Saturday, September 3, 2005

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Milton Friedman, meet Robert Reich

Milton Friedman introduced the idea of a "negative income tax" in his 1962 book Capitalism and Freedom. The idea behind it was a way to provide welfare in the most efficient and least welfare-distorting manner possible.

In the New York Times today, Robert Reich drives this point home by looking at the deleterious effects of the alternative policy possibilities -- protectionism and pork-barrel spending:

Oil shocks, hurricanes and housing bubbles aside, consumers who are worried about their jobs and wages will be reluctant to buy goods and services, thereby dampening any recovery. But the new insecurity is undermining our national interest in other, less predictable ways by setting off political resistance to economic change, with negative repercussions that ripple beyond the economy.

Forty years ago, free-trade agreements passed Congress with broad backing because legislators recognized that they helped American consumers and promoted global stability. But as job and wage insecurity have grown, public support for free trade has declined. The North American Free Trade Agreement, which passed by 34 votes in 1993, was a hard sale for the Clinton administration. But the recent Central American Free Trade Agreement, embracing a far smaller and less populous area, was an even harder sale for President Bush. Despite Republican control of Congress, the trade deal cleared the House in July by just two votes, and then only after heavy White House pressure.

The increasing insecurity of ordinary workers also imperils our national defense by handcuffing the Pentagon. It can't shift the defense budget to fighting terrorism because of local fears that well-paying jobs will be lost. Contrast this with the comparative ease by which the Pentagon downshifted from fighting World War II to the cold war, more than 50 years ago. Its recent base-closing recommendations ignited a political firestorm, causing even the apolitical Base Closure and Realignment Commission to retreat. The commission's chairman justified its decision to save the Niagara Falls Air Reserve Station, for example, by noting that the base "is the second-largest employer in western New York."

Consider, finally, the pork that's been larded into the federal budget. Republicans may collectively oppose wasteful spending, but as individual legislators they've created more pork than any Congress in history. The new $286 billion transportation act is bloated with 6,371 "special projects" with a price tag some $30 billion more than the White House wanted. The president reassured the nation that it would, at the least, "give hundreds of thousands of Americans good-paying jobs." The new $12.3 billion energy bill cost twice what the White House sought because it's laden with what Senator Pete Domenici, the New Mexico Republican who ushered it through Congress, defends as measures to create "hundreds of thousands of jobs." According to the conservative watchdog group Citizens Against Government Waste, pork programs have risen from fewer than 2,000 a year in the mid-1990's to almost 14,000 this year.

Read the whole thing -- Reich proposes a number of policy possibilities, including the expansion of the modern-day equivalent of the negative income tax, the earned income tax credit.

I'm not sure I buy all of Reich's proposed package, but his analysis of the political economy of the status quo is dead on.

posted by Dan on 09.03.05 at 09:11 PM


What did he do with all thesse bright ideas during the Clinton administration?

posted by: Mark on 09.03.05 at 09:11 PM [permalink]


According to Sid Blumenthal, Reich was busy strengthening the levees in New Orleans.

posted by: JK on 09.03.05 at 09:11 PM [permalink]

Two thoughts:

First, it is a shame that the jobs lost due to the taxes required to fund these "job-creating" projects are never counted. In many if not most cases, the net number of jobs will likely be negative. It is a shame too, that the politicians and bureaucrats, most but not all of whom understand this, feel so comfortable lying to the public.

Second, it is important to note that the EITC is very different from the NIT because it is a conditional transfer. You have to work to get the EITC. As such, it is not a substitute for programs such as TANF (pardon all the acronyms - that is how this area works) for single parents who are unwilling or unable to work. The NIT was proposed as an unconditional transfer - you have a pulse, you get it. The economics are therefore quite different.

Jeff Smith

posted by: Jeff Smith on 09.03.05 at 09:11 PM [permalink]

If Reich told me that the sky was blue, I'd go get a spectrophotometer and check his work.

posted by: Mitch H. on 09.03.05 at 09:11 PM [permalink]

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