Money Management and the Economy

Monday, October 18, 2010

The T-Party Movement and Running Government Like a Business

There is a media narrative out there about the T-party that it is made up of people who are angry because they lost their jobs or fear losing their jobs. The actual demographics of T-party supporters don't really reflect this at all. Instead, the typical T-party adherent is male, moderately well to do and in his 40's. Of course, not all fit that demographic. But far from being "trailer trash" as some people imagine, the T-party folks have been relatively successful.

So why are they angry? Because they fear life is getting worse, rather than better. And they, as individuals, react psychologically to their fears by getting angry, as opposed to other extreme of going to bed and pulling the covers over their head. But to focus on the causes of their anger, which are mostly personal psychology, is to ignore the causes of their fear.

Of course, we can't expect politicians or the media to address those causes. Success in politics requires validating that fear and anger regardless of its source. And playing on people's emotions is what holds an audience for advertisers. Neither one has any real interest in deconstructing people's emotions and addressing their fears rationally.

But confronting the sources of fear is probably the only way to pull out of a death spiral of fear feeding the anger and the anger just adding to the level of fear. The causes of people's fear are both rational and irrational. And they are not universal. So lets take a look at several of them.

One of the complaints you will here from the T-party folks is that they are paying taxes and "most Americans" aren't. This is based on the current talk show meme that most income tax is paid by the highest earners, while a large number of American families get off "scot-free", paying little or no taxes. It isn't really true, but that is a different issue. The T-party folks believe it because it fits their own experience.

Under our tax system, we pay income tax at different rates during different periods in our lives. Obviously most children pay no income tax. When we are teenagers, we may pay very little even if we have a job. Once we enter the workforce, we will start to pay a significant portion of our income in taxes, but our overall earnings are generally low. But the tax system is set up that once we start a family, there are numerous tax breaks that are income tested. People whose income is in the mid-range of household incomes, may find that with deductions they get for their children, there tax bill is again small or non-existent. Much like when they were teenagers.

Unfortunately(?), children leave home. When they do family expenses decline, but the tax man comes to take away a lot of that extra income. I think that may be why you see the T-party demographic being well-to-do 40-something male Republicans. These are folks who have moved from the "tax-privileged" category, that people who have families with children are in, into the tax-paying part of their lives. They had looked forward to the time when the kids were out of college and they would have a lot more money to spend on themselves. They found instead that Uncle Sam was going to take a much bigger share. So, while taxes in general haven't gone up, theirs have.

As we age, our income increases and the expense of maintaining a family disappears, our tax bill continues to increase. But once we retire, its likely the bill will fall again. Most people do not pay additional taxes on their Social Security benefits. So people totally dependent on social security and their savings for their expenses, may pay no taxes. Of course, that will be less true in the future when people have large amounts of tax-deferred savings that are taxable when used.

Of course, this process is nothing new. What feeds the fear now for those in the middle of that proccess, is that many of them have lost confidence in the future. They don't necessarily expect to be earning more in the future. They are under water on their mortgage, even if they can make the payments. The savings they thought guaranteed a comfortable retirement looks a lot less certain. In short, when it looks like hard times ahead, we all tend to hoard our resources. So as taxes take a bigger share of their income, it is coming at time when they are feeling very insecure about the future. They NEED that money.

You can see this fear of the future play out in the political debate. Concern about the federal deficit, the cost of paying for our retirement system, opposition to public investments and the demands to cut back assistance to the less fortunate all reflect a lack of belief in a prosperous, productive future. It is that fear of the future and feeling the need to hoard our resources for the coming lean times that is emotionally driving the current political/media discussions.

The problem is that acting on those fears makes that future all the more likely. Which brings us to "running government like a business".

I always wonder that when people use this cliche they seem to mean "run government like a small, unsuccessful business". They don't seem to include the most successful, large businesses that are perpetually in debt. Those businesses borrow money and invest it in production, confident that they will produce enough income to repay the debt and return an even larger profit than if they hadn't borrowed. They are always trying to reduce costs, but not at the expense of productivity.

Even small businesses faced with falling revenue or low profits have two choices. One is to cut costs even if it reduces productivity, the other is to invest to bring in new customers or increase productivity to serve current customers at lower costs. Its really the unsuccessful business, the one that is dying, that cuts its necessary expenses in order to maintain a profit. Successful businesses, large and small, go by the adage "you have to spend money to make money".

Of course, many small businesses are not successful or even run like a business. Instead, they are just a way for someone to make a living. As one local business owner said of a store that was for sale, "Its not really a going business, but someone might be able to buy it to create a job for themselves." For people who own and operate those businesses, cutting the advertising budget to pay for their kids college makes perfect sense. The success of the business is a secondary consideration. Its really just a way to have a job.

Those same choices exist with government. There are certainly good arguments that some of the money government spends is wasted. Government, like a business, should always be trying to identify and cut that waste. And other public costs, like retirement and other social service benefits are not going to bring a return in the future. Instead those are debts being paid to those who helped to build the vibrant country we inherited. But many of the folks who say they want to "run government like a business" also want to cut costs that are really investments for future success - education, infrastructure and effective business regulation. And that's because they have lost confidence in the country's future. They don't really believe those investments will bring a return that will repay them. They want to run the country like a failing small business that cuts advertising because it "can't afford it" only to have even fewer customers. They have given up on the American dream.

Rather than looking to the future, the T-party and its allies are fearful. Instead of building for the future, they are just trying to hang onto what they have until their lives run out. Of course that is not how America became the greatest country on earth, but it is how other country's have lost that status in the past.

I still believe in American exceptionalism. As a democratic country we can decide we are not going to go into decline and die. We can leave a better and stronger country for the next generation to build their prosperity on , just as our parents provided the basis for our own prosperity. I'm an optimist, the meme of the day is fear and anger, but this too shall pass.

"Courage... is mastery of fear – not absence of fear" - Mark Twain

1 comment:

Anonymous said...

Excellent. I really enjoyed this post.