High Interest Charges Guarantee the Need for a Bailout

At MarketWatch today there's an article entitled 'Spain up against a wall as borrowing costs soar'.


Of course, it's logical, that if an entity in financial trouble is charged higher and higher costs for its existing borrowings something will have to give.  A catastrophe is predictable!


The obvious solution is have a fair procedure for bankruptcy for all nations who are insolvent.  Such procedures exist for corporations, why not for nations?  What form should national bankruptcy take?  


Moreover, how much responsibility should individual countries take for the effects of a great pool of (out of control) global funds that cause speculative bubbles in every nation they invade?

Mitt Reagan

This news title says it all:

Romney marks Memorial Day with call for continued military strength

I guess he’ll pay for all the extra defense spending the same way President Reagan did – tax cuts for the rich. If someone votes for this clown – we should wonder if that person understands basic arithmetic.

But haven’t we already tried borrowing to stimulate?

Paul Krugman reacts to the following childish insult from The Telegraph:

To his followers, he’s a saint; to his detractors, he’s a false prophet with satanic intent.

The Telegraph does note that Paul’s policy advice is entirely consistent with the writing of British economist Lord Keynes. My title is where this op-ed starts in on its own view of why Keynesian economics might be wrong headed. But let me suggest that the author of this op-ed does not understand Keynesian economics. Keynes was not in favor of the type of long-term fiscal irresponsibility that we have witnessed say in the United States during the Administrations of Ronald Reagan and George W. Bush. Yes I know proponents of the 1981 and 2001 tax cuts could argue that we were not at full employment when these tax cuts were passed. However, the 1981 tax cut was not needed to get us back to full employment. Volcker’s monetary policy – for better or worse (worse in my view) – was the main driving factor for the U.S. economy. And we know George W. Bush pursued a host of fiscal policies that were more long-term in nature and all fiscally irresponsible. If the author of this Telegraph op-ed thinks Lord Keynes would have approved these episodes of fiscal stimulus – I submit he’s very ignorant of the brand of economics that Lord Keynes and economists like Paul Krugman strive to describe.

Romney-Ryan Fiscal Policy – a Return to Reaganomics?

Brian Beutler offers a very good discussion on whether Obama or Romney is offering more austerity with Brian correctly noting the short-term fiscal restraint would be a disaster in terms of getting our economy closer to full employment. He notes the ambiguity of Romney’s proposals (no specifics on tax offsets or spending cuts) noting:

Because we can’t know for sure what will become of the unknowns in Romney’s fiscal plan, it exists simultaneously on both ends of the Keynesian scale. If the offsetting base-broadeners never materialize, and the spending cuts don’t happen as advertised, Romney’s plan amounts to a hugely stimulative tax cut. “A large amount of stimulative tax cuts, and no contractionary spending cuts would suggest the true Keynesian in the race is Romney,” says University of Pennsylvania economist Justin Wolfers.

In other words – a return to the spend&spend and borrow&borrow policies during Reagan’s first term. But we also get this from Paul Ryan:

Paul Ryan — the GOP’s official spokesman on fiscal issues — boasted that a Republican victory in November will give his party a mandate to turn his controversial spending-slashing budget into law. “If we make the case effectively and win this November, then we will have the moral authority to enact the kind of fundamental reforms America has not seen since Ronald Reagan’s first year,” Ryan said.

Funny thing – spending as a share of GDP never declined under President Reagan. Sure we got a few domestic spending reductions but they were offset by increases in defense spending. And Mr. Romney has already said he is for more defense spending. Short-term fiscal stimulus when we are in a liquidity trap may be a good thing but the lasting effects of the Reagan fiscal stimulus was higher real interest rates, less investment demand, and slower long-term growth.

Preannouncement of Paperback Edition of my Book

After letting my book languish for almost five years Palgrave let The Confiscation of American Prosperity, they are about to release a paperback edition.  In addition, they are featuring me as author of the month and reprinting my new introduction, which I explain why the book was constructed as a crime story.

My picture and the introduction are at the bottom.

 http://view.mail.macmillan.com/?j=fe5816787c6d057f7316&m=feee1c737d6c02&ls=fdd015717762057b7511777465&l=fe5c1575746d01757512&s=fe3010727564037b731171&jb=ffcf14&ju=fe1f1773716d027b721777&r=0

Romney on Unemployment: 2, 4, 6, 8 – Who Do Appreciate?

CNN has a good story on all the fuss about the latest from the GOP Presidential candidate on unemployment:

"I can tell you that over a period of four years, by virtue of the policies that we'd put in place, we'd get the unemployment rate down to 6%, and perhaps a little lower," the presumptive GOP nominee told the magazine. The number marked the first time Romney had talked about a specific rate during this election cycle, although he listed 5.9% as the number he would strive for in his 59-point economic plan released in September. Economic forecasts suggest Romney may not be too far off in his prediction. Based on the current rate of growth, the jobless rate is expected to fall to around 7% by the end of 2015 and 5.5% by the end of 2017, according to reports by the bipartisan Congressional Budget Office. In a conference call Wednesday, Obama campaign spokesman Ben LaBolt pointed to those predictions in criticizing Romney's statement. "Government economists have been clear that under current law their projection today is that unemployment will hit 6% by that point," LaBolt said. He went on to cite recent remarks in which Romney, chiding the president for his job creation record, said any unemployment figure above 4% was not worth celebrating.

To their credit – even Republican leaning economists were critical of any claim we could get the unemployment rate down to 4% by the end of 2016 but why retreat to a goal of 6% unemployment when even the CBO is forecasting we’d get close to 5.5% by then. CBO seems to be saying: (a) that the GDP gap won’t fully close until the end of the decade; and (b) that the unemployment rate will be north of 5% when it does close. So is Mr. Romney promising to do worse than what is expected under current policy? Given the state of the economy and our dismal fiscal policy which is akin to doing nothing, I could almost vote for a Republican who decided to both promise a more vigorous return to full employment and put forth a credible plan to get there. CNN outlines what Mr. Romney claims is his plan:

"Well, there are a number of things," Romney said on Fox News. "You start off by saying, let's stop something that's hurting small business from creating jobs and that's 'Obamacare.' Get rid of it. No. 2, have an energy strategy that takes advantage of our natural gas and oil and coal, as well as our renewables. Those low cost energy fuels will ultimately mean jobs come back here, even manufacturing jobs that left here. And finally, get a handle on the deficit so that people understand if they invest in America, their dollars will be worth something in the future."

#1 is a return to a failed health care system and #2 is continued reliance on fossil fuels. Both are bad policies but neither has much to do with the current macroeconomic mess. So had he stopped there, I could understand his not so ambitious goal of reaching a 6% unemployment rate. But then he had to mention #3, which is austerity. Which is working so well in the UK and Europe – not! We have heard from the CBO that allowing the fiscal cliff will lead to another recession. I guess the Republicans are promising some other variation on austerity, which if implemented would mean a continued high GDP gap and high unemployment. Is Mr. Romney running for the office of President or Head Cheerleader?

Neoconservatives Wildly Misrepresent Iran (What Else Is New?)

On today's Washington Post editorial page, Marc Reuel Gerecht, formerly of the CIA, and Mark Dubowitz, current Director of the Foundation for Defense of Democracies and its Iran Energy Project (where Gerecht now works also), have a column titled, "In Iran Talks, one side ready to bend," neatly timed to coincide with the beginning of negotiations between Iran and the Group of Six, and just after Iran announced a willingness to open to outside inspections some previously blocked sites and programs.  The authors argue that the West, European countries particularly, will be looking for the least excuse to relax the economic sanctions against Iran for only stopping their uranium enrichment to 20% activities.  They argue that the sanctions should be maintained to "crater" the Iranian economy so that even enrichment to 5% (far below the 90+% needed for nuclear weapons, but needed for their domestic electricty producing reactors) is shut down as well.

Quite aside from the authors not noticing the existence of the Iranian domestic civilian reactors needing the 5% enriched uranium (with them presumably wanting those reactors shut down as well), or that the Iranian nuclear program dates back to the pro-US regime of the Shah, they make several simply outrageously incorrect claims.  The clearest is a claim that Supreme Leader Ali Khamenei has been actively supporting a nuclear weapons program since "when it was still covert" in the mid-1980s, before he became the Vilayat-el-faqih (Supreme Jurisprudent), although Rafsanjani is identified as the "true father" of the nuclear weapons program.  Quite aside from the fact that what program they had was shut down about a decade ago, this ignores that after that shutdown and also very recently and publicly, Khamenei has issued religious edicts, fatwas, against nuclear weapons.  That he had done so earlier was widely ignored in the US media, with only people like Juan Cole reporting on it.  This most recent utterance did get public attention, however, presumably because it coincided with the decision to move to this round of negotiations.  Most of the reports failed to mention that this was nothing new on Khamenei's part.

The other is a claim, based on quoting Anthony Cordesman, to the effect that pursuing nuclear weapons has been the "main focus of Iran's military strategy for the past quarter of a century."  This claim also runs into the same problem already mentioned above, that Iran gave up its half-baked pursuit of nuclear weapons a decade ago, with its Commander-in-Chief Khamenei issuing his fatwa against nuclear weapons not too long thereafter.  Of course, for much of this more recent period, it was fashionable to ignore Khamenei completely and focus on President Ahmadinejad, who conveniently issued periodic semi-insane remarks that could be focused on.  However, as it has become increasingly clear more recently that he is not in charge at all (and never was of military programs) and Khamenei is, we now have this weird drumbeat of focusing on Khamenei and actually presenting the beaten down Ahmadinejad as a "reformer."  I cannot begin to describe how ridiculous and misleading all this is, but this particular column is really far out there in terms of its egregious and hysterical misrepresentations of basic facts.

Global trends in an era of diminishing returns

In 1996, Lester Thurow's book entitled 'The Future of Capitalism' was published.  I found his book a very interesting read in the context of the global financial crisis which is continuing to unfold since 2007.  On pages 8-10 Thurow describes, what he terms as, 'five economic tectonic plates' crashing together and providing an ominous trend that helps to foretell capitalism's crisis.  They are:

1. The end of Communism (leading to an increase of one third of humanity operating under capitalism's umbrella, "with a very different set of criteria for success and failure..."
2. Technological shift to an era dominated by manmade brainpower industries which "don't have natural predetermined homes.  They are geographically free - capable of being located anywhere on the face of the earth..."
3. A demography never before seen.  "Population is booming in the poorest countries [leading to] "the pull of higher standards of living abroad" where "unskilled labour is not needed". Thurow also mentions the development of "a new 'class' of human beings - a very large group of elderly, relatively affluent people, most of whom do not work, and who are dependent upon government social welfare payments for much of their income."
4. A global economy.  "Shifts in technology, transportation and communications are creating a world where anything can be made anywhere on the face of the earth.....Thurow notes that this creates a 'disconnect' between "global business firms with a worldview" and national governments.
5. An era where there is no dominant economic, political or military power.  How (Thurow asks) is the economic world to be designed or organised in a multipolar world?

By looking at the trends outlined above one is able to predict a few other things occuring simultaneously in the global economy.  With the very large increase in the world's workforce it is probable that the global unemployment would rise significantly, and wages would decline.  The deepening of globalisation would, in turn, lead to difficulties for national governments to secure a big enough tax (revenue) base from the incomes of dominant corporations (who can flit money across national boundaries at the tap of the keyboard.) I would also expect financial regulation to become almost impossible under the laissez-faire mentality created by the emergence of powerful global (self-interested) corporate giants.

Indeed, on page one of Thurow's book he writes: "In all of Western Europe not one net new job was created from 1973 to 1994."  And the International Labor Organisation reported a few years back that in Europe between 1970 and 2005 the financial sectors share of corporate profits climbed from 21% to 42% [1].

But why are the trends that Thurow outlines above happening in the first instance? Have we entered an historical era of 'diminishing returns'?

It looks quite possible that, for decades now, global economic growth has actually coexisted with a steadily declining general standard of living. 

Brenda J Rosser, 23rd May 2012.

REFERENCES:

[1]  World of Work 2009.  Snapshot of the European Union

http://www.ilo.org/public/english/bureau/inst/download/eu_region.pdf

GDP Gap by End of 2013 if the Fiscal Cliff is Allowed to Occur

The Congressional Budget Office has considered the effect on real GDP growth in 2013 under two alternative fiscal policies:

Under current law, the federal budget deficit will fall dramatically between 2012 and 2013 owing to scheduled increases in taxes and, to a lesser extent, scheduled reductions in spending—a development that some observers have referred to as a “fiscal cliff.” Today CBO released an analysis of the economic effects of that fiscal restraint. Under those fiscal conditions, growth in real (inflation-adjusted) gross domestic product (GDP) in calendar year 2013 will be just 0.5 percent, CBO expects—with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession. If lawmakers changed fiscal policy in late 2012 to remove or offset all of the policies that are scheduled to reduce the federal budget deficit by 5.1 percent of GDP between calendar years 2012 and 2013, the growth of real GDP in calendar year 2013 would lie in a broad range around 4.4 percent, CBO estimates, well above the 0.5 percent projected for 2013 under current law.

Using the CBO estimate of potential GDP, the gap as of 2012QI was 5.4%. CBO also expects GDP to grow by a mere 2% during 2012, which would mean that the gap at year end would still be 5.3%. If policymakers allow the fiscal cliff to occur, this CBO forecast says that the gap will grow to 6.6% by the end of 2013. If policymakers avoided the fiscal cliff in such a way that GDP grew by 4.4%, however, the gap would fall to 3% by the end of 2013. While many economists might prefer some fiscal stimulus so as to close the GDP gap even faster, maybe our best hope given this dysfunctional Congress is that they don’t impose even more austerity.

Austerity by Magic Asterisk

Mercifully the Speaker of the House’s oped was short. I’m trying but that’s the only kind thing I can find to say about it. Its growth by austerity theme is evident from the inception:

The American people continue to ask "where are the jobs?" and the overspending going on in Washington, D.C., is a big part of the reason why. Our national debt, which has grown significantly due to President Obama's failed "stimulus" policies, is a drain on our economy and a crushing burden on our kids and grandkids.

But did we expect Mr. Boehner to do anything other than praise the policies of Herbert Hoover? He wants to blame the President for the failure to reach any compromise on long-term fiscal responsibility but he proposes nothing in the way of specifics. In fact, he criticizes the President for considering tax increases. No wisdom on how to get us back to full employment and no courage on long-term fiscal responsibility. This is what the Republicans have as leadership? It is a wonder that USAToday wasted any of its space on this oped!

Does the Chamber of Commerce CEO Recall the S&L Crisis?

Tom Donohue has a similar view as Mitt Romney on the recent JPMorgan fiasco:

The first government to help the banks was George Washington, and ever since, every time they do it, they make usurious amounts of money. And the government has got tons of money back from everything they did through the TARP funds and now they were sort of a little chagrinned to say they’re making a lot of money on the AIG deal.

And I thought taxpayers were out over $160 billion bailing out those S&Ls and commercial banks back in the 1980’s. Of course, the government did assist the US automobile sector and financially did OK with that deal. Funny thing – some folks like Mitt Romney thought that was a bad idea. I guess the Chamber of Commerce thinks lemon socialism is fine and dandy for the financial sector even without regulation. Ahem!

Will The Student Debt Burden Depress The US Housing Market For The Foreseeable Future?

There is every reason to believe so.  On the one hand, after years of mortgages being granted without down payments, those have been reimposed along with much stricter standards regarding analysis of credit worthiness of mortgage borrowers in the wake of the collapse of the housing bubble.  However, the student debt burden has now reached a record high in excess of $1 trillion total, with many recent grads unable to get jobs that will allow them to begin dealing with their accumulated burdens in a serious way, and even some of their parents and grandparents burdened with paying these.  These burdens are especially great for the most recent grads, who are very unlikely to be able to buy houses for the foreseeable future.

It is worth noting how alone the US is in having this level student debt burden.  It is clearly the result of our having by far the highest levels of tuition of any country in the world, substantially driven in more recent years by major cutbacks in state aid in for public colleges and universities.  In many nations college education remains free, and in most others the tuitions are all but nominal.  The small number with more substantial tuitions includes Austria, Netherlands, Chile, South Africa, and especially Canada, the only one that approaches the US level at all.  Canada does have a student debt problem, but it comes nowhere near that of the US, with current aggregate student debt amounting to $20 billion.  Yes, Canada is only about a tenth of the US size in population, but that still leaves the per capita student debt burden there at less than a quarter of that in the US. 

So, the US has a uniquely substantial drag around its younger population that will make large portions of its younger population unable to buy homes for a long time to come.  Forget any serious "recovery" of housing prices anywhere in the US anytime soon.

Ah, For the Ignorance that Is Ignorant of Itself

Catherine Rampell quotes Daniel Webster, who sponsored a bill to eliminate the American Community Survey, which was passed by the full House of Representatives: “We’re spending $70 per person to fill this out. That’s just not cost effective, especially since in the end this is not a scientific survey. It’s a random survey.”

Metaphorically Speaking

Robert Schiller opens his New York Times column today on a promising note, pointing out the power that metaphors have over our thinking about economics.  A particularly nefarious motif is “belt-tightening”, conjuring up the idea that running an economy is like managing the finances of a family.  When family income falls, under normal circumstances a proper response is to cut spending too: live within your means.  It’s a  misleading guide to macroeconomics, however, since it takes the outside world, the place where our money comes from, as given and looks only at how we can respond to it.

Unfortunately, Schiller’s alternative, while fine for some purposes, also misses the point.  He suggests “a winter on the family farm”, where, while when the land is covered in snow, it makes sense to invest time in repairing old equipment, investing in new methods, and so on.  He’s right of course, except that his metaphor also sidesteps macro.  It too takes “winter” as an exogenous force and fails to illuminate how economic winters are created by the behavior of the farmers themselves.

I’ve been looking for the right metaphor, and I don’t have it yet, but I do have a story.  It is the farm family version of the baby sitting coop, sort of.  Apparently we all have peasant roots and respond better to yarns about hardscrabble agriculturalists than yuppies looking for a place to park their babies.

It goes like this: there is a far-off land with just two farmers and their families.  One grows wheat, the other raises cows for milking.  Each produces for itself and sells the rest to the other farmer.  One day, the dairy farmer decides to try out a low-carb diet and reduces her family’s wheat purchase.  The wheat farmer’s income drops, and his family holds an emergency meeting to figure out what to do about it.  “Our income is down,” he says, “and we have no alternative but to tighten our belt.  This means we have to cut down on milk.”  And so they do.  But then income falls over at the dairy farm, and they too hold a meeting, and the result is even less wheat buying.  And so it goes, around and around, until neither family has any income at all, and everyone’s diet is terrible.

Yes, I have left out prices, and there is nothing about expectations.  It’s just a story, and the point is to make as vivid as possible the core macroeconomic insight that spending is income—that they are two sides of exactly the same thing.  Every dollar or euro the government spends is income for someone, and if income is dropping and the government responds by cutting its spending, that dries up the flow of income even more.

Nothing profound here, and I’m sure most readers are asking, why bother?  The answer is that none of us has time to book up on every subject of importance, and we need metaphors and simple stories to help us get through the rest.  That’s how it is for most people and economics.  How can we create potent little macroeconomic memes and send them out into the world where they can do some good?

An Open Letter to Alexis Tsipras

I have just finished reading the interview with you that was published in this morning’s New York Times.  I assume it is accurate, even if the questions were not always the ones I would have asked.  I was especially struck by this comment from the reporter:

Although he conceded that the Greek state had “significant dysfunctionalities and a need for deep structural changes,” he did not offer specifics beyond faulting the Socialists and center-right New Democracy for building up a jobs-for-votes system that helped Greece’s public debt balloon.

The rest of the interview was about Greece and the EU, Greece and the ECB, Greece and Germany, and so on.  Your party was portrayed as focusing its strategy on linking up with dissidents across the Eurozone who want to end the fixation on protecting creditors and enforcing austerity.

Fine: I can understand why you would do this.  Greece needs friends, and a regime change in Brussels and Frankfurt could do a world of good.  But if I were you I wouldn’t put to much faith in this approach.

Greece is now seen as a pariah state across the rest of Europe.  You can blame the leaders of Pasok and New Democracy for this: they joined into the charade of “bailouts”, giving the impression to ordinary people elsewhere (and especially in Germany) that feckless Greeks were subsisting off the handouts of the others, the honest, hardworking taxpayers north of the Alps.  None of these politicians pointed out that it was not Greece that was on the receiving end of these funds but banks and other private investors whose only goal was to get as much of their wealth out of the country as possible.  That game succeeded, and now it is only working class Greeks who will suffer if the country returns to the drachma and all domestic financial assets are radically devalued.  Meanwhile, bailout fatigue has settled on the rest of the continent, since the myth has been upheld that the very Greeks who are most at risk are the ones who benefitted.

In short, while it is necessary to fight for support throughout Europe for a zone-wide policy shift, I would place a lot more emphasis on domestic change—the goal Greece can pursue with or without Europe’s help.

The dysfunctionalities you briefly referred to are class issues, and this should be emphasized at every opportunity.

1. The tax revenue capacity of the Greek state is a class issue.  This is partly a matter of who pays and who doesn’t, although many small business owners who are hardly members of the elite also participate in tax avoidance.  The real issue, however is that working class Greeks  depend on the ability of the state to collect taxes in order to live a civilized life, to enjoy the protection of social insurance and public services without which capitalism would be utterly intolerable.  The rich don’t need this and are content to live in a society with a small, threadbare state.  We have this conflict in the US too, and its class dimension is perfectly obvious.

2. The patronage system of politics and economics is deeply injurious to the working class.  This is often disguised at the individual level, since each recipient of a job or the expedited consideration of a claim or help with queue-jumping is grateful for what he or she gets.  Such benefits, however, are purchased at the cost of submission.  The beneficiary must provide loyalty to the big shot who hands out the favors.  Each time this exchange of benefits for loyalty occurs, it reproduces the hierarchy that tells you, “They are above and I am below.”  It is a humiliation.  OK, I don’t know exactly how patronage is experienced in Greece, but such systems are known all over the world (I’ve personally experienced aspects of it in the US), and the story is more or less the same.  It is a matter of shifting from a system of favors to a system of rights.

My point is that focusing on Europe is a trap.  It buys into the narrative that the political choices in Greece are fundamentally about how to respond to the demands of the troika.  If cracking down on tax cheats and creating a truly independent civil service are seen as demands from their creditors, most Greeks will understandably oppose them, quietly if not openly.  But they are not primarily about forking over money to the rest of Europe but social justice in Greece itself.  They are class issues and should be fought for no matter what happens on the financial front.

There are two sides to the democratic deficit of the EU.  One is the lack of democracy at the level of Europe that has permitted so-called technocrats, which is to say acolytes of neoliberalism who put the interests of finance ahead of all others, to impose their will on civil society.  The other is the removal of essential economic issues from national political debate, because they have been superceded by “Europe”.  On these issues there is democracy neither up there nor down here.  I don’t know what Greece can do for the effort to expand the democratic political space in the EU, but it can do a lot for democracy in Greece by attacking a system founded on privilege.