Mobility

http://nyti.ms/z1mID4

Social Mobility is an interesting beast. Social scientists will say that having a large degree of mobility is tantamount to having a vigorous and dynamic society, one in which resources are appropriately spent chasing things which are good for society and in which there are not entrenched class divisions which lead to long-term inequalities.

While it is tempting to say that American society as a whole does not have structural inequality due to the relative fairness of the market system, we know for a fact that this is not precisely true. The article cited would have us believe that American market economics has created an almost “pay for access” system, in which the children of the wealthy have “first screw-up” opportunity. In other words, those seeking upward mobility tend to not get many second chances, while those seeking to avoid downward mobility are given numerous chances.

This is not inherently a bad thing. Depending on how you look at it, if all boats are rising, who cares if some are consistently higher than others? As long as legislation does not favor the creation of an entrenched class system (i.e. as long as a semi-permanent upper class does not use its enhanced influence over government to institutionalize itself), this may be a natural state of affairs. If, indeed, there is a genetic component to “talent”, and ultimately fitness for competition in society equates to reproductive fitness (or if talent marries talent), then over time it may be reasonable to expect speciation. In other words, the US might have lower social mobility now than other countries because Americans have traditionally had a much more level playing field than most other countries, and the effect of multiple generations of mobility has created “proper” classes. If one looks at the degree of mobility amongst first-and-second generation immigrants (new entrants to the American gene pool), one sees (anecdotally, at least), that it is in fact considerably higher than for families that have been here a few generations.

There is an obvious long-term remedy to issues of social mobility. Inflation, and a moderately large amount, is the single most powerful force that can impoverish idle wealth while enriching the poor and indebted. If we want more mobility in this country, we need to start inflating away the fortunes of the upper classes and the debts of the lower, to ensure that poverty is at best confined to a single generation only. Inflation forces continual reassessment of wages and incomes and mandates that the very wealthy invest their money in the most productive ways possible (because indeed they have the most to lose).

Propertization

Before proceeding further, I’d like to take a minute to talk about propertization. By propertization, I mean something akin to the enclosure movement as it applies to fundamentally open things. Ideas, for example, can be propertized through patents and copyrights (“intellectual property”). Advertising slogans and tag-lines (brands) can be propertized through trademarks. This propertization can be described as necessary and proper to incentivizing innovation. Similarly, wireless spectrum is propertized in America (the idea being that if you pay for it, you’ll use it wisely and in the most economically rational way – in principle for the benefit of the American consumer).

However, propertization carries risks, and there is an alarmingly strong argument against it. The premise behind propertization is that when you’re tackling a particular problem, it’s your problem to solve. You are an entity with a vested interest in a particular industry or field, and you want to solve a problem in that field and sell the solution.

In other words, propertization, in some contexts, views whatever is being propertized as an end in and of itself, instead of a means to a larger end. In my own line of work, I see this happen a lot. Individuals and groups develop novel solutions to small problems and sit on them. The incentive is there for people to sit on them until they can use them to rush to the rescue in solution of some problem. However, adding these small solutions to a repository of knowledge and incentivizing everyone to add to the repository obviously creates the optimal environment for rapid development.

This is my particular version of “the innovator’s dilemma”.  That is to say, society as a whole benefits the most when innovators share their results with everyone (and charge people for products, not ideas), but the cost of developing an idea is so great that no-one really wants to share it with anyone once they’ve done it.  Companies are moving towards open source development models (indeed, mega-corporations such as IBM, Sun Microsystems, Oracle, and the like have contributed tremendously to open source projects such as Eclipse and OpenOffice.org, and Google routinely releases source for new projects such as the Chromium Web Browser), but the economics always favors closed development over open development.

I don’t know what a good solution to this might be.  One possible solution might be to establish “protected commons” domains.  Within such domains, intellectual property is literally considered to be the joint property of the participating companies or people.  Companies agree to contribute a given percentage of their gross revenues (or a certain minimum amount of cash-equivalent) in R&D work to the domain, and also to not compete with other companies within the same domain.

With this type of structure, small companies can band together to produce remarkable results, but also (in the unlikely event of their demise) ensure that their work products can be used by other companies.  Indeed, this may be the only way in which it actually becomes cost effective for small and start-up businesses to perform R&D in certain areas.  Since so many companies “apply” the same or similar technologies to different problems, this type of structure would also incentivize creation of open standards and aggressive adoption and development of BoB technologies.  Lastly, and perhaps most importantly, this type of structure would ensure that no company wastes time unnecessarily replicating work performed by others which is available within their particular commons domain.

One obvious potential problem with this type of protected commons domain would be that if two companies within the same protected commons agreement attempt to pursue the same avenue of development (towards the same product).  The only reasonable arrangement if neither company currently occupies this particular market space is that the two companies develop the product in the commons and then form a joint venture to market the product.  Since this would be by far the most sensitive part of any such domain, it may even be reasonable to make a condition of membership that no companies can enter new market spaces after joining the domain, and require that companies form spinoffs, offshoots, or joint ventures to pursue new areas of expansion.

The “protected commons” may also be the savior of capitalism as we know it (despite the obvious analogue to the socialist farm cooperative).  In today’s innovation economy, small start-up companies (which have the drive to pursue truly innovative areas of research and development) have very high barriers to developing certain capital-intensive technologies.  (While almost any company these days can reinvent the wheel when it comes to software, though it may waste significant amounts of time doing so, development of novel hardware may simply be beyond the reach of many small businesses, despite excellent ideas and good business models).  Technology sharing domains in which manufacturing techniques, component designs, and approaches are shared across multiple companies mitigates risk inherent in such development and speeds innovation by providing companies the opportunity to accelerate innovation in one market space by using technologies developed “for” another.  Aside from such domains, the only hope for rapid technological evolution lies with large companies, which are neither agile enough to adapt to rapidly changing market conditions nor truly incentivized to do so.

Social Distortion

One of the great problems plaguing American society is something I like to term “social distortion”.  In an effort to keep this blog somewhat separate from any of my previous writings, I’ll rehash it here.

Social Distortion, in my eyes, is an alteration in the natural allocation of resources and effort in a society.  Not all social distortion is a bad thing, and indeed not all economic intervention by the government causes distortion.  However, the sheer amount of distortion afoot in the American economy is staggering.  There is not a single market not somehow shaped by government regulation or manipulation.

In many cases, what the government is doing is creating a market where otherwise none could exist.  That is to say, they are defining property rights in an area where conventional notions of property do not extend well (wireless spectrum, intellectual property, etc.).  This is something that has to happen in a centralized fashion; it might as well be a government that does it because no-one else can necessarily be trusted with it.  (There is a counterargument to this which is perhaps a little more arcane but also an interesting discussion in and of itself, so I’ll reserve it for another post).

In other cases, however, the government is creating artificial subsidies for industries, either directly or indirectly.  This can be as direct as the AAA, TARP, and the like, or it can be indirect, such as Mortgage Interest, Long-Term Capital Gains, Carried Interest, Federal School Lunch programs.  Indeed, it could very well be argued that Medicare Part D is actually the largest backdoor subsidy for any industry ever, since it essentially provided the pharmaceutical industry with unlimited access to government funds.

Now, I’ll be the first to say that I don’t know if these are necessary or not.  Some of the subsidies exist for a good reason (or, at the very least, for a reason that seemed good at the time that they were enacted), and others were intended to be temporary but became permanent.  I can’t say I dislike them but I can say, with full certainty, that we have no idea how the economy would function without them.  The nonlinearities inherent in multiple levels of price supports and consumer subsidies for interacting goods across the entire economy are almost absurdly large.  They’re so large, in fact, that when we tax or subsidize economic behavior these days, we have almost no idea if the tax or subsidy is really necessary – it just appears to be necessary on top of the morass of existing taxes and subsidies that are in place.

At a minimum, we need data.  We need to be able to analyze the functioning of the economy in a relative vacuum.  We need to remove price supports and price controls in any competitive marketplaces, and then analyze resultant behaviors.

This is very important for a number of reasons, not the least of which is that, left to itself, the market will find solutions to problems that we as individuals may not see.  As an example, currently, switchgrass-based biofuels are not economically feasible in the United States because agricultural subsidies artificially depress the price of corn-based ethanol.  Other subsidies depress the price of gasoline.  Left to itself, however, we have no idea what the fair market price of switchgrass-based ethanol would be (or what production processes may be employed) relative to any other fuel.  We believe that it would be cheaper, but we have no way of proving it.  Rather than subsidize it down to a cheaper price, it would be far better to see what an untrammeled market would do, and then decide upon a (short-term) policy prescription to arrive at a more desirable state.

Therefore, the first step has to be taking the economy back to a near-vacuum state.  Let’s walk down a line of reasoning that will achieve this.

First, eliminate all industrial subsidies for all industries.  This includes differential tax credits for certain actions (R&D, Capital Investment). Then, to avoid (in net) reducing employment as a result of this move, remove all corporate taxation. Then, to avoid playing favorites, remove all tax deductions which preferentially favor certain economic behaviors.  (Consumer tax deduction is a subsidy in disguise).  Then, to avoid a net tax increase on the middle class, remove all income taxes.  To prevent reductions in services that may be caused by removals of subsidies, remove all price controls.  Since price controls are needed in noncompetitive marketplaces, tighten anti-trust legislation to make all markets competitive.  Then, to avoid government bankruptcy, replace the personal and corporate income taxes with another tax.

So, we’ve come up with a policy prescription that possibly has a little bit of a libertarian feel to it but seems to contain all of the right elements for ensuring the near vacuum state of the economy.  To be perfectly clear, this is not a state that I this is philosophically correct or anything of the sort.  The objective is to optimize resource utilization across the economy and (secondarily, perhaps) to accelerate technological development, GDP growth, and employment growth.

What is the nature of this “another tax” to replace lost revenue that we speak of?  Well, the obvious solution is a moderate (global) import tariff.  The total volume of imports to America in 2010 was roughly $1.9 trillion while the federal budget was approximately $3.5 trillion.  Simple math suggests a 184% tariff on all imports would handily pay for the entire federal budget.  To cover the costs associated with consumers switching to domestically produced products rather than foreign-made products, this tariff should actually be higher (perhaps as high as 400%), but this substitution effect is not exactly an undesirable behavior.  Indeed, one would hope that this substitution effect becomes more pronounced with time.

Since these policies would have significant impact on the overall structure and function of the United States economy, we must ensure that prices are as free to float as possible.  Therefore, a minimum 2% inflation rate must be enforced (by seigniorage, if necessary)

• Remove taxes on individuals and corporations and subsidies to corporations – Repeal the 16th Amendment to the US Constitution
• Move noncompetitive markets towards full competition – Increase anti-trust enforcement
• Remove price controls in competitive marketplaces
• Implement a 400% global import tariff to replace lost revenues
• Use monetary policy to enforce a minimum 2% inflation rate

These policies will have a nontrivial impact on the United States and world economies, which will be discussed further in posts to come.  At a minimum, we must explore the full impact on the United States and World Economies.  We must also discuss necessary corollary arguments: anti-trust policy, labor policy, social policy, and the nature of the public domain.

Also, as this is the first in a series of posts outlining the platform, it should be noted that this is neither the entirety of the platform nor even the major plank.  It is merely a point of particular relevance given the state of current affairs.