Feldstein on the Tax Rebate – Life-cycle Model Vindicated

When President Bush and some in Congress thought that their one-time tax rebate was just the right fiscal remedy for an economy about to enter a Keynesian slowdown, some of us wonder if Albert Ando and Franco Modigliani’s old life cycle model of consumption had it right – that people would save much of this one-time tax rebate. Martin Feldstein argues that they were correct:

Tax rebates of $78 billion arrived in the second quarter of the year. The government's recent GDP figures show that the level of consumer outlays only rose by an extra $12 billion, or 15% of the lost revenue. The rest went into savings, including the paydown of debt.

That’s right – very little bang for the buck. Feldstein takes this evidence and then turns on one of Obama’s proposals:

These conclusions are significant for evaluating the likely impact of Barack Obama's recent proposal to distribute $1,000 rebate checks to low- and middle-income workers at an estimated cost of approximately $65 billion. His plan, to finance those rebates with an extra tax on oil companies, would reduce investment in refining and exploration, keeping oil prices higher than they would otherwise be … All of the evidence on one-time tax rebates implies that the Obama plan to send $1,000 rebate checks would do little to raise consumer spending and stop the decline in employment. If the past is an indicator of what would happen, the $65 billion he proposes to spend on this plan would raise consumer spending by only about $10 billion, or less than one-tenth of 1% of GDP.

If Obama’s proposal was solely to boost consumption demand – it is even worse than this as it is a transfer of income from one household to another with the likely effect on aggregate consumption being zero if the households had similar marginal propensities to consume. But a lack of consumption is not what ails the US economy. Furthermore, Obama’s proposal is more designed to address income inequality and less about Keynesian demand stimulus. The fiscal stimulus part of the Obama plan would be from accelerating certain forms of public investment.

Feldstein closes on what I consider heresy:

The distinction between one-time tax rebates and permanent changes in net income is also important for the debate about Mr. Obama's proposal to raise income and payroll taxes. Because those tax increases would be permanent, they would cause a substantial reduction in consumer spending and aggregate demand.

Feldstein is well aware that we have a long-term fiscal imbalance with the current level of taxes being far below the current and projected level of government spending. Ricardian Equivalence types would mock at the idea that recognizing those deferred taxes into current taxes might curb aggregate demand. And even if one rejects Ricardian Equivalence, how can any economists with a supply-side orientation dismiss fiscal responsibility. After all, Keynesian maladies tend to be short-run affairs but the crowding-out of investment is something that lowers long-term growth. Feldstein knows this and usually preaches this. What on earth got him to close his WSJ oped with such heresy?

Update: Mark Thoma is linking to several comments about this Feldstein oped including how Free Exchange has caught Feldstein criticizing something he once endorsed:

MARTIN FELDSTEIN wrote back in December of 2007 that a fiscal stimulus was needed, and that a good way to design said stimulus was in the form of uniform tax rebates. For once, Congress did just what an economist wanted it to do, introducing a tax rebate stimulus plan that sent cheques to millions of households in the second quarter of this year. Naturally Mr Feldstein is appreciative, no? No. In today's Wall Street Journal, Mr Feldstein writes that of course the stimulus didn't work, and what's more, any old fool should have known it wouldn't. I believe this is what is known as a flip-flop.

More Pension Ripoffs: Ellen Schultz Deserves an Award

Ellen Schulz deserves some sort of award for keeping on top of the pension ripoffs that the corporations pull off. Here she also discusses my old employer, Consolidated Freightways.

Basically, the companies, even when they are cutting benefits for ordinary workers, they get shift lush executive pensions into the tax-free pension fund, increasing profits and managerial benefits at the same time.

Here is the article. Read it and weep.



Wall Street Journal - August 4, 2008

Companies Tap Pension Plans
To Fund Executive Benefits
Little-Known Move
Uses Tax Break Meant
For Rank and File

By ELLEN E. SCHULTZ and THEO FRANCIS

At a time when scores of companies are freezing pensions for their workers, some are quietly converting their pension plans into resources to finance their executives' retirement benefits and pay.

In recent years, companies from Intel Corp. to CenturyTel Inc. collectively have moved hundreds of millions of dollars of obligations for executive benefits into rank-and-file pension plans. This lets companies capture tax breaks intended for pensions of regular workers and use them to pay for executives' supplemental benefits and compensation.

The practice has drawn scant notice. A close examination by The Wall Street Journal shows how it works and reveals that the maneuver, besides being a dubious use of tax law, risks harming regular workers. It can drain assets from pension plans and make them more likely to fail. Now, with the current bear market in stocks weakening many pension plans, this practice could put more in jeopardy.

How many is impossible to tell. Neither the Internal Revenue Service nor other agencies track this maneuver. Employers generally reveal little about it. Some benefits consultants have warned them not to, in order to forestall a backlash by regulators and lower-level workers.

The background: Federal law encourages employers to offer pensions by giving companies a tax deduction when they contribute cash to a pension plan, and by letting the money in the plan grow tax free. Executives, like anyone else, can participate in these plans.

But their benefits can't be disproportionately large. IRS rules say pension plans must not "discriminate in favor of highly compensated employees." If a company wants to give its executives larger pensions -- as most do -- it must provide "supplemental" executive pensions, which don't carry any tax advantages.

The trick is to find a way to move some of the obligations for supplemental pensions into the plan that qualifies for tax breaks. Benefits consultants market sophisticated techniques to help companies do just that, without running afoul of IRS rules against favoring the highly paid.

Now, when the executives get ready to collect their deferred salaries, Intel won't have to pay them out of cash; the pension plan will pay them.

Normally, companies can deduct the cost of deferred comp only when they actually pay it, often many years after the obligation is incurred. But Intel's contribution to the pension plan was deductible immediately. Its tax saving: $65 million in the first year. In other words, taxpayers helped finance Intel's executive compensation.

Meanwhile, the move is enabling Intel to book as much as an extra $136 million of profit over the 10 years that began in 2005. That reflects the investment return Intel assumes on the $187 million.

Fred Thiele, Intel's global retirement manager, said the benefit was probably somewhat lower, because if Intel hadn't contributed this $187 million to the pension plan, it would have invested the cash or used it in some other productive way.

The company said the move aided shareholders and didn't hurt lower-paid employees because most don't benefit from Intel's pension plan. Instead, they receive their retirement benefits mainly from a profit-sharing plan, with the pension plan serving as a backup in case profit-sharing falls short.

The result, though, is that a majority of the tax-advantaged assets in Intel's pension plan are dedicated not to providing pensions for the rank and file but to paying deferred compensation of the company's most highly paid employees, roughly 4% of the work force.

On the Hook

And taxpayers are on the hook in other ways. When deferred executive salaries and bonuses are part of a pension plan, they can be rolled over into an Individual Retirement Account -- another tax-advantaged vehicle.

Intel believes that its practices "feel consistent" with both the spirit and letter of the law that gives tax benefits for providing pensions.

Intel may be a model for what's to come. Many companies are phasing out their pension plans, typically by "freezing" them, i.e., ending workers' buildup of new benefits. This leaves more pension assets available to cover executives' compensation and supplemental benefits. A number of companies have shifted executive benefits into frozen pension plans.

Technically, a company makes this move by increasing an executive's benefit in the regular pension plan by X dollars and canceling X dollars of the executive's deferred comp or supplemental pension.

CenturyTel, for instance, in 2005 moved its IOU for the supplemental pensions of 18 top employees into its regular pension plan. Chief Executive Glen Post's benefits in the regular pension plan jumped to $110,000 a year from $12,000. A spokesman for the Monroe, La., company, which made more such transfers in 2006, was frank about its motive: to take advantage of tax breaks by paying executive benefits out of a tax-advantaged pension plan.

How They Do It

So how can companies boost regular pension benefits for select executives while still passing the IRS's nondiscrimination tests? Benefits consultants help them figure out how.

To prove they don't discriminate, companies are supposed to compare what low-paid and high-paid employees receive from the pension plan. They don't have to compare actual individuals; they can compare ratios of the benefits received by groups of highly paid vs. groups of lower-paid employees.

Such a measure creates the potential for gerrymandering -- carefully moving employees about, in various theoretical groupings, to achieve a desired outcome.

Another technique: Count Social Security as part of the pension. This effectively raises low-paid employees' overall retirement benefits by a greater percentage than it raises those of the highly paid -- enabling companies to then increase the pensions of higher-paid people.

Indeed, "it is actually these discrimination tests that give rise to Qserp in the first place!" said materials from one consulting firm, Watson Wyatt Worldwide. "Qserp" means "qualified supplemental executive retirement plan" -- an industry term for a supplemental executive pension that "qualifies" for tax breaks.

Watson Wyatt senior consultant Alan Glickstein said the firm's calculations tell employers exactly how much disparity they can achieve between the pensions of highly paid people and others. "At the end, when the game is over, when the computer is cooling off, you know whether you passed [the IRS nondiscrimination tests] or not," he said. At that point, companies can retrofit the benefits of select executives, feeding some into the pension plan.

They can do this even if they freeze the pension plan, because executives' supplemental benefits and deferred comp aren't based on the frozen pension formula.

Keeping Quiet

Generally, only the executives are aware this is being done. Benefits consultants have advised companies to keep quiet to avoid an employee backlash. In material prepared for employers, Robert Schmidt, a consulting actuary with Milliman Inc., said that to "minimize this problem" of employee relations, companies should draw up a memo describing the transfer of supplemental executive benefits to the pension plan and give it "only to employees who are eligible."

The IRS was also a concern for Mr. Schmidt. He advised employers that in "dealing with the IRS," they should ask it for an approval letter, because if the agency later cracks down, its restrictions probably won't be retroactive.

"At some point in the future, the IRS may well take the position" that supplemental executive pensions moved into a regular pension plan "violate the 'spirit' of the nondiscrimination rules," Mr. Schmidt wrote. In an interview, he confirmed his written comments.

Companies don't explicitly tell the IRS that an amendment is intended to shift supplements executive benefits obligations into the regular pension plan. "They hide it," a Treasury official said. "They include the amendment with other amendments, and don't make it obvious."

With too little staffing to check the dozens of pages of actuaries' calculations, the IRS generally accepts the companies' assurances that their pension plans pass the discrimination tests, the official said.

"Under existing rules, there's little we can do anyway. If Congress doesn't like it, it can change the rules." To halt the practice, Congress would have to end the flexibility that companies now have in meeting the IRS nondiscrimination tests.

A spokesman for the IRS said it has no idea how many such pension amendments it has approved or how much money is involved.

A Way to Pass

Sometimes, the only tipoff that a firm is moving executive benefits into the regular pension is that it provides small increases to some lower-paid groups in the plan, in order to pass the nondiscrimination tests.

Royal & SunAlliance, an insurer, sold a division and laid off its 228 employees in 1999. Just before doing so, it amended the division's pension plan to award larger benefits to eight departing officers and directors. One human-resources executive got an additional $5,270 a month for life.

But to do this and still pass the IRS's nondiscrimination tests, the company needed to give tiny pension increases to 100 lower-level workers, said the company's benefits consultant, PricewaterhouseCoopers. One got an increase of $1.92 a month.

Joseph Gromala, a middle manager who stood to get $8.87 more a month at age 65, wrote to the company seeking details about higher sums other people were receiving. A lawyer wrote back saying the company didn't have to show him the relevant pension-plan amendment.

Mr. Gromala then sued in federal court, claiming that administrators of the pension plan were breaching their duty to operate it in participants' best interests. The company replied that its move was a business decision, not a pension decision, so the fiduciary issue was moot. The Sixth U.S. Circuit Court of Appeals agreed.

PricewaterhouseCoopers declined to comment. A spokesman for Royal & SunAlliance's former U.S. operation, now called Arrowpoint Capital, said the pension plan "wasn't discriminatory." Royal & SunAlliance recently changed its name to RSA Insurance Group.

Pension-plan amendments like the documents Mr. Gromala sought must be filed with the IRS, but the agency normally won't disclose specifics such as who benefits. The IRS says it can't release details of the amendments because they reflect individuals' benefits.

Not So Safe

Employers sometimes tell executives that moving their supplemental pensions or deferred comp into the company pension plan will make them more secure. Normally, supplemental pensions or deferred comp are just unsecured promises; companies don't set aside cash for supplemental executive pensions and deferred comp because there's no tax break for doing so. But the promises will be backed by assets if the company can squeeze them into a tax-advantaged pension plan.

This supposed security can prove illusory, as executives at Consolidated Freightways found out.

The trucking firm moved most of its retirement IOUs for eight top officers into its pension plan in late 2001. It said this would protect most or all of their promised benefits, which ranged up to $139,000 a year.

This came as relief to Tom Paulsen, then chief operating officer, who says he knew the Vancouver, Wash., trucking company was on "thin ice."

But the pension plan was underfunded. And Consolidated didn't add more assets to it when the company gave the plan new obligations. Adding the executive IOUs thus made the plan weaker. It went from having about 96% of the assets needed to pay promised benefits to having just 79%.

Losing Benefits

Consolidated later filed for bankruptcy and handed its pension plan over to a government insurer, the Pension Benefit Guaranty Corp. The PBGC commits to paying pensions only up to certain limits. Mr. Paulsen said he and other executives have been told they won't get their supplemental pensions.

Some lower-level people will lose benefits, too. Chester Madison, a middle manager who retired in 2002 after 33 years, saw his pension fall to $20,400 a year from $49,200. Mr. Madison, 62, has taken a job selling flooring in Sacramento, Calif.

He faults those who made the pension decisions. "I look at it as greed and taking care of the top echelons," he says.

It's impossible to know how much the addition of executive pensions to the pension plan contributed to the plan's failure. But in this as in similar companies where a plan saddled with executive benefits failed -- such as at kitchenware maker Oneida Ltd. in upstate New York -- it's clear the move weakened the plans by adding liabilities but no assets.

A trustee for Consolidated's bankruptcy liquidation declined to discuss details of the company's pension plan.

Mr. Madison and five other ex-employees sued Towers Perrin, a consulting firm that had advised Consolidated on structuring its benefits. The suit, alleging professional negligence over this and other issues, was dismissed in late 2006 by a federal court in the Northern District of California. Towers Perrin declined to comment.

Some companies, after moving executives' supplemental benefits into a pension plan, now take steps to protect them. When Hartmarx Corp. added executive obligations to its pension plan last year, it set up a trust that automatically would be funded if the plan failed.

Glenn Morgan, the clothier's chief financial officer, said the trust benefits nine or 10 people. "The purpose is to pay them the benefit they've earned," he said.

Monopoly then and now

1932: “Appraising the situation in the bitter dawn of a cold morning after, what do we find? We find two thirds of American industry concentrated in a few hundred corporations and actually managed by not more than five human individuals… We find fewer than three dozen private banking houses, and stock selling adjuncts of commercial banks, directing the flow of American capital. [1]

1950 – 1971: “Between 1950 and 1971 the 200 leading U.S. corporations increased their control of all U.S. manufacturing assets from 46 to 87 percent. [2]

1975: “We live in an age of global enterprise-more precisely global monopoly-in which a small number of U.S. banks and corporations have expanded their sphere of operations from a national to a global plane… the American global enterprise is "multinational" neither in ownership nor at the top echelons of management. A recent survey of 1,029 executives of leading U.S. global corporations, for example, found just 19 foreign citizens.” [3]

2000: “Since the 1970s, the productive resources of the food-producing industry have become concentrated in a relatively small number of large, corporate farms…. Another trend in today's food-production industry is the reduced number and increased size of the corporations in each segment of the industry. As a result, the market power of the corporations that remain is increasing… Today, many suppliers of farm inputs enjoy near monopolies” [4]

2002: “..the US and Europe control almost 80 percent of the corporations who dominate industry, banking and trade around the world.”[5]

2006: “And then there were eight.” A visual representation of 25 years of media mergers [in the US] [6]



[1] The Public Papers and Addresses of Franklin D. Roosevelt, Volume 1 (New York: Random House, 1938), p. 679.

[2] Quoted from: American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975

[3] American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975
http://www.questia.com/

[4] American Agriculture in an Uncertain Global Economy
Willard W. Cochrane. U of MN Extension, No. 700 Spring 2000.
http://www.extension.umn.edu/newsletters/ageconomist/components/ag237-700a.html

[5] Facts on the US Economic Empire
by etra Jaimers. Eat the State. Volume 7, #3 October 9, 2002
http://eatthestate.org/07-03/FactsonEconomic.htm

[6] See: http://www.motherjones.com/news/feature/2007/03/and_then_there_were_eight.pdf

How to Fix the Housing Mess: An Alternative to Dean Baker

Despite the large number of people who lack adequate housing and rents that make decent housing unaffordable, the Wall Street Journal's Holman Jenkins suggests housing demolition as a way to eliminate the excess supply of "homes going rancid on the shelf." As discussed in
www.yale.edu/agrarianstudies/papers/20perelman.pdf

New York, inspired by Roger Starr, engaged in the planned shrinkage of New York, which meant letting houses burn in poor neighborhoods, which inspired arson, which helped to clear out neighborhoods for developers.

This kind of logic might even lead to reducing unemployment by ....

Jenkins, Holman W. jr. 2008. "How to Shake Off the Mortgage Mess." Wall Street Journal (30 July): p. A 13.
http://online.wsj.com/article/SB121737434767195077.html

Jenkins reports: "The Economist, in its July 10 edition, endorsed a "wrecking-ball response." Bill Gross, the Pimco bond king, says in an ideal world Washington would "buy one million new/unoccupied homes, blow them up, and then start all over again"."

"... a relevant policy would consist of judiciously buying unsalvageable houses and demolishing them. Fannie and Freddie's strength is housing market software: They could be put to work devising a least-cost, maximum-bang strategy for demolishing unoccupied homes to preserve as much value as possible for the homeowners and mortgage creditors who remain."

What Economists Should be Doing about Climate Change

It’s good to see that Paul Krugman is channeling Marty Weitzman on the urgency of preventing catastrophic climate change. Here is what the Weitzman analysis means for economists.



Weitzman argues forcefully that in the face of extreme risk and great uncertainty, the quest for “optimal” policies is futile. The point is simply to insure against the worst, and that will mean very aggressive programs to stabilize greenhouse gases at a tolerable level. (Bill McKibben wants us to memorize 350 ppm.) It turns out that stopping runaway climate change is at heart an ecological problem, not an economic one.

Meanwhile, a whole industry of economists, financed by clueless foundations, are barking up the wrong tree. They assemble and run dubious CGE models estimating marginal costs and benefits, as if anyone in a position to make decisions really cared. In fact, not only is there no reason to believe this line of research has anything to offer, there is no evidence that the advice of economists, even heavy hitters like Nordhaus, have or will have any effect on the main policy parameters, like carbon targets and timetables.

So what should we do with all the economists freed from the quest for the true dollar value of a ton of carbon? Put them to work anticipating the impact of an impending carbon cap and coming up with measures to adapt as painlessly as possible. What regions and industries will be most affected? What policies can smooth their transitions? How much of the capital stock will be written off before amortization and with what affect on employment and the financial system? What are the most cost-effective ways to increase the elasticity of demand for carbon-intensive goods? That is, how can we foster substitutes, fast?

Why are hundreds of economists laboring night and day to answer questions no one with any sense asks any more, while the critical issues of economic adaptation are almost completely ignored? Why are we about to walk blindly into a carbon-constrained world?

US Economy is Not Suffering from Underconsumption

Robert Reich wants a more equitable distribution of after-tax income and so I do but to blame weak aggregate demand on a lack of consumption is odd as Paul Krugman notes:

But how, exactly, do you reconcile this assertion with the fact that we have a negative savings rate, and that consumption is at a near-record share of national income?

Paul wrote this even before the BEA’s release of the 2008QII data, while my graphs include them. James Hamilton has a nice summary of the latest BEA information:

The main reason that the final GDP number was weaker than predicted was the big drawdown in inventories. Without that negative contribution from inventories, real final sales grew at a robust 3.8% annual rate. Housing subtracted 0.6% from the annual real GDP growth rate, though that's actually the smallest negative contribution we've seen in a year. Remember that new home construction has to be worse (on a seasonally adjusted basis) than it was the previous quarter in order to make a negative contribution to the GDP growth rate. Bigger exports and smaller imports each boosted the GDP growth rate by over 1%. Complain as you like about the Fed permitting such a big slide in the dollar, but at least it's having the intended effect on aggregate demand through the international channel. Without the gains on net exports, real GDP would have actually fallen, making one worry about recent indications of a global economic slowdown. Real personal consumption spending also grew, though less than I had been expecting, given the presumed stimulus from the tax rebate.

Just as the 2001 recession was an investment led slump, investment demand as a share of GDP is also on the decline. The consumption/GDP ratio was 71.16% last quarter, while government purchases relative to GDP were 20.13%. These figures compare to the figures for 2000QII where consumption/GDP was 68.09% and government purchases/GDP was 17.51%. In other words, the gross national savings/GDP ratio fell from 14.4% to only 8.72%. If we assume that depreciation represents about 10% of GDP, then we do have a negative savings rate with what little net investment we are seeing being financed by a large current account deficit.

Many economists – including myself – have noted that exports are growing relative to GDP. We should note, however, that the import/GDP ratio has been rising as well. While dollar devaluation may indeed encouraging more exports, we are not going to reduce the current account deficit as long as national savings remains below what little net investment we have.

If You Subsidize the Production of Something, Less of it Will Be Produced

That’s the economic wisdom behind an op-ed piece in today’s NYT by Victor Davis Hanson, a former classics professor and current columnist for the National Review (where he extolled the “humane treatment” of Guantanamo inmates in a recent offering). Far be it from me to defend the current level and especially pattern of subsidies, which go largely to the wrong people for growing the wrong things in the wrong way, but I’d love to see the economic model that shows how agricultural subsidies lower food output in a hungry world.

A Shortage of Lawyers

Here is a situation that Shakespeare might appreciate. A shortage of lawyers is plaguing Japan. Really? A New York Times article seems to suggest that.

One regression estimates that the optimum number of lawyers is 23 per 1000 workers. The U.S. has 38; Japan, 20; Germany, 27; France, 7; Hong Kong, 7; U.K., 12; Spain, 33; India, 34; Chile, 47.

Stephen P. Magee and William A. Brock. 1984. "The Invisible Foot and the Waste of Nations: Redistribution and Economic Growth." in David C. Colander, ed. Neoclassical Political Economy: The Analysis of Rent-seeking and DUP Activities (Cambridge, MA: Ballinger): pp. 177-85.

According to an estimate during the 1980s, lawyers constitute 42% of the House; 61% of the Senate.

Here is the article:


Onishi, Norimitsu. 2008. "Lawyers in Rural Japan: Low Supply, Iffy Demand." New York Times (29 July).

The article describes the arrival of a lawyer, Katsumune Hirai, to Yakumo, a northern Japanese town, population 19,743, had never had a lawyer before. Few people seem interested in his services.

Japan, in contrast to the United States, has long suffered from a shortage of lawyers, especially in the countryside. If it was not unusual for towns with five times Yakumo's population to have no lawyer, how could Yakumo hope to secure one just for itself? And yet, thanks to a national campaign to raise the number of lawyers, and to dispatch them to lawyerless corners of Japan, Yakumo welcomed its first one in April. The Yakumo Legal Office opened shop, behind gray blinds and under blue awnings, in the square facing the train station.

... half of Japan's lawyers are concentrated in Tokyo, leaving only one lawyer for every 30,000 Japanese outside the capital, according to the federation. The Japanese government is trying to increase the number of lawyers as part of broader judicial reforms that have included establishing 74 law schools since 2004. Under the system that will be abolished in 2011, anyone could take the national bar exam, though it was so difficult that the annual pass rate was about 3 percent.

IRA STEWARD BIBLIOGRAPHY

by the Sandwichman

I intend to write more about Ira Steward's eight-hours theory when my move to the house on the hill is complete. Meanwhile, I had suggested some readings by and on Steward in response to a comment by YouNotSneaky and I'm moving those up to this blog post. YNS pointed out a good overview of Hours of Work in U.S. History by Robert Whaples in the EH.Net Encylopedia.

Ira Steward poses a challenge of isolating and reconstructing the usable kernel of his argument. He wrote propaganda. George Gunton, his 'disciple', also wrote propaganda. That was fair enough considering that most of the reputable political economists of the day essentially wrote propaganda from the employers' side.

I would recommend reading Steward with some context. A good place to start is Dorothy W. Douglas's "Ira Steward on consumption and unemployment" in the Journal of Political Economy, August 1932. Henry Mussey's 1927 essay, "Eight-hour theory in the American Federation of Labor" (in Economic Essays, edited by Jacob Hollander) is sympathetic but critical. Reading Mussey's essay in juxtaposition to Douglas's is instructive because they fall on opposite sides of the stock market crash and start of the depression. Different "consensuses" are evidently in play.

Steward's tract, "A reduction of hours an increase of wages" is available through Google Books and also through the Internet Archive in John R. Commons' Documentary History of American Industrial Society. George Gunton produced a more systematic exposition of Steward's theory in his 1889 pamphlet, "The economic and social importance of the eight-hour movement", which can be found in the anthology, Wages, hours and strikes: L
labor panaceas in the 20th century, (edted by Leon Stein and Phillip Taft).

A couple of more contemporary discussions of Steward are Lawrence Glickman's "Workers of the world, consume" in International labor and working class history Fall, 1997, and David Roediger's "Ira Steward and the anti-slavery origins of the American eight-hour theory, Labour History, 1986.

A couple of points I would like to make about Steward, Gunton and their interpretors. First, Steward's theory appeared without a frame or, more accurately, outside of and in opposition to the frame of classical political economy and its wages-fund theory. There are loose ends in it that I suggest could be resolved within a Keynesian frame. Keynes himself alluded to the possibility of such a reconciliation in his war time remarks on the reduction of working time as the "ultimate solution" to unemployment. Second, no one has ever re-evaluated Steward's theory in the light of Chapman's theory of the hours of labor. I strongly believe that a reconciliation of Steward, Chapman and Keynes (throwing in Luigi Pasinetti for good measure) is feasible and would be extremely invigorating for heterodox economic thought.

Neoliberal “freedom” = Government coercion, violence. The non-market.

In the last few decades many individuals and politicians, with rather privileged access to global mass media outlets[1], have spread an ideology of political persuasion known as ‘neoliberalism’ or ‘neoconservatism’. It has been confused by many – and it seems that this confusion may be deliberate[2 ] - as the simple reiteration of ‘liberalism’ [3 ]. However, critiques of neoliberalism indicate that this doctrine focuses on only one aspect of the traditional liberal doctrine – that of ‘economic liberalism’ which is the belief that “states ought to abstain from intervening in the economy, and instead leave as much as possible up to individuals participating in free and self-regulating markets.” [4 ]

How strange! This doctrine has emerged at the very time when the evidence for the effectiveness of ‘self-regulation was virtually non-existent and after governments gave birth to the giant corporation with heavy-handed protectionist approaches. It was promulgated when a large body of economic literature showed that industry in developed nations had become extraordinarily concentrated and was exerting undue political influence over and within governments. Environmental scientists, independent journalists and even the Secretary General of the United Nations were warning that nations had a very limited amount of time “to improve the human environment, to defuse the population explosion and to supply the required momentum to development efforts” before planetary problems would reach “such staggering proportions that they will be beyond out capacity to control.”[5 ] If there was ever a time for governments around the world to reign in the excesses of industrial pollution, wasteful production methods and excessive and unnecessary consumption it must surely have been the last 30-40 years.

For all the incessant talk of freedom and markets the reality on the ground is that governments are fully in league with large transnational corporations and both have moved not to foster market relations but to actually prevent ordinary citizens from engaging as producers and sellers in markets.



This has been done through forced evictions [6] , a mountain of new regulation, tax privileges and resource agreements that allocate almost an entire region’s forests, water, land etc to only a select few enterprises. In Australia, for instance, the Federal Liberal and Labor governments have encouraged investors to put their money into a small number of selected corporations that are engaged in the clearfelling and woodchipping of huge stands of government-granted native forest. Forests that have been taken out of the hands of the public through the passing of ‘resource guarantee’ legislation where citizens and every other unselected enterprise (almost every one) are banned from the purchase and access to forest resources. ‘Managed Investment Schemes’ (MIS) are the tool used by government to redirect economic resources away from viable and sustainable forms of business. Those investors with capital gains that need to be offset are “generally driven into MIS by their tax deductibility - you put in $100,000 and you get $100,000 of deductions against other income” [7 ]

The biggest native forest woodchipper in Tasmania is Gunns Ltd. Two of its major investors are the AMP (Australian Mutual Provident) Society and Perpetual Investments. Both companies have links with the Fairfax [8 ] and Murdoch [9 ] media empires. Rupert Murdoch’s ‘News Corporation’ is one of the three largest international media groups, operating in most sectors and most continents. Are these media organisations using their investments to access a very cheap source of newsprint for their publications? The question has to be asked.

I believe that a careful unraveling of the corporate networks involved in Tasmania’s contemporary environmental holocaust[10 ] [11] need to be performed. Will such research reveal a host of transnational corporations co-owned by each other? Will we find that these entities are, in effect, exchanging goods between their own enterprise both within Australia and, by way of intra-corporate transactions, across national boundaries? If so, we cannot view this as even a form of trade [12] ; it is all ‘in-house’. They will be seen simply to be using cheaply or freely acquired public resources, with government granted exclusion of competitors from the market place to take advantage of the most extraordinary profit-making opportunities in history. How convenient it appears to be, to use these inaptly entitled ‘free trade’ agreements that allow for avoidance of tariffs along with the employment of a host of other questionable mercantile mechanisms.

‘Market’? ‘Freedom’? ‘liberalism’? Will we find any of those? I doubt it.

[1] Money and power are now sustaining global media concentration. This poses serious questions about the state of democracy in nations.

[2] One of the innumerable examples is Ronald Reagan stating in his speech at Moscow State University on May 31, 1988: “Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States. They are the prime movers of the technological revolution.” http://www.nationalreview.com/document/reagan_moscow200406070914.asp

This was said at a time when a vast literature was well established warning of the dangerous levels of economic concentration in the US and the implications for political influence/policy setting priorities in Government. Further most of the most successful companies and countries of the 20th century did not develop according to free-market principles; successful countries protected and nurtured their industries.

[3] Liberalism. http://en.wikipedia.org/wiki/Liberalism

[4] What is Neoliberalism? By Dag Einar Thorsen and Amund Lie, Department of Political Science University of Oslo
www.statsvitenskap.uio.no/ISVprosjektet/neoliberalism.pdf

[5] UN Secretary General U Thant in 1969.

[6] IMMINENT FORCED EVICTION OF TWENTY-SIX COMMUNITIES UNDER THE LEKKI FREE TRADE ZONE (LFTZ) PROJECT IN LAGOS, NIGERIA. By Felix C. Morka
Social and Economic Rights Action Center (SERAC). Late 2007
http://www.serac.org/Pages.asp?id=295

[7] Investors wield the axe as Futuris blames forest scheme for downgrade
Ian McIlwraith, June 26, 2008. imcilwraith@theage.com.au
http://business.smh.com.au/business/investors-wield-the-axe-as-futuris-blames-forest-scheme-for-downgrade-20080625-2wx3.html

[8] Sir James Reading Fairfax was a founder and director of the Perpetual Trustee Co. and a director of the Australian Mutual Provident Society the Bank of New South Wales, the Commercial Banking Co. of Sydney and Burns, Philp & Co. Ltd. Other members of the Fairfax family past and present have been directors of AMP.

[9] Australia's AMP lets Murdoch off the hook over News Corp. relocation.
http://findarticles.com/p/articles/mi_hb5553/is_200410/ai_n22257898

[10] Paradise lost - with napalm
http://www.guardian.co.uk/comment/story/0,,1197159,00.html
By RICHARD FLANAGAN

[11] LORDS OF THE FOREST
Australian Broadcasting Corporation
FOUR CORNERS
http://www.abc.net.au/4corners/content/2004/s1132778.htm

[12] It’s NOT International Trade. Don’t be Fooled. By Brenda Rosser on 24th July 2008.
http://econospeak.blogspot.com/2008/07/its-not-international-trade-dont-be.html

The Military Basketball Complex

Because of the Tim Donaghy gambling scandal, the NBA hired Army Maj. Gen. Ronald L. Johnson as senior vice president of refereeing operations. He is uniquely suited to the job because he was responsible for overseeing $18 billion of reconstruction in Iraq.

Another Nice Review of The Confiscation of American Prosperity

The Crime of the Century

Michael Perelman, The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression. Palgrave Macmillan. 239 pp.

Economist Michael Perelman has written a whodunit about a heist, but not just any heist. His new book dissects the grandest bit of thievery in modern human history, the robbery that snatched away the economic security of the great American middle class and made America’s rich the richest rich the world has ever seen.

How did all this happen? Perelman takes us back to the initial crime scene, the United States of the early 1970s, a society then completing a quarter-century of unparalleled prosperity. Most Americans had shared in those good times. Most expected them to continue.

But not everyone felt that way. Corporate America’s movers and shakers, back in the early '70s, sensed a world spinning out of — their — control. They feared marketplace challenges from abroad. Western Europe and Japan had rebuilt their war-torn economies. They also feared challenges at home, from social activists and angry workers. Even consumers were organizing.

Corporate leaders, amid these challenges, panicked. They rejected the basic assumption behind America's good times, that balance in economic life — and prosperity for all — requires an active role for trade unions and government regulators. Corporate leaders would instead link up with radical conservatives and help speed what Michael Perelman calls a “right-wing revolution.”

That revolution would rewrite the nation’s economic rules and leave in its wake a deeply and ferociously unequal United States.

Michael Perelman names names as he fills in the outline of this broad sweeping story with intriguing detail on who did what when. He introduces us, for instance, to Lewis Powell, the corporate lawyer — and future Supreme Court justice — whose 1971 memo for the U.S. Chamber of Commerce rallied the nation’s power-suits to rise up and “save” free enterprise.

“Each time the United States has increased income inequality,” author Perelman reminds us along his story-telling way, “disaster has followed.”

And disaster, Perelman notes, will surely follow our contemporary right-wing revolution. Perelman explains why, patiently laying out how top-heavy distributions of wealth deflate broad-based consumer demand, pump up speculative asset bubbles, and invariably invite a “culture of corruption.”

Perelman ends his whodunit with a look at “the presumptive cops” on the beat, his fellow economists, the academics who could have and should have blown the whistle on the right-wing’s frontal assault on American prosperity. They did not. Michael Perelman has. More power to him.

Tom Coburn

The New York Times has an article today about Tom Coburn, a right-wing, antiabortionist, ultraconservative, probably wingnut.

Coburn makes a practice of putting folds on legislation techniques that needs with this disapproval. Where was the Democratic senator who hold the spying bill or war funding?

I do not know if he has strong principles or if he is just playing to his conservative constituency, but I wish that the Democrats have somebody with a tenacity to do something other than to cower before the right-wing.

The vital gore

I spent the better part of the weekend with the wonderful Gore Vidal - reading the new selection of his essays by Jay Parini. I had forgotten how brilliant his take-down of the Kennedys, "The Holy Family," was. The comparison of JFK and BO has often been made - let's hope it is wrong. In Vidal's account, JFK's charisma masked as ambitious a politician as ever walked the earth, whose only principle was to to get to the top and who, once there, had no idea what to do.

Did you know - as I learned in his essay on William Dean Howells - that Howells was alone among the literary intelligentsia of the day in condemning the trial and execution of the Haymarket Martyrs? Conspicuously silent was Samuel Clemens, sad to say - who knew better.

Looking Ahead Toward the Housing Crisis.

After decades of relative stability, the rate of U.S. homeownership began to surge in the mid-1990s, rising from 64% in 1994 to a peak of 69% in 2004, near which it has hovered ever since . . . [S]ome of the explanation likely stems from innovations in the mortgage market that resulted in greater access to credit, lower down payment requirements, and easy and low-cost access to the equity in a house, which makes homeownership more attractive.

Doms, Mark and Meryl Motika. 2006. "The Rise of Homeownership." Federal Reserve Bank of San Francisco Economic Letter (3 November).

Thanks to an old Timothy Taylor column in the Journal of Economic Perspectives