtue ethics.   Concerted efforts would need to be made by Keynesians to defend themselves politically, most probably evoking some form of a deontological commitment to overall social welfare and to good work with adequate wages.  Though there are exceptions, the declaration of commitment to this type of values with manifest emotive basis has not, for the most part, been forthcoming from either the economic profession nor political elites.

The Public Deficit Debate as a Conflict Between Ethical Systems

Hinted at in the introductory post on ethical dynamics in economics, the debate between deficit hawks, both sincere and hypocritical, and the defenders of deficit spending can be very clearly understood as a competition between two orientations that use different ethical tools to understand the world.  The competition is on the level of the tools (meta-ethics) and the content of professed and/or real ethical commitments, so therefore on two levels of abstraction within ethics.  To analyze the ethical dynamics that either underlie or coexist with conventional economic arguments, I believe one has to assume something like a meta-economic stance, a stance that sees economics as embedded in a larger scientific and philosophical enterprise.

To underline the point above, the most contextually well-grounded economic arguments did not win the day in setting the terms of the policy debate or the development of an academic economic consensus; economic arguments were supplemented or supplanted by what I would describe as statements of ethical probity.  These ethical orientations may either be open to or immune to empirically grounded arguments either for or against fiscal austerity, so an ethics does not necessarily undermine rational or scientific understanding.  It appears now that increasing numbers of economists are realizing that empirical evidence supports continued deficit spending.  Nevertheless, I would submit that the power of this meta-ethical conflict was triggered first within academic economic and political circles without a primary reference to empirical or relevant historical comparative study and has set the debate on a course that makes it relatively immune to evidence-based discussion.

Ethical Conflict and Old and New Class Conflict

A competing and not necessarily contradictory explanation of the debate, popular on the political left, is that the deficit debate is motivated by a form of a narrowly-defined class conflict, a conflict of economic interests between “haves” and “have nots” and that it is therefore not premised on a conflict between universal ethical orientations.  In terms of a conventional class conflict, on the one side of the conflict, those who want to cut deficits are attempting to prevent a re-distribution of wealth downward via deficit- and tax-funded social and economic stimulus programs.  The cutting of deficits in this view functions as a means for the wealthiest to hold onto a concentration of money and power that has dramatically increased since the advent of supply-side economics in the 1980’s.  On the other side of this conflict, those who are attempting to maintain deficit spending as a public policy tool do so as defenders of the middle and working classes or as defenders of the social contract that emerged from the Great Depression and Second World War, in which the wealthiest would accept higher tax levels, government regulation of business and government-funded social programs in exchange for social stability.

An alternative or emerging view of classes that has its clearest theoretical grounding in post-Keynesian economics is that the fundamental class conflict in contemporary capitalism is between a new financial class and almost all the other classes in society, including the traditional owners of productive assets.  It is striking how many popular and economic discussions now refer to this division without using the still unfashionable “class” moniker.  As in traditional class conflict this is not exclusively an argument between ethical world views but a power struggle between interest groups.

While this class or distributional conflict may or may not be the primary cause in the conflict over deficit spending, it is not the field upon which the political conflict over policy has been fought, at least in the United States.  I would submit that the arena of conflict is public debate about and internal ethical struggle over ideals of individual and social economic probity and the ultimate purposes of economic activity.

Debt as Sin; Fiscal Austerity as Virtue

The urging to cut deficits, with or without empirical grounding, has been couched in terms of personal and/or national virtue as regards debt and repayment of loans.  This virtue, based on the simple transactional morality of loan and repayment, has been generalized to the situation of a number of governments around the world, including the United States, as these governments face mounting public debt in the aftermath of the financial crisis of 2007-8.  The complexity of the situation and its historical context for many, who did not bother or wish to think through the economics, was distilled down to a simple morality play of the debtor attempting to reclaim virtue for him or herself by repaying loans.  As it is difficult to appear as though one is ignoring this simple, seemingly basic morality, those who advocated a more nuanced response were drowned out or have been, until recently, politically marginalized.

Furthermore a generalized discourse about debt both private and public has perhaps spurred deeper social and individual psychological dynamics in which many people around the world seem to be at times blindly seeking to purify themselves of the “pollution” of debt.  In this effort, government is held up at the avatar or scapegoat for a sometimes personal or motivated effort to get out of a world of “bailouts” and what appears to be economic and political corruption.  While it is convenient for those in the private sector that lived off and helped spur this debt crisis for the focus to shift to government debt, the popularity of the discourse of cutting public debt draws upon the simple ethics of debt repayment and the worries about personal moral pollution and self-disgust that may be stirred up by the economic crisis.  The “qui bono” (who benefits) approach to explaining the stirring and deployment of this morality tale does not explain its popularity, the depth of feeling or the apparent rationale with which governments around the world and various individuals attempt to purge themselves of debt and, in so doing, may make their economic situation worse.

On the level of what’s called “normative ethics” there are three generally recognized classifications of ethical system, deontological (dutiful compliance with ethical rules is good), consequentialist/utilitarian (what produces the most happiness or pleasure overall is good), and virtue ethics (what encourages the development of good characteristics in people is good).  The argument for cutting deficits now is based on both a simplified deontology (the duty of the debtor to the lender is primary) and most strikingly a virtue ethics.  Those who have worried most, or appeared to worry most, about the reaction of bond markets, are making an argument that is premised almost entirely on a virtue ethics:  bond markets, i.e. lenders or buyers of debt, need to be convinced of the virtue of a nation before they buy its debt, i.e. lend it money.  Furthermore the display of this virtue is supposed to forestall or appease the imagined or real retribution of bond markets.

Virtue ethics is not entirely irrelevant to a simplified lender-borrower relationship: the lending relationship is ultimately one that involves decisions about whether someone or some entity will repay, which involves both the borrower’s circumstances and the borrower’s will.  That a borrower is regarded as “virtuous” in the area of repayment of loans is then a key, though not the only ingredient, for determining whether money will be loaned and, if so, at what rate.  Various bond, investment, and credit ratings are modern efforts to assess the “virtue” of borrowers or sellers of debt.  These ratings can be unreliable and have an element of subjective judgment as well as motivated under- or over-rating by the raters but they are an effort to apply a number to and evaluate this type of virtue.

The repeated argument by those preaching fiscal austerity after the crash of 2008 has been that debtor nations must appear to be virtuous borrowers or sellers of debt to avoid punishment by nervous or finicky bond buyers.  For a borrower in a simplified borrower-lender relationship, virtue involves either timely or accelerated repayment of debt or a show of abstemiousness that signals an intention or capacity to do the former.  The latter however can become simple ritual self-laceration, without benefit to the lender other than maintaining a sense of moral or financial superiority.

The implicit model of a virtue ethics is that ethics is a property of actors and their identities rather than a function of rules or actions in the world.  While attaching moral valuation and judgment to the identities of actors themselves is itself highly motivating, it obscures systemic issues, complex histories and interactions.  To spur harmful actions through fear of losing virtue is not an effective financial morality.  Not all of economic “goodness” inheres in actors themselves but in a complex interaction of factors.

Richard Koo, in his description of the long Japanese “lost decade”, sketches out how the focus of individual economic actors (in this case corporations) on repaying debts simultaneously, leads overall to an exacerbation of the economic downturn for the system as a whole.  As, due to a variety of factors, each Japanese corporation focused on its own balance sheet in the period 1997 to the present and attempted to pay down debt rather than invest in productive activity led to slackening demand for services from other companies and therefore economic contraction and increased unemployment.  While in Koo’s description of a “balance sheet recession”, each actor could explain their behavior using a justifiable microeconomic rationality, their behavior was analogous to the pursuit of individual economic virtue implied by the current worldwide drive towards fiscal austerity.

Counter-Austerity:  Deontological Commitment to Addressing Human Needs

The economists and observers of the debate (including myself) who are most appalled by the rush to austerity are generally operating with a different conception of how economics and economies should work.  While those who are counseling austerity start with a rule (deontological ethical systems start with a priori rules) about duty to lenders to repay their loans, much of their argument is based on a virtue ethics, the idea that nations who borrow should demonstrate virtues to lenders to avoid an escalating spiral of debt.  The appearance of debt as a sign of a lack of virtue is as, or more, important than the ethical rule “you must repay your debts” in their arguments.

By contrast those who are pre-disposed to question the logic of fiscal austerity are often starting from an assumption that economies and economics exist to serve widely-shared human and social needs as a primary goal.  While not often discussed explicitly as such, there exists for them a duty by economists to design or steer economic frameworks so that the likelihood that these needs are either directly fulfilled or as a byproduct of economic activity are largely fulfilled is increased.   Starting from a commitment to “needs first” generally leads to favoring government intervention in markets or direct government investment to supplement the work of markets or even, though this has become unfashionable in an era in which markets have been viewed as a panacea, replacing private market activity in areas where it has become entirely dysfunctional.

Those who preach fiscal austerity would counter-argue that their position is about serving human needs better in the long run, because they feel that the inculcation of the virtues of prudence and fiscal discipline will enable prosperity for more people over a period of decades.  This counterargument however depends upon an assumption that markets and the individual relationships of buyer/seller and lender/borrower can manage themselves and produce optimal outcomes without “steering” by governments and the influence of “external” actors to these basic transaction types.  If the unregulated market economy is prone to break down, destroy its own natural basis or shrink for endogenous reasons, the basis for this counter-argument would prove to be illusory.  Koo’s “balance sheet recession” is also an uncomfortable counter-example for this argument.

There is then a clear demarcation between those who reach for fiscal austerity and those who argue against it during this downturn in the area of their preferred meta-ethical systems and specific ethical commitments they endorse.  The deficit “hawks” call upon an ethics of commitment to lenders and a display of virtue to lenders and to the world at large.  Those who are opposed to the austerity campaign point out the human and other damage that would be caused by this effort and renew their call for a economists’ and broader social commitment to fulfilling basic human needs.  For them the display of virtue to lenders is outweighed by the use to which the lent funds will be put.  Furthermore, for them, any economic means should be applied to avert a human catastrophe.

Events Redefine Virtue for Government Borrowers

While this “classic” conflict has been playing out, events in the world have seemed to redefine the virtue of government borrowers, at least temporarily.  It now appears that bond markets are more trusting of debt issued by countries that continue efforts to stimulate their economies, rather than those countries, like Ireland, that have been engaging in efforts to display the virtue of a private borrower.  As Krugman has pointed out, bond ratings for countries that continue to run deficits are at very low levels.  The bond investment company PIMCO has expressed concern about governments cutting their stimulative efforts, inclusive of running more budget deficits.

That this has occurred either temporarily or for a longer term does not erase the conflict of ethical and meta-ethical systems established above.  Economists will continue to be divided by differences in their ethical commitments and the means by which they arrive at the valuation of different economic tools.  However, making these differences a matter of reflection and public discussion may enable more self-reflective consideration of which tools are appropriate and which valuations are best justified.

Addendum:  Where is Utilitarianism in the Deficit Debate?

Economics, especially the dominant neo-classical school has operated largely within the third normative ethical system, consequentialism, of which utilitarianism is the predominant school.  Utilitarianism can have an individualized or a larger social scope:

  1. for the individual, what is good is what maximizes pleasure and minimizes pain
  2. more commonly a utilitarian framework is used by ethicists and macro-economists applied to society as a whole to attempt to “achieve the greatest good for the greatest number”.   Various macro-economic indicators like GDP are efforts to create a numerical utilitarian method of evaluating “the Highest Good” for an entire economy.

While there have been criticisms of  measures like GDP in particular the fact that it hides social inequality and also endorses growth for growth’s sake,  the broad middle of economics continues to use some version of a utilitarian framework by attempting to find measures of social welfare that assign a number to some composite happiness, usually an aggregate of individual “happinesses”.

An argument can be made that critics of fiscal austerity are solidly within the utilitarian tradition, in that they are sensitive to the woes of mass unemployment and marginal employment, and the harms caused by an unsustainable overhang of household financial debt.  If they have made a case using both notions of greater social welfare through deficit spending and also now via continuing “approval” by bond buyers for the bonds of many deficit-spending nations, they would seem to have shown themselves to be “better utilitarians” (and therefore economists) than their deficit hawk opponents.

However, I would argue that while many economic arguments will necessarily take place within a utilitarian evaluative framework, these arguments are by their very nature backwards looking:  utilitarian value judgments are almost always a posteriori or after the fact.  Therefore policy advice must either contain a rule-based or virtue-based component that may derive from a utilitarian argument and analysis but nevertheless requires some a priori assumptions about what is “the Good”.   While confirmed utilitarians and those convinced that all of their beliefs are entirely based on established facts may find the reliance on a priori assumptions suspect these assumptions are absolutely necessary for anybody to act in a policy or business context under the usual or, especially under unusual, conditions of uncertainty.

As an example, to act on climate change or to structure an economy around an agenda to address energy shortages and irreversible environmental damage means to, of necessity, use some form of rule- and duty-based decision-making structure.  The endangerment of pleasures and pains in the future is highly abstract in comparison to the weight of past and present pleasures and pains that are the basis of utilitarian calculations.  It is therefore no accident that among established economists, that James Galbraith and other economists who see economics as primarily an instrument to fulfill human needs, incipiently or explicitly within a rule based ethical framework, have the clearest argument for a future effort to address as yet unknown but extremely probable disasters.  The natural scientific results upon which an argument for decisive action on climate change and oil depletion is based, are most compatible with a deontological commitment to human and planetary welfare, rather than other two major systems for arriving at “the Good”, virtue ethics and utilitarianism.   Why this is so is beyond the scope of this piece.

Much more can be written on the normative and meta-ethical dynamics that underlie social and economic conflicts and debates but this is all for now….

Krugman Describes a Meta-Economic Problem in the Social Security “Debate”

In his “Conscience of a Liberal” blog on the New York Times website today, Paul Krugman calls attention to the inconsistency via which various “deficit hawks” account for the budget for the US Social Security system.  Krugman points out how leaders of the deficit commission appointed by President Obama alternate in an arbitrary way between two ways of accounting for Social Security and any shortfalls related to its finances:

  1. Sometimes it is referred to as a dedicated (payroll) tax which adds to a sequestered social security trust fund from which Social Security benefits are paid.  Complaints by deficit hawks that this will eventually run out of money in an unplanned way (soon) are used as one form of justification for cutting benefits by among other things, raising the retirement age.
  2. At different times, payroll tax revenue is viewed as part of the general federal budget.  The argument is made by deficit hawks that too much is borrowed from Social Security surpluses because of shortfalls in other programs, endangering Social Security.payments in the near term.

Krugman makes the point that you either say that Social Security has a current or near-term surplus or that you can say that it has a current or near-term deficit but you can’t say both.

Krugman during the course of the article appeals to a rule, that might be called either an epistemological or a logical rule:

“But here’s what you can’t legitimately do:  you can’t switch views in midstream..”

I agree with him, but to whom or what is he appealing?  There is no framework “around” economics or economic argumentation, a meta-economics, which would not make this simply an appeal to those who agree with him or to the skies above.

Thus, the notion of an ordered form of argumentation, perhaps even a “scientific” method, which made this inconsistency illegitimate, makes sense.  Economists and folk economists like those who head the deficit commission could at least be “cited” for their inconsistency or illogic.  On the other hand, Krugman and other economists would also be giving up some freedom to make up their own “creative” forms of argumentation, if they were to submit their own argumentation to such a framework.  Within such a framework, one could not continue to support distortions or poor argumentation just because you agree with the underlying sentiment.

Without a meta-economic or more rigid epistemological framework for social scientific argumentation and related political discourse, this type of accusation becomes an ad hominem political attack:  “my opponents are inconsistent (I’m not)”.   Krugman may intend this as well, and I too want to call into question the authority of those who wield power with poor arguments and little accountability.   But I believe such a form of argumentation is not as strong as presenting a clearer, more transparent means for everybody to make their arguments.

Of course, if one side adheres to such a framework and the other side does not, then you have imbalances in forms of argumentation very similar to the current situation.  Some are happy to reduce every issue to a contest of wills or ad hominem verbal blows but then something like the truth and the common good are left out of the picture.    Those who believe in frameworks that make human comity and increased human knowledge and self-knowledge possible, need to point out when such rules, if established, are broken.

The Case for a Metaeconomics Pt. 5: Tracing the Origins of Demand and Economic Preferences

In the previous post in the “Case for a Meta-economics” series, I explored the possibility that the interface between economics and ethics has a significant impact on economic arguments and the division of economics into schools.  Ethics is supposed to contain, develop, and communicate our higher and better selves.  Crucially, though, economics is also supposed to account for the effects of our more basic or amoral drives, for which there are not necessarily traditional ethical justifications.  Economists are tasked to explain how human wishes, no matter how trivial or “primitive”, become economically important and shape economic institutions like money and “demand”.

Neoclassical Economics and Demand

Neoclassical economics, the dominant school of economics in most of the world, assumes that one of the prime drivers of economic activity is “demand” along with its complement “supply”.  Within this paradigm, demand is thought of as the result of the search of individuals and organizations to maximize their “utility” through a rational process of calculation of the relative benefits of one consumption or investment option over another.    Utility is a “black box” of wants and needs which is supposed to remain inscrutable to economists though is best observed by its behavioral effects after the fact:  what maximizes utility is that which compels monetary transactions to occur.  While everybody can imagine and infer what they think constitutes the basics of utility (the satisfaction of recognizable wants), economists are wary of defining what actually drives people to want one product or service over another.  Instead, the argument remains the rather circular and somewhat limited notion that what people want is what they want (to buy).  Like many aspects of neoclassical economics, the notion of “demand” suggests that it is a dynamic force but in its actual measurement it is an outcome rather than the force itself.

While in underdeveloped or pre-consumer societies, demand for essential goods is more likely to “chase after” supply, in affluent societies, supply tends to chase after demand making demand the more powerful of the two main economic entities in neoclassical economics.  Economic success depends, in consumer societies, on being able to figure out what people want or might want then being able to supply those wants at an affordable price.  Occasionally in consumer societies, either a monopolist or a highly successful market leading company (like Apple) can shape to some degree what people should want by creating new appetites and leading in product design; sometimes supply can create its own demand.

Marketing and Demand

While within the “high church” of conventional economics, demand can be represented as a “demand function” or “demand curve“, theories of how demand itself actually arises are pushed outside the main body of theory into fields like marketing or consumer psychology, within which numerous ideas about people’s wishes and how to address them compete.  Neoclassical economic theories of demand therefore have not much to offer businesspeople in the way of guidance about how to figure out what the market wants and need to turn to the diverse and sometimes confusing toolkits of marketing and related social sciences.

Marketing then might be considered the craft and/or science of demand, either assessing its pre-existing form or creating demand by sending messages to potential buyers of a product or service.  Furthermore, more on the supply side, marketing can help in product design and refinement by embarking on an iterative process of improvement by continual communication with existing and potential buyers.  Even though marketing can be credited with many of notable business successes in the last century, marketing, like other business economics disciplines, is not in regular communication with the abstract formulations found in academic economics.

Despite its location outside the “High Church” of neoclassical economics, many human activities critical to the functioning of the economy fall under the rubric of marketing.  So a meta-economics or a more complete economic theory would need to be able to incorporate both the domains of human experience associated with marketing as well as shed some light on the techniques themselves that are used in marketing.  Splitting off marketing as either slightly “sub-rosa” and entirely unproductive or as an art beyond economic theory does this critical domain a disservice.

Keynesianism and Demand

Though John Maynard Keynes did not break decisively with neoclassical economics on all issues, he did formulate theories which suggest that there are qualitative as well as quantitative dimensions to demand.  Keynes suggested in his General Theory, that “animal spirits”, presumably their tone and energy, were key in determining how willing people are to engage in economic activity.  These emotional states kept people in the Great Depression and other economic crises from spending money, when in fact, if people as a group did spend, the economy would recover sooner.  The theory of “animal spirits” is thus linked to another concept revived by Keynes, the paradox of thrift.  Furthermore Keynes pointed to the insufficiencies in overall measurable (aggregate) demand after an economic crisis, pointing to the need by governments to step in to stimulate or substitute for the weakening of private demand after a financial crisis.

While economists since Keynes have been more accepting of his observations about aggregate demand (though these are still disputed by conservative economists who wish to reduce the role of government in management of the economy), his ideas about animal spirits are other qualitative dimensions of demand are sometimes treated as “sui generis” musings of a great mind but not part of what came to be called Keynesian (as well as neo and new Keynesian) theory.  In general Keynesian economics has been characterized overall as “demand-side” rather than “supply-side” economics.  “Supply-side economics“, a now somewhat out-dated term, focuses on whether investors have enough money after taxes to invest in productive assets (therefore “supply”) and is used as a justification for cutting taxes on the wealthy and on businesses.

Wants, Needs and Economics

Attempts to translate the experience of “demand” in terms of utility and utility maximization has presented a problem for the dominant neoclassical economics in that the political actors who help shape economic policy have been unable to take such a distanced view of their own subjective experience of wants and/or needs.   Folk or popular economics of almost every kind must draw in the vernacular to relate economics to lived experience and as I have posited in an earlier post, all schools of economics have to in some way grapple with the interaction of their abstractions with how people feel and think about the economy.  Economics students might think of themselves as “maximizing their utilities” by satisfying their wants but very few others will relate to this language.

The part of English vernacular that addresses the experience of “demand” (and there are close analogues in other languages I know) deals with “wants”, “needs”, and “desires”, most of which are used to describe what presumably is an internal or a social experience of needing and wanting things and experiences.  In addition to these subjective experiences, technically “demand” involves an additional component, the ability and readiness to pay for a good or services that addresses the perceived need or want.

While the collection of human material strivings in “demand” papers over the distinction between wants and needs, the latter distinction has extremely important political economic effects that motivate conflicts between economic schools despite their nominal commitment to the neutral language of “demand”.  Wants or desires are subjectively experienced states but needs are a subset of wants that are socially sanctioned and recognized by others.  Paradoxically “needs” though they contain this additional component are usually more primitive wants without which we would not survive.   So “wishes” are analytically simpler (a wish is a component of a need) but “needs” are a complex combination of phylogenetically and biologically more basic strivings within a social web of relationships.  Needs, which evoke the dependence of children in childhood, imply a web of social interdependence while wants can be ascribed to the individual, self-responsible social “atoms” of neoclassical theory.

Laissez-faire or neoliberal economics tends to emphasize that all of “demand” is individual wants or freely chosen selections from a variety of wishes, which an unregulated market is supposed to supply.  These economists make an exception for national defense and criminal law which they think of as vital social needs, especially in defense of property rights.  Meanwhile Keynesian and leftward economic commentators operate with a both a conception of optional wants and an implicit or explicit concept of individual human and social needs, which most often are being insufficiently served by the market for at least the more vulnerable parts of the population.  In left-of-center economics, there is the implication or statement of social responsibility for partially or completely fulfilling certain basic wants, i.e. needs.  By contrast, neo-liberal economists subscribe in theory to a doctrine of individual responsibility for one’s personal wishes.

An instance of this conflict between economists who conceive of individual needs being primary versus economists who believe that wants are primary is found in the recent conflict between “deficit hawks” and that group of economists that oppose them, mostly from left of center.   The more leftward group of economists and their supporters who oppose the efforts of deficit hawks seem to be operating with an implied socially-validated concept of needs, which their opponents in the US like to call, “entitlements”.  They believe that the moral imperative to care for the needy as well as provide some level of universal social benefits is threatened by the drive to cut deficits at all costs.  For example, James Galbraith has recently stated that the fulfillment of human needs as the ultimate purpose for economics and government fiscal policy in both the US and in Europe.  Other opponents of deficit hawkery might disown the idea that they are operating with a concept of human needs, perhaps to continue to be included in a mainstream economic discourse that is inimical to the idea of needs. In fact, most opponents of immediate action to cut deficits are operating with a political-economic hypothesis that the primary reason that deficit hawks have started their assault on deficits is to undermine government support for needs.  In fact, some deficit hawks have shown inconsistent support for the idea of cutting deficits (by insisting on maintaining tax cuts), apparently tipping their hand that cutting social services is the prime objective of their campaign.

By contrast, deficit hawks suggest that a show of responsibility for one’s wants is required to reassure bond markets or other lenders to the US government by either denying those wants, or it seems, less frequently, raising taxes to pay for the fulfillment of those wants.  Their idea is that the need/want for social services needs to yield (soon) to some form of scarcity, be that a scarcity of tax revenues or a scarcity of the ability of government to run budget deficits.  The troubling aspect of this insistence on an apparent universal rule of individual responsibility and management of scarce resources is that, as mentioned above, the vulnerable are those who are supposed to yield to the principle of scarce resources, while the wealthy (and most of the deficit hawks are personally wealthy) will seemingly keep both their personal wealth (via continued low tax rates) plus the public services that they value and use, including a government that will bailout the well-connected and powerful.

Demand, Sustainability and Growth

Another area of challenge for understanding the current economy as well as some future economy is how such an economy would deal with a net zero material growth state, an economic steady-state.  Most rational observers of the growth of humanity both in terms of number but also in terms of consumption put some hard limit on the size of the human footprint on the world.  Those who assume our continuing propensity to grow exponentially as an immutable fact sometimes turn to idea of the colonizing of other worlds as a means to continue humanity’s current rate of growth and consumption, though how this would happen in physical and biological terms currently resides almost entirely in the realm of science fiction.

Moving simply by successive approximation to a no-growth state from where we now stand however is also unworkable.  The set of tools upon which our current economy would be unsustainable under any conditions because of their dependence on the irreversible conversion of depleting fossil fuels into their constituents some of which additionally undermine the sustainability of the biosphere.  Thus certainly in the next several decades there will and should be robust economic growth in the sector of developing sustainable alternatives in the area of energy as well as industrial production.  Further along in this process, facing the hard choices associated with achieving a steady state economy would seem to be inevitable.

Demand, our wants and needs, is one of the key drivers of our economic system.  If our wants and needs, are, as some claim or imply, rigid and hard-wired in their objectives and intensity, we will be unable to move to a society where most economic activity is focused on either maintenance of material well-being or the development of cultural and non-material products and goals.  If our wants and needs are responsive to (elastic) the encroaching externalities of our ways of consumption and production, then it should be possible for human beings to evolve towards the next stage of our species’ “wild ride” on this planet.  A comparative anthropological perspective indicates that an economy that grows meteorically and then plunges is not necessarily part of our genetic code.  A meta-economic perspective will enable the relevant portions of philosophy, comparative economics and economic anthropology to at least inform such Big Picture theorizing about “what’s next” for humanity.

Needed: A Multi-disciplinary View of “Demand”

I hope the foregoing has suggested to readers that a view of demand as simply a quantitative record of past expenditures and investments or a projection of those numbers into the future compresses what is a more complex and dynamic reality.  I am proposing that a meta-economic framework can bring to bear insights from biology, biophysics, psychology, and philosophy to capture some of the causal factors that drive purchasing and investment behavior in both the private and public sectors.  Additionally such a framework can help explain or at least clarify the existing divides in economic theory and popular economic debates.

The America Speaks Town Hall Pt. 2: Implications for Folk Economics and the Politics of the Deficit Commission

In the first part of this post, I described what I thought were the most important aspects, events and results that emerged from the 7 hour June 26th AmericaSpeaks Townhall which I attended at the Silicon Valley site.  In my account, I attempted to include aspects of the experience that contradicted some of my preconceptions as well as those that confirmed them.  I obviously am a partisan observer, with a clear interest in not allowing budget fears or fear-mongering to reduce the already minimal welfare state that we have in the US as well as with the future-looking projects related to oil independence and climate change which would depend in part on deficit spending.  However, I don’t want to simply reinforce my biases in this account because I learned from the experience without fundamentally reversing my overall view of the intensified campaign against budget deficits at this time.

Two Folk Economic “Layers” at AmericaSpeaks/Deficit Commission

The AmericaSpeaks event is an example of folk economics on two levels, one of them more problematic than the other.  On the one most obvious level, the event itself was organized as a event where ordinary citizens were supposed to apply their values and understanding to the macroeconomic question of reducing the federal budget deficit.  So this was an invitation to engage in folk economics.  As almost everybody is affected by economic decision making, it makes sense to get people involved to try to educate them and get their opinions about these issues.  Also, as I have claimed here, professional economics can never replace folk economics, so formalizing the relationship between folk (or popular) economics and professional economics makes sense.

On the second level, which may be more controversial, AmericaSpeaks was communicating a vision of how the government spends money that corresponds largely to one political/folk economic view of government spending rather than one that is fully in tune with all of the tools of professional economics.  While James K. Galbraith is an economist who is decidedly left of center, he provides in an article in Huffington Post a rather detailed vision of how the deficit commission is overlooking key aspects of how governments that control their own currencies actually spend money and manage deficits; these details are entirely absent from the AmericaSpeaks materials.  Also Paul Krugman, again left of center, points out that the economic framework within which those who prioritize cutting budget deficits work, rests on worries about future events and fears of disapproval in the bond market about the solidity of US government debt for which there are no current signs and attention to which doesn’t seem to help countries like budget-slashing Ireland reduce their interest rates.  Furthermore, the notion that deficit reduction is a primary concern at this time, ignores what many of the leading American macroeconomists are focused on a still anemic American economy with massive private indebtedness.  Trade deficits are also left out of the picture.  Within the world of AmericaSpeaks then, a folk economic vision that ignores much of what concerns professional macroeconomists is presented as the primary economic task of the American people (“Our Budget, Our Economy”).

The most ardent supporters of the AmericaSpeaks townhall or the work of the budget deficit commissions might object that these economists are of a different or outside-the-mainstream political persuasion.  While some of these economists are left of center, the premise of any science and the meta-economics project is that we are looking for the best explanations that account for the broadest and most relevant data-set available no matter their political provenance.  If some economists on the left have a better theory of one phenomenon or another, an economic science should take complete account of their theories rather than cast economic analyses and differences of interpretation as purely a political contest by other means.

The Political-Economic “Frame” and Timing of the Townhall (and the Anti-Deficit Campaign)

Many of the critics of the anti-budget deficit campaigns point out that the organizers of these events and the politicians who are most enthusiastic about cutting deficits are paying attention now to budget deficits rather than when their closest political allies (Republicans like George Bush) were in office.  The American “deficit hawks” seem most worried when someone from the centrist to left leaning Democrat Party has decision-making power , a group which they may feel they have less political influence over, therefore requiring the manufacture of or intensification of  pre-existing fears about deficits to rein in a less secure political ally.  Spending on military adventures and hardware, as well as bailouts demanded by their powerful economic allies are apparently not so troubling to these budget hawks, even if, in particular, those same bailouts are now ideological targets for Republicans after the fact.

The issue of timing of the budget deficit scare is not only political but economic.  Most explanations of the 2008-9 economic crisis emphasize the role of private debt both consumer and commercial which helped inflate the asset bubble that punctured in 2008.  Some Wall Street firms were leveraged 30 to 1 (had 30 times more debt than assets) while consumers and homeowners have never been so indebted in the US and in some other countries.  A similar phenomenon occurred before the Great Depression, when a similar debt-fueled asset bubble burst.  If those in the private sector who were co-responsible for the downfall or at least benefited greatly during the asset bubble and during its bailout, might have a vested interest in distracting from the bad debts and mishandling of debt in the private sector by focusing on public debt as the prime evil in our economy.

The counter-argument that is mustered against this line of thought common mostly on the political Right and in the now-opposition Republican Party is that quasi-public agencies like Fannie Mae and Freddie Mac, as well as pro-homeownership policies by the Bush and other Administrations distorted the operation of free markets which would never have allowed so much bad debt to accumulate.  While there is some plausibility to the idea that the presence of a government that was willing to bailout firms increased risk-taking, to “blame” government guarantees alone overlooks the active and aggressive means that private businesses leveraged themselves up and encouraged government to look the other way.  Furthermore, these objections to government guarantees were, for the most part, not forthcoming from Republicans when powerful corporate donors were reaping profits from favorable policies.  Military spending, wars and tax cuts for the rich were also not part of the concerns of these political deficit hawks in general, all of which have increased the federal budget deficit.

Scapegoating Gullible Politicians, Government and Public Budget Deficits

While Republicans are favoring a focus on public debt, the role of private debt either within the financial system, corporate America or of the American people as a whole, falls almost entirely out of the framework set in motion by the focus on public debt and fiscal deficits.   The formulation of the AmericaSpeaks townhall “Our Budget, Our Economy” suggests that contrary to the economic wisdom of the last thirty years, suddenly government budgeting forms the economy, conveniently when that economy is deeply troubled;  in the dominant market fundamentalist ideology beloved by supporters of budget cuts, the government is usually pictured as the impediment to “The Economy”.  Nowhere in the AmericaSpeaks proceedings was the role of private debt even mentioned and furthermore, and perhaps gleefully, the two Republican Senators (Domenici and Gregg) were attempting to re-write history by suggesting that our current economic situation is due to public deficits when only the most ideologically motivated economists could find a link between public budget deficits and the economic downturn of 2008-9.

Furthermore and most damagingly these efforts are made in a society with a very poor public information system/news media, a short memory, and a public discourse that is biased towards stories that emphasize the positive and tend to shy away from the negative aspects of life.  There is consequently a tendency to “ball together” all negatives in one location, be it demonic forces or, more recently the government.  These efforts to conflate all “evils” (debt, profligacy, and government together) are part of a political move that the rather credulous Obama Administration has allowed itself to be maneuvered into.   The public’s grasp of economics, let alone politicians’ grasp, cannot in the context be expected to be able to make distinctions between public and private debt or their dynamic roles in the economy.  The government can be used as a whipping boy or a sacrificial lamb, for these ills especially in the wake of neoliberalism, the ideology that maintains that markets represent economic virtue and government, economic vice.

It would seem that government and the party that believes to some degree in governing in the US, the Democrats, have been placed in the position of being made responsible for the  negatives in the American economy by the push to blame public debt and deficits for most of societies’ ills.  Why they would allow themselves to be put in this position is an interesting question, which I would partly attribute to a lack of understanding of both the deeper cultural and even psychological dynamics that animate American politics as well as a lack of a deep understanding of the economic dynamics of the Great Crash of 2008.   Republicans have been only too willing, including Sens. Gregg and Domenici, to entrap these compliant Democrats with falsehoods or implied false connections between budget deficits and our current economic distress.

Meta-economics, Folk Economics and Ethics

Unfortunately I have not yet had the time to make a formal introduction of one of the key rationales for building a meta-economics: exploring in a systematic way the interaction of certain aspects of philosophical and practical ethics with economics.  The timeliness of the budget issue and the material from the AmericaSpeaks townhall should not bias this discussion in this context:  I will write a more inclusive introduction of the topic shortly.

Nevertheless one of the entry points for ethical concerns in economics has been folk or popular economics, where people attempt to blend their own personal ethical concerns or viewpoint with their view of how the economy does or should work.  As an example of organized folk economics, the AmericaSpeaks “Our Budget, Our Economy” meetings attempted to link ethical concerns to its mission to mobilize people to become involved in the budget deficit cutting discussion.

While I am supportive of developing an economics that is responsive to ethical concerns, within “Our Budget, Our Economy” as I highlighted in part one, these concerns were introduced in a way that activated moral conflicts in a manipulative way, violating some precepts of what might be called a scientific economics, especially as regards public spending.  Most troubling was the first “Values” polarity on one of the worksheets where caring for the current generation was played off against caring for future generations.  There are areas of the economy (climate change and fossil fuel use) where there is quite a stark conflict between the interests of the current generation and future generations but in the area of budget deficits at the current conjuncture this polarity is not a guide to meaningful action (for instance the proposal favored by many deficit hawks to raise the age of eligibility for Social Security due to budget concerns would mean that older workers would compete longer for jobs with younger workers).

The implication in this polarity is that concern for future generations is equated with cutting deficits and therefore denying oneself services, while presumably, supplying similar levels of social services is considered to be anti-thetical to this highest ethical goal.  An elaborate, potentially fraudulent, misappropriation of people’s more noble ethical concerns were thus mobilized for those who did not have either sufficient economic instinct or economic scientific background to note this false choice.   Put another way, if the current generations are immiserated future generations aren’t put at advantage or may not come into being in the first place.

Furthermore, there is a similar and quite sinister political sleight of hand that recalls the obscuring of public and private debt in the deficit discussion as a whole.  Individuals went into private debt in the last two decades to either supplement meager earnings (or earnings that were assessed as too meager) or sometimes to indulge in various luxuries.  Financial firms went deeply into debt in pursuit of very high profit margins.  By contrast most of what seniors and poor people use social insurance for (SS, Medicare, Medicaid) are for the absolute bare necessities and the payments are often insufficient for that.   The period of the 90’s and 00’s could be viewed by some luckier people as a time of foolish excess in their lives for which they feel the need to repent in some way.  The current form of expiation for these sins is viewed as concern about budget deficits, which is a political and psychological “displacement” from looking at excessive debt in the financial sector and in people’s personal budgets.

By contrast resolving our current PRIVATE indebtedness via growing employment in productive industries and solid investment strategies is difficult, complex and requires a large-scale re-birth and restructuring of the American economy.  This will probably involve confrontations with powerful interest groups, a difficult passage from to investment in paper assets to investment in productive assets, as well as genuine self-searching about one’s own values as they apply in the private economy.

Potential Political Uses of the “Our Budget, Our Economy” Townhall

As Catherine Lukensmeyer, the CEO of AmericaSpeaks reminded participants, the funders have specific interests in sponsoring this townhall that seem to go beyond a mere opinion poll of the American people.  For one, she mentioned that they had a particular interest in the high quality video of tables working together on the budget deficit problem.

  1. The Townhall as an Opinion Poll – Deficit obsessives would not have gotten too much validation from the results of the opinion poll.  The assembled group was in general favorable towards more stimulus even if that raised the deficit.   A majority favored more progressive tax policies rather than flat, across-the-board taxes.   There was however some support for increasing the age of eligibility for Social Security.  The enthusiasm for a carbon tax and a financial transactions tax were strong.  However, motivated interpreters of the event could distort these messages or selectively attend to only those portions that fit the deficit cutting mantra that targets social spending rather than tax cuts for the wealthy.  Alarmingly, Alice Rivlin who sits on both the “Debt Reduction Task Force” and the “National Commission on Fiscal Responsibility” (the latter being Obama’s bi-partisan deficit commission), commented on the AmericaSpeaks broadcast disapprovingly that participants had shown most enthusiasm for taxing the rich.   More alarming than Rivlin’s views is the sense of entitlement she seemed to have felt to second-guess and stand in judgement of what were a set of multiple choice questions offered by AmericaSpeaks.  The potential for Rivlin’s preferred “folk economics” to override the poll results within the cloistered commissions is then made more vivid.
  2. The Townhall as Colorful Backdrop – The video footage from the event could be used as a backdrop against which the Commission could continue on its deliberation without reference to the poll results or critical comments like mine and those of others about the content and course of deficit cutting efforts.
  3. The Townhall as Grassroots “Civic” Rubberstamp – Similar to being used as a backdrop, interpreters of the event, like Lukensmeyer, could pour the data and results from the event into a form which adds “vox populi” to the conclusions and gives a populist flair to the decidedly elite Deficit Commission.  Below in testimony to the Commission last week, Lukensmeyer constructs an interesting rhetorical chain that condemns partisanship and Washington business-as-usual while, in the end, reinforcing the sanctity of the task of cutting budget deficits as a prime directive and implying that “the people are ready to cut deficits”.
  4. The Townhall as Sanctification of Deficit Cutting – Re-interpreting the same testimony of Lukensmeyer as in “3” above, in a slightly loonier version, the “people’s” concern about budget deficits could be made a sacred cow which could become a (misinterpreted) touchstone of the Commission.
  5. The Townhall as Sanctifying Bipartisanship — Lukensmeyer in the video below portrays like so many political actors in the last few years the importance of bipartisanship; claiming that the Townhall shows that both sides can work together unlike in Washington.  If however one Party is simply trying to damage the other Party and a majority of Americans, what is the moral basis of bipartisanship?

A posting on Youtube by the White House of public hearings by the President’s Deficit Commission. Lukensmeyer’s testimony starts approximately at 35 minutes in.  An interesting effect of the controversy surrounding the deficit commission, including perhaps the firestorm ignited by Co-chair Simpson’s remarks on film has been the posting of approximately 7 hours of testimony on Youtube.  The activities of the Deficit Commission are potential political dynamite.

The Misuse of Civic and Individual Virtue

In the end, my take on the “Our Budget, Our Economy” Townhall and by extension the work of the budget deficit commissions as evidenced so far is that civic and individual virtue is being called upon to solve the wrong problem at the wrong time.  Some people, rightly, would like to live a more virtuous life and not to rely on debt as much in their own businesses and lives.  However, at this time, to repay debts, we must have an economy that generates income and jobs.

Additionally, Americans and those in other developed nations might plausibly and beneficially sacrifice some of their more fleeting pleasures for forward-looking causes like a more sustainable economy and energy-use system.  The Townhall and anti-deficit campaigners are looking to opportunistically collect these sentiments and impulses and yoke them to a cause that does the economy and the long-run deficit little or no good and risks doing the economy some serious long-term damage.   I hope to establish here at Meta-economics that virtue that is ignorant of science or our best organized knowledge is, in the privileged and powerful, no virtue at all.

The America Speaks Budget Deficit “Townhall” of June 26: Folk Economics In Action Pt. 1

I have already reported here on the current rush to cut public budget deficits in the US as well as elsewhere in the developed world but this effort is not just an economic abstraction or future possibility:  here in the US, the Senate has just voted down extensions of unemployment and other social benefits in part on budget fears.  Three foundations, led by the budget-deficit obsessed Peterson Foundation, hired the non-profit AmericaSpeaks to organize one of its “21st Century Townhalls” on the topic “Our Budget, Our Economy” which was supposed to collect “America’s” views on budget deficits and federal spending.  Besides the Peterson Foundation, the John D. and Catherine T. MacArthur Foundation and the Kellogg Foundation lent their credibility and contributed funds to this event as well.

Having heard about these meetings and concerned that a biased sample or biased views on deficits and deficit spending were being promoted there, I decided to show up to the local meeting for Silicon Valley to be held in the conference room of a large law firm located in East Palo Alto.  My own leanings within folk economics may already be obvious to readers of this and my other blog:  I have already been convinced that deficit spending is a necessary evil not only now during the deepest recession since WWII but also on longer term projects like carbon mitigation and developing oil-independent transport infrastructure, until such time that raising taxes will no longer hurt economic recovery.   However I will attempt here to provide an account that is as descriptive as possible and avoids simply a confirmation of my biases.  Others who have attended and/or analyzed these forums have presented views that reinforce what is largely my own view of budget deficit concern and hysteria (Dean Baker, Digby, Richard Eskow, Dave Dayen at Firedoglake).

Account of the Townhall

Given my prejudices, I went in with the preconception that this was going to be an event where the deck had been stacked in favor of cutting spending and where participants had been culled to attempt to “bias the sample”.  I didn’t pre-register and showed up at the swank offices of this Silicon Valley law firm early on Saturday morning.  I soon learned that “America Speaks” is an operation that attempts to organize massive simultaneous discussion/townhall events connected by a video feed from a central location.  Just from a pure social science point of view these mass events cannot be scientific because they involve a self-selecting subgroup of people, like myself, who are willing to spend 6 hours of their time in a room discussing and opining about an issue.   While I was expecting the “America Speaks” folk to look like Young Republicans they appeared to be a demographically diverse bunch of employees, permanent or temporary of this non-profit that organizes these meetings.

About 150 of us were seated at tables of approximately 10 participants with an American Speaks facilitator at each table, who I am guessing was paid, and a volunteer participant sitting at a laptop who was the table’s secretary.   We were handed a packet of materials which included the budget analysis and the agenda for the day.  A representative of the local sponsor of the event Joint Venture Silicon Valley stood up and told us we looked like a cross section of Silicon Valley which was one of a number of strategic falsehoods uttered at the event.  The crowd was obviously much whiter and older than Silicon Valley by far, with an under representation of Asian and Latino residents.  A large screen with a video projector soon became the focus of the meeting.  In the room, there were also a professional soundman and a professional video crew of two who were capturing the interactions at tables.

This is AmericaSpeaks’ brief summary video of the proceedings at the AmericaSpeaks event.

The focus then turned to a broadcast via the video projector and sound system, apparently over the Internet because the picture and sound were sometimes not well synchronized, from the main location in Philadelphia where the two leaders of the event from America Speaks, founder and CEO, Carolyn Lukensmeyer and a man whose name escapes me, introduced first the funders of the event and the ground rules.  There was then a parade of speakers from both the funders of the event and the government sponsored deficit commissions who in various ways intoned the importance of this event.  There was an interesting and rather jarring comment that Lukensmeyer made that the video crews were recording the event to serve the needs of the events’ funders, which seemed to detract from the ostensible public, quasi-governmental purpose of the event.  We were given radio frequency response pads with which we were to indicate our answers to demographic then opinion questions, the results of which were within seconds registered from the 3500 participants around the country.

While I was expecting pure budget worry/hysteria to be ladled out by the speakers, there were a few deviations from this “line” that I think were worth noting:  Lukensmeyer and David M. Walker, the CEO of the Peterson Foundation were careful to note that the economy was in a deep recession and that raising taxes and cutting spending now MIGHT not be advisable.   This acknowledgement of some form of Keynesian wisdom at least as regards deep recessions was also reflected in a few questions at the beginning about current economic conditions.   In those questions the assembled participants showed themselves at least to be “crisis Keynesians”  with a plurality of 32% “supportive” and 19% “somewhat supportive” of spending on stimulus even if it raised the deficit (11% were “neutral”, 12% “somewhat unsupportive” and 26% “unsupportive”).   A majority of 61% thought the government should do more to strengthen the economy, 14% “about the same”, and 25% “less”.  Those critical of the enterprise may well view these statements and three brief questions as simply a “fig-leaf” for an enterprise that may help cast the US and the world into a deeper recession and/or increase social inequality and poverty.  Others may see that even these well-financed activists for cutting spending acknowledge the truth of weak aggregate demand in the recession.

Reinforcing the fears of those critical of the enterprise were the utterances of the two sitting Republican Senators who offered welcoming messages on the video feed, Judd Gregg and Pete Domenici.  Gregg implied and Domenici stated that budget deficits had CAUSED our current economic situation.  When Domenici spoke what I consider to be a falsehood, I could not contain myself and said “False” and was reminded by the table moderator that “everybody needs to have their turn”.   Democratic Senator Dorgan and Rep. Shaka Fatah did not offer anything remarkable that changed the framing of the discourse laid down by Lukensmeyer and the representatives of the three sponsoring foundations.

The “Values” Section Reinforces a Problematic “Frame”

In an acknowledgement that values play a role in economic decision making, AmericaSpeaks forced participants to choose between three choices, at least two of which were designed in a manner that reinforced a highly problematic “frame” for the issue.  These choices were introduced to us as a prelude to the “tough choices” that we would be engaging in in the second half of the event.  The first seven point scale asked us to choose between “Taking care of the current generation” (“1”) and between “Taking care of future generations” (“7”).  Contained within this choice is the set of assumptions of the deficit hawks that spending now endangers future generations and therefore engaging with it “forced” the participants to accept the framework that current and future generations were competing with each other over a fixed pot of money.  Most economists would not accept the view of the economy contained within this choice, seeing “flows” in the economy as being as important as “stocks” (stores of value), though some of these would be more or less concerned about the effect of government budget deficits.    Derived from this one would expect the economically informed or intuitive folk economists to select choice “4” to deny either side of this false choice and in fact a plurality of 42% of the participants selected this choice, while 22% selected “5” and 15% “6” biasing the distribution of responses towards the ethically validated “caring for future generations” that also is the argument which many deficit hawks claim is the result of cutting social spending.

The second “Values” forced choice was somewhat less controversial in that it asked whether the burden of reducing the deficit should be shared “equally” (choice “1”) or greater burden for reducing the deficit should be placed on the “those that have more ability or capacity” (choice “7”).  Here most elected to remain with the current system of progressive taxation with choice “5” garnering 20%, “6” 24%, and “7” 20%.   The problematic element here is that the Values section was introduced as “What are the core values that should guide our decisions about our country’s fiscal future”, which might include running budget deficits into the future or increasing them.  The second choice, in an ideological manner narrows the choice to “reducing the budget deficit” from “fiscal future,” a much broader category.

The final of three choices also presented in simplified terms what is a more complicated political, ethical and fiscal reality. The final choice was between “1” “The government’s responsibility to take care of the most vulnerable people and “7” “Individual responsibility to take care of one’s self”.  While this choice pretty much reproduces the American political liberal-conservative divide, it ignores the idea of government delivered services for “everybody”.  Additionally it suggests that the network of social responsibilities by individuals that make up “government” are the opposite of “caring for oneself”.   While the latter interpretation may seem tendentious, the political choice between offering universal benefits (Social Security, Medicare, single-payer healthcare) or need-based benefits (welfare, Medicaid) has very serious ramifications for the efficiency, fiscal impact, and political durability of social service programs.  The response to this question was the most muddled though slightly biased towards government care of the neediest (“1” 13%, “2” 18%, “3” 15% “4” 21%, “5” 12%, “6” 13%, and “7” 8%).

Tough Fiscal Choices Combined with Political Choices

Having “biased the sample” in a manner that might have appeared subtle to those who were not already wary of the agenda of the organizers of the event, the bulk of the time was spent in an exercise where the participants were to deliberate among themselves and make individual decisions about 42 options with regard to either cutting spending or raising taxes to closing the presumed budget deficit in 2025 by $1.2 trillion.

Controversially, and others have commented on this already, the accounting framework within which the Deficit Commission is operating, lets the Social Security budget, a program that is projected to run without incurring any deficits  until 2037 unless it is used as a slush fund for to make up for revenue shortfalls (tax cuts) in other categories, flow into the general ledger.  This is the preferred schema of the deficit hawks, who seem to want to “smear” Social Security with as much of the “fault” for budget deficits as possible.  The AmericaSpeaks exercise was structured this way as well, with a simple ledger with “spending” on one side and “revenues” on the other.

The booklet that was issued also had a page within which “Approaches to Changing the Health Care System” were outlined among which was “Single Payer”.  There were no action items on this page and Lukensmeyer skimmed over this to go on to the “forced choice” action items that involved either cuts or no change to spending or increases in revenue via taxation.  We were additionally allowed to submit our own options via the computer and notetaker at each table and apparently enough tables reinserted “single payer” as an option for it to be mentioned by Lukensmeyer in her wrap up speech.  According to most assessments of most analysts that healthcare costs are the underlying driver for long-term deficits; the fact that government supervised universal health care systems with cost controls (single-payer and all-payer), which in other countries have yielded equivalent or better health outcomes with 50-65% of US expenditures, were taken off the table undermines the seriousness of both the AmericaSpeaks and the budget deficit commission proceedings.  While the appearance of “pluralism” apparently was vital to AmericaSpeaks its leaders might be concerned about angering its funders, at least one of which is no fan of expanded government services and regulation.

Within then the deficit-hawk-defined framework with pluralistic trappings, the participants still remained surprisingly resistant to slashing social spending in favor of raising taxes on the wealthy.  The results of the forced choice poll of the 3500 participants regarding health care spending in existing programs were a plurality for “no change” 38% with 27% for cutting healthcare spending by 5%, 16% for cutting spending by 10% and 19% for cutting spending by 15%.   There were for Social Security a wide range of choices and here the deficit hawks won at least one talking point where 52% said that the age for full benefits should be raised to 69 but 85% said that more of the income of high earners should be subject to SS taxes by moving eligibility up to 90% of total earnings, while 23% said there should be no change.  A slight plurality in non-defense spending said it should not be changed (32%), while 51% said defense spending should be lowered by 15% with an additional 34% saying it should be lowered by lesser amounts.

In the area of taxation there were three units:  change of existing taxes, reform of the tax code and new taxes.  Participants had to choose between changing existing taxes and a set of pre-defined reforms of the tax code that would supposedly increase its efficiency.  As none of us at our table were tax lawyers or accountants and the 10 reforms of the tax code could have contained hidden agendas, I elected to choose the existing tax option where I could pick and choose.  In the “Raise Existing Taxes” bracket, the group could choose more than one or “no change”.  44% chose “no change” while 68% (some must have cheated) chose a 5% millionaire’s tax, 48% chose a 20% marginal tax increase in the top two tax brackets and 18% chose a 10% marginal incrase in those brackets.  48% chose raising the taxes on capital gains and dividends for those in the highest tax brackets by 5% and 59% chose to raise the top corporate income tax from 35% to 40%.  On the other hand 20% chose to raise everyone’s taxes by 10% of existing tax rates and 8% chose to raise taxes on everyone’s incomes by 20%.

In “Reduce Deductions and Credits”, 51% elected to limit corporate accelerated depreciation for equipment purchases, 45% elected “no change”.   It is not clear from the results how many elected to “Reform the Tax Code” via the 10 measures suggested though the read out I have states that 50% elected “No change”.

Finally, in “Create New Taxes”  a whopping 64% favored a carbon tax while 61% favored a securities transaction tax.  A 5% V.A.T. (national sales tax) polled 27% while 35% elected “No change”.  Finally in additional options, enough tables suggested reducing defense spending by more than 15%, remove the limit on earnings subject to Social Security payroll tax, reforming the tax code to just a flat tax, and the aforementioned single-payer healthcare system to be announced at the end of the event by Lukensmeyer.

About My Table

Finally, I want to end this account of the Townhall by describing how things worked out at my table.  In general, despite my misgivings about the framework and the attempts to bias the results, I enjoyed interacting with the good people at the table where I would say the median age was probably 55-60.  Most of us were probably left of center, though one of us seemed to be troubled by the willingness of the people at the table to agree to essentially no change in spending with the exception of cutting military spending and to raise taxes mostly on the rich.  Our secretary was wearing a pro-single-payer tee-shirt and she and another member of the table had heard about the event through the liberal-left action group  There were no Tea Party members at our table and even that one person who seemed caught up in the discourse of self-sacrifice and benefit cuts, was seemingly a liberal in her interests.  There was one fellow who had his own public-access TV show and was prone to entering into quasi-rants that were slightly off-topic, though he didn’t succeed in derailing the overall discussion, in part due to the intervention of the table leader.  Most decisions at the table about individual measures were made on a 6 out of 10 vote, despite what appeared to be general commonalities of interest and orientation.  If we had worked harder together on individual issues, we might have come to more of a consensus.

The good feeling of working together with civic-minded people may have been part of the point of this whole townhall, a point that may have, as well, its political uses given the structure of the event and its sponsors.  I will continue my analysis of this and other meta-economic issues raised by “Our Budget, Our Economy” in the next post.