The slide of the ‘average’

Much more has been written than read about the divisive subject of income and wealth inequality in America over the last decade. It is the reading equivalent of a dance marathon, painting a gloomy picture of American society. If we are to address it successfully, we must start by enacting policies that recognize the importance of the middle class rather than simply relying on the invisible hand of the free market.

Earlier this year, the number one book on the Amazon bestseller list was “Capital in the Twenty-First Century” by French economist Thomas Piketty. Its central message is a call for wealth redistribution to reduce inequality, an approach that has never been popular in America, a country where economic growth comes first and distribution last.

Despite President Obama’s repeated statements that inequality is the “defining challenge of our time,” things continue to slide for the average American. For those living close to the ground, inequality is alive and well in America.

While there is disagreement about how to measure inequality, most studies focus on income, wages and wealth. For example, the bottom quarter of American households have seen almost no increase in real income for the last 25 years.

The top one percent of Americans, however, seems to be getting on quite well. They have seen their real incomes almost triple during the same period. Their share of national income has reached 20 percent and they own nearly 35 percent of the country’s wealth, figures not seen since the Roaring Twenties. The rich are running up the score.

As few as 16,000 families have a combined wealth equal to 5 percent of America’s gross domestic product, a level of concentration reminiscent of business monopolies. There’s also the legitimate concern that as the economic power of the richest one percent increases, their political power increases with it and they shape the rules governing our economy and society. Can you imagine this group raising taxes on themselves to finance new investments in education, job retraining and infrastructure that are routinely suggested as solutions to the inequality problem.

Americans are witnessing the Matthew effect. To paraphrase Matthew 25:29 in the King James version of the bible: “that to those who have, more will be given, while to those who have less, even that will be taken away.” Or in popular parlance, the rich get richer and the poor get poorer.

This widening gap between the rich and the poor brings with it all kinds of bad implications. Rising income and wealth inequality and the lack of opportunity to move up the income ladder threaten the nation’s economic growth and fundamental values; the middle class is growing thinner and thinner.

A strict free-market capitalist, the economic equivalent of a religious fundamentalist, argues that because inequality puts more resources into the hands of capitalists, it promotes savings and investment that in tum generate economic growth and increase the size of the economic pie. Just lower taxes on rich folks, cut the federal deficit, and deregulate and they will invest in the economy, creating millions of new jobs and lifting the unemployed out of poverty. This holds a grain of truth, but just.

While the issue of what is to be done about economic inequality is not one that lends itself to easy answers, especially in our politically polarized environment, we must start with policies that recognize the important role the middle class plays in driving economic growth.

originally published: July 19, 2014

The Highway Trust Fund is crumbling; maybe it should

The federal Highway Trust Fund, which provides transportation funding to the states, is projected to run dry in August. But with a technology-driven revolution underway in the way Americans use surface transportation, applying yesterday’s solution and simply replenishing the fund won’t solve the problem.

According to the Obama administration, if the fund is exhausted, states will be forced to put off 112,000 highway construction and 5,600 transit projects, resulting in the loss of 700,000 jobs. When dealing with the government, there are always plenty of zeroes to go around.

The traditional source of revenue for the trust fund is the federal fuel tax of 18.4 cents per gallon, which has not been increased in over two decades. Given that it’s an election year, an increase is not only dead but already decomposing.

One reason the federal fuel tax doesn’t generate enough revenue is more fuel-efficient cars. But that isn’t the whole story. Surface transportation is in the midst of a quiet but profound transformation because technology is fundamentally improving urban mobility.

Technology advances make it easier for people to navigate public bus and rail transportation. Personal ride-booking and car-sharing services are available in nearly every major city, resulting in an interactive transportation network that generates fewer vehicle miles traveled.

As is always the case, technology is outpacing traditional institutions’ ability to adapt. Customers and markets have embraced the digital revolution. The country is witnessing the emergence of an integrated surface transportation network where each transportation mode no longer operates as if it exists in a separate universe.

Technology is in place that allows cities to operate roadway, rail and water transportation modes that complement each other. This gestalt shift represents a fundamental challenge to the traditional approach of the road gang pouring more and more concrete. This is all happening in the name of market solutions, the kind that would make Adam Smith smile.

The proliferation of innovative mobility tools has major implications for traditional approaches to planning, funding, and delivering surface transportation. Recent lifestyle changes, especially among the millennia! generation, are transforming the surface transportation marketplace. It is hard to resist the temptation to conclude that it is time to deliver the eulogy for traditional surface transportation planning and funding.

History- specifically the Japanese Navy’s strategic failure at Pearl Harbor- can teach us something about not letting business as usual blind us when it comes to the need to overhaul surface transportation in the U.S. The Japanese Navy’s officially sanctioned model for everything it did was the British Royal Navy. Standard histories of the Royal Navy emphasize its victories in spectacular naval battles like Trafalgar during which Royal Navy warships attacked and destroyed opposing warships.

Thus, Japanese naval thinking focused on attacking the U.S. Pacific Fleet’s battleships while they were moored at Pearl Harbor. Lost in the shuffle was any serious consideration of trying to cripple Pearl Harbor’s ability to function as a forward naval base. The Japanese were intellectual prisoners of a past that they believed would shape the future.

So it was that, in a brilliant display of tactical management, six aircraft carriers furtively approached the Hawaiian Islands just before dawn that fateful Sunday, launched their planes into the rising sun, caught the U.S. Pacific Fleet with its pants down and wrought havoc in spectacular fashion. On paper at least, this rivaled the triumph at Trafalgar, the Japanese Navy’s benchmark of success.

But as the sun set on Dec. 7, Pearl Harbor’s all-important fuel storage and ship repair facilities remained untouched by Japanese bombs, allowing it to continue serving as a forward base for American naval power in the Pacific. In reality, Japan’s tradition-bound naval leaders chose the wrong targets at Pearl Harbor.

Tradition is often the worst guide when it comes to doing anything really important. Things that have survived long enough to be venerated are often obsolete. American surface transportation is beset by a host of traditions that have helped produce the problems we face today. We must free ourselves of them if we’re to come up with a truly effective vision for what transportation should look like in the future.

originally published: July 12, 2014

The D.C. tempest that is the Ex-Im Bank

All the world, as the man said, is a stage, and the little-known Export-Import Bank is center stage in Washington’s latest political tempest. Conservative lawmakers are mounting an unwise push in the House of Representatives to pull the plug on the bank ahead of a Sept. 30 deadline for its charter to be renewed. The so-called Ex-Im Bank is funded by the U.S. Treasury (a.k.a., taxpayer dollars) and encourages the sale of American exports by providing direct loans, loan guarantees, working-capital guarantees and export credit insurance to foreign buyers and assists U.S. exporters. All these financial products carry the full faith and credit of the U.S. government.

In recent years, the bank has been the target of conservative lawmakers who want to shut it down. Currently, they are mounting a push in the House of Representatives to pull the plug on the bank ahead ofthe Sept. 30 deadline.

President Franklin D. Roosevelt established the Ex-Im Bank in 1934 to help finance overseas sales of American goods to combat the global collapse in trade and trade credit during the Great Depression. In 1945, it was made an independent government agency, which made it easier to obtain capital from the U.S. Treasury to help reconstruct war-tom Europe.

More recently, the bank extended a multi-million-dollar direct loan to finance exports of gas turbine generators from General Electric to three power plants in Saudi Arabia. Alternatively, if a foreign buyer of an American product sought a loan from a commercial bank, that bank could apply for a loan guarantee from the Ex-Im to cover the debt in the event of a default and pass the costs to the buyer.

Ex-Im Bank also offers export credit insurance to American exporters to protect against the political and commercial risks of defaults by foreign buyers. Finally, the bank guarantees working-capital loans extended by commercial banks to eligible exporters with exportable inventory or export receivables as collateral.

The bank does not give these services away. It uses the interest and fees it charges borrowers to reimburse the U.S. Treasury.

Critics claim the commercial lending market, not the government, ought to fund trade finance deals. The bank is derided as an expensive boondoggle, providing large, politically connected multinational firms with an unfair competitive advantage. Critics also argue that there is little evidence to support the notion that the bank is a major export driver, since it finances less than 2 percent of the $2.2 trillion worth of goods and services American firms exported in fiscal 20 13.

Ex-Im supporters say American exports are tied to jobs and economic growth and that the bank supports exports by assuming risks that commercial lenders are unwilling to take on. They say it provides small and medium-sized businesses with important services at reasonable prices.

America needs the bank because, in the current global economic landscape, other countries have export credit agencies that offer comparable services. Without it, American exports would be at a competitive disadvantage.

In an ideal world, businesses would obtain trade financing from privately owned banks. But since more than 60 countries have export credit agencies, shutting down the bank would amount to unilateral disarmament.

Unilateral disbarment doesn’t work any better in global trade than it does in warfare. That’s why America should not abolish the Export-Import Bank without securing reciprocal action from other trading countries that have their own export credit agencies.

originally published: July 5, 2014