U.S. COVID-19 Restrictions Cost-Benefit Analysis

Using an unlikely assumption that COVID-19 restrictions cut the U.S. death and hospitalization count in half from what they would have been without restrictions, the U.S. spent 5 trillion dollars to lose 86 million QALY. The problem is doing population-wide public health measures on an illness that is disproportionally fatal for the frail aged.

Updated April 27, 2021

Public health cost-benefit analyses are usually done using Quality Adjusted Life Years (QALY). QALY ranges from 0 to 1, with 0 being death, and 1 being a fantastic year. When COVID-19 lockdowns began in the U.S. in March 2020, leaders rushed to implement unprecedented totalitarian public health measures that were first used in China. They ignored a viewpoint (later known as the Great Barrington Declaration) that, based on the 1000-fold difference in mortality risk between young and old, called for a focused protection approach for the vulnerable old, while letting non-vulnerable young people live normal lives. What is the cost-benefit analysis for these policies based on a year of experience?

The U.S. states had differing approaches that varied over time, from severe lockdowns to milder measures. Typically, Republican governors chose less restrictive measures than Democratic governors. No state (or Western country) did a full Great Barrington-type policy, which involved no general testing/contact tracing/quarantining, letting non-vulnerable younger people live near-normal lives, while protecting the vulnerable essential workers by giving them disability pay to stay home, protecting vulnerable people in multigenerational homes by giving them the option to live elsewhere at government expense, protecting vulnerable people living alone by delivering all food and supplies, and doing a better job protecting nursing home residents.

Regression analysis indicates that there is little correlation between level of restrictiveness of public health measures and COVID death rates, indicating that it’s unlikely that a less restrictive approach would have made much of a difference in death rates. It’s possible that a Great Barrington focused protection approach would have resulted in fewer deaths. It’s certain that a focused protection approach would have been much less expensive, and avoided the collateral damage of lockdowns and other restrictions.

I will do a cost-benefit analysis for the U.S. being especially generous to lockdown proponents, using CDC data for March 19, 2021. Let’s assume that the U.S. COVID death count of 535k is an accurate number of people who died of COVID (it actually includes many frail elderly with comorbidities who died with COVID). Let’s assume that without lockdowns and other restrictions that the U.S. death count would have doubled, from 535k to 1.07M. Considering the high percentage of elderly people in this death count, including 81% above 65 years old, and 59% above 75 years old, and about 1/3 nursing home residents, QALY lost will be much less than for younger people. Older people have fewer years remaining, and these years are far less than 1 QALY each due to health conditions, restricted mobility, etc. To be generous, let’s assume an average of 5 QALY lost per COVID death. That implies that lockdowns/restrictions saved 535k * 5 = 2.7M QALY.

Immediate family and close friends of the COVID deceased would have lost QALY. Let's assume 0.5 QALY lost for immediate family member, with an average of 3 immediate family members for every deceased. Let's also assume 0.25 QALY lost per close friend, with an average of 2 close friends per deceased. Then lockdowns/restrictions saved 1.6M immediate family members from losing 803k QALY, and 1.07M close friends from losing 268k QALY.

There have been 1.88M U.S. COVID hospitalizations. Let’s assume that these would have doubled without lockdowns/restrictions to 3.76M. Let’s assume 0.5 QALY lost per hospitalization. That implies that lockdowns/restrictions saved 1.88M * 0.5 = 0.94M QALY.

Let’s also assume that all of these extra hospitalizations would have stressed and sometimes overwhelmed hospital staff, and resulted in inferior care for both COVID and non-COVID patients. Some patients will immediately die, others will die sooner than they otherwise would have, and others will have lower quality of life due to lack of care. Many of these people would have been elderly, as they are more likely than younger people to have conditions that require hospitalization. Let's assume that the number of non-COVID hospitalized people affected by this is the same as the additional COVID hospitalizations, or 1.88M. Let’s assume an additional 3 QALY lost per additional COVID hospitalization. That implies that lockdowns/restrictions saved 1.88M * 3 = 5.64M QALY.

We need to account for the QALY lost for hospital staff that were stressed due to the doubling of COVID hospitalizations. There are about 6.6M hospital employees in the U.S. Let's assume that hospital employees would have lost an average of 0.25 QALY each due to the doubling of COVID hospitalizations. Then this implies that lockdowns/restrictions saved 6.6M * 0.25 = 1.65M QALY. 

The impact of COVID on other health problems is controversial. During the pandemic, people have died from heart attacks, strokes, suicide, drug overdoses, dementia, etc. Did some of these people who wouldn’t have died if there were no pandemic die because of COVID, or because of restrictions? COVID made a lot of people afraid to get care, or find it hard to get care. The lockdowns and restrictions almost certainly increased this fear. Lockdowns and restrictions didn’t cancel emergency care, but did cancel some elective surgeries and other non-critical care. Social isolation is a risk factor for many medical problems, especially mental health and cardiovascular issues. Enforced social isolation due to COVID social distancing restrictions likely contributed to additional excess deaths, along with increased morbidity from many non-COVID health problems. Missed cancer screenings will contribute to excess deaths in the coming years. For the sake of simplicity, and to be generous to lockdown proponents, I will ignore this impact on other health problems in the QALY calculation.   

Long COVID is another problem that costs QALY. It’s unclear how many people have long COVID, but one suggestion is 10% of COVID infections. There have been 29.4M U.S. COVID cases. A CDC estimate of total infections is 4.6 * cases, or 4.6 * 29.4 = 135.2M. 10% of this number of 13.5M. Let’s assume that these long COVID cases would have doubled without restrictions to 27M. Long COVID is more common among younger and healthier people than being hospitalized for or dying of COVID, so QALY lost should reflect that. Let’s assume that QALY lost for long COVID is the same as that lost for hospitalizations, or 0.5. That implies that lockdowns/restrictions saved 13.5M * 0.5 = 6.75M QALY.

Total QALY saved from lockdowns/restrictions is 2.7M + 0.80M + 0.27M  + 0.94M + 5.64M + 1.65M + 6.75M = 18.75M. Deaths, impact on family, impact on friends, COVID hospitalizations, non-COVID hospitalizations, impact on hospital workers, and long COVID would have affected a total of 1.07M + 3.21M + 2.14M + 3.76M + 1.88M + 6.6M + 27M = 45.66M people without lockdowns/restrictions.

Now we need to find the QALY lost from lockdowns/restrictions. Everyone who didn’t die, wasn't family/friend of deceased, be COVID or non-COVID hospitalized, was a hospital worker, or develop long COVID lost QALY due to the lockdowns/restrictions. To simplify the analysis, I will assume a uniform level of moderate restrictiveness in the U.S. (in reality, there was a lot of variation across states). Healthy young people, who had the least to fear from COVID, lost the most. A normal year for them is about 1 QALY. Being denied the ability to socialize, travel, go to school in person, participate in group sports, go to concerts, shows, sporting events, etc. for a year deprived them of much of this 1 QALY. Being subjected to testing/contract tracing/quarantining/masking for a virus that posed little risk of death or serious illness also deprived them of QALY. Being subjected to stay-at-home orders (essentially house arrest) for periods of time deprived them of QALY. Being subjected to periodic unemployment due to business closures deprived them of QALY. Some young people did better than others. Considering that restrictions limited most social activity outside of the home, married people and people in relationships did better than single people, and single people living alone did the worst. Social distancing and masking made it difficult for single people to meet other single people in the few public places that were open. Children who attended in-person school did better than children who attended remote school. The parents of children who attended in-person school did better than the parents of children who attended remote school. Introverted/socially anxious people did better than extraverted people. Professionals who were able to work remotely did better than essential workers who were forced to show up for work and risk exposure to the virus. Small business owners did especially poorly, and many lost their businesses. Let’s assume that young people lost an average of 0.5 QALY each. Older people have less QALY to lose, and would have isolated even without lockdowns/restrictions. But some older people would have wanted to travel, see family, go to concerts, etc. While they were at much higher risk of dying of COVID, a year is a lot more valuable to a person who doesn't have many years left. Let’s assume that QALY lost for older people was 0.1 QALY each. Middle-aged people would be somewhere in between older and younger people, say 0.3 QALY each. There are 171.2M younger Americans (under 40), 103.3M middle aged (40 – 65), and 54M over 65. Weighted mean of QALY lost is (171.2 * 0.5 + 103.3 * 0.3 + 54 * 0.1)/328.5 = (85.6 + 31.0 + 5.4)/328.5 = 0.37. Subtract the 45.7M who died, were family/friends of deceased, were hospitalized, denied hospitalization, were hospital workers, or developed long COVID from 328.5M to come up with 282.8M. 282.8M * 0.37 QALY = 104.6M QALY lost.

Net QALY lost is 104.6M – 18.8M = 85.8M. The U.S. federal government spent $5 trillion to lose 86 million QALY.

While all of the numbers used as input to this calculation are open to reasonable criticism, it’s unlikely that any change will affect the outcome that net QALY will be negative. I show QALY lost being over 5 times QALY gained from the restrictions. The reason for this is that even for an aging society like the U.S., people over 65 who are most vulnerable to COVID only make up about 16% of the population. Due to their age and comorbidities, dying from COVID results in a relatively low number of QALY lost. Taking away a fraction of a QALY from the much larger healthy younger and middle-aged population to save some elderly people from dying has more cost than benefit.

Assuming that COVID lockdowns and restrictions cut the death and hospitalization rates in half is almost certainly an overestimate, even if nothing at all was done. “Letting it rip” would have resulted in front loading deaths and hospitalizations to the first (spring) and second (summer) waves, but would have had a much milder impact for the fall/winter wave. It would have allowed for the buildup of herd immunity with the less contagious earlier variants of COVID-19, which would have protected a majority of the population from the more contagious later variants. Most remote working, unemployed or retired vulnerable people living in the community would have self-isolated regardless of government restrictions. Nursing homes and assisted living facilities would have been pressured to restrict visitors and socially distance residents regardless of government regulations. Letting it rip would have avoided the collateral damage that the lockdowns/restrictions occurred.

Following the Great Barrington focused protection approach would have also avoided the collateral damage, but would have better protected the vulnerable. It’s possible that the Great Barrington approach would have ended in the same or lower death/hospitalization count than what actually occurred, while allowing the non-vulnerable to live near-normal lives. The government would have spent a fraction of the $5 trillion, and avoided the QALY lost from locking down the non-vulnerable.

Tea Party Republicans Are Anarchists

Two years ago, I blogged about Tea Party Republicans, asking the question if they are anarchists. This was the first time that the Tea Party brought America to the brink of default on its debt. I blogged that since Tea Party Republicans want limited government, they are not, strictly speaking, anarchists. But they are extremists, and if they get their way the economy and federal government may collapse, producing a condition of anarchy.

After the recent government shutdown and near-default, I will change my question to a statement: Tea Party Republicans are anarchists. They were willing to let our country default on its debts to force a repeal of Obamacare. Whatever one thinks of Obamacare, it’s crazy to seriously consider having the country default. As we got closer to potential default, economists, bankers, and financial people sounded the alarm. A default by the U.S. on its debt would be catastrophic, as reported by International Business Times and Center for American Progress. Some of the consequences of a default include:

• Higher interest rates on Treasuries and all consumer credit
• Stock market crash
• Plunge in value of the dollar
• Worldwide recession
• Freezing up of the U.S. financial system

It would be very bad, a major economic blow to every American (and to others in the world). Anyone who would consider this as serious policy option does not have the best interests of the country at heart. Such a person is an anarchist and saboteur. Instead of blowing up buildings or factories, he has the potential to do immeasurably more damage by blowing up the entire U.S. economy.

Public opinion has soured against the Tea Party since the shutdown and debt ceiling debacle. A Pew Research Poll earlier this month shows the Tea Party with 30% favorable, and 49% unfavorable ratings. Business leaders have also turned against the Tea Party, igniting a Republican civil war between business groups allied with the Republican establishment versus the Tea Party. It’s possible that the Tea Party has reached its peak, and is on the decline. But there’s no way to be sure.

There is considerable danger ahead. If Republicans and Democrats can’t come up with a budget agreement, which is a realistic possibility, we will have to go through another possible government shutdown and debit limit crisis next year. The 2014 elections could provide the Tea Party more victories. The more Tea Party members in Congress, the greater chance of a default, economic crisis, and descent into anarchy.

I see nothing wrong with criticism of Obamacare. The American health care system is an expensive mess, and Obamacare falls short in many areas. If Republicans don’t like it, they need to come up with a viable alternative. After coming up with an alternative, they would then need to convince the voters that this alternative is better. That’s the way change is done in a stable democracy. It may not be quick, and will involve compromise, but can lead to gradual improvement. Threatening economic chaos and ruin if Tea Party Republicans don’t get what they want is not the American way. These anarchists need to be voted out of office, the sooner the better.

David Brooks on American Politics

David Brooks has an interesting perspective on American politics and public policy. A New York Times Op-Ed columnist, his viewpoint can be described as moderately conservative (a vanishing breed in contemporary American politics). His commentary is informed by a humanities and social sciences perspective that is rare among political analysts today. I earlier blogged about his criticism of the current American meritocracy. I want to talk today about two of his recent columns that provide an interesting perspective on what’s wrong with our political thinking. While he doesn’t provide specific solutions, he talks about some failings among both parties, along with how we need to change our thinking about what we want government to do. As we enter the election year 2012, in which Americans will choose between the same tired and failed alternatives, it’s important to think about our political problems in a different way, as Brooks does.

His first article entitled The Two Moons, is named after Samuel Lubell’s concept of a “political solar system.” Lubell, writing in the 1950’s, proposed the idea that at any moment there’s a Sun Party (the majority party) and a Moon Party (the minority party). The Sun Party drives the agenda, and the Moon Party (which shines by reflecting the Sun’s rays) opposes the Sun Party. During the New Deal, the Democrats were the Sun Party. During the Reagan Revolution, the Republicans were. Between 1996 and 2004, the two parties were tied. This was a transition time, in which from historical experience a Sun Party usually emerges. But no Sun Party emerged. No party was able to take the lead; they both are now Moon Parties. Both Republicans and Democrats have record low approval ratings. “Neither party has been able to rally the country behind its vision of government.”

Having two simultaneous minority parties leads to strange outcomes. Both parties embrace minority mentalities. Democrats feel oppressed by big business and big finance, while Republicans feel oppressed by big government and the big liberal establishment (the media, academics, judges, artists, Hollywood, etc.). Neither side wants to compromise, feeling that the outside world, and especially members of the opposing party, are hostile. They instinctively protect their special interests (labor unions, the poor, the old, and minorities for Democrats; the rich, big business, big finance, and evangelicals for Republicans), and refuse to engage or try to convert outsiders. Neither party engages in serious internal debates, and moderates are no longer welcome.

The Two Moon era is volatile. Voters reject one party, then two years later reject the other party. That happened in the 2008 and 2010 elections, which had a historically large shift from Democrat to Republican. Usually, minority parties suffer a string of election defeats, promoting modernization and revision. The Republicans’ defeats in 2006 and 2008 did help promote internal change via the Tea Party. But rather than owning up to the failures of their neoconservative ideology, and moving more to the center, Tea Party Republicans pushed the party to an extreme libertarian agenda. The Republicans’ 2010 victory encouraged them to act like a Sun Party, trying to force their Tea Party agenda, but were stymied by the fact that they were not a true majority party, and that Democrats controlled the Senate and Presidency. The Democrats’ defeat in 2010, along with subsequent Republican intransigence, is making the Democrats become more extreme. Even if they win big in 2012, however, they do not have the broad-based support to become a Sun Party.

How will the Two Moon era become resolved? Brooks suggests either a third party or a crisis. A third party faces enormous obstacles in the American political context, as discussed in this article. A third-party presidential run has always lost, but sometimes (e.g. Teddy Roosevelt in 1912, or Ross Perot in 1992) can spoil an election. Even in the unlikely event that a third-party candidate can win the election, he’ll have to govern with a Congress in which almost all members are Republicans or Democrats. For a third party to make fundamental changes in government, it needs to control both the executive and legislative branch, which the American political system makes virtually impossible.

This leaves a crisis as a way to break the Two Moon deadlock. It’s possible that a financial panic and/or war will force some major political change. Exactly how the events will unfold and what the responses will be are impossible to determine, but the American political system will have to undergo a radical (and painful) transformation for the Two Moon deadlock to become resolved.

* * *

Brooks’ second article is entitled Midlife Crisis Economics. Brooks criticizes the Obama’s administration’s historical accuracy. When the administration first came to power in 2009, it compared the current situation to the 1930’s, and promoted a second New Deal. Obamacare was a product of this thinking, a successor of ambitious social legislation like Social Security. The problem is that the public’s perception of government has radically changed since the New Deal. “Today, Americans are more likely to fear government than be reassured by it.”

The Obama Administration then switched historical analogies from the New Deal to the progressive era at the beginning of the 20th century (e.g. Obama’s “Roosevelt Speech” in Kansas). There are some similarities between today and a century ago. “Then, as now, we are seeing great concentrations of wealth, especially at the top.” But the differences outweigh the similarities. The economy was much different back then, a vibrant jobs machine at the height of the industrial era. The information age we live in today is not a jobs machine. The industrial decline and elimination of jobs due to outsourcing/offshoring/automation was taking place well before the current recession. Factories that used to employ 1000 workers can now produce more products while employing fewer than 100 workers.

Inequality, while due partially to government policy, has a structural economic component that would be difficult to reverse (short of communism). Inequality is growing in all developed countries, including ones (e.g. Sweden and Germany) that have much more generous welfare states.

Brooks succinctly summarizes the essential differences between today and a century ago: “In the progressive era, the economy was in its adolescence and the task was to control it. Today the economy is middle-aged; the task is to rejuvenate it.” A century ago there were few or no government agencies, institutions, or regulations to protect workers, the sick, the disabled, the old, children, minorities, etc. Today, we have more than enough government; the challenge is to make government more effective. We need to reform existing programs to make them deliver more services at less cost.

Brooks also talks about the moral differences between today and the progressive era. The beginning of the twentieth century was still a time of Victorian culture, with its strict moral code. Individuals and the government taking on debt that they had no hope of repaying would have been considered sinful. Illegitimacy and divorce were culturally prohibited and very rare.

These moral differences have major practical consequences. It’s obvious today what harm the contemporary embracing of public and private debt has caused our economy. Subprime and other risky mortgages led directly to the 2008 financial crisis and subsequent recession. Deficit financing that the American federal government has been doing routinely for decades has led to a buildup of unsustainable debt, and is preventing the government from responding in an appropriate way to the magnitude of the current crisis. The fact that 40% of American children are born out of wedlock leads to a number of social and mental health problems that were unknown a century ago. These problems, including crime, juvenile delinquency, drug abuse, dangerous neighborhoods, failed schools, etc., forces the government to intervene in family life and child upbringing, and spend billions of dollars that it otherwise would not have had to spend.

My favorite quote from this article is the following: “One hundred years ago, we had libertarian economics but conservative values. Today we have oligarchic economics and libertarian moral values — a bad combination.” It’s important to understand that the last (and only) time that libertarian economics was ever practiced, during the late nineteenth and early twentieth centuries in America, Britain, and (to a lesser extent) in other Western European countries, was a time of strict conservative Victorian morality. There is no historical example of a combination of libertarian economics and libertarian morality. There is no contemporary example of libertarian economics. Contemporary countries with strong, rapidly growing, export-oriented economies, e.g. China, are anything but libertarian.

Ron Paul’s fans need to understand that they are advocating an experimental system, something never before tried. They also need to understand that the rise of American government deficit spending, regulation, waste, inefficiency, and all the other things they complain about occurred during a time of increasing libertarian morality. It was the 1960’s embrace of individual social liberty, of personal and sexual freedom from authority, of licentiousness, that represented a cultural revolution, something unique in history. The trend for increasing individual social freedom and autonomy has only increased since the 1960’s. During that period, government deficit spending, regulation, litigation, interference with the economy, waste, fraud, and incompetence has also increased. The two are clearly correlated; it’s impossible to prove whether libertarian morality caused the explosion of government spending and regulation.

Note that Brooks said that we have “oligarchic economics” in America today, not “socialist economics.” The distinction is important. It implies that libertarian ideas did in fact influence not only social and cultural life, but also the economy. Instead of moving toward the libertarian ideal of limited government, however, we moved toward a corrupt, oligarchic form of government, one in which the rich and powerful use a bloated government to become more rich and powerful. The most egregious example is explosion in growth of the financial sector, which occurred after libertarian-inspired deregulation. The investment banks won the freedom to gamble on risky mortgage-based securities, a gamble that led to the 2008 crisis. Unlike in a truly free market, they felt secure enough to make these gambles knowing that the government would bail them out.

As usual, Brooks has no specific solutions to the problems he talks about. “The job is to restore old disciplines, strip away decaying structures and reform the welfare state. The country needs a productive midlife crisis.” I’d agree with that, but how is it going to happen? How can we reform an oligarchic government while maintaining libertarian moral values? How can people from different socioeconomic status, intelligence, race, age, ethnicity, culture, sexual orientation, political beliefs, religious beliefs, etc. come together and agree on anything, when libertarian morality tells them to pursue their own self interest no matter the social cost? Will they be willing to make sacrifices for the common good, whether it take the form of accepting fewer government benefits, more taxation, or a combination of the two? I doubt it. My view is that the “productive midlife crisis” our country needs must include a serious re-evaluation of the permissive morality that has been dominant since the 1960’s.

Are Tea Party Republicans Anarchists?

NY Times columnist Timothy Egan’s recent article describes radical Republicans as anarchists, seeking to destroy the U.S. government. Their refusal to raise the debt limit, and refusal to deal at all with Obama and Democrats, threatens America with another financial crash and economic catastrophe. This “burn-it-all-down position” indicates that the Tea Party Republicans “didn’t go to Washington to find solutions; they went there to destroy the place.” Is Egan being fair in his description of radical Republicans?

Anarchy is the absence of government, a condition of complete freedom from government coercion. Anarchists are people who want to bring about this utopian condition. Tea Party republicans claim to want to reduce the size of government, not eliminate it entirely. So by the strict dictionary definition, radical Republicans aren’t anarchists. They are extremists, however, and this extremism threatens the stability and health of our government and society. It also threatens to bring about a condition of anarchy.

Extremists share some common attributes, whether they are anarchists, libertarians, communists, Nazis, sixties radicals, or religious zealots:

1. Promoting extreme change
2. Wanting the extreme change now
3. Being unwilling to compromise
4. Promoting violence

I’ll go over these attributes and see if the Tea Party Republicans fit these characteristics.

1. Extreme change: The Tea Party Republicans claim to be conservative, wanting the federal government to return to its small pre-Great Deal size. But since so many people have become dependent on government programs, and we’ve had for decades a large military, progressive income tax, and widespread regulation of industry, a return to the way things were 80 or more years ago is an extreme change from the status quo. Thus I can conclude that radical Republicans promote extreme change.
2. Wanting the extreme change now: Paul Ryan’s plan to overhaul Medicare doesn't take effect until 2022, exempting people 55 and older from the change. Although it proposes a radical change to Medicare, it’s not extremist in the sense of wanting the change now. The refusal to extend the debt limit in the absence of an immediate agreement to major cuts in government spending is, however, extremist. It threatens economic catastrophe unless changes are made now. While it’s true that changes are badly needed in Washington, threatening an economic crisis unless changes happen immediately is extremist and very dangerous. So I conclude that in the context of the debt crisis radical Republicans want extreme change now.
3. Being unwilling to compromise: Tea Party Republicans are refusing to compromise with Obama and the Democrats on the issue of tax increases. They will not accept any deal that involves tax increases, even if the spending cuts vastly outnumber the tax increases, as is the case in the Obama plan. This “my way or the highway” attitude is definitely extremist. Tea Party Republicans have exuded this type of extremism since they began their term in office.
4. Promoting violence: Tea party advocates and representatives so far haven’t advocated violence or committed any violent acts. But the other three extremist characteristics that describe Tea Party Republicans make it highly likely that violence will eventually happen. If one of the two major American political parties wants extreme change, wants it now, and is unwilling to compromise, then the legislative process will grind to a halt. We can see that happening already. If legislators cannot accomplish anything, then the government won’t be do anything, even to pay its bills. This will provoke a crisis.

While it’s possible that the crisis can be solved peacefully, I wouldn’t bet on it. Historically, economic crises have sometimes led to violent revolutions in other countries. The French Revolution and subsequent reign of terror was a product of a financial crisis. The Bolsheviks came to power in the context of the economic and political chaos of World War I.

A revolution can sometimes be a good thing, right? What about the American Revolution? The Tea Party Republicans may claim to be intellectual heirs of the American Revolution, but in reality they are far apart ideologically. Compared to other revolutions, the American Revolution was moderate. Before the revolution and after, Americans enjoyed the privileges of a representative government, freedom of expression and religion, a capitalistic economic system, and the absence of any hereditary aristocracy. The biggest change was the withdrawal from the British Empire and the establishment of a new republican political system. While this was a substantial change, it didn’t affect the daily life of most people. There was no widespread expropriation of property or political murders that characterized the contemporaneous French Revolution.

The Tea Party Republicans may not provoke a revolution at all. Since their dominant ideology is anti-government, if they succeed in bringing the economy and the federal government to their knees, we may end up with a condition of anarchy. The best contemporary example is Iraq after the 2003 invasion. Like the Iraqi government, the American government may become so weakened and ineffective that terrorists and criminals will basically take over the country. Anarchy is an unstable condition, so it won’t last forever, but as we’ve seen in some countries (e.g. Somalia) this could last for years and possibly decades.

I think that America has too much going for it (i.e. its wealth, history, political system, social structures) that we will become another Iraq or Somalia. But there’s a real chance of some major political and economic disruption that will affect the lives of millions. If the Tea Party Republicans get their way, this disruption will happen soon.

How Greed and Ideology are Endangering America’s Financial and Mental Health

I just watched the excellent documentary Inside Job about the financial crisis. Its main point is that the 2008 crisis and subsequent Great Recession were a consequence of deregulation of the financial sector. This deregulation (primarily in the United States, but also in other countries like Iceland and Ireland) led to an explosion of trading in risky investments like CDO’s, that in turn led to the housing bubble and crash. The tragic thing about this crash is that if we had kept the regulations in place that came about after the 1929 crash and Great Depression, we would never have had the recent crisis. Protections such as separation of savings and investment banks, restrictions on leverage, and enforcement by the SEC and other regulatory agencies of securities and fraud laws were stripped away in recent decades. Also, the financial services industry created new exotic “financial weapons of mass destruction” and successfully lobbied to keep them unregulated.

How did this unstable and risky situation develop? Inside Job argues that a combination of greed and free market ideology led to the housing bubble and bust. The greed came about from the enormous profits generated by the deregulated post-1980 financial services industry. This money flowed to traders in the form of multi-million dollar bonuses, to politicians in the form of lobbying and campaign contributions, and to academic economists in the form of consulting fees. The free market ideology, promoted by right-wing think tanks, politicians, and academic economists, provided a rationalization for the government to deregulate the financial services industry. This ideology argued that allowing an unfettered financial services industry to generate incredible amounts of wealth, and to make riskier and riskier investments, was good for the economy. This attitude is best summarized by Gordon Gekko’s memorable line in the first Wall Street movie: "Greed, for lack of a better word, is good."

While the free market ideology is seductive, and I admit that I was once an enthusiastic follower, it clearly failed as a rationale for financial services deregulation. While it’s easy to blame the government for everything bad that happens, and the government did promote home ownership for people who should have been renting, the leaders of the Wall Street investment banks were the main culprits. They knowingly and deliberately invested their client’s savings in risky mortgage securities, sometimes while simultaneously betting against the securities (i.e. betting that their own clients would lose money). It was Wall Street money that bid up housing prices, that promoted subprime mortgages, that paid the ratings agencies to give ridiculously high ratings to what was basically junk, and that led to the worst financial crash and recession since World War II. Some foreign banks also were to blame, as they did the same thing that the Wall Street banks did. Ireland and Iceland are two egregious examples of investment banks destroying their economies. The executives in charge of the investment banks got greedy, and even after their companies lost billions and needed to be bailed out, they got to keep their multi-million dollar bonuses and salary. The most disgusting thing is that not one of them has been prosecuted (in the U.S.) for fraud or securities violations.

When an ideology fails in the real world, people who believe in it have two options. One is to accept reality, and stop believing in the ideology. The other is to continue believing in the ideology, and abandon reality. Most Democrats, who in the past (especially in the Clinton administration) joined with Republicans in eagerly stripping away financial services regulation, realized after the crash that they made a grave error. When they were in charge of Congress, they passed the Dodd-Frank bill to improve regulation of Wall Street. These regulations, while inadequate, were better than doing nothing. These regulations are now law, but as Paul Krugman writes in an article, they are in danger of not being enforced. The reason for this is that Republicans have chosen to keep their free market ideology, while abandoning reality. Republicans are now in charge of the House, and Republicans don’t believe in regulation in any form. Since they control the funds, Republicans can prevent the SEC and other agencies from doing any regulating and investigating. Wall Street will then be free to create more bubbles and more crises.

Why do people continue believing in an ideology when it has clearly failed? To answer this, consider the historical example of Communism. Within a few years after the 1917 Bolshevik revolution, it was clear that Communism was failing in its ability to provide goods and services that people wanted. That’s when the scapegoating started. It wasn’t Communism’s fault, it was the fault of the capitalists (or the kulaks, or the imperialists, or the fascists, etc.). That scapegoating continued for decades, until finally no one believed the ideology any more, and all that was left was greed and corruption.

In the case of Republicans, the scapegoat is the government. Wall Street didn’t do anything wrong, it was government intervention in the economy that caused the crash and recession. The fact that the financial services companies made many risky investments and bad decisions, not just in the U.S. but also overseas, is also a result of U.S. government intervention. If the government hadn’t provided guarantees and bailouts, the companies wouldn’t have made these risky investments.

In the context of a mixed economy, with an internationally-linked market, the government needs to regulate the financial markets. If Republicans get their way, and repeal or refuse to enforce the new regulations, another crash will happen. We’ll then be in the same situation in which the choice will be government bailouts or a second Great Depression. Blaming the government for all our problems is similar to the Communists blaming the capitalists for all their problems. The free market ideology has failed the reality test vis-à-vis financial regulation, and continuing to adhere to it is a sign of either delusion or greed. Regarding the latter motive, Wall Street continues to utilize its vast wealth to lobby politicians to weaken and gut regulations.

Now let me turn to mental health and psychiatry. While watching Inside Job, I was struck with the parallels between the financial services industry and the psychiatric-pharmaceutical industry. While the free market ideology is used by the financial services industry to justify deregulation, the chemical imbalance ideology is used by psychiatists to justify their prescribing drugs to patients. The chemical imbalance ideology states that schizophrenia is caused by too much of the neurotransmitter dopamine, and that depression is caused by too little serotonin. These imbalances can be treated by antipsychotic and antidepressant drugs, respectively. Patients who take their drugs restore balance in their brains, become symptom free, and function better than patients who are unwilling or unable to take drugs.

This chemical imbalance ideology doesn’t fit the facts. As Robert Whitaker describes in his book Anatomy of an Epidemic (which I reviewed in a previous blog post), after many millions of dollars of research money, and enormous time and effort spent, this theory remains unverified. Scientists haven’t made much progress in understanding the cause or pathophysiology of mental illness. Diagnosis is still based on symptoms due to a lack of any reliable or valid lab tests. Drugs that seem to help patients in the short term, have a much more problematic long-term outcome. As newer drugs began to be prescribed more frequently, patients seemed to function worse than they ever did before, many of them becoming permanently disabled and unable to work.

Just as the free market true believers identify the government as an all-encompassing scapegoat, the chemical imbalance true believers come up with their own scapegoat: the disease. The reason why juvenile bipolar disorder prevalence skyrocketed, why so many children were being diagnosed and treated with drugs, and becoming permanently disabled, wasn’t due to drugs they were being prescribed. It was due to something else in the environment causing a psychiatric epidemic. It’s almost comical reading Whitaker’s description of how bipolar disorder was “discovered” in children. Before psychiatric drugs were widely used, children never got bipolar disorder. The fact that stimulant and antidepressant drugs induce manic episodes, and that many more children were taking stimulants and antidepressants than ever before, was conveniently ignored. Since many children taking antidepressant drugs became bipolar, some researchers argued that the drugs were an effective diagnostic tool, unmasking the bipolar disorder that was hidden underneath. Diagnostic boundaries for juvenile bipolar disorder were expanded to include irritable and antisocial children, and these children were given drug cocktails that led to functional impairment and serious physical and mental side effects.

Another similarity between the financial services industry and the psychiatric-pharmaceutical industry is greed. When the ideology has cracks, fill in the gaps with cash. Just as academic economists receive thousands of dollars from the financial services industry in consulting fees, academic psychiatrists receive thousands of dollars from the pharmaceutical industry. This money provides an incentive for economists to spout free-market/deregulation dogma, and psychiatrists to promote drugs.

This ideology-greed connection becomes self-perpetuating. Academic economists promote deregulation and free markets, which leads to more profits for Wall Street, which means more consulting fees, which means more economists promote deregulation, etc. Academic psychiatrists promote the chemical imbalance theory and drug treatments, which means more profits for the pharmaceutical industry, which means more consulting fees for the psychiatrists, which means more psychiatrists promote drugs, etc.

What can be done to emerge from these vicious circles of greed and failed ideology? Reform from within isn’t an option. Both the financial services and psychiatric-pharmaceutical industries are too hopelessly corrupt to reform or regulate themselves. The only institution powerful enough to take on the economic and ideological might of these two industries is the federal government. But the government is itself corrupted by Wall Street and Big Pharma money. The government must be spurred into action by grassroots advocacy groups.

Any advocacy group needs to have a clear, specific goal in mind. The American Tea Party had a vague goal of opposing big government and bailouts. It has now been hijacked by libertarian/free market extremists.

The group that takes on Wall Street should have these goals: Phase 1 should be to pressure the government to fully fund all the regulatory agencies involved in enforcing Dodd-Frank. In addition, the government should prosecute bank and financial executives who committed fraud and securities violations during the housing boom and bust. Phase 2 should be to make even more ambitious reforms to curb the power, influence, and money of the financial services industry.

The group that takes on Big Pharma should begin with pressuring for congressional hearings. Robert Whitaker and other people who criticize the psychiatric-pharmaceutical industry should be allowed to speak, along with academic psychiatrists, drug company representatives, and parents and patients. If it turns out that there’s not enough evidence to demonstrate that drugs do long-term good (the burden of proof is on the pro-drug people to show that they work), then Phase 2 should be a major overhaul of psychiatric drug regulation. This can include banning drug advertising, banning off-label prescribing, banning prescribing the drugs to children, and extending clinical trials to several years (from the current 6 weeks).

Did America’s Economy Implode Because the Rich Are Too Wealthy? A Review of “Aftershock” by Robert B. Reich

The Great Recession has forced Americans to confront political and economic issues that have been ignored for decades. Since around 1980, middle class real wages have stagnated, both personal and government debt have increased to unsustainable levels, infrastructure and education have declined—and both Democrats and Republicans are to blame. The optimism, pragmatism, “can-do” attitude, and belief in continual progress that characterized America for most of its history (with some notable exceptions, including the Civil War and Great Depression) have been shattered. Americans have grown increasingly pessimistic that their children and grandchildren can achieve the “American Dream.”

Robert B. Reich, former secretary of labor under Bill Clinton, writes about the causes of America’s economic problems in his book Aftershock: The Next Economy and America’s Future. His central message is that the concentration of wealth at the top of the income ladder results in insufficient domestic demand for products and services, which leads to economic stagnation, anemic recoveries, and deep recessions.

There’s no question that income has become more concentrated the last 30 years. In the late 1970’s, the richest 1% of the country took in less than 9% of the nation’s total income. By 2007, the richest 1% took in 23.5% of the nation’s income, or more than double what it was before. Real wages of a typical American worker, however, stagnated during the same time period. If the gains of the American economy had been more equally distributed during the last 30 years, a typical person would be making 60% more now than he did then.

The problem with the rich becoming too wealthy is that they don’t spend enough. They live too modestly compared to what they can afford. The overall demand for goods and services shrinks because the rich invest most of their income. If more of the nation’s wealth went to the middle class, who spend a greater percentage of their income than the wealthy do, demand would increase, businesses would expand and hire more, and the economy would grow.

Reich writes approvingly of the period of the “Great Prosperity”, the years 1947 through 1975, in which American implemented a “basic bargain”: workers made enough to buy what was produced, resulting in complementary mass production and mass consumption. Wages of lower-income Americans grew faster than those at or near the top, doubling over these years. Productivity also doubled, giving the lie to those who argued that large inequality was needed for economic growth. It’s true that high income and wealth is an incentive for entrepreneurial and executive achievement, but how high does this income and wealth have to be? Even though CEO’s made only 30 times the typical worker salaries during the Great Prosperity (as opposed to 300 times today), they seemed motivated enough back then to do their jobs well.

The Great Prosperity also included powerful unions, generous health and pension benefits, minimum wage and overtime laws, unemployment insurance, Social Security, Medicare and Medicaid (in 1965), and interest deduction on mortgages. The G.I. Bill and expansion of the public university system helped make college affordable for the middle class. The interstate highway system became the most ambitious public works program in American history. The Cold War resulted in continued high military spending, which (via the “military-industrial complex”) led to the invention of the transistor, laser, computer, jet engine, and Internet. Unlike today, there was a societal consensus that this high level of government spending had to be paid for. The top marginal income tax rates in the 1950’s were 91%, and were 77% as late as 1969.

After the late 1970’s, the Great Prosperity ended and America began a period of increasing inequality. Reich recognizes that both globalization and automation led to the loss of high-paying manufacturing jobs. New jobs that were created, mainly in the service sector, didn’t pay as well as the jobs lost. At the same time that the middle and working classes had to accept lower wages, however, business executives and Wall Street traders saw their incomes skyrocket.

Government could have enforced the basic bargain, and reversed these trends leading to more wealth concentration at the top. For example, it could have given employees more bargaining power to get higher wages, especially in industries sheltered from foreign competition. It could have enlarged safety nets, financed Medicare for all, and forced industries laying off large numbers of workers at once to pay a year’s severance, along with training them for new jobs. It could have raised taxes on the rich and cut them for the poor. Instead, it did the opposite. Under the influence of libertarian, free-market economists, the government deregulated, privatized, cut taxes, and shredded the safety nets. It allowed companies to bust unions, slash jobs and wages, cut benefits, and move factories and jobs overseas. Government deregulated Wall Street while insuring it against major losses. This changed the finance industry from the servant to the master of American industry. Wall Street demanded short-term profits over long-term growth. “Between 1997 and 2007, the finance sector became the fastest-growing part of the U.S. economy” (p. 56). Finance and insurance companies’ share of American corporate profits increased from 10% to 40%.

It’s true that confidence in government began to decline toward the end of the Great Prosperity, with events such as the Vietnam War, Watergate, oil shortages and double-digit inflation. This confidence has continued to decline since. Reich attributes this decline to deterioration of government services and explosion of deficits, both of which were caused by the tax cuts. Also important was the increasing appeal of free-market dogma, which came through think tanks, books, media and ads that were largely financed by the rich and powerful.

Middle class Americans developed three “coping mechanisms” to help mitigate the effects of their declining economic status. These mechanisms included:

1. Women moved into paid work. In 1966, 20% of mothers with young children had jobs outside the home. By the late 1990’s, this had risen to 60% of mothers. While women with college degrees were able to land high-paying jobs, most women worked low-wage jobs to try to prop up stagnant and declining family income.
2. Everyone worked longer hours. By the 2000’s the typical American family worked 500 hours, or 12 weeks longer per year than it had in 1979.
3. People saved less and borrowed more. During the Great Prosperity, the American middle class saved about 9% of their after-tax income each year, and their debt averaged 50 to 55%. The savings rate declined to 2.6% in 2008, while debt exploded to 138%. Reich sees this indebtedness not as a moral failing, but as a way to try to maintain their previous lifestyle. When the debt bubble burst during the Great Recession, people were unable to continue borrowing.

The wealth inequality today is similar to what it was in 1928, just before the Great Depression, and Reich draws parallels between the two eras. There were high levels of private debt, especially mortgage debt, in both the 1920’s and 2000’s. Richer Americans speculated on a limited range of assets, resulting in stock market and real estate bubbles. The 1920’s even witnessed a Florida real estate boom, similar to recent times.

After the Great Recession that began in 2007, the U.S. government kept interests rates near-zero, bailed out the banks, and printed a great deal of money. This helped avert a second Great Depression, but left the federal government with vastly increased debt and deficits. Unlike during the Great Depression, in which the Roosevelt administration created a new economic order through its New Deal policies, the post-Great Recession Obama administration has done very little fundamental reform. The problem of widening inequality will likely continue. Reich predicts many years of high unemployment, middle class economic insecurity, and economic stagnation. From this Great Recession “aftershock”, we’ll see either a major political backlash against both big business and government, or large-scale reforms.

Some reforms that Reich would like to see implemented include:

• A reverse income tax that supplements the wages of the middle class.
• Higher marginal tax rates on the wealthy.
• A carbon tax, to promote the development of “green” technologies.
• A redesign of the unemployment system, making it a “reemployment system” that smoothes the transition to a new job.
• Replacing spending on public schools with vouchers based on family income, which would force wealthy suburban schools to take in lower and middle-income students.
• Making tuition free in all public colleges and universities, which will be financed by requiring that all graduates pay a fixed percentage of their taxable income for the first 10 years of full-time work.
• An expansion of Medicare to all Americans (replacing the current private insurance system).
• Expanding government spending on public goods such as transportation, parks, recreational facilities, museums, and libraries, making them free for all.
• Strengthening campaign-finance laws, funding elections publically, and limiting issue advertising.

Reich’s agenda for change makes sense in a nation in which there’s a consensus for government activism, high taxation, and social programs, in which people respect and admire politicians and bureaucrats, and are confident in the competence and ability of government to follow through on its promises. Such a nation doesn’t have anything in common with contemporary America. Reich’s laundry list for change has no chance for passage.

Reich’s views are similar to those of Nobel Prize-winning Princeton economist and New York Times columnist Paul Krugman. The Reich/Krugman viewpoint can be classified as “Liberal Democrat” and “Keynesian”. Unlike Thomas Friedman, who focuses on competitiveness and tries to appeal to both ends of the political spectrum (see my review of his book The World is Flat), Reich and Krugman focus exclusively on the demand side of the economy, and their appeal is mainly to liberals.

Was the Great Recession caused by too much wealth possessed by the rich? The speculative real-estate boom that led to the Great Recession was a world-wide phenomenon. Lax regulation certainly contributed to it. I’m not sure that American wealth inequality was a direct cause, although it may also have contributed to it. European countries have much less wealth inequality than America, yet they also suffered from the recession. The fact that the rich invest most of their money has led to more speculation and greater influence and power of Wall Street.

Regarding Reich’s point that the economy would be doing better if there was less inequality, I don’t agree with that. The American economy grew enormously during the (relatively) laissez-faire period of 1870-1928. This graph shows how real per capita GNP in the U.S. more than doubled. During that period, there were significant inventions and technological advances that improved the standard of living of many Americans, including electric power, electric lights, bicycles, telephones, automobiles, airplanes, widespread use of railroads and steamboats, medical advances, improved public sanitation, central heat, air conditioning, appliances, and radio. While there were few government social programs, and little military spending, America emerged from the ashes of its Civil War to become the world’s premier economic power. So I don’t agree that government programs are necessary to have a robust, vibrant economy, or to have a higher standard of living for the majority of people.

On the other hand, contrary to what many conservatives and libertarians say, a mixed economy with substantial military and social welfare spending, along with high marginal taxes, isn’t inimical to economic progress. Reich and Krugman are correct that the Great Prosperity (1947-1975) period in America was a time of enormous economic and technological progress, along with an improved standard of living for the majority of people.

Both liberals and conservatives agree that the last 30 years has been a period of economic decline in America. They’re in sharp disagreement, however, over the causes. Liberals such as Reich and Krugman argue that the decline was due to tax cuts and subsequent reduced government investments in social programs and infrastructure, along with deregulation, leading to wage stagnation among the middle class, concentration of wealth at the top, and increased deficits and debt. Conservatives argue that government social welfare and entitlement spending, regulation, and litigation exploded, leading to increased taxes, deficits, debt, and economic decline.

Both sides are right. Liberals are correct that the tax cuts have largely benefited the wealthy. Infrastructure has been neglected. Deregulation led to the housing boom and bust. Conservatives are correct that social welfare and entitlement spending has increased, along with some types of regulation and litigation (especially connected to employment, discrimination, and civil rights).

I think the problem isn’t the level of government spending or taxation, but fundamental disagreements between the two parties that has led to gridlock. Both periods of growth and progress, the laissez-faire one of 1870-1928, and the mixed economy one of 1947-1975, were a time of general consensus. While there were people and groups who opposed the consensus, they were an insignificant minority. During both periods, there was a long-term vision, and large investments in infrastructure and education. The infrastructure and education investments during the laissez-faire period were largely private; during the mixed economy period they were mostly public and military. The private versus public nature of the infrastructure and education investments is less important than the fact that they get done. They haven’t been getting done the last 30 years—existing American infrastructure and education has not been well maintained, and new investment is virtually nonexistent.

The Great Depression and World War II eras (1929-1945) were a transition time from a laissez-faire to a mixed economy. Reich argues in this book that the Great Depression was caused by income inequality, leading to inadequate demand. Conservatives would counter that the Great Depression was caused by government meddling in the economy, both before (income tax, antitrust regulation, the Federal Reserve), and after (New Deal regulations and programs, increased taxation). I would argue that the laissez-faire consensus was lost during the Great Depression, and the fact that the consensus was lost led to the length and severity of the depression. The crisis of World War II created a new consensus for big government, and led to the mixed economy Great Prosperity of 1947-1975. It was a combination of the transmutation of liberalism from a strictly economic philosophy to a combination economic-social philosophy in the 1960’s and 1970’s, along with the religious and libertarian conservative backlash that began with the Regan administration in the 1980’s, that led to the demise of the Great Prosperity consensus.

As further evidence of the importance of consensus to economic progress, consider contemporary China. It’s difficult to characterize the political-economic situation there—part Communist, part mixed-economy, part laissez-faire—but it’s undeniable that whatever they are doing, is working. The consensus there is produced partly by a dictatorship that tolerates no dissent, but this dictatorship, unlike the Maoist one, isn’t based solely on fear and ideology. The people in China are seeing their standard of living improve—millions have achieved middle class status, and the general progress there is perhaps the greatest economic miracle of our time. Compared to how other countries have fared in the Great Recession, especially America, China has weathered the downturn well.

This Chinese success story directly contradicts both the liberal and conservative perspectives. As Reich notes in his book, most of Chinese government spending is devoted to production, not consumption. Chinese people have virtually no safety net—spending on social services is about 6% of the economy, compared to an average of 25% in most developed nations. China isn’t following the Reich-Krugman vision of a demand-oriented, socially-generous nation. It also isn’t following the conservative/libertarian vision of “free minds and free markets.” The basic political system is a Communist dictatorship that arrests and jails dissidents, limits families to one child, and suppresses religious expression. Contemporary China bears little resemblance to past or present America. Yet its economy is one of the fastest-growing in the world. This chart shows China’s explosive GDP growth since 1990, 5 times America’s growth during the same period.

Since neither Reich’s liberal agenda, nor a libertarian/conservative agenda can be enacted in the current political climate of gridlock, what can be done to achieve a new consensus that will allow America to grow and prosper again? One possibility is for centrists like Thomas Friedman, David Brooks, Fareed Zakaria, and others to bring the two sides together and come up with a workable compromise. The problem is that the two sides have been trying to compromise for 30 years, and the compromises haven’t been working:

• Conservatives cut taxes and increased defense spending, while liberals increased social welfare and entitlement spending. This has led to skyrocketing deficits and debt, along with declining infrastructure and education.
• Conservatives deregulated the financial industry, while liberals used the government to insure against poor investments and losses. This led to the financial crash and bailout of 2008.
• Conservatives tried to keep some private sector, free market elements in the American health care system, while liberals tried to expand the public sector options and give more people access to care. The conservative influence has produced a supposedly competitive private insurance sector that fails to control costs, and the liberal vision has produced a public sector that provides all the benefits of socialized medicine (free and unlimited health care for seniors and the disabled) without any of the cost controls (i.e. rationing). The result is the most expensive health care system in the world that provides mediocre results. We have the highest infant mortality among the world’s industrialized nations, and our life expectancy is shorter than 40 other nations.
• Conservatives promoted school choice, especially private schools, while liberals maintained the status quo in the public schools. The result has been that most students today attend mediocre public schools, while a few lucky or rich kids attend charter or private schools.
• Conservatives promoted oil drilling and other fossil fuel development, while liberals advocated for conservation and green technology. The result has been that we’ve had no energy policy, and we’re almost twice as dependent on foreign oil today than we were at the time of the first oil crisis in 1973.

These differences and failed compromises on economic issues are only part of the bad blood between conservatives and liberals. The other part is the profound differences over social issues. Since the 1970’s, liberals have become more secular and hostile to traditional religion, as exemplified in their using the courts and legislation to legalize abortion, to restrict public religious expression, and promote alternative lifestyles such as homosexuality. At the same time, conservatives have embraced fundamentalist Christianity, seething at the godless liberals and their secular-humanistic agenda. For many liberals and conservatives, these differences are more important than the economic ones.

The over 30-year marriage of modern liberals and conservatives has failed. The two sides have spent most of the time attacking and criticizing the other, neglecting their duty to promote the public good. It’s unlikely that centrist marriage counselors like Thomas Friedman can do anything constructive to bring the two sides together. It’s time for a divorce.

I propose that the country split into two, a predominantly liberal Coastal America, and predominantly conservative Middle America. Coastal America would include most of the “Blue” states. Some states in the middle portion of the country would likely join, such as Illinois. Some states in the Southeast, such as South Carolina, would likely not join. Middle America would include most of the “Red” states. My guess is that the capitol of Middle America would be in Texas, the most heavily populated among the “Red” states. Splitting the country this way would cause major logistical and transportation issues, since some state borders would transform into international borders. If, for example, Kansas joins Middle America, and Missouri joins Coastal America, many commuters in the Kansas City metro area would have to cross an international border to get to work. Also, the “marriage settlement agreement” (i.e. splitting the assets and debts between the two countries) would be a source of contention. Would both sides get nuclear weapons? There would be a possibility of military engagement between the two sides (perhaps leading to civil war, as it did 150 years ago).

While not an ideal situation, and one with many obstacles and pitfalls, it’s the best of several bad alternatives. One alternative is to continue the way we’ve been going. This will lead to continued economic decline, neglect of infrastructure and education, growing frustration at government, and the increased possibility of widespread political unrest or civil war. Another alternative is to wait for some crisis or external threat to bring the sides together. Even in the unlikely event that some unifying crisis will happen, such as the 9/11 attacks, this crisis won’t change the fundamental differences. Just as with the 9/11 attacks, after the crisis is over the status quo will resume. Another alternative is for one side to establish a dictatorship, imposing its ideas on the other. That’s the only way that either the liberal Reich or the conservative/libertarian agenda can be achieved in an intact America. An American dictatorship would be impossible without first a civil war, a major economic disaster, or both.

Reich’s agenda has a good chance for passage in Coastal America. While there would be some conservatives there, they wouldn’t be numerous or influential enough to stop the liberals from passing the legislation, and a President Obama or some other liberal President from signing it. Reich, Krugman, Obama, Hillary Clinton and others can transform Coastal America into a European-style welfare state, complete with high taxes, universal Medicare, and, most importantly, public investment in infrastructure and education. Their model would be the Great Prosperity America of 1947-1975, along with contemporary European countries. One thing liberals need to understand is that the aging of America, along with foreign competition, forces them to be much less generous with social welfare and entitlement spending than they were in the past.

Rush Limbaugh, Glenn Beck, Sarah Palin, Ron/Rand Paul, Newt Gingrich and others can transform Middle America into a Libertarian-Christian utopia, using as their model the laissez-faire U.S. from 1870-1928. They can promote private investment and free markets in health care, infrastructure and education. Since American today is closer to the 1947-1975 model than the 1870-1928 model, and many people depend on social welfare and entitlement programs, the conservatives would have a harder time enacting their agenda. One thing that conservatives need to understand is that the America of 1870-1928 had very little defense spending (with the brief exception of World War I). If Rush, Glenn, Sarah and the others want to cut taxes to pre-1930 levels, or eliminate the income tax, they’ll need to radically cut defense spending.

The good thing about a split America is that neither the Coastal nor Middle parts would have any pretensions about being a superpower. There would be no need for (or ability to fund) the level of military spending we have now. We wouldn’t be able to send troops to a future Iraq or Afghanistan to try to perform nation building. We would have to sell off or destroy much of our military hardware, and send most of our troops back to private life. Our military would transform from being the world’s policeman to being a self-defense force.

Like with West and East Germany between World War II and the destruction of the Berlin Wall, Coastal and Middle America can be seen as a large-scale political-economic experiment. If one is vastly more successful than the other, as West Germany was compared to East Germany, then perhaps the failed one will eventually agree to accept the system adopted by the successful one. Like with the reunification of Germany, America may then become reunited again. On other hand, if both are successful, or neither one successful, then perhaps America may remain divided for a long time.

In conclusion, Aftershock has some good examples of how our country has become more economically unequal in the last 30 years. The middle class has struggled while the rich have gotten much richer. The coping mechanisms that those in the working and middle classes have used to try to maintain their standard of living, including having both spouses work, increasing their work hours, and increasing their level of debt relative to income, have been exhausted. The money going to the rich, unlike that going to the middle class, is usually invested, not spent, which helps out Wall Street but not Main Street.

I don’t agree with Reich’s argument that a massive increase of government social welfare spending and taxation is needed to grow America’s economy. While such a policy will lead to more equality, there are other ways to promote economic growth and improved standard of living that rely more on stimulating production than consumption. These alternatives include laissez-faire economics that America utilized in the late 19th and early 20th centuries, along with a mix of Communist dictatorship and capitalism that contemporary China uses. Reich’s agenda can only be achieved in a Coastal America that results from splitting the country into two. Such a split is the best of a number of bad alternatives that face America today, a result of a failed marriage between modern liberals and conservatives.

Is Globalization Good For America? A Review of “The World is Flat” by Thomas Friedman

Globalization has its advantages and disadvantages. While American consumers can enjoy cheaper products and services thanks to manufacturing plants in China and call centers in India, many American workers have lost their jobs. What was an economic change affecting mainly manufacturing workers in the 1980’s and 1990’s has in the last decade, and especially since the Great Recession began, been transformed into a job-destroying mechanism for workers at all levels of ability, in many different fields. Secretaries, computer programmers, and even lawyers have seen their jobs outsourced to India and other countries. Does globalization benefit the country as a whole?

Thomas L. Friedman writes about globalization in his 2005 book The World is Flat: A Brief History of the Twenty-First Century. I decided to read this book because I have read many New York Times opinion columns by the author, and found him to have an interesting perspective on the economy, politics, global warming, and the Middle East. Friedman is a journalist, and traveled extensively to research this book, interviewing business executives from around the world, from Bill Gates to Vivek Paul (president of the Indian outsourcing company Wipro). The book contains no footnotes, endnotes, or bibliography. Most of the material comes from Friedman’s observations and interviews.

Being a computer programmer, I have seen firsthand that many IT jobs have been shipped to India. I was fascinated by Friedman’s account of the history of this outsourcing process. It began with India’s opening up of its previously socialist economy in the early 1990’s, a political change influenced by the fall of the Berlin Wall and the collapse of the former Soviet Union. The computer, telecommunication, and Internet revolutions helped create a platform for globalization of IT. During the late 1990’s technology bubble, companies overinvested in fiber optic networks. The dotcom bust in the early 2000’s bankrupted many companies, but brought down the price of data and phone transmission. These technological and economic changes made India “the luckiest country in the history of the late twentieth century” (p. 103). Finding themselves with cheap fiber optic networks just waiting to be used, Indian entrepreneurs utilized homegrown engineering, computer science, and software talent to outsource American jobs. The Y2K computer crisis that occurred at the turn of the twenty-first century gave Indian outsourcing companies a big project to work on, and programmers there did much of the Y2K upgrade work. E-commerce was another important technology outsourced to India, and pretty soon it would be hard to find a technology or software product in which Indian companies didn’t have a footprint.

The title of the book reflects how technology, business process, economic and political changes have “flattened the world,” i.e. removed barriers that prevented individuals or countries from competing. The above paragraph shows how India benefited from these changes. China, Russia, Eastern Europe, and some countries in Latin America and Asia also benefited. Certain countries, such as many in the Middle East and Africa, have not benefited. Friedman talks about the reasons why Arab-Muslim countries have been left behind in the global flattening. In his view, anger and frustration at the Israeli occupation of Palestine, at the Arab-Muslims having to live under authoritarian governments, and at a decadent and promiscuous West has helped promote religious extremists such as members of al-Qaeda. He calls al-Qaeda terrorists “Islamo-Leninists.” Like Lenin, they have a utopian-totalitarian worldview, one in which their acts of terrorism against the West mobilize and energize the Muslim masses to rise up against their corrupt rulers. Unlike Lenin, however, they want to establish an Islamic state that spans the territory of the former Muslim empire. Desiring life and government to return to the way it was in the Middle Ages is not an attitude conducive to participating in the global economy. Friedman offers a counterexample of Arab entrepreneur Fadi Ghandour, cofounder and CEO of Aramex, a package delivery service company, the only Arab company listed on the Nasdaq. If more Arabs would desire to be like Ghandour, and fewer like bin Laden, the Middle East would be part of the flat world.

Friedman believes in free trade, the economic basis for globalization. Trying to protect certain jobs or industries, while helping one group of people, is not going to help the country as a whole. The wealth of examples he provides of how globally integrated our economy has become is good evidence in support of his view. An example is his description of how his Dell computer was assembled using a global supply chain. His order was emailed to a Dell notebook factory in Malaysia. The notebook was codesigned in Texas and Taiwan. The Intel microprocessor came from a factory either in the Philippines, Costa Rica, Malaysia, or China. The memory came from a factory in Korea, Taiwan, Germany, or Japan. The motherboard came from a factory in China or Taiwan. The hard drive came from a factory in Singapore, Thailand, or the Philippines. Note that the only thing from this list made in America was the notebook design, and it was only codesigned here. Most of the factories are in Asia.

While there may be transition phases in certain fields, in which wages go down, and people lose their jobs, there’s no reason to believe that this downward trend will be permanent. Not everything that can be invented has been invented. New technologies, new types of jobs will replace the ones lost. A good example is the computer/IT/Internet revolution. Fifty years ago, who could have imagined how the computer revolution would take place, how many jobs would be created, and how our lives would change? There will likely be new technologies that come into existence in the future, that no one can imagine now. These technologies will produce new jobs and new companies, just as the computer revolution produced Microsoft, Apple, and Google.

Friedman is sensitive to the plight of workers who become unemployed due to globalization. He would like to see instead of lifetime employment, lifetime employability. Government and business can both help in making a worker employable for his lifetime. Education is the key to this. Tertiary education should be government-subsidized for at least two years, whether at a state university, a community college, or technical school. Employers should help train and cross-train employees so that if their job is outsourced, they have the skills necessary to get another job.

Friedman talks about social problems in America that will make the country less competitive down the road, something he calls “a quiet crisis.” He wrote the book before the Great Recession began. Now, this crisis is becoming noisier than ever. One problem is that fewer Americans are becoming scientists and engineers, at a time when the number of jobs requiring science and engineering training continues to grow. A National Science Board report in 2004 notes that science and engineering degrees represent 60% of all bachelor’s degrees in China, 33% in South Korea, 41% in Taiwan, but only 31% in the United States. The number of American college-age students who receive science degrees has fallen to seventeenth in the world, when we ranked third 30 years ago. Immigrants have filled in some of this gap. 60% of the nation’s top science students and 65% of the top mathematics students are children of recent immigrants.

Another problem is that Americans have a sense of advantage and entitlement that makes them lazier than people who grow up in less affluent countries and homes. It takes a sense of self-discipline, delayed gratification, and long-term thinking to pursue higher education and achieve success in an intellectually-demanding career. Americans seem to have lost the ability to defer gratification and look to the long-term. The best example is the debt-fueled consumption of the recent decades, financed in large part by the disciplined and motivated Chinese. The Great Recession has forced many an American to “wake up” to the new reality, and redirect their lives.

Friedman doesn’t mention a related problem that seems to afflict Americans more than anyone else: the drug epidemic. Nothing represents a national failure to delay gratification more than widespread drug abuse and addiction. The illegal drugs like cocaine, heroin, pot, and ecstasy give the user an immediate high, they feel good for a short time, but then pretty soon they feel miserable until their next fix. The legal psychotropic ones like antidepressants, antipsychotics, benzodiazepines and analgesics help people suffering from a variety of disorders to temporarily feel better. But they don’t provide any long-term relief. As I report elsewhere, many of these supposedly therapeutic drugs make people worse over the long run, suffering from chronic addiction, and physical and mental side effects. Antidepressants and antipsychotics also blunt motivation and emotion, something not conducive to career achievement. Doctors ignore these deleterious long-term effects, prescribing these drugs willy-nilly. A nation of drugged-up zombies and addicts can't compete in the global marketplace.

What should people do to keep from being outsourced? Friedman devotes a chapter to this. One suggestion is for people to work in a specialized field. Examples include specialized lawyers, brain surgeons, cutting-edge computer architects, and robot operators. This type of work cannot easily be digitized and transferred to a lower-wage location. The problem for most people is that they don’t have the skills or education necessary to work in these fields.

Another suggestion is to be anchored, i.e. to work in a service job that cannot easily be automated or outsourced. Robots or Indians can't serve you lunch or check out groceries, at least not yet. The problem with these jobs is that they are usually low wage.

Another suggestion is to be adaptable, to constantly acquire new skills, knowledge, and expertise. If you are a computer programmer and only know the C language, you’re not very marketable. The problem with this suggestion is that older and low-IQ people have difficulties being adaptable.

Friedman doesn’t mention that there is a large group of people who are being left behind in this new economy. They don’t have the intelligence, education, ambition, or skills necessary to work in a specialized field, or to be adaptable. The only thing left for them is to work in a low-wage service job. I have some friends, bright people, people who have worked in good, decent-paying, middle class jobs, who are unable to get a good job in the current economy. They are forced to take low-wage service or call center jobs. Eventually, as robots become more advanced and prevalent, even the service jobs will become automated. Then what will happen to people who can only work in these jobs? Will we have a large group of unemployable people who will have to rely on state assistance to live? How can society afford to support these people? What will being on chronic state assistance do to their inner dignity and self-worth? These are questions that Friedman and others who applaud globalization need to answer.

How an Unstable Meritocracy Has Failed America

David Brooks’ interesting NY Times Op-Ed column points out that while American society has become more fair and open, the level of trust and respect of our institutions has plummeted. The male WASP, blue-blood establishment of the past has given way to a new establishment in which religion, family, race, and gender are no longer as important. People get into the top schools largely based on intelligence and academic achievement, and after they graduate they move into positions of power in government, business, and academia. This can be seen as a triumph of meritocracy, a system in which people are promoted and reach leadership positions based on ability. Isn’t that a good thing, something that generations of Americans have longed for, something that harks back to the anti-aristocratic heritage of the American Revolution?

Brooks points out that this meritocratic establishment is lacking in several respects. One is that it’s based on a narrow (academic) definition of talent. This definition lacks context and empathy, two important factors for good decision making. In recent years, members of the political and economic elite have made some poor decisions that have severely harmed American long-term interests.

Another problem with the current meritocracy (a point which was made by the authors of The Bell Curve) is that members of it live almost entirely separate lives from everyone else. They go to their elite schools, work in a rarefied environment, live in gated communities, and marry and socialize with other elites. They could care less about ordinary people.

Another problem is that solidarity among elites is weaker. The socially connected, inbred WASP elite may have competed with each other, but didn’t fight an all-out war, as elites do today. Is it in the best interests of the country that Democrats and Republicans can’t agree with each other on anything?

A related problem is that our society is too transparent. No one knew at the time that JFK was having various love affairs, because certain topics were considered off-limits to reporters. Was it in the best interest of the country that Bill Clinton was impeached for sexual indiscretions?

The most important problem with meritocracy is that it is unstable and based on short-term thinking. The WASP elite could trace their lineage back generations, and this family-centric perspective encouraged long-term thinking. The 1960’s revolution and its aftermath swept away the WASP elite, but didn’t put any stable social structures in its place. The U.S. has been a very unstable country since this revolution. This instability occurs at every level of society, from the family breakdown, drug abuse, and crime in the inner cities, to the reckless gambling of Wall Street elites that led to the current Great Recession. Schools and infrastructure have declined as our political leaders put special interests over the interests of the country as a whole.

Brooks doesn’t offer any solutions to this problem. While we can’t go back to the 1950’s, I think that we need to start rolling back some of the reforms that have led us to our present dire situation. We need to regain our appreciation for social stability and social structures, for family connections, and for long-term thinking. Creative public policy ideas that involve such an appreciation need to be formulated and implemented.

What $640 / month rent gets you in Tokyo

Times are tough in Japan right now. Their export-oriented economy has been hit hard by the Great Recession. "Hotels" like the one pictured above, originally intended for salarymen who stayed out too late and missed the last train, now rent out a third of the units long term. Read more about life in a 6.5 x 5 ft cubicle here.

Ben Bernanke—A Creative Leader

In my Triumph of Dullness blog post I say that there aren’t any contemporary creative geniuses in the arts and sciences. Creativity can be exercised in other fields, however, most notably in business or political leadership, and technology. Bill Gates and Steve Jobs are two names that come to mind as geniuses in technology management. Those of us who are old enough to remember life without the PC or Mac realize how much our lives have been transformed by these devices. When I was in high school in the early 1980’s, the early versions of PC’s and Mac’s were available. There was no Internet, however, and we still did our term papers on typewriters. I couldn’t imagine using a typewriter now.

It’s much rarer to find intelligently creative political leadership. FDR was a good example of a creative leader, who guided his country through two of the biggest crises of the last century: the Great Depression and World War II. There was no guidebook to follow, no historical precedent, so FDR had to improvise. While you can disagree with specific policies or programs, by the time he died in 1945 the U.S. had defeated Hitler in just 3 ½ years, and was on its way to defeating Japan. World War II also ended the Great Depression.

After reading Time Magazine’s Person of the Year article, I have to conclude that Fed Chairman Ben Bernanke is a creative leader. In the fall of 2008, the world financial system ground to a halt. The housing bubble had burst, and a Depression 2.0 was a real possibility. Instead of responding in predictable ways, such as only lowering interest rates, this scholar of the Great Depression did some creative things. These had never been done before on the scale that Bernanke did them:

1. Coordinating rate cuts and other interventions with central bankers around the world
2. Buying up commercial paper, mortgage-based securities, and other debts.
3. Bailing out troubled banks and other financial firms.

One can disagree with specific actions, such as some of the bailouts, but that’s the case for any leader or policy maker. It’s easy to lose sight of the fact that we were threatened with an economic depression. If Bernanke hadn’t acted, we could have 25% unemployment now, instead of 10%. It’s easy to blame people for disasters that actually happened; it’s harder to praise them for disasters that didn’t happen. A good example of this is that we haven’t had any terrorist attacks on American soil since 9/11. Our national security agencies deserve credit for this, but they’re rarely praised. For the same reason, Bernanke deserves recognition for the disaster that didn’t happen.