I uploaded a Youtube post. I used up my time before I was able to pull everything together. Here is the url:
Tuesday, September 6, 2011
Monday, September 5, 2011
Schäuble: Bankrupt
Amazing. Schäuble’s opinion piece in the FT is titled “Why austerity is only cure for the eurozone”, and his argument is
Piling on more debt now will stunt rather than stimulate growth in the long run. Governments in and beyond the eurozone need not just to commit to fiscal consolidation and improved competitiveness – they need to start delivering on these now.and
There is some concern that fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term. I am not convinced that this is a foregone conclusion, but even if it were, there is a trade-off between short-term pain and long-term gain. An increase in consumer and investor confidence and a shortening of unemployment lines will in the medium term cancel out any short-term dip in consumption.Cutting employment and income will increase confidence in future employment and income—did I hear that right? That must be why there is such a positive market reaction every time a new round of statistics points toward contraction.
And, incidentally, how are all the world’s governments going to simultaneously increase competitiveness?
It’s unfortunate, to put it mildly, that our economic futures depend on people like this.
Environmental Regulation and Jobs
The short answer is that it’s the wrong question. Now for the longer answer.
Friday, September 2, 2011
A Further Sign of Academic Idiocy
I proposed a guest speaker for this semester. Our chair told me that I may not be able to extend the invitation. The University is exploring the possibility of charging for the use of rooms. I am reminded of Charles Davenant, one of the subjects of my new book, who wrote, "Everyone is on the scrape for himself, ... each cheating, raking, and plundering what he can, and in a more profligate degree than ever was known." Davenant 1701, pp. 300-301. At least the restrooms are still free for the moment.
Thursday, September 1, 2011
Cutting Teacher Compensation: A Demand and Supply Model
Eric Kleefeld reports:
I know some of these Republican governors cite the fact that total compensation for public school teachers is above the national average for all workers, but it is also true that their compensation is below the national average for college educated workers. A case can be made that school teachers were already undercompensated. Cut their compensation and the textbook demand and supply model would predict a shortage of workers as we move along the supply curve. OK – there may be unemployed workers in other sectors ready to take these vacancies but:
about double the number of Wisconsin public school teachers have retired this year when compared to the past two years, before Scott Walker's anti-union law -- which stripped away most collective-bargaining rights for public-sector unions, and required greater contributions by public employees for their healthcare and pensions -- was ever proposed or much less passed."It wouldn't make sense for me to teach one more year and basically lose $8,000," said Green Bay teacher Ginny Fleck, age 69, who has 30 years of experience.
I know some of these Republican governors cite the fact that total compensation for public school teachers is above the national average for all workers, but it is also true that their compensation is below the national average for college educated workers. A case can be made that school teachers were already undercompensated. Cut their compensation and the textbook demand and supply model would predict a shortage of workers as we move along the supply curve. OK – there may be unemployed workers in other sectors ready to take these vacancies but:
Many of these positions will be filled, though no comprehensive statistics are available. But the issue does remain that the school systems have spontaneously lost an unusual amount of total experience. "You can't get experience through a book, you've got to teach," said Green Bay teacher C.J. Peters, who for her own part has retired after 24 years. "I think a lot of talent has been lost."
Wednesday, August 31, 2011
Irene and the Broken Window “Fallacy”
Doug Matacons argues that Paul Krugman is wrong with what Doug calls the “broken window fallacy”:
Doug then applies to Frédéric Bastiat for this line of new classical thinking:
Yes – economists like Krugman and Keynes must be “bad economists” for looking out at the real world and recognizing that we are far from full employment. I would like to give a lot of credit to Irwin Kellner for this:
In other words, Irwin starts with all those negative impacts from Irene that we can see. But Irwin goes onto to note the boost to aggregate demand expected to come in the last quarter of this year. Is Irwin being a bad economist for not seeing the crowding-out effects that Bastiat talked about? Of course not! Shall we repeat? We are far from full employment!
What this argument ignores, and what people like Krguman and this Politico reporter refuse to recognize is the simple fact that destruction does not create wealth. The money that will be spent to rebuild, repair, and recover from Irene will doubtless line the pockets of the various contractors that will be hired to perform said work, but to argue that it “creates wealth” is simply a fallacy. By some estimations, the losses from Hurricane Katrina will total in the tens of billions of dollars. That’s wealth that doesn’t exist anymore, it’s gone. The money that will be will be used to pay for the recovery already exists and, rather than being invested in other projects, it will go toward repairing the damage caused by natural disaster. A home damaged by Hurricane Irene will be no more valuable after it is repaired than it was the day before the storm hit, for example. And this analysis doesn’t even take into account the losses from lower consumer spending that businesses will feel as a result of the storm, all of which will reverberate out into the economy as a whole.
Doug then applies to Frédéric Bastiat for this line of new classical thinking:
It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library. In brief, he would have put his six francs to some use or other for which he will not now have them.
Yes – economists like Krugman and Keynes must be “bad economists” for looking out at the real world and recognizing that we are far from full employment. I would like to give a lot of credit to Irwin Kellner for this:
The bad news is pretty obvious: Countless houses and cars were smashed by fallen trees; there was lots of water damage from the storm itself, as well as from the water that spilled over from nearby rivers and lakes — and even from the ocean. Widespread power outages left millions in the dark, spoiling food and depriving people of air conditioning. Many businesses had to shut their doors for as long as a week. For retail outfits, this is lost revenue that is unlikely to be made up. The damages have yet to be totaled up, but estimates of $7 billion or so seem to be common ...For their part, restaurants either forced to close their doors or bereft of their usual complement of customers will not be able to make up these lost receipts. The same goes for other retailers like gasoline stations and department stores. Theaters will be unable to make up for the last-minute walk-ins at canceled performances. Cities like New York, which shut down their mass-transit systems and waived tolls on bridges and tunnels, will be unable to recoup these losses as well. Although occurring more than halfway through the third quarter, the effects of this storm could be enough to reduce growth in the gross domestic product by anywhere from a half to a full percentage point.
In other words, Irwin starts with all those negative impacts from Irene that we can see. But Irwin goes onto to note the boost to aggregate demand expected to come in the last quarter of this year. Is Irwin being a bad economist for not seeing the crowding-out effects that Bastiat talked about? Of course not! Shall we repeat? We are far from full employment!
Tuesday, August 30, 2011
The Long Depression And the Great Recession
A substantial debate over the nature of the the deflation in the US during the 1873-1896 period has erupted on marginal revolution, http://marginalrevolution.com/marginalrevolution/2011/08/the-deflation-of-1873-1896.html#comments . Much of the debate centers on reevaluations of the path of real US output during the so-called "Long Depression" of 1873-79, with newer sources arguing that declline in real output only lasted from 1873-1875, thus arguing that it was not as bad as many thought, and while indebted farmers were hurt by deflation, particularly by the 1890s, this was a golden age of the American economy and a model for laissez-faire policy, with the deflation itself generally a good thing outside of agriculture (whose falling prices helped the rest of the economy).
I am less interested in the matter of deflation and more in the comparison with the current Great Recession period. Indeed, in their book, This Time is Different: 800 Years of Financial Folly, Reinhardt and Rogoff distinguish crises/recessions that do not involve the entire financial sector from those that do, arguing that the latter involve much longer and slower recoveries. For the US economy they list three such episodes, the 1870s, the 1930s, and today, with the current situation perhaps most resembling the events of the 1870s. In looking at the debate on marginal revolution, I am struck even more by the similarities, given this newer data.
So, both had two years of outright decline: 1873-75 and 2007-09. Both involved major financial crashes of international scale, with the downturns international also. The 1870s one started in Germany with a major selloff of silver after the Franco-Prussian War that then spread to the rest of the world, hitting the US most dramatically in a crash on May 9, 1873 arising from financing problems in the US railroad industry, particularly the failure of the Cooke Company after the failure of its bond issue for building the Northern Pacific, the second transcontinental railway. This was particularly important in that the railroad industry was the largest employer in the US economy outside of agriculture, and its leading sector.
The data is most dramatically seen in railroad consturction itself. In fact, the post-Civil War boom in such construction had peaked in 1871, but the decline in production accelerated, going from 6,000 miles worth in 1872 to just over 4000 miles worth in 1873, then plunging to barely over 2000 miles worth in 1872, and dropping further to under 2000 miles in 1875, the bottom.
Now here is where the similarity to the present day becomes clearest, despite the carrying on by some in the marginal revolution discussion to the effect that after 1875 everything was just fine. It wasn't, and it is no accident that the period to 1879 is viewed as depressed. Yes, railroad construction began to recover, just as output did in the US starting in late 2009. But it did so only fitfully and basically remained flat and low during the 1876-78 period, fluctuating around 3000 miles of construction, much as we have seen a very weak recovery since the bottom in 2009. Only in 1879 did construction surge again up to 5000 miles, followed then by the biggest surge of all as the 1880s would prove to be by far the leading decade of rail construction, only to be followed by a nearly total collapse in the 1890s, the decade that gave us the populist movement.
I am less interested in the matter of deflation and more in the comparison with the current Great Recession period. Indeed, in their book, This Time is Different: 800 Years of Financial Folly, Reinhardt and Rogoff distinguish crises/recessions that do not involve the entire financial sector from those that do, arguing that the latter involve much longer and slower recoveries. For the US economy they list three such episodes, the 1870s, the 1930s, and today, with the current situation perhaps most resembling the events of the 1870s. In looking at the debate on marginal revolution, I am struck even more by the similarities, given this newer data.
So, both had two years of outright decline: 1873-75 and 2007-09. Both involved major financial crashes of international scale, with the downturns international also. The 1870s one started in Germany with a major selloff of silver after the Franco-Prussian War that then spread to the rest of the world, hitting the US most dramatically in a crash on May 9, 1873 arising from financing problems in the US railroad industry, particularly the failure of the Cooke Company after the failure of its bond issue for building the Northern Pacific, the second transcontinental railway. This was particularly important in that the railroad industry was the largest employer in the US economy outside of agriculture, and its leading sector.
The data is most dramatically seen in railroad consturction itself. In fact, the post-Civil War boom in such construction had peaked in 1871, but the decline in production accelerated, going from 6,000 miles worth in 1872 to just over 4000 miles worth in 1873, then plunging to barely over 2000 miles worth in 1872, and dropping further to under 2000 miles in 1875, the bottom.
Now here is where the similarity to the present day becomes clearest, despite the carrying on by some in the marginal revolution discussion to the effect that after 1875 everything was just fine. It wasn't, and it is no accident that the period to 1879 is viewed as depressed. Yes, railroad construction began to recover, just as output did in the US starting in late 2009. But it did so only fitfully and basically remained flat and low during the 1876-78 period, fluctuating around 3000 miles of construction, much as we have seen a very weak recovery since the bottom in 2009. Only in 1879 did construction surge again up to 5000 miles, followed then by the biggest surge of all as the 1880s would prove to be by far the leading decade of rail construction, only to be followed by a nearly total collapse in the 1890s, the decade that gave us the populist movement.
Monday, August 29, 2011
Why Would Eric Cantor Insist on Paygo for Irene Disaster Relief?
Eric Cantor stated his position:
Cantor has suggested before that we don’t have the money for additional government spending. And I guess if one were foolish enough to believe we were near full employment, one might worry about the crowding-out of private spending. Cantor, however, undermines both claims with his August 29 memo that claims its agenda is to create new jobs with part of his policy message being tax cuts. On policy grounds – Cantor has no principled reasons for this application of paygo.
"Yes there's a federal role, yes we're going to find the money -- we're just going to need to make sure that there are savings elsewhere to continue to do so," Cantor told Fox News on Monday.
Cantor has suggested before that we don’t have the money for additional government spending. And I guess if one were foolish enough to believe we were near full employment, one might worry about the crowding-out of private spending. Cantor, however, undermines both claims with his August 29 memo that claims its agenda is to create new jobs with part of his policy message being tax cuts. On policy grounds – Cantor has no principled reasons for this application of paygo.
Saturday, August 27, 2011
Thomas Hoenig and the Ever-Expanding Universe of Excuses for High Interest Rates
It’s now a week old—an internet lifetime—but we shouldn’t let this pass without comment. In an interview with Gretchen Morgenson, departing Fed district president Thomas Hoenig offers this bizarre justification for his votes against near-zero interest rates since the 2007 collapse:
We as a nation have consumed more than we produced now for well over a decade. Having very low rates for an extended period of time encourages us to continue focusing on consumption, but to correct our imbalances, we have to focus on production.Global imbalances made me do it! Think for a moment, however, and the argument makes no sense at all.
Friday, August 26, 2011
Understanding Debt
The “embeddedness” argument of the economic sociologists and anthropologists applies supremely to debt. If you have any doubt, read this captivating interview with David Graeber (via Naked Capitalism). Here’s a nice quote, pulled from near the end, after a long discussion of monetary and credit practices in different times and places:
What’s been happening since Nixon went off the gold standard in 1971 has just been another turn of the wheel – though of course it never happens the same way twice. However, in one sense, I think we’ve been going about things backwards. In the past, periods dominated by virtual credit money have also been periods where there have been social protections for debtors. Once you recognize that money is just a social construct, a credit, an IOU, then first of all what is to stop people from generating it endlessly? And how do you prevent the poor from falling into debt traps and becoming effectively enslaved to the rich? That’s why you had Mesopotamian clean slates, Biblical Jubilees, Medieval laws against usury in both Christianity and Islam and so on and so forth.
Since antiquity the worst-case scenario that everyone felt would lead to total social breakdown was a major debt crisis; ordinary people would become so indebted to the top one or two percent of the population that they would start selling family members into slavery, or eventually, even themselves.
Well, what happened this time around? Instead of creating some sort of overarching institution to protect debtors, they create these grandiose, world-scale institutions like the IMF or S&P to protect creditors. They essentially declare (in defiance of all traditional economic logic) that no debtor should ever be allowed to default. Needless to say the result is catastrophic. We are experiencing something that to me, at least, looks exactly like what the ancients were most afraid of: a population of debtors skating at the edge of disaster.The name that is missing from this interview (I don’t know about the book) is J. M. Keynes. Keynes had clearly confronted the moral aura surrounding debt, and his approach to monetary policy above all tried to strike a pragmatic balance between the interests of creditors and debtors.
Thursday, August 25, 2011
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).
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).
Wednesday, August 24, 2011
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.
Monday, August 22, 2011
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:
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.
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.
Sunday, August 21, 2011
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).
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).
Saturday, August 20, 2011
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
Tuesday, August 16, 2011
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).
Sunday, August 14, 2011
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." Hmmm...national 'trade policy'? Or is it the regulatory cartelisation of the global economy by state capitalist policies of the wealthy nations?
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.
Thursday, August 11, 2011
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
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
Monday, August 8, 2011
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
http://www.youtube.com/watch?v=tmYWMV-PJ-M
Friday, August 5, 2011
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.
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.
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.
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.
Sunday, July 31, 2011
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.
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.
Friday, July 29, 2011
If No Abolition, Then At Least Link Debt Ceiling Changes To Budget Passage
So, nobody at all is responding to my and Moody's call to abolish the debt ceiling, and probably nobody is going to follow up on the semi-wacko coining large platinum coins scheme either. So, while this will not avoid the current oncoming train wreck, if all these people want to hang onto this silly anachronism of a debt ceiling, then the obvious thing to do is to in the future tie changes in it to passing a budget. So, when Congress actually passes a budget, it should make sure that the financing for that budget is in place, either through taxes or borrowing. Part of making sure the latter is in place is to make sure the debt ceiling (if there is one) is high enough to accommodate that borrowing, preferably with some wiggle room for an unexpected deficit surge due to an unexpected decline of the economy. Why do we not see any politician proposing this obvious remedy for the future in the face of what Moody's predicted, a likely default due to "political gridlock in the Congress"? Mandating spending while witholding the ability to pay for it (or finance the paying for it) is the utter height of irresponsibility.
Moody's Says "Abolish The Debt Ceiling"
This actually dates back to July 18, but has somehow gotten nearly zero coverage in the MSM, somewhat like Bill Clinton's argument that the debt ceiling is unconstitutional, something that Obama's press secretary seemed to move him away from agreeing with this past Monday. In any case, one link to the declaration by Moody's that the US should abolish the debt ceiling is at http://economicsnewspaper.com/policy/german/moodys-u-s-should-abolish-debt-limit-47142.html. That Moody's has threatened to downgrade the US credit rating has received a lot of attention, but this piece of their threat has somehow been completely ignored, and so far there are exactly zero members of Congress of either party who have even remotely suggested that we do what Moody's suggests, which is clearly what needs to be done.
I remind everyone again: no other nation in world history has ever had such a ridiculous thing as a nominal debt ceiling. Whether or not it is unconstitutional, it is utterly incoherent. It forces the president to break the law if Congress neither raises the ceiling nor prescribes which bills are to be paid on time (if at all). I find it bizarre that all sorts of people are loudly declaring how the president has no authority raise the debt ceiling but somehow has the authority to "prioritize" which bills will be paid and which will not, meaning that somehow it is his responsibility rather than Congress's to actually destroy the "full faith and credit of the United States" that is demanded by the Constitution. Again, not paying legally mandated bills is a default, not just a failure to pay interest on securities on time.
I remind everyone again: no other nation in world history has ever had such a ridiculous thing as a nominal debt ceiling. Whether or not it is unconstitutional, it is utterly incoherent. It forces the president to break the law if Congress neither raises the ceiling nor prescribes which bills are to be paid on time (if at all). I find it bizarre that all sorts of people are loudly declaring how the president has no authority raise the debt ceiling but somehow has the authority to "prioritize" which bills will be paid and which will not, meaning that somehow it is his responsibility rather than Congress's to actually destroy the "full faith and credit of the United States" that is demanded by the Constitution. Again, not paying legally mandated bills is a default, not just a failure to pay interest on securities on time.
Tuesday, July 26, 2011
Fun and Games
Josh Marshall on the debt ceiling impasse: "Yes, it's a game of chicken. But one of the cars doesn't have a driver in it."
Monday, July 25, 2011
What the Other 95% Reads
It’s easy to forget that the vast majority of Americans don’t read econ blogs and know almost nothing about economics. From time to time it’s helpful to check in with them to see what they’re thinking.....like this. (Note: over 360,000 hits from the US.)
What would you say to someone who believes this visual demonstration of how US sovereign debt translates into paper conveys an important truth? My approach would be a variant on the classroom game, “What’s the Denominator?” Everything has to be measured in relation to something else. A million dollars is a lot for me but not Bill Gates. If we put $1M in the numerator, what should we put in the denominator in order to make sense of it? Now do this with the government’s debt: we know what goes in the numerator, but what goes in the denominator? How much room does all that denominator paper take up? What have you learned? (When governments and corporations move lots of money around, it’s better not to use paper.)
What would you say to someone who believes this visual demonstration of how US sovereign debt translates into paper conveys an important truth? My approach would be a variant on the classroom game, “What’s the Denominator?” Everything has to be measured in relation to something else. A million dollars is a lot for me but not Bill Gates. If we put $1M in the numerator, what should we put in the denominator in order to make sense of it? Now do this with the government’s debt: we know what goes in the numerator, but what goes in the denominator? How much room does all that denominator paper take up? What have you learned? (When governments and corporations move lots of money around, it’s better not to use paper.)
Sunday, July 24, 2011
Bill Clinton Says Debt Ceiling Unconstitutional
It was nearly a week ago on Monday evening when Bill Clinton gave an interview to the National Memo, http://www.nationalmemo.com/article/exclusive-former-president-bill-clinton-says-he-would-use-constitutional-option-raise-debt . However, it only got picked up by the New York Times yesterday and still has not really gone national.
So, he says he "would not hesitate" to use the constitutional option, that the 4th section of the 14th amendment overrides the debt ceiling and he "would dare" the courts to stop him, which would take a lot of time. Obama has said his lawyers say this is "not a winning case," but has continued to refuse to unequivocally rule out using this tool. The article notes many consequences, including a possible impeachment by the House, not to be implemented by the Senate. It also notes that not bringing this forward makes it more likely that there will be a deal, which may be a lousy deal. In any case, Clinton's waying in on this is important.
So, he says he "would not hesitate" to use the constitutional option, that the 4th section of the 14th amendment overrides the debt ceiling and he "would dare" the courts to stop him, which would take a lot of time. Obama has said his lawyers say this is "not a winning case," but has continued to refuse to unequivocally rule out using this tool. The article notes many consequences, including a possible impeachment by the House, not to be implemented by the Senate. It also notes that not bringing this forward makes it more likely that there will be a deal, which may be a lousy deal. In any case, Clinton's waying in on this is important.
Transcending Medieval Economics
In my new book, Sex, Lies and Economics, about early economics of the late seventeenth and early eighteenth centuries, one of the constant themes is the struggle against the medieval thinking. Beginning with William Petty, the early economists I am analyzing were following the new science, which emphasized close observation to replace received dogma. Here is a nice description of how the dogma was presented at the time. Notice how closely the medieval method resembles the scholastic method that the early economists opposed. In this sense, we are losing ground.
Matters of exchange: commerce, medicine, and science in the Dutch Golden Age by Harold John Cook:
15-6: "Universities were the preserve of the professors who had studied and disputed for long years and then passed on their knowledge to students by lecturing and debating. They valued demonstrative certainty above all else, wishing to draw conclusions that could be shown to follow from necessity. Such demonstrative certainty came from reasoning by clear and certain steps from premises known to be true. The classic examples are demonstration by dialectic, in which a proposition (thesis) is contradicted (antithesis) and resolved by a proposition containing truths from both (synthesis) or by the use of syllogism, in which a proposition known to contain true and universal assertions is linked to another that refers to a new premise, yielding new truths conclusively (as in "All men are mortal, Socrates is a man, Socrates is mortal"). These methods could be clearly explained and could be tested not only by writing things down but by debating with an opponent. Because such methods yielded demonstrative certainty, knowledge of this kind could be built into philosophical systems of great range and power capable of being passed on to others by explanation. Above all, they had the capacity to reason about the causes of change, probing for why matters were as they were."
Matters of exchange: commerce, medicine, and science in the Dutch Golden Age by Harold John Cook:
15-6: "Universities were the preserve of the professors who had studied and disputed for long years and then passed on their knowledge to students by lecturing and debating. They valued demonstrative certainty above all else, wishing to draw conclusions that could be shown to follow from necessity. Such demonstrative certainty came from reasoning by clear and certain steps from premises known to be true. The classic examples are demonstration by dialectic, in which a proposition (thesis) is contradicted (antithesis) and resolved by a proposition containing truths from both (synthesis) or by the use of syllogism, in which a proposition known to contain true and universal assertions is linked to another that refers to a new premise, yielding new truths conclusively (as in "All men are mortal, Socrates is a man, Socrates is mortal"). These methods could be clearly explained and could be tested not only by writing things down but by debating with an opponent. Because such methods yielded demonstrative certainty, knowledge of this kind could be built into philosophical systems of great range and power capable of being passed on to others by explanation. Above all, they had the capacity to reason about the causes of change, probing for why matters were as they were."
A Game Plan for Rational, Self-Interested Republicans
Let’s suppose for a moment that all this talk about ideology—about the evils of big government, the flood of debt that threatens our moral and economic collapse, and of course the line that must be drawn in the sand against any new taxes of any kind on anybody—is simply a fig leaf, and that Republicans are pursuing their own partisan advantage without any scruples whatsoever. What would such a strategy look like?
As an unpaid advisor to Boehner and company, here is what I propose:
Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections.
The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed.
Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots.
Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans. True, at the moment it may look like a risk premium that simply compensates the rich for the added risk of default, but in reality the Republicans have their hands on the dial and can keep averting default at the last moment so that there is a real ex post transfer.
To put it bluntly, a perils-of-Pauline debt ceiling strategy will force the Democrats to run on a ruined economy, bleed them of fiscal resources and cleverly funnel yet more money to the rich. What’s not to like?
There is a risk, however, that the Democrats will be able to make the argument that Republican intransigence and guile has tanked the economy and made them unworthy of election. My assessment is that this risk is minimal for four reasons:
1. Democrats would have to be capable of taking a strong partisan stand. Simply by continuing to play the (illusory) negotiating game, and by presenting the image of a clash of honestly-held principles, they would undermine their ability to go partisan. If Republicans were using the debt ceiling standoff as a ruse to depress the economy, what were the Democrats doing?
2. It would have to be clear that Republican actions had caused the renewed economic slump. It is never so simple, however, because there are always lots of other things going on at the same time that might have an effect on recession and unemployment. There will almost certainly be more bad news coming out of the Eurozone, for instance, as well as natural and man-made disasters, corporate scandals, etc. It could be this or it could be that.
3. Above all, the public would have to acquire a sufficiently sophisticated understanding of financial and economic matters to see the connection between debt ceiling brinksmanship, interest rates and economic pain. Since the evidence is clear that they don’t have this understanding now, they would have to learn in a hurry. This is unlikely, especially since there will be a steady flow of analyses coming out of academia, think tanks and the mass media to cast doubt on truly valid explanations. The climate debate shows that this is entirely doable.
4. There remains the worry that business interests may become alienated from the Republicans due to the losses they incur as a result of this kill-the-economy strategy. Without doubt, some will see it this way and support the Democrats. By this point, most of this segment of the business community is already leaning to blue, so the net effect is likely to be small. The rest of the corporate and financial upper tier will have the discipline to recognize that short-term suffering is the price that has to be paid to restore complete conservative dominance of American politics. Come 2013, a Republican president and congress will go ape-Keynesian, slashing taxes and increasing spending on various emergency and national security initiatives. The economy will come back, and meanwhile a serious, unimpeded assault will begin on what remains of the public sector. The profit opportunities will be spectacular.
As an unpaid advisor to Boehner and company, here is what I propose:
Using any arguments at hand, however implausible, delay an agreement on raising the debt ceiling. At some point, just before moment of reckoning, the markets will be spooked, and interest rates will begin to take off. Use this crisis to reach a compromise that raises the ceiling, but only for a couple of months or so, signaling to the markets that default risk remains on the table. With luck, interest rates will stay relatively high. Continue doing this, again and again, until next year’s elections.
The advantages practically scream out to be heard. Above all, the interest rate spike will doom the economy, more or less guaranteeing a second, even more painful dip. Obama will have to go before the American people with the economy in tatters and unemployment at a post-FDR high. He might as well stay in bed.
Second, the added interest expense guarantees that there will be no resources for the government to initiate any new programs under Obama’s watch or even implement the few he has started. The public sector at all levels will be tied in knots.
Third, higher interest rates mean more transfers to the bondholders, a core constituency of the Republicans. True, at the moment it may look like a risk premium that simply compensates the rich for the added risk of default, but in reality the Republicans have their hands on the dial and can keep averting default at the last moment so that there is a real ex post transfer.
To put it bluntly, a perils-of-Pauline debt ceiling strategy will force the Democrats to run on a ruined economy, bleed them of fiscal resources and cleverly funnel yet more money to the rich. What’s not to like?
There is a risk, however, that the Democrats will be able to make the argument that Republican intransigence and guile has tanked the economy and made them unworthy of election. My assessment is that this risk is minimal for four reasons:
1. Democrats would have to be capable of taking a strong partisan stand. Simply by continuing to play the (illusory) negotiating game, and by presenting the image of a clash of honestly-held principles, they would undermine their ability to go partisan. If Republicans were using the debt ceiling standoff as a ruse to depress the economy, what were the Democrats doing?
2. It would have to be clear that Republican actions had caused the renewed economic slump. It is never so simple, however, because there are always lots of other things going on at the same time that might have an effect on recession and unemployment. There will almost certainly be more bad news coming out of the Eurozone, for instance, as well as natural and man-made disasters, corporate scandals, etc. It could be this or it could be that.
3. Above all, the public would have to acquire a sufficiently sophisticated understanding of financial and economic matters to see the connection between debt ceiling brinksmanship, interest rates and economic pain. Since the evidence is clear that they don’t have this understanding now, they would have to learn in a hurry. This is unlikely, especially since there will be a steady flow of analyses coming out of academia, think tanks and the mass media to cast doubt on truly valid explanations. The climate debate shows that this is entirely doable.
4. There remains the worry that business interests may become alienated from the Republicans due to the losses they incur as a result of this kill-the-economy strategy. Without doubt, some will see it this way and support the Democrats. By this point, most of this segment of the business community is already leaning to blue, so the net effect is likely to be small. The rest of the corporate and financial upper tier will have the discipline to recognize that short-term suffering is the price that has to be paid to restore complete conservative dominance of American politics. Come 2013, a Republican president and congress will go ape-Keynesian, slashing taxes and increasing spending on various emergency and national security initiatives. The economy will come back, and meanwhile a serious, unimpeded assault will begin on what remains of the public sector. The profit opportunities will be spectacular.
Friday, July 22, 2011
Is Platinum Coin Seignorage A Way Out Of The Debt Ceiling Impasse?
So, the latest rumblings are that Obama and Boehner may be near a deal, but if they are not, or if it will not pass in time, there may be another way to get around the debt ceiling without provoking a constitutional crisis and possible impeachment by having Obama ignoring it, as I have supported, or in conjunction declaring it unconstitutional, which I also think it is, or violating the constitution by making arbitrary cuts in spending not approved by Congress. This is to coin one, or maybe several, platinum coins of very high value, depositing it or them in the NY Fed, and keep on paying bills.
This can be done due to a peculiar and little known act passed in 1996 that allows the US Treasury to mint platinum coins of arbitrary value, but no other metals. Why this was passed, I have no idea, but it is in the code apparently. A single one trillion dollar platinum coin deposited at the NY Fed by the Treasury would do the trick for some time.
I thank James Galbraith for bringing this to my attention. Apparently this was suggested initially some time ago by the commentator known as "beowulf." Matt Yglesias provides more discussion at http://tinyurl.com/6xub2ab .
This can be done due to a peculiar and little known act passed in 1996 that allows the US Treasury to mint platinum coins of arbitrary value, but no other metals. Why this was passed, I have no idea, but it is in the code apparently. A single one trillion dollar platinum coin deposited at the NY Fed by the Treasury would do the trick for some time.
I thank James Galbraith for bringing this to my attention. Apparently this was suggested initially some time ago by the commentator known as "beowulf." Matt Yglesias provides more discussion at http://tinyurl.com/6xub2ab .
Trigger Madness: A Clue to How Dumb the Debt Ceiling Deal Truly Is
Garry Kasparov not withstanding, life is not much like chess, but sometimes the wisdom of one does rub off on the other. One thing I learned in my playing days is that you are at your greatest risk of doing something dumb when you think you are being clever. A current case in point is the crucial role played by “triggers” in the emerging debt ceiling deal.
First, let’s look at it from the point of view of Obama. He thinks the problem is that credit markets may shift their sentiment regarding the long-range US fiscal position. Long rates on Treasuries are low right now, but how can we be sure they will stay that way? Wouldn’t it be better if we could lock in a decade-length deal that would stabilize public debt as a percentage of GDP?
But the problem is that we live in a democracy. Every two years there is an election, and the new politicos in charge may want to reverse the policies of their predecessors. How can we lock in any policy for the long run? This is the time consistency problem.
Ah, but there is an oh-so-clever solution: impose on yourself and your negotiating partner a horrible outcome that will come to pass unless you follow through with your commitments. This self-threat is the “trigger”.
Like many economists, I first heard about this strategy from Thomas Schelling. He describes a situation in which you are being held by a kidnapper. You want to be released, but the kidnapper is rationally afraid that you will reveal his identity. Of course, you could promise to never do such a thing, but how can the kidnapper know that you will keep this promise? Once you are released, it will be in your interest to go to the police: your incentives then will be different from what they are today. Schelling’s very clever solution is for you to share with the kidnapper some awful fact about your life that you want to keep secret. What this does is to keep your post-release incentives the same as your pre-release. The ability of the kidnapper to spill your secret is the trigger that keeps you honest. (I have always wondered how common it is for people to have a secret that is awful enough to do the job, but that’s another story.)
In effect, Obama and Boehner are offering to share secrets, to each bind their future selves to a long-term deal so that something horrible, like repeal of the Bush tax cuts (horrible to Boehner) or the removal of the health insurance mandate (horrible to Obama) doesn’t happen “automatically”. One convenient feature of this strategy is that the timing of the various aspects of the budget deal don’t matter. If the cuts come first, but the revenue increases don’t happen until several years from now, it’s not a problem because the triggers ensure that all aspects of the deal will eventually materialize.
Except that it’s all an illusion. The triggers being negotiated by Obama and Boehner are legislative, not constitutional. They can be undone by a future Congress or president. If Michele Bachmann is our new president come 2013 (gulp), I’m sure she will be happy to remove the tax increase trigger, especially if she has a Republican congress to work with.
The general point is that the hold-yourself-hostage trigger strategy does not solve the time inconsistency problem in a democracy, because part of the meaning of democracy is that new governing majorities have the power to undo the acts of those they replace. It is not possible for Obama to negotiate a ten (or more) year plan with the Republicans—period. He can push for actions to be taken during his term, and after that it’s up to the next president.
Of course, the markets know this well. Suppose there is a change in investor sentiment, and, against all logic, potential creditors decide that the US government is at risk of being unable to service its debts. Do you suppose they would be placated by promises to cut deficits several years down the road? Look at Greece and Italy. When interest rates shoot up, the only bone governments can throw is immediate austerity. Bondholders are perfectly aware of the time consistency problem, and promises mean nothing to them.
But that’s why the whole debt ceiling charade is so dumb. Bondholders are happy to hold Treasuries, even with long maturities. We don’t need austerity any time soon. And if the tide ever changes, distant promises will be irrelevant; the only thing that will matter will be fiscal policies at the moment of crisis.
The only thing we can do, although it is apparently too much for us, is to act intelligently in the present. Getting current fiscal policy right would be a good place to start, and addressing longer-term challenges through investments in people and infrastructure, along with cost controls in health care, would be a good way to continue.
First, let’s look at it from the point of view of Obama. He thinks the problem is that credit markets may shift their sentiment regarding the long-range US fiscal position. Long rates on Treasuries are low right now, but how can we be sure they will stay that way? Wouldn’t it be better if we could lock in a decade-length deal that would stabilize public debt as a percentage of GDP?
But the problem is that we live in a democracy. Every two years there is an election, and the new politicos in charge may want to reverse the policies of their predecessors. How can we lock in any policy for the long run? This is the time consistency problem.
Ah, but there is an oh-so-clever solution: impose on yourself and your negotiating partner a horrible outcome that will come to pass unless you follow through with your commitments. This self-threat is the “trigger”.
Like many economists, I first heard about this strategy from Thomas Schelling. He describes a situation in which you are being held by a kidnapper. You want to be released, but the kidnapper is rationally afraid that you will reveal his identity. Of course, you could promise to never do such a thing, but how can the kidnapper know that you will keep this promise? Once you are released, it will be in your interest to go to the police: your incentives then will be different from what they are today. Schelling’s very clever solution is for you to share with the kidnapper some awful fact about your life that you want to keep secret. What this does is to keep your post-release incentives the same as your pre-release. The ability of the kidnapper to spill your secret is the trigger that keeps you honest. (I have always wondered how common it is for people to have a secret that is awful enough to do the job, but that’s another story.)
In effect, Obama and Boehner are offering to share secrets, to each bind their future selves to a long-term deal so that something horrible, like repeal of the Bush tax cuts (horrible to Boehner) or the removal of the health insurance mandate (horrible to Obama) doesn’t happen “automatically”. One convenient feature of this strategy is that the timing of the various aspects of the budget deal don’t matter. If the cuts come first, but the revenue increases don’t happen until several years from now, it’s not a problem because the triggers ensure that all aspects of the deal will eventually materialize.
Except that it’s all an illusion. The triggers being negotiated by Obama and Boehner are legislative, not constitutional. They can be undone by a future Congress or president. If Michele Bachmann is our new president come 2013 (gulp), I’m sure she will be happy to remove the tax increase trigger, especially if she has a Republican congress to work with.
The general point is that the hold-yourself-hostage trigger strategy does not solve the time inconsistency problem in a democracy, because part of the meaning of democracy is that new governing majorities have the power to undo the acts of those they replace. It is not possible for Obama to negotiate a ten (or more) year plan with the Republicans—period. He can push for actions to be taken during his term, and after that it’s up to the next president.
Of course, the markets know this well. Suppose there is a change in investor sentiment, and, against all logic, potential creditors decide that the US government is at risk of being unable to service its debts. Do you suppose they would be placated by promises to cut deficits several years down the road? Look at Greece and Italy. When interest rates shoot up, the only bone governments can throw is immediate austerity. Bondholders are perfectly aware of the time consistency problem, and promises mean nothing to them.
But that’s why the whole debt ceiling charade is so dumb. Bondholders are happy to hold Treasuries, even with long maturities. We don’t need austerity any time soon. And if the tide ever changes, distant promises will be irrelevant; the only thing that will matter will be fiscal policies at the moment of crisis.
The only thing we can do, although it is apparently too much for us, is to act intelligently in the present. Getting current fiscal policy right would be a good place to start, and addressing longer-term challenges through investments in people and infrastructure, along with cost controls in health care, would be a good way to continue.
Wednesday, July 20, 2011
Cut, Cap, and Balance Made Personal
The House of Representatives passed the “Cut, Cap, and Balance” Act, which Brian Beutler says (if it became law)
And I think Brian has this right. But going over Federal budget numbers might not quite drive my point home as to what should rightly be called Duck, Dodge, and Dismantle. So let me recast Jay Carney’s point by an analogy to a family in Manhattan struggling to make ends meet. The husband is making $70,000 (gross) a year on his primary job and is considering part-time work that would pay him an additional $30,000. The wife in addition to taking primary care of their two children – who both have medical conditions that cause them to spend $2000 a month on medical care – works receiving $50,000 a year. If the husband took the second job, their $150,000 in gross income would net $120,000 after taxes or $10,000 a month. While that might seem like a nice income – this is Manhattan and their apartment runs them $4000 a month, and they spend $1000 a month on food, $1000 a month on other necessities, and $1000 a month on entertainment.
The husband just happens to be a Republican and really does not understand why he needs to take this part-time job. After the wife – who just happens to be a Democrat – lays out the simple arithmetic of their budgetary situation, the husband replies by arguing that they could just reduce their spending by 20 percent. The wife – having counting to ten so she doesn’t scream in front of the kids – asks the husband where do they cut spending. After all, it is the husband who wants to stay in their Manhattan apartment and insists that they not cut back on the entertainment budget. She then points out that reducing the food and other necessities budgets by any feasible amount is not going to come close to making ends meet if the husband chooses not to take the part-time position.
Well – I guess the husband might suggest that they eliminate their medical spending but he should be forewarned that divorce attorneys in Manhattan are also expensive.
would slash federal programs deeply, and restrict dramatically the government's ability to do anything constructive for the country.
And I think Brian has this right. But going over Federal budget numbers might not quite drive my point home as to what should rightly be called Duck, Dodge, and Dismantle. So let me recast Jay Carney’s point by an analogy to a family in Manhattan struggling to make ends meet. The husband is making $70,000 (gross) a year on his primary job and is considering part-time work that would pay him an additional $30,000. The wife in addition to taking primary care of their two children – who both have medical conditions that cause them to spend $2000 a month on medical care – works receiving $50,000 a year. If the husband took the second job, their $150,000 in gross income would net $120,000 after taxes or $10,000 a month. While that might seem like a nice income – this is Manhattan and their apartment runs them $4000 a month, and they spend $1000 a month on food, $1000 a month on other necessities, and $1000 a month on entertainment.
The husband just happens to be a Republican and really does not understand why he needs to take this part-time job. After the wife – who just happens to be a Democrat – lays out the simple arithmetic of their budgetary situation, the husband replies by arguing that they could just reduce their spending by 20 percent. The wife – having counting to ten so she doesn’t scream in front of the kids – asks the husband where do they cut spending. After all, it is the husband who wants to stay in their Manhattan apartment and insists that they not cut back on the entertainment budget. She then points out that reducing the food and other necessities budgets by any feasible amount is not going to come close to making ends meet if the husband chooses not to take the part-time position.
Well – I guess the husband might suggest that they eliminate their medical spending but he should be forewarned that divorce attorneys in Manhattan are also expensive.
From Chaos To Catastrophe?
I once wrote a book entitled (partly) _From Catastrophe to Chaos_, which my interviewer on the NPR show kept mentioning. However, the way things are going, it looks like this situation regarding the debt ceiling may well be a matter of the chaos of a decisionmaking process leading to a catastrophe in the economy.
Tuesday, July 19, 2011
Quote of the Day
From the abstract to “Student Attitudes and Knowledge Change in an Introductory College Economics Course”:
I take back every cynical comment I have ever made about the student portion of the human race.
Students’ attitudes towards economics as well as their knowledge of economics before and after taking a college introductory economics class is examined using standardized multiple choice economics knowledge and attitude questions. Prior knowledge of economics, having a bank account, and other biographical information are used to hold constant many factors influencing pre/post performance in an economics class. Students who gained in economics knowledge appear to have a more negative attitude towards the subject compared to students who exhibited no knowledge gained.
I take back every cynical comment I have ever made about the student portion of the human race.
Whose Responsibility Is it that the Public Doesn’t Understand Public Finance?
While education wonks debate microscopic movements in the NAEP and other standardized measurements of student learning, those of us who care about the capacity of democracy in the modern world face data like this
:
Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.
But there’s no point in complaining. The question is, how did we get into this political mess, and how can we get out of it? Real answers depend on real data, but in the meantime here are some speculations:
1. There is no functioning incentive in the media (print and electronic) from which most people get their information to be factually correct. Whether to portray the world as it actually is or make stuff up is a choice, and those who go for option #2 suffer no ill effects. Hence there is a vast amount of misinformation out there. The solution is not government regulation of the media, but a societal effort to build incentives for journalistic integrity. For instance, professional associations could not only give awards for exceptional service, but also black marks for incompetence and deceit. Teams of journalists could noncoercively “accredit” news outlets (including megablogs) the way colleges and universities are accredited, through an open process with transparent criteria.
2. Economists have collectively taken little responsibility for public education. For instance, I know of no attempts to identify the critical gaps in the public’s understanding of economics in order to mobilize a response. Even in the obvious places, like introductory textbooks, there is no systematic attempt to address economic illiteracy. If you think I’m exaggerating, show me the textbooks that speak to the three elementary observations made above—that make it clear that public debts are rarely capped, much less “repaid”, and that these debts are also economically vital assets.
3. There is a deep cognitive dimension to economic illiteracy. The term “national debt” is perceived by most people to be ominous and threatening, especially when numbers in the trillions are thrown around. They think governments are like households, going on consumption binges and waking up to debt bondage. In other words, they have a one-way view of causation, beginning with one’s own economic choices and leading to debt, and cannot see the other, from debt choices made by the government back to the economy, since each individual household’s insertion into the economy (their frame of reference) has only the first dimension. In addition, they see their own debts only from the liability side and not from the asset side. In other words, they are applying a personal, household template to the systemic terrain that economics is supposed to illuminate. Without getting more specific, all I can say is that a defective frame can be countered only by a better one: we need a coordinated effort to popularize a framework for visualizing the economy that is also based on us as a community, not just me as an atom.
4. The first three of these causal factors are exploited and amplified by a wealthy and politically powerful business-conservative coalition. They bankroll media that cynically make stuff up, and where none exist they create them. They reward economists who twist evidence and invent fanciful models that just happen to justify misinformation and cognitive errors regarding the real-world economy. And of course they make constant reference to images and framing devices that reinforce the inability of the public to think clearly about economic choices. Their political strategy is predicated on mass ignorance and error, so any movement for rationality and honesty has to be political as well.
:
Obviously, a great majority of the American people lack the elementary knowledge of government budgets to formulate a sensible answer—and, yes, there is only one sensible answer.There are at least three things they apparently fail to understand:
1. An increase in the debt ceiling simply follows through on the revenue and spending commitments that Congress has already made. Not raising it is like check kiting.
2. The only way the debt can fail to rise each and every year is if the government runs a budget surplus. Such a surplus is impossible this year, all but impossible for the next several, and has been a rare event not only in the US, but in every other modern economy. Moreover, there is no theoretical reason why such surpluses should be the norm, and many why moderate, intelligently directed borrowing should be.
3. Failure to raise the debt ceiling would lead to an immediate economic calamity. US Treasury bonds play a crucial role in the national and world economies, and all of us depend, directly or indirectly, on the income people get from government employment and social programs.
But there’s no point in complaining. The question is, how did we get into this political mess, and how can we get out of it? Real answers depend on real data, but in the meantime here are some speculations:
1. There is no functioning incentive in the media (print and electronic) from which most people get their information to be factually correct. Whether to portray the world as it actually is or make stuff up is a choice, and those who go for option #2 suffer no ill effects. Hence there is a vast amount of misinformation out there. The solution is not government regulation of the media, but a societal effort to build incentives for journalistic integrity. For instance, professional associations could not only give awards for exceptional service, but also black marks for incompetence and deceit. Teams of journalists could noncoercively “accredit” news outlets (including megablogs) the way colleges and universities are accredited, through an open process with transparent criteria.
2. Economists have collectively taken little responsibility for public education. For instance, I know of no attempts to identify the critical gaps in the public’s understanding of economics in order to mobilize a response. Even in the obvious places, like introductory textbooks, there is no systematic attempt to address economic illiteracy. If you think I’m exaggerating, show me the textbooks that speak to the three elementary observations made above—that make it clear that public debts are rarely capped, much less “repaid”, and that these debts are also economically vital assets.
3. There is a deep cognitive dimension to economic illiteracy. The term “national debt” is perceived by most people to be ominous and threatening, especially when numbers in the trillions are thrown around. They think governments are like households, going on consumption binges and waking up to debt bondage. In other words, they have a one-way view of causation, beginning with one’s own economic choices and leading to debt, and cannot see the other, from debt choices made by the government back to the economy, since each individual household’s insertion into the economy (their frame of reference) has only the first dimension. In addition, they see their own debts only from the liability side and not from the asset side. In other words, they are applying a personal, household template to the systemic terrain that economics is supposed to illuminate. Without getting more specific, all I can say is that a defective frame can be countered only by a better one: we need a coordinated effort to popularize a framework for visualizing the economy that is also based on us as a community, not just me as an atom.
4. The first three of these causal factors are exploited and amplified by a wealthy and politically powerful business-conservative coalition. They bankroll media that cynically make stuff up, and where none exist they create them. They reward economists who twist evidence and invent fanciful models that just happen to justify misinformation and cognitive errors regarding the real-world economy. And of course they make constant reference to images and framing devices that reinforce the inability of the public to think clearly about economic choices. Their political strategy is predicated on mass ignorance and error, so any movement for rationality and honesty has to be political as well.
Monday, July 18, 2011
Priorities in a declining empire
Schumpeter, Joseph A. 1954. "The Economic Crisis of the Tax State." International Economic Papers, 4; reprinted in Schumpeter, Joseph A. 1991. The Economics and Sociology of Capitalism, ed. Richard Swedberg (Princeton: Princeton University Press): pp. 99-140.
"... public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- and this and more is written in its fiscal history." He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. "the budget is the skeleton of the state stripped of all misleading ideologies."
Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.
The one area that the Obama is willing to rein in military spending is on medical care for the troops -- at least Robert Gates emphasized that approach.
What is weird is that virtually nobody with access to the public media is talking sense. Even the unions seem to be swallowing the Kool Aid.
"... public finances are one of the best starting points for an investigation of society. The spirit of a people, its cultural level, its social structure, the deeds its policy may prepare -- and this and more is written in its fiscal history." He cites Goldscheid. 1917. Staatsozialismus order Staatskapitalismus. "the budget is the skeleton of the state stripped of all misleading ideologies."
Following Schumpeter, the budget debates illustrate the kind of life that the rich and powerful wish on the rest of society. Get rid of the social safety net, destroy unions, turn the clock back to the nineteenth century. And yes, a bloated military to fight in every corner of the world.
The one area that the Obama is willing to rein in military spending is on medical care for the troops -- at least Robert Gates emphasized that approach.
What is weird is that virtually nobody with access to the public media is talking sense. Even the unions seem to be swallowing the Kool Aid.
Balancing the Budget by Magic
Brian Beutler reports on the Republican “cuts, cap, and balance” fiscal proposal:
Unspecified spending cuts is right! Taking the 2010 figures from the Bureau of Economic Analysis for various types of Federal spending as a percent of GDP, we have the following: (1) defense purchases at 5.6%; nondefense purchases at 2.7%, interest payments at 2%, and transfer payments (mainly Social Security, Medicare, and Medicaid) at 15.9%. So how is the sum of all of this supposed to magically be reduced to only 18%?
Transfer payments as a share of GDP will decline a bit if we ever return to full employment. Of course, the GOP zest for immediate spending cuts – if politically successful – could trigger another recession. But even under the most optimistic assumptions, transfer payments as a share of GDP will remain fairly high if we do not slash and burn our SocialSecurity MedicareMedicaid system, which is not going to happen. So what do these Republicans “leaders” propose we cut? Certainly not defense spending. But unless they are proposing to do away with all nondefense Federal purchases, this notion that we can limit Federal spending to 18% of GDP is nothing more than bad arithmetic.
Tuesday, the House of Representatives will vote on, and likely pass, a conservative Republican plan called "Cut, Cap, and Balance." The package will include some immediate, as-yet unspecified spending cuts, a statutory cap to keep spending below 18 percent of GDP, and a promised separate vote on a Constitutional amendment that requires Congress to maintain a balanced budget, but essentially forbids any future tax increases.
Unspecified spending cuts is right! Taking the 2010 figures from the Bureau of Economic Analysis for various types of Federal spending as a percent of GDP, we have the following: (1) defense purchases at 5.6%; nondefense purchases at 2.7%, interest payments at 2%, and transfer payments (mainly Social Security, Medicare, and Medicaid) at 15.9%. So how is the sum of all of this supposed to magically be reduced to only 18%?
Transfer payments as a share of GDP will decline a bit if we ever return to full employment. Of course, the GOP zest for immediate spending cuts – if politically successful – could trigger another recession. But even under the most optimistic assumptions, transfer payments as a share of GDP will remain fairly high if we do not slash and burn our SocialSecurity MedicareMedicaid system, which is not going to happen. So what do these Republicans “leaders” propose we cut? Certainly not defense spending. But unless they are proposing to do away with all nondefense Federal purchases, this notion that we can limit Federal spending to 18% of GDP is nothing more than bad arithmetic.
Me On Debt Ceiling On Local NPR
This afternoon between 3 and 4 I shall be on Virginia Insight discussing the debt ceiling. This is NPR covering western Virginia and is a call-in show.
Blaming it on the Economists
So what was the New York Times supposed to say? Economists agree that the Republican Party is acting like a bunch of lunatics? No, you can’t do that. So they came up with an analysis piece that says that there is economic support for all sides in the debt ceiling debate. It’s like climate change: you have some scientists over here who say we’re in trouble, and over there are others who say not to worry. You aren’t allowed to tell the public who to believe, and you certainly can’t say that a party led by climate deniers is in the hands of idiots.
Now it is true that, if the question is whether, to reach a particular deficit target, it is better, ceteris paribus, to cut spending or raise taxes, economic research won't give you a clear signal—but that’s not the question.
The first question is whether we should be talking about tightening fiscal policy on the brink of a second dip, in the midst of a nonrecovery from a balance sheet recession. Textbook economics says no.
The second question is whether it makes sense for a country near the bottom of the OECD in tax revenues as a percent of GDP to burrow down even further. Unless you think the rest of the world is wrong and only Friedrich Hayek (or Ayn Rand) knows the score, you would find this dubious on its face.
The third question is whether there is actually much scope for deficit reduction even in the medium to long run as long as the US runs enormous current account deficits. And how are we going to balance our current account unless the rest of the world lets the dollar devalue drastically, or we accept permanent austerity—or we wake up and begin making the investments in human capital and infrastructure that a competitive economy needs? And that third option means borrowing and spending more in the short run.
Incidentally, you can tell the author of the article has no clue about the topic when he writes, “The key point of contention is whether the government should pay any part of its debts by raising revenue, or solely by spending less.” Aside from its larger conceptual problems, this sentence confuses stock and flow. Fiscal tightening can cut the deficit, but no one is talking about the budget surplus that would be required to pay off existing debts. “Paying back the debt” is the sort of thing that only the economically uninformed say, since budget surpluses are extremely rare, and debts are hardly ever reduced. You grow or inflate your way out of a debt overload, or you get whomped.
Now it is true that, if the question is whether, to reach a particular deficit target, it is better, ceteris paribus, to cut spending or raise taxes, economic research won't give you a clear signal—but that’s not the question.
The first question is whether we should be talking about tightening fiscal policy on the brink of a second dip, in the midst of a nonrecovery from a balance sheet recession. Textbook economics says no.
The second question is whether it makes sense for a country near the bottom of the OECD in tax revenues as a percent of GDP to burrow down even further. Unless you think the rest of the world is wrong and only Friedrich Hayek (or Ayn Rand) knows the score, you would find this dubious on its face.
The third question is whether there is actually much scope for deficit reduction even in the medium to long run as long as the US runs enormous current account deficits. And how are we going to balance our current account unless the rest of the world lets the dollar devalue drastically, or we accept permanent austerity—or we wake up and begin making the investments in human capital and infrastructure that a competitive economy needs? And that third option means borrowing and spending more in the short run.
Incidentally, you can tell the author of the article has no clue about the topic when he writes, “The key point of contention is whether the government should pay any part of its debts by raising revenue, or solely by spending less.” Aside from its larger conceptual problems, this sentence confuses stock and flow. Fiscal tightening can cut the deficit, but no one is talking about the budget surplus that would be required to pay off existing debts. “Paying back the debt” is the sort of thing that only the economically uninformed say, since budget surpluses are extremely rare, and debts are hardly ever reduced. You grow or inflate your way out of a debt overload, or you get whomped.
Sunday, July 17, 2011
Italy Versus Japan, External Deficit Versus External Surplus
Paul Krugman asks
Invoke the macro identity: the current account equals the sum of private and public net saving. Japan is a net saving country; the savings of its households and firms exceeds the borrowing of its government. As long as Japanese savers and financial institutions are willing to stockpile Japanese bonds, interest rates will remain low. This willingness results not only from general financial sentiment, but also institutional linkages between public and private institutions, which are commingled at a deep level.
Italy in recent years has increasingly become a deficit country. It is not as chronic a case as some of the Eurozone strugglers, but it is headed south. It depends on external creditors whose evaluation of its financial soundness includes the fact that it depends on external creditors.
In short, capital is not yet borderless. It is easier to borrow domestically than from abroad. Japan and Italy are on different sides of the current account divide.
A question (to which I don’t have the full answer): why are the interest rates on Italian and Japanese debt so different? As of right now, 10-year Japanese bonds are yielding 1.09%; 10-year Italian bonds 5.76%.The short answer has to be that Italy is a deficit country, and Japan is a surplus country. To wit:
Invoke the macro identity: the current account equals the sum of private and public net saving. Japan is a net saving country; the savings of its households and firms exceeds the borrowing of its government. As long as Japanese savers and financial institutions are willing to stockpile Japanese bonds, interest rates will remain low. This willingness results not only from general financial sentiment, but also institutional linkages between public and private institutions, which are commingled at a deep level.
Italy in recent years has increasingly become a deficit country. It is not as chronic a case as some of the Eurozone strugglers, but it is headed south. It depends on external creditors whose evaluation of its financial soundness includes the fact that it depends on external creditors.
In short, capital is not yet borderless. It is easier to borrow domestically than from abroad. Japan and Italy are on different sides of the current account divide.
Saturday, July 16, 2011
What Is Public Capital?
Floyd Norris really missed the boat this morning in his column on the European Banking Authority’s latest round of stress tests. There are big issues with the stresses EBA elected to test, but that’s a story for another day. For now, focus on Norris’ criticism of Helaba, the state bank (landesbank) for Hesse and Thuringia:
The first thing you need to know is what the state banks like Helaba are. They are publicly owned entities that rest on top of a pyramid of thousands of municipally owned savings banks. If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive.
But the EU doesn’t like the landesbanken. They denounce the explicit and implicit public subsidies that state ownership entails, saying they violate the rules of competition policy. For over a decade they have fought to have the system privatized. In the end, the dispute is simply ideological: if you think that public ownership should only be an exception, narrowly crafted to address specific market failures, you want to see the landesbanken put on the auction block. If you think an economy should be organized to meet socially defined needs, you would want a large part of capital allocation to be responsive to public input, and you’d fight to keep the landesbanken the way they are. (There is a movement afoot in the US to promote public banking.)
One result of the EU attack has been pressure on the landesbanken to demonstrate competitive rates of return. The folks who move money in these banks are public servants, very good with forms and checklists in hallowed German tradition, but not very savvy in nouveau finance. Sadly, some of these naive beamters loaded up on the mortgage-based securities that collapsed in the financial crisis, since the returns were what Brussels was demanding, and, well, they were AAA.
But on to the topic at hand. What constitutes equity for the landesbanken? For a privately owned bank, capital is raised by drawing on private funds, for instance through a share offering. For a public bank, capital is the financial commitment authorized by the public institutions that guarantee the bank’s liabilities. It’s pretty obvious when you think about it, and that’s the position taken by Helaba and the other landesbanken.
According to the EBA, however, public commitments don’t count. They don’t think there should be public banks in the first place, and they don’t want to legitimize the financial structure of the German public banking system. In other words, their opposition isn’t about whether the landesbanken can cover their liabilities, but is pure ideology.
My guess is that Norris is unaware of the battle lines that have formed around the landesbanken and has adopted the EU position by reflex, out of distrust for all financial institutions. The cynicism that serves so well in the US, however, has to be translated into the European context before you can understand why Helaba is so stressed about its stress test.
Helaba is outraged that the E.B.A. will not count “hardened silent participations” as core capital. And what is that? As near as I can tell, it amounts to promises by the two states that own the bank that the states will put up more money if needed....This makes it sound as though Helaba is a band of sharp operators trying to hide how overleveraged they are—like some of the Wall Street players that blew up in 2008. There is a lot you could say about the landesbanken, but sharp is not what comes to mind.
The fact that these arguments are going on does provide some evidence that the stress tests are more credible than previous ones. They also remind us that one of the games that banks have played in the past — often with support from bank regulators — has been to count some pretty dubious things as capital. When the crisis hit, a lot of that “capital” turned out to not be of much use.
The first thing you need to know is what the state banks like Helaba are. They are publicly owned entities that rest on top of a pyramid of thousands of municipally owned savings banks. If you add in the specialized publicly owned real estate lenders, about half the total assets of the German banking system are in the public sector. (Another substantial chunk is in cooperative savings banks.) They are key tools of German industrial policy, specializing in loans to the Mittelstand, the small-to-medium size businesses that are at the core of that country’s export engine. Because of the landesbanken, small firms in Germany have as much access to capital as large firms; there are no economies of scale in finance. This also means that workers in the small business sector earn the same wages as those in big corporations, have the same skills and training, and are just as productive.
But the EU doesn’t like the landesbanken. They denounce the explicit and implicit public subsidies that state ownership entails, saying they violate the rules of competition policy. For over a decade they have fought to have the system privatized. In the end, the dispute is simply ideological: if you think that public ownership should only be an exception, narrowly crafted to address specific market failures, you want to see the landesbanken put on the auction block. If you think an economy should be organized to meet socially defined needs, you would want a large part of capital allocation to be responsive to public input, and you’d fight to keep the landesbanken the way they are. (There is a movement afoot in the US to promote public banking.)
One result of the EU attack has been pressure on the landesbanken to demonstrate competitive rates of return. The folks who move money in these banks are public servants, very good with forms and checklists in hallowed German tradition, but not very savvy in nouveau finance. Sadly, some of these naive beamters loaded up on the mortgage-based securities that collapsed in the financial crisis, since the returns were what Brussels was demanding, and, well, they were AAA.
But on to the topic at hand. What constitutes equity for the landesbanken? For a privately owned bank, capital is raised by drawing on private funds, for instance through a share offering. For a public bank, capital is the financial commitment authorized by the public institutions that guarantee the bank’s liabilities. It’s pretty obvious when you think about it, and that’s the position taken by Helaba and the other landesbanken.
According to the EBA, however, public commitments don’t count. They don’t think there should be public banks in the first place, and they don’t want to legitimize the financial structure of the German public banking system. In other words, their opposition isn’t about whether the landesbanken can cover their liabilities, but is pure ideology.
My guess is that Norris is unaware of the battle lines that have formed around the landesbanken and has adopted the EU position by reflex, out of distrust for all financial institutions. The cynicism that serves so well in the US, however, has to be translated into the European context before you can understand why Helaba is so stressed about its stress test.
Thursday, July 14, 2011
Sex, Lies, and Economics: please help
I have just finished my introduction to the book, which is shaping up. I would very much appreciate any comments.
http://michaelperelman.files.wordpress.com/2011/07/intro.doc
http://michaelperelman.files.wordpress.com/2011/07/intro.doc
Consciousness Lost. Looking back at 1972
I experienced 1972 as another letdown year of revived 'business as usual'. The shutdown of the alternative press and progressive environmental and social thought was pretty obvious in the mass media at the time and it has continued to this present day. It is so hard to imagine, for those born in latter decades, that open discussion and heated debate on our most important and vital issues did occur for a short and glorious few years in the 1960s. Then blackout.
1972 – The World3 'reference run' projected that the industrial output per capita (IOPC) would reach its all-time peak in 2013 and then would steeply decline through 2100. Moreover, the duration of Industrial Civilization (as measured by the leading and lagging IOPC 30% points) came out to be about 105 years. [Industrial Civilization, defined herein, began in 1930 and is predicted to end on or before the year 2030.] [1]
1972 Conference on the Human Environment. The Stockholm deliberations were confused by the fact that the luckier nations which happened to achieve industrial prodigality before the earth's savings became depleted had already infected the other nations with an insatiable desire to emulate that prodigality. The infection preceded recognition of the depletion. The result of this sad historical sequence was the pathetic quarrel over whether the luxury we cannot afford is economic growth or environmental preservation. Neither was a luxury; worse, neither was possible on a global scale. [2]
1972 – 1981 – The price of oil increased nine-fold. This fueled stagflation. Important changes occurred within the World Bank as a result of the energy crisis. It moved from supporting protection for infant industries and state planning and lending for state-owned enterprises to a commitment to trade liberalization and abandoned its support for public enterprises.[3]
1972 – December. John Kenneth Galbraith restates that the neglect of power in economics serves conservative political and social functions. The state is the only social entity that could exercise countervailing power to the corporate oligarchy but this situation is problematic given the state’s ‘consanguinity’ to the very corporate oligarchy that must be challenged. [4]
REFERENCES:
[1] THE PEAK OF WORLD OIL PRODUCTION AND THE ROAD TO THE OLDUVAI GORGE
Richard C. Duncan, Ph.D.1
Pardee Keynote Symposia
Geological Society of America
Summit 2000
Reno, Nevada
November 13, 2000
http://dieoff.org/page224.htm
[2] Industrialization: Prelude to Collapse
by William Catton
(Excerpt from Overshoot: The Ecological Basis of Revolutionary Change)
Unrecognized Preview
http://dieoff.org/page15.htm
[3] jkissing on April 23, 2006 - 7:24pm
http://www.theoildrum.com/story/2006/4/22/23169/4783
[4] Galbraith and Robinson's second crisis of economic theory.
Publication: Journal of Economic Issues
Publication Date: 01-MAR-08
Author: Wrenn, Mary ; Stanfield, James Ronald ; Carroll, Michael
http://www.accessmylibrary.com/coms2/summary_0286-34227679_ITM
COPYRIGHT 2008 Association for Evolutionary Economics
1972 – The World3 'reference run' projected that the industrial output per capita (IOPC) would reach its all-time peak in 2013 and then would steeply decline through 2100. Moreover, the duration of Industrial Civilization (as measured by the leading and lagging IOPC 30% points) came out to be about 105 years. [Industrial Civilization, defined herein, began in 1930 and is predicted to end on or before the year 2030.] [1]
1972 Conference on the Human Environment. The Stockholm deliberations were confused by the fact that the luckier nations which happened to achieve industrial prodigality before the earth's savings became depleted had already infected the other nations with an insatiable desire to emulate that prodigality. The infection preceded recognition of the depletion. The result of this sad historical sequence was the pathetic quarrel over whether the luxury we cannot afford is economic growth or environmental preservation. Neither was a luxury; worse, neither was possible on a global scale. [2]
1972 – 1981 – The price of oil increased nine-fold. This fueled stagflation. Important changes occurred within the World Bank as a result of the energy crisis. It moved from supporting protection for infant industries and state planning and lending for state-owned enterprises to a commitment to trade liberalization and abandoned its support for public enterprises.[3]
1972 – December. John Kenneth Galbraith restates that the neglect of power in economics serves conservative political and social functions. The state is the only social entity that could exercise countervailing power to the corporate oligarchy but this situation is problematic given the state’s ‘consanguinity’ to the very corporate oligarchy that must be challenged. [4]
REFERENCES:
[1] THE PEAK OF WORLD OIL PRODUCTION AND THE ROAD TO THE OLDUVAI GORGE
Richard C. Duncan, Ph.D.1
Pardee Keynote Symposia
Geological Society of America
Summit 2000
Reno, Nevada
November 13, 2000
http://dieoff.org/page224.htm
[2] Industrialization: Prelude to Collapse
by William Catton
(Excerpt from Overshoot: The Ecological Basis of Revolutionary Change)
Unrecognized Preview
http://dieoff.org/page15.htm
[3] jkissing on April 23, 2006 - 7:24pm
http://www.theoildrum.com/story/2006/4/22/23169/4783
[4] Galbraith and Robinson's second crisis of economic theory.
Publication: Journal of Economic Issues
Publication Date: 01-MAR-08
Author: Wrenn, Mary ; Stanfield, James Ronald ; Carroll, Michael
http://www.accessmylibrary.com/coms2/summary_0286-34227679_ITM
COPYRIGHT 2008 Association for Evolutionary Economics
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