A Manifesto for Economic Sense, and Why We Need One…

Why are policy makers so immune to doing the right thing when it comes to creating and following policy that will ease the current unnecessary crisis of unemployment and reign in the forces that have taken the world into the financial and economic crisis we still face? Here are two views offered to help understand the problem. First a look at what the problem really is and what policy makers can and should do immediately, and then a look at the hubris and criminality policy makers, particularly those on the right, refuse to acknowledge and address that is exacerbating the problem.

From www.manifestoforeconomicsense.org:

A Manifesto for Economic Sense

More than four years after the financial crisis began, the world’s major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reason is simple: we are relying on the same ideas that governed policy in the 1930s. These ideas, long since disproved, involve profound errors both about the causes of the crisis, its nature, and the appropriate response.

These errors have taken deep root in public consciousness and provide the public support for the excessive austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which mainstream economists offer the public a more evidence-based analysis of our problems.

  • The causes. Many policy makers insist that the crisis was caused by irresponsible public borrowing. With very few exceptions – other than Greece – this is false. Instead, the conditions for crisis were created by excessive private sector borrowing and lending, including by over-leveraged banks. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause.
  • The nature of the crisis. When real estate bubbles on both sides of the Atlantic burst, many parts of the private sector slashed spending in an attempt to pay down past debts. This was a rational response on the part of individuals, but – just like the similar response of debtors in the 1930s – it has proved collectively self-defeating, because one person’s spending is another person’s income. The result of the spending collapse has been an economic depression that has worsened the public debt.
  • The appropriate response. At a time when the private sector is engaged in a collective effort to spend less, public policy should act as a stabilizing force, attempting to sustain spending. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people. Unfortunately, that’s exactly what many governments are now doing.
  • The big mistake. After responding well in the first, acute phase of the economic crisis, conventional policy wisdom took a wrong turn – focusing on government deficits, which are mainly the result of a crisis-induced plunge in revenue, and arguing that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, instead of playing a stabilizing role, fiscal policy has ended up reinforcing the dampening effects of private-sector spending cuts.

In the face of a less severe shock, monetary policy could take up the slack. But with interest rates close to zero, monetary policy – while it should do all it can – cannot do the whole job. There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic, making recovery and future deficit reduction even more difficult.

How do those who support present policies answer the argument we have just made? They use two quite different arguments in support of their case.

The confidence argument. Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery.

But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries where there is a normally functioning central bank. This is true even in Japan where the government debt now exceeds 200% of annual GDP; and past downgrades by the rating agencies here have had no effect on Japanese interest rates. Interest rates are only high in some Euro countries, because the ECB is not allowed to act as lender of last resort to the government. Elsewhere the central bank can always, if needed, fund the deficit, leaving the bond market unaffected.

Moreover past experience includes no relevant case where budget cuts have actually generated increased economic activity. The IMF has studied 173 cases of budget cuts in individual countries and found that the consistent result is economic contraction. In the handful of cases in which fiscal consolidation was followed by growth, the main channels were a currency depreciation against a strong world market, not a current possibility. The lesson of the IMF’s study is clear – budget cuts retard recovery. And that is what is happening now – the countries with the biggest budget cuts have experienced the biggest falls in output.

For the truth is, as we can now see, that budget cuts do not inspire business confidence. Companies will only invest when they can foresee enough customers with enough income to spend. Austerity discourages investment.

So there is massive evidence against the confidence argument; all the alleged evidence in favor of the doctrine has evaporated on closer examination.

The structural argument. A second argument against expanding demand is that output is in fact constrained on the supply side – by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations. But in most countries that is just not the case. Every major sector of our economies is struggling, and every occupation has higher unemployment than usual. So the problem must be a general lack of spending and demand.

In the 1930s the same structural argument was used against proactive spending policies in the U.S. But as spending rose between 1940 and 1942, output rose by 20%. So the problem in the 1930s, as now, was a shortage of demand not of supply.

As a result of their mistaken ideas, many Western policy-makers are inflicting massive suffering on their peoples. But the ideas they espouse about how to handle recessions were rejected by nearly all economists after the disasters of the 1930s, and for the following forty years or so the West enjoyed an unparalleled period of economic stability and low unemployment. It is tragic that in recent years the old ideas have again taken root. But we can no longer accept a situation where mistaken fears of higher interest rates weigh more highly with policy-makers than the horrors of mass unemployment.

Better policies will differ between countries and need detailed debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this Manifesto to register their agreement at http://www.manifestoforeconomicsense.org, and to publically argue the case for a sounder approach. The whole world suffers when men and women are silent about what they know is wrong.

And why we need economic common sense…

Matt Taibbi contributing editor of The Rolling Stone magazine, and Yves Smith, author of Econned, and creator of the blog http://www.nakedcapitalism.com, explain against the backdrop of JP Morgan’s recent loss on (now estimated at nearly $9 billion) of bets hedging the bank’s investment positions, how Wall Street with Mafia-like fixing of bids, continuing government largess in corporate welfare propping up operations, and expertise at gaming the system with depositor funds epitomizes the greed that has played it’s role in destroying municipal, state, and national budgets, causing so much suffering through the resulting austerity measures, bailouts for the wealthiest, reductions in safety net protections to the elderly, children, the disabled, and the poor. Republican senators fawned over JP Morgan CEO Jamie Dimon in hearings earlier in June, ignoring JP Morgan’s record of criminal abuse evident in the fines paid for illegally foreclosing mortgages of military service men and women serving overseas, or for bid-rigging for municipal bonds and CDO fraud for which they paid fines of $228mil and $153mil, respectively, last year. Being too big to fail (privatizing profits, while socializing the risks inherent in gaining those profits) is apparently the neo-liberal corporatocracy the current crop of “trickle-down” economic faith-healers believe is the “American way” to freedom and liberty…

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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.

Growth, Inequality, Policy, and Power: Connecting the Dots

Another new Teach-In addition comes by way of a slideshow presentation given by Jared Bernstein of the Center on Budget and Policy Priorities during a talk in the Daniel Thursz Distinguished Professor of Social Justice Lecture series at the University of Maryland in March 2012. This is an easy to follow discussion of the causes of our present inequality and how the prevalent economic policy agenda is exacerbating inequality, a growth in poverty as opposed to fair economic growth, and a rise in children living in poverty.

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.

 

What We Have Become…

                                                               Pavel Constantin, Cagle Cartoons, Romania

 

What does it say about democracy in the US when this cartoon coming out of a former communist country in Eastern Europe so clearly describes our corporatist state where an elite political class enjoys the benefits of police state protections against the people? Stay in line, and nobody will get hurt…

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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