Privatizing Government I

Yale Open Course <Power and Politics in Today's World>

Lecture 8: Privatizing Government I: Utilities, Eminent Domain, and Local Government

Notes

Neoliberalism (domestic) & Washington Consensus (abroad)

• components: deregulation, privatization, free trade

• hegemonic through 2008; then starts fracturing

  • backlash after 2008

    • Dodd-Frank Act to regulate

Hegemony is never complete

• Michael Walzer <Interpretation and Social Criticism>

  • internal resources within any hegemony that enables criticism of it & possibility of changing it into something different

    • “imminent criticism”

Water privatization ↑ 1991-2007 around the world

• in developing countries (imposed by the IMF/World Bank and developed countries)

Eminent Domain

• right of the government to take private property for a public good

• “Privatizing” eminent domain in India

  • 1984, 2007 → expansion of the definition of “public purpose” in the Land Acquisition Act

    • 70% rule: companies need to acquire 70% of the land; the rest is bought by the govt and sold to the company

      • prevents hold outs

    • Special economic zone with regulatory/tax breaks → magnet for capital

  • Ex. the Tata Nano in Singar, West Bengal

    • Bengal governed by the Communist Party operating a capitalist economy

    • the govt started firing farmers off their lands, some without given any compensation

    • People + opposition party began attacking the car plant

    • “just compensation” → flash point

    • informal transfer & tax evasion

      • land sold at “official price” not “unofficial” price which was higher

    • increased land value after the project was launched

    • moral hazard of the 70% rule

      • people can still hold out for higher prices

    • many farmers unlikely to reap Tata employment benefits

  • Case of eminent domain backfiring

    • lands bought for the purposes of “economic development” but resistance and mobilization of the affected population

Privatizing eminent domain in the US

• Takings clause of the 5th amendment + due process clause of the 14th amendment

  • private property can’t be taken for public use without just compensation

• what makes a use “public”?

  • public good:

    • non-excludable (creating benefits for me also gives them to you)

    • non-rivalrous (my having it doesn’t stop you from having it)

    • inevitably politically charged question

      • bc of alternative courses actions that could’ve been taken

        • there are always winners and losers

      • externalities: costs that some people will have to bear

      • valuation

• Case: Kelo v. City of London 2005

  • Supreme court in favor of the city deploying ED to build a shopping mall for economic growth even when there is no blight

    • Back lash:

      • widespread diverse coalition opposition

      • 2019, 45 states against private use of ED

• conclusion:

  • neither efficiency or “just” compensation enough for people to greenlight privatization

  • loss aversion might be important

  • unexpected externalities can trigger opposition

Privatizing local government

• downstream effects of Proposition 13

• CA with less revenue, needed to make up with other taxes

  • but revenue still growing slowly

  • local governments response: privatize government

    • Common Interest Developments (similar to condo associations)

      • condo owners pay a fee to receive utility services that local govts typically provide

      • 2009, ~20% of US population living in CIDs

        • some states (ex. CA) don’t allow any other kinds of residential developments

        • saves money for governments

      • consequences for democratic politics?

        • private government (board) chosen by developers → undemocratic boards

        • accountability problems

        • entry barrier → what about the homeless?

        • “Segmented democracy” (Douglas Rae)

        • people spending time with people like themselves

        • which can lead to political polarization (Kahneman & Cass Scutean

        • Privatizing of policing; CIDs essentially gated communities

The Anti-Tax Movement

Yale Open Course <Power and Politics in Today's World>

Lecture 7: Shifting Goalposts: The Anti-Tax Movement

Notes

Origin of the anti-tax movement

• Post-Watergate soul-searching and the rise of activist think tanks on the right

  • think tanks to change the ideological terrain that had allowed for the New Deal and Great Society

• California Proposition 13 (June 1978)

  • referendum vote on limiting property tax

  • “government is the problem”

  • starting point of the anti-tax movement

The logic of referendum politics

• The Brexit Paradox

  • 2015 the majority of the Parliament pro-remain

  • 2016 Brexit referendum - 52:48 pro-leave

  • 2017 Parliament more pro-remain than 2015

  • Referendum votes focus only on single issues

    • masks the downstream effect and their relations to other issues

    • Kahneman & Twersky

      • Framing effect: how you frame an issue has a lot to do with what people will say about it

• Anti-tax movement

  • tax cuts as single issue politics

  • became non-negotiable for republicans to support tax cuts

    • GWHB - “no tax increases” → 1991 Gulf War + fiscal crisis: raised taxes → Newt Gingrich: “GWHB = traitor” → GWHB loses to Clinton

  • 1994 Gingrich “Contract with America”

    • manifesto of anti-new deal coalition on taxes

      • every republican to pledge anti-tax

  • 1932 - 1994: Senate mostly under the democrats; afterwards Republican congress

    • 1994 pivot point

Repeal of the Estate Tax (the “death tax”)

• estate tax = most progressive tax that almost no one paid but repealed with bipartisan support

• June 2001 Bush’s <Economic Growth & Tax Relief Reconciliation Act>

  • phasing out estate & gift taxes over a 10 year period

  • income and capital gains tax cuts

  • increased tax credit for children

  • *Reconciliation → didn’t have the senate’s 60 votes → go through budge reconciliation (only need majority in the senate); the changes to be introduced must balance budget over a 10 year period without increasing deficit → CBO refused to do dynamic scoring (scoring assuming economic growth) → bill phased over 10 years

  • banked on the idea that the tax cuts will likely be extended in 2011

  • where did the bipartisan support come from?

    • diverse coalition possible with single issue politics

      • black caucus, gay activists, etc.

    • what was the opposition doing? didn’t take the movement seriously

      • organized labor? too weak to do anything

      • non-profits? not an easy argument to make given they receive donations from the rich

      • insurance industry? republican-dominated industry

      • liberal democrats? split

  • the campaign

    • well organized & resourced

    • smart strategy & leadership

    • good at managing conflicts within the coalition

      • rates vs. threshold?

        • rates affect billionaires, thresholds affect small businesses

      • farmers vs. small businesses

        • farmers could influence the senate

        • small businesses could influence the house

    • How was the coalition held together?

      • ‘total repeal’ the rallying cry

      • moral narrative (ideology)

        • “morally repugnant tax,” “a moral cause”

        • moral argument headed off the splintering

Tax cuts and the Republican coalition

• “the one issue that unites the entire Republican party”

• Tax cuts & race (2nd dimension)

  • tax agenda & racial agenda linked

    • underlying idea: tax money spent on undeserving poor who are probably not white

• tax cuts for all

  • heads off the divide-a-dollar game

How much has the goalpost shifted?

• 2010 Obama administration

  • in recession → tax increase not a good idea, so extended the tax cuts for 2 years till 2012

  • 2012 → Republican Congress, 82% of Bush’s bill kept

    • estate tax:

      • 2010 - repealed

      • 2011 - $5 mil threshold

      • 2019 - $11.4 mil threshold at 40% rate (lower than the starting 55% 2001 rate)

How effective was the anti-tax movement in shrinking the size of the govt?

• not very:

  • ↑ # of govt workers + privatized/contracted out govt sectors

  • per capita spending ↑, deficit ↑

• funding govt with taxes → funding govt with debt

The Resurgent Right in the West

Yale Open Course <Power and Politics in Today's World>

Lecture 5: The Resurgent Right in the West

In the 1970s and 80s, the West saw a shift away from social democratic models of government towards those centered around undoing and opposing the postwar consensus. The collapse of communism and the changing labor market contributed to new geopolitical and economic conditions favorable to the conservative movement. The Reagan and Thatcher administrations' rhetoric of personal responsibility and absolute economic improvement, along with the unstable nature of distributive politics, further fueled this shift. During this time, the burgeoning welfare state and unions came under attack, although to a lesser degree in multi-party systems such as France and Germany compared to two-party systems exemplified by the UK and the US.

Notes

The “Postwar consensus” from 1950s in almost all capitalist societies

• Strong welfare + social protections

• Progressive redistribution through tax system

• Substantially bipartisan

• Ex.

  • US: “The Great Society” (LBJ) → civil rights, Medicare, expansion of welfare

  • Britain: Clement Attlee’s govt 1945 → British welfare state

  • European social democracies

• Euro-communism

  • Social democracy not a byway to Marxist communism but a proper form of organization

70s, 80s → conservative attacks

• Hostility towards unions and the welfare state

• Against progressive taxes and regulations

• “Government is the problem!”

• Reagan elected 1980, Thatcher 1979

  • Weren’t initially considered a threat to the establishment

The Effect of the End of Communism

• Good for the left?

  • Social democracy → acknowledged as a legitimate form of social organization, an equilibrium

  • got rid of the bogeyman for the right to mobilize against

    • Leftist agenda could no longer be seen as an attempt to promote communism if there is no communism

  • Money spent on arms race could be channeled into the economy

• BUT

  • less favorable demography and geopolitics

    • Post-war social democracy and welfare state had depended on fortuitous circumstances

      • Demographically - big working age population

        • Dependency ratio ↑ = working age population / dependent population (<15 and >65)

        • in the 80s

        • working age population grew old to become the dependent population

        • Dependency ratio ↓ → fiscal stress

      • Economic health had been buttressed by American funds

        • Europe hadn’t needed to spend any money on defense

        • American interest in building Europe bulwark against USSR ↓

  • Alternative bogeyman

    • Islamic fundamentalism → not a threat to capitalism since there is no Islamic model of economy

  • ↓ incentive to buy off working class discontent

    • post-depression fear among business elite of the spread of communism among workers → approved the New Deal

    • w/o USSR, no need to keep the expensive welfare state

      • No alternative system to win over people

Two logics of distributive politics → contributed to the rise of the right

• Median always below the mean (the ultra rich pulling the average up)

• Always more people below the average income

• Median voter theorem: politicians seeking to win votes will be responsive to median votes

  • impetus for downward redistribution

  • But this doesn’t happen!

    • Why?

      • Another dimension other than income such as gender, race, etc.

      • Majority rule divide-a-dollar game

• No matter how you divide it, there is always some potential majority to upset that division

• Implications

  • Don’t need a second dimension to get distributive instability

  • Interest alone will not produce effective demand for downward redistribution

• Then what about ideals and institutions?

Ideals

• fairness?

  • people usually make local comparisons (within their groups)

    • Not fatal to solidarity but compete with other ideals of fairness

      • self-referential comparisons, “Pareto improvement”

        • Whether you are better off than you were before

      • gap between the rich and the poor

  • Thatcher / Reagan appealed to:

    • absolute improvements

    • prospects for upward mobility

    • Reagan’s (the new right) rhetoric: “everyone should be able to become a millionaire”

      • v. modern day pro-market conservatism revolving around loss aversion

      • responsible for:

        • “Make American Great Again” (Donald Trump)

        • Trump never promising to eliminate inequality but rather to deliver absolute improvements

        • “America’s best days lie ahead” (Hilary Clinton)

    • Benjamin Disraeli: possible to appeal to working class voters to vote conservative policies

  • Difficult to hold solidarity with the fairness ideal because factions within the group can be picked off with rewards (divide-a-dollar game)

    • Thatcher appealed to the lower-middle class with upwardly mobile aspiration

    • w/o a second dimension like race, solidarity vulnerable to breaking off by ideologies

• Ideals of fairness not enough for redistributive politics?

Institutions to sustain working class solidarity?

• Unions?

  • Reagan firing air traffic controllers / Thatcher breaking up miner’s union

    • new hostile attitude toward unions

  • Dramatic decline of union membership

  • Wagner Act 1935 protecting unions

    • Undone by Taft-Hartley Act of 1974 that cut back on union protection

  • America economy shifting from manufacturing to service

    • ↓ union membership

      • ↑ difficult to unionize in the service sector

      • free trade

        • can’t sustain unions when

        • exit cost for capital ↓

        • exit cost for labor ↑

      • As union membership ↓, inequality ↑

        • Middle class share of income ↓

  • Around the world, in major economies, unions getting smaller and weaker (except for Finland)

  • Unions tend to be relatively small in two-party systems

    • Can’t get a lot of redistribution

• France/Germany = multiparty system

• US/UK = two-party system

• Multiparty system more responsive to redistribution/media voters?