Reform and Recovery - A Word of Caution from Keynes

From John Maynard Keynes's Open Letter to President Roosevelt

"You are engaged on a double task, Recovery and Reform;--recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old "spoils system" have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once."

Health Reform and the Reconciliation Process

Washington was buzzing Friday with news that health care reform would likely be pushed through the Senate this Fall during the reconciliation process, making it immune to the risk of filibuster. Normally, the famously "collegial" Senate has sensibilities that are far too delicate to countenance interrupting a given Senator when he or she is speaking. To close debate on a bill, 60 out of 100 Senators must vote for cloture. The end result of this procedural rule is that any given bill actually needs 60 votes to pass, not 51, so long as some Senator cares enough to filibuster it*. Filibustering is good insofar as it requires Senators to produce a more bipartisan bill. However, it opens the possibility that the minority will be able to dictate to the majority in a variety of occasions. The House does not have this rule.

However, budget bills can be submitted as "reconciliation bills", which cannot be filibustered. A reconciliation budget will specify certain legislative committees that need to bring certain pieces of legislation into alignment with the budget bill. So for example, this year's budget bill may say "we will spend X amount of money on health care", and specify that the committee that deals with health care bring the law in line with the spending requirements. These changes in health care law will then be passed without the risk of filibuster as well. This means that health care reform may be passed this year with 51 votes (which the Democrats easily have), rather than 60 (which they can't count on). It may come as a surprise to most Americans that this is even a major piece of news - isn't the majority always supposed to rule? Yes... except in the United States Senate.

Republicans are predictably suggesting that this is heavy handed and inappropriate. Why is this response predictable? Because it's exactly how the Democrats responded when the Republicans used the reconciliation process to push through the Bush tax cuts.... and most of Clinton's budgets... and most of Reagan's budgets. The false outrage over the reconciliation process is old hat in Washington. I personally have no problem with the Democrats using the reconciliation process - I wouldn't mind seeing filibusters eliminated from the Senate entirely. They have some moderating benefits, but they are inherently undemocratic. Republicans shouldn't be ashamed for using them to pass tax cuts under Bush, and they shouldn't be outraged that Democrats are using them now. But let's get past all this... why do I start by quoting a note of caution that Keynes offered to Roosevelt in the 1930s?

Reform and Recovery

The reconciliation process essentially guarantees that we will see some sort of health care reform this year. It may be a monumental overhaul, or it may be a first step towards a monumental overhaul. Right now we don't know. Health care reform is desperately needed in this country, no matter what side of the aisle you're on. We pay far more for the care we receive than any other country, and tens of millions of Americans don't have any health insurance. Higher costs and lower coverage are an explosive combination. These rising health care costs are also a burden on U.S. businesses who provide most of the coverage in the U.S.. Whatever the failings of the health care systems of our peer nations, they have been more successful at keeping costs down, which means that their businesses can operate that much more efficiently than ours can. Health care reform is unambiguously an imperative right now.

But another imperative is recovery from the current recession. Despite the upbeat talk of President Obama and Fed Chair Bernanke recently, most analysts think that we have not bottomed out yet, and when we do the recovery will be drawn out, rather than rapid. The ubiquitous Depression analogies aren't made to scare people, but they are made for a reason - this downturn will end up being substantial, and like the Depression there is no real prospect that the recovery will be swift. Those who write off double digit unemployment are fooling themselves. The "real economy" hasn't even bottomed out yet, and unemployment won't stop rising until well after the "real economy" has reached it's trough and started climbing again for at least a couple quarters.

Many people see the problem as steering deftly between the Scylla of a broken health care system and the Charybdis of a once (more likely twice) in a lifetime economic downturn. I think this understanding of the situation is incorrect. Health care is obviously a problem in this country - but is it a problem that throws millions out of work in a matter of months? Is it a problem that destroys a third of a family's savings? Is it a problem that will grow exponentially worse if it is allowed to fester for another year or two or three? No. If we are still at the bottom of this hole in 2011 or 2012, history will remember this as the Second Great Depression, and the future prospects of capitalism will truly be in jeopardy. If we maintain the current health care system through 2011 or 2012, how will history remember us? Perhaps as lazy. Perhaps that we missed an opportunity. Perhaps even that we are uncaring and primitive. It will probably look at us the same way that we look back to the sluggish adoption of Social Security and unemployment insurance in this country; unnecessarily slow, but since the change was inevitable, the delay is ultimately just remembered as an artifact of history. We have had somewhere around 40 to 50 million uninsured for years. It is a burden and it is a crisis, but that crisis clearly lacks the immediacy or urgency of the economic crisis.

We did elect Obama for a double task: reform and recovery. But his mandate for reform and recovery doesn't mean that both need to be done within ten months of taking office.

What is to be done?

I, like the vast majority of Americans, am suspicious of what's called a "single payer", public health insurance system. Thankfully, Barack Obama and the United States Congress also seem to be wary of such a course. We know that the market is too efficient to completely abandon. But there are problems that public policy can help to address. While Americans shouldn't be required to purchase government health care, we can think about making some sort of subsidized public insurance available to the 50 million people who are uninsured. The externalities of public health may justify mandating health insurance coverage, either from a public or private source - much like many states already do with car insurance. We can think about eliminating the tax privileges currently afforded to employer provided health benefits, which encourage sub-optimal over-consumption of health care and hide the true costs of care. We can imagine the benefits of a system of electronic health records, and we can conceive a potential role for government in jump-starting this process. There is a lot we can potentially do, but there are no silver bullets. I think this suggests that we act, but also that we discuss and deliberate. The "experts" have discussed our options for years - at least since the aborted attempt at health care reform spearheaded by the current Secretary of State in 1993. But our elected representatives have not had a real debate on the finer points of health reform, probably since that debate on the Clinton plan fifteen years ago.

If we don't act immediately to address the economic crisis, we could easily slip into a cycle of deflation, rising debt burdens, rising unemployment, and further deflation. A moment of hesitation could make this recession much worse. Can we say the same for health reform? Of course not? A moment's hesitation - even a year's hesitation, or two year's hesitation will probably find us about where we are today: with a health care system that could be vastly improved on a number of measures, but that generally keeps Americans healthy. What would a rush to reform health care risk? It risks leaving us with an equally poorly conceived system that we're likely to be stuck with for years or even decades to come.

I will note, this is not meant to suggest that there is no risk associated with rushing a program of economic recovery. Hindsight will certainly show us that there were major problems with TARP, TALF, ARRA, and every other "rescue" that's been rolled out since the summer of 2008. We will pay a price for these problems. But I would argue that these problems are far outweighed by the problems that would have emerged if we had waited longer to do something. I think the risks are flipped when it comes to reforms in general, and health care reforms in particular. Prudence and careful consideration will pay off. Obama should not rush into this (nor should he rush into education reform, finance regulatory reform, etc. etc.).

*The Washington buzz of Tuesday, the 28th (which absolutely swamps the events of last Friday in overal buzziness) largely negates the buzz on reconciliation of Friday, the 24th. Republican Senator Arlen Specter announced that he is changing his affiliation to Democratic, virtually assuring that by the Fall (when Al Franken will in all likelihood be seated), the Democrats will have a filibuster-proof majority anyway.

Four Reasons Why the Torturers Must Be Prosecuted

I agree completely with Evan that the torturing of prisoners that went on during the Bush administration was unambiguously criminal, and that the Justice Department needs to charge somebody with these acts, even if the burden of proof may represent a steep uphill battle. The torture of a few al Qaeda operatives is important because it violates U.S. and international law, but it's not important for that reason alone. I'm confident that the law is violated all the time - sometimes flagrantly, sometimes accidentally - and not all of these infractions merit public indignation over whether the Justice Department decides to prosecute. So why this time?

- First, because this crime is uniquely heinous. As Christopher Hitchens has said, "It used to be in the press you remember people would say that it simulates the feeling of drowning. You've read that I'm sure. In fact it doesn't simulate it at all in fact you are being drowned." There is a reason that both the Republican and the Democratic candidate for president this Fall came out strongly against torture, and it had less to do with McCain's war experience than it did with the fundamental incongruity of torture with modern society.

- Second, because this is not just a legal violation - it as a constitutional violation as well. While some of the Bill of Rights protections of criminals arguably do not apply to prisoners of war, and those who are tried by military tribunals, the injunction against cruel and unusual punishments has no such distinction. The numerous protections guaranteed by the fifth amendment are qualified by a very vital loophole that the Bush administration has ably exploited: "No person shall be held to answer for any capital, or otherwise infamous crime, unless on a presentment or indictment of a Grand Jury, except in cases arising in the land or naval forces, or in the Militia, when in actual service in time of War or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation." The eighth amendment, for what should be obvious reasons, includes no such qualification: "Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted."

- Third, and quite simply, the Bush administration has to be held accountable for something with respect to the prosecution of the war on terror and the Iraq War. History will judge the American people to be as complicit with the Bush as the American people were found to be with Jackson's Trail of Tears or FDR's internment camps if they do nothing to right this wrong. The specific points of the Patriot Act, the War on Terror, the Iraq War, the Plame Affair, extraditions, Guantanamo Bay, Abu Gharib, etc. can certainly be debated by reasonable people, and several of these cases have already been tried. Not all critiques may end up being legitimate critiques (I've agreed with the administration on a few of these concerns. For example, I'm a strong supporter of a vigorous War on Terror, and I don't think there's anything wrong with having a prison at Guantanamo, so long as the proceedings there are legal). This third point is therefore not meant to be a thoughtless, blanket indictment of the Bush administration. Instead, it is a recognition that life in America and abroad was radically different between September 11th, 2001, and January 20th, 2009. Some of it was handled quite well, and some of it was handled not as well. But we cannot abandon an evaluation of these years in an effort to "move forward". We can't move forward with confidence without knowing where we may have misstepped in the path. Obama's justification for failing to prosecute for these crimes is completely wrong-headed. If we don't grapple with what was done we have no road map with which we can move forward.

- Fourth, and by far the most important, we must prosecute as a defense against fascist tendencies. I have been enormously critical of news outlets that apply labels like "fascist" or "socialist" to President Obama. That kind of hyperbole is incredibly destructive. So why do I use this word now? It is because I'm concerned about letting the mindset of fascism take root in this country. Allow me to explain my distinction: it is my opinion that the Iraq War was aggressive and unprovoked - that we should have focused our energies on the War on Terror, which we actually had cause to prosecute. Despite my strong disagreement with Bush on the Iraq war, I don't think the war had any tendency towards fascism at all. Bush made a case to the people. He made a case to the international community. He had allies. He got the approval of Congress. A reasonable person could say that he didn't intentionally and recklessly abandon international law. In other words, the Iraq War may have been ill-advised, inappropriate, and perhaps even illegal: but it was done in broad daylight, it was not executed by personal fiat, and it was prosecuted in line with the Constitution. It was therefore not fascist. The same is true of the stimulus package and the TARP program. I'm infuriated when these things are called "fascist", not just because I agree with their necessity, but also because the critics ignore the clear consistency of the method of passing the stimulus package and the TARP with the liberal political tradition and democratic principles. No such consistency exists for these acts of torture, and while they may not be fascist themselves, they represent "fascist tendencies". Fascism is about method, not policy. A "benevolent dictator" could implement the same programs that any presidential administration in history has enacted, but they would still be fascist if they did so by will of the president, rather than by the will of the people, through the Constitutional apparatuses designed and assented to by the people. Likewise, democracies are capable of a great deal of misery, but poor or even ruthless decisions on the part of democracies are not "fascist" so long as they are implemented by a government limited by well defined constraints on it's power and the will of the people. I think this distinction is important to make, because we have flirted with fascism on more than a few occasions in our country's history. The bedrock fascist position is best stated by Nixon, probably the closest we have come to a president with a truly fascist mindset: "When the president does it, that means that it is not illegal." Nixon probably hurt his policital adversaries more than anyone else - his crime ultimately didn't result in much more of substance than a broad-based loss of innocence - but this man's very mindset was a fascist mindset. He was, and I think he will be remembered as, a fascist who held an official position in a democratic Republic for a number of years in the late twentieth century. Was Bush a fascist in this mold? Was Cheney? Prosecuting torturers won't answer that question, and we may never know. We probably won't have the benefit of a Frost interview for those men, like we had with Nixon. But the tortures reek of something terrible, in the same way that Watergate did. And even if the torture could be explained away in various ways (just like Watergate could have itself been explained away as quite insignificant), the entire endeavor is indicative of "fascist tendencies" in the Bush White House - a tendency to place the president above the law, rather than under it. We need that tendency to be scrutinized in the light of day. And perhaps I have it all wrong and the torturers will be found not guilty, and this whole post was all a big mistake - but I think the preponderance of evidence for enough people suggests that we need to shore up the value and strength of the law in America. We're likely to have very trying times ahead - we don't want a charismatic president like Obama to enter trying times without a firm message from the American people that fascist tendencies are not acceptable, regardless of the objective desirability of the program that the fascist is offering.

Smith's Theory of Moral Sentiments

This year is the 250th anniversary of the publication of Adam Smith's "Theory of Moral Sentiments" - the work of moral philosophy that in many ways served as a precursor to his "Wealth of Nations". Econtalk.org is marking the occasion with an audio series on the book, the first installment of which was recently released.

I, like many, am far less familiar with Moral Sentiments than I am with Wealth of Nations. And also, like many, my understanding of Wealth of Nations is largely restricted to the popular cookie-cutter interpretation of that work. To summarize: the pursuit of self-interest is actually beneficial to society, and restrictions on the pursuit of self-interest often have unintended negative consequences. The foundational "human motivation" in Wealth of Nations and most subsequent works of economics is this self-interested pursuit of "utility" or "profit". The few exceptions, including institutionalists like Thorstein Veblen, or heterodox thinkers like John Kenneth Galbraith (I'm thinking of the Galbraith of The Affluent Society primarily, rather than the Galbraith of The New Industrial State) seem to prove the rule.

There are many reasons to believe that any model of society based exclusively or even primarily on the motive of utility maximization is likely to imperfectly represent (and perhaps more substantially, imperfectly predict) reality. It should be self-evident (and I don't appreciate the casual use of that hallowed phrase) that we are motivated in our own lives by other things than self-interest. In many cases, when economists confront this reality, they explain it away by suggesting that alternative motivations aren't directly relevant to the marketplace. Yes, altruism, jealousy, etc. may motivate much of human activity - but greed and self-interest exercise such primacy in market decisions and any model determining production and allocation can safely disregard other motivations.

Adam Smith used his "Theory of Moral Sentiments" to outline the major facets of human motivation beyond self-interest, and for that reason it should serve as a motivator for economists who cling to utility or profit maximization models. This is not to say that self-interest should be marginalized. It will always be central to economics. But I would like to see (I would like to design myself) models that explicitly model the optimization of some combination of relative wealth and absolute wealth. We know people "keep up with the Jones's" - why do we pretend that relative wealth is irrelevant in our models?

Often we look back to Adam Smith, accept the foundational insights into the market that he introduced, and then proceed to qualify the Smithian worldview with various externalities and market failures that economists have come up with since the 18th century. The Wealth of Nations earns it's place of honor on our bookshelves (I have three copies myself, my favorite of which is about 125 years old and looks quite handsome, safely nestled on it's shelf, four feet above the floor), but it is rarely cracked open for actual guidance. I've never read Moral Sentiments, but I think it holds the possibility of exploding the profit-maximizing myth of modern economics. If economics is really going to be a science of human decision making, it should more explicitly encompass the full range of human motivations.