What Real Economic Stimulus Looks Like

Via Brad DeLong and Jamie Galbraith, here’s what real economic stimulus looked like:

If the banking system is crippled, then to be effective the public sector must do much, much more. How much more? By how much can spending be raised in a real depression? And does this remedy work? [E]conomist Marshall Auerback….

“[Roosevelt’s] government hired about 60 per cent of the unemployed in public works and conservation projects that planted a billion trees, saved the whooping crane, modernized rural America, and built such diverse projects as the Cathedral of Learning in Pittsburgh, the Montana state capitol, much of the Chicago lakefront, New York’s Lincoln Tunnel and Triborough Bridge complex, the Tennessee Valley Authority and the aircraft carriers Enterprise and Yorktown. It also built or renovated 2,500 hospitals, 45,000 schools, 13,000 parks and playgrounds, 7,800 bridges, 700,000 miles of roads, and a thousand airfields. And it employed 50,000 teachers, rebuilt the country’s entire rural school system, and hired 3,000 writers, musicians, sculptors and painters, including Willem de Kooning and Jackson Pollock.”

In other words, Roosevelt employed Americans on a vast scale, bringing the unemployment rates down to levels that were tolerable, even before the war—from 25 percent in 1933 to below 10 percent in 1936, if you count those employed by the government as employed, which they surely were.

If you’re in a hurry, check out DeLong… He will give you the shorthand. If not, and want a more in-depth view, be sure to read Galbraith’s column. He was one of a few progressive economists that called the game early (March 2009), and in hindsight was pretty much spot on in his analysis. Galbraith’s piece is both a good primer on the history of how Obama’s economic team reacted to the crisis, and a prescient analysis of Geitner’s banking plan, identifying weaknesses in the plan then now playing out. The article is invaluable for understanding why we are struggling still with high unemployment and little movement to implement policy to put people to work. The Obstructionistas in Congress and in the States have by choice given us a socially devastating slow recovery, instead implementing policy that cuts both revenue and spending, prolonging the crisis for millions rather than mitigating its effects on Main St and the middle class. Intent on shrinking government to the size it can be drowned in a bathtub, as Grover Norquist famously quipped, the Norquist tax pledge has held hostage the politicians who signed his pledge to cut taxes to draconian measures shouldered by the unemployed, the elderly, children, the poor and the sick.

Focusing on the short-term, the Obstructionistas have turned common sense and precedent on their heads, giving the American middle class stones when what they have asked for is bread. When government can borrow at negative real interest rates to finance infrastructure projects and help relieve cash strapped State and municipal budgets, there is no better time to take advantage of cheap credit to help create jobs, spur demand, and get people back to work. The prevailing “wisdom” runs counter to such common sense, and the suffering continues. By choice… The slow recovery is because of politics, little else… And from the politics comes this:

For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash—protected by deposit insurance and now desperately being conserved—the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare—illiquid and intangible but real and inalienable in a way that home and equity values are not. And so it will remain, as long as future benefits are not cut.

Who, then, claiming to identify with the American middle class, would in their right mind propose cuts to Social Security and Medicare? As it turns out, the President’s Simpson-Bowles “cat food” Commission, the Tea Party caucus in Congress, a presidential candidate, and scads of candidates for lesser office… you get the idea… just about everyone except those progressives that have an appreciation for history and what has gone before.

More on recession dynamics here. And be sure to read this recent post, A Manifesto for Economic Sense.

How Much Inequality?

A brief essay by Daniel Little on the website UnderstandingSociety asks the following questions, examining the issues of inequality in income and opportunity from moral, social justice, social cohesiveness, and utilitarian perspectives, with links to additional writings on each view.

How much inequality is too much?  Answers range from Gracchus Babeuf (all inequalities are unjust) to Ayn Rand (there is no moral limit on the extent of inequalities a society can embody). Is there any reasoned basis for answering the question?  What kinds of criteria might we use to try to answer this kind of question?

Ayn Rand’s novels appear to have infected a large number of people with the notion that moral considerations of inequality in a society are inappropriate when compared to the rights and motivations of the individual, which argument is helping fuel the divisive gridlock on economic matters policy makers are facing in States and the Federal government. The author of a budget proposal lacking a moral compass, Paul Ryan, is awarded a “fiscal responsibility” award, while legislation to aid job creation and to continue benefits for millions of the long-term unemployed is routinely blocked, growing an underclass of otherwise productive workers unable to return to their former areas of expertise or income levels. The States under growing budget constraints choose to cut revenues, primarily for those at the top of the income scale, while they reduce spending, placing the burden of strangled government on the shoulders of the unemployed, the elderly, children, the sick, and the disabled. It is not hard to see the moral inequality of these actions, and as Joseph Stiglitz in his commentary and latest book, The Price of Inequality, How Today’s Divided Society Endangers Our Future, points out social cohesiveness is at risk as those in the vice of unequal policy and advantage in society reject and resist such policy. (More here.)

America has long prided itself on being a fair society, where everyone has an equal chance of getting ahead, but the statistics suggest otherwise: the chances of a poor citizen, or even a middle-class citizen, making it to the top in America are smaller than in many countries of Europe. The cards are stacked against them. It is this sense of an unjust system without opportunity that has given rise to the conflagrations in the Middle East: rising food prices and growing and persistent youth unemployment simply served as kindling. With youth unemployment in America at around 20 percent (and in some locations, and among some socio-demographic groups, at twice that); with one out of six Americans desiring a full-time job not able to get one; with one out of seven Americans on food stamps (and about the same number suffering from “food insecurity”)—given all this, there is ample evidence that something has blocked the vaunted “trickling down” from the top 1 percent to everyone else. All of this is having the predictable effect of creating alienation—voter turnout among those in their 20s in the last election stood at 21 percent, comparable to the unemployment rate.

And the driver of this alienation…? The “anything goes” philosophy from the right that has promoted security force violence against students and demonstrators protesting the effects of inequality, too big to fail industries that privatize their profits while socializing the risks they take to realize their profits, and unresponsive government unwilling and unable to represent the vast majority of people in their societies. Can we do better? Let us hope so…

The Great Recession

At the end of April PBS’s investigative unit Frontline began showing the first of their four part series,  Money, Power and Wall St. Each one hour segment  is worth paying close attention to. I developed a greater appreciation for how collateralized debt obligations (CDO’s) and credit default swaps (CDS’s) are created, traded, and how the market for these derivatives — private, proprietary, opaque — contributed to (if not created) the financial crisis and continues to create enormous risk today. Several of the economists and public officials that I have looked to to gain understanding of the crisis, and have found to be progressively minded and extremely knowledgeable, Robert Reich, Joseph Stieglitz, Paul Krugman, Jared Bernstein, are featured along with a number of other smart, informed, highly credible players in the drama that unfolded. The role of Occupy Wall Street is featured prominently is this discussion, especially in the last hour with interviews of the Occupiers, former Wall St. traders, involved with Occupy the SEC and whose workgroup is offering public comment on the rule-making process surrounding the Frank-Dodd legislation.

The Derivative Markets

The phenomenal profit to be made from securitizing mortgages for a growing derivatives market drove both unscrupulous and unwitting lenders to write mortgages as fast as they could that many borrowers simply couldn’t afford, or similarly didn’t understand as to the terms to which they were agreeing. Predatory lending and aggressive markets in derivatives largely fueled a worldwide housing bubble, which when bursting caught up millions of people stuck with out-sized mortgages worth more than the homes they had financed. This derivatives market is to this day a largely unregulated shadow banking industry, which in 2010 held assets of $13 trillion, $3 trillion more than the regulated, public, commercial banking system held in loans.

This shadow banking system trades derivatives in private, proprietary transactions and counter bets which wiped out unsuspecting investors not only in mortgage markets, but created turmoil for cities in the US and Europe, and for nations such as Greece, Ireland, Spain. A complicated deriviatives deal in Italy by Bear Stearns left the city of Casino in debt to the financiers at Bear. Goldman Sachs profited by the hundreds of millions from derivative deals with Greece, helping propel Greece into the civil turmoil discussed below in the posting Dignity. The bank runs that ensued in the turmoil of late 2008 and 2009 depleted some of the largest Wall St. banks of their already thin, over-leveraged capital reserves, freezing credit, and very nearly initiating a second Great Depression. Nearly $8 Trillion in emergency loans by the Federal Reserve to banks around the globe prevented a much more serious crisis from enveloping the world economy.

An Occupier

Additional at length interviews by some of the contributors are also worth taking in. Cathy O’Neil wanted to be a mathematician since she was in her early teens. Her academic path lead her from UC Berkeley to Harvard to MIT and post-grad training. After joining a hedge fund company and coming to see the basic immorality of the prevailing attitude on Wall St. she left her firm to take up risk analysis. As a former “quant,” an analyst who understood the statistical models used to gauge trends traders reacted to Ms. O’Neil brought to the alternative banking working group of OWS her expertise with risk management and how the system can and does get gamed. She has been working with the sub-group Occupy the SEC to submit public comment on the Volker Rule which is meant to regulate the extent to which commercial and investment banking in a single firm might overlap. A step in the right direction to the reinstatement of Glass-Steagall-like protections, which provided a clear separation of commercial and investment banking, the Volker Rule as part of the Frank-Dodd Financial Reform Act may help Frank-Dodd be an effective piece of reform legislation. If watered down too much, by banking lobbyists and the loopholes they argue for, the legislation will be weak and unable to reign in the predatory nature of Wall St. investment banking.

 

Another additional at length interview worth your attention is by Phil Angelides, head of the Financial Inquiry Commission that investigated the crisis and who has advocated deep reform measures to address the ongoing threat, as serious a threat as before the crisis that in his words “hasn’t ended.”

Some may view this series as “too establishment,” as too much an endorsement of a system thoroughly broken… I view this as a good starting place to begin to understand the history, knowing no historical depiction is ever 100% correct. I encourage folks to have a look and take from this what they will.

Nick Hanauer’s “Controversial” TED talk

So, really, who are the “job creators?” Not those the political class would have you believe… the hallowed 1%. The following TED talk is a simple, though not simplistic, explanation of how the economy really works so far as job creation is concerned, and why building and maintaining a strong middle class is so important. The feedback loop between business and the middle class is what creates jobs, not the incredibly wrongheaded economic ideas that have gained currency today, of an almost deified set of “job creators,” the very wealthy, an idea egged on by self-serving politicos, the corporate media, and economically unenlightened journalism.

Paul Ryan’s draconian and ridiculous budget Congressional Republicans have in lockstep backed, or Maine Governor Paul LePage’s and the Republican legislature’s cruel supplemental budget, both based on thoroughly discredited “trickle down” economic theories of Hayek and the “Chicago boys” channeling Milton Friedman, have been shown over and over to be a drag on the economy, slowing job creation, creating and extending misery for those under-employed or among the long-term unemployed.

Without an enlightened understanding of how our macro-economy works, things will only get worse. The redistribution of wealth and opportunity will continue to flow upwards, the middle class will continue to shrink creating an even larger underclass desperate for relief from those that seem to have no interest or ability in providing relief, their elected representatives. The current obsession with perpetual war, the security state, and a war economy that displaces useful manufacturing with armaments and weaponry serves the elite businesses that dominate the world economy. Governments captured by the elite in this mindset have little choice but to deliver… to the detriment of the masses who must comply in order to survive.

Have a look, and decide for yourself…

Government Capture is the American Condition

American corporations today are like the great European monarchies of yore: They have the power to control the rules under which they function and to direct the allocation of public resources. This is not a prediction of what’s to come; this is a simple statement of the present state of affairs. Corporations have effectively captured the United States: its judiciary, its political system, and its national wealth, without assuming any of the responsibilities of dominion. Evidence of government capture is everywhere.
Six Symptoms of Government Capture:
  1. The “smoking gun” is CEO pay.
  2. Retirement risk has been transferred to employees.
  3. Corporate money now controls every stage of politics — legislative, executive, and ultimately judicial.
  4. Government Capture has been further implemented through the extensive lobbying power of corporations.
  5. The most powerful CEOs are above the reach of the law and beyond its effective enforcement.
  6. Government capture has been perpetuated through the removal of property “off shore,” where it is neither regulated nor taxed.
Government cannot and will not hold corporations to account. That much is now obvious.  Indeed, the dawning realization of this truth is what has informed the Occupy movement, but only the owners of corporations can create the accountability that will ultimately unwind the knot of government capture.
Continue reading here.

Another View on the Politics Prolonging the Lesser Depression

This VOXEU article discusses the politics that arise in the aftermath of financial crises on a broader scale, not just our current one.

Political environments appear systematically different in the aftermath of a financial crisis relative to before the crisis. This column argues that the ensuing gridlock and the delay in potentially beneficial policy reforms should come as no surprise.

Financial crises of all colours (banking, currency, inflation, or debt crises) leave deep marks on an economy. Deep economic contractions, both in output and employment, are systematic in the interim and in the aftermath of financial crises, as thoroughly documented in research by Reinhart and Rogoff (2009) and Reinhart and Reinhart (2010).

Sustained waves of volatility, often resulting in secondary crises (e.g. debt crises following banking crashes), are almost the norm in the post-crisis period (Reinhart and Rogoff 2011).

What exactly occurs in the aftermath of financial crises that makes recovering from such shocks so hard? This column argues that the answer may lie mostly with the politics, not the economics.

I might disagree with the authors that the Occupy movement is primarily a “leftist” movement, but the overwhelming weight of this analysis that the politics of the extremes are at play here is difficult to dismiss. With the dominant culture favoring the corporatist alignments of corporation, wealth, and the elite political class the extreme politics prolonging the current Lesser Depression, as Paul Krugman describes our present economic status, can be best described as that which favors inequality at the expense of the vast majority of the public in the world’s nations today. Austerity in Europe is pushing the EU into a recession, and while the Federal government in the US has largely avoided the drastic austerity crippling Britain, Spain, Ireland, Portugal,  and Greece states and local municipalities in the US are being forced into austere budget cuts that defy logic, are counter-productive to growth, largely rooted in extreme political economics espoused by both parties that for the past 40 years has helped create the difficulties and inequality we are now experiencing.

 

Paul Krugman’s Playboy Interview

Paul Krugman speaks with Playboy about the financial crisis and why the ongoing slow recovery is unnecessary, the result of politics, not economics. Read the entire article, but here are a few of the “money” quotes:

PLAYBOY: Some of [the] debate is irrelevant to the average person. All they know is they don’t have a job or they don’t have a job that pays enough.

KRUGMAN: The point is there’s a tremendous amount of suffering. A lot of America is much worse off than it was four years ago. I think the main reason you should be angry about it is that it’s gratuitous. This doesn’t have to be happening. We actually have the tools to make most of this go away. If we could throw aside the political prejudices and bad ideas that are crippling us, in 18 months we could be back to something that feels like a much better economy.

On the utility of union organizing:

PLAYBOY: Is it accurate to simplify our modern economy as a choice between working for a high-wage General Motors model versus the low-wage Walmart strategy?

KRUGMAN: I think the choice we made, really without understanding that we were making the choice, was to make Walmart jobs low paying. They didn’t have to be. In a different legal environment, a megacorporation with more than a million employees might well have been a company with a union that resulted in decent wages. We think of Walmart jobs as being low wage with 50 percent turnover every year because that’s the way we’ve allowed it to develop. But it didn’t have to be that way. If the rise of big-box stores had not taken place under the Reaganite rules of the game, with employers free to do whatever they wanted to block union organizing, we might have had a different result. Part of the hysterical opposition to the auto-industry bailout was the notion that we were bailing out well-paid workers with union jobs.

On the policy failures that have prolonged unemployment at demoralizing low levels that hurt the country, its labor force, based on backward political thinking:

PLAYBOY: So people in America today are suffering when they don’t have to be because of policy makers who won’t do the right thing?

KRUGMAN: That’s right. I’ve gotten some grief for my remark that if it were announced that we faced a threat from space aliens and needed to build up to defend ourselves, we’d have full employment in a year and a half. But that’s true. Why couldn’t we do that to repair our sewer systems and put an extra tunnel under the Hudson instead of to fight imaginary space aliens? Everybody in the world except us is doing a lot of investment in infrastructure and education. This is the country of the Erie Canal and the Interstate Highway System. The Erie Canal was a huge public infrastructure project financed with no private or public-private partnership. Can you imagine doing that in 21st century America? We really have slid backward for the past 200 years from the kinds of things we used to understand needed to be done now and then. And all of that because we are shackled to the wrong ideas.

(The interview that appears in the link above in a recent edition of Playboy, so if a little suggestive skin is offensive to you, reader beware.)

Jefferson vs Lincoln: On Inequality and the Lack of Social Mobility

America’s failed promise of equal opportunity

By Alex Gourevitch and Aziz Rana

Americans are increasingly aware that the ideal of equal opportunity is a false promise, but neither party really seems to get it.

Republicans barely admit the problem exists, or if they do, they think tax cuts are the answer. All facts point in the opposite direction. Despite various tax cuts over the past 30 years, not only have income and wealth inequality dramatically increased, but the ability of individuals to rise out of their own class has declined. Social stagnation is increasingly the norm, with poverty rates the highest in 15 years, real wage gains worse even than during the decade of the Great Depression, average earnings barely above what they were 50 years ago, and more than 80 percent of the income growth of the past 25 years going to the top 1 percent. In fact, since 1983, the bottom 40 percent of households have seen real declines in their income and the same goes for the bottom 60 percent when it comes to wealth. We know what the economic status quo does: It redistributes upwards.

Continue reading here:

The Disingenuous Mr. Romney Comes to Portland

I confess. I was a bad boy at the Romney event last Friday evening at Portland Yacht Services. I openly challenged some of Romney’s disingenuous assertions and after a time the police, at the request of the owner, asked that I leave which I voluntarily did. I have a video clip of my peaceful exchange with the officer. When I inquired who requested my leaving I was given to understand by the police sergeant who escorted me to the exit that it was Phineas Sprague, local business man and host of the event.

I’d like to ask why a campaign event such as this would be publicized as “open to the public” but in fact not be a public event when it comes to the subject of speech. I understood open to the public to mean that anyone from the public was welcomed, regardless of political persuasion. That is what I have always thought “public event” meant. And as a public gathering I naturally thought my speech, particularly my political speech, could arguably be protected. Private ownership of the property on which an advertised “public event” was taking place was used in this case to trump public speech. Had I repeatedly shouted, “fire,” it would have been entirely appropriate for the nearest fifty people to clamor onto my back and shut me up. However, stifling me for challenging Mr. Romney’s thin assertions hardly rises to the level of “fire.”

A fellow that was not even allowed entry into the event and instead stood outside the door listening said nothing whatsoever. His appearance disqualified him. He had the appearance of a fisherman, wore cargo shorts to his mid-calf, had longish hair and a beard, and wore a beret with a non-descript insignia on the front. He described himself as a conservative, actually as an acquaintance of Mr. Sprague. As soon as he entered the event police were signaled by someone inside to remove him. Open to the public, indeed.

I didn’t shout “fire,” at least not in the literal sense. By addressing the platitudes and thin veneer of Mr. Romney’s rhetoric I was calling out the shallowness of the spectacle. A 1%-er put up a private stage for this other 1%-er to shower the crowd with feel good bromides — “When I am President I will create jobs…” “When I am President I will fix the economy…” – saying nothing, really, about how that would be accomplished in any meaningful way. After all it has been over three years since Mr. Romney’s party have openly admitted to on principle opposing every Obama policy and yet the economy improves, albeit slowly but still. It is meaningful that he loves his country, as he offered (I’m sure he does, he has done extremely well here, and in the Caymans…), but the platitude that by bestowing more favors on the 1% he will create jobs and balance the budget is as light as gossamer.

I would have Mr. Romney comment on the fact that one of the last times strong measures were taken to balance the federal budget, by Andrew Jackson, a 75-month depression occurred. These hollow notions are what the 1%-ers — him on the stage and him staging the event — use to whip up support for policies that benefit the 1% more than anyone else. There is a reason why the US Census Bureau citing 2010 census data states one in three Americans is poor or near poor. It is no coincidence major corporations are reporting record profits quarter after quarter, or that a very small minority holds the vast wealth of the country. The wealth of this nation has been systematically redistributed upward through preferential tax treatment and special services that only the wealthiest have access to, among other mechanisms. It’s no coincidence the national conversation shifted to this inequality when Occupiers occupied Wall St, the engine feeding this inequality. The truth of this resonates far and wide.

The Maine Revenue Service recently affirmed that if Maine’s wealthiest citizens were taxed at the same level that most other Mainers are, the 65,000 Maine people threatened to be thrown out of MaineCare, Maine’s Medicaid program, would not fear for their health, their housing, nor their place in society. The politics of the corporation and the 1% does not make for a government of, by, and for the people.

With my challenges I am taking back my little piece of ground and occupying it. There is a fire in our republic and I will cry fire.

I have a great deal of respect for the Portland Police, or I should really say, police in general. They do an incredibly difficult job policing our cities and towns. They deal with situations most of us would balk at, some of which put their very lives at risk or in danger of severe harm. They are required to make careful sometimes life changing split-second decisions that are expected to be blameless. Not just anyone possesses the courage to face such a job so organic to the proper functioning of our society. I have a great deal of respect for those that aspire to do so. (On the other hand, I have little respect for the militarization of local police under a dubious banner of national security. This is a slippery slope we have slid way too far down already.)

The police, as far as politeness and respect for my person were concerned, carried out Mr. Sprague’s bidding in an entirely appropriate manner. The space was his and I admit he had the prerogative. My speech obviously upset Sprague and by instructing the police to ask me to leave, he obviously did not think my speech was protected speech. I think really, though, we never even approached that question. My challenges to Mr. Romney were not part of the script for the evening and that may have been what upset him.

I respectfully followed the officer’s polite request that I leave Mr. Sprague’s property. The officer is part of the 99% and I respect that his unions are under attack by people like Mitt Romney, and those that provide stages for Mr. Romney to deliver the 1%’s song and dance routine. Think of me as someone throwing a metaphorical rotten tomato at a lousy performer.

For more on the disingenuous Mr. Romney, Brad Delong offers:

Mitt Romney Rises to Amazing Heights of Incoherence in Michigan

V Recessions, U Recessions, and L Recessions

Jared Bernstein does a nice job showing the relative recovery dynamics of several recessions suffered in the US since June of 1969. As he briefly explains the role of business cycles on his blog, and with a great graphic showing employment as a share of population (from the Bureau of Labor Statistics), recoveries take form based on how quickly employment numbers rebound. V recessions hit bottom with recovery in jobs showing a relatively quick rebound. Re-hires or easier mobility between jobs tend to work to the benefit of the unemployed here after the initial storm is weathered and the economic adjustment kicks in. U recessions rebound more slowly, and in the early 90’s and 00’s were viewed as “jobless” recoveries. Not as easily explained, but clear to have been the dynamic for these two recoveries.

Where we are now is in one of the more insidious recoveries, described by the L profile. The long-term unemployment in this dynamic is ensuring for some, especially for older workers, that they will not enter the workforce again at the same level of income or with the same level of work as when they left it. That is the tragedy of such a loss of utilizable capacity, or in more human terms, a tragedy of the loss in terms of human dignity for those that have worked all their lives, played by the rules, only to be pushed out of the job market as they approach their retirement and are unlikely to be able to return to meaningful work.

For those in that case, without sufficient savings with which to retire, either through a loss of savings in the financial crash, not having been able to save, a divorce, foreclosure, or medical crisis that ate up savings, this portends a difficult end of life scenario for those caught on the foot of the L…

Look around. Many of your neighbors are in just this predicament. Connect the dots as to why: a failure to enact effective fiscal and monetary policy to speed recovery (thanks to anti-revenue, “business-friendly” corporatists), off-shoring of jobs to boost profits, reliance on automation to boost profits, down-sizing and consolidation to boost profits, technological advances that make re-training difficult for many. Efforts to weaken already weak safety nets leave these under-utilized workers scrambling at the end of their lives (also thanks to anti-revenue, “business-friendly” corporatists). While Bernstein doesn’t delve into the role of inequality in our current L shaped recovery neither the preferential tax benefits for those making a living from capital gains and dividends (the corporatists), nor the race to maximize profits is to be ignored.

Source: BLS

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