The latest news from BEA can be found here. James Hamilton provides some details on this 3.9% annual growth rate bit of goods news and lowers his recession probability. A few more observations are in order.
Consumer demand growth was only 3 percent – which to a Rubinesque bear like myself is sort of good news if this eventually translates into more investment. Investment demand barely grew however as the growth in business investment barely offset the continuing fall in residual investment. Ah but the Federal Reserve did lower the Federal Funds rate by more than inflation dove Brad DeLong would have.
The two other GDP categories are government purchases and net exports. Government purchases grew by 3.7 percent at annualized rate almost entirely because of defense spending growth. One has to wonder why our neocon President had his temper tantrum yesterday morning. But the truly excellent news was the rise in exports. Let’s hope this continues – even if it means Lou Dobbs would have one less thing to complain about.
Wednesday, October 31, 2007
WALL STREET DEMS LET FRANKENSTEIN'S MONSTER OUT AFTER SOCIAL SECURITY WITH "ENDOWMENTS COMMISSION"
Eeeeek! Frankenstein's Monster is back on the loose, prowling the landscape chanting "Social Security Crisis! Social Security Crisis! Fix Social Security!" It is bad enough that Obama has joined the Ghoulsbee bunch chanting this nonsense that Goldman Sachs's Robert Rubin's appointees to the Social Security Trustees under Bill Clinton instituted as "Official Projections" back in the late 1990s, since proven drasically overly pessimistic, but continued by the Bushies. Now Kent Conrad (D-ND), Chair of the Senate Finance Committee, along with Judd Gregg (R-NH), in cahoots with Goldman Sachs's current Treasury Sec, Paulson, are creating an "Endowments Commission" supposed to frighten the next president into "doing something about endowments."
This is a bait and switch the enemies of social security have been playing to for some time. Scare everybody with genuine long run problems in funding endowments. However, instead of focusing on medicare and medicaid, the sources of these problems, these entities formed to deal with endowments suddenly start going after untroubled (so far, still running a rising and nearly $200 billion surplus) social security. I understand people like pgl who might go along with this, given that so many people have fallen for the lies about social security's fiscal status, it may well be politically that the only possible tax increase out there is one on social security, sold to Republicans along with a benefit cut as some kind of deal. But, it is based on a lie. Can we not try to educate people and deal with ther real problems, please, without letting Wall Street get its mitts on social security (and some kind of privatization would almost certainly be part of any such deal)?
This is a bait and switch the enemies of social security have been playing to for some time. Scare everybody with genuine long run problems in funding endowments. However, instead of focusing on medicare and medicaid, the sources of these problems, these entities formed to deal with endowments suddenly start going after untroubled (so far, still running a rising and nearly $200 billion surplus) social security. I understand people like pgl who might go along with this, given that so many people have fallen for the lies about social security's fiscal status, it may well be politically that the only possible tax increase out there is one on social security, sold to Republicans along with a benefit cut as some kind of deal. But, it is based on a lie. Can we not try to educate people and deal with ther real problems, please, without letting Wall Street get its mitts on social security (and some kind of privatization would almost certainly be part of any such deal)?
Introduction to My New Book in Progress
Now that the Confiscation of American Prosperity has been published, I have a new book that is fairly well advanced. I expect that , The Manacles of Capitalism: How Market Control Undermines Productivity, I will have the manuscript ready to send to Stanford University Press in a few months.
Here is my introduction. Any suggestions would be appreciated. Most of all, my title is clunky. Anyone who comes up with a title that works for me, will win a free copy of the book.
Introduction: The Hidden Manacles
Setting the Stage
This book makes the case that the modern economy has matured to the point where markets do not and cannot harness the anything near the full productive potential of society; and even more important, that markets seriously undermine economic performance.
This book will emphasize only one of the many defects of the market that markets rely on a system of incentives that are self defeating. Purely monetary incentives may appear to work effectively when one takes a narrow view of their operation, but from a larger perspective they are counterproductive for the economy, as well as society as a whole.
To make my case, I will concentrate on the United States of America, which is the purest example of capitalism today. Here is the most powerful economy in the world, yet it seems powerless to meet the most pressing needs of society. The current U.S. economy falls short on a maddening array of counts. The list of pervasive problems includes excessive poverty, inadequate health care, environmental damage, pervasive toxins, and an unsatisfying quality of life, just to name a few. Although the United States neglects these problems in order to nurture market relations, the relative economic strength of its economy seems to be eroding.
The contradictory nature of the U.S. economy raises a host of relatively obvious questions about the quality of life. Why has a widening circle of poverty begun to engulf more and more people, even when the pace of technological change began to accelerate in the late twentieth century? Surely, an economy with a communication system that would have been unimaginable only a few years earlier should be able to nurture a sense of community or at least create a satisfying culture. Although the majority of the population may have access to considerable material goods, the current economic system fails miserably in creating a good quality lifestyle.
Such questions, while important, largely adopt the position of people as "consumers" whom the economy affects. This book will take a different perspective looking at how market incentives impact people as producers. To make this focus clearer, this book will, for the most part, leave aside many serious problems that typically tend to be seen from the perspective of people. For example, the market system has the adverse environmental consequences (see Perelman 2003). Most people regard these negative effects of the economy as a quality of life issue.
This producerist focus is doubly important because economists studiously ignore it; instead, they cleverly justify the status quo by arguing that people supposedly benefit greatly from the market through their participation in society as consumers. For example, Wal Mart is to be applauded because its prices are low while obscuring the company's effect on people as producers. Although the consumer perspective is important, the producer perspective should not be overlooked. This book is intended to remedy that neglect.
Some elements of the producer and consumer perspectives merge. For example, the pollution that degrades the quality of life can also seriously affect production through negative health effects on workers. Other seemingly consumer oriented questions have more far reching producerist consequences.
Consider the role of modern technology. Although engineers have devised methods of producing sophisticated electronic devices with virtually no human labor, the market economy has not managed to discover a way of reducing the working day. How is it that virtually nobody stops to ask even the better paid, but harried people if they would prefer to sacrifice some of the stuff that they consume for more leisure?
The producerist implication of this technology are equally important. One must wonder why an economy with such advanced technological capacities does not provide for more fulfilling work. Although this leisure might be used for more consumption, it could also increase the workers' productive capacity by improving their health. More leisure, like the opportunity for more fulfilling work, could also allow workers to develop improved skills.
The Theological Defense of Markets
The responses to anybody who dares to question the market are predictable. In their first strong line of defense, defenders of markets will respond, that any measures to address deficiencies other than the standard knee jerk remedy of expanding market powers even further threaten to interfere with economic efficiency. A second, and even stronger line of defence, will admit that problems exist, but insist that the cause is not the system, but the personal inadequacies of the people. As Margaret Thatcher, the Conservative British Prime Minister, popularly known as the Iron Lady once explained: "Economics (sic) are the method. The object is to change the soul" (Harris 1989). This call for spiritual Procrusteanism inspired the extreme neoliberalism that continues to this day.
The stubbornness of the prevailing ideological rhetoric of today reflects the view that markets are an end in themselves rather than a means to an end. Any challenge to the market, no matter how mild, reeks of heresy. Edmund Burke, perhaps the most famous British statesman of the eighteenth century, famously set the tone for theological defense of markets, declaring: "... the laws of commerce ... are the laws of nature, and consequently the laws of God" (Burke 1795, p. 137). The modern Journal of Markets and Morality continues to promote that theological tradition.
From a less elevated perspective, business and political leaders commonly join the familiar litany of praise for the market, bandying about lofty terms, such as freedom, democracy, and justice, not to mention efficiency and prosperity. While first running for president in 1999, George W. Bush offered a simpler formulation, declaring that "trade and markets are freedom" (Schwartz 2005, p. 6; citing Fischer 1999).
Surely nobody could object to people being allowed to enjoy freedom, democracy, or any of these other positive attributes of the market. Why would anyone be foolish enough to challenge the existing economic system, which supposedly represents the pinnacle of social organization or at least it would be if ill considered taxes and regulations did not interfere with what President Ronald Reagan called "the magic of the marketplace"?
But adults should not believe in magic. Despite Reagan's fanciful rhetoric, the market is a harsh taskmaster. Frederick Winslow Taylor, known as the father of scientific management and who devoted his life to cutting split seconds from workers' tasks, gave a more realistic verdict of the modern situation, observing: "In the past the man has been first; in the future the system must be first" (Taylor 1911, p. 7). But how well does this system serve people's essential needs? This book argues that it does not.
A Different Theology
Turning to a quite different theology than that of Burke according to Greek legend, a bandit named Damastes terrorized people near Eleusis, in Attica. People called him Procrustes, or "The Stretcher" because he compelled unwary travelers who fell into his hands to spend the night on an iron bed. He sadistically murdered his guests by stretching the ones who were too short for the bed, or, if they were too tall, cutting off as much of their limbs as necessary to fit the dimensions. His sadism supposedly turned the surrounding countryside into a desert. Procrustes's reign of terror was eventually cut short. Theseus, famous for his legendary exploits and destined to become king of Athens, subjected Procrustes to his own bed treatment.
This mythological reference might seem out of place in a book on the economy, but the workings of the economy have become so absurd and the language of the economy so perverted that reframing the subject in an unfamiliar context seems appropriate. As Frederick Winslow Taylor, who attempted to use the scientific method to tighten the screws on the Procrustean bed, suggested, the modern economy requires that people conform to its dictates: "the system must be first."
Max Weber, the famed German sociologist, who was hardly a radical, vividly captured this harsh spirit of the Procrustean world. For Weber, "the market is the most impersonal relationship of practical life into which humans can enter with one another .... Such absolute depersonalization is contrary to all the elementary form, of human relationship" (Weber 1921, pp. 636 37).
One of Weber's most famous expressions is his metaphor of the iron cage (actually a mistranslation of a less poetic "shell as hard as steel") (Weber 1904 5, p. 121). Weber described the inhuman consequences of this cage/shell:
Today's capitalist economic order is a monstrous cosmos, into which the individual is born and which in practice is for him, at least as an individual, simply a given, an immutable shell, in which he is obliged to live. It forces on the individual, to the extent that he is caught up in the relationships of the "market," the norms of its economic activity. [Weber 1904 5, p. 13]
Beyond the Procrustean Economy
In the spirit of Weber at least the mistranslated Weber you can think of the market as a Procrustean bed. Those who do not accommodate themselves to the system suffer a cruel fate. Like Procrustes, the market is also destructive of its surroundings.
In describing the economy as Procrustean, I realize that I am distancing myself from conventional economics. Certainly, the story economics tells about the market economy is very different. Markets are supposed to be purely voluntary arrangements. People chose to work where they want and to buy what they want. Nobody tells anybody what to do (except on the job).
Unlike the irrational sadism of Procrustes a parasite that destroyed its host economists present the modern economy as the height of rationality. Contemporary economists are fond of comparing the organizational achievements of a market economy with the efficiency of a computer or even the brain itself.
While I admit that many individual actors in the economy often do act quite rationally in furthering their own short term self interest, this book will show how, taken as a whole, the modern market economy falls quite short of the excellence ascribed to it. How can anyone rationalize that hours of work have not radically decreased despite the proliferation of modern, labor saving technology? How anyone reconcile increasing job insecurity and stagnating wages with market efficiency?
No, the market is indeed Procrustean. The business leaders, politicians, and economists who are quick to explain that the logic of the system is immutable and who come down hard on anyone who dares to question Procrustean rationality, are generally immune from the harsh demands of Procrusteanism.
The position advocated in this book flies in the face of prevailing opinion. Besides the dogmatic defenders of the markt, some well intentioned people acknowledge some shortcomings, but pin their hopes on minor regulatory tinkering. History does not look kindly on those who have expected much from such piecemeal measures in the past. Still others might promise that better technologies will be able to correct existing problems within the framework of market. The underlying problem, however, is not technological inadequacy. Nor is it a material deficiency. For example, people do not go hungry because too little food is produced. After all, food surpluses have long plagued most developed countries.
Viable alternatives do exist, but they might seem impossibly utopian only because the gatekeepers of the Procrustean economy adamantly refuse to accept any dialogue or even the possibility of a dialogue. As Prime Minister Thatcher proclaimed: "There is no alternative." The iron bed must remain in place. Everyone must learn to accept the dictates of the Procrustean economy. Neither individuals nor societies have any choice in the matter. To defy the logic of the market would be suicidal at least in an economic sense.
This book makes the case that this Procrustean ideology is as absurd as it is inhuman. The book shows why markets are incapable of permitting people to use their productive potential, while, at the same time, pointing in a more positive direction. Once people realize that the economy does not have to put the system first, as Taylor suggested, society can tap into people's potential and create a more fulfilling life.
The first step is a critical evaluation of the market. Hopefully, with sufficient intelligence, courage, and imagination we can get the kind of economy we deserve an anti Procrustean one in which the productive system will finally adjust to meet society's most pressing needs.
Here is my introduction. Any suggestions would be appreciated. Most of all, my title is clunky. Anyone who comes up with a title that works for me, will win a free copy of the book.
Introduction: The Hidden Manacles
Setting the Stage
This book makes the case that the modern economy has matured to the point where markets do not and cannot harness the anything near the full productive potential of society; and even more important, that markets seriously undermine economic performance.
This book will emphasize only one of the many defects of the market that markets rely on a system of incentives that are self defeating. Purely monetary incentives may appear to work effectively when one takes a narrow view of their operation, but from a larger perspective they are counterproductive for the economy, as well as society as a whole.
To make my case, I will concentrate on the United States of America, which is the purest example of capitalism today. Here is the most powerful economy in the world, yet it seems powerless to meet the most pressing needs of society. The current U.S. economy falls short on a maddening array of counts. The list of pervasive problems includes excessive poverty, inadequate health care, environmental damage, pervasive toxins, and an unsatisfying quality of life, just to name a few. Although the United States neglects these problems in order to nurture market relations, the relative economic strength of its economy seems to be eroding.
The contradictory nature of the U.S. economy raises a host of relatively obvious questions about the quality of life. Why has a widening circle of poverty begun to engulf more and more people, even when the pace of technological change began to accelerate in the late twentieth century? Surely, an economy with a communication system that would have been unimaginable only a few years earlier should be able to nurture a sense of community or at least create a satisfying culture. Although the majority of the population may have access to considerable material goods, the current economic system fails miserably in creating a good quality lifestyle.
Such questions, while important, largely adopt the position of people as "consumers" whom the economy affects. This book will take a different perspective looking at how market incentives impact people as producers. To make this focus clearer, this book will, for the most part, leave aside many serious problems that typically tend to be seen from the perspective of people. For example, the market system has the adverse environmental consequences (see Perelman 2003). Most people regard these negative effects of the economy as a quality of life issue.
This producerist focus is doubly important because economists studiously ignore it; instead, they cleverly justify the status quo by arguing that people supposedly benefit greatly from the market through their participation in society as consumers. For example, Wal Mart is to be applauded because its prices are low while obscuring the company's effect on people as producers. Although the consumer perspective is important, the producer perspective should not be overlooked. This book is intended to remedy that neglect.
Some elements of the producer and consumer perspectives merge. For example, the pollution that degrades the quality of life can also seriously affect production through negative health effects on workers. Other seemingly consumer oriented questions have more far reching producerist consequences.
Consider the role of modern technology. Although engineers have devised methods of producing sophisticated electronic devices with virtually no human labor, the market economy has not managed to discover a way of reducing the working day. How is it that virtually nobody stops to ask even the better paid, but harried people if they would prefer to sacrifice some of the stuff that they consume for more leisure?
The producerist implication of this technology are equally important. One must wonder why an economy with such advanced technological capacities does not provide for more fulfilling work. Although this leisure might be used for more consumption, it could also increase the workers' productive capacity by improving their health. More leisure, like the opportunity for more fulfilling work, could also allow workers to develop improved skills.
The Theological Defense of Markets
The responses to anybody who dares to question the market are predictable. In their first strong line of defense, defenders of markets will respond, that any measures to address deficiencies other than the standard knee jerk remedy of expanding market powers even further threaten to interfere with economic efficiency. A second, and even stronger line of defence, will admit that problems exist, but insist that the cause is not the system, but the personal inadequacies of the people. As Margaret Thatcher, the Conservative British Prime Minister, popularly known as the Iron Lady once explained: "Economics (sic) are the method. The object is to change the soul" (Harris 1989). This call for spiritual Procrusteanism inspired the extreme neoliberalism that continues to this day.
The stubbornness of the prevailing ideological rhetoric of today reflects the view that markets are an end in themselves rather than a means to an end. Any challenge to the market, no matter how mild, reeks of heresy. Edmund Burke, perhaps the most famous British statesman of the eighteenth century, famously set the tone for theological defense of markets, declaring: "... the laws of commerce ... are the laws of nature, and consequently the laws of God" (Burke 1795, p. 137). The modern Journal of Markets and Morality continues to promote that theological tradition.
From a less elevated perspective, business and political leaders commonly join the familiar litany of praise for the market, bandying about lofty terms, such as freedom, democracy, and justice, not to mention efficiency and prosperity. While first running for president in 1999, George W. Bush offered a simpler formulation, declaring that "trade and markets are freedom" (Schwartz 2005, p. 6; citing Fischer 1999).
Surely nobody could object to people being allowed to enjoy freedom, democracy, or any of these other positive attributes of the market. Why would anyone be foolish enough to challenge the existing economic system, which supposedly represents the pinnacle of social organization or at least it would be if ill considered taxes and regulations did not interfere with what President Ronald Reagan called "the magic of the marketplace"?
But adults should not believe in magic. Despite Reagan's fanciful rhetoric, the market is a harsh taskmaster. Frederick Winslow Taylor, known as the father of scientific management and who devoted his life to cutting split seconds from workers' tasks, gave a more realistic verdict of the modern situation, observing: "In the past the man has been first; in the future the system must be first" (Taylor 1911, p. 7). But how well does this system serve people's essential needs? This book argues that it does not.
A Different Theology
Turning to a quite different theology than that of Burke according to Greek legend, a bandit named Damastes terrorized people near Eleusis, in Attica. People called him Procrustes, or "The Stretcher" because he compelled unwary travelers who fell into his hands to spend the night on an iron bed. He sadistically murdered his guests by stretching the ones who were too short for the bed, or, if they were too tall, cutting off as much of their limbs as necessary to fit the dimensions. His sadism supposedly turned the surrounding countryside into a desert. Procrustes's reign of terror was eventually cut short. Theseus, famous for his legendary exploits and destined to become king of Athens, subjected Procrustes to his own bed treatment.
This mythological reference might seem out of place in a book on the economy, but the workings of the economy have become so absurd and the language of the economy so perverted that reframing the subject in an unfamiliar context seems appropriate. As Frederick Winslow Taylor, who attempted to use the scientific method to tighten the screws on the Procrustean bed, suggested, the modern economy requires that people conform to its dictates: "the system must be first."
Max Weber, the famed German sociologist, who was hardly a radical, vividly captured this harsh spirit of the Procrustean world. For Weber, "the market is the most impersonal relationship of practical life into which humans can enter with one another .... Such absolute depersonalization is contrary to all the elementary form, of human relationship" (Weber 1921, pp. 636 37).
One of Weber's most famous expressions is his metaphor of the iron cage (actually a mistranslation of a less poetic "shell as hard as steel") (Weber 1904 5, p. 121). Weber described the inhuman consequences of this cage/shell:
Today's capitalist economic order is a monstrous cosmos, into which the individual is born and which in practice is for him, at least as an individual, simply a given, an immutable shell, in which he is obliged to live. It forces on the individual, to the extent that he is caught up in the relationships of the "market," the norms of its economic activity. [Weber 1904 5, p. 13]
Beyond the Procrustean Economy
In the spirit of Weber at least the mistranslated Weber you can think of the market as a Procrustean bed. Those who do not accommodate themselves to the system suffer a cruel fate. Like Procrustes, the market is also destructive of its surroundings.
In describing the economy as Procrustean, I realize that I am distancing myself from conventional economics. Certainly, the story economics tells about the market economy is very different. Markets are supposed to be purely voluntary arrangements. People chose to work where they want and to buy what they want. Nobody tells anybody what to do (except on the job).
Unlike the irrational sadism of Procrustes a parasite that destroyed its host economists present the modern economy as the height of rationality. Contemporary economists are fond of comparing the organizational achievements of a market economy with the efficiency of a computer or even the brain itself.
While I admit that many individual actors in the economy often do act quite rationally in furthering their own short term self interest, this book will show how, taken as a whole, the modern market economy falls quite short of the excellence ascribed to it. How can anyone rationalize that hours of work have not radically decreased despite the proliferation of modern, labor saving technology? How anyone reconcile increasing job insecurity and stagnating wages with market efficiency?
No, the market is indeed Procrustean. The business leaders, politicians, and economists who are quick to explain that the logic of the system is immutable and who come down hard on anyone who dares to question Procrustean rationality, are generally immune from the harsh demands of Procrusteanism.
The position advocated in this book flies in the face of prevailing opinion. Besides the dogmatic defenders of the markt, some well intentioned people acknowledge some shortcomings, but pin their hopes on minor regulatory tinkering. History does not look kindly on those who have expected much from such piecemeal measures in the past. Still others might promise that better technologies will be able to correct existing problems within the framework of market. The underlying problem, however, is not technological inadequacy. Nor is it a material deficiency. For example, people do not go hungry because too little food is produced. After all, food surpluses have long plagued most developed countries.
Viable alternatives do exist, but they might seem impossibly utopian only because the gatekeepers of the Procrustean economy adamantly refuse to accept any dialogue or even the possibility of a dialogue. As Prime Minister Thatcher proclaimed: "There is no alternative." The iron bed must remain in place. Everyone must learn to accept the dictates of the Procrustean economy. Neither individuals nor societies have any choice in the matter. To defy the logic of the market would be suicidal at least in an economic sense.
This book makes the case that this Procrustean ideology is as absurd as it is inhuman. The book shows why markets are incapable of permitting people to use their productive potential, while, at the same time, pointing in a more positive direction. Once people realize that the economy does not have to put the system first, as Taylor suggested, society can tap into people's potential and create a more fulfilling life.
The first step is a critical evaluation of the market. Hopefully, with sufficient intelligence, courage, and imagination we can get the kind of economy we deserve an anti Procrustean one in which the productive system will finally adjust to meet society's most pressing needs.
Military contracting.
George Mason [read: laissez-faire] economist Tyler Cowen wrote in the New York Times that -
This article is a useful read and makes some important points (while tending to oppose Bush's Splendid Little War). But as usual with free-market types, Cowen leaves important stuff out.
His basic point makes sense: in the end, Blackwater's sins fall on our government's head, and thus on the voters' heads. (Also, it makes sense in our current capitalist system that at least some government functions will be privatized and that we have to balance benefits and costs of privatization.) But there are two points in addition:
1) No contract is perfect. Given the incomplete information about what the contractor must do and uncertainty about the future, it is (almost?) inevitable that there will be loopholes. Further, profit-seeking companies will look at contracts to find absolutely all loop-holes. Companies such as Blackwater will then exploit all the profit-enhancing ones. This "loop-hole" mining is familiar to students of banking, where financiers are always looking for ways around regulations, even those which ultimately are to their benefit.
This tells us that in addition to contracts with privateers, there must be vigorous direct supervision of them. (This, of course, must be part of the original contract, agreed to by the privateer.) Contrary to the laissez-faire crowd, we cannot rely on the "magic of the market" (to use Ronald Reagan's phrase) to supervise the privateers.
2) The government does not just respond to the interests of the voters. In a capitalist system such as ours, it responds to the concentrated power of money. And it did so before the poorly-conceived campaign finance reforms that now prevail.
In fact, unless people are pissed and actively organized in their anger against the government enough to push against the normal mode of government operation, Big Money trumps voters every time. This was true even under FDR, despite recent efforts to paint the New Deal as some sort of Golden Age. Back then, however, a big fraction of the plutocrats was scared of the popular discontent. So they did the Right Thing (or rather, part of it) for awhile.
Anyway, the power of money means that companies such as Blackwater can arrange for weak oversight of their contracts. They can almost guarantee that there will be loopholes and that enforcement will be feeble and chummy.
Of course, Blackwater was a very small company just a few years ago, so something had to happen first for it to have so much influence. What happened was part of the general neoliberal movement of the last 30 years or so, i.e., the Cheney/Rumsfeld effort to privatize as many military functions as possible. (My dad was in the Navy Supply Corps, feeding sailors during World War II. If he were alive today, he'd be doing his job for some private company.)
This privatization movement -- which involves much more than merely hiring mercenaries -- has created (1) a bunch of companies made rich by government contracts with (2) a vested interest in lobbying the government for more privatization (more business opportunities for them) and (3) providing more campaign contributions for those pushing privatization (not just Cheney & Rumsfeld, but also W. J. Clinton). There's a vicious circle of crony capitalism going on.
The Big Money voters are the ones who are ultimately responsible for the poor contracts and poor contract enforcement that Blackwater et al. have profited from (until they were caught). It's only when the actual voters -- real, live, people -- decide to throw out Big Money that we are responsible (in practice) for what our government does. Until then, the sins fall on the heads of the real rulers of the United States government.
This second point should be obvious to the George Mason folks. Their "public choice" school of economics tells us that we cannot simply take government policies for granted or as representing the "true" interest of the people. What they miss is the power of the capitalist class and the influence of important sections of that class (such as military privateers).
Jim Devine
Private contractors [such as Blackwater] may not respect virtue for its own sake, but like most businesses, they will respect the wishes of their most powerful customers, in this case governments. What is wrong with Blackwater may, most of all, mirror what is wrong with Uncle Sam.
This article is a useful read and makes some important points (while tending to oppose Bush's Splendid Little War). But as usual with free-market types, Cowen leaves important stuff out.
His basic point makes sense: in the end, Blackwater's sins fall on our government's head, and thus on the voters' heads. (Also, it makes sense in our current capitalist system that at least some government functions will be privatized and that we have to balance benefits and costs of privatization.) But there are two points in addition:
1) No contract is perfect. Given the incomplete information about what the contractor must do and uncertainty about the future, it is (almost?) inevitable that there will be loopholes. Further, profit-seeking companies will look at contracts to find absolutely all loop-holes. Companies such as Blackwater will then exploit all the profit-enhancing ones. This "loop-hole" mining is familiar to students of banking, where financiers are always looking for ways around regulations, even those which ultimately are to their benefit.
This tells us that in addition to contracts with privateers, there must be vigorous direct supervision of them. (This, of course, must be part of the original contract, agreed to by the privateer.) Contrary to the laissez-faire crowd, we cannot rely on the "magic of the market" (to use Ronald Reagan's phrase) to supervise the privateers.
2) The government does not just respond to the interests of the voters. In a capitalist system such as ours, it responds to the concentrated power of money. And it did so before the poorly-conceived campaign finance reforms that now prevail.
In fact, unless people are pissed and actively organized in their anger against the government enough to push against the normal mode of government operation, Big Money trumps voters every time. This was true even under FDR, despite recent efforts to paint the New Deal as some sort of Golden Age. Back then, however, a big fraction of the plutocrats was scared of the popular discontent. So they did the Right Thing (or rather, part of it) for awhile.
Anyway, the power of money means that companies such as Blackwater can arrange for weak oversight of their contracts. They can almost guarantee that there will be loopholes and that enforcement will be feeble and chummy.
Of course, Blackwater was a very small company just a few years ago, so something had to happen first for it to have so much influence. What happened was part of the general neoliberal movement of the last 30 years or so, i.e., the Cheney/Rumsfeld effort to privatize as many military functions as possible. (My dad was in the Navy Supply Corps, feeding sailors during World War II. If he were alive today, he'd be doing his job for some private company.)
This privatization movement -- which involves much more than merely hiring mercenaries -- has created (1) a bunch of companies made rich by government contracts with (2) a vested interest in lobbying the government for more privatization (more business opportunities for them) and (3) providing more campaign contributions for those pushing privatization (not just Cheney & Rumsfeld, but also W. J. Clinton). There's a vicious circle of crony capitalism going on.
The Big Money voters are the ones who are ultimately responsible for the poor contracts and poor contract enforcement that Blackwater et al. have profited from (until they were caught). It's only when the actual voters -- real, live, people -- decide to throw out Big Money that we are responsible (in practice) for what our government does. Until then, the sins fall on the heads of the real rulers of the United States government.
This second point should be obvious to the George Mason folks. Their "public choice" school of economics tells us that we cannot simply take government policies for granted or as representing the "true" interest of the people. What they miss is the power of the capitalist class and the influence of important sections of that class (such as military privateers).
Jim Devine
Tuesday, October 30, 2007
"Saving" Social Security, Obama Style
If this article is correct, the Obama team has a lot of explaining to do.
In particular, they need to tell us whether their guy doesn’t have the chops to understand Dean Baker and Paul Krugman, or if he is serving some other, darker interest. And don’t give me any bull about how virtuous it would be to raise the cap on SS taxes: it all depends on the narrative. If you get to a more progressive tax system by flashing false alarms about Social Security, you feed the beast under the guise of clipping its clawnails.
In particular, they need to tell us whether their guy doesn’t have the chops to understand Dean Baker and Paul Krugman, or if he is serving some other, darker interest. And don’t give me any bull about how virtuous it would be to raise the cap on SS taxes: it all depends on the narrative. If you get to a more progressive tax system by flashing false alarms about Social Security, you feed the beast under the guise of clipping its clawnails.
Monday, October 29, 2007
Globalization -- A New Twist
I just spent the weekend with a pretty high level delegation from China. At the final banquet, some of them were telling my wife that they appreciated the low prices in US stores. They were especially happy with some shoes that cost 6 times more than in China. They were taken aback when she mentioned that the shoes were made in China, where they presumably cost far less than in Los Angeles.
The Best Fit Ever
Krugman on his blog uses Larry Bartel's data, from the latter's *What's The Matter With What's The Matter With Kansas* to puncture the myth that the rich are more likely to vote Republican.
In my forthcoming *What's The Matter With What's The Matter With What's The Matter WIth Kansas* I find a perfect negative correlation between intelligence and a tendency to vote Republican. My inverse measure of intelligence? - the tendency to vote Republican!
In my forthcoming *What's The Matter With What's The Matter With What's The Matter WIth Kansas* I find a perfect negative correlation between intelligence and a tendency to vote Republican. My inverse measure of intelligence? - the tendency to vote Republican!
Sunday, October 28, 2007
$90 Oil Prices: Is This a New Record in Real Terms?
AP reports:
Should we inflation adjust using the GDP deflator or the CPI deflator?
James Hamilton does the latter in a chart entitled dollar price of West Intermediate divide by ratio of CPI. By this measure, we are not yet an inflation adjusted record. WRTG Economics has their own historical price in real terms though 2006. The inflation-adjusted real price record in terms of 2006 dollars was less than $70 per barrel. I suspect WRTG Economics is using the GDP deflator, which has not risen as much as the CPI deflator since 1980. AP was not kidding when they said “depending on the adjustment”. I get the $101 figure if we use CPI but where does the $96 dollar figure come from? The GDP deflator in 2007QIII were only 2.29 times the GDP deflator as of 1980QI so wouldn't the inflation-adjusted oil price been $87 not $96 dollars?
Of course, it also matters which measure of the spot rate one uses for this. WRTG also reports both the WTI spot price and Brent Spot price, which was considerably lower.
With the recent gains, the price of oil is closing in on the inflation-adjusted highs hit in early 1980. Depending on the adjustment, a $38 barrel of oil in 1980 would be worth $96 to $101 or more today.
Should we inflation adjust using the GDP deflator or the CPI deflator?
James Hamilton does the latter in a chart entitled dollar price of West Intermediate divide by ratio of CPI. By this measure, we are not yet an inflation adjusted record. WRTG Economics has their own historical price in real terms though 2006. The inflation-adjusted real price record in terms of 2006 dollars was less than $70 per barrel. I suspect WRTG Economics is using the GDP deflator, which has not risen as much as the CPI deflator since 1980. AP was not kidding when they said “depending on the adjustment”. I get the $101 figure if we use CPI but where does the $96 dollar figure come from? The GDP deflator in 2007QIII were only 2.29 times the GDP deflator as of 1980QI so wouldn't the inflation-adjusted oil price been $87 not $96 dollars?
Of course, it also matters which measure of the spot rate one uses for this. WRTG also reports both the WTI spot price and Brent Spot price, which was considerably lower.
Hedge Funds: Ben Stein Finds the Money Machine That Will Eliminate the Federal Debt
While Ben Stein hearts Stephen Cohen of SAC Capital, Dean Baker has a closer look. I sense a tie to the Social Security debate!
Ben Stein writes:
As I read this, I had to wonder about my belief in the Efficient Markets Hypothesis. But then Dean Baker brought a little reality to this discussion:
OK, this may be a very small departure from a perfectly efficient market but Ben Stein’s 36 percent return is not a measure of the benefits from exploiting inefficiency. Rather it is the benefit to SAC Capital from exploiting others. But isn’t this kind of wealth transfer the real agenda for those who wish to privatize Social Security?
Ben Stein writes:
magicians like Steven A. Cohen, founder of SAC Capital in Stamford, Conn., can regularly earn 40 percent a year - often more - on their capital. But why waste our time on envy or disbelief? Let’s put Mr. Cohen to work for the greater good. Let’s have the federal government issue about $10 trillion in Steven A. Cohen National Debt Retirement Fund Bonds. After interest is paid on the bonds, if Mr. Cohen makes 40 percent on the money, the fund will return 36 percent a year. That means that in only two years, he will have made roughly $10 trillion for the taxpayers, with which he can pay off the entire United States federal debt.
As I read this, I had to wonder about my belief in the Efficient Markets Hypothesis. But then Dean Baker brought a little reality to this discussion:
Well Cohen's modus operandi is to make bets ahead of the market. He finds the winners just before they start winning and dumps the losers just before they start losing. The economic benefit from Cohen's actions is that prices adjust somewhat quicker than they otherwise would ... Mr. Cohen's gains come from other shareholders. If he buys IBM stock before it rises, he helps to bring the stock price to its proper level, but he gets the gain rather than some other potential stock purchaser. By being faster and better informed than other traders, Cohen is able to garner earnings that would otherwise have gone to other shareholders. Higher returns for Cohen mean lower returns for everyone else.
OK, this may be a very small departure from a perfectly efficient market but Ben Stein’s 36 percent return is not a measure of the benefits from exploiting inefficiency. Rather it is the benefit to SAC Capital from exploiting others. But isn’t this kind of wealth transfer the real agenda for those who wish to privatize Social Security?
Friday, October 26, 2007
The Fire This Time and The Water Last Time
I see there are no refugees this time - only evacuees. And we don't have Barbara Bush talking about the greater opportunities dislocation offers to the dislocatees. And we do have free massages in the stadium. And so on. Words fail me. I'll take them from Leadbelly: "If you're white, you're alright/ If you're brown, stick around/ but if you're black, oh baby/ Get back, Get back, Get back."
Thursday, October 25, 2007
Speaking of Wal-Mart and Avoiding Taxes
Michael talks about how Wal-Mart has played the transfer pricing manipulation game to reduce its state income taxes. But this is small potatoes when compared to the Federal tax reduction game.
AB readers know that I have had lots of posts on this topic – often giving huge hat tips to Max Sawicky. Here I document the drop in Wal-Mart’s overall effective tax rate. Here I note how part of this play relates to how they source goods from China. As I note – none of this is rocket science so one has to wonder why the tax authorities are not doing a better job at enforcing arm’s length pricing under section 482.
AB readers know that I have had lots of posts on this topic – often giving huge hat tips to Max Sawicky. Here I document the drop in Wal-Mart’s overall effective tax rate. Here I note how part of this play relates to how they source goods from China. As I note – none of this is rocket science so one has to wonder why the tax authorities are not doing a better job at enforcing arm’s length pricing under section 482.
Wal-Mart's Efficiency -- In Avoiding Taxes!
This Wall Street Journal article describes how Wal-Mart is able to pay about half as much state tax as a typical corporation.
Drucker, Jesse. 2007. "Inside Wal-Mart's Bid To Slash State Taxes." Wall Street Journal (23 October): p. A 1.
"In May 2001, Wal-Mart Stores Inc. issued an appeal to big accounting firms: Find us creative new ways to cut our state tax bills. Ernst & Young LLP swung into action. Senior tax experts at the big accounting firm swapped ideas via email and in a series of meetings. At least one gathering, according to an internal Ernst & Young calendar, took place in Wal-Mart's headquarters in the "Tax Shelter Room"."
"Big companies hardly ever discuss how outside accountants, lawyers and investment bankers help them cut their tax bills. But Ernst & Young's contributions to Wal-Mart's state-tax minimization project are outlined in a raft of documents filed in recent months in North Carolina state court, where the state's attorney general is challenging a Wal-Mart tax-cutting structure involving real-estate investment trusts. The material, which includes company emails and memos, provides a rare window into accountants' role in generating tax-reduction ideas at one major company."
"Companies often assert that tax savings are simply happy byproducts of transactions pursued for other business reasons. But documents from the North Carolina case indicate that Wal-Mart, from the outset, had one primary purpose: cutting its state income taxes. Ernst & Young worked to fulfill that goal. In 2002, for example, the accounting firm delivered a 37-page proposal laying out a smorgasbord of 27 potential tax strategies, most tailored to a particular state's tax code. It described one of them as "a very aggressive strategy with considerable risk."
"Publicly traded companies reduced their federal income taxes by about $12 billion in 2004 through potentially abusive tax transactions, according to Internal Revenue Service data. Some experts say companies save far more than that each year through elaborate tax-cutting maneuvers."
"Wal-Mart's 2001 letter to accounting firms got right to the point. It began: "Wal-Mart is requesting your proposal(s) for professional tax advice and related implementation services in connection with minimization of state income taxes in the following states: Arizona, California, Florida, Illinois, Indiana, Michigan, Minnesota, and Pennsylvania"."
"State income-tax rates for corporations average about 6.9%, and come on top of a federal statutory rate of 35%. Tax rates vary from state to state, and some states have no corporate tax at all on certain income. That provides ample opportunity for so-called tax arbitrage, in which companies allocate expenses and revenues between states in order to minimize taxes owed."
"On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."
"In the early 1990s, it employed an "intangibles holding company," a unit operating in tax-friendly Delaware into which it transferred ownership of its brand names such as Sam's Club. It then made payments to that unit for use of those brands, deducting them as expenses from its taxable income in other states, according to court records. That strategy fell out of favor after several states successfully challenged Wal-Mart and other companies in court over the maneuver."
"Wal-Mart set aside about $526 million for state and local income taxes last year, not including its substantial property-tax bills, according to the company's financial reports. But its various state tax-cutting strategies seem to have had an impact. On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."
"After Wal-Mart hired the firm in 1996 ..., an Ernst & Young tax executive urged his team to be discreet, according to a staff memo included in North Carolina court records. "We don't think there is much the state taxing authorities can do to mitigate these savings to Wal-Mart, however some states might attempt something if they had advance notification," he wrote. "We think the best course of action is to keep the project relatively quiet .... there just seems to be too many opportunities for it to get out to the press or financial community and we all know they are difficult to control, particularly when we are dealing with a client as well-known as Wal-Mart"."
"David Bullington, Wal-Mart's vice president for tax policy, said in a deposition that he began feeling pressure to lower the company's effective tax rate after the current chief financial officer, Thomas Schoewe, was hired in 2000. Mr. Schoewe was familiar with "some very sophisticated and aggressive tax planning," Mr. Bullington said, according to a transcript of the deposition, taken by the North Carolina attorney general's office in July. "And he ride herds [sic] on us all the time that we have the world's highest tax rate of any major company"."
"As Ernst & Young worked on its proposals, one high-ranking tax partner sent an email to a colleague addressing a concern often faced by companies: how to describe a tax-driven transaction in a way that won't create problems later on with tax authorities. "You asked if we have a document that details how the tax savings will work, how much they will save .... We really don't have anything like that except for the sales document, partly because we have avoided calling this a 'tax' project, to show that we did not have a tax savings motivation, rather it is a 'domestic restructuring' project," he wrote."
"As for Wal-Mart's "Tax Shelter Room," North Carolina officials asked Mr. Bullington about the odd name. In his deposition, the Wal-Mart vice president said the moniker was "a bit of a pun," stemming from the conference room's use by tax-department employees to conduct safety drills for natural disasters such as tornadoes."
Drucker, Jesse. 2007. "Inside Wal-Mart's Bid To Slash State Taxes." Wall Street Journal (23 October): p. A 1.
"In May 2001, Wal-Mart Stores Inc. issued an appeal to big accounting firms: Find us creative new ways to cut our state tax bills. Ernst & Young LLP swung into action. Senior tax experts at the big accounting firm swapped ideas via email and in a series of meetings. At least one gathering, according to an internal Ernst & Young calendar, took place in Wal-Mart's headquarters in the "Tax Shelter Room"."
"Big companies hardly ever discuss how outside accountants, lawyers and investment bankers help them cut their tax bills. But Ernst & Young's contributions to Wal-Mart's state-tax minimization project are outlined in a raft of documents filed in recent months in North Carolina state court, where the state's attorney general is challenging a Wal-Mart tax-cutting structure involving real-estate investment trusts. The material, which includes company emails and memos, provides a rare window into accountants' role in generating tax-reduction ideas at one major company."
"Companies often assert that tax savings are simply happy byproducts of transactions pursued for other business reasons. But documents from the North Carolina case indicate that Wal-Mart, from the outset, had one primary purpose: cutting its state income taxes. Ernst & Young worked to fulfill that goal. In 2002, for example, the accounting firm delivered a 37-page proposal laying out a smorgasbord of 27 potential tax strategies, most tailored to a particular state's tax code. It described one of them as "a very aggressive strategy with considerable risk."
"Publicly traded companies reduced their federal income taxes by about $12 billion in 2004 through potentially abusive tax transactions, according to Internal Revenue Service data. Some experts say companies save far more than that each year through elaborate tax-cutting maneuvers."
"Wal-Mart's 2001 letter to accounting firms got right to the point. It began: "Wal-Mart is requesting your proposal(s) for professional tax advice and related implementation services in connection with minimization of state income taxes in the following states: Arizona, California, Florida, Illinois, Indiana, Michigan, Minnesota, and Pennsylvania"."
"State income-tax rates for corporations average about 6.9%, and come on top of a federal statutory rate of 35%. Tax rates vary from state to state, and some states have no corporate tax at all on certain income. That provides ample opportunity for so-called tax arbitrage, in which companies allocate expenses and revenues between states in order to minimize taxes owed."
"On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."
"In the early 1990s, it employed an "intangibles holding company," a unit operating in tax-friendly Delaware into which it transferred ownership of its brand names such as Sam's Club. It then made payments to that unit for use of those brands, deducting them as expenses from its taxable income in other states, according to court records. That strategy fell out of favor after several states successfully challenged Wal-Mart and other companies in court over the maneuver."
"Wal-Mart set aside about $526 million for state and local income taxes last year, not including its substantial property-tax bills, according to the company's financial reports. But its various state tax-cutting strategies seem to have had an impact. On average, Wal-Mart has paid taxes at a rate equal to about half of the average statutory state rate over the past decade, according to an analysis of the company's regulatory filings by Standard & Poor's Compustat."
"After Wal-Mart hired the firm in 1996 ..., an Ernst & Young tax executive urged his team to be discreet, according to a staff memo included in North Carolina court records. "We don't think there is much the state taxing authorities can do to mitigate these savings to Wal-Mart, however some states might attempt something if they had advance notification," he wrote. "We think the best course of action is to keep the project relatively quiet .... there just seems to be too many opportunities for it to get out to the press or financial community and we all know they are difficult to control, particularly when we are dealing with a client as well-known as Wal-Mart"."
"David Bullington, Wal-Mart's vice president for tax policy, said in a deposition that he began feeling pressure to lower the company's effective tax rate after the current chief financial officer, Thomas Schoewe, was hired in 2000. Mr. Schoewe was familiar with "some very sophisticated and aggressive tax planning," Mr. Bullington said, according to a transcript of the deposition, taken by the North Carolina attorney general's office in July. "And he ride herds [sic] on us all the time that we have the world's highest tax rate of any major company"."
"As Ernst & Young worked on its proposals, one high-ranking tax partner sent an email to a colleague addressing a concern often faced by companies: how to describe a tax-driven transaction in a way that won't create problems later on with tax authorities. "You asked if we have a document that details how the tax savings will work, how much they will save .... We really don't have anything like that except for the sales document, partly because we have avoided calling this a 'tax' project, to show that we did not have a tax savings motivation, rather it is a 'domestic restructuring' project," he wrote."
"As for Wal-Mart's "Tax Shelter Room," North Carolina officials asked Mr. Bullington about the odd name. In his deposition, the Wal-Mart vice president said the moniker was "a bit of a pun," stemming from the conference room's use by tax-department employees to conduct safety drills for natural disasters such as tornadoes."
Wednesday, October 24, 2007
Fred Thompson Takes Credit for Clinton’s Fiscal Record
This CNN Video is entitled Thompson Talks Immigration but the real whoppers come when Fred talks fiscal policy. Take a listen and then let’s talk.
Fred Thompson mentions cutting taxes and balancing the budget almost in the same sentence. He fails to mention the 1993 tax increase – opposed by all Republicans in the Senate – even though this was one of the two major moves that did lead to fiscal responsibility. The other major move has often been called the “Peace Dividend” where we felt able to sharply reduce defense spending. There is only one candidate running for the GOP Presidential nomination that would once again reduce defense spending. His name is Ron Paul and he tends to be mocked by his colleagues when they are not promising more tax cuts. So it goes in the Spend & Borrow wing that dominates the Republican Party.
Fred Thompson mentions cutting taxes and balancing the budget almost in the same sentence. He fails to mention the 1993 tax increase – opposed by all Republicans in the Senate – even though this was one of the two major moves that did lead to fiscal responsibility. The other major move has often been called the “Peace Dividend” where we felt able to sharply reduce defense spending. There is only one candidate running for the GOP Presidential nomination that would once again reduce defense spending. His name is Ron Paul and he tends to be mocked by his colleagues when they are not promising more tax cuts. So it goes in the Spend & Borrow wing that dominates the Republican Party.
CHINA: EMERGENCE OF THE NEW CLASS
The 17th National Congress of the Chinese Communist Party has just ended, with a roll-out of the new members of the Standing Committee of the Poltiburo of the Central Committee of the party. Identified among those as the current leading candidate to succeed newly reentrenched leader, Hu Jintao, is Xi Jinping, identified by news reports (WaPo) as one of many "princelings" in newly powerful positions, in his case, son of Xi Zhongxun, a former Politburo member and Vice Premier. Just as in North Korea, with Kim Il Jong succeeding his father, and the children of the ruling Nomenklatura coming to power in the later stages of the former Soviet Union, we see The New Class reproducing itself in the PRC. (Of course in the US we cannot complain to much with our succession of Bushes.)
Tuesday, October 23, 2007
PER CAPITA CARBON EMISSIONS AND PER CAPITA INCOME
Here is ranking of top 25 or so countries in real per capita income with their ranks in per capita carbon emissions, with Singapore and Taiwan missing data. Oil producers mostly do badly, but users of nuclear for electricity tend to do well. Real GDP is for 2006, IMF data, per capita carbon emissions from Wikipedia for 2004.
Real per cap GDP in order Per cap carbon emissions rank
Luxembourg 4 (burns lots of coal for electricity)
Ireland 32
Norway 12
USA 10 (third worst on list, big surprise)
Iceland 53 (lots of geothermal)
Hong Kong 72 (don't know why so good, best on list)
Switzerland 69 (don't know its breakdown for electricity production)
Netherlands 43
Denmark 36 (tops in use of wind power)
Qatar 1 (small OPEC oil producer)
Austria 46
Finland 21
Canada 11 (fourth worst on list, oil)
UK 37
Belgium 40
Sweden 66 (lots of nuclear and hydro)
UAE 3 (small OPEC oil producer)
Australia 13
Greece 44
Japan 34
France 63 (lots of nuclear)
Israel 29
Germany 38
Italy 52
Real per cap GDP in order Per cap carbon emissions rank
Luxembourg 4 (burns lots of coal for electricity)
Ireland 32
Norway 12
USA 10 (third worst on list, big surprise)
Iceland 53 (lots of geothermal)
Hong Kong 72 (don't know why so good, best on list)
Switzerland 69 (don't know its breakdown for electricity production)
Netherlands 43
Denmark 36 (tops in use of wind power)
Qatar 1 (small OPEC oil producer)
Austria 46
Finland 21
Canada 11 (fourth worst on list, oil)
UK 37
Belgium 40
Sweden 66 (lots of nuclear and hydro)
UAE 3 (small OPEC oil producer)
Australia 13
Greece 44
Japan 34
France 63 (lots of nuclear)
Israel 29
Germany 38
Italy 52
Subscribe to:
Posts (Atom)