Economic Policy For A Post-Qaddafi Libya

Yesterday Juan Cole at http://www.juancole.com posted "How to Avoid Bush's Iraq Mistakes in Libya," listing ten matters and noting that "arqana," or "Iraqization," is now an Arabic word, and is not used favorably by anybody anywhere, even if some neocons continue to attempt to turn the Bush-Iraq mess into something admirable. Of the ten points Cole makes (all of which I agree with to varying degrees), five have to do with economic policy.

Point 5 is that the Libyans should avoid "privatizing everything." In Iraq we brought in a bunch of young idealistic pro-free-marketers who attempted this, only to have many of these previously state-owned factories/enterprises, simply go out of business, thereby exacerbating the major economic problems facing Iraq. They should have learned from the transition from the Soviet model in the former Soviet bloc. Countries that attempted sudden privatizations, such as Russia, ended up with badly managed companies being bled dry by corrupt owners. More successful cases, such as Poland, engaged in gradual and carefully managed privatizations. Libya should follow that example, not the idiocy in Iraq (or Russia).

Hallig Hooge

I’m just back from a trip to the North Frisian Islands.  Tens of thousands flock there for vacations each summer, inundating the long, car-choked island of Sylt and the much nicer but still busy Amrum.  My strongest impression, however, was the lonely landscape of Hallig Hooge, the small island just NW of Pellworm.

Governor Christie Calls Cap and Trade Gimmicky

The governor of New Jersey is receiving criticism from rightwing nuts for admitting the obvious - that climate change is real and that human activity plays a role. I’m sorry but that is not the real story. The policy decision was for his state to do nothing:

Gov. Chris Christie Thursday declared the nation’s first regional cap-and-trade program designed to reduce air pollution a failure and promised to pull New Jersey out of it by the end of the year. While acknowledging humans contribute to climate change, Christie called the Regional Greenhouse Gas Initiative a "gimmicky" partnership and said it does nothing to reduce the gases that fuel the problem.

Christie joined other opponents of cap and trade by complaining how it would raise the cost of doing business as if this were a “job killer” – the new buzz word for rightwingers when they oppose something. But isn’t that the whole point of cap and trade – to induce private agents to shift their activities away from those that add to greenhouse emissions via the price system.

Christie’s decision to withdraw from this regional cap-and-trade program is bad policy but this is the kind of policy decision conservatives are turning to in order to gain political favor with rightwing nuts. But I guess this was not enough for some people.

The Imminent Fall From Power of Muammar al-Qaddafi

See http://www.juancole.com for details of the uprising in Libya's capital, Tripoli, emanating from the working class districts in the eastern part of the city. With rebel forces having now captured most of the key towns around Tripoli and moving in, and with many of his top officials defecting, it looks like the end is near for the Qaddafi regime, one of the longest ruling in the world at over 40 years.

Shortly after the uprising began I was one of the first to forecast (here) the serious possibility of a partition and stalemate between the rebel East and the loyalist West. This was based on the long historical, ethnic, religious differences between the old Roman province of Cyrenaica in the East and Tripolitania in the West, and for many months it looked as if that would be the case, with the border at Brega in the center of the main oil region. But things have finally gone the rebels' way after a long time and external support by NATO (or some of it).

Smacking Down Self-Plagiarism - The Bruno Frey Affair Becomes Official

The latest issue of the Journal of Economic Perspectives (JEP) has just gone up online and includes the replication of a letter exchange between its editor, David Autor of MIT, and Bruno Frey, regarding accusations that a paper published by Frey and two coauthors (Benno Torgler and David Savage) self-plagiarized three other papers by them appearing earlier in the Proceedings of the National Academy of Sciences (PNAS), the Journal of Economic Behavior and Organization (JEBO), which I was editing when that paper was submitted and accepted and published (and was the first version submitted to any journal), and Rationality and Society (R&S). None of these highly similar papers cited any of the other ones. In his letter, addressed to the editors of the other journals as well as to Orley Ashenfelter, President of the AEA and John Siegfried, longtime AEA Secretary-Treasurer, Autor accuses Frey of having engaged in conduct "ethically dubious and disrespectful to the American Economics Association [publisher of the JEP], the JEP and the JEP's readers." Frey, speaking on behalf of one coauthor, his former student Benno Torgler (Savage is currently Torgler's student, and they both pleaded for Savage not to be punished), stated "we deeply apologize" and "This is deplorable." (referring to their conduct). This can all be found at http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.3.239

Great Moments in Punditry: Calling Dean Baker

46: "And so defenders of faith in the Bush boom abounded, typically in and around the Bush administration. Early in 2005 in the Washington Times, James Miller III, who had served as Ronald Reagan's budget director, lauded "the efficient U.S. arrangements for housing finance" as "the envy of every other country." The trillions going into home loans reflected the accumulated wisdom of a competitive financial system: "Gone are the days of mortgage credit crunches and exorbitant mortgage rates spreads. American homeowners . . . are assured of a steady, liquid, and generally affordable supply of mortgage credit. And investors, both domestic and foreign, are provided a flow of debt- and mortgage-related securities that are highly liquid, transparent, and secure." Miller, James III. 2005. "Should Homeowners Worry?" Washington Times (7 January): p. A 17.

46: "Also in 2005, Alan Reynolds of the Cato Institute disparaged " the economic pessimists, who try to persuade us terrible things are about to happen. A perennial favorite is the 'housing bubble' about to burst, with a supposedly devastating impact on household wealth. ... In short, we are asked to worry about something that has never happened for reasons still to be coherently explained. 'Housing bubble' worrywarts have long been hopelessly confused. It would have been financially foolhardy to listen to them in 2002. It still is." Reynolds, Alan. 2005. "No Housing Bubble Trouble." Washington Times (8 January).

The crisis of the global economy. Was it a planned disintegration?

“The biggest propaganda story this decade is the fiction of the Japanese and now Chinese workers are thrifty folks who want to desperately save money and they want this so badly, they will happily toil away in order to hand over this loot to the American consumer who will then spend it for them! And everyone lives happily after living off the blood and sweat of those foolish Asian workers who don't know how to have fun, hahaha."

So penned Elaine Meinel Supkis in her 2007 article exploring the reasons for the existence of the global money glut. [1]

Russian writers Vasily Koltashov, Boris Kagarlitsky, Yuri Romanenko and Igor Gerasimov provide a wider (and clearer) context for the imbalance between the world's monetary base and its real economy. "The world economic crisis ... is systemic in nature" they wrote and comes about through the "contradictions of the neoliberal model of capitalism" - an economic model, they say, that is based on the "exploitation of cheap labor power in the Third world", the systematic lowering of real wages whilst stimulating consumption in the rich nations.

"...The scope for intensifying this exploitation has been almost exhausted."[2]

Not surprisingly, given the way that consumption was expanded by whatever means available, including through the ballooning of debt and the stepped up, extremely modern, efficient (and mostly institutional) environmental pillage.

John Bellamy Foster provides his own elaboration of the contradictions in today's global capitalist economy:

"Three critical contradictions make up the contemporary world crisis emanating from capitalist development: (1) the current Great Financial Crisis and stagnation/depression; (2) the growing threat of planetary ecological collapse; and (3) the emergence of global imperial instability associated with shifting world hegemony and the struggle for resources. Such structural weaknesses of the system, as Joseph Schumpeter might have said, are the product of capitalism’s past successes, but they raise catastrophic problems and failures in the present nonetheless."[3]

It certainly feels to me like we're all now (metaphorically) standing at the pinnacle of a 'contradiction mountain' built up over the last two hundred years; with a cliff edge descent into some oddly familiar future existence.

The historical evolution to present day seems to have gone something like this:

What lies behind the debt ceiling 'crisis'?

Below I have posted some brief comments made recently by Diane Warth (our Econospeak administrator) on the recent US debt ceiling 'crisis'. "

I don’t believe the recent debt ceiling “crisis” was anything but a media circus designed to usher in the “necessary” dismantling of Social Security – Obama is a Wall St. puppet and the outcome was his intent. It’s a distraction.

The real story, in my opinion, is the bubble of arrogance the players insist on floating – encouraging the public to invest blindly in the virility of the US econ engine which prevents them seeing the fiat can they keep kicking down the road has hit a dead end. The financial elite do realise it and are hedging their bets on it. When the can hit the wall the elite created derivatives. Stiglitz challenged any economist to define derivatives. Not only did Wall St. create a catastrophically obscene amount of its own fake money, the Fed printed money to bail them out when the bubble burst. The scenario will repeat – what will stop it. The Indian economist Jayati Ghosh sees it happening in commodities.

The US is waging 7 wars and whilst its main exports are war-toys a manufacturer’s primary customer should not be itself, no? The “wars” are not going well. War is insanely expensive – robotics, PTSD, the medical costs alone would be injurious to the healthiest of economies let alone an unimaginably impaired one that has no real change in the works. The govt. can’t privatise the military quickly enough. Then there are the long-term health costs of new age weaponry, as well, not only does Japan have to deal with rebuilding infrastructure, but medical fallout for years to come – as would any country that experiences such a disaster, double the trouble here in the US where the nuclear industry is entirely subsidised by the public.

Trade policy remains moored in oppressive tactics – China now seems no more or less menacing a partner - the US emperor is naked but no one in Murdoch world notices. The kooky US left believes marching in DC will affect change? It’s pathetic. The crisis for capitalism will happen when China’s working class revolts. If that doesn’t happen, China will become what the US is today, as the US simultaneously bottoms out. I prefer the death blow to capitalism inflicted by a worker revolution but history is not a promising indicator.

" Hmmm...national 'trade policy'? Or is it the regulatory cartelisation of the global economy by state capitalist policies of the wealthy nations?

It’s the Political Economy, Stupid!

Sometimes living in the world of ideas makes it harder to understand the real one. If you happen to be an economist, and the time is now, that is true in spades. Take Paul Krugman, for instance. After bemoaning the terrible policy choices of the last two years, he writes, “I’m still trying to make sense of this global intellectual failure.” It’s as if the core problem is that political leaders didn’t learn their macroeconomics well enough.

But Keynes was wrong about the power of “academic scribblers”. Idea-smiths provide language, narratives and tools for those in control, but the broad contours of policy depend on who the controllers happen to be. We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours.

This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable.

The rapid and robust global restoration of profits post-2008 was not an accident. Public funds were used to bail out exposed creditors and shore up asset values, while the crisis was used to suppress wages and postpone meaningful regulatory reform. Indeed, I can predict with some confidence that many of the profits, particularly in the financial sector, that have been reported in official filings and blessed by the accounting firms will later be found to be illusory—but not before those who have claims on the revenues have cashed in to their own personal advantage. The institutions will be decimated, but those who owned, lent to or bet on them will be rich. This is not a failure, at least not for them.

You could make a case that, collectively, the interests of the financially endowed ultimately require a rescue of the real, nonfinancial global economy. Surely, when we take our painful plunge into the second dip of the Great Recession, their wealth will be at risk. But the ability to see it at a system level presupposes either a system-level organization of the class or the existence of individual interests that are transparently systemic. Neither appears to be the case today. From what we (you and me) can see from our vantage point, the ruling demands are to make sure my bonds are serviced, my counterparties pony up, the markets I invest in stay liquid, and expenditures for public welfare (i.e. the losers and chiselers) are slashed.

The first principle of political economy is that the scope of democracy depends on the range of views and interests (typically tightly linked) of the owning and controlling class. Genuine public debate and decision-making extends only to those issues on which the elites are divided. In what country today is there a significant division among political-economic elites over core economic questions? How would our situation be different if Obama, Cameron, Merkel, Sarkozy et al. had been on the losing side of their elections?

So, the current mess is not the result of a failure by intellectuals—although clearer, less ideologically-driven thinking by economists would certainly be a good thing and might make a small dent at the margin. As long as there are even a few economists who proclaim the virtues of austerity and deregulation, however, their views will dominate. They haven’t won a battle of ideas; they are simply the ones who have been handed the microphone.

The real problem is political, and it is profound. Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy.

A Calamitous Response to Calamity

I grew up 18 miles from Youngstown, Ohio, the nearest thing to a "big city." The town was the epicenter of the Rust Belt because of his heavy dependence on steel. As the economy disintegrated, arson became the major industry because housing values had declined so much. Recently, the town was in the news because it pioneered in the deliberate shrinkage of a city.

Now, the Wall Street Journal reports that a new steel mill is under construction, which might seem to be a reason for celebration. Unfortunately, the purpose of the mill is to produce million tons of seamless steel tubes used in "fracking," which has become a major source of income in the area, but a serious threat to the water supply.

Ansberry, Clare. 2011. "A Steel Plant Rises in Ohio." Wall Street Journal (2 August): p. B 1.
http://online.wsj.com/article/SB10001424053111904233404576462562705511704.html?mod=ITP_marketplace_0

Manufacturing Discontent: A Prelude to the Phony Debt Crisis

I just posted a short video clip discussing my 2005 book, Manufacturing Discontent and its relevance to the phony debt crisis.

http://www.youtube.com/watch?v=tmYWMV-PJ-M

Unions vs. the Good Guys at Delta Airlines

The FAA was shut down because of a partisan dispute. The basic issue was supposed to be the Republican demand that the agency save $16 million by ceasing to subsidize 13 airports with relatively little demand. Yes, the airports were in Democratic strongholds.

NPR's Brian Naylor reported that the airports were a bargaining chip. The real issue was the threat that union power posed for Delta. The National Mediation Board rejected a practice that counted required a union to win more than half the eligible votes rather than half of the votes cast.

Delta, the only non-union airline, got the Republican bill to include language overturning the National Mediation Board decision. Since the House leadership refused to budge, the FAA shut down, leaving the government unable to collect $30 million per day in taxes. Patriotically, most of the airlines continued to collect the tax in the form of higher fares. However, these "job creators" kept the money so that they could help the economy. Besides, the government could make up the lost taxes with still more tax cuts.

This brings us back to Delta, which graciously agreed to refund the "taxes" that it collected. Hopefully, we will reward Delta for this good behavior by supporting the House repeal of the union election rule.

The Tea Party Destroys The "Full Faith And Credit" Of The United States

No, in the end they did not actually block a debt ceiling increase, so we avoided a formal default, and the ratings agencies may even yet let us off the hook for an official downgrade. But that does not matter. Since our one-only-in-the-world debt ceiling was unified in 1939, it has had 89 "clean" increases up until this year, despite some noise and huffing on some, and even a delay in 1979 great enough to cost taxpayers something like $10 billion due to a one month technical delay in paying $120 million in interest.

But now we are in a new world. The master of this increase, Sen. Mitch McConnell (R-KY), has made it clear that this is the "new normal." There will be no clean increases in the future, and the tea party has made it clear that Grover Norquist is our dictator; there will be no tax increases to help in meeting the demands to reduce deficits, even though these efforts look to push us back into another recession, 1937-style, all over again. Chinese and other foreign commentators have gotten the message, just as did Moody's, that there is a very severe risk to the full faith and credit of the United States due to potential political gridlock in the Congress, with the worst of this driven by maniacs who refuse to increase taxes and some of whom even think that a default would actually improve the credit rating of the US. The only thing that could have been worse out of this mess would have been if in fact they had failed to raise the damned debt ceiling.

As it is, the New York Times has a lead editorial this morning calling for the abolition of the debt ceiling, a position I have been pushing here since April 19.

The Choices of 2008, the Consequences for Today (Caution: Very Dark)

It’s always a good idea to try to see the present as a moment in history, in relation to the main forces at work.  By now it can no longer be denied that the US and European, and therefore world, economies are in serious trouble.  We are awash in analyses that examine at close distance the various aspects of our predicament: beleaguered US consumers, sovereign European borrowers who can’t keep treading water as their interest rates rise, and misguided politicians and policy chieftains on both continents who provide half measures at best on top of perversely procyclical fiscal and monetary blunders.  All this is true.

But let’s go back to the critical moment in the fall of 2008 when global markets froze and, in the midst of crisis, decisions had to be made about fundamental economic strategy.

Obama's 5 Options If Congress Fails To Raise Debt Ceiling On Time

1) Declare the debt ceiling unconstitutional and keep on borrowing. Bruce Bartlett, Bill Clnton, and I support this one, based on Section 4 of the 14th Amendment. If it held, as it would be challenged in the courts, it would effectivly abolish this uniquely idiotic device. OTOH, aside from serious people like Laurence Tribe who say the debt ceiling is constitutional, Obama would certainly face impeachment by the House, if not removal by the Senate, and the financial markets might demand higher interest rates on US securities due to the uncertain legal foundation of any new borrowings. While his press secretary has supposedly ruled this out, Obama himself has never specifcally commented on this issue, indeed, has refused to do so. Non-trivial possibility he might follow this one, if he has the chutzpah.

2) The full haircut. Under the constitution the president (and the treasury secretary acting on his behalf) does not have the right to decide to pay some bills and not others (although this has been done in the past during hilariously labeled "government shutdowns"). So, to avoid violating this law, he simply cuts all spending across the board by the necessary amount to immediately balance the budget, everything. This would mean a technical default as interest payments on the debt would not be made. This has serious legality, but very unlikely.

3) Partial haircut. Avoid technical default by paying interest and principal on coming due debt, but cut other spending. This has many variations from applying (2) but not to the debt itself or also preserving some other categories not to cut, with pensions for veterans having perhaps the strongest constitutional argument for being preserved based on the specific language in Section 4 of Amendment 14 that speaks of pensions for Union soldiers in addition to the national debt as being inviolate. Some variatoin on this may be his most likely choice, legally problematic as it would be.

4) Mint high-value platinum coins. I have posted here on this idea of beowulf's, legal under a 1997 law. So, US Treasury mints trillion dollar platinum coin and deposits it with the NY Fed, continues to pay bills without having to borrow. This is indeed legal and would avoid a constitutional crisis, but would kick the can down the road on the broader debt ceiling and deficit issues, and would also probably be ridiculed and poorly received by the financial markets.

5) Have the Fed forgive portions of US debt it holds. This would allow for borrowing without breaching the debt ceiling, and is probably legal. However, no other central bank has ever done such a thing, as near as I can discern from some googling (although some have forgiven interest payments on debt), and would also be received poorly by financial markets. Also, House in particular would probably go after the Fed big time, led by Ron Paul. Indeed, I suspect that if Ben Bernanke and Tim Geithner were to discuss this, Ben would say to Tim, "you mint that coin."

I shall make one final note on the debt ceiling itself. Many are loudly declaring that it has always been there to "discipline" the budgetmakers, even though the budgetmakers are Congress itself and should tie the debt ceiling to their making of a budget, as I recommended in my most recent post here. However, back in 1917 when the ceiling was first adopted, it was done so as a mechanism to allow for flexibility on the part of the Treasury in connection with financing for WW I. Previously, in following the explicit mandates in the Constitution, Congress had always specifically approved (or disapproved) every specific act of borrowing money by the US government, much in the way one sees at state and local government levels. But the debt ceiling was put in place to allow the Treasury to engage in borrowing on its own, although within the limits set by the debt ceiling, very far from the current interpretations by so many people, including a lot of idiots in Washington who, as Paul Krugman describes them, claim to be Very Serious People.