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Casino Capitalism: Neoliberalism in Western countries

"When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done"

John Maynard Keynes

PseudoScience > Who Rules America > Neoliberalism

News Neoliberalism Recommended Links Neoclassical Pseudo Theories and Crooked and Bought Economists as Fifth Column of Financial Oligarchy Peak Cheap Energy and Oil Price Slump Regulatory Capture & Corruption of regulators Neocolonialism as Financial Imperialism
Ayn Rand and Objectivism Cult Energy returned on energy invested (EROEI) The Systemic Instability of Financial Institutions In Goldman Sachs we trust Number racket GDP as a false measure of a country economic output Neoliberalism as a Cause of Structural Unemployment in the USA
Neoliberalism and rising inequality Secular Stagnation  Efficient Market Hypothesis Redistribution of wealth up as the essence of neoliberalism Supply side Voodoo Rational expectations scam Monetarism fiasco
Twelve apostles of deregulation Summers Greenspan Rubin Reagan Helicopter Ben: Arsonist Turned into Firefighter Bush II
Chicago school of deification of market Free Market Fundamentalism Free Market Newspeak as opium for regulators The Idea of Dynamic Stochastic General Equilibrium CDS -- weapons of mass financial destruction Phil Gramm Clinton
Zombie state of neoliberalism Insider Trading SEC corruption Fed corruption Systemic Fraud under Clinton-Bush Regime Wall Street Propaganda Machine American Exceptionalism
Pseudo Theories and Crooked and Bought Theorists Glass-Steagall repeal Pope Francis on danger of neoliberalism Fiat money, gold and petrodollar Neoliberalism as a Cause of Structural Unemployment in the USA Buyout Kleptocrats Republican Economic Policy
Principal-agent problem Quiet coup Pecora commission History of Casino Capitalism Casino Capitalism Dictionary :-) Humor Etc
Sine ira et studio

Tacitus, see Wikipedia


Alternatively, we could have spent more time studying the work of Hyman Minsky. We could also have considered the possibility that, just as Keynes’s ideas were tested to destruction in the 1950s, 1960s and 1970s, Milton Friedman’s ideas might suffer a similar fate in the 1980s, 1990s and 2000s. All gods fail, if one believes too much. Keynes said, of course, that "practical men … are usually the slaves of some defunct economist". So, of course, are economists, even if the defunct economists are sometimes still alive.

Martin Wolf

Speculation and gambling were always a part of Wall Street but since the 1930’s they were just a side-show, now they are the show.

comment to Matt Taibbi article Fannie, Freddie, and the New Red and Blue t

Introduction

History

The concept of Quite Coup

Stages of transformation

Casino Capitalism as a result of stagnation of industrial manufacturing

Casino Capitalism and Financial Instability

The Ideology of Casino Capitalism

Early Researchers of Casino Capitalism

Conclusions: From Animal Farm To Animal House


Introduction

“The sense of responsibility in the financial community
for the community as a whole is not small. It is nearly nil.”

-- John Kenneth Galbraith, The Great Crash of 1929

The term Casino Capitalism as a specific phase of neoliberal transformation of capitalism. Politically it was slow motion corporate coup d'état, which started in 70th and is now accomplished in the USA and other Western countries which buries social-democratic (New Deal style) model of capitalism.  It hypertrophied police functions of state (in the form of national-security state)  while completely avoiding economic sphere in ways other then enforcement of laws (with a notable exclusion from this top 1% -- Masters of the Universe). In this sense it is the opposite of communism (i.e. an entirely state-planned economy) and presupposed a deregulated economy (in a sense of the "law of jungle" as a business environment) , but with extremely strong militarized state, suppressing all the attempts to challenge the new "nomenklatura" (much like was the case in the USSR).  It is also called economic liberalism or neoliberalism

“Liberalism” can refer to political, economic, or even religious ideas. In the U.S. political liberalism has been a strategy to prevent social conflict. It is presented to poor and working people as progressive compared to conservative or Right wing. Economic liberalism is different. Conservative politicians who say they hate “liberals” — meaning the political type — have no real problem with economic liberalism, including neoliberalism.

In other words this is a variant of neoliberal model of corporatism used in wealthy Western countries during the period of "cheap hydrocarbons".  The period that is probably near the end and which by some estimate can last only another 50 years or so.  The major crisis of casino capitalism in 2008 was connected both with financial excesses (caused by moving to semi-criminal ways of extracting return on capital, typical for casino capitalism),  but also with the rise of the price of oil and decrease of  Energy returned on energy invested (EROEI)In this sense the current low oil price period that started in late 2014 can be viewed as the "last hurrah" of the casino capitalism.

The term itself was coined by Susan Strange who used it as a title of her book Casino Capitalism published in 1986. She was one of the first who realized that

  1. "The roots of the world's economic disorder are monetary and financial";
  2. "The disorder has not come about by accident, but has in fact been nurtured and encouraged by a series of government decisions." (p. 60). In other words its was a counter-revolution of the part of ruling elite which lost its influence in 30th (dismantling New Deal from above in the USA (Reaganomics) or Thatcherism in the GB).

According to Susan Strange transformation of industrial capitalism into neoliberal capitalism ("casino capitalism") involved five trends. All of them increased the systemic instability of the system and the level of political corruption:

  1. Innovations in the way in which financial markets work due to introduction of computers;
  2. The sheer size of markets;
  3. Commercial banks turned into investment banks;
  4. The emergence of Asian nations as large players;
  5. The shift to self-regulation by banks (pp.9-10).

Now it is pretty much established fact that the conversion from "industrial capitalism" to neoliberal "casino capitalism" is the natural logic of development of capitalism. In early and incomplete matter this trend was noticed at early 1990th by many thinkers. This is just the second iteration of the same trend which was interrupted by the Great Depression and subsequent WWII. So, in a way, replacement of industrial capitalism with financial capitalism in a natural tendency within the capitalism itself and corruption was contributing, but not decisive factor.  The same is true about globalization, especially about globalization of financial flows, typical for casino capitalism.

Also this conversion did not happen due to lack of oversight or as a folly. It was a couscous choice made by the US and GB elite, both of which faced deterioration of rates of return on capital. Also unlike "industrial capitalism" which was more-or-less stable system, able to outcompete the neo-theocratic system of the USSR, the financial capitalism is unstable in the same sense as radioactive elements are unstable.  And this instability tend to increase with time. So there is probably natural half-life period for neoliberalism as a social system. It might be already reached in 2008.  In we assume that global victory of neoliberalism happened in 1990. It is just 18 years.  If we think that it happened in late 60th, then it is closer to 50 years.

The global crisis of neoliberal capitalism which started from bursting the USA subprime housing bubble in 2008 undermined ideological legitimacy of its central claim that "free markets" lead to faster and more uniform economic development of all countries. While the peak of its "ideological" power might be over (much like the peak of attractiveness of "command socialism" was over after WWII), it will exist in a zombie state for a long time due to economic and military power of the USA and G7.  And as we know from Hollywood films, zombies can be especially bloodthirsty. It probably will remain the dominant force for at least the next two decades pursuing the same policy of "forceful" opening of energy rich  and resource countries for western multinationals intact using color revolutions and local wars.  But as Napoleon quipped "You can do anything with bayonets, you just can't sit on them".

Conversion to neoliberal capitalism was a reaction on stagnation of industrial production and as such it was nurtured and encouraged by a series of government decisions for the last 50 years. Stagnation of industrial production made expansion of financial sector of paramount importance for the ruling elite and by extension for Congress which represents this elite. House vote 377:4 for Commodity Futures Modernization Act of 2000 is pretty telling in this respect.

There were also at least two important parallel developments.

Most respectable authors like Henry Giroux in his article in Counterpunch generally consider the term "casino capitalism" to be an equivalent to the term Neoliberalism. Here is a relevant quote from Henry Giroux's Authoritarian Politics in the Age of Casino Capitalism :

There is more at work here than simply a ramped up version of social Darwinism with its savagely cruel ethic of “reward the rich, penalize the poor, [and] let everyone fend for themselves,” [ii] there is also a full scale attack on the social contract, the welfare state, economic equality, and any viable vestige of moral and social responsibility. The Romney-Ryan appropriation of Ayn Rand’s ode to selfishness and self-interest is of particular importance because it offers a glimpse of a ruthless form of extreme capitalism in which the poor are considered “moochers,” viewed with contempt, and singled out to be punished. But this theocratic economic fundamentalist ideology does more. It destroys any viable notion of the and civic virtue in which the social contract and common good provide the basis for creating meaningful social bonds and instilling in citizens a sense of social and civic responsibility. The idea of public service is viewed with disdain just as the work of individuals, social groups, and institutions that benefit the citizenry at large are held in contempt.

As George Lakoff and Glenn W. Smith point out, casino capitalism creates a culture of cruelty: “its horrific effects on individuals-death, illness, suffering, greater poverty, and loss of opportunity, productive lives, and money.”[iii]

But it does more by crushing any viable notion of the common good and public life by destroying “the bonds that hold us together.”[iv] Under casino capitalism, the spaces, institutions, and values that constitute the public are now surrendered to powerful financial forces and viewed simply as another market to be commodified, privatized and surrendered to the demands of capital. With religious and market-driven zealots in charge, politics becomes an extension of war; greed and self-interest trump any concern for the well-being of others; reason is trumped by emotions rooted in absolutist certainty and militaristic aggression; and skepticism and dissent are viewed as the work of Satan.

If the Republican candidacy race of 2012 is any indication, then political discourse in the United States has not only moved to the right—it has been introducing totalitarian values and ideals into the mainstream of public life. Religious fanaticism, consumer culture, and the warfare state work in tandem with neoliberal economic forces to encourage privatization, corporate tax breaks, growing income and wealth inequality, and the further merging of the financial and military spheres in ways that diminish the authority and power of democratic governance.[v] Neoliberal interests in freeing markets from social constraints, fueling competitiveness, destroying education systems, producing atomized subjects, and loosening individuals from any sense of social responsibility prepare the populace for a slow embrace of social Darwinism, state terrorism, and the mentality of war — not least of all by destroying communal bonds, dehumanizing the other, and pitting individuals against the communities they inhabit.

Totalitarian temptations now saturate the media and larger culture in the language of austerity as political and economic orthodoxy. What we are witnessing in the United States is the normalization of a politics that exterminates not only the welfare state, and the truth, but all those others who bear the sins of the Enlightenment — that is, those who refuse a life free from doubt. Reason and freedom have become enemies not merely to be mocked, but to be destroyed. And this is a war whose totalitarian tendencies are evident in the assault on science, immigrants, women, the elderly, the poor, people of color, and youth.

What too often goes unsaid, particularly with the media’s focus on inflammatory rhetoric, is that those who dominate politics and policymaking, whether Democrats or Republicans, do so largely because of their disproportionate control of the nation’s income and wealth. Increasingly, it appears these political elite choose to act in ways that sustain their dominance through the systemic reproduction of an iniquitous social order. In other words, big money and corporate power rule while electoral politics are rigged. The secrecy of the voting booth becomes the ultimate expression of democracy, reducing politics to an individualized purchase—a crude form of economic action. Any form of politics willing to invest in such ritualistic pageantry only adds to the current dysfunctional nature of our social order, while reinforcing a profound failure of political imagination. The issue should no longer be how to work within the current electoral system, but how to dismantle it and construct a new political landscape that is capable of making a claim on equity, justice, and democracy for all of its inhabitants. Obama’s once inspiring call for hope has degenerated into a flight from responsibility.

The Obama administration has worked to extend the policies of the George W. Bush administration by legitimating a range of foreign and domestic policies that have shredded civil liberties, expanded the permanent warfare state, and increased the domestic reach of the punitive surveillance state. And if Romney and his ideological cohorts, now viewed as the most extremists faction of the Republican Party, come to power, surely the existing totalitarian and anti-democratic tendencies at work in the United States will be dangerously intensified.

History

Casino capitalism can probably be more properly called financial corporatism. While the key idea of corporatism: that political actors are not individual people, but some associations and first of all corporations (which are officially considered to be "persons" and have rights) and trade unions, remains intact, financial corporatism is different from classic corporatism in several major ways:

Historically corporatism in various modifications became dominant social system after WWII and defeated "command socialism" as was implemented in the USSR. Here is an instructive review of corporatism history (The Economic System of Corporatism):

In the last half of the 19th century people of the working class in Europe were beginning to show interest in the ideas of socialism and syndicalism. Some members of the intelligentsia, particularly the Catholic intelligentsia, decided to formulate an alternative to socialism which would emphasize social justice without the radical solution of the abolition of private property. The result was called Corporatism. The name had nothing to do with the notion of a business corporation except that both words are derived from the Latin word for body, corpus.

The basic idea of corporatism is that the society and economy of a country should be organized into major interest groups (sometimes called corporations) and representatives of those interest groups settle any problems through negotiation and joint agreement. In contrast to a market economy which operates through competition a corporate economic works through collective bargaining. The American president Lyndon Johnson had a favorite phrase that reflected the spirit of corporatism. He would gather the parties to some dispute and say, "Let us reason together."

Under corporatism the labor force and management in an industry belong to an industrial organization. The representatives of labor and management settle wage issues through collective negotiation. While this was the theory in practice the corporatist states were largely ruled according to the dictates of the supreme leader.

One early and important theorist of corporatism was Adam Müller, an advisor to Prince Metternich in what is now eastern Germany and Austria. Müller propounded his views as an antidote to the twin dangers of the egalitarianism of the French Revolution and the laissez faire economics of Adam Smith. In Germany and elsewhere there was a distinct aversion among rulers to allow markets to function without direction or control by the state. The general culture heritage of Europe from the medieval era was opposed to individual self-interest and the free operation of markets. Markets and private property were acceptable only as long as social regulation took precedence over such sinful motivations as greed.

Coupled with the anti-market sentiments of the medieval culture there was the notion that the rulers of the state had a vital role in promoting social justice. Thus corporatism was formulated as a system that emphasized the positive role of the state in guaranteeing social justice and suppressing the moral and social chaos of the population pursuing their own individual self-interests. And above all else, as a political economic philosophy corporatism was flexible. It could tolerate private enterprise within limits and justify major projects of the state. Corporatism has sometimes been labeled as a Third Way or a mixed economy, a synthesis of capitalism and socialism, but it is in fact a separate, distinctive political economic system.

Although rulers have probably operated according to the principles of corporatism from time immemorial it was only in the early twentieth century that regimes began to identify themselves as corporatist. The table below gives some of those explicitly corporatist regimes.

Corporatist Regimes of the Early Twentieth Century
System Name Country Period Leader
National Corporatism Italy 1922-1945 Benito Mussolini
Country, Religion, Monarchy Spain 1923-1930 Miguel Primo de Rivera
National Socialism Germany 1933-1945 Adolph Hitler
National Syndicalism Spain 1936-1973 Francisco Franco
New State Portugal 1932-1968 Antonio Salazar
New State Brazil 1933-1945 Getulio Vargas
New Deal United States 1933-1945 Franklin Roosevelt
Third Hellenic Civilization Greece 1936-1941 Ioannis Metaxas
Justice Party Argentina 1943-1955 Juan Peron

In the above table several of the regimes were brutal, totalitarian dictatorships, usually labeled fascist, but not all the regimes that had a corporatist foundation were fascist. In particular, the Roosevelt New Deal despite its many faults could not be described as fascist. But definitely the New Deal was corporatist. The architect for the initial New Deal program was General Hugh Johnson. Johnson had been the administrator of the military mobilization program for the U.S. under Woodrow Wilson during World War I. It was felt that he did a good job of managing the economy during that period and that is why he was given major responsibility for formulating an economic program to deal with the severe problems of the Depression. But between the end of World War I and 1933 Hugh Johnson had become an admirer of Mussolini's National Corporatist system in Italy and he drew upon the Italian experience in formulating the New Deal.

It should be noted that many elements of the early New Deal were later declared unconstitutional and abandoned, but some elements such as the National Labor Relations Act which promoted unionization of the American labor force are still in effect. One part of the New Deal was the development of the Tennessee River Valley under the public corporation called the Tennessee Valley Authority (TVA). Some of the New Dealer saw TVA as more than a public power enterprise. They hoped to make TVA a model for the creation of regional political units which would replace state governments. Their goal was not realized. The model for TVA was the river development schemes carried out in Spain in the 1920's under the government of Miguel Primo de Rivera. Jose Antonio Primo de Rivera, the son of Miguel Primo de Rivera, was the founder of Franco's National Syndicalism.

Corporatist regime typically promote large governmental projects such as TVA on the basis that they are too large to be funded by private enterprise. In Brazil the Vargas regime created many public enterprises such as in iron and steel production which it felt were needed but private enterprise declined to create. It also created an organized labor movement that came to control those public enterprises and turned them into overstaffed, inefficient drains on the public budget.

Although the above locates the origin of corporatism in 19th century France it roots can be traced much further back in time. Sylvia Ann Hewlett in her book, The Cruel Dilemmas of Development: Twentieth Century Brazil, says,

Corporatism is based on a body of ideas that can be traced through Aristotle, Roman law, medieval social and legal structures, and into contemporary Catholic social philosophy. These ideas are based on the premise that man's nature can only be fulfilled within a political community.
..........
The central core of the corporatist vision is thus not the individual but the political community whose perfection allows the individual members to fulfill themselves and find happiness.
...............
The state in the corporatist tradition is thus clearly interventionist and powerful.

Corporatism is collectivist; it is a different version of collectivism than socialism but it is definitely collectivist. It places some importance on the fact that private property is not nationalized, but the control through regulation is just as real. It is de facto nationalization without being de jure nationalization.

Although Corporatism is not a familiar concept to the general public, most of the economies of the world are corporatist in nature. The categories of socialist and pure market economy are virtually empty. There are only corporatist economies of various flavors.

These flavors of corporatism include the social democratic regimes of Europe and the Americas, but also the East Asian and Islamic fundamentalist regimes such as Taiwan, Singapore and Iran. The Islamic socialist states such as Syria, Libya and Algeria are more corporatist than socialist, as was Iraq under Saddam Hussain. The formerly communist regimes such as Russia and China are now clearly corporatist in economic philosophy although not in name.

The concept of Quite Coup

The term "Quiet coup" which means the hijacking of the political power in the USA by financial oligarchy was introduced by Simon H. Johnson, a British-American economist, who currently is the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. From March 2007 through the end of August 2008, he was Chief Economist of the International Monetary Fund. The term was introduced in his article in Atlantic magazine, published in May 2009(The Quiet Coup - Simon Johnson - The Atlantic). Which opens with a revealing paragraph:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government

The wealth of financial sector gave it unprecedented opportunities of simply buying the political power iether directly or indirectly (via revolving door mechanism):

Becoming a Banana Republic

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies — lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits — such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight — a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

He further researched this theme in his book 2010 book 13 Bankers The Wall Street Takeover and the Next Financial Meltdown  (ISBN 978-0307379054), coauthored with James Kwak. They also founded and regularly contributes to the economics blog The Baseline Scenario. See also History of Casino Capitalism

The net effect of the ideological counter-revolution based on market fundamentalism ideology was that it restored the power of financial oligarchy typical for Gilded Age. As Simon Johnson argues that was partially done by subverting regulators and that oversize institutions always disproportionately influence public policy:

The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the "efficiency costs" of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths

To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy "stress scenario" that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump "cannot be as bad as the Great Depression." This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

It is pretty interesting to see how financial oligarchy filters information provided to the population to fit their biases. For example, the key facts about repeal of Glass-Steagall law  (BTW Joe Biden voted for it) mostly hidden from the public: 

Commodity Futures Trading Commission — under the leadership of Mr. Gramm’s wife, Wendy — had approved rules in 1989 and 1993 exempting some swaps and derivatives from regulation. In December 2000, the Commodity Futures Modernization Act was passed as part of a larger bill by unanimous consent after Senator Gramm dominated the Senate debate...

"He was the architect, advocate and the most knowledgeable person in Congress on these topics," Mr. Donovan said. "To me, Phil Gramm is the single most important reason for the current financial crisis."

"The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis, including the now $167 billion taxpayer rescue of A.I.G.," Christopher Cox, the chairman of the S.E.C. and a former congressman, said Friday.

But you will never find discussion of flaws and adverse consequences Phil Gram (or Greenspan for a change) initiatives in Heritage Foundation and other right-wing think tanks publications.

Stages of transformation

So what we are experiencing is a the completion of the transformation of one phase of capitalism to another. It happened in stages:

  1. Manufacturing stagnated and can't provide the "decent" rate of growth. Competition from re-built Europe and Asian markets severely stressed the US manufacturing. due to competition return of capital dropped and in several industries became negative.
     

  2. Computers brought innovations into financial markets. They make possible real time trading of induces like S&P500, complex financial instruments like derivatives, etc. Later they enables superfast trading (HFT). All those instruments dramatically increased the possibilities of extracting the rent by financial institutions from the society.
     

  3. Globalization kicked in due to new opportunities offered by high speed global communications (Internet). And that is not limited to outsourcing. Due to globalization the sheer size of the financial markets increased to the extent that they started to represent a different, new transnational phenomena allowing new types of redistribution of wealth to be practiced. Integration of Russian elite (oligarchs) is just one example of this process. In case of pro-western oligarchs (fifth column) West went to significant length to protect them and their racket (Mikhail Khodorkovsky - Wikipedia,)
     

  4. Commercial banks turned into investment banks to exploit this opportunity.
     

  5. Financial sector completely corrupted academic science converting most economists to pay prostitutes which serve their interests.
     

  6. Collapse of the USSR provided the financial sector major shoot in the arm and a golden, once in century opportunity to finance new half-billion consumers and stole for a penny on a dollar huge industrial assets and natural resources as well as put most of those countries in the debt (Latin-Americanization of xUSSR space). Harvard Mafia (with some support from London) did the bidding of western banks in xUSSR space. As more becomes known about the laundering of Russian money in Western banks, many in the United States will likely try to hide behind stories of faraway organized crime. But U.S. policy toward Russia has contributed to that country's sorry conditions--with the Harvard Institute for International Development's Russia project (HIID) playing a major role (Harvard's 'Best and Brightest' Aided Russia's Economic Ruin ). Professor Jeffery Sacks provided a bogus idea of "shock therapy" to achieve spectacular for Western banks result. As a result all xUSSR space became new Latin America with typical for Latin America problems like huge level of inequality, prostitution, child poverty, and prominent role of organized crime.
     

  7. Banks became dominant political force on western societies with no real counterbalance from other parts of the elite. The first president completely subservient to banking elite was elected in the USA in 1992. Bill Clinton regime lasted eight years and along with economic rape of xUSSR space in best colonial powers tradition, it removed what was left of financial regulations after the flurry of deregulation of the early 1980s. And they behaved as an occupying force not only in xUSSR space but in the USA as well. They deprived workers out of their jobs, they abolished the US pension system as it impede playing with population money and replaced in with widely inadequate 401K plans. They deprived municipalities out of their revenues and assets, while municipalities became just a den of bond traders looking for then next mark which give them the ability to put municipalities deeper in debt.

  8. Newly acquired political power of financial elite speeded the shift to bank "self-regulation" created huge shadow banking system which dwarf "official" under the smoke screen of "free-market" propaganda and PR from a coterie of corrupts academics (Chicago Scholl, Harvard Mafia, etc) . It engaged in pursuit of short term profits and self-enrichment of top brass which became new elite by-and-large displacing not only the old one, but also the newly minted IT elite of dot-com boom. Using newly acquired power financial elite remove all regulations that hamper their interests. Glass-Steagall was repealed at the last days of Clinton presidency, financial derivatives became unregulated.

  9. Deindustrialization kicked in. As financial speculation proved to be much more profitable to other activities deindustrialization kicked in the USA as the financial center of the world. Outsourcing which first was limited to manufacturing jobs now extent its reach on IT and decimate previously profitable sector and its export potential.

  10. Externalities can no longer be suppressed and economics became unstable. Growth of inequality, job insecurity, as well as frequency of financial crises were natural consequences of financialization of the economy. They create huge imbalances, like bubble in residential real estate which was blown with the help and full support of the USA government as a way to overcome dot-com crisis consequences.

  11. Debt crisis strikes. Growth of debt became unsustainable and produces the financial crisis of enormous proportions. By their reckless policies and greed financial sector caused huge financial crisis of 2008 and now they are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go in fire sales at prices rigged by twenty-something largest banks, the most corrupt institutions the world has ever known.

  12. Devastating "local" wars became "new normal". Due to financial crisis, the overconsumption in western economies came under threat. Debt expansion which led to overconsumption within the western economies affected (or infected) by financialization. To sustain the current standard of living financial expansion became the necessity. It took the form of a competition for spheres of influence in the area of energy supplies, which we see in post USSR space, Iraq, Libya and elsewhere. And central banks play critical role in financing wars. After all Banks of England was created with this exact purpose.

I think by 2008 when the second major financial crisis hit the USA, the transformation on the USA economy into casino capitalism, which is essentially implementation of neoliberal doctrine (or more correctly the US brand of corporatism) was by-and-large complete.

In short we are living in a new politico-economic system in which financial capital won victory over both labor and industrial capital. We might not like what we got, but financial elite is now a new ruling class and this fact is difficult to dispute. As a result. instead of the robber barons of the early 20th century (some of whom actually created/consolidated new industries), we have the top executives from investment banks, insurers and mortgage industry who represent a new Rentier class, much like old aristocracy.

They are living off parasitic monopolization of access to any (physical, financial, intellectual, etc.) kind of property and gaining significant amount of profit without contribution to society (see Rentier capitalism which is a very fuzzy term for neoliberal model of capitalism).

Casino Capitalism as a result of stagnation of industrial manufacturing

Stagnation of industrial manufacturing droved up financial speculation as the method to compensate for falling rate on return on capital. This stagnation became prominent during Reagan administration (which started the major shift toward neoliberalism), although signs of it were present from early 60th.

For example Chicago which was a manufacturing center since 1969 lost approximately 400K manufacturing jobs which were replaced mainly by FIRE-related jobs, In 1995 over 22% of those employed by FIRE industries (66K people) were working in executive and managerial positions. Another 17% are in marketing, sales and processional specialty occupations (computer system analysts, PR specialists, writer and editors).

Those changes in the structure of employment had several consequences:

  1. The stagnation of the underlying economy meant that capitalists were increasingly dependent on the growth of finance to preserve and enlarge their money capital.
  2. The financial superstructure of the capitalist economy could not expand independently of its base -- underlying productive economy — hence the bursting of speculative bubbles became a recurrent and growing problem.
  3. Financialization could never overcome stagnation of industrial production. It is just an opium for rich, not a structural adjustment of the stagnation-prone economy. But like addition to narcotics does to human body it does tremendous damage to real economy.
  4. Rapid increase in inequality is necessary to sustain the appetites of the elite in the system with fixed size of the pie. Politico-economic conditions might became even more unfavorable for labor. Stagnation of industrial production mean shrinking pie, which necessitates redistribution of wealth in favor of a new, all-powerful financial Rentier class. This redistribution resulted in partial wipe-out of large swats of middle class. For the past three decades, America has steadily converted itself into a nation of haves (as Bush II quipped "This is an impressive crowd -- the haves and the have mores! Some people call you the elite -- I call you my base". ) and have-nots. The cost of a college education rises rapidly at a time when wages for skilled labor stagnate, so access to college became against discriminated in favor of upper class of the society. Repressive apparatus and ideological brainwashing are too strong to mount effective resistance.

The key to understanding of Casino Capitalism is that it was a series of government decisions (or rather non-decisions) that converted the state into neoliberal model. In other words casino capitalism has distinct "Government property" mark. It was the USA elite, which refused to act responsibly in the face of changing economic conditions resulting from its own actions, and instead chose to try to perpetuate, by whatever means it had at its disposal, the institutional advantages of dollar as a reserve currency which it had vis-à-vis its main economic rivals and grab as large part of the world economic pie as it can. And this power grab was supported first of all by the role of dollar as currency in which oil is traded.

There might be some geo-strategically motives as well as the US elite in late 80th perceived that competitiveness is slipping out of the USA and the danger of deindustrialization is real. Many accuse Reagan with the desire to ride dollar status as a world reserve currency (exorbitant privilege) until the horse is dead. That's what real cowboys do in Hollywood movies... But the collapse of the main rival, the USSR vindicated this strategy and give a strong short in the arm to financialization of the economy. Actually for the next ten years can be called a triumphal ascend of financialization in the USA.

Dominance of FIRE industries clustered up and in recent years reached in the USA quite dramatic proportions. The old Bolsheviks saying "When we say Lenin we mean the Party and when we say the Party we mean Lenin" now can be reworded: "Now it we say US banks, we mean the US government and vise versa if we say US government we mean US banks".

According to the Center for Responsive Politics, the FIRE sector was and is the biggest contributor to federal candidates in Washington. Companies cannot give directly, so they leave it to bundlers to solicit maximum contributions from employees and families. They might have been brought down to earth this year, but they’ve given like Gods: Goldman Sachs, $4.8 million; Citigroup, $3.7 million; J.P. Morgan Chase & Co., $3.6 million; Merrill Lynch, $2.3 million; Lehman Brothers, $2.1 million; Bank of America, $2.1 million. Some think the long-term effect of such contributions to individual candidates was clear in the roll-call votes for the bailout.

Take the controversial first House vote on bailout of major banks on Sept. 29, 2008. According to CRP, the "ayes" had received 53 percent more contributions from FIRE since 1989 than those who voted against the bill, which ultimately failed 228 to 205. The 140 House Democrats who voted for the bill got an average of $188,572 in this election cycle, while the 65 Republicans backing it got an average of $185,461 from FIRE—about 23 percent more than the bill’s opponents received. A tinkered bill was passed four days later, 263 to 171.

According to the article Fire Sale (The American Conservative) half of Obama’s top ten contributors, together giving him nearly $2.2 million, are FIREmen. The $13 million contributed by FIRE executives to Obama campaign is probably an undercount. Democratic committee leaders are also dependent of FIRE contributions. The list includes Sen. Dodd ( please look at Senator Dodd's top donors for 2007-8 on openSecrets.org ) and Sen. Chuck Schumer ($12 million from FIRE since 1989), Rep. Barney Frank ($2.5 million), and Rep. Charlie Rangel ($4 million, the top recipient in the House). All of them have been accused of taking truckloads of contributions while failing to act on the looming mortgage crisis. Dodd finally pushed mortgage reform last year but by then as his hometown paper, The Hartford Courant stated, "the damage was done."

Casino Capitalism and Financial Instability

At the same time rise of financial capital dramatically increased instability. An oversized financial sector produces instability due to multiple positive feedback loops. In this sense we can talk about Financial Sector Induced Systemic Instability of Economy. The whole society became "House of cards", "Giant Enron" and "extension of Las Vegas". Reckless management, greed and out-right stupidity in playing derivatives games was natural consequence of the oversized financial sector, not just a human folly. In a way it was dramatic manifestation of the oversized financial sector negative influence of the economy. And in 2008 it did brought out economy to the brink of destruction. Peak oil added to suffocating effect on the economy of reckless gambling (and related debts) of financial sector producing the economic calamity that rivals Great Depression. Also, like Socialism, Casino Capitalism demands too much of its elite. And in reality, the financial elite much like Bolsheviks elite, is having its own interests above the interests of the society.

As Kevin Phillips noted "In the United States, political correctness, religious fundamentalism, and other inhibitions sometimes dumb down national debate". And the same statement is true for financial elite that became the center of power under the Casino Capitalism. Due to avalanche of greed the society became one giant Enron as money that are made from value addition in the form of manufacturing fade in significance to the volume of the money that is made from shuffling money around. In other was the Wall Street's locked USA in the situation from which there is no easy exit.

Self-reinforcing ‘positive’ feedback loops prevalent in Casino Capitalism trigger an accelerating creation of various debt instruments, interest of which at some point overwhelm the system carrying capacity. Ability to lend against good collateral is quickly exhausted. At some point apparently there is no good collateral against which lending freely was possible, even at high rates. This means that each new stage of financial innovation involves scam and fraud, on increasing scale. In other words Ponzi economy of "saving and loans" is replaced with Madoff economy.

Whether you shift the resulting huge private debt to public to increase confidence or not, the net result is of this development of events is a crisis and a huge debt that society needs to take. Actually the debt bubble in 2008 can only be compared to the debt bubble of 1933. The liquidation of Bear Sterns and Lehman was only a start of consolidation of finances and we need to find something that replace financial sector dominance in the national economy. It would be nice is some technological breakthrough happened which would lift the country out of this deep hole.

See Financial Sector Induced Systemic Instability of Economy for more details.

Neoliberalism as the Ideology of Casino Capitalism

Like Bolshevism was marked by deification of teaching of Marx and Lenin, converting them into pseudo-religious doctrine, the Casino Capitalism has its own deified ideological doctrine. It is the ideology of Neoliberalism. The latter as an ideology and an agenda seeks to topple democratic capitalism and replace it with a de facto unaccountable autocratic government which serves as channel of a wealth transfer from the public to a rentier elite. In a way it is a spectacular example of a successful (in a very negative sense) pseudo-religious doctrine.

Addiction of the societies to disastrous politico-economical doctrines are similar to addictions to alcohol and drugs in individuals. It is not easy to recover and it takes a long, long time and a lot of misery. As dissolution of the USSR aptly demonstrated not all societies can make it. In this case the USSR elite (nomenklatura) simply shed the old ideology as it understood that it will be better off adopting ideology of neoliberal capitalism; so it was revolution from above.  this abrupt switch created chaos in economics (which was applauded by Washington which under Clinton administration adopted the stance the Carnage needs to be destroyed and facilitated the process), criminal privatization of major industries, and pushed into object poverty the 99% of population of those countries. For some period under "drunk Yeltsyn" Russia sees to exist as an independent country and became a vassal of Washington.

This also means that "society at large" did not had effective brakes to the assent of financial plutocracy (aka financial oligarchy).  I would add to this the computer revolution and internet that made many financial transaction qualitatively different and often dramatically cheaper that in previous history. Computers also enabled creation of new financial players like mutual funds (which created a shadow banking system with their bond funds) , hedge funds, exchange-traded funds (ETFs), as well as high-frequency trading and derivatives.

From the historical view Reaganomics also can be considered to be the US flavor of Lysenkoism with economics instead of genetics as a target. Here is how Reaganomics is defined in Wikipedia

Reaganomics (a portmanteau of "Reagan" and "economics") refers to the economic policies promoted by United States President Ronald Reagan. The four pillars of Reagan's economic policy were to:[1]
  1. reduce the growth of government spending,
  2. reduce marginal tax rates on income from labor and capital,
  3. reduce government regulation of the economy,
  4. control the money supply to reduce inflation.

In attempting to cut back on domestic spending while lowering taxes, Reagan's approach was a departure from his immediate predecessors.

Reagan became president during a period of high inflation and unemployment (commonly referred to as stagflation), which had largely abated by the time he left office.

Please not that the Number 1 idea ("reduce government spending") was essentially a scam, a smoke screen designed to attract Rednecks as a powerful voting block. In a way this was a trick similar to one played by Bolsheviks in Russia with its "worker and peasants rule" smokescreen which covered brutal dictatorship. In reality all administrations which preached Reagonomics (including Clinton's) expanded the role of state and government spending. The number two was applied by-and-large to top 1%. The number three means deregulation in the interests of financial oligarchy and dismantling all social program that hamper profit of the latter (including privatizing of Social Security). The number fours is a scam, in the same sense as number one. As soon as financial institutions get in trouble, money are printed as if there is no tomorrow.

While the essence of Reagonomics was financial deregulation, the other important element was restoring the Gilded Age level of power of financial oligarchy which influence was diminished by FDR reforms. In this sense we can say that Reagan revolution was essentially a counter-revolution: an attempt to reverse the New Deal restrictions on financial sector and restore its dominance in the society.

Like it was the case in Bolshevism the ideology was developed and forced upon the society by a very small group of players. The key ideas of Casino Capitalism were formulated and implemented by Reagan administration with some contribution by Nixon (the role of rednecks aka "moral majority", "silent majority" as an important part of republican political base, which can be attracted to detrimental to its economic position policies by the smoke screen of false "moral" promises).

It was supported by each president after Reagan (paradoxically with Clinton having the most accomplished record -- he was the best Republican President in a very perverted way). Like in case of Lysenkoism opponents were purged and economic departments of the country were captured by principless careerists ready to tow the party line for personal enrichment. Like in case of Bolshevism, many of those special breed of careerists rotated from Republican Party into Fed and other government structures. A classic example of compulsive careerists that were used by finance sector to promote its interests was Alan Greenspan.

One of the key ideas of Reaganomics was the rejection of the sound approach that there should be a balance between too much government regulation and too little and that government role is important for smooth functioning of the market. In this area Reagan and its followers can be called Anarchists and their idea of 'free market" is a misnomer that masks the idea of "anarchic market" (corporate welfare to be exact -- as it was implemented). Emergence of corporate welfare Queens such as GS, Citi, AIG, are quite natural consequence of Reaganomics.

Reaganomics was a the US flavor of Lysenkoism with economics instead of generics as a target... It can and should be called Economic Lysenkoism.

The most interesting part of Reaganomics was that the power of this ideology made it possible to conditioned "working class" and middle class to act against their own economic interests. It helped to ensure the stagnation of wages during the whole 25 years period, which is close to what Soviets managed to achieve with working class of the USSR, but with much more resentment. This makes it in many ways very similar to Bolshevism as a whole, not just Lysenkoism (extremes meet or in less flattering way: "history repeats, first as a tragedy, then as farce).

Along with the term Reaganimics which implicitly stresses the deregulation, the other close term "market fundamentalism" is often used. Here is how market fundamentalism is defined (Longview Institute):

Market Fundamentalism is the exaggerated faith that when markets are left to operate on their own, they can solve all economic and social problems. Market Fundamentalism has dominated public policy debates in the United States since the 1980's, serving to justify huge Federal tax cuts, dramatic reductions in government regulatory activity, and continued efforts to downsize the government’s civilian programs.

Some level of government coercion (explicit or implicit ) is necessary for proper labeling of any pseudo-scientific theory with the term Lysenkoism. This holds true for both Market Fundamentalism (after all Reagan revolution was "revolution from above" by financial oligarchy and for financial oligarchy and hired guns from academia just do what powers that be expected) and, especially, Supply side economic. The political genius of those ideas is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

In this sense the Republican Party played the role very similar to the Communist Party of the USSR.

For example supply side economics was too bizarre and would never survive without explicit government support. This notion is supported by many influential observers. For example, in the following comment for Krugman article (Was the Great Depression a monetary phenomenon):

Market fundamentalism (neoclassical counter-revolution — to be more academic) was more of a political construct than based on sound economic theory. However, it would take a while before its toxic legacy is purged from the economics departments. Indeed, in some universities this might never happen.

Extreme deregulation and extreme regulation (Brezhnev socialism) logically meets and both represent a variant of extremely corrupt society that cannot be sustained for long (using bayonets as in the case of USSR or using reserve currency and increasing leverage as is the case of the USA). In both cases the societies were economically and ideologically bankrupt at the end.

Actually, elements of market fundamentalism looks more like religious doctrine than political philosophy — and that bonds its even closer to Lysenkoism. In both cases critics were silenced with the help of the state. It is interesting to note that Reaganomics was wiped into frenzy after the dissolution of the USSR, the country which gave birth to the term of Lysenkoism. In a way the last act of the USSR was to stick a knife in the back of the USA. As a side note I would like to stress that contrary to critics the USSR was more of a neo-feudal society with elements of slavery under Stalin. Gulag population were essentially state slaves; paradoxically a somewhat similar status is typical for illegal immigrants in industrialized countries. From this point of view this category of "state slaves" is generally more numerous that gulag inmates. Prison population also can be counted along those lines.

It look like either implicitly or explicitly Reagan's bet was on restoration of gilded Age with its dominance of financial oligarchy, an attempt to convert the USA into new Switzerland on the "exorbitant privilege" of dollar status as the global fiat currency.

Casino Capitalism is characterized by political dominance of FIRE industries (finance, insurance, and real estate) and diminished role of other and first of all manufacturing industries. It was also accompanied by the drastic growth of inequality (New Gilded Age). Its defining feature is "the triumph of the trader in assets over the long-term producer" in Martin Wolf's words.

Voodoo economic theories

Attempts of theoretical justification of Economic Lysenkoism fall into several major categories:

Those can be called pillars, cornerstones of Economic Lysenkoism. Each of the deserves as separate article (see links above).

Historically especially important was Chicago school of market fundamentalism promoted pseudo-scientific theories of Milton Freedman (Chicago School) as well as supply side economics.

Collapse of the USSR as ideological justification of Casino Capitalism superiority

The huge boost of Casino Capitalism was given by the collapse of the USSR in 1991. That gave a second life to Reagan era. Collapse of the USSR was used as a vindication of market fundamentalism. After it New Deal regulations were systematically destroyed. Dumped down variants of Nietzsche philosophy like bastardatized variant promoted by Russian emigrant became fashionable with an individual "creative" entrepreneur as a new Übermensch, which stands above morality.

"The word Übermensch [designates] a type of supreme achievement, as opposed to 'modern' men, 'good' men, Christians, and other nihilists ... When I whispered into the ears of some people that they were better off looking for a Cesare Borgia than a Parsifal, they did not believe their ears."[9] Safranski argues that the combination of ruthless warrior pride and artistic brilliance that defined the Italian Renaissance embodied the sense of the Übermensch for Nietzsche. According to Safranski, Nietzsche intended the ultra-aristocratic figure of the Übermensch to serve as a Machiavellian bogeyman of the modern Western middle class and its pseudo-Christian egalitarian value system.[10]

Brainwashing

The instability and volatility of active markets can devalue the economic base of real lives, or in more macro-scenarios can lead to the collapse of national and regional economies. In a very interesting and grotesque way it also incorporates the key element of Brezhnev Socialism in everyday life: huge manipulation of reality by mass media to the extend that Pravda and the USSR First TV Channel look pretty objective in comparison with Fox news and Fox controlled newspapers. Complete poisoning of public discourse and relying on the most ignorant part of the population as the political base (pretty much reminiscent of how Bolsheviks played "Working Class Dictatorship" anti-intellectualism card; it can be called "Rednecks Dictatorship").

The "heroes" or transformation of US economy to casino capitalism model

While transformation to casino capitalism was an objective development, there were specific individuals who were instrumental in killing New Deal regulations. We would single out the following twelve figures:

  1. Ronald Reagan (although first steps toward casino capitalism were made under Carter).
  2. Milton Friedman
  3. Alan Greenspan
  4. Phil Gramm
  5. Robert Rubin
  6. Larry Summers
  7. Helicopter Ben
  8. Bush II
  9. Bill Clinton
  10. Sandy Weill
  11. Jeffrey Sachs with his "shock therapy" racket
  12. Martin Feldstein

There is no question that Reagan and most of his followers (Greenspan, Rubin, Phil Gramm, etc) were rabid radicals blinded by ideology. But they were radicals of quite different color then FDR with disastrous consequences for society. Here again the analogy with Bolsheviks looms strong. In a way, they can be called financial terrorists inflicting huge damage on the nation and I wonder if RICO can be use to prosecute at least some of them.

In Bailout Nation (Chapter 19) Barry Ritholtz tried to rank major players that led country into the current abyss:

1. Federal Reserve Chairman Alan Greenspan
2. The Federal Reserve (in its role of setting monetary policy)
3. Senator Phil Gramm
4-6. Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings (rating agencies)
7. The Securities and Exchange Commission (SEC)
8-9. Mortgage originators and lending banks
10. Congress
11. The Federal Reserve again (in its role as bank regulator)
12. Borrowers and home buyers
13-17. The five biggest Wall Street firms (Bear Stearns, Lehman Brothers, Merrill Lynch,Morgan Stanley, and Goldman Sachs) and their CEOs
18. President George W. Bush
19. President Bill Clinton
20. President Ronald Reagan
21-22. Treasury Secretary Henry Paulson
23-24. Treasury Secretaries Robert Rubin and Lawrence Summers
25. FOMC Chief Ben Bernanke
26. Mortgage brokers
27. Appraisers (the dishonest ones)
28. Collateralized debt obligation (CDO) managers (who produced the junk)
29. Institutional investors (pensions, insurance firms, banks, etc.) for
buying the junk
30-31. Office of the Comptroller of the Currency (OCC); Office of Thrift
Supervision (OTS)
32. State regulatory agencies
33. Structured investment vehicles (SIVs)/hedge funds for buying the junk

Early Researchers of Casino Capitalism

Hyman Minsky

Hyman Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt. He identified 3 types of borrowers that contribute to the accumulation of insolvent debt: Hedge Borrowers; Speculative Borrowers; and Ponzi Borrowers. That corresponds to three stages of Casino Capitalism of increasing fragility:

After the collapse of the USSR there were a lot of chest thumping of the status of America as a hyper power (American exceptionalism) and "end of history" where capitalism was supposed to reign supreme followed. But in 2000 the first moment to pay the piper arrives. It was postponed by Iraq war and housing bubble but reappeared in much more menacing form in 2008. It looks like in 2009 the USA arrived to the a classic Minsky moment with high unemployment rate and economy suppressed by (and taken hostage) by Ponzi finance institutions which threaten the very survival of our system and way of life.

The shift from speculative toward Ponzi finance was speed up by increased corruption of major players.

"As Minsky observed, capitalism is inherently unstable. As each crisis is successfully contained, it encourages greater speculation and risk taking in borrowing and lending. Financial innovation makes it easier to finance various schemes. To a large extent, borrowers and lenders operate on the basis of trial and error. If a behavior is rewarded, it will be repeated. Thus stable periods naturally lead to optimism, to booms, and to increasing fragility.

A financial crisis can lead to asset price deflation and repudiation of debt. A debt deflation, once started, is very difficult to stop. It may not end until balance sheets are largely purged of bad debts, at great loss in financial wealth to the creditors as well as the economy at large."

Susan Strange

For Strange the speed at which computerized financial markets work combined with new much larger size and their now, near-universal pervasiveness is an important qualitative change. One of the side effects of this change is that volatility extends globally. Approximately $1.5 trillion dollars are invested daily as foreign transactions. It is estimated that 98 per cent of these transactions are speculative. In comparison with this casino Las Vegas looks like a aborigine village in comparison with Manhattan.

Notes:

Susan Strange (June 9, 1923 - October 25, 1998) was a British academic who was influential in the field of international political economy. Her most important publications include Casino Capitalism, Mad Money, States and Markets and The retreat of the State: The Diffusion of Power in the World Economy.

For a quarter of a century, Susan Strange was the most influential figure in British international studies. She held a number of key academic posts in Britain, Italy and Japan. From 1978 to 1988, she was Montague Burton Professor of International Relations at the London School of Economics and Political Science (LSE), the first woman to hold this chair and a professorial position in international relations at the LSE. She was a major figure in the professional associations of both Britain and the US: she was an instrumental founding member and first Treasurer of the British International Studies Association (BISA) [1] and the first female President of the International Studies Association (ISA) in 1995.

It was predominantly as a creative scholar and a forceful personality that she exercised her influence. She was almost single-handedly responsible for creating ‘international political economy’ and turning it into one of the two or three central fields within international studies in Britain, and she defended her creation with such robustness, and made such strong claims on its behalf, that her influence was felt—albeit not always welcomed—in most other areas of the discipline. She was one of the earliest and most influential campaigners for the closer integration of the study of international politics and international economics in the English language scholarship.

In the later period of her career, alongside the financial analyses offered in Casino Capitalism (the analysis in which she felt was vindicated by the South-East Asian financial crisis) and Mad Money, Strange's contributions to the field include her characterisation of the four different areas (production, security, finance and knowledge) through which power might be exercised in International Relations. This understanding of what she termed "structural power", formed the basis of her argument against the theory of American Hegemonic Decline in the early eighties.

Her analysis particularly in States and Markets focused on what she called the ‘market-authority nexus’, the see-saw of power between the market and political authority. The overall argument of her work suggested that the global market had gained significant power relative to states since the 1970s. This led her to dub the Westphalia system Westfailure. She argued that a ‘dangerous gap’ was emerging between territorially-bound nation states and weak or partial intergovernmental cooperation in which markets had a free hand which could be constructive or destructive.

John K. Galbraith

Among early critiques of casino capitalism was John K. Galbraith. He promoted a pretty novel idea that the major economic function of Governments is to strengthen countervailing powers to achieve some kind of balance between capital and labor. While unions are far from being perfect and his prediction did not materialize in view of sliding to corporatism it may well be that the renewed support of unions right efforts to organize could make a big contribution to a revised, post subprime/derivatives/shadow_banking crisis stage of capitalism.

His critique of Milton Freedman pseudoscience still has its value today.

As Joseph Stiglitz noted (CSMonitor, Dec 28, 2006):

...In many ways, Galbraith was a more critical observer of economic reality.

Driven to understand market realities

Galbraith's vivid depictions of the good, bad, and ugly of American capitalism remain a sorely needed reminder that all is not quite as perfect as the perfect market models – with their perfect competition, perfect information, and perfectly rational consumers – upon which so much of Friedman's analysis depended.

Galbraith, who cut his teeth studying agricultural economics, strove to understand the world as it was, with all the problems of unemployment and market power that simplistic models of competitive markets ignore. In those models, unemployment didn't exist. Galbraith knew that made them fatally flawed

... ... ...

In his early research, Galbraith attempted to explain what had brought on the Great Crash of 1929 – including the role of the stock market's speculative greed fed by (what would today be called) irrational exuberance. Friedman ignored speculation and the failure of the labor market as he focused on the failures of the Federal Reserve. To Friedman, government was the problem, not the solution.

What Galbraith understood, and what later researchers (including this author) have proved, is that Adam Smith's "invisible hand" – the notion that the individual pursuit of maximum profit guides capitalist markets to efficiency – is so invisible because, quite often, it's just not there. Unfettered markets often produce too much of some things, such as pollution, and too little of other things, such as basic research. As Bruce Greenwald and I have shown, whenever information is imperfect – that is, always – markets are inefficient; hence the need for government action.

Galbraith reminded us that what made the economy work so well was not an invisible hand but countervailing powers. He had the misfortune of articulating these ideas before the mathematical models of game theory were sufficiently developed to give them expression. The good news is that today, more attention is being devoted to developing models of these bargaining relationships, and to complex, dynamic models of economic fluctuations in which speculation may play a central role.

Government's role

While Friedman never really appreciated the limitations of the market, he was a forceful critic of government. Yet history shows that in every successful country, the government had played an important role. Yes, governments sometimes fail, but unfettered markets are a certain prescription for failure. Galbraith made this case better than most.

Galbraith knew, too, that people aren't just rational economic actors, but consumers, contending with advertising, political persuasion, and social pressures. It was because of his close touch with reality that he had such influence on economic policymaking, especially during the Kennedy-Johnson years.

Galbraith's penetrating insights into the nature of capitalism – as it is lived, not as it is theorized in simplistic models – has enhanced our understanding of the market economy. He has left an intellectual legacy for generations to come. And he has left a gap in our intellectual life: Who will stand up against the economics establishment to articulate an economic vision that is both in touch with reality and comprehensible to ordinary citizens?

Galbraith was vindicated in his belief that the only economics possible is political economics and as government is always an agent of dominant class it always mixed with politics. Krugman and Stiglitz both have eaten humble pie, because according to neoclassical economics the crises should not have happened. Both should now reread Galbraith's The Great Crash: 1929 (see also extracts). BTW it is interesting that in 1996 Paul Krugman criticized limitations of Galbright vision in the following way:

To be both a liberal and a good economist you must have a certain sense of the tragic--that is, you must understand that not all goals can be attained, that life is a matter of painful tradeoffs. You must want to help the poor, but understand that welfare can encourage dependency. You must want to protect those who lose their jobs, but admit that generous unemployment benefits can raise the long-term rate of unemployment. You must be willing to tax the affluent to help those in need, but accept that too high a rate of taxation can discourage investment and innovation.

To the free-market conservative, these are all arguments for government to do nothing, to accept whatever level of poverty and insecurity the market happens to produce. A serious liberal does not reply to such conservatives by denying that there are any trade-offs at all; he insists, rather, that some trade-offs are worth making, that helping the poor and protecting the unlucky may have costs but will ultimately make for a better society.

The revelation one gets from reading John Kenneth Galbraith's The Good Society is that Galbraith--who is one of the world's most celebrated intellectuals, and whom one would expect to have a deeper appreciation of the complexity of the human condition than a mere technical economist would -- lacks this tragic sense. Galbraith's vision of the economy is one without shadows, in which what is good for social justice always turns out to have no unfavorable side effects. If this vision is typical of liberal intellectuals, the ineffectuality of the tribe is not an accident: It stems from a deep-seated unwillingness to face up to uncomfortable reality.

Similar limited understanding of Galbright is demonstrated in London Times (cited from comment to Economist's View blog) :

Some motifs of Galbraith’s work have entered popular consciousness. Galbraith wrote of private opulence amid public squalor, illustrating it with a memorable metaphor of a family that travels by extravagant private car to picnic by a polluted river.

Yet while arguing for increased public expenditure on welfare, Galbraith gave scant attention to the limits of that approach. His writings perpetuate a debilitating weakness of modern liberalism: a reluctance to acknowledge that resources are scarce. In Galbraith’s scheme, said Herbert Stein, the former chairman of the Council of Economic Advisers: “The American people were only asked whether they wanted cleaner air and water . . . The answers to such questions seemed obvious — but they were not the right questions.”

Soros contribution to the understanding of growth of financial sector as source of new, global economic instability

This idea of "casino capitalism" as a driver of financial instability was developed further in the book The Crisis of Global Capitalism by George Soros (1998), who highlights the potential for disequilibrium in the financial system, and the inability of non-market sectors to regulate markets.

Although the insights of the Soros critique of global capitalism are scarcely new, they were articulated with such candor and accuracy that the book made a significant impact. The following is a sampling of Soros' insights.
  1. Unregulated financial markets are inherently unstable. Soros observes that, contrary to conventional economic theory, financial markets are not driven toward a relatively stable and rational price by the objective value assessment of such things as the soundness of a company's management, products, or record of profitability. Rather they are constantly driven away from equilibrium by the momentum of self-fulfilling expectations -- a rising stock price attracts buyers who further raise the price-to the point of collapse. The recent massive inflation and subsequent collapse in the price of the shares of unprofitable dot-com companies illustrates Soros' point.

    Bank lending also contributes to the instability, because the price of real and financial assets is set in part by their collateral value. The higher their market price rises the larger the loans banks are willing to make to their buyers to bid up prices. When the bubble bursts, the value of the assets plummets below the amount of the money borrowed against them. This forces banks to call their loans and cut back on the lending, which depresses asset prices and dries up the money supply. The economy then tanks-until credit worthiness is restored and a new boom phase begins.

  2. Financial markets are amoral by definition. Following Napoleon Bonaparte, Soros stressed that there is no meaningful place for individual moral behavior in the context of financial markets, because such behavior has no consequence other than to reduce the financial return to the ethical actor.

    When I bought shares in Lockheed and Northrop after the managements were indicted for bribery, I helped sustain the price of their stocks. When I sold sterling short in 1992, the Bank of England was on the other side of my transactions, and I was in effect taking money out of the pockets of British taxpayers. But if I had tried to take social consequences into account, it would have thrown off my risk-reward calculation, and my profits would have been reduced.

    Soros argues that if he had not bought Lockheed and Northrop, then somebody else would have, and Britain would have devalued sterling no matter what he did. "Bringing my social conscience into the decision-making process would make no difference in the real world; but it may adversely affect my own results." One can challenge the Soros claim that such behavior is amoral rather than immoral, but his basic argument is accurate. His understanding that it is futile to look to individual morality as the solution to the excesses of financial markets is all too accurate.

  3. Corporate employees are duty-bound to serve only corporate financial interests. Soros writes:

    Publicly owned companies are single-purpose organizations-their purpose is to make money. The tougher the competition, the less they can afford to deviate. Those in charge may be well-intentioned and upright citizens, but their room for maneuver is strictly circumscribed by the position they occupy. They are duty-bound to uphold the interests of the company. If they think that cigarettes are unhealthy or that fostering civil war to obtain mining concessions is unconscionable, they ought to quit their jobs. Their place will be taken by people who are willing to carry on.

    Though not specifically mentioned by Soros, this is why corporations were in the past (at least partially) excluded from the political processes (although it was never complete and it is well known fact that Crusades and Siege of Constantinople (1204) were financed by Genoese bankers upset by lack of access to the Byzantium markets). But at least formally other parts of the society can define their goals and the rules of the marketplace. They are incapable of distinguishing between private corporate interests and broader public interests. But that changed with the global dominance of corporatism.

  4. Financial markets are oblivious to externalities and are infected by "short-termism". Specifically the fact that a strategy or policy produces economic returns in the short-term does not mean the long-term results will be beneficial. The focus of financial markets is on short-term individual gain to the exclusion of both social and longer-term consequences. The fact that particular policies and strategies are effective in producing short-term financial returns does not mean they are more generally beneficial or desirable. Soros offers the example that running up a budget or trade deficit "feels good while it lasts, but there can be hell to pay later."

  5. The relationship between the center and the periphery of the capitalist system is profoundly unequal. The powerful countries at the center of the capitalist system are both wealthier and more stable than countries at the periphery because control of the financial system and ownership of productive assets allows them to shape economic and political affairs to their benefit.

    "Foreign ownership of capital deprives peripheral countries of autonomy and often hinders the development of democratic institutions. The international flow of capital is subject to catastrophic interruptions."

    In times of uncertainty financial capital tends to return to its country of origin, thus depriving countries at the periphery of the financial liquidity necessary to the function of monetized economies. "The center's most important feature is that it controls its own economic policies and holds in its hands the economic destinies of periphery countries."

  6. In the capitalist system greed (aka "monetary values") tend to displace social values in sectors where this is destructive of important public interests. Soros writes:

    Monetary values have usurped the role of intrinsic values, and markets have come to dominate spheres of existence where they do not properly belong. Law and medicine, politics, education, science, the arts, even personal relations-achievements or qualities that ought to be valued for their own sake are converted into monetary terms; they are judged by the money they fetch rather than their intrinsic value."

    Because financial "capital is free to go where most rewarded, countries vie to attract and retain capital, and if they are to succeed they must give precedence to the requirements of international capital over other social objectives.

Ha-Joon Chang

One notable later researcher of casino capitalism, especially "free market" fundamentalism propaganda Cambridge University researcher Ha-Joon Chang. In 2011 he published a fascinating book 23 Things They Don't Tell You About Capitalism. Here are two Amazon reviews that shed some light at the key ideas of the book:

William Podmore

Ha-Joon Chang, Reader in the Political Economy of Development at Cambridge University, has written a fascinating book on capitalism's failings. He also wrote the brilliant Bad Samaritans. Martin Wolf of the Financial Times says he is `probably the world's most effective critic of globalization'.

Chang takes on the free-marketers' dogmas and proposes ideas like

He notes that the USA does not have the world's highest living standard. Norway, Luxemburg, Switzerland, Denmark, Iceland, Ireland, Sweden and the USA, in that order, had the highest incomes per head. On income per hours worked, the USA comes eighth, after Luxemburg, Norway, France, Ireland, Belgium, Austria and the Netherlands. Japan, Switzerland, Singapore, Finland and Sweden have the highest industrial output per person.

Free-market politicians, economists and media have pushed policies of de-regulation and pursuit of short-term profits, causing less growth, more inequality, more job insecurity and more frequent crises. Britain's growth rate in income per person per year was 2.4 per cent in the 1960s-70s and 1.7 per cent 1990-2009. Rich countries grew by 3 per cent in the 1960s-70s and 1.4 per cent 1980-2009. Developing countries grew by 3 per cent in the 1960s-70s and 2.6 per cent 1980-2009. Latin America grew by 3.1 per cent in the 1960s-70s and 1.1 per cent 1980-2009, and Sub-Saharan Africa by 1.6 per cent in the 1960s-70s and 0.2 per cent 1990-2009. The world economy grew by 3.2 per cent in the 1960s-70s and 1.4 per cent 1990-2009.

So, across the world, countries did far better before Thatcher and Reagan's `free-market revolution'. Making the rich richer made the rest of us poorer, cutting economies' growth rates, and investment as a share of national output, in all the G7 countries.

Chang shows how free trade is not the way to grow and points out that the USA was the world's most protectionist country during its phase of ascendancy, from the 1830s to the 1940s, and that Britain was one of world's the most protectionist countries during its rise, from the 1720s to the 1850s.

He shows how immigration controls keep First World wages up; they determine wages more than any other factor. Weakening those controls, as the EU demands, lowers wages.

He challenges the conventional wisdom that we must cut spending to cut the deficit. Instead, we need controls capital, on mergers and acquisitions, and on financial products. We need the welfare state, industrial policy, and huge investment in industry, infrastructure, worker training and R&D.

As Chang points out, "Even though financial investments can drive growth for a while, such growth cannot be sustained, as those investments have to be ultimately backed up by viable long-term investments in real sector activities, as so vividly shown by the 2008 financial crisis."

This book is a commonsense, evidence-based approach to economic life, which we should urge all our friends and colleagues to read.

Loyd E. Eskildson

The 2008 'Great Recession' demands re-examination of prevailing economic thought - the dominant paradigm (post 1970's conservative free-market capitalism) not only failed to predict the crisis, but also said it couldn't occur in today's free markets, thanks to Adam Smith's 'invisible hand.' Ha-Joon Chang provides that re-examination in his "23 Things They Don't Tell You About Capitalism." Turns out that the reason Adam Smith's hand was not visible is that it wasn't there. Chang, economics professor at the University of Cambridge, is no enemy of capitalism, though he contends its current conservative version should be made better. Conventional wisdom tells us that left alone, markets produce the most efficient and just outcomes - 'efficient' because businesses and individuals know best how to utilize their resources, and 'just' because they are rewarded according to their productivity. Following this advice, countries have deregulated businesses, reduced taxes and welfare, and adopted free trade. The results, per Chang, has been the opposite of what was promised - slower growth and rising inequality, often masked by rising credit expansion and increased working hours. Alternatively, developing Asian countries that grew fast did so following a different version of capitalism, though to be fair China's version to-date has also produced much greater inequality. The following summarizes some of Chang's points:

  1. "There is no such thing as a free market" - we already have hygiene standards in restaurants, ban child labor, pollution, narcotics, bribery, and dangerous workplaces, require licenses for professions such as doctors, lawyers, and brokers, and limit immigration. In 2008, the U.S. used at least $700 billion of taxpayers' money to buy up toxic assets, justified by President Bush on the grounds that it was a necessary state intervention consistent with free-market capitalism. Chang's conclusion - free-marketers contending that a certain regulation should not be introduced because it would restrict market freedom are simply expressing political opinions, not economic facts or laws.
  2. "Companies should not be run in the interest of their owners." Shareholders are the most mobile of corporate stakeholders, often holding ownership for but a fraction of a second (high-frequency trading represents 70% of today's trading). Shareholders prefer corporate strategies that maximize short-term profits and dividends, usually at the cost of long-term investments. (This often also includes added leverage and risk, and reliance on socializing risk via 'too big to fail' status, and relying on 'the Greenspan put.') Chang adds that corporate limited liability, while a boon to capital accumulation and technological progress, when combined with professional managers instead of entrepreneurs owning a large chunk (e.g.. Ford, Edison, Carnegie) and public shares with smaller voting rights (typically limited to 10%), allows professional managers to maximize their own prestige via sales growth and prestige projects instead of maximizing profits. Another negative long-term outcome driven by shareholders is increased share buybacks (less than 5% of profits until the early 1980s, 90% in 2007, and 280% in 2008) - one economist estimates that had GM not spent $20.4 billion on buybacks between 1986 and 2002 it could have prevented its 2009 bankruptcy. Short-term stockholder perspectives have also brought large-scale layoffs from off-shoring. Governments of other countries encourage longer-term thinking by holding large shares in key enterprises (China Mobile, Renault, Volkswagen), providing greater worker representation (Germany's supervisory boards), and cross-shareholding among friendly companies (Japan's Toyota and its suppliers).
  3. "Free-market policies rarely make poor countries rich." With a few exceptions, all of today's rich countries, including Britain and the U.S., reached that status through protectionism, subsidies, and other policies that they and their IMF, WTO, and World Bank now advise developing nations not to adopt. Free-market economists usually respond that the U.S. succeeded despite, not because of, protectionism. The problem with that explanation is the number of other nations paralleling the early growth strategy of the U.S. and Britain (Austria, Finland, France, Germany, Japan, Korea, Singapore, Sweden, Taiwan), and the fact that apparent exceptions (Hong Kong, Switzerland, The Netherlands) did so by ignoring foreign patents (a free-market 'no-no'). Chang believes the 'official historians' of capitalism have been very successful re-writing its history, akin to someone trying to 'kick away the ladder' with which they had climbed to the top. He also points out that developing nations that stick to their Ricardian 'comparative advantage,' per the conservatives prescription, condemn themselves to their economic status quo.
  4. "We do not live in a post-industrial age." Most of the fall in manufacturing's share of total output is not due to a fall in the quantity of manufactured goods, but due to the fall in their prices relative to those for services, caused by their faster productivity growth. A small part of deindustrialization is due to outsourcing of some 'manufacturing' activities that used to be provided in-house - e.g.. catering and cleaning. Those advising the newly developing nations to skip manufacturing and go directly to providing services forget that many services mainly serve manufacturing firms (finance, R&D, design), and that since services are harder to export, such an approach will create balance-of-payment problems. (Chang's preceding points directly contradict David Ricardo's law of comparative advantage - a fundamental free market precept. Chang's example of how Korea built Pohang Steel into a strong economic producer, despite lacking experienced managers and natural resources, is another.)
  5. "The U.S. does not have the highest living standard in the world." True, the average U.S. citizen has greater command over goods and services than his counterpart in almost any other country, but this is due to higher immigration, poorer employment conditions, and working longer hours for many vs. their foreign counterparts. The U.S. also has poorer health indicators and worse crime statistics. We do have the world's second highest income per capita - Luxemburg's higher, but measured in terms of purchasing power parity (PPP) the U.S. ranks eighth. (The U.S. doesn't have the fastest growing economy either - China is predicted to pass the U.S. in PPP this coming decade.) Chang's point here is that we should stop assuming the U.S. provides the best economic model. (This is already occurring - the World Bank's chief economist, Justin Lin, comes from China.)
  6. "Governments can pick winners." Chang cites examples of how the Korean government built world-class producers of steel (POSCO), shipbuilding (Hyundai), and electronics (LG), despite lacking raw materials or experience for those sectors. True, major government failures have occurred - Europe's Concorde, Indonesia's aircraft industry, Korea's promotion of aluminum smelting, and Japan's effort to have Nissan take over Honda; industry, however, has also failed - e.g.. the AOL-Time Warner merger, and the Daimler-Chrysler merger. Austria, China, Finland, France, Japan, Norway, Singapore (in numerous other areas), and Taiwan have also done quite well with government-picked winners. Another problem is that business and national interests sometimes clash - e.g.. American firms' massive outsourcing has undermined the national interest of maintaining full employment. (However, greater unbiased U.S. government involvement would be difficult due to the 10,000+ corporate lobbyists and billions in corporate campaign donations - $500 million alone from big oil in 2009-10.) Also interesting to Chang is how conservative free marketing bankers in the U.S. lined up for mammoth low-cost loans from the Federal Reserve at the beginning of the Great Recession. Government planning allows minimizing excess capacity, maximizing learning-curve economies and economies of scale and scope; operational performance is enhanced by also forcing government-owned or supported firms into international competition. Government intervention (loans, tariffs, subsidies, prohibiting exports of needed raw materials, building infrastructure) are necessary for emerging economies to move into more sophisticated sectors.
  7. "Making rich people richer doesn't make the rest of us richer." 'Trickle-down' economics is based on the belief that the poor maximize current consumption, while the rich, left to themselves, mostly invest. However, the years 1950-1973 saw the highest-ever growth rates in the U.S., Canada, Australia, and New Zealand, despite increased taxation of the rich. Before the 'Golden Age,' per capita income grew at 1-1.5%/year; during the Golden Age it grew at 2-3% in the U.S. Since then, tax cuts for the rich and financial deregulation have allowed greater paychecks for top managers and financiers, and between 1979 and 2006 the top 0.1% increased their share of national income from 3.5% to 11.6%. The result - investment as a ratio of national output has fallen in all rich economies and the pace at which the total economic pie grew decreased.
  8. "U.S. managers are over-priced." First, relative to their predecessors (about 10X those in the 1960s; now 300-400X the average worker), despite the latter having run companies more successfully, in relative terms. Second, compared to counterparts in other rich countries - up to 20X. (Third, compared to counterparts in developing nations - e.g.. JPMorgan Chase, world's 4th largest bank, paid its CEO $19.6 million in 2008, vs. the CEO of the Industrial and Commercial Bank of China, the world's largest, being paid $234,700. Read more ›

Willem Buiter and the idea of long term after crisis stagnation

Willem Buiter in his FT article After the Crisis Macro Imbalance, Credibility and Reserve-Currency suggested that after financial crisis of 2008 there might be very long a painful deleveraging period aka secular stagnation. In short each financial crisis make recovery longer and longer. That's why the US will most likely face a long period of stagnation: the digestion of huge excessive debt of the private sector might well take a decade:

Since the excess of debt is relative to income and GDP, the lower the rate of growth, the longer the required period of digestion. This explains for the paradox of trying to stimulate consumption when the economy faces a monumental crisis provoked exactly by excessive debt and excessive consumption. A cartoon line best captured the spirit of it: "country addicted to speculative bubbles desperately searches a new bubble to invest in. "

... ... ...

The roots of the crisis are major international macroeconomic imbalances. Despite the fact that the excesses of the financial system were instrumental to lead these imbalances further than otherwise possible, insufficient regulation should not be viewed as the main factor behind the crisis. The expenditure of central countries, spinned by all sort of financial innovations created by a globalized financial system, was the engine of world growth. When debt became clearly excessive in central countries and the debt-financed expenditure cycle came to an end, the ensuing crisis paralyzed the world economy. With the lesson of 1929 well assimilated, American monetary policy became aggressively expansionist. The Fed inundated the economy with money and credit, in the attempt to avoid a deep depression. Even if successful, the economies of the US and the other central countries, given the burden of excessive debt, are likely to remain stagnant under the threat of deflation for the coming years. The assumption of troubled assets by the public sector, in order to avoid the collapse of the financial system, might succeed, but at the cost of a major increase in public debt. Fiscal policy is not efficient to restart the economy when the private sector remains paralyzed by excessive debt. Even if a coordinated effort to increase public expenditure is successful, the central economies will remain stagnant for as long as the excessive indebtedness of the private sector persists. The period of digestion of excess debt will be longer than the usual recessive cycle. Since imports represent a drain in the effort to reanimate domestic demand through public expenditure, while exports, on the contrary, contribute to the recovery of internal demand, the temptation to central economies to also adopt a protectionist stance will be strong.

Willem Buiter also defined ‘cognitive regulatory capture’ which existed during the Greenspan years and when the Fed were just an arm of Wall Street.

This regulatory capture has resulted in an excess sensitivity of the Fed to financial market and financial sector concerns and fears and in an overestimation of the strength of the link between financial market turmoil and financial sector deleveraging and capital losses on the one hand, and the stability and prosperity of the wider economy on the other hand. The paper gives five examples of recent behavior by the Fed that are most readily rationalized with the assumption of regulatory capture. The abstract of the paper follows next. The latest version of the entire enchilada can be found here. Future revisions will also be found there.

Joseph Stiglitz on 5 steps to Casino Capitalism

In his 2008 Vanity Fair article Capitalist Fools Stiglitz identifies five key steps in transformation of American capitalism to Casino Capitalism (moments of failure as he called them):

No. 1: Reagan Fires Fed Chairman Volcker and Replaces Him With Greenspan in 1987:

Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.

snip

If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you’ll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.

Greenspan presided over not one but two financial bubbles.

  1. Congress repealed the Glass-Steagall Act in 1999 under Bill Clinton (Glass-Steagall was a depression-era reform that separated commercial and investment banks)

I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest—toward short-term self-interest, at any rate, rather than Tocqueville’s "self interest rightly understood."

Stiglitz also refers to a 2004 decision by the SEC "to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process."

Once more, it was deregulation run amuck, and few even noticed.

  1. The Bush tax cuts, both on income and capital gains

The Bush administration was providing an open invitation to excessive borrowing and lending—not that American consumers needed any more encouragement.

  1. Faking the Numbers

Here he refers to bad accounting, the failure to address problems with stock options, and the incentive structures of ratings agencies like Moodys that led them to give high ratings to toxic assets.

  1. Paulson and the Flawed Bailout

Valuable time was wasted as Paulson pushed his own plan, "cash for trash," buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

Stiglitz concludes:

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, "I have found a flaw." Congressman Henry Waxman pushed him, responding, "In other words, you found that your view of the world, your ideology, was not right; it was not working." "Absolutely, precisely," Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

The flawed economic philosophy brought by Reagan, and embraced by so many, brought us to this day. Ideas have consequences, especially when we stop empirically testing them. Republican economics have created great pain to America and harmed our national interest.

The flaw that Greenspan found was always there: self-regulation does not work. As Stiglitz said:

As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest — toward short-term self-interest

Yes, for all their claims to science, the premise conflicts with tendencies of people.

This is the real legacy of Ronald Reagan and Alan Greenspan:

The whole scheme was kick-started under Ronald Reagan. Between his tax cuts for the rich and the Greenspan Commission’s orchestrated Social Security heist, working Americans lost out in a generational wealth transfer shift now exceeding $1 trillion annually from 90 million working class households to for-profit corporations and the richest 1% of the population. It created an unprecedented wealth disparity that continues to grow, shames the nation and is destroying the bedrock middle class without which democracy can’t survive.

Greenspan helped orchestrate it with economist Ravi Batra calling his economics "Greenomics" in his 2005 book "Greenspan’s Fraud." It "turns out to be Greedomics" advocating anti-trust laws, regulations and social services be ended so "nothing....interfere(s) with business greed and the pursuit of profits."

 Conclusions: From Animal Farm To Animal House

Instead of conclusion I will reproduce the post from Sudden Debt (March 17, 2008):

In Orwell's Animal Farm all animals are equal - except that some are more equal than others. All in the spirit of law, order and the proper functioning of society, of course. Fittingly, the animals that have chosen this role by themselves and for themselves, are the pigs.

Cut to US financial markets today. After years of swinish behavior more reminiscent of Animal House than anything else, the pigs are threatening to destroy the entire farm. As if it wasn't enough that they devoured all the "free market" food available and inundated the world with their excreta, they now wish to be put on the public trough. Truly, some businessmen believe they are more equal than others.

But do not blame the pigs; they are expected to act as swine nature dictates. The fault lies entirely with the farmers, those authorities entrusted by the people to oversee the farm because they supposedly knew better. While the pigs were rampaging and tearing the place apart, they were assuring us all that farms function best when animals are free to do as they please, guided solely by invisible hooves. No regulation, no oversight, no common sense. Oh yes, and pigs fly..

So what is to be done now? Two things:

In other words, the focus from now on should be on adding value by means of work and savings (capital formation), instead of inflating assets and borrowing.

Furthermore, we should realize that in a world already inhabited by close to 7 billion people and beset by resource depletion and environmental degradation, defending growth for growth's sake is a losing proposition. The wheels are already wobbling on the Permagrowth model; pumping harder on the accelerator is not going to make it go any faster and will likely result in a fatal crash.

Debt, and finance in general, should be left to re-size downwards to a level that better reflects the carrying capacity of our world. The Fed's current actions are shortsighted and "conservative" in the worst interpretation of the words: they are designed to artificially maintain debt at levels that myopically projects growth as far as the eye can see.

What level of resizing may be necessary? I hope not as much as at Bear Stearns, which got itself bought by Morgan at buzz-saw prices: $2 per share represents a 98% discount from its $84 book value. What scares me, though, is the statement by Morgan's CFO, who said the price reflected the risk the firm was taking, even though he was comfortable with the valuation of assets in Bear's books. It "...gives us the flexibility and margin of error that's appropriate given the speed at which the transaction came together", he said.

If it takes a 98% discount and the explicit guarantee of the Fed for a large portion of assets to buy one of the largest investment banks in the world, where should all other financial firms be trading at? ....Hello? Anyone? Is that a great big silence I hear, or the sound of credit imploding into a vacuum?


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[Sep 29, 2016] The academic precariat in the UK

Sep 29, 2016 | www.nakedcapitalism.com

paul September 29, 2016 at 7:24 am

The precariat article is good, reflecting the depressing industrialisation of education in the UK. Think only low–paid workers get the Sports Direct treatment? You're wrong Guardian. The academic precariat in the UK.
The guardian is all for this in its own workplace,however

Reply
Clive September 29, 2016 at 7:43 am

The Guardian is, increasingly (if you'll pardon the phrase) getting on my tits at the moment. Is there anything worse in the mainstream media than a Progressive In Name Only newspaper?

Reply
paul September 29, 2016 at 7:52 am

The BBC's fair and balanced news and current affairs departments ( driven by its sinister business unit ) are perhaps worse because of its greater reach, but it's a tight race.

Reply
DJG September 29, 2016 at 9:22 am

Clive, intemperate: The agony of the Guardian is indeed interesting. A while back, I read that its site was the most used among English-language newspapers, particularly by U.S. readers looking for some balance.

With regard to the U.S. political coverage, and their rah-rah Clintonism, as evinced by the resurrection of the likes of Jill Abramson, I tend to cut them some slack. I find that many English (in particular, the English) are somewhat tone-deaf about U.S. culture and folkways. I imagine some Guardian Uxonian editors, who once spent a week in NYC with a side trip to LA, and who have actually eaten corn on the cob, thinking that they understand the U.S. Constitution and U.S. politics. But they still don't know how to pronounce Illinois and Arkansas.

The anti-Corbyn hysteria shows detachment from their roots. The Guardian editors should get in a car and head out for a field trip to Manchester (do they recall Manchester?) to find out more about Brexit and Corbyn. A trip to the English nether-regions would do them some good.

And yet I can't complain too much: How often do they present Douthat, Bruni, and Brooks as sages?

[Sep 29, 2016] Georgia Tech's master degree in computer science costs less than one-eighth as much as its most expensive rival - if you learn online.

Sep 29, 2016 | www.nakedcapitalism.com

Portia September 29, 2016 at 8:05 am

http://www.burlingtonfreepress.com/story/news/2016/09/28/st-michaels-facing-15m-deficit/91212534/
I thought the reasoning was interesting:

To keep a little more of that tuition money, the college is considering slightly ratcheting down financial aid. They are also going to offer buyouts to a number of employees later this fall.

"When you have a reduction in your enrollment, you're going to need a proportionate reduction in faculty and staff," Robinson said. "We definitely need to get smaller."

Adding to the problem, there were fewer unrestricted donations - donations that are free to use for whatever the college might need - than expected last year, but more donations overall. Gifts that were received were earmarked for specific programs and buildings on campus, not necessarily for the general fund. (can't put your name on a general fund)

By next year the college won't be able to break even, but by 2018 Robinson and his team expects to present a balanced budget to the Board of Trustees.

Despite the budget issues, the college is still on strong footing and is looking ahead, said Alex Bertoni, spokesperson for the college.

"The college is doing well, and the students here are thriving," he said. "We're going to continue to invest in the long-term. " (that long-term does not look good for a lot of students, to me)

bolding and comments in () mine. I am an eye-roller for sure, and they got a workout here.

Reply
Jim Haygood September 29, 2016 at 8:14 am

The ghastly horror of competition roils the cozy academic cartel:

Georgia Tech's master's [sic] in computer science costs less than one-eighth as much as its most expensive rival - if you learn online.

With one of the top 10 computer science departments in the nation, according to U.S. News & World Report, Georgia Tech had a reputation to uphold. So it made the online program as much like the residential program as possible.

Tuition for a 30-credit master's in computer science from the University of Southern California runs $57,000. Syracuse, Johns Hopkins and Carnegie Mellon charge over $43,000 for the same degree.

Most prestigious colleges are currently sticking with the model that lets them offer degrees for $57,000 instead of the roughly $7,000 that it costs at Georgia Tech.

http://www.nytimes.com/2016/09/29/upshot/an-online-education-breakthrough-a-masters-degree-for-a-mere-7000.html

Creative destruction, comrades: Who is Joe Schumpeter?

Reply
Portia September 29, 2016 at 8:24 am

To be fair, IMO computer science is an ideal online course, coding being something most people do alone. And only the self-disciplined will endure.

[Sep 29, 2016] The Coming of the Post Neoliberal Era

Notable quotes:
"... The current US presidential election shows, perhaps better than anything else, just how far that decadence has gone. Hillary Clinton's campaign is floundering in the face of Trump's challenge because so few Americans still believe that the [neo]liberal shibboleths in her campaign rhetoric mean anything at all. ..."
"... Even among her supporters, enthusiasm is hard to find, and her campaign rallies have had embarrassingly sparse attendance. Increasingly frantic claims that only racists, fascists, and other deplorables support Trump convince no one but true believers, and make the concealment of interests behind shopworn values increasingly transparent. Clinton may still win the election by one means or another, but the broader currents in American political life have clearly changed course. ..."
Sep 29, 2016 | www.nakedcapitalism.com

fresno dan September 29, 2016 at 8:48 am

The Coming of the Post[neo]liberal Era The Archdruid Report

Ironies of this sort are anything but unusual in political history. It's astonishingly common for a movement that starts off trying to overturn the status quo in the name of some idealistic abstraction or other to check its ideals at the door once it becomes the status quo. If anything, American liberalism held onto its ideals longer than most and accomplished a great deal more than many, and I think that most of us-even those who, like me, are moderate Burkean conservatives-are grateful to the liberal movement of the past for ending such obvious abuses as chattel slavery and the denial of civil rights to women, and for championing the idea that values as well as interests deserve a voice in the public sphere. It deserves the modern equivalent of a raised hat and a moment of silence, if no more, as it finally sinks into the decadence that is the ultimate fate of every successful political movement.

The current US presidential election shows, perhaps better than anything else, just how far that decadence has gone. Hillary Clinton's campaign is floundering in the face of Trump's challenge because so few Americans still believe that the [neo]liberal shibboleths in her campaign rhetoric mean anything at all.

Even among her supporters, enthusiasm is hard to find, and her campaign rallies have had embarrassingly sparse attendance. Increasingly frantic claims that only racists, fascists, and other deplorables support Trump convince no one but true believers, and make the concealment of interests behind shopworn values increasingly transparent. Clinton may still win the election by one means or another, but the broader currents in American political life have clearly changed course.

=====================================

Great article IMHO – I certainly agree about the portion concerning immigration.
And for an example of a contradiction – Police unions and big cities. Unions do much more than raise wages and pensions – many of the protections of police by hamstringing complaint investigations against the police are exposing a fissure that has reached the point of earthquake.
Or one could take the idea that "Health" or "College" reform is merely funneling ever more resources to insurance companies and College administrations with precious little if any improvement in the real cost or quality to the users of the service.

[Sep 29, 2016] How Short-Termism Saps the Economy

Sep 29, 2016 | economistsview.typepad.com

RC AKA Darryl, Ron : , Thursday, September 29, 2016 at 04:00 AM
http://www.wsj.com/articles/how-short-termism-saps-the-economy-1475018087

How Short-Termism Saps the Economy

Paying CEOs so much in stocks puts their focus on the share price instead of building for the long run.


By
Joe Biden
Sept. 27, 2016 7:14 p.m. ET

135 COMMENTS

Short-termism-the notion that companies forgo long-run investment to boost near-term stock price-is one of the greatest threats to America's enduring prosperity. Over the past eight years, the U.S. economy has emerged from crisis and maintained an unprecedented recovery. We are now on the cusp of a remarkable resurgence. But the country can't unlock its true potential without encouraging businesses to build for the long-run.

Private investment-from new factories, to research, to worker training-is perhaps the greatest driver of economic growth, paving the way for future prosperity for businesses, their supply chains and the economy as a whole. Without it robust growth is nearly impossible. Yet all too often, executives face pressure to prioritize today's share price over adding long-term value.

The origins of short-termism are rooted in policies and practices that have eroded the incentive to create value: the dramatic growth in executive compensation tied to short-term share price; inadequate regulations that allow share buybacks without limit; tax laws that designate an investment as "long-term" after only one year; a subset of activist investors determined to steer companies away from further investment; and a financial culture focused on quarterly earnings and short-run metrics.


Consider the evolution in the structure of CEO compensation. In the 1980s, roughly three-fourths of executive pay at S&P 500 companies was in the form of cash salary and bonuses, and the rest in investment options and stock, according to an article in the Annual Review of Financial Economics. The Omnibus Budget Reconciliation Act of 1993 included a provision to link executive pay to the performance of the company. But it didn't work as intended. By the time I became vice president, only 40% of executive pay was in cash, with the bulk being tied to investment options and stock. Now more than ever, there is a direct link between share price and CEO pay.

Performance-based pay encourages executives to think in the short-term. Ever since the Securities and Exchange Commission changed the buyback rules in 1982, there has been a proliferation in share repurchases. Today buybacks are the norm. According to economist William Lazonick , from 2003-12, companies on the S&P 500 spent 37% of their earnings on dividends and a full 54% on buybacks-leaving less than 10% for reinvestment.

This emphasis on returning profits to shareholders has led to a significant decline in business investment. Total investment as a share of the economy has fallen to about 11% today, down from a high of about 15% in the early 1980s, according to the Bureau of Economic Analysis. With interest rates at historically low levels, and business confidence in the U.S. far ahead of its economic competitors, there should be more investment, not less.

I am not blaming CEOs. The business leaders I've met over the course of my career want to build their firms and contribute to the economy, not simply send checks to investors or buy back their own stock. Sometimes they succeed. Other times the pressures to lift the short-run share price are simply too great.

As these short-term pressures mount, most of the harm is borne by workers. As any economist will tell you, productivity is typically the most important driver of increasing wages. But productivity will never flourish without businesses investing in endeavors like on-the-job training, new equipment, and research and development. In short, business investment boosts productivity, which lifts wages.

A continued economic resurgence requires solving the short-termism puzzle. The federal government can help foster private enterprise by providing worker training, building world-class infrastructure, and supporting research and innovation. But government should also take a look at regulations that promote share buybacks, tax laws that discourage long-term investment and corporate reporting standards that fail to account for long-run growth. The future of the economy depends on it.

[You go, Joe! He even references William Lazonick.

Lazonick wrote about the new economy business model (NEBM) versus the old, but never really pinned down what changed in the taxation on returns to capital that caused it. Also, Lazonick seemed to believe that the rapid capital formation used in the NEBM justified the low taxation on capital gains. That was a big mistake. Scarce capital has never been a obstacle in the US since early in the 20th century except when a financial shock locked up capital allocation.

Dividends payouts are sometimes seen as short term payouts to shareholders, but if not for the capital gains tax preference that would not be true. Paying dividends reduces a firms capital, but increases the desirability of its shares both as a source of income and as a performer which boost share price more than the underlying reduction of equity due to capital payout. So, dividends versus capital gains is not an either or in the short term. Over the longer term accumulated dividends from a firm that invests in itself are a better incentive for reinvestment than a capital gains windfall at some point in that longer term. The capital gains preference makes selling shares more desirable than holding shares and M&A more desirable than internal investment.

In 1954 the dividends tax credit was rescinded in that year's tax act. It had been in effect since 1913 except for 1936-1939. I know that I should provide references, but since I started writing about this five years ago most of the evidence has been taking off the WWW.

The dividends tax credit returned to the individual taxpayer the amount of their tax liability on their dividends income that had been paid in corporate taxes by the issuing firms. This served as an incentive to shareholders to prefer higher corporate tax rates with fewer loopholes. Higher effective corporate tax rates encourage firms to increase their expenses in wages and exempt reinvestments that lowers their taxable profits.

If we wanted even less short termism then we should have higher capital gains tax rates with reductions per year of holding term along with the dividends tax credit. Rescinding the dividends tax credit might be considered desirable because it was a tax increase on the wealthy, but in 1954 both Congress and POTUS were Republican which is worth considering. Democrats had done it before in 1936, but reversed it in 1939. Joe Biden's article on short termism is probably a lot more significant than it will ever been given credit for which goes a long ways to explain how corporatism and globalization have had such devastating effects on jobs and wages. We not only do not know what we are doing, but we don't know what we have done either.]

RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , Thursday, September 29, 2016 at 04:27 AM
Sure huge executive stock options have a perverse effect on corporate financial decisions, but "higher capital gains tax rates with reductions per year of holding term along with the dividends tax credit" would go a long ways to changing the incentives created by stock options as well. By higher capital gains tax rates I mean much higher, at least before holding term exclusions. Also, an inflation adjustment to the basis for capital gains calculation for each year of holding term equal to each year's SSA COLA would eliminate the pressure against SSA COLA that is exerted by agents of the wealthy against the interest of retired wage class seniors.
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , Thursday, September 29, 2016 at 04:29 AM
It would be a much different world if rich people supported higher effective corporate tax rates and SSA COLA.
Tom aka Rusty -> RC AKA Darryl, Ron... , Thursday, September 29, 2016 at 05:06 AM
https://www.washingtonpost.com/news/wonk/wp/2012/08/16/bill-clinton-tried-to-limit-executive-pay-heres-why-it-didnt-work/
jonny bakho -> Tom aka Rusty... , Thursday, September 29, 2016 at 05:27 AM
The only way to limit executive pay is to tax it at very high levels. Reagan blew up the top tax rate and set the stage for executive pay to skyrocket.
pgl -> jonny bakho ... , Thursday, September 29, 2016 at 05:46 AM
From that WaPo story: "According to a new paper from Temple University's Steven Balsam published by the Economic Policy Institute, the big flaw in 162(m) was its broad exemption of "performance-based" pay. The $1 million cap only applied to traditional salaries, bonuses and grants of company stock."

Sort of a silly way of measuring compensation it seems. I agree that a higher tax rate on income would help but be careful to define income as total compensation.

Of course the other thing one might consider is to have a Board of Directors that answers to shareholders and not upper management.

RC AKA Darryl, Ron -> Tom aka Rusty... , Thursday, September 29, 2016 at 05:53 AM
The tax incentives on dividends relative to capital gains work for executive pay, monopoly, investment, and wage worker channels. Dividends can be used for just taking profits but they produce more over the longer term from investment returns. Capital gains are never more than a one time windfall although stable share price is useful for equities as collateral.
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , -1
Since CEOs are usually the shareholders with the most power then affecting their incentives as shareholders can be very effective. Getting CEOs to not raise their own pay is futile. Changing the game for everyone to favor internal investment over M&A as a use for retained earnings is necessary. The downside of my recommendation is that IPOs will no longer make angel investors insanely rich over night. Boohoo!

[Sep 29, 2016] A recession initiated by a financial crisis cause consumers to reduce their own borrowing, so erroneous analogies between governments and households resonate

Sep 29, 2016 | economistsview.typepad.com

pgl : , A recession initiated by a financial crisis cause consumers to reduce their own borrowing, so erroneous analogies between governments and households resonate

Simon Wren Lewis (Mainly Macro) highlights his new paper on why some supported austerity even if it was a disaster. Krugman's latest adds more.
Dan Kervick -> pgl... , Thursday, September 29, 2016 at 05:21 AM
It seems to me this line from Wren-Lewis is the biggie as far as the Great Recession/Longer Depression is concerned:

"A recession initiated by a financial crisis is also likely to see consumers reducing their own borrowing, and so (erroneous) analogies between governments and households resonate."

In 2008/9 the public was (rightly) convinced that the collapse was due to deflation of a financial bubble blown up by many years of excessive private borrowing and debt-fueled over-consumption: too much credit card debt; too much borrowing against (inflated) home values; two much speculative gambling with, and ponzi profiting from, cutesy and overvalued financial instruments. That correct, instinctive evaluation of the situation was backed up by numbers showing that the total private debt to GDP ratio had reached a level unseen since 1928, and by the sudden discovery of the many analyses of many experienced, sober, but neglected financial observers who had been predicting some kind of collapse for years.

Since the public was thus primed to believe that, going forward, the private economy had to reduce its overall debt load, it was very easy to convince them that governments, being just another part of the overall economy, had to do the same thing.

But what Wren-Lewis doesn't seem to mention is that the public had already been primed by decades of Norquistian, Petersonian and Rubinite deficit-hectors, debt-despairers and entitlement-exterminators to believe that our deficits were a very bad thing, that government was too big, and that we were headed for a "fiscal train wreck" because of our undisciplined budgets and government spending. They were thus easily convinced that the financial crisis also had something to to with the problems alleged by this bipartisan team of budget Casandras all finally coming a-cropper.

We had endless cadres of Republican politicians promoting hysteria over the public debt and also decrying the very size of government, whether deficit-financed or not.

We had Bill Clinton running around bragging about his "reinvention" (shrinking) of government and his dot-com boom-assisted surprise surplus.

We had Joe Biden telling everyone that the financial collapse was caused by "putting two wars on a credit card".

We had the Concord Coalition and the Peterson Institute gearing up their zombies for the Fix the Debt onslaught that eventually saddled us with an economic discourse driven by a stupid budget-reduction commission in the middle a deep recession!

Hatred of governments and their spending habits had already given us years of gradually building stagnation due to declining public investment and a consequent secular shift from capital formation to consumption. But the voters saw only that all of the Serious People in both parties were strongly in favor of this "disciplined" decimation of government. So why in the world wouldn't they end up supporting its continuation?

ken melvin -> Dan Kervick... , -1
Very good.

[Sep 29, 2016] Economists Keep Getting It Wrong Because the Media Coverup Their Mistakes

Notable quotes:
"... Most workers suffer serious consequences when they mess up on their jobs. Custodians get fired if the toilet is not clean. Dishwashers lose their job when they break too many dishes, but not all workers are held accountable for the quality of their work. ..."
"... At the top of the list of people who need not be competent to keep their job are economists. Unlike workers in most occupations, when large groups of economists mess up they can count on the media covering up their mistakes and insisting it was just impossible to understand what was going on. ..."
Sep 29, 2016 | economistsview.typepad.com

anne : September 29, 2016 at 05:18 AM , September 29, 2016 at 05:18 AM

http://cepr.net/blogs/beat-the-press/economists-keep-getting-it-wrong-because-the-media-coverup-their-mistakes

September 29, 2016

Economists Keep Getting It Wrong Because the Media Coverup Their Mistakes

Most workers suffer serious consequences when they mess up on their jobs. Custodians get fired if the toilet is not clean. Dishwashers lose their job when they break too many dishes, but not all workers are held accountable for the quality of their work.

At the top of the list of people who need not be competent to keep their job are economists. Unlike workers in most occupations, when large groups of economists mess up they can count on the media covering up their mistakes and insisting it was just impossible to understand what was going on.

This is first and foremost the story of the housing bubble. While it was easy * to recognize that the United States and many other countries were seeing massive bubbles that were driving their economies, which meant that their collapse would lead to major recessions, the vast majority of economists insisted there was nothing to worry about.

The bubbles did burst, leading to a financial crisis, double-digit unemployment in many countries, and costing the world tens of trillions of dollars of lost output. The media excused this extraordinary failure by insisting that no one saw the bubble and that it was impossible to prevent this sort of economic and human disaster. Almost no economists suffered any consequences to their career as a result of this failure. The "experts" who determined policy in the years after the crash were the same people who completely missed seeing the crash coming.

We are now seeing the same story with trade. The New York Times has a major magazine article ** on the impact of trade on the living standards of workers in the United States and other wealthy countries. The subhead tells readers:

"Trade is under attack in much of the world, because economists failed to anticipate the accompanying joblessness, and governments failed to help."

Of course many economists did not anticipate the negative impact of trade, but of course many of us did. The negative impact was entirely predictable and predicted. (Here are a few from Center for Economic and Policy Research, *** **** ***** there are many more books and papers from my friends at the Economic Policy Institute.) The argument is straightforward: trade policy has been designed to put manufacturing workers in direct competition with low paid workers in the developing world. This costs jobs and puts downward pressure on the wages of these workers. It also puts downward pressure on the wages of less-educated workers more generally, as displaced manufacturing workers seek jobs in retail and other sectors. Stagnating wages and increasing inequality are the predicted result of this pattern of trade, not a surprising outcome.

If economists were like custodians and dishwashers, the failure to recognize this obvious outcome of trade policy would have put them out on the street. Instead, we get major news outlets like the New York Times, telling us this is all a remarkable surprise. No one could have seen that trade would have bad outcomes for large segments of the workforce. Rather than lose their jobs, economists can still draw comfortable six figure salaries as they tell reporters how it was impossible for them to understand the economy.

Economic theory tells us that if economists don't face consequences for completely messing up on the job then they have no incentive to get things right. If the custodian never pays any price for not cleaning the toilet, then they won't clean the toilet. In the same way, if the media and the country always grant a "who could have known" amnesty to large chunks of the economics profession when it gets things completely wrong, then there is no reason to expect that economists will ever get things right. All they have to do is say the same things as other elite economists say, and if it turns out to be wrong, the NYT will just run major news articles explaining that no one could have known better.

There is one other important point that needs emphasis here. There was nothing inherent to trade that required growing inequality, it was the structure of trade policy that gave us this result. There are millions of very bright ambitious people in the developing world who would be very happy to study to meet U.S. standards and work as doctors, dentists, lawyers and other professionals in the United States. We could have designed trade agreements to facilitate this process.

The result would be massive economic gains in the form of lower cost health care, dental care, legal services and other professionals services. In the case of physicians alone, if the increased supply brought the pay of our doctors down to the levels of Western Europe and Canada, we would save close to $100 billion a year. This comes to roughly $700 a year in savings for every family in the United States. And, this would lead to a reduction in inequality.

Our elite economists have chosen not to discuss this sort of trade opening. (They also rarely discuss reducing rather than increasing protectionist barriers like patents and copyrights.) These issues are discussed in more depth in my forthcoming book, "Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer" (coming to a website near year in October). But the key point here is that economists should know better, and if they were doing their job, they did.

* http://cepr.net/documents/publications/housing_2002_08.pdf

** http://www.nytimes.com/2016/09/29/business/economy/more-wealth-more-jobs-but-not-for-everyone-what-fuels-the-backlash-on-trade.html

*** http://cepr.net/documents/publications/trade_2008_01.pdf

**** http://cepr.net/documents/publications/faf_2006_11.pdf

***** http://cepr.net/documents/publications/trade_2001_10_03.pdf

-- Dean Baker

Paine -> anne... , Thursday, September 29, 2016 at 06:47 AM
Dean is a dream

I'll leave it at that !

Peter K. -> Paine... , Thursday, September 29, 2016 at 06:56 AM
the job class happy warrior
Peter K. -> anne... , Thursday, September 29, 2016 at 06:56 AM
"The argument is straightforward: trade policy has been designed to put manufacturing workers in direct competition with low paid workers in the developing world. This costs jobs and puts downward pressure on the wages of these workers. It also puts downward pressure on the wages of less-educated workers more generally, as displaced manufacturing workers seek jobs in retail and other sectors. Stagnating wages and increasing inequality are the predicted result of this pattern of trade, not a surprising outcome."

This is surprising to PGL and Krugman who argue the Fed will just adjust to keep full employment or at least that's what the models tell them.

pgl -> Peter K.... , Thursday, September 29, 2016 at 07:07 AM
Dean is talking about protectionism for drug companies, doctors etc. and free trade for the rest of us. On this score he is exactly right and I have said so many times. This is a very different issue from the macroeconomic ones. I would accuse you of once again misrepresenting what I have said. But to be fair - you are too stupid to get these distinctions so maybe you are not lying. I do wish I had a smarter internet stalker.
Tom aka Rusty -> anne... , -1
Baker get the diagnosis correct.

Baker's standard solutions do very little for blue collar workers. Having a cheaper doctor and lawyer don't help much for the unemployed and underemployed.

[Sep 29, 2016] A General Theory Of Austerity

Sep 29, 2016 | economistsview.typepad.com

anne : September 29, 2016 at 04:45 AM , September 29, 2016 at 04:45 AM

http://krugman.blogs.nytimes.com/2016/09/29/a-general-theory-of-austerity/

September 29, 2016

A General Theory Of Austerity?
By Paul Krugman

Simon Wren-Lewis has an excellent new paper * trying to explain the widespread resort to austerity in the face of a liquidity trap, which is exactly the moment when such policies do the most harm. His bottom line is that

"austerity was the result of right-wing opportunism, exploiting instinctive popular concern about rising government debt in order to reduce the size of the state."

I think this is right; but I would emphasize more than he does the extent to which both the general public and Very Serious People always assume that reducing deficits is the responsible thing to do. We have some polling from the 1930s, showing a strong balanced-budget bias even then:

[Chart]

I think Simon would say that this is consistent with his view that large deficits grease the rails for deficit phobia, since Franklin Roosevelt's administration did run up deficits and debt that were unprecedented for peacetime. But has there ever been a time when the public favored bigger deficits?

Meanwhile, as someone who was in the trenches during the US austerity fights, I was struck by how readily mainstream figures who weren't especially right-wing in general got sucked into the notion that debt reduction was THE central issue. Ezra Klein documented this phenomenon ** with respect to Bowles-Simpson: ***

"For reasons I've never quite understood, the rules of reportorial neutrality don't apply when it comes to the deficit. On this one issue, reporters are permitted to openly cheer a particular set of highly controversial policy solutions. At Tuesday's Playbook breakfast, for instance, Mike Allen, as a straightforward and fair a reporter as you'll find, asked Simpson and Bowles whether they believed Obama would do 'the right thing' on entitlements - with 'the right thing' clearly meaning 'cut entitlements.' "

Meanwhile, as Brad Setser points out, the International Monetary Fund - whose research department has done heroic work puncturing austerity theories and supporting a broadly Keynesian view of macroeconomics - is, in practice, pushing for fiscal contraction **** almost everywhere.

Again, this doesn't exactly contradict Simon's argument, but maybe suggests that there is a bit more to it.

* http://www.bsg.ox.ac.uk/sites/www.bsg.ox.ac.uk/files/documents/BSG-WP-2016-014.pdf

** https://www.washingtonpost.com/news/wonk/wp/2013/02/20/the-problem-with-alan-simpson/

*** https://en.wikipedia.org/wiki/National_Commission_on_Fiscal_Responsibility_and_Reform

*** http://blogs.cfr.org/setser/2016/08/22/imf-cannot-quit-fiscal-consolidation-in-asian-surplus-countries/

anne -> anne... , Thursday, September 29, 2016 at 04:50 AM
http://www.bsg.ox.ac.uk/sites/www.bsg.ox.ac.uk/files/documents/BSG-WP-2016-014.pdf

May, 2016

A General Theory of Austerity
By Simon Wren-Lewis

Abstract

Austerity is defined as a fiscal contraction that causes a significant increase in aggregate unemployment. For the global economy, or an economy with a flexible exchange rate, or a monetary union as a whole, an increase in unemployment following a fiscal consolidation can and should be avoided because monetary policy can normally offset the demand impact of the consolidation. The tragedy of global austerity after 2010 was that fiscal consolidation was not delayed until monetary policy was able to do this.

An individual member of a currency union that requires a greater fiscal contraction than the union as a whole cannot use its own monetary policy to offset the impact of fiscal consolidation. Even in this case, however, a sharp and deep fiscal contraction is unlikely to be optimal. Providing this economy is in a union where the central bank acts as a sovereign lender of last resort, a more gradual fiscal adjustment is likely to minimise the unemployment cost.

As the theory behind these propositions is simple and widely accepted, the interesting question is why global austerity happened. Was austerity an unfortunate accident, or is there a more general political economy explanation for why it occurred? Answering this question is vital to avoid the next global recession being followed by yet more austerity.

jonny bakho -> anne... , Thursday, September 29, 2016 at 05:43 AM
The answer is that politicians and pundits have a flawed understanding of inflation and its relationship to hyperinflation.
Some economists promoted a seriously flawed interpretation of the 1970s stagflation that solidified myths about inflation.

As Max Planck said, "Science advances one funeral at a time." We need the current generation of economists and their failed models to be replaced by a new generation that does not suffer from the same mythology.

Peter K. -> anne... , -1
If one just read Krugman or Kevin Drum you wouldn't understand how Bill Clinton declared "the era of Big Government is over" or how after he was first elected he listened to his top two economic advisers Robert Rubin and Alan Greenspan and dropped his middle class spending campaign promise in favor of deficit reduction.

Greenspan promised Clinton lower rates in exchange for reducing government. Clinton ended "welfare as we knew it."

But Greenspan didn't regulate this increase in private investment. It led to the tech-stock bubble and a shadow banking system which was susceptible to a banking panic.

According to Hillary, Bush's tax cuts caused the housing bubble and Great Recession. It's a little more complicated. But this cuts against Krugman and Drum's narrative that the Clinton years were nothing but awesome.

Summers told Brooksley Born that derivatives shouldn't be regulated b/c the market is magic.

Obama reinforced the narrative that government should tighten its belt during hard times like households do. This is exactly wrong.

Maybe it's understandable for politicians to pander for short-term political expediency but it's hurts the long-term ideological conflict.

There's the right and there's the left and Obama and Clinton tried to straddle the two ideologies which just waters down the left's appeal and pull.

That's why the millennials and more progressive workers aren't as excited for Hillary's candidacy. That's why Sanders energized them.

Now I agree with Sanders that a Trump Presidency would be a disaster, but this doesn't preclude me from correcting Krugman's outlook as some center-leftists would insist in their binary thinking.

pgl : , Thursday, September 29, 2016 at 01:41 AM
Simon Wren Lewis (Mainly Macro) highlights his new paper on why some supported austerity even if it was a disaster. Krugman's latest adds more. mainly macro Why was austerity once so popular
Dan Kervick -> pgl... , Thursday, September 29, 2016 at 05:21 AM
It seems to me this line from Wren-Lewis is the biggie as far as the Great Recession/Longer Depression is concerned:

"A recession initiated by a financial crisis is also likely to see consumers reducing their own borrowing, and so (erroneous) analogies between governments and households resonate."

In 2008/9 the public was (rightly) convinced that the collapse was due to deflation of a financial bubble blown up by many years of excessive private borrowing and debt-fueled over-consumption: too much credit card debt; too much borrowing against (inflated) home values; two much speculative gambling with, and ponzi profiting from, cutesy and overvalued financial instruments. That correct, instinctive evaluation of the situation was backed up by numbers showing that the total private debt to GDP ratio had reached a level unseen since 1928, and by the sudden discovery of the many analyses of many experienced, sober, but neglected financial observers who had been predicting some kind of collapse for years.

Since the public was thus primed to believe that, going forward, the private economy had to reduce its overall debt load, it was very easy to convince them that governments, being just another part of the overall economy, had to do the same thing.

But what Wren-Lewis doesn't seem to mention is that the public had already been primed by decades of Norquistian, Petersonian and Rubinite deficit-hectors, debt-despairers and entitlement-exterminators to believe that our deficits were a very bad thing, that government was too big, and that we were headed for a "fiscal train wreck" because of our undisciplined budgets and government spending. They were thus easily convinced that the financial crisis also had something to to with the problems alleged by this bipartisan team of budget Casandras all finally coming a-cropper.

We had endless cadres of Republican politicians promoting hysteria over the public debt and also decrying the very size of government, whether deficit-financed or not.

We had Bill Clinton running around bragging about his "reinvention" (shrinking) of government and his dot-com boom-assisted surprise surplus.

We had Joe Biden telling everyone that the financial collapse was caused by "putting two wars on a credit card".

We had the Concord Coalition and the Peterson Institute gearing up their zombies for the Fix the Debt onslaught that eventually saddled us with an economic discourse driven by a stupid budget-reduction commission in the middle a deep recession!

Hatred of governments and their spending habits had already given us years of gradually building stagnation due to declining public investment and a consequent secular shift from capital formation to consumption. But the voters saw only that all of the Serious People in both parties were strongly in favor of this "disciplined" decimation of government. So why in the world wouldn't they end up supporting its continuation?

ken melvin -> Dan Kervick... , Thursday, September 29, 2016 at 06:28 AM
Very good.
Benedict@Large -> Dan Kervick... , Thursday, September 29, 2016 at 06:38 AM
+1

Exactly. This all having started with the 70s arrival of monetarism, essentially a gold standard with no gold. While no one really paid attention to gold standard (depressionary) budgeting until Clinton I, the rhetoric was being put into place such that, even today, the Democrats still hail Clinton's "balanced budget" disaster as if it were God's gift, when in reality it was the kickoff to consumers cannibalizing the home equity just to keep pace, and the ultimate reason the 2008 crash was so severe on household spending. Hillary Clinton; be forewarned.

Hobroken -> Dan Kervick... , Thursday, September 29, 2016 at 08:03 AM
Hatred of governments and their spending habits
"

If governmental fat cats and billionaire lobbyists would spend more time at fixing the obvious, they would have less time for looting the public treasure. Do you see how they could have prevented the HD, Hoboken disaster?

They could have removed the overpowered transformers that oversupplied coulombs to the Catenary wire that supplied current to the Pantograph of the Hoboken train that just now crashed into the station full of passengers. All the transformers at the end of the line should be scaled down to prevent this sort of disaster, plus all the transformers near a curves in the roadbed should be scaled back to prevent excess power from speeding train up enough to jump the track. No!

You can't always depend on the engineer's judgment to prevent these disasters. Can't always depend on high-tech-safety devices to prevent! Hell! High-tech can be hacked by the North Koreans. You need to change the deep infrastructure of power available.

Get back to work,

Governmental
goof-off-s
!

jonny bakho -> pgl... , Thursday, September 29, 2016 at 05:24 AM
Most people have a flawed understanding of inflation.
Sustainable inflation means BOTH wages and prices go up.
Most people think of inflation only in terms of price increases so we get: Prices go up, wages stay the same: BAD.

A minimum level of inflation is necessary to allow relative prices and wages to reset smoothly.
Prices and wages are sticky downward.
It is unsustainable for a business to deflate prices below fixed costs.
A price can be reset downward by inflation (if inflation is high enough) erosion and thus is less likely to be below fixed costs.
Businesses don't cut wages of employees, they layoff employees.
Businesses don't only cut prices, they cut production.
Workers with leverage and fixed payments cannot afford to work for less.
Inflation allows relative wages to deflate without causing issues with fixed payments.
Everyone agrees that deflation is bad because it is associated with lower output and higher unemployment.
Inflation and deflation are a continuum. Inflation that is too low is only marginally better than deflation.
Inflation must be high enough to absorb relative price resets demanded by the majority of economic shocks or the process of resetting wages and prices will be extended and be a continued drag on an economy.
The evidence clearly suggests that US inflation in the 21st Century has been much too low. A higher inflation target is clearly necessary.

People misunderstand hyperinflation.
Hyperinflation is associated with an increased money supply.
The increased money supply is an effect of hyperinflation not its cause.
Under hyperinflation, an economy needs increasingly larger amounts of currency for transactions, so governments print more money to meet demand.

Hyperinflation is caused by loss of confidence in a currency.
Under hyperinflation, the risk of complete loss of buying power of a currency factors into the price that vendors are willing to accept for goods and services.
Example: In the 1865 US, Confederate currency hyper inflated, not because too much was printed, but because the Confederate government was facing elimination and the currency no longer being honored. 90 percent of the currency could have been eliminated and prices still would have hyperinflated.

Major Myths:
Printing money does not cause hyperinflation, loss of confidence does.
A higher rate of inflation does not make hyperinflation more likely.
A lower rate of inflation is NOT always better for an economy than a higher rate.
Politicians and pundits need to unlearn these inflation myths.

DrDick -> pgl... , -1
Krugman makes some good points, adding to Wren Lewis's excellent observations. I would point out, however, that neither of them acknowledges that most of our media are economic and policy illiterates and incapable of understanding the issues, while the general public has been sold on the idiocy that national budgets are just like household budgets (mostly by that same illiterate media).

[Sep 28, 2016] Battling Apple and the Giants naked capitalism

Notable quotes:
"... Reuters reports that an investigation conducted by it in 2013 found that around three-fourths of the 50 biggest U.S. technology companies use practices that are similar to Apple's to avoid paying tax. So Verstager has taken on not just one giant, but the worlds corporate elite. She should not lose. But even if she does this time, this is a battle well begun. ..."
"... Thus the power of the multinationals comes not just from their own size and reach, and from the support that their own governments afford them, but from their ability to divide desperate countries seeking the presence of global giants to make a small difference to their economic conditions ..."
"... Those who support globalisation support this power disparity. ..."
Sep 28, 2016 | www.nakedcapitalism.com
The case of Apple's Irish operations is an extreme example of such tax avoidance accounting. It relates to two Apple subsidiaries Apple Sales International and Apple Operations Europe. Apple Inc US has given the rights to Apple Sales International (ASI) to use its "intellectual property" to sell and manufacture its products outside of North and South America, in return for which Apple Inc of the US receives payments of more than $2 billion per year. The consequence of this arrangement is that any Apple product sold outside the Americas is implicitly first bought by ASI, Ireland from different manufacturers across the globe and sold along with the intellectual property to buyers everywhere except the Americas. So all such sales are by ASI and all profits from those sales are recorded in Ireland. Stage one is complete: incomes earned from sales in different jurisdictions outside the Americas (including India) accrue in Ireland, where tax laws are investor-friendly. What is important here that this was not a straight forward case of exercising the "transfer pricing" weapon. The profits recorded in Ireland were large because the payment made to Apple Inc in the US for the right to use intellectual property was a fraction of the net earnings of ASI.

Does this imply that Apple would pay taxes on these profits in Ireland, however high or low the rate may be? The Commission found it did not. In two rather curious rulings first made in 1991 and then reiterated in 2007 the Irish tax authority allowed ASI to split it profits into two parts: one accruing to the Irish branch of Apple and another to its "head office". That "head office" existed purely on paper, with no formal location, actual offices, employees or activities. Interestingly, this made-of-nothing head office got a lion's share of the profits that accrued to ASI, with only a small fraction going to the Irish branch office. According to Verstager's Statement: "In 2011, Apple Sales International made profits of 16 billion euros. Less than 50 million euros were allocated to the Irish branch. All the rest was allocated to the 'head office', where they remained untaxed." As a result, across time, Apple paid very little by way of taxes to the Irish government. The effective tax rate on its aggregate profits was short of 1 per cent. The Commissioner saw this as illegal under the European Commission's "state aid rules", and as amounting to aid that harms competition, since it diverts investment away from other members who are unwilling to offer such special deals to companies.

In the books, however, taxes due on the "head office" profits of Apple are reportedly treated as including a component of deferred taxes. The claim is that these profits will finally have to be repatriated to the US parent, where they would be taxed as per US tax law. But it is well known that US transnationals hold large volumes of surplus funds abroad to avoid US taxation and the evidence is they take very little of it back to the home country. In fact, using the plea that it has "permanent establishment" in Ireland and, therefore, is liable to be taxed there, and benefiting from the special deal the Irish government has offered it, Apple has accumulated large surpluses. A study by two non-profit groups published in 2015 has argued that Apple is holding as much as $181 billion of accumulated profits outside the US, a record among US companies. Moreover, The Washington Post reports that Apple's Chief Executive Tim Cook told its columnist Jena McGregor, "that the company won't bring its international cash stockpile back to the United States to invest here until there's a 'fair rate' for corporate taxation in America."

This has created a peculiar situation where the US is expressing concern about the EC decision not because it disputes the conclusion about tax avoidance, but because it sees the tax revenues as due to it rather than to Ireland or any other EU country. US Treasury Secretary Jack Lew criticised the ruling saying, "I have been concerned that it reflected an attempt to reach into the U.S. tax base to tax income that ought to be taxed in the United States." In Europe on the other hand, the French Finance Minister and the German Economy Minister, among others, have come out in support of Verstager, recognizing the implication this has for their own tax revenues. Governments other than in Ireland are not with Apple, even if not always for reasons advanced by the EC.

... ... ...

Thus the power of the multinationals comes not just from their own size and reach, and from the support that their own governments afford them, but from their ability to divide desperate countries seeking the presence of global giants to make a small difference to their economic conditions. The costs of garnering that difference are, therefore, often missed. Reuters reports that an investigation conducted by it in 2013 found that around three-fourths of the 50 biggest U.S. technology companies use practices that are similar to Apple's to avoid paying tax. So Verstager has taken on not just one giant, but the worlds corporate elite. She should not lose. But even if she does this time, this is a battle well begun.

JEHR September 28, 2016 at 10:42 am

Greed has no boundaries!

Ranger Rick September 28, 2016 at 10:43 am

I think the common misconception that multinational corporations exist because "they are big companies that happen to operate in more than one country" is one of the biggest lies ever told.

From the beginning (e.g. Standard Oil, United Fruit) it was clear that multinational status was an exercise in political arbitrage.

tegnost September 28, 2016 at 11:23 am

" Thus the power of the multinationals comes not just from their own size and reach, and from the support that their own governments afford them, but from their ability to divide desperate countries seeking the presence of global giants to make a small difference to their economic conditions "

Those who support globalisation support this power disparity.

[Sep 28, 2016] A simple linear trend suggests that by mid-century about a quarter of men between 25 and 54 will not be working at any moment

Sep 28, 2016 | www.nakedcapitalism.com

"Oil and gas companies typically leave management of their sites to subcontractors, a practice that dilutes safety standards and protects companies from liability, making an already dangerous job even more so, a Denver Post investigation has found" [ Denver Post ]. "Workers' compensation laws give the site owners immunity from lawsuits brought by subcontracted workers injured on the job. Contracts between owners and subcontractors often contain a provision - so controversial that its use in the oil and gas industry is banned in several other high-producing states - in which the companies agree not to sue each other over accidents regardless of who is at fault."

"Labor-force participation rate decline is mostly structural, Fed's Fischer says" [ MarketWatch ]. "On the participation rate, Fischer said some of the decline reflects the people who became discouraged after losing their job and not finding new ones. But he said "much" of the decline was due to the nation's aging population, as well as a trend since the mid-1960s for declining participation by prime-age males. As for the reason why prime-age male participation is falling, particularly for those with no more than a high school education, Fischer said there's a number of possibilities. He said some economists have said disability insurance and public assistance income has played a role, while others point out a decline in demand for lower-skilled labor, which is evidenced by the steep drop in wages in comparison with college graduates."

"A simple linear trend suggests that by mid-century about a quarter of men between 25 and 54 will not be working at any moment" [ Larry Summers ].

[Sep 28, 2016] TPP implies the increased protectionism, in the form of longer and stronger patent and copyright protections. which are equivalent to tariffs of several thousand percent on the protected items. As they apply to an ever growing share of the economy, the resulting economic losses might be huge.

Notable quotes:
"... It is not clear what the NYT thinks it is telling readers with this comment. The economy grows and creates jobs, sort of like the tree in my backyard grows every year. The issue is the rate of growth and job creation. While the economy has recovered from the lows of the recession, employment rates of prime age workers (ages 25-54) are still down by almost 2.0 percentage points from the pre-recession level and almost 4.0 percentage points from 2000 peaks. There is much research ** *** showing that trade has played a role in this drop in employment. ..."
"... It is not surprising that Ford's CEO would say that shifting production to Mexico would not cost U.S. jobs. It is likely he would make this claim whether or not it is true. Furthermore, his actual statement is that Ford is not cutting U.S. jobs. If the jobs being created in Mexico would otherwise be created in the United States, then the switch is costing U.S. jobs. The fact that Michigan and Ohio added 75,000 jobs last year has as much to do with this issue as the winner of last night's Yankees' game. ..."
"... The piece goes on to say that the North American Free Trade Agreement has "for more than two decades has been widely counted as a main achievement of [Bill Clinton]." It doesn't say who holds this view. The deal did not lead to a rise in the U.S. trade surplus with Mexico, which was a claim by its proponents before its passage. It also has not led to more rapid growth in Mexico which has actually fallen further behind the United States in the two decades since NAFTA. ..."
"... It is worth noting that none of the analyses that provide the basis for this assertion take into the account the impact of the increased protectionism, in the form of longer and stronger patent and copyright protections, which are a major part of the TPP. These forms of protection are equivalent to tariffs of several thousand percent on the protected items. As they apply to an ever growing share of the economy, the resulting economic losses will expand substantially in the next decade, especially if the TPP is approved. ..."
economistsview.typepad.com

anne said... \ September 28, 2016 at 04:55 AM

http://cepr.net/blogs/beat-the-press/nyt-editorial-in-news-section-for-tpp-short-on-substance

September 28, 2016

NYT Editorial In News Section for TPP Short on Substance

When the issue is trade deals, like the Trans-Pacific Partnership (TPP), the New York Times throws out its usual journalistic standards to push its pro-trade deal agenda. Therefore it is not surprising to see a story * in the news section that was essentially a misleading advertisement for these trade deals.

The headline tells readers that Donald Trump's comments on trade in the Monday night debate lacked accuracy. The second paragraph adds:

"His aggressiveness may have been offset somewhat by demerits on substance."

These comments could well describe this NYT piece.

For example, it ostensibly indicts Trump with the comment:

"His [Trump's] first words of the night were the claim that "our jobs are fleeing the country," though nearly 15 million new jobs have been created since the economic recovery began."

It is not clear what the NYT thinks it is telling readers with this comment. The economy grows and creates jobs, sort of like the tree in my backyard grows every year. The issue is the rate of growth and job creation. While the economy has recovered from the lows of the recession, employment rates of prime age workers (ages 25-54) are still down by almost 2.0 percentage points from the pre-recession level and almost 4.0 percentage points from 2000 peaks. There is much research ** *** showing that trade has played a role in this drop in employment.

The NYT piece continues:

"[Trump] singled out Ford for sending thousands of jobs to Mexico to build small cars and worsening manufacturing job losses in Michigan and Ohio, but the company's chief executive has said 'zero' American workers would be cut. Those states each gained more than 75,000 jobs in just the last year."

It is not surprising that Ford's CEO would say that shifting production to Mexico would not cost U.S. jobs. It is likely he would make this claim whether or not it is true. Furthermore, his actual statement is that Ford is not cutting U.S. jobs. If the jobs being created in Mexico would otherwise be created in the United States, then the switch is costing U.S. jobs. The fact that Michigan and Ohio added 75,000 jobs last year has as much to do with this issue as the winner of last night's Yankees' game.

The next sentence adds:

"Mr. Trump said China was devaluing its currency for unfair price advantages, yet it ended that practice several years ago and is now propping up the value of its currency."

While China has recently been trying to keep up the value of its currency by selling reserves, it still holds more than $4 trillion in foreign reserves, counting its sovereign wealth fund. This is more than four times the holdings that would typically be expected of a country its side. These holdings have the effect of keeping down the value of China's currency.

If this seems difficult to understand, the Federal Reserve now holds more than $3 trillion in assets as a result of its quantitative easing programs of the last seven years. It raised its short-term interest rate by a quarter point last December, nonetheless almost all economists would agree the net effect of the Fed's actions is the keep interest rates lower than they would otherwise be. The same is true of China and its foreign reserve position.

The piece goes on to say that the North American Free Trade Agreement has "for more than two decades has been widely counted as a main achievement of [Bill Clinton]." It doesn't say who holds this view. The deal did not lead to a rise in the U.S. trade surplus with Mexico, which was a claim by its proponents before its passage. It also has not led to more rapid growth in Mexico which has actually fallen further behind the United States in the two decades since NAFTA.

In later discussing the TPP the piece tells readers:

"Economists generally have said the Pacific nations agreement would increase incomes, exports and growth in the United States, but not significantly."

It is worth noting that none of the analyses that provide the basis for this assertion take into the account the impact of the increased protectionism, in the form of longer and stronger patent and copyright protections, which are a major part of the TPP. These forms of protection are equivalent to tariffs of several thousand percent on the protected items. As they apply to an ever growing share of the economy, the resulting economic losses will expand substantially in the next decade, especially if the TPP is approved.

* http://www.nytimes.com/2016/09/28/us/politics/hillary-clinton-donald-trump-trade-tpp-nafta.html

** http://www.nber.org/papers/w21906

*** http://economics.mit.edu/files/6613

-- Dean Baker

[Sep 28, 2016] Mook Spooked Clinton Campaign Manager, Other Top Dems Dodge Questions on Whether Hillary Wants Obama to Withdraw T

www.breitbart.com
Hillary Clinton's campaign manager Robby Mook and other top Democrats refused to answer whether Clinton wants President Barack Obama to withdraw the Trans Pacific Partnership (TPP) from consideration before Congress during interviews with Breitbart News in the spin room after the first presidential debate here at Hofstra University on Monday night.

The fact that Mook, Clinton campaign spokesman Brian Fallon, and Democratic National Committee (DNC) chairwoman Donna Brazile each refused to answer the simple question that would prove Clinton is actually opposed to the Trans Pacific Partnership now after praising it 40 times and calling it the "gold standard" is somewhat shocking.

After initially ignoring the question entirely four separate times, Mook finally replied to Breitbart News. But when he did respond, he didn't answer the question:

BREITBART NEWS: "Robby, does Secretary Clinton believe that the president should withdraw the TPP?"

ROBBY MOOK: "Secretary Clinton, as she said in the debate, evaluated the final TPP language and came to the conclusion that she cannot support it."

BREITBART NEWS: "Does she think the president should withdraw it?"

ROBBY MOOK: "She has said the president should not support it."

Obama is attempting to ram TPP through Congress as his last act as president during a lame duck session of Congress. Clinton previously supported the TPP, and called it the "Gold Standard" of trade deals. That's something Brazile, the new chairwoman of the DNC who took over after Rep. Debbie Wasserman Schultz (D-FL) was forced to resign after email leaks showed she and her staff at the DNC undermined the presidential campaign of Sen. Bernie Sanders of Vermont and in an untoward way forced the nomination into Clinton's hands, openly confirmed in her own interview with Breitbart News in the spin room post debate. Brazile similarly refused to answer if Clinton should call on Obama to withdraw the TPP from consideration before Congress.

[Sep 28, 2016] Wolf Richter Negative Growth of Real Wages is Normal for Much of the Workforce, and Getting Worse – New York Fed naked cap

Notable quotes:
"... If you're wondering why a large portion of American consumers are strung out and breathless and have trouble spending more and cranking up the economy, here's the New York Fed with an answer. And it's going to get worse. ..."
"... That the real median income of men has declined 4% since 1973 is an ugly tidbit that the Census Bureau hammered home in its Income and Poverty report two weeks ago, which I highlighted in this article – That 5.2% Jump in Household Income? Nope, People Aren't Suddenly Getting Big-Fat Paychecks – and it includes the interactive chart below that shows how the real median wage of women rose 36% from 1973 through 2015, while it fell 4% for men... ..."
"... Nominal wages are sticky downwards but not real wages. That is why the FED, the banks, the corporate sector and the economists support persistent inflation, i.e. it lowers real wages. The "study" correlating wage growth with aging is one of those empirical pieces by economists to obscure the role of inflation in lowering real wages. ..."
"... Real Wage Growth chart very interesting, crossing negative at about 55 for no college, and 43 for a Bachelor's degree. 43!! Not even halfway through a work-life, and none better since 2003 at best. ..."
Sep 28, 2016 | www.nakedcapitalism.com
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.

The New York Fed published an eye-opener of an article on its blog, Liberty Street Economics , seemingly about the aging of the US labor force as one of the big economic trends of our times with "implications for the behavior of real wage growth." Then it explained why "negative growth" – the politically correct jargon for "decline" – in real wages is going to be the new normal for an ever larger part of the labor force.

If you're wondering why a large portion of American consumers are strung out and breathless and have trouble spending more and cranking up the economy, here's the New York Fed with an answer. And it's going to get worse.

The authors looked at the wages of all employed people aged 16 and older in the Current Population Survey (CPS), both monthly data from 1982 through May 2016 and annual data from 1969 through 1981. They then restricted the sample to employed individuals with wages, which boiled it down to 7.6 million statistical observations.

Then they adjusted the wages via the Consumer Price Index to 2014 dollars and divide the sample into 140 different "demographic cohorts" by decade of birth, sex, race, and education. As an illustration of the principles at work, they picked the cohort of white males born in the decade of the 1950s.

That the real median income of men has declined 4% since 1973 is an ugly tidbit that the Census Bureau hammered home in its Income and Poverty report two weeks ago, which I highlighted in this article – That 5.2% Jump in Household Income? Nope, People Aren't Suddenly Getting Big-Fat Paychecks – and it includes the interactive chart below that shows how the real median wage of women rose 36% from 1973 through 2015, while it fell 4% for men...

Sally Snyder September 28, 2016 at 7:22 am

Here is an interesting article that looks at which Americans have left the workforce in very high numbers:

http://viableopposition.blogspot.ca/2016/08/exiting-workforce-growing-pastime-for.html

The current real world employment experience of millions of Americans has shown little improvement since the end of the Great Recession.

Damian September 28, 2016 at 7:35 am

The number of public companies have been cut in half in the last 20 years. Just for one metric.

So for those born in the 50's, reaching middle or senior management by the time they were in their mid 40's (1999) was increasingly harder as the probability of getting squeezed out multiplied. In the last ten years, the birth / death rate of startups / small business has reversed as well.

There is probably ten other examples of why age is not the mitigating criteria for the decline in wages. It's not skill sets, not ambition, not flexibility. Pure number of chances for advancement and therefore associated higher wages has declined precipitously.

Anti Trust Enforcement went out the window as Neo-Liberal policies converted to political donations for promoting consolidation.

Now watch even those in their 20-30 age group will experience the same thing as H-1b unlimited takes hold with the Obama / Clinton TTP burning those at younger demographics. Are you going to say they are "too old" as well to write software?

Tell me where you want to go, and I will focus on selective facts and subjective interpretation of those selective facts to yield the desired conclusions.

Barack Peddling Fiction Obama – BS at the B.L.S. – has a multiplicity of these metrics.

Jim A. September 28, 2016 at 7:37 am

Hmm…Because wages are "sticky downwards" it would be helpful to see the inflation rate on that first chart.

Reply
Ignim Brites September 28, 2016 at 8:35 am

Nominal wages are sticky downwards but not real wages. That is why the FED, the banks, the corporate sector and the economists support persistent inflation, i.e. it lowers real wages. The "study" correlating wage growth with aging is one of those empirical pieces by economists to obscure the role of inflation in lowering real wages.

Steve H. September 28, 2016 at 8:05 am

Real Wage Growth chart very interesting, crossing negative at about 55 for no college, and 43 for a Bachelor's degree. 43!! Not even halfway through a work-life, and none better since 2003 at best.

[Sep 28, 2016] The Consequences of Long Term Unemployment - NBER

Sep 28, 2016 | www.nber.org

[Sep 27, 2016] DeLong on helicopter money

Sep 27, 2016 | economistsview.typepad.com

Peter K. : September 27, 2016 at 06:45 AM DeLong on helicopter money: "The swelling wave of argument and discussion around "helicopter money" has two origins:

First, as Harvard's Robert Barro says: there has been no recovery since 2010.

The unemployment rate here in the U.S. has come down, yes. But the unemployment rate has come down primarily because people who were unemployed have given up and dropped out of the labor force. Shrinkage in the share of people unemployed has been a distinctly secondary factor. Moreover, the small increase in the share of people with jobs has been neutralized, as far as its effects on how prosperous we are, by much slower productivity growth since 2010 than America had previously seen, had good reason to anticipate, and deserves.

The only bright spot is a relative one: things in other rich countries are even worse.
..."

I thought Krugman and Furman were bragging about Obama's tenure.

"Now note that back in 1936 [John Maynard Keynes had disagreed][]:

"The State will have to exercise a guiding influence... partly by fixing the rate of interest, and partly, perhaps, in other ways.... It seems unlikely that the influence of banking policy on the rate of interest will be sufficient by itself.... I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative..."

By the 1980s, however, for Keynes himself the long run had come, and he was dead. The Great Moderation of the business cycle from 1984-2007 was a rich enough pudding to be proof, for the rough consensus of mainstream economists at least, that Keynes had been wrong and Friedman had been right.

But in the aftermath of 2007 it became very clear that they-or, rather, we, for I am certainly one of the mainstream economists in the roughly consensus-were very, tragically, dismally and grossly wrong."

DeLong sounds very much left rather than center-left. His reasons for supporting Hillary over Sanders eludes me.

Hillary's $275 billion over 5 years is substantially too small as center-leftist Krugman put it.

Now we face a choice:

Do we accept economic performance that all of our predecessors would have characterized as grossly subpar-having assigned the Federal Reserve and other independent central banks a mission and then kept from them the policy tools they need to successfully accomplish it?

Do we return the task of managing the business cycle to the political branches of government-so that they don't just occasionally joggle the elbows of the technocratic professionals but actually take on a co-leading or a leading role?

Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools it needs?

Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it, of unemployment will in the long run turn out to be good medicine, for some reason or other. And our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that attempts to go through it will rob central banks of their independence and wind up with us going through door number (2), which we know ends badly..."

------------

Some commenters believe more fiscal policy via Congress is politically more realistic than helicopter money.

I don't know, maybe they're right. I do know Hillary's proposals are too small. And her aversion to government debt and deficit is wrong given the economic context and market demand for safe assets.

Some pundits like Krugman believe helicopter money won't be that effective "because the models tell him." We should try it and find out. Reply Tuesday, September 27, 2016 at 06:45 AM

reason -> Peter K.... , Tuesday, September 27, 2016 at 08:40 AM

"Moreover, the small increase in the share of people with jobs has been neutralized, as far as its effects on how prosperous we are, by much slower productivity growth since 2010 than America had previously seen, had good reason to anticipate, and deserves."

?????? The rate of (measured) productivity growth is not all that important. What has happened to real median income.

And why are quoting from Robert Barro who is basically a freshwater economist. Couldn't you find somebody sensible?

pgl -> reason ... , Tuesday, September 27, 2016 at 09:08 AM
Barro wants us to believe we have been at full employment all along. Of course that would mean any increase in aggregate demand would only cause inflation. Of course many of us think Barro lost it years ago.

These little distinctions are alas lost on PeterK.

Peter K. -> pgl... , Tuesday, September 27, 2016 at 01:05 PM
run a long stupid troll.

Go read some hack Republican analyses.

Peter K. -> reason ... , Tuesday, September 27, 2016 at 01:06 PM
DeLong is quoting Barro.
Paine -> Peter K.... , Tuesday, September 27, 2016 at 09:57 AM
Really it's Delong on the context that has produced a return to HM fantasies

I'm sure u agree

He doesn't endorse HM in this post does he ?

Peter K. -> Paine ... , Tuesday, September 27, 2016 at 01:09 PM
Sounds to me like he does:

"Now we face a choice:

[1] Do we accept economic performance that all of our predecessors would have characterized as grossly subpar-having assigned the Federal Reserve and other independent central banks a mission and then kept from them the policy tools they need to successfully accomplish it?

[2] Do we return the task of managing the business cycle to the political branches of government-so that they don't just occasionally joggle the elbows of the technocratic professionals but actually take on a co-leading or a leading role?

[3] Or do we extend the Federal Reserve's toolkit in a structured way to give it the tools it needs?

Helicopter money is an attempt to choose door number (3). Our intellectual adversaries mostly seek to choose door number (1)-and then to tell us that the "cold douche", as Schumpeter put it, of unemployment will in the long run turn out to be good medicine, for some reason or other. And our intellectual adversaries mostly seek to argue that in reality there is no door number (3)-that attempts to go through it will rob central banks of their independence and wind up with us going through door number (2), which we know ends badly...""

---------------------
Conservatives want 1 and 2 ends badly, so 3 is the only choice.

[Sep 27, 2016] The US grand strategy post-Bush was to reposition itself at the heart of a liberal economic system excluding China through TTIP with the EU and TPP with Asia-Pac ex. China and Russia. The idea was that this would enable the US to sustain its hegemony.

Notable quotes:
"... It has been an absolute failure. Brexit has torpedoed TTIP and TPP has limited value - the largest economy in the partnership, Japan, has been largely integrated in to the US for the past 70 years. ..."
"... IMO the biggest failure of the US has been hating Russia too much. The Russians have just as much reason to be afraid of China ..."
"... It's old Cold War thinking that has seen America lose its hegemony -- similar to how the British were so focused on stopping German ascendancy they didn't see the Americans coming with the knife. ..."
Sep 27, 2016 | discussion.theguardian.com
Dante5 1d ago
The US grand strategy post-Bush was to reposition itself at the heart of a liberal economic system excluding China through TTIP with the EU and TPP with Asia-Pac ex. China and Russia. The idea was that this would enable the US to sustain its hegemony.

It has been an absolute failure. Brexit has torpedoed TTIP and TPP has limited value - the largest economy in the partnership, Japan, has been largely integrated in to the US for the past 70 years.

IMO the biggest failure of the US has been hating Russia too much. The Russians have just as much reason to be afraid of China as the US do and have a pretty capable army.

If the US patched things up with the Russians, firstly it could redeploy forces and military effort away from the Middle East towards Asia Pac and secondly it would give the US effective leverage over China -- with the majority of the oil producing nations aligned with the US, China would have difficulty in conducted a sustained conflict.

It's old Cold War thinking that has seen America lose its hegemony -- similar to how the British were so focused on stopping German ascendancy they didn't see the Americans coming with the knife.

[Sep 27, 2016] Contrary to What AP Tells You, Social Security Is NOT a Main Driver of the Countrys Long-term Budget Problem

Sep 27, 2016 | economistsview.typepad.com

anne : Tuesday, September 27, 2016 at 05:05 AM

http://cepr.net/blogs/beat-the-press/contrary-to-what-ap-tells-you-social-security-is-not-a-main-driver-of-the-country-s-long-term-budget-problem

September 27, 2016

Contrary to What AP Tells You, Social Security Is NOT a Main Driver of the Country's Long-term Budget Problem

The New York Times ran a short Associated Press piece * on Social Security and "why it matters." The piece wrongly told readers that Social Security is "a main driver of the government's long-term budget problems." This is not true. Under the law, Social Security can only spend money that is in its trust fund. If the trust fund is depleted then full benefits cannot be paid. The law would have to be changed to allow Social Security to spend money other than the funds designated for the program and in that way contribute to the deficit.

The piece also plays the "really big number" game, telling readers:

"the program faces huge shortfalls that get bigger and bigger each year.In 2034, the program faces a $500 billion shortfall, according to the Social Security Administration. In just five years, the shortfalls add up to more than $3 trillion.

"Over the next 75 years, the shortfalls add up to a staggering $139 trillion. But why worry? When that number is adjusted for inflation, it comes to only $40 trillion in 2016 dollars - a little more than twice the national debt."

Since this is talking about shortfalls projected to be incurred over a long period of time, it would be helpful to express the shortfall relative to the economy over this period of time, not debt at a point in time. This is not hard to do, since there is a table ** right in the Social Security trustees report that reports the projected shortfall as being equal to 0.95 percent of GDP over the 75-year forecasting horizon. By comparison, the costs of the war in Iraq and Afghanistan came to around 1.6 percent of GDP at their peaks in the last decade.

The piece also gets the reason for the projected shortfall wrong. It tells readers:

"In short, because Americans aren't having as many babies as they used to. That leaves relatively fewer workers to pay into the system. Immigration has helped Social Security's finances, but not enough to fix the long-term problems.

"In 1960, there were 5.1 workers for each person getting benefits. Today, there are about 2.8 workers for each beneficiary. That ratio will drop to 2.1 workers by 2040."

Actually the drop in the birth rate and the declining ratio of workers to beneficiaries had long been predicted. The reason that the program's finances look worse than when the Greenspan commission put in place the last major changes in 1983 is the slowdown in wage growth and the upward redistribution of wage income so that a larger share of wage income now goes untaxed.

In 1983, only 10 percent of wage income was above the payroll tax cap. Today it is close to 18 percent. This upward redistribution explains more than 40 percent *** of projected shortfall over the next 75 years.

It is also worth noting that the loss in wage income for most workers to upward redistribution swamps the size of any tax increases that could be needed to maintain full funding for the program. While AP wants to get people very worried over possible tax increases in future years, it would rather they ignore the policies (e.g. trade, Federal Reserve policy, Wall Street policy, patent policy) that have taken money out of the pockets of ordinary workers and put it in the hands of the rich.

* http://www.nytimes.com/aponline/2016/09/27/business/ap-us-campaign-2016-why-it-matters-social-security.html

** https://www.ssa.gov/OACT/TR/2016/VI_G2_OASDHI_GDP.html#200732

*** http://www.cepr.net/index.php/blogs/cepr-blog/the-impact-of-the-upward-redistribution-of-wage-income-on-social-security-solvency

-- Dean Baker

Reply Tuesday, September 27, 2016 at 05:05 AM Foreign Kidnappers said in reply to anne... , Tuesday, September 27, 2016 at 05:21 AM

fewer workers to pay into the system. Immigration has helped Social Security's finances, but not enough to fix the long-term
"
~~dB~

Fewer workers who on balance draw smaller pay-check-s within a World of rising prices. Can you see the long trend of inflation? Do you see how the price of a t-bond has risen steady on during the past 35 years? As the bond price rises the yield falls. Do you see how much?

This is a long term unstoppable inflation that raises the price of all ships. All nursing homes and all ships!

Holy
ship
!

Paine -> anne... , Tuesday, September 27, 2016 at 07:23 AM
Dean in high gear
Remove the taxable compensation exclusions and caps
Julio -> anne... , Tuesday, September 27, 2016 at 01:39 PM
That's 139 Trillion with a capital "T", and that rhymes with "P", and that stands for pool!

And don't look at guys like me to save Social Security. My unfunded liability for kids shoes alone is over $20,000, and that's assuming they leave home at 18.

anne : , Tuesday, September 27, 2016 at 05:08 AM
http://cepr.net/publications/op-eds-columns/time-to-treat-bank-ceos-like-adults

September 26, 2016

Time to Treat Bank CEOs Like Adults
By Dean Baker

The country's major banks are like trouble-making adolescents. They constantly get involved in some new and unimagined form of mischief. Back in the housing bubble years it was the pushing, packaging and selling of fraudulent mortgages. Just a few years later we had JP Morgan, the country's largest bank, incurring billions in losses from the gambling debts of its "London Whale" subsidiary. And now we have the story of Wells Fargo, which fired 5,300 workers for selling phony accounts to the bank's customers.

It is important to understand what is involved in this latest incident at Wells Fargo. The bank didn't just discover last month that these employees had been ripping off its customers. These firings date back to 2011. The company has known for years that low-level employees were ripping off customers by assigning them accounts -- and charging for them -- which they did not ask for. And this was not an isolated incident, 5,300 workers is a lot of people even for a huge bank like Wells Fargo.

When so many workers break the rules, this suggests a problem with the system, not bad behavior by a rogue employee. And, it is not hard to find the problem with the system. The bank gave these low level employees stringent quotas for account sales. In order to make these quotas, bank employees routinely made up phony accounts. This practice went on for five years.

As it became aware of widespread abuses, it's hard to understand why the bank would not change its quota system for employees. One possibility is that they actually encouraged this behavior, since the new accounts (even phony accounts) would be seen as good news on Wall Street and drive up the bank's stock price.

Certainly Wells Fargo CEO John Stumpf, as a major share and options holder, stood to gain from propping up the stock price, as pointed out by reporter David Dayan. In keeping with this explanation, Carrie Tolsted, the executive most immediately responsible for overseeing account sales, announced her resignation and took away $125 million in compensation. This is equal to the annual pay of roughly 5,000 starting bank tellers at Wells Fargo. That is not ordinarily the way employees are treated when they seriously mess up on the job.

Regardless of the exact motives, the real question is what will be the consequences for Stumpf and other top executives. Thus far, he has been forced to stand before a Senate committee and look contrite for four hours. Stumpf stands to make $19 million this year in compensation. That's almost $5 million for each hour of contrition. Millions of trouble-making high school students must be very jealous.

There is little reason for most of us to worry about Stumpf contrition, or lack thereof. His bank broke the law repeatedly on a large scale. And, he was aware of these violations, yet he nonetheless left in place the incentive structure that caused them. In the adult world this should mean being held accountable.

This is not a question of being vindictive towards Stumpf, it's a matter of getting the incentives right. If the only price for large-scale law breaking by the top executives of the big banks is a few hours of public shaming, but the rewards are tens of millions or even hundreds of millions in compensation, then we will continue to see bankers disregard the law, as they did at Wells Fargo and they did on a larger scale during the run-up of housing bubble.

There is another aspect to the Wells Fargo scandal that is worth considering. Insofar as the bank was booking revenue on accounts that didn't exist, it was also ripping off the banks' shareholders. The shareholders' interests are supposed to be protected by the bank's board of directors.

It doesn't seem the shareholders got much help there....

anne -> anne... , Tuesday, September 27, 2016 at 06:09 AM
http://www.nytimes.com/2016/09/27/business/dealbook/wells-fargo-workers-claim-retaliation-for-playing-by-the-rules.html

September 26, 2016

Wells Fargo Workers Claim Retaliation for Playing by the Rules
By STACY COWLEY

In two lawsuits seeking class-action status, workers say they were fired or demoted for acting ethically and falling short of unrealistic sales goals.

Paine -> anne... , Tuesday, September 27, 2016 at 07:31 AM
Really important
pgl -> anne... , Tuesday, September 27, 2016 at 08:19 AM
Rehire the staff. Fire the CEO.
EMichael -> anne... , Tuesday, September 27, 2016 at 09:06 AM
This isn't going to be popular in here, and I do not even like saying it, but the timing of these lawsuits suggest to me ambulance chasing.

Unless someone can tell me how it is possible for these employees to accept this treatment for years and years until the CFPB fines Wells Fargo.

pgl -> EMichael... , Tuesday, September 27, 2016 at 09:18 AM
Cellino & Barnes? I hope these plaintiffs have been attorneys than that. But yea - having a government agency make your case is a good idea as I'm sure top Wells Fargo management has hired some nasty defense attorneys.
EMichael -> pgl... , Tuesday, September 27, 2016 at 09:26 AM
Not my point.

California has some of the strongest whistle blower protections in the country.

I find it remarkable that(and I have tried but failed to find any evidence) not one of these mistreated employees filed a lawsuit years ago. The firings started in 2011. Are you telling me these employees sat around for 5 years without a single one of them taking action?

The other part that bothers me is this bonus level goal. Wells Fargo is not the only company in the world that sets their bonus levels at points that are almost impossible to obtain.

I do not see why that is an issue at all.


pgl -> EMichael... , Tuesday, September 27, 2016 at 09:46 AM
Not talking whistle blower protections. Firms like Cellino and Barnes only take cases where they know they can win. Then again - I am talking about a dirt bag law firm. Why bring a case when the odds are stacked against you? But I think what you are pointing out is they is a new sheriff in town with respect to gathering the facts - which of course is always key in winning any law suit.
pgl -> EMichael... , Tuesday, September 27, 2016 at 09:47 AM
"not one of these mistreated employees filed a lawsuit years ago".

A lot of women who have been raped don't bother to prosecute the creep thinking they can't win anyway. This may have been the thinking of these employees until now.

EMichael -> pgl... , Tuesday, September 27, 2016 at 10:04 AM
0 for 5300 is mind boggling.

I am not saying the law firm is incompetent, I am saying it seems to me they are taking a case where WF might not want to deal with more bad pr and settle.

The only people, from what I have seen of this case, that have a chance to win on the merits are those who claimed they called the ethics department at Wells and were fired for that action.

Julio -> EMichael... , Tuesday, September 27, 2016 at 11:19 AM
Yes, the lawyers are circling like vultures.
But it just shows that lawyers evaluate cases before taking them on, and that the cases' prospects depend on public opinion.

In addition, it is much easier for people to feel empowered, talk to lawyers, and fight back if they don't feel isolated and vulnerable to retaliation.

cm -> anne... , Tuesday, September 27, 2016 at 09:35 AM
"the executive most immediately responsible for overseeing account sales, announced her resignation and took away $125 million in compensation. ... That is not ordinarily the way employees are treated when they seriously mess up on the job."

Based on (public) evidence available to me, I have to inform you that this *is* ordinarily the way how the higher executive ranks are treated when the have to leave because of a serious blunder. In many cases, the termination package is written into their contract, with exceptions mostly for criminal malfeasance, breach of contract, and that type of thing, or if the management/board deems it is better for everybody else to "convince" the undesired executive to leave without a big splash, then they will sweeten the deal.

As I have seen in tech, in many companies the rank-and-file are treated to similar arrangements, only the amounts are several orders of magnitude lower. But it is not very common for somebody to be outright fired without severance. There are commonly provisions like a few weeks of salary continuation per year of service, or offering a small sum to get a quick exit instead of a drawn out and arduous process of managing somebody out and "documenting" everything.

EMichael -> anne... , Tuesday, September 27, 2016 at 10:52 AM
Here's the part that bothers me about this.(and once again I will mention that I feel almost dirty defending bank execs).

" large-scale law breaking by the top executives of the big banks".

I don't get this at all. It seems that setting huge bonus numbers is somehow large scale law breaking.

But let's look at the real numbers is some perspective here(which is usually Baker's thing).

The idea seems to be that Stumpf came up with this idea to open accounts that people did not know they had. Those accounts would both generate revenue and allow him to talk about the growth of accounts in the bank.

I have seen nothing that shows how many accounts were opened illegally(I would like to see that) and nothing to show how many legal accounts were opened during this time frame. With that info you could put this into perspective how Stumpf and other high level execs gained from this action.

That being said I know one thing. People who had accounts opened illegally were returned the fees that they paid. That total is $5 million. Not a lot of revenue but it kind of makes sense. You cannot charge people a lot of fees with products they do not even know they have. there is no way in the world that anyone can think there was going to be a lot of money made on accounts that were, to all intents and purposes, dead.

Meanwhile, in the time period that this case covers, Wells Fargo had profits of almost $100 billion. To think the CEO is going to worry about such an insignificant amount of revenue by "planning" an illegal action is absurd.

I am all in in the bank CEOs committing fraud during the bubble, there was a huge amount of profit to be made. But to think this thing came from the top, or even five or six levels down, is silly. There is no reason.

This was the case of front line people committing fraud to make money. It was also the case of their managers to encourage and/or allow that fraud to make money.

Wells certainly deserves the punishment for allowing this fraud to happen, but thinking it originated in the executive offices makes no sense from an standpoint.

Paine -> EMichael... , Tuesday, September 27, 2016 at 11:38 AM
It takes courage to defend top management
Of a oligop bank
Peter K. -> Paine ... , Tuesday, September 27, 2016 at 01:01 PM
EMichael hates lefites. He gets off on baiting them (us).
paine -> Peter K.... , -1
Let us enjoy the attention

[Sep 27, 2016] reason

Sep 27, 2016 | plus.google.com
said... https://www.stlouisfed.org/on-the-economy/2016/september/great-moderation-vacation

I don't like the way this is written. Is low volatility in measured GDP growth and inflation a good thing in and of itself? I would think that this needs justification. I have the feeling this is a clear case of proxy creep. We try to control a proxy for something we care about, and in the end we forget what it is that we actually care about and the proxy becomes useless, misleading even. What if the decline of the middle class that we are so concerned about is the result precisely of the policies we are using to reduce volatility? Reply Tuesday, September 27, 2016 at 01:58 AM Paine said in reply to reason ... Excellent Trade-induced increases in inequality of disposable income erode about 20% of the gains from trade reason said... http://www.nber.org/papers/w22676#fromrss
Didn't read the paper, but in the conclusions this was important
"Our quantitative results suggest that both corrections are nonnegligible: trade-induced increases in inequality of disposable income erode about 20% of the gains from trade, while the gains from trade would be about 15% larger if redistribution was carried out via non-distortionary means. " reason said... http://oecdinsights.org/2016/09/26/complexity-theory-and-evolutionary-economics/
"So where should we go with complexity? I believe that a core component of complexity is and should be evolution. In an evolutionary view, an economy is an "organism" that is constantly developing new industries, technologies, organizations, occupations, and capabilities while at the same time shedding older ones that new technologies and other evolutionary changes make redundant. This rate of evolutionary change differs over time and space, depending on a variety of factors, including technological advancement, entrepreneurial effort, domestic policies, and the international competitive environment. To the extent that neoclassical models consider change, it is seen as growth more than evolution. In other words, market transactions maximize static efficiency and consumer welfare. As Alan Blinder writes, "Can economic activities be rearranged so that some people are made better off, but no one is made worse off? If so we have uncovered an inefficiency. If not, the system is efficient."

In complexity or evolutionary economics, we should be focusing not on static allocative efficiency, but on adaptive efficiency. Douglass North argues that: "Adaptive efficiency…is concerned with the kinds of rules that shape the way an economy evolves through time. It is also concerned with the willingness of a society to acquire knowledge and learning, to induce innovation, to undertake risk and creative activity of all sorts, as well as to resolve problems and bottlenecks of the society through time." Likewise, Richard Nelson and Sidney G. Winter wrote in their 1982 book An Evolutionary Theory of Economic Change, "The broader connotations of 'evolutionary' include a concern with processes of long-term and progressive change."

This provides a valuable direction. It means that a key focus for economic policy should be to encourage adaptation, experimentation and risk taking. It means supporting policies to intentionally accelerate economic evolution, especially from technological and institutional innovation. This means not only rejecting neo-Ludditism in favor of techno-optimism, it means the embrace of a proactive innovation policy. And it means enabling new experiments in policy, recognizing that many will fail, but that some will succeed and become "dominant species." Policy and program experimentation will better enable economic policy to support complex adaptive systems.
"

Yes, I basically agree with this because it is specifically directed towards policy thinking in the broadest sense. I was suspicious of the article at first because of this:
"However, despite what Larry Summers has written, economics is not a science that applies for all times and places."
This seems to me wrong headed. Do we need a new biology every time there is some genetic change or do we need a biology that can cope with genetic change? Reply Tuesday, September 27, 2016 at 02:12 AM RC AKA Darryl, Ron said in reply to reason ... We need a new biology that can rewrite the laws of science whenever we want :<)

[Sep 27, 2016] Globalization is gone as a main driving force, pan-European unity is gone, and whether the United States will stay united is far from a done deal

Notable quotes:
"... Global is gone as a main driving force, pan-European is gone, and whether the United States will stay united is far from a done deal. We are moving towards a mass movement of dozens of separate countries and states and societies looking inward. All of which are in some form of -impending- trouble or another. ..."
"... And of course it's confusing that the protests against the 'old regimes' and the growth and centralization -first- manifest in the rise of faces and voices who do not reject all of the above offhand. That is to say, the likes of Marine Le Pen, Donald Trump and Nigel Farage may be against more centralization, but none of them has a clue about growth being over. They don't get that part anymore than Hillary or Hollande or Merkel do. ..."
"... Dems in the US, Labour in the UK, and Hollande's 'Socialists' in France have all become part of the two-headed monster that is the political center, and that is (held) responsible for the deterioration in people's lives. ..."
Sep 27, 2016 | www.nakedcapitalism.com
fresno dan September 27, 2016 at 4:46 pm

Why There is Trump ~Ilargi

But nobody seems to really know or understand. Which is odd, because it's not that hard. That is, this all happens because growth is over. And if growth is over, so are expansion and centralization in all the myriad of shapes and forms they come in.

Global is gone as a main driving force, pan-European is gone, and whether the United States will stay united is far from a done deal. We are moving towards a mass movement of dozens of separate countries and states and societies looking inward. All of which are in some form of -impending- trouble or another.

What makes the entire situation so hard to grasp for everyone is that nobody wants to acknowledge any of this. Even though tales of often bitter poverty emanate from all the exact same places that Trump and Brexit and Le Pen come from too.

That the politico-econo-media machine churns out positive growth messages 24/7 goes some way towards explaining the lack of acknowledgement and self-reflection, but only some way. The rest is due to who we ourselves are. We think we deserve eternal growth.

And of course it's confusing that the protests against the 'old regimes' and the growth and centralization -first- manifest in the rise of faces and voices who do not reject all of the above offhand. That is to say, the likes of Marine Le Pen, Donald Trump and Nigel Farage may be against more centralization, but none of them has a clue about growth being over. They don't get that part anymore than Hillary or Hollande or Merkel do.

So why these people? Look closer and you see that in the US, UK and France, there is nobody left who used to speak for the 'poor and poorer'. While at the same time, the numbers of poor and poorer increase at a rapid clip. They just have nowhere left to turn to. There is literally no left left.

Dems in the US, Labour in the UK, and Hollande's 'Socialists' in France have all become part of the two-headed monster that is the political center, and that is (held) responsible for the deterioration in people's lives. Moreover, at least for now, the actual left wing may try to stand up in the form of Jeremy Corbyn or Bernie Sanders, but they are both being stangled by the two-headed monster's fake left in their countries and their own parties.
================================================
This is from today's Links, but I didn't have a chance to post this snippet.
https://fred.stlouisfed.org/series/A191RL1A225NBEA

Long time since we had 5% – if the whole system is financial scheme is premised on growth, and there is less and less of it ever year, it doesn't look sustainable. How bad http://www.nakedcapitalism.com/2016/09/200pm-water-cooler-9272016.html#comment-2676054does it have to get for how many before the model is chucked???

In the great depression, even the bankers were having a tough time. If the rich are exempt from suffering, I think history has shown that a small elite can impose suffering on masses for a long time…

'there is nobody left who used to speak for the 'poor and poorer'.

Actually, there are plenty who SPEAK for the poor, there just is NONE who ACT.

Reply
jrs September 27, 2016 at 5:08 pm

How would we measure this growth that is supposed to be over? Yes of course there are the conventional measurements like GDP, but it's not zero. Yes of course if inflation is understated it would overstate GDP, and yes GDP measurements may not measure much as many critics have said. But what about other measures?

Is oil use down, are CO2 emissions down, is resource use in general down? If not it's growth (or groath). This growth is at the cost of the planet but that's why GDP is flawed. And the benefit of this groath goes entirely to the 1%ers, but that's distribution.

The left failed, I don't know all the reasons (and it's always hard to oppose the powers that be, the field always tilts toward them, it's never a fair fight) but it failed. That's what we see the results of.

fresno dan September 27, 2016 at 6:13 pm

I agree

OpenThePodBayDoorsHAL September 27, 2016 at 5:12 pm

Someone very smart said "the Fed makes the economy more stable".
He also quoted The Princess Bride: "You keep using that word, I do not think it means what you think".
Definition of stable: firm; steady; not wavering or changeable.
As in: US GDP growth of a paltry 1.22% per year.
But hey it only took an additional trillion $ in debt per year to stay "stable".

Softie September 27, 2016 at 5:42 pm

there are plenty who SPEAK for the poor, there just is NONE who ACT.
========
That's why in 1992 Francis Futurama refirmed the end of history that was predicted by Hegel some 150 years earlier.

Lee September 27, 2016 at 5:58 pm

Time to revisit Herman Daly's Steady-State Economy.

[Sep 27, 2016] TPP is practically written by the lobbyists from the multi-international corporations that exploit every possible tax laws, labor laws, environmental and public health regulations, legal representations and consequences. It is imperialism 2.0 in the 21st century

Sep 27, 2016 | discussion.theguardian.com

wumogang

22h ago 12 13

TPP is practically written by the lobbyists from the multi-international corporations that exploit every possible tax laws, labor laws, environmental and public health regulations, legal representations and consequences. It is imperialism 2.0 in the 21st century, exclusively serving the interests of top point one percent while greatly depressing the wages of middle class; it is overwhelmingly opposed by the public opinion, law makers of all sides and current president candidates. There is zero chance Obama could make it through legislation before his exit; Clinton will not even consider bringing it back if she wins the election because she already flip-flopped once on the issue during her campaign; and it would seriously damage her chance of re-election if she does. As for Trump, I leave it to anyone's imaginations.

[Sep 26, 2016] The Financialization of Education and the Student Loan Debt Bubble

Sep 26, 2016 | www.nakedcapitalism.com

DrBob September 25, 2016 at 11:58 am

The Financialization of Education and the Student Loan Debt Bubble

http://www.nybooks.com/articles/2016/10/13/how-the-financing-of-colleges-may-lead-to-disaster/

[Sep 26, 2016] Human population as an ecosystem problem

Notable quotes:
"... These are unsustainable trends that cannot be ignored and part of the reason I absolutely hate all the "green energy" (which isn't really green) miracle cures. Even if 100% renewable carbon free energy existed, it would not matter, we would still face environmental and ecological collapse due to the pressures of unsustainable populations. ..."
"... Population is the number one driver of global warming, in addition to decreasing arable topsoil at an unimaginably fast rate. Currently the world has between 60-200 years worth of topsoil left that will take 1000-2000 years to fully renew in "ideal" conditions. ..."
"... Yes better more sustainable methods are important. but you are saying by implementing these we can have infinite population growth which is insane. 9 billion no problem, 12 billion no problem, 20 billion no problem, Ad infinitum, right? Do you really believe that? ..."
Sep 26, 2016 | www.nakedcapitalism.com

HBE September 25, 2016 at 10:30 am

Bloomberg population link

Population is the number one driver of global warming, in addition to decreasing arable topsoil at an unimaginably fast rate. Currently the world has between 60-200 years worth of topsoil left that will take 1000-2000 years to fully renew in "ideal" conditions.

In addition to acidification from population driven climate change, the oceans have faced so much demand as a food source that 85% of the world's oceans have been fully exploited as a food source.

These are unsustainable trends that cannot be ignored and part of the reason I absolutely hate all the "green energy" (which isn't really green) miracle cures. Even if 100% renewable carbon free energy existed, it would not matter, we would still face environmental and ecological collapse due to the pressures of unsustainable populations.

Honestly, (in a selfish sense) I am glad I was born when I was, it looks like nothing will ever be done about population and population driven Global warming, soil collapse and empty oceans will all likely make the perfect storm just after I kick it. That's not to say I don't practice personal sustainability; no car, local shopping only, limited meat, no fish etc. But that doesn't really matter on the macro level.

HBE September 25, 2016 at 10:30 am

Bloomberg population link

Population is the number one driver of global warming, in addition to decreasing arable topsoil at an unimaginably fast rate. Currently the world has between 60-200 years worth of topsoil left that will take 1000-2000 years to fully renew in "ideal" conditions.

In addition to acidification from population driven climate change, the oceans have faced so much demand as a food source that 85% of the world's oceans have been fully exploited as a food source.

These are unsustainable trends that cannot be ignored and part of the reason I absolutely hate all the "green energy" (which isn't really green) miracle cures. Even if 100% renewable carbon free energy existed, it would not matter, we would still face environmental and ecological collapse due to the pressures of unsustainable populations.

Honestly, (in a selfish sense) I am glad I was born when I was, it looks like nothing will ever be done about population and population driven Global warming, soil collapse and empty oceans will all likely make the perfect storm just after I kick it. That's not to say I don't practice personal sustainability; no car, local shopping only, limited meat, no fish etc. But that doesn't really matter on the macro level.

HBE September 25, 2016 at 1:48 pm

Here is another link on soil loss which is completely different from degradation.

http://www.scientificamerican.com/article/only-60-years-of-farming-left-if-soil-degradation-continues/

Nobody (the outcast) September 25, 2016 at 2:43 pm

The too-many-humans argument is nihilistic and a deflection. Increased CO2 into the atmosphere and oceans is the number one driver. Poor farming methods, deforestation, over-consumption of fossil fuels (and everything else) are to blame, not numbers of humans per se. It is perfectly possible to feed the world and sequester carbon without destroying soil and destroying forests. Soil can be maintained as long as there are rocks for soil life to dissolve. It is perfectly possible for humanity to survive and prosper without turning insane amounts of energy into atmospheric carbon and heat. The argument amounts to humans are too ignorant and/or stupid to live with nature, so the amount of humans is the problem. No, it is human ignorance and/or stupidity that is the problem. It's not the numbers, it's how those numbers behave, and Western humans behave the worst and they are exporting their behavior all over the world. Yes, the negative behaviors are amplified by more humans doing them, but reducing the numbers does nothing to solve the negative behaviors. The economic system the west, and increasingly the world, lives under (exploitative "Capitalism") was designed to ignore thermodynamics, biosphere services and externalities. So is it any surprise that these negative behaviors have become accepted as normal and considered a birthright? We won't be screwed because there are too many of us, we will be screwed because we fail to challenge our assumptions and recognize and correct our mistakes.

HBE September 25, 2016 at 3:08 pm

Yes better more sustainable methods are important. but you are saying by implementing these we can have infinite population growth which is insane. 9 billion no problem, 12 billion no problem, 20 billion no problem, Ad infinitum, right? Do you really believe that?

[Sep 26, 2016] Population is the favoured red herring of genocidaires who wish to justify their consumption. 5% of the global populations consumption is responsible for 50% of the emissions.

Sep 26, 2016 | www.nakedcapitalism.com
Synoia September 25, 2016 at 1:25 pm

Want to Slow Climate Change? Stop Having Babies Bloomberg

The quickest mechanism to cutting population growth is promoting poor people to the middle class. This involves higher pay. It does not involve massive, increasing rent extraction by the wealthy.

Do I note cognitive dissonance at work here?

Aka: Copulating Peasants – It's all your fault?

Indrid Cold September 25, 2016 at 1:36 pm

"Bed is the poor mans opera"

Paper Mac September 25, 2016 at 2:11 pm

Population is the favoured red herring of genocidaires who wish to justify their consumption. 5% of the global population's consumption is responsible for 50% of the emissions.

subgenius September 25, 2016 at 2:35 pm

…and by promoting people to the middle class, you massively increase their energy and material demands – thus negating any reduction in numbers…in fact making them HUGELY more of an issue.

John k September 25, 2016 at 1:46 pm

Wanna slow climate change? Plus, we emit 3x more carbon per capita than Western Europe…
Some here say climate change is our biggest existential problem, and the real issue is too many people, So
Guns kill, gun control bad?
Wars kill, more wars good? Plus less breeding in war zones. (May affect your vote.)
Starvation kills, stop food aid?
Disease kills, stop research in deadly diseases?
And it's past time to tell all the third worlders to stop all that dreaming about higher standard of living, they need to stay on their rice paddies.

Yes, women's education/birth control would help in those countries lacking same, but as the world gallops towards 9 billion the US would need to pull out all the stops… our country's massive per capita sinning mean we emit as if 1 billion or so live here. We have a lot of extra miles to go. Think about what we would have to do to cut emissions here 2/3 and get down to Western Europe levels.

Of course people find the topic uncomfortable, who will step up and cut first? Or make the ultimate sacrifice and jump off? And now, back to the election, sex, action movies and other fun stuff.

(Imagine we discover a large asteroid will hit us, but not for another 100 years…

MyLessThanPrimeBeef September 25, 2016 at 2:15 pm

So, one middle class person consumes 3x a middle class western European.

And one middle class European consumes ?X a poor Third World person?

Hopefully, a middle class Third World person is wiser than a middle class western European, so when more Third World poor persons becomes middle class Third World person, there is no increase in carbon emission.

I think we need to address inequality.

Regarding climate change, those already in the middle and especially, the 1%, need to reduce consumption.

subgenius September 25, 2016 at 2:37 pm

Everybody in the first world needs to reduce energy use.

To almost zero.

If you want to really get down to reality…

[Sep 26, 2016] The Outlaws of Political Economy

Sep 26, 2016 | econospeak.blogspot.com

EconoSpeak

Perusing Palgrave's Dictionary of Political Economy from 1894 alerted me to the odd interaction of a pair of distinctions. The first distinction was between the study of "what is" and "what ought to be." The second distinction was between "economic science" (or "economics") and "political economy." Economic science presumably distinguished itself from political economy by its strict focus on describing "what is" rather than on prescribing "what ought to be."

Palgrave's
explains the latter distinction to have been at least partly motivated by the confusion that arose over just what kind of laws -- legal or natural -- so-called "laws of political economy" were. Even after the attempt at rebranding, however:
"...even well-educated persons still occasionally speak of "laws of political economy" as being "violated" by the practice of statesmen, trades-unions and other individuals and bodies.
You can't "break" scientific laws. They are simply generalized descriptions of fact. A flying airplane doesn't break the law of gravity. It conforms to a more comprehensive complex of physical laws. The law of gravity isn't the only law.

Palgrave's Dictionary further noted that the "great complexity and variety of circumstance which surround every economic problem are such as to render the enunciation of general laws, on a large scale, barely possible and if possible barely useful."

So the whole "positive" economics rigamarole wasn't just about methodological rigor. It was a purification ritual to rid the political economist of the stigma of dogma. Economists who invoke the violation of so-called laws aren't only forfeiting any legitimate claim to economic science. They are contaminating their profession with atavistic hokum.

Speaking of atavistic hokum, I have been trying to track down ANY accessible published record of a trade unionist or advocate of the reduction of the hours of labor EVER overtly expressing the belief that there is a fixed amount of work to be done or a certain quantity of labor to be performed or whatever synonymous equivalent. There is none.

There is a reasonable explanation for this absence of evidence. The alleged false belief is expressed in abstract language that was not vernacular to the people accused of harbouring it. It's the wrong answer to a question workers never asked themselves.

False belief requires two conditions to be fulfilled: 1. the idea is false and 2. it is believed by someone to be true. The matrix below shows the possible states of belief and falsehood. An idea does not have to be true to be "not false" and it doesn't have to be believed to be false to be "not believed to be true." The fallacy claim asserts a simplistic (and false!) polarization in which the beliefs of the "unenlightened" are "the opposite" of economic orthodoxy.

In an 1861 letter to the Times of London "A Master Builder" alleged that George Potter, secretary of the carpenters' union, and his associates had "absurdly argued that there was only a certain amount of work to be done" during a 1859 strike and lock-out of the London building trades. There is a detailed report on the 1859 strike in an 1860 report on Trades' Societies and Strikes published by the National Association for the Promotion of Social Science. The 23-page account presents several items of correspondence from Potter outlining the union's position with not a hint of a lump in the load. The "certain amount of work to be done" was what Mr. Master Builder thought he heard when he mentally translated Potter's argument into his own capitalistic patois .

There was something else interesting in the 685-page document -- an overarching controversy about whether or not labor was a commodity just like any other and therefore whether or not unions violated the laws of political economy by trying to regulate wages and hours of work. The employers who maintained this were pretty dogmatic about it. "Rates of wages cannot be settled by mediation, but must be left to the free operation of supply and demand." It's the law!

This was not simply political economy It was vulgar political economy of the most self-serving and disingenuous kind. One has no difficulty whatsoever finding multiple evocations by employers of the so-called laws of political economy but the elusive lump remains "one of the most tenaciously held and generally least articulated of trade union beliefs."

Least articulated? Least articulated is an understatement. Try NEVER articulated. There is no there there. The alleged false belief is a pure projection by the laws-of-political-economy crowd onto the unbeliever. The eighth annual report of the New York Bureau of Labor Statistics for the year 1890 contains the responses of over 600 labor union locals to the question of whether and why they support an eight-hour day. Not one claims there is only a certain quantity of work to be done.

Below is an example of what an overt statement of the theory of the lump of labor looks like. It is not from a trade union manifesto or a pamphlet of the eight-hour day movement. It is from a propaganda tract put out by Nassau Senior's crew of Whig-Benthamites in defense of their New Poor Laws, which abolished outdoor relief and established the workhouse test:

The fact is, there is a certain quantity of work to be done, and the question is who ought to do it -- those who live by their labour, and their labour only, or those who have thrown themselves on public charity.
Can anyone find such an unequivocal articulation of the false belief by a trade unionist? Of course not. It's not the way that workers talk about their work. Work is not an abstract, disembodied quantity to those who do it. It is part of a lived experience. "A certain quantity of work to be done" is political economy speak, plain and simple. It's ceteris paribus and "all else being equal."

Paradoxically, for old school vulgarians there both is and is not a certain quantity of work to be done. There is a certain quantity of work to be done when it comes to disparaging the idea that workers might increase wages their through collective action:

There is a certain quantity of work to be done, and a certain number of hands to do it; if there be much work and comparatively few hands, wages will rise; if little work and an excess of hands, wages will fall. It is self-evident that combinations and strikes cannot alter this law. They can neither increase capital, nor diminish population; and, therefore, it is utterly impossible, in the very nature of things, that they ever can procure a permanent rise of wages.
But there isn't a certain amount of work when it comes to explaining why such foolish action isn't even necessary:
There is, say they, a certain quantity of labour to be performed. This used to be performed by hands, without machines, or with very little help from them... The principle itself is false. There is not a precise limited quantity of labour, beyond which there is no demand. Trade is not hemmed in by great walls, beyond which it cannot go. By bringing our goods cheaper and better to market, we open new markets, we get new customers, we encrease the quantity of labour necessary to supply these, and thus we are encouraged to push on, in hope of still new advantages. A cheap market will always be full of customers.
Five years ago I compiled a database of over 500 instances of the claim in books and journal articles between 1890 and 2010 ( Excel file ). That's 500 claims without a single overt statement of the false belief from an alleged believer. Six claimants (about one percent) named culprits whose argument "arguably depends upon..." "makes an error equivalent to..." "indicates a belief..." "seems hopelessly involved in..." "is an example of the strange conclusions to which one may be carried by clinging clinging firmly to..." and "are driven by implicit assumptions." Each of those turns out to be a false alarm -- an uncharitable, speculative inference. Five hundred boys crying "wolf" and not a single wolf to be seen?

This is an astonishing performance. This compulsion to repeat is not "careless" or "dogmatic." It's neurotic.

The patient cannot remember the whole of what is repressed in him, and what he cannot remember may be precisely the essential part of it.. He is obliged to repeat the repressed material as a contemporary experience instead of remembering it as something in the past.
The atavistic return of the repressed "laws of political economy" conforms faithfully to a description toward the end of chapter 3 of Beyond the Pleasure Principle where Freud talks about the experiences of "people with whom every human relationship ends in the same way" and gives as a "singularly affecting" final example the events in a romantic epic, in which the hero, Tancred, repeatedly slays his beloved, Clorinda, each time she reappears in a different guise. In this example, as Gavriel Reisner notes,
Freud reverses the compulsion to repeat, showing how we will sometimes injure others in order to avoid injuring ourselves. Freud concludes that we often project the internal, masochistic drive as the external, sadistic drive, victimizing others to redirect an intent toward self-victimization.
The utilitarian political economists styled themselves advocates for "the greatest good for the greatest number" and viewed opponents as apologists for narrow special interests. The supposed laws they discovered, which operated through isolated exchanges between individuals in the market, vindicated a system of natural liberty and consequently freedom entailed obedience to those laws. Collective action and collective bargaining violated the laws of individual exchange, resulting in sub-optimal outcomes. Such perversity could only be motivated by false beliefs. The false beliefs of the adversary were presumably the opposite of the true beliefs of the faithful: trade unions operated through tyranny and their bizzaro-world political economy assumed that less output meant more income.

Reality discredited that polemic of political economy and calmer heads sought to rebrand the enterprise as economics. The ersatz laws were scaled back to tendencies, which operated within the admittedly abstract ceteris paribus pound of the economist's static model. Real life and the evolution of economic relations operated outside the ceteris paribus pound but maybe the static model could shed light on dynamic economic activity.

It was no longer fashionable to denounce "The Evils of Collective Bargaining in Trades' Unions" (Thomas Cree, 1898) because it was increasingly understood that the so-called laws of supply and demand operated quite differently with regard to the peculiar commodity of labor power (Richard Ely, 1886):

While those who sell other commodities are able to influence the price by a suitable regulation of production, so as to bring about a satisfactory relation between supply and demand, the purchaser of labor has it in his own power to determine the price of this commodity and the other conditions of sale.
But even as old-guard political economy was being gradually displaced by rebranded economics in the universities, employers' associations and business journalism emerged to propound and propagate the old-time religion. The break with quasi-scientific, quasi-legalistic, quasi-religious pseudo-laws was ambivalent, the reconciliation surreptitious. Employers' associations told the college teachers what to teach. Textbooks served up a smorgasbord of the obsolescent and the innovative.

In this twilight of science and superstition, the fallacy claim offered uncertain economists a distinctive advantage. It enabled them to continue to denounce violations of the laws of political economy without actually having to specify which laws were being violated. That left them exempt from any obligation to justify the validity of defunct laws. The burden of proof deftly shifted and the providence of economic science affirmed, albeit by default.

Economic science thus gets to have its "what is" humility... and eat its "what ought to be" hubris too! Evidence be damned.



That there was one particular offense singled out for condemnation by the self-appointed economic police is suggested by the example given in Palgrave's Dictionary for the common confusion between the legislative and scientific senses of law: "Thus it is often said that to regulate the hours of labour, or to introduce differential import duties, is to break economic law." The anachronism of such a view should require no explanation. The hours of labor are regulated.

Any proposal to repeal the Fair Labor Standards Act of 1938 on the grounds that it "breaks economic law" would no doubt be laughed at by Paul Krugman, David Autor, Jonathan Portes or Alan Manning. But, inadvertently, that is precisely the historical grammar of their lump-of-labor fallacy taunt. Although there is no logical imperative that links the law-breaking claim to the fallacy claim, they have been inseparably paired in usage from their inception. To invoke the latter is either to imply the former or it is a non sequitur.

At long last, economists, have you no scientific self-respect ? On this labor day, 2016, would you still insist that regulating of the hours of work breaks the laws of economics? Posted by Sandwichman at

[Sep 26, 2016] Equilibrium and Information Literacy

Sep 23, 2016 | econospeak.blogspot.com
"Everybody except Joan Robinson agrees about capital theory." -- Robert Solow (as paraphrased by Robinson)
An essential text in my researches on mercantilism, usury and bills of exchange is Raymond de Roover's Gresham on Foreign Exchange, which just happens to be stored in part of SFU's library that is under construction and thus inaccessible. The immediate unavailability of that book, however, led to a fortuitous discovery.

I browsed in the call number section of the library's general collection where de Roover's book would have been and Robert Leeson's Ideology and the International Economy caught my eye. I flipped through the book and noticed on page 19 the delicious quote from Joan Robinson that, "the free-trade doctrine is just a more subtle form of mercantilism."

The quote is from a 1966 lecture, "The New Mercantilism" that is included in a collection of essays, Contributions to Modern Economics, which also contains "Capital Theory Up-to-Date," a 1970 review of C. E. Ferguson's The Neoclassical Theory of Production and Distribution, in which Robinson reprises her parody of neo-Walrasian, neo-neoclassical capital " leets. " Leets is steel spelled backward and makes its debut in "Equilibrium Growth Models," Robinson's 1961 review of James Meade's Neo-Classical Theory of Economic Growth.

This allegedly ectoplasmic representation of capital is, in a nutshell, the crux of the "Cambridge capital controversy," which Robinson launched with her 1952 challenge, "I leave it to those who draw production functions to say what marginal productivity and the elasticity of substitution mean when labour and capital are the factors of production." Looking back, in 1978, on her 1952 essays and the "long struggle to escape... habitual modes of thought and expression," Robinson stressed that "it was precisely from the concept of equilibrium that Keynes was struggling to escape..." Contrarily, though:

"...textbook teaching in the department of so-called macro theory was an attempt to push Keynes into short-term equilibrium. ... The grand neoclassical synthesis (now known as bastard Keynesianism) was a more ambitious attempt to reduce the General Theory to a system of equilibrium."
In responding to Robinson's leets critique, Robert Solow began by acknowledging "much truth" to the objection that "the usual production functions, allowing for more or less substitutability between capital and labor, attribute to 'capital' a degree of malleability which contradicts common observation." He then distinguished between the "econometrically-minded person" who would view the overly malleable capital as a "specification error" and others -- presumably including Robinson -- who judge it to be "a doctrinal error; and its consequence is a kind of Fall from Grace." Seven years later, Robinson had this to say about "doctrinal disputes":
Many economists, nowadays, who are interested in practical questions are impatient of doctrinal disputes. What does it matter, they are inclined to say, let him have his leets, what harm does it do? But the harm that the neo-neoclassicals have done is, precisely, to block off economic theory from any discussion of practical questions.
If one is concerned about actual unemployment in an actual economy, Robinson later explained, one "has to discuss it in terms of processes taking place in actual history. The concept of equilibrium is incompatible with history. It is a metaphor based on movements in space applied to processes taking place in time." In other words, it is not just some kind of ethereal affectation to object to the concept of equilibrium -- it is an argument with irrevocable real-world consequences.

The failure of what Robinson dismissed as "bastard Keynesianism" also had real-world doctrinal consequences. "In the era of stagflation, this notion [that equilibrium growth can be achieved through fiscal and monetary 'fine tuning'] has been discredited and the quantity theory of money is blossoming afresh amongst its ruins." This 'blossoming,' incidentally, was not something Robinson welcomed.

Well, my interlibrary loan of de Roover's Gresham on Foreign Exchange has arrived, so I'm off up the hill to pick it up. To be continued...

[Sep 26, 2016] Another way of eliminating employees and forcing the customer to do the work

Notable quotes:
"... I refuse to use self-checkouts at grocery stores, as well. I see that, and this new Sam's app, as doing nothing more than 'outsourcing' the job onto the customers themselves (but even better, as they have to pay no one), eliminating jobs, while increasing their profits by cutting the overhead for the company we're patronizing. ..."
"... IMO I think we, as the public, should refuse to use such apps, forcing companies such as these to keep employees rather than allowing them to eliminate jobs to increase their profits. The words 'customer service' are rare enough in businesses these days, already. ..."
Sep 26, 2016 | www.nakedcapitalism.com

Walmart's Sam's Club Scan-and-Go App May Make Cash Registers Obsolete

As of 2014, nearly 30% of the US households no internet access. How do you think that maps onto WalMart customers? Plue get outside the big cities, you see a big drop in smart phone use. Even in wealthy Mountain Brook, Alabama (yes, believe it or not, it looks like the better parts of Westchester County), you see a fraction of the device use in NYC. These analysts need to get out and see more of the heartland.

KurtisMayfield September 25, 2016 at 7:39 am

Re: the street article on the Walmart app.

#1 I am happy that the news industry has found new sources of revenue, because that story read like a Walmart advertisement. Don't they have to disclose if they are getting paid for it?

#2. They already have these prescan guns in supermarkets. I see a very small percentage of people us them. I doubt that it saves you any time shopping because the register person can probably scan the items faster than an amateur. If you wanted to save time at the store you would have ordered online.

crittermom September 25, 2016 at 11:13 am

I certainly agree with you on #1. It did read like a Walmart ad.

The part that jumped out at me was: "If the item doesn't have a barcode, it could be easily looked up."

Really? How is the barcode looked up? And by whom? The customer?
It didn't say how in that 'ad'. (poor reporting)

It all sounds like another way of eliminating employees and forcing the customer to do the work. Obviously 'checking out' is one job that can't be outsourced, so now they've discovered a way to still eliminate the employees by forcing the customer to do the work instead.

As Yves mentioned, many of us living rural don't have dumbphones because we don't have service. I've never had a cell phone because there's never been coverage where I've lived out in the country, but even if I did, I'd resent having to 'check myself out' to increase the profits of the company. Oh, hell no!

I refuse to use self-checkouts at grocery stores, as well. I see that, and this new Sam's app, as doing nothing more than 'outsourcing' the job onto the customers themselves (but even better, as they have to pay no one), eliminating jobs, while increasing their profits by cutting the overhead for the company we're patronizing.

SS recently required a cell phone to access your account online. They quickly dialed that back when they realized that many of us don't have one. Duh? I agree with Yves that these analysts need to get out into the heartland more.

And I hope their vehicle breaks down while there, so reality smacks 'em hard. To quote a comedian, "Here's your sign!"

Regarding #2, I have no experience with those. My nearest Walmart is hours away so what little I do buy from them I order online and have it shipped to me.

IMO I think we, as the public, should refuse to use such apps, forcing companies such as these to keep employees rather than allowing them to eliminate jobs to increase their profits. The words 'customer service' are rare enough in businesses these days, already.

[Sep 26, 2016] EconoSpeak All Models are False The Internet-Computer Explanation of Major Recessions

Notable quotes:
"... Female labor force participation in the U.S. is well below its pre-crisis level. Maybe video games are now marketed equally toward men and women. ..."
"... Cowen is an idiot. I think the man needs to get some serious first hand experience on how much "fun" unemployment is. ..."
Sep 24, 2016 | econospeak.blogspot.com
Uneasy Money has a wonderful post on the "all models are false dodge". Nothing really to add but I especially enjoyed this:
Romer's most effective rhetorical strategy is to point out that the RBC core of modern DSGE models posit unobservable taste and technology shocks to account for fluctuations in the economic time series, but that these taste and technology shocks are themselves simply inferred from the fluctuations in the times-series data, so that the entire structure of modern macroeconometrics is little more than an elaborate and sophisticated exercise in question-begging.
I used to ask the New Classical crowd what the great negative real shock was during the early 1980's. The massive real appreciation of the dollar may have lowered net export demand but that was one of those Keynesian things. One would think the rise in the relative price of domestically supplied goods would have increased employment. Same with the alleged wonders of the Reagan tax cut. Oh but it was paid for by reducing transfer payments – another one of those Keynesian things. If poor people got less government assistance, then they should have gone all Jeb! and worked harder. And of course we were enjoying the start of the computer and technology revolution. But here is where the list gets hysterical – the line was that these new tools were being used to do less work in the office. But before you fall in the floor laughing at this excuse consider a recent excuse ala Tyler Cowen :
There are a few reasons, but the internet may be the biggest. It is easier to have fun while unemployed. That's a social problem for some people.
Tyler was debating Noah Smith. Noah had just argued for more infrastructure investment on the Keynesian notion that we were still below full employment. Tyler seems to think the low employment to population ratio is still somehow consistent with full employment. Noah disagreed noting that real wage growth is weak to which Tyler continues:
Maybe employers just aren't that keen to hire those males who prefer to live at home, watch porn and not get married. Is that more of a personal failure on the part of the worker than a market failure?
Oh my – boys will be boys! Noah had some good counters including:
Female labor force participation in the U.S. is well below its pre-crisis level. Maybe video games are now marketed equally toward men and women.
Thankfully Tyler did not respond by suggesting the ladies in the office were going crazy over hot dudes on Instragram. Posted by ProGrowthLiberal at

DrDick said... September 25, 2016 at 10:45 AM

Sweet spreadable Jeebus on a matzoh, Cowen is an idiot. I think the man needs to get some serious first hand experience on how much "fun" unemployment is.
Anonymous said... September 25, 2016 at 4:38 PM
I take it you don't put much stock in articles like this in The Post, then?

https://www.washingtonpost.com/news/wonk/wp/2016/09/23/why-amazing-video-games-could-be-causing-a-big-problem-for-america/

ProGrowthLiberal September 25, 2016 at 4:46 PM
The Washington Post article noted this presentation:
"Leisure Luxuries and the Labor Supply of Young Men"
Presenter: Mark Bils, University of Rochester
Coauthors: Mark Aguiar, Kerwin Charles, and Erik Hurst
Discussant: John Kennan, University of Wisconsin

https://www.frbatlanta.org/news/conferences/2016/0922-unemployment-wages-productivity/agenda

did not provide a link so I have not read this "research".

Until I do - I am not taking stock into this thesis.

Anonymous said... September 25, 2016 at 5:51 PM
Fair enough.

As it happens, Dean Baker was the only person who noted that "the drop in employment rates among less-educated women over the last 15 years has been even sharper. Furthermore there has been a decline in employment rates among all groups of prime age workers (25-54), even those with college degrees."

This seems to put a pretty big whole in the idea from the get go, doesn't it?

ProGrowthLiberal September 25, 2016 at 6:42 PM
Anon- Dean's point was pretty clear. We have seen a broad based drop in the employment to population ratio which is better described by weak aggregate demand than some strange tale that the kids stay home to watch video games. And the weakness in real wage growth is better explained by demand rather than supply factors. The rest is details.

[Sep 26, 2016] Report: New Data Disproves US Corporations False Narrative on Taxes

Notable quotes:
"... Originally published at Tax Justice Network ..."
"... Corporations used to contribute $1 out of every $3 in federal revenue. Today, despite very high corporate profitability, it is $1 out of every $9. ..."
"... As of 2015, U.S. corporations had $2.4 trillion in untaxed profits offshore. Another study, looking at S&P 500 companies, found they held $2.1 trillion as of 2014. This roughly five-fold increase from $434 billion in 2005 stems largely from anticipation of a tax holiday. ..."
Sep 263, 2016 | www.nakedcapitalism.com
Yves here. This short post extracts key findings from a new study by Americans for Tax Fairness and the Economic Policy Institute. We liked the summary and include it immediately below. One thing to keep in mind: taxes are a big element of economic policy by default, as in that they provide incentives and disincentives. The fact that Big Pharma and tech companies lower their tax rates through the use of clever structuring and tax havens and report higher profits is an economic privilege relative to other industries.

From the overview :

While the statutory tax rate on corporate income is 35 percent, estimates of the rate corporations actually pay put the effective rate at about half the statutory rate. Driving this divergence between what corporations are supposed to pay and what they actually pay is a combination of offshore profit shifting and tax avoidance. Multinational corporations pay taxes on between just 3.0 and 6.6 percent of the profits they book in tax havens.

And corporations have become increasingly adept at making their profits appear to be earned in these tax havens; the share of offshore profits booked in tax havens rose to 55 percent in 2013. Almost half of offshore profits are held by health care companies (mostly pharmaceutical companies) and information technology firms. Because of the inherent difficulty in assigning a precise price to intellectual property rights, it is relatively easy for these companies to manipulate the rules so that U.S. profits show up in tax havens.

The use of offshore profit-shifting hinges on a single corporate tax loophole: deferral. Multinational companies are allowed to defer paying taxes on profits from an offshore subsidiary until they pay them back to the U.S. parent as a dividend. Proponents of cutting the corporate tax rate refer to profits held offshore as "trapped." This characterization is patently false. Nothing prevents corporations from returning these profits to the United States except a desire to pay lower taxes. In fact, corporations overall return about two-thirds of the profits they make offshore, and pay the taxes they owe on them.

Further, there are numerous U.S. investments that these companies can undertake without triggering the tax. In short, deferral provides a mammoth incentive for multinational corporations to disguise their U.S. profits as profits earned in tax havens. And they have responded to this incentive: 82 percent of the U.S. tax revenue loss from income shifting is due to profit shifting to just seven tax-haven countries.

Firms have also become increasingly adept at manipulating the rules here in the United States to avoid taxation. Lower tax rates on "pass-through" business entities and poor regulatory responses have given firms the chance to reorganize as "S-corporations" or opaque partnerships in order to avoid paying any corporate income tax at all.

This intentional erosion of the U.S. corporate income tax base has real consequences. Rich multinational corporations avoiding their fair share of U.S. taxes means that domestic firms and American workers have to foot the bill. It also means that corporations are not paying their fair share for our infrastructure, schools, public safety, and legal systems, despite depending on all of these services for their profitability.

Originally published at Tax Justice Network

From Americans for Tax Fairness, a major new report about corporate taxes in the United States. It's called Corporate Tax Chartbook: How Corporations Rig the Rules to Dodge the Taxes They Owe, and it contains many useful facts, such as this:

And there are plenty more striking facts. Just for example:

And here's a picture pointing to the "big six" corporate tax havens, which we've noted before:

Now read the report .

Further reading: Corporate tax

Report: why we need to tax corporations now, more than ever

Ten reasons to defend the corporate income tax

allan September 23, 2016 at 7:02 am

"It also means that corporations are not paying their fair share for our infrastructure, schools, public safety, and legal systems,"

and two more:

1. Federal R&D, which provides the lifeblood for pharma and tech, in terms of both basic research
and a highly trained workforce.

2. DoD. But funding and fighting in the Forever War is for little people.

Ignacio September 23, 2016 at 7:08 am

:-(

What about mergers. Do they not only facilitate monopolies but tax evasion?

The IP stuff, the inverted balance sheets of those companies and their opaque allocation of revenues is the "dark matter" economists talk about euphemistically?

Robert Hahl September 23, 2016 at 9:11 am

I presume these offshore profits are not held in cash but are moved into U.S. Treasury bonds and other investments. What happens to the profits and losses from those? Are they eventually returned to the U.S. and taxed?

DJG September 23, 2016 at 9:22 am

Yves: Thanks for this. Still another area of bipartisan connivance and neglect. And there is a real irony about the Netherlands, which has been doing a lot of virtual signaling with regard to Greece (especially) and Italy, being a major tax haven. I guess that it is easy to balance the budget with all of that funny money floating around.

Luxembourg? My solution is just to give it to France as a new département.

Robert Hahl: Don't count on profits not being held in cash. There are some indications, and Yves has published posts about them, that companies indeed are hoarding cash.

Paul Tioxon September 23, 2016 at 10:21 am

http://www.philly.com/philly/business/real_estate/commercial/City-Council-bill-seeks-to-crack-down-on-real-estate-transfer-tax-dodgers.html

You do not have to leave your backyard to find the same tax avoidance built into the capitalist system. Here in Philadelphia, during a 2nd wave of large scale real estate investment in the 10s of $Billions$, property is sold off for development parcels or after the development is completed, fully rented and a juicy source of rental for years and years to come. You would think the city government would reap some kind of windfall, that the school district funded by annual real estate taxes based on market value, but of course, the crony capitalism assures that tax avoidance strategies, all perfectly legal due to the laws written by the 1%, the self dealing loopholes will prevail.

Now, a very successful real estate developer got himself elected to city council, along with a long suffering republican chamber of commerce guy. And THEY want to close some of the long standing loopholes that may have cost the city as much as $24Mil last year alone. Plus the ongoing depressed valuation used for the annual real estate tax bill.

Immanuel Wallerstein in his lectures has pointed the 3 main obstacles to profits that the Global Capitalist System must control in order to sustain growth.
1. The cost of inputs
2. The costs of wages and ancillary benefits such as social insurances for health, unemployment, and eventual retirement.
3. Taxes

This article speaks directly to #3, as does my local example. The ongoing war on tax avoidance as a necessary standing policy by capitalists is on the local, national and international levels. The universal rule of law begs the questions, who writes these laws, who interprets these laws, who benefits from these laws and why do they never change in a way that gives meaning to the authority of government as having authority to rule. The pretense that tax loopholes are perfectly legal is critical to maintain the social order and belief in the rule of law. When tax laws are rendered useless by legal mumbo jumbo, the authority of the state to govern must be called into question as well!

When people out in the street riot, loot and vandalize to show political dissatisfaction, that is criminal behavior, not legal, and has no loophole to excuse them. There is no question that the state must step in with its full power and authority and enforce the law, which is crystal clear in the case of rioting. There is no question that even local government must seek reinforcement from the military. Imagine a lawyer saying: "Well, the rioters are adopting a perfectly legal strategy of prosecution and jail avoidance by massing in numbers so large that they all can not be arrested, tried and convicted.

This constitutes not a crime against society, but the legitimate right to self determination in the face of a corrupt and meaningless system of democracy where the majority of the people are permanently relegated into menial economic toil to sustain the oversized wealth and power of the 1%. Clearly, this must considered protected political activity and freedom of speech, NOT violence in the pedestrian sense of a lone gun man holding up a liquor store. The socially redeeming value of large scale social change due to mob activity protects this crowd as political activists, not mere petty criminals. They are making the world a better place, not just stealing to benefit themselves as individuals. Just as people vote with their dollars, vote with their feet by moving to where jobs are, people are voting by rioting to correct the abuse of power not regulated by the meaningless ballot box which has been rendered useless and beyond reach."

Tracey September 23, 2016 at 8:17 pm

WOW Paul: why are you not writing for/with NC & Yves? Excellent commentary!

Synoia September 23, 2016 at 12:58 pm

given firms the chance to reorganize as "S-corporations"

That seem unliky as S corporation cannot be owner by other corporations and are limited to 100 shareholders.

Can you clarify that point, and explain further?

Yves Smith Post author September 24, 2016 at 2:39 am

On the one hand, Tax Justice Network is often fuzzy (as in wrong) on technical tax details. Tax is fiendishly complex. But on the other hand, the general idea that there may be ways to structure around this isn't crazy. As I recall, for instance, if I recall correctly, the publicly-traded PE firms are legal entities that own (or own the cash flows) of general partnerships.

Andrew Watts September 23, 2016 at 1:34 pm

So the government is subsidizing corporate profits through tax breaks, loopholes, and non-enforcement. This has the overall effect of re-distributing the wealth towards the upper end of the income spectrum and sponsors the creation of millionaires and billionaires. Who would have a problem with that?

That's not class warfare at all says this temporarily embarrassed trillionaire.

animalogic September 23, 2016 at 11:16 pm

How long will it be before an actual "trillionaire" emerges, I wonder ?

ilporcupine September 24, 2016 at 6:17 pm

i bet if you had a "birds-eye" view of all the money in all the accounts, both her and overseas, and ownership of shell companies stock, and on and on, you would find that that person exists already.

Pelham September 24, 2016 at 7:41 pm

Don't the mega-corporations write the thousands of pages of our corporate tax code? Congress just rubber stamps it, right?

Can't remember where I read it, but it has been suggested that the supposedly high corporate tax rate is there by design. The biggest players write in all the loopholes they need and more, burdening the small fry with the nominal rate and thus squelching any competition that the big guys might face from lesser competitors.

[Sep 26, 2016] Its good to see articles criticizing financialization now and then. But the real problem is neoliberalism

Notable quotes:
"... It's good to see articles criticizing financialization now and then. It would be great if our politicians would take this issue up, but alas, it would be suicide (certainly politically, and possibly literally). ..."
"... On the surface, the reasons behind Bridgeport's poverty and Greenwich's wealth do not seem related. Bridgeport is struggling because it is a one-time manufacturing hub whose jobs went overseas as factories moved away in the late 20th century. Greenwich became a home for New York City financiers who wanted to live somewhere a little more bucolic than New York, and later hedge-fund managers decided they could work closer to home and set up their companies there, too. ..."
"... Michael Parenti gets it: "The reason we have poor people is rich people." ..."
"... And because we have poor people who are told they should not envy the rich their advantages because they just might be one of them someday. So we lionize this era's robber barons from Bezos to Cook to Brin instead of roasting them over a slow fire until they agree to pay taxes in this country. Too bad we don't have a trust-busting politician of any stripe around, Teddy Roosevelt where are you when we need you. ..."
Sep 26, 2016 | www.nakedcapitalism.com
scott 2 September 25, 2016 at 8:11 am

The Atlantic article ( Finance Is Ruining America Atlantic (Phil U)) would have been more effective if it had described a typical hedge fund deal, like, say, Guitar Center, or one of Mitt Romney's "successes" (you know, debt fueled special dividends). It's good to see articles criticizing financialization now and then. It would be great if our politicians would take this issue up, but alas, it would be suicide (certainly politically, and possibly literally).

fresno dan September 25, 2016 at 8:15 am

Finance Is Ruining America Atlantic (Phil U)

On the surface, the reasons behind Bridgeport's poverty and Greenwich's wealth do not seem related. Bridgeport is struggling because it is a one-time manufacturing hub whose jobs went overseas as factories moved away in the late 20th century. Greenwich became a home for New York City financiers who wanted to live somewhere a little more bucolic than New York, and later hedge-fund managers decided they could work closer to home and set up their companies there, too.

These two towns have different fates in part because of two distinct dynamics in the American economy. Yet there are economists who believe that there is a link between the improving prosperity of the wealthy and the eroding bank accounts of everyone else. The reason? It's two-fold: First, there is the rise of the financial industry, which has fueled extraordinary wealth for a very few without creating good jobs down the line, and, second, a tax policy that not only fails to mitigate these effects, but actually incentivizes them in the first place. It's probably not surprising, then, that the 10 states with the biggest jumps in the top 1 percent share from 1979 to 2007 were the states with the largest financial service sectors, according to the Economic Policy Institute analysis.

=============================================
It is astounding that people still believe low interest rates mean some industrialist can get a loan and start a factory and hire employees….where it seems pretty apparent that it means a financier can move a company overseas….
As well as the fact it seems harder and harder to be able to say that the 1%'s getting richer is NOT due to everybody else getting poorer.

Uahsenaa September 25, 2016 at 9:38 am

It's the neoliberal Rube Goldberg machine. Why just give money where needed when you can give it to someone on the assumption they'll give a portion to someone else, who will give it to someone else, so that they can maybe pass some of it along to whoever needs it?

Also, because markets.

Jim Haygood September 25, 2016 at 10:10 am

'Greenwich became a home for New York City financiers who wanted to live somewhere a little more bucolic than New York'

Until 1991, Connecticut had no income tax. New Jersey had walked that plank in 1976, leaving CT as the only quasi-tax haven within commuting distance of NYC.

But then former Gov. Lowell Weicker (who had run on a "no income tax" platform - he lied ) introduced one. Result : a stagnant, moribund Connecticut economy, with flat population. General Electric saw the light and bailed for Boston with its HQ.

Jaren Dilliian, who grew up there, wrote of throwing a party in CT with a deejay. The DJ had to be licensed, plus they needed a permit, plus union electricians had to set up and take down the equipment. Hassle, cost, bureaucracy.

What value added does contemporary CT provide for its tax take, vs pre-1991 CT? Zero. Maybe less than zero.

Katharine September 25, 2016 at 12:10 pm

"But then former Gov. Lowell Weicker (who had run on a "no income tax" platform - he lied) introduced one. Result: a stagnant, moribund Connecticut economy, with flat population."

Sequel, perhaps. Result, not proved, and I suspect questionable. The data here appear to undermine your claim:

http://www.itep.org/whopays/states/connecticut.php

They show corporate income tax at <1% and personal income tax <5% for all but the top 5% of incomes. I find it very hard to believe those rates are responsible for Connecticut's allegedly moribund economy.

As for not providing value, consider another point of view:

http://ctviewpoints.org/2016/08/30/opinion-ellen-shemitz-2/

kgw September 25, 2016 at 10:28 am

Michael Parenti gets it: "The reason we have poor people is rich people."

OpenThePodBayDoorsHAL September 25, 2016 at 1:46 pm

And because we have poor people who are told they should not envy the rich their advantages because they just might be one of them someday. So we lionize this era's robber barons from Bezos to Cook to Brin instead of roasting them over a slow fire until they agree to pay taxes in this country. Too bad we don't have a trust-busting politician of any stripe around, Teddy Roosevelt where are you when we need you.

Get Rich or Die Tryin is the last gasp in the American Hunger Games. It's the same story as ever, told down through the ages, the rich squeeze the poor, then they can't help but squeeze juuust that little bit more, and we get Charlotte

Mo's Bike Shop September 25, 2016 at 12:27 pm

>>whose jobs went overseas as factories moved away in the late 20th century

Those jobs and factories sure have a lot of personal agency.

John Wright September 25, 2016 at 12:30 pm

It is sad to read the story of Bridgeport.

Where I work, when we need do to some quick machining, we go to use the "Bridgeport" vertical mill in the shop.

This is the milling machine manufactured and popularized by Bridgeport Machines, Inc of Bridgeport.

These mills were produced in Bridgeport from 1938 until 2004, and were another important cog in the post war manufacturing economic miracle.

The Bridgeport mill is still made by Hardinge of Elmira, NY, but the jobs are gone from Bridgeport.

USA finance is as large as it is because TPTB allow/abet it, not because it serves the USA well..

BecauseTradition September 25, 2016 at 8:40 am

It is astounding that people still believe low interest rates mean some industrialist can get a loan and start a factory and hire employees….where it seems pretty apparent that it means a financier can move a company overseas….
fresno dan [bold added]

Or automate jobs away with what is, in essence, the public's credit due to extensive government privileges for depository institutions.

The implicit social contract whereby capitalists shall provide good jobs in exchange for the public's credit is broken – if it ever existed – without hope of fixing due to automation alone.

fresno dan September 25, 2016 at 10:14 am

BecauseTradition
September 25, 2016 at 8:40 am

good point and I agree.
And there are probably all sorts of examples. For instance, how long did low interest rates help by stimulating home building, home buying, until shadow banking was able to super charge profits by taking a rather straight forward, dull, simple to understand thing like home loans and turning it into a giant scam? How was it that something that worked so well for so long got so totally f*cked up?
Doesn't it feel nowadays that in every protection, advancement, or progress is advocated by a Hillary talking clone, and that the only point of it is to weasel more money out of you???
and that the word "protection" defacto means "screw"

ProNewerDeal September 25, 2016 at 10:23 am

FD, nice take

Hillary hack says "protect you", he means "a protection racket our campaign funder/owners devised to rob you"

BecauseTradition September 25, 2016 at 10:42 am

How was it that something that worked so well for so long got so totally f*cked up? fresno dan

Well, point of fact, it did not work so well if one was red-lined. And philosophically, how does one justify government privileges for depository institutions in the first place? Because they work? Work for who? Not those who were redlined, for sure.

OpenThePodBayDoorsHAL September 25, 2016 at 1:55 pm

America is like an aging, punch drunk prize fighter, so much blood streaming into his eyes he can't even see what he's doing any more. So we flail around with Iraq-style nation-building wars despite being smashed squarely in the face with all our previous ones. Just put your hands behind your back and stick your jaw way out. The Fed sprays free money around like its Skittles despite the fact that the only takers for new debt are CEOs buying back their stocks and heading for the islands. And precisely one candidate has the stones to mention it, and no I don't mean the falling down, sickly grandmother who sold the business of our government for immense personal gain through her Foundation.

temporal September 25, 2016 at 9:08 am

Scan and go.

Swapping standing in line at the check-out for the line at the exit. And when there is an issue then the greeter calls in the check-out police thereby pissing off the customer. Brilliant.

While Apple fanboys are willing to work for their iPhone's company for free by doing their own check-out I doubt that is likely for people going to Sam's Club. As well many customers, even if they have a smartphone, will not enjoy using up their data plan as they try to check and process the details online.

All these smartphone apps have one major goal, besides collecting credit fees. Reduce store overhead by getting customers to do more of the work while eliminating employees. The winners are not the customers or people looking for a way to make ends meet.

Pavel September 25, 2016 at 2:27 pm

Another goal of course is to track even further every single purchase - what, and where, and when. And then sell the consumption data to the insurers perhaps… a packet of cigs per day? Or too many bottles of booze?

Of course they are already doing that with the store "fidelity cards", but the mobile apps will be more precise and less optional.

Carolinian September 25, 2016 at 9:09 am

Re the Oilprice link, here's an article that contradicts the notion that US policy in Syria was about the Qatari pipeline as that claim–put forth in a Politico article by Robert Kennedy Jr–was little more than a poorly sourced rumor.

That claim has no credibility for a very simple reason: there was no Qatari proposal for Syria to reject in 2009. It was not until October 2009 that Qatar and Turkey even agreed to form a working group to develop such a gas pipeline project.

Gareth Porter says that instead

The US decision to support Turkey, Qatar and Saudi Arabia in their ill-conceived plan to overthrow the Assad regime was primarily a function of the primordial interest of the US permanent war state in its regional alliances. The three Sunni allies control US access to the key US military bases in the region, and the Pentagon, the CIA, the State Department and the Obama White House were all concerned, above all, with protecting the existing arrangements for the US military posture in the region[….]

The massive, direct and immediate power interests of the US war state – not the determination to ensure that a pipeline would carry Qatar's natural gas to Europe – drove the US policy of participation in the war against the Syrian regime. Only if activists focus on that reality will they be able to unite effectively to oppose not only the Syrian adventure but the war system itself.

In other words the MIC strikes again and seems to be directly challenging Obama policies with "accidents" like the recent bombing of the Syrian army. Time for movie fans to dust off old copies of Seven Days in May?

http://original.antiwar.com/porter/2016/09/23/war-assad-regime-not-pipeline-war/

tgs September 25, 2016 at 12:20 pm

Porter may well be right about the pipeline. However, a piece that purports to account for our Syria operations and the obsession with the removal of Assad that does not mention Israel and the Israel Lobby cannot be the complete story. Breaking the 'Shia Crescent' is a major strategic aim of the friends of Israel.

Carolinian September 25, 2016 at 1:45 pm

Without a doubt the Lobby keeps the liberals–the "progressives except for Palestine"–supporting the fever dreams of the generals, but arguably it's this internal, and traditionally rather Waspy pressure group that is the real menace. As the following quite accurately points out, we have a WW2 military with nothing to do with itself unless they can invent a suitable enemy.

http://original.antiwar.com/reed/2016/09/23/bombing-everything-gaining-nothing/

We live in a military world fundamentally different from that of the last century. All-out wars between major powers, which is to say nuclear powers, are unlikely since they would last about an hour after they became all-out, and everyone knows it. In WWII Germany could convince itself, reasonably and almost correctly, that Russia would fall in a summer, or the Japanese that a Depression-ridden, unarmed America might decide not to fight. Now, no. Threaten something that a nuclear power regards as vital and you risk frying. So nobody does.

Or, to sum up

What is the relevance of the Pentagon? How do you bomb a trade agreement?

The generals and admirals need a Russian foe to justify their absurd budgets and their very existence. It's ironic that our great victory in WW2–triumph of industrial America–may end up doing us more long term harm than those European and Asian nations that were bombed into ashes. You can rebuild cities but dismantling imperial hubris turns out to be harder.

OpenThePodBayDoorsHAL September 25, 2016 at 2:13 pm

Occam would probably just say that the Cold War never ended for our geniuses-in-chief, despite dissolving away in 1989 our enemy is and always was and will be Russia uber alles. The simple fact that they back Assad is all it took, yes add in a sprinkle of Tehran and Tel Aviv and goose with a little juice from Riyadh but the overnight disappearance of our existential enemy was something up with which we could not put.

[Sep 26, 2016] countercyclical fiscal policy should be our equivalent of a first responder to recessions,

Sep 26, 2016 | economistsview.typepad.com

RGC : September 25, 2016 at 09:45 AM , September 25, 2016 at 09:45 AM

San Fran Fed president calls for fiscal policy as automatic stabilizer:
.......................
Turning to policies that can help stabilize the economy during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to recessions, working hand-in-hand with monetary policy. Instead, it has too often been stuck in a stop-and-go cycle, at times complementing monetary policy, at times working against it. This is not unique to the United States; Japan, and Europe have also fallen victim to fiscal consolidation in the midst of an economic downturn or incomplete recovery.

One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy that support the economy during recessions and recoveries (Williams 2009, Elmendorf 2011, 2016). These already exist in the form of programs such as unemployment insurance but are limited in size and scope. Some possible ideas for the United States include Social Security and income tax rates that move up or down in relation to the national unemployment rate, or federal grants to states that operate in the same way. Such approaches could be designed to be revenue-neutral over the business cycle; they also could avoid past debates over fiscal stimulus by separating decisions on countercyclical policy from longer-run decisions about the appropriate role of the government and tax system. Indeed, economists across the political spectrum have championed these ideas (Elmendorf and Furman 2008, Taylor 2000, 2009).
.......................
http://www.frbsf.org/economic-research/publications/economic-letter/2016/august/monetary-policy-and-low-r-star-natural-rate-of-interest/

Are some people waking up a little bit? Will they totally wake up?

pgl -> RGC... , Sunday, September 25, 2016 at 09:45 AM
"Turning to policies that can help stabilize the economy during a downturn, countercyclical fiscal policy should be our equivalent of a first responder to recessions".

Just love it!

RGC -> RGC... , Sunday, September 25, 2016 at 10:05 AM
Three points to note:

1. "fiscal policy should be our equivalent of a first responder" (fiscal policy first)

2. "One solution to this problem is to design stronger, more predictable, systematic adjustments of fiscal policy" (systematic is key - not ad hoc)

3 "....that move up or down in relation to the national unemployment rate,..." (automatic and applicable to up or down)

And this from a Fed guy.

pgl -> RGC... , Sunday, September 25, 2016 at 10:55 AM
"And this from a Fed guy."

A FED guy who managed to escape the FED borg!

RGC -> pgl... , -1
I am pleasantly surprised.

Must be that San Francisco air.

[Sep 26, 2016] In 2015, the work rate (or employment-to-population ratio) for American males ages 25 to 54 was slightly lower than it had been in 1940, at the tail end of the Great Depression.

Notable quotes:
"... "In 2015, the work rate (or employment-to-population ratio) for American males ages 25 to 54 was slightly lower than it had been in 1940, at the tail end of the Great Depression. If we were back at 1965 levels today, nearly 10 million additional men would have paying jobs. The collapse of male work is due almost entirely to a flight out of the labor force-and that flight has on the whole been voluntary. The fact that only 1 in 7 prime-age men are not in the labor force points to a lack of jobs as the reason they are not working." ..."
"... "these unworking men are floated by other household members (wives, girlfriends, relatives) and by Uncle Sam. Government disability programs figure prominently in the calculus of support for unworking men-ever more prominently over time." ..."
Sep 26, 2016 | economistsview.typepad.com

pgl : , In 2015, the work rate (or employment-to-population ratio) for American males ages 25 to 54 was slightly lower than it had been in 1940, at the tail end of the Great Depression.

A hat tip to PeterK for alerting us to the latest from Nicholas Eberstadt (AEI):

http://time.com/4504004/men-without-work/

"In 2015, the work rate (or employment-to-population ratio) for American males ages 25 to 54 was slightly lower than it had been in 1940, at the tail end of the Great Depression. If we were back at 1965 levels today, nearly 10 million additional men would have paying jobs. The collapse of male work is due almost entirely to a flight out of the labor force-and that flight has on the whole been voluntary. The fact that only 1 in 7 prime-age men are not in the labor force points to a lack of jobs as the reason they are not working."

Uh Nick – thanks for telling us what we already knew – labor force participation is down. But do you realize how you just contradicted yourself. Keynesians like myself would agree that is due to a lack of jobs (aka low aggregate demand). So is this a voluntary thing?

Let's read on:

"these unworking men are floated by other household members (wives, girlfriends, relatives) and by Uncle Sam. Government disability programs figure prominently in the calculus of support for unworking men-ever more prominently over time."

Since government provided benefits have not been scaled up by our policy makers – he must think the hard working ladies are cuddling young men for their good lucks or something. Uh Nick – come to NYC and you will see that the ladies here think this is so stupid. His next excuse is all those dudes in prison. Seriously? Does this AEI clown not realize crime is much lower than it was a generation ago? This piece was dumb even by AEI "standards". But at least he did not dwell on the Tyler Cowen porn thing.And at the risk of repeating myself (and Noah Smith) if their thesis that young men had suddenly decided to loaf, then the inward shift of the labor supply curve would mean higher real wages than we are seeing.

pgl -> pgl... , Sunday, September 25, 2016 at 10:43 AM
I decided to put these thoughts in the following Econospeak post which goes a little further debunking the misrepresentations from the AEI hack:

http://econospeak.blogspot.com/2016/09/the-new-men-without-jobs-conservative.html

RC AKA Darryl, Ron : , Sunday, September 25, 2016 at 10:10 AM
[A reply from Paine:

"paine -> RC AKA Darryl, Ron...


Joe playing hill
courtier

Who knows what he thinks

Reply Friday, September 23, 2016 at 01:29 PM"

Reminded me of this entirely by accident or maybe incident:]

http://unionsong.com/u017.html


Joe Hill

A song by Alfred Hayes, Music by Earl Robinson©1938 by Bob Miller, Inc.

I dreamed I saw Joe Hill last night
Alive as you or me
Says I, But Joe, you're ten years dead
I never died, says he
I never died, says he

In Salt Lake, Joe, says I to him
Him standing by my bed
They framed you on a murder charge
Says Joe, But I ain't dead
Says Joe, But I ain't dead

The copper bosses killed you, Joe
They shot you, Joe, says I
Takes more than guns to kill a man
Says Joe, I didn't die
Says Joe, I didn't die

And standing there as big as life
And smiling with his eyes
Joe says, What they forgot to kill
Went on to organize
Went on to organize

Joe Hill ain't dead, he says to me
Joe Hill ain't never died
Where working men are out on strike
Joe Hill is at their side
Joe Hill is at their side

From San Diego up to Maine
In every mine and mill
Where workers strike and organize
Says he, You'll find Joe Hill
Says he, You'll find Joe Hill

I dreamed I saw Joe Hill last night
Alive as you or me
Says I, But Joe, you're ten years dead
I never died, says he
I never died, says he


[More about Joe Hill and Alfred Hayes at the link.]

RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , Sunday, September 25, 2016 at 10:14 AM
Fortunately I will have very little spare time for idle or addle minded leisure now until well after the election and even well after the subsequent coronation save those days so rainy that outdoor activity is entirely impractical.
pgl : , Sunday, September 25, 2016 at 11:55 AM
I never liked Ross Douhart. The political right thinks he has written something very important:

http://www.nytimes.com/2016/09/21/opinion/campaign-stops/clintons-samantha-bee-problem.html?_r=0

"At the same time, outside the liberal tent, the feeling of being suffocated by the left's cultural dominance is turning voting Republican into an act of cultural rebellion - which may be one reason the Obama years, so good for liberalism in the culture, have seen sharp G.O.P. gains at every level of the country's government. This spirit of political-cultural rebellion is obviously crucial to Trump's act."

Vote for a racist like Trump because liberals are suffocating. Did I say I really do not like Ross Douhart?

Peter K. -> pgl... , Sunday, September 25, 2016 at 01:38 PM
Again we agree. (Signs of the apocalypse? I guess Trump is going to win.)

Douchehat is the worst hypocrite. He wants readers to believe he's an expert in morality and morale rectitude and that's what conservative should be known for when in reality Republicans chose Trump as their candidate, one grand example of immorality and dishonesty.

And still Douthat turns on the liberals as behaving badly. Suffocating? Howabout the insanity of the Republican convention? That was suffocating.

He even quotes Internet Troll Steve Sailor!!!

*rubs eyes*

"(The alt-right-ish columnist Steve Sailer made the punk rock analogy as well.)"

It's like Douthat writing about JohnH or BINY. Every one of Sailor's Internet comments would be racist ones about immigration. He's mentally unhinged.

"But it remains an advantage for the G.O.P., and a liability for the Democratic Party, that the new cultural orthodoxy is sufficiently stifling to leave many Americans looking to the voting booth as a way to register dissent."

Clueless Douthat. The culture is getting better in certain ways because the TV executives just want to sell advertising and these performers are popular. It's capitalism at work.

Kudos to John Oliver for winning an Emmy.

"Among millennials, especially, there's a growing constituency for whom right-wing ideas are so alien or triggering, left-wing orthodoxy so pervasive and unquestioned, that supporting a candidate like Hillary Clinton looks like a needless form of compromise."

Note the disdain for millennials. "Triggering."

Conservative like Douthat and Bobo Brooks "trigger" the hate and anger centers of my brain.

The fact is that Samantha Bee is right and NBC facilitated the rise of Trump with the Apprentice and treating him well on other shows like Jimmy Fallon and SNL.

Here's the offending video.

http://www.huffingtonpost.com/entry/samantha-bee-slams-jimmy-fallon-nbc-for-softball-donald-trump-interview_us_57e12dbbe4b0071a6e095c1f

anne -> Peter K.... , Sunday, September 25, 2016 at 02:44 PM
--------- is the worst hypocrite....

[ Do not use sickening language on this blog. Never ever use such language here. ]

pgl : , Sunday, September 25, 2016 at 12:24 PM
I have provided this link to some of the papers by Michael Bruno – many co-authored by Jeffrey Sachs – for a couple of reasons:

http://www.nber.org/authors/michael_bruno

The minor reason is they have a nice paper on the Dutch Disease – something JohnH thinks he understands but he needs to read up on this topic. But the main reason has to do with a stupid comment from Paine on my Econospeak post, which goes to show how very little Paine actually learned in graduate school.

I was try to paint a picture of some Real Business Cycle claim that Bruno and Sachs emphasized when I was in graduate school. I never truly bought their story as I was (and still am) a die hard Keynesian. But here is how it went as applied to the early 1980's (the period I was talking about). If a nation enjoys a massive real appreciation and if aggregate demand does not matter (the New Classical view which we Keynesians do not buy) then the real wages of its domestic workers rise. These workers supply more labor driving down wages relative to domestic prices. So domestic firms hire more workers.

That is their story. I do not buy it as I was clearly mocking it. Alas Paine never learned this. And so he mocks someone who did. Just another day at the EV comment section. Aals.

[Sep 26, 2016] Neoliberal prostitute Cowen about unemployment

Sep 26, 2016 | economistsview.typepad.com

anne -> djb... September 25, 2016 at 07:29 AM https://www.bloomberg.com/view/articles/2016-09-12/debating-government-s-role-in-boosting-growth

September 12, 2016

Debating Government's Role in Boosting Growth: Cowen and Smith
By Tyler Cowen & Noah Smith

Smith: If that's true -- if we're seeing a greater preference for leisure -- why are we not seeing wages go up as a result? Is that market also broken?

Cowen: Maybe employers just aren't that keen to hire those males who prefer to live at home, watch porn and not get married. Is that more of a personal failure on the part of the worker than a market failure? Reply Sunday, DrDick -> djb... , Sunday, September 25, 2016 at 07:49 AM

This is a man who has never visited reality.
Paine -> DrDick... , Sunday, September 25, 2016 at 12:03 PM
And he's well compensated for his pipe dreaming

Why seek truth from facts
When from scratch
story telling pays so much better

DrDick -> Paine ... , -1
;-)
cm -> djb... , -1
And I thought it was "video games".

There will always be water carriers "explaining" lack of success by lack of virtue. Likewise, before large scale automation and "globalization", we didn't need PISA studies to highlight the failures of the education systems and alleged lack of student/graduate preparedness.

Sandwichman had multiple expositions on the early lump of labor fallacy debates where the plight of laborers was ascribed to their carrying their money to the ale house.

pgl -> djb... , -1
He lacks basic logic. If his story was valid, real wages would have risen. Inward shift of the supply curve v. movement along a supply curve? Hello? What do they teach the kids at GMU?
Peter K. -> pgl... , -1
This month's Time magazine - with Kaepernick on the cover - has a column by an AEI hack, Eberstadt, who pushes the exact same line Cowen is pushing. The lazy/entertained male meme.

His reasoning is that the decline in the labor force participation rate is consistent through boom times and recessions. (I'm not going to bother linking.)

"Consider: America's prime-male workforce participation has been declining at a virtually linear rate for half a century - a trajectory unaffected by good times or recessions."

Again I suspect the conservatives are just lying. The Age of Niallism.

Excellent Econospeak post by PGL. He can be quite good when not trolling or mud-wrestling with trolls.

Peter K. -> Peter K.... , Sunday, September 25, 2016 at 06:42 AM
Dean Baker also takes on the new conservative meme:

http://cepr.net/blogs/beat-the-press/if-men-don-t-work-because-of-video-games-what-explains-women-not-working

If Men Don't Work Because of Video Games, What Explains Women Not Working?

by Dean Baker

Published: 24 September 2016

As is widely known the Washington Post never misses an opportunity to blame the victims of policy for bad outcomes, rather than rich and powerful folks who design policy. We are treated to yet another example of this charade with the Post running a major article that claims that video games are a major reason that fewer young men are working today than 15 years ago.

The basic story is that many young men, particularly those with less education, have dropped out of the labor force in the last 15 years. According to survey data, they appear to be spending much of their time playing video games. They also report to be relatively happy. See, all you people who thought it was a bad economy are mistaken, the problem is the video games are just too much fun.

Okay, that's a great Trumpian level of analysis, but let's get back to the real world. Less-educated young men are not the only group with declines in employment rates. In fact, the drop in employment rates among less-educated women over the last 15 years has been even sharper. Furthermore there has been a decline in employment rates among all groups of prime age workers (25-54), even those with college degrees.

This general drop in employment rates might suggest that the real problem is a lack of demand. In other words, young men are not working for the same reason young women are not working, the Washington Post and other advocates of austerity have been successful in reducing demand in the economy by reducing the government budget deficit. So the problem has little to do with video games, the problem is the policy, but hey, if the Post can use video games to distract attention from what its favored policies are doing to people -- why not?

Peter K. -> Peter K.... , Sunday, September 25, 2016 at 06:43 AM
Not just Time magazine, but the Washington Post as well. A large problem is MediaMacro or the corporate media.
cm -> Peter K.... , Sunday, September 25, 2016 at 08:40 AM
What, is there a presumption that young women don't play video games? (Or indulge in other online/"social media" entertainment formats?)

Of course lack of employment is not the consequence but the cause of filling one's day with any available entertainment - and due to cheap offshore manufacturing the hardware is overall a minor expenditure, as well as due to the near zero marginal cost of software replication, the games are quite affordable. For online games there are data center expenses but they are distributed over many players which fits the budget of involuntary or semi-voluntary "Hotel Mama" residents.

Of course puritans cannot have it that the un(der)employeds are not suffering every inconvenience there is, particularly the soul crushing boredom of an absence of any engaging activity. Hence the mindset that the welfare state must provide exactly the measure of life support that keeps the beneficiaries from death but in this particular state of suffering. Being able to play games or having sexual relations (with others or oneself) defeats the whole purpose.

Peter K. -> cm... , Sunday, September 25, 2016 at 09:16 AM
Well said.
JF -> Peter K.... , Sunday, September 25, 2016 at 10:25 AM
You mean reducing Spending in the economy, and yes via political controls that stop the govt from spending at levels that might fill the gaps.

But the point is, to me, that private spending is where it is and will not increase to fill the gaps. Only the public acting as society's agent vua its govt can increase spending to fill the gaps - uh, jusy as Keynes and many ithers have said for quite some time.

I'm pretty sure you agree, but the point is about spending, not about the fiscal math (a deficit is just 2nd grade math, not a policy). The other party does not want to fill gaps and does not want the public to understand its role in governance - political control for infirm reasons, and that is not a word containing a typo.

Spending to cause gaps to fill. How to get this.

pgl -> Peter K.... , Sunday, September 25, 2016 at 09:23 AM
I will have to take a peek at this Eberstadt piece. Maybe he will explain to us how a supposed inward shift of the labor supply curve is consistent with weak real wage growth. Oh wait - he writes for the AEI so maybe not.
Peter K. -> pgl... , Sunday, September 25, 2016 at 10:15 AM
That's what I thought. When I saw he was from AEI I knew we were getting lies. Just like with Trump.

That it was in a column in Time magazine depressed me.

Reading your blogpost shredding Cowen cheered me up!

Thanks.

pgl -> Peter K.... , Sunday, September 25, 2016 at 10:45 AM
I have a new Econospeak post going after this horrible AEI post. Thanks again for the alert.
pgl -> Peter K.... , Sunday, September 25, 2016 at 09:39 AM
Just posted a link to this really awful piece from this AEI goofball. Thanks for the tip. Along with the link, I rip its sheer stupidity. Tyler Cowen was really bad but this AEI guy is incredibly incoherent.
Paine -> pgl... , Sunday, September 25, 2016 at 11:18 AM
Try this on for incoherent

" ...One would think the rise in the relative price of domestically supplied goods would have increased employment. "

Typo or
banana peel ?

pgl -> Paine ... , Sunday, September 25, 2016 at 11:45 AM
I see standard aka Econ 101 theory - which is what the New Classical crowd pushes - is lost on you. Do try to follow the discussion before your usual babbling. Jesus H. Christ - even JohnH is trying to grasp the economics of the Dutch disease. OK - he is doing his usual terrible job but you do not even try.
Paine -> pgl... , Sunday, September 25, 2016 at 12:24 PM
Look carefully my friend

It's your good fortune no ump stands over your shoulder to rub your face in this goof

Higher dollar leads to lower domestic employment in trade good industries
That or lower wage rates

Or some combo of both

Paine -> Paine ... , -1
RBC. Modelers
Largely Ignore the complications of open systems
U invoke the forex rate

Then fumble the ball behind the line of scrimmage

You are actual more careless and over confident then most here realize

My adivice avoid actual economists
Stay in the boon docks
And at that very gentl hetero fox site econo speak

Where loons can flock with mavericks
Lions lie down with skunks

anne -> pgl... , Sunday, September 25, 2016 at 07:00 AM
https://en.wikipedia.org/wiki/Real_business-cycle_theory

Real business-cycle theory (RBC theory) are a class of New classical macroeconomics models in which business-cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks. Unlike other leading theories of the business cycle, RBC theory sees business cycle fluctuations as the efficient response to exogenous changes in the real economic environment. That is, the level of national output necessarily maximizes expected utility, and governments should therefore concentrate on long-run structural policy changes and not intervene through discretionary fiscal or monetary policy designed to actively smooth out economic short-term fluctuations.

According to RBC theory, business cycles are therefore "real" in that they do not represent a failure of markets to clear but rather reflect the most efficient possible operation of the economy, given the structure of the economy.

DrDick -> pgl... , -1
Conservative economics, like RBC, cannot survive exposure to reality. Your post in the list today quite nicely shreds that kind of nonsense.

[Sep 26, 2016] Neoliberal corruption is enhanced by 401K investors

Sep 26, 2016 | economistsview.typepad.com
Peter K. : September 25, 2016 at 07:01 AM This is a large problem for the left. (and I see the prospect of enacting "maximum wage laws" as pretty slim. Maybe I'm wrong.)

You read progressive commenters like David and EMichael here pondering the returns on their investments. Not that there's anything fundamentally wrong with it. It's just a problem needed to be solved by public policy so everyone is facing the same rules.

http://cepr.net/blogs/beat-the-press/you-voted-to-pay-wells-fargo-ceo-john-stumpf-19-5-million

You Voted to Pay Wells Fargo CEO John Stumpf $19.5 Million
by Dean Baker

Published: 24 September 2016


You don't remember casting that vote? Well, you didn't actually cast it, but if you have a 401(k) someone like Blackrock CEO Larry Fink cast the vote for you.

Most middle income people have 401(k)s for their retirement and most of this money is in mutual funds. These mutual funds have control over the proxy votes for the shares they hold. This means that funds like Blackrock, which has more than $5 trillion in assets, have enormous say over the distribution of income in this country. And, as Gretchen Morgenson points out in her NYT column this morning, these folks almost always endorse outlandish pay packages for CEOs. As they say in Wall Street circles, what's a few million dollars between friends.

So, if you're upset about an economy where the rich keep getting richer, just remember, you voted for it, sort of. Reply Sunday, pgl -> Peter K.... , Sunday, September 25, 2016 at 09:43 AM

$19.5 million and zero accountability. Wells Fargo needs a new CEO now.
Cray Singularity -> pgl... , Sunday, September 25, 2016 at 10:04 AM

Folks need to keep their $$$$ out of mutual funds, keep their $$$$ out of 401(k). Plus you will avoid the load. When stocks fall your t-bonds will rise by virtue of their negative beta. Is that why investment bankers are contributing more to Clinton Dynasty Foundation? To Clinton election slush fund? Than to Trump University? Because the strongly suspect that stocks will collapse when the Donald moves into White House?

Do you know where your assets are? When was the last

time you saw
Uranus
?

pgl -> Cray Singularity... , Sunday, September 25, 2016 at 10:47 AM
Gold may be a negative beta asset but government bonds? Don't think so.
mrrunangun -> Peter K.... , Sunday, September 25, 2016 at 10:06 AM
I hate to remark on so obvious a matter. A TBTF bank CEO bonus of $19.5million is a low bonus by industry standards. Back in the 90s and oughties a $2million bonus for a managing director was an insult or an indication that you were on your way out. $10million was a good bonus, $5 million was OK. A $20 million bonus was really good for an MD. CEOs and leaders of successful business units could see 9 figure bonuses, like Mr Blankfein's $130million 2010 bonus, and he was not the highest paid GS exec that year. A bonus below $20million for a current day CEO could be read as bad news and is probably read as such by his friends. He is probably on his way out.

Bonuses today are not as sumptuous as they were in 2010 when the Obama bailout money was considered income and bonuses were paid out in proportion to the income of the business unit.

pgl -> mrrunangun... , Sunday, September 25, 2016 at 10:48 AM
OK, I bet Jamie Dimon makes more but I'd be really dismayed if he refused to take basic accountability for what Wells Fargo did.
pgl -> mrrunangun... , Sunday, September 25, 2016 at 10:50 AM
It seems Wells Fargo may have avoided the disasterous decline in stock valuations that BofA and Citigroup experienced but this is not exactly a large increase either:

https://finance.yahoo.com/quote/WFC?ltr=1

pgl -> pgl... , Sunday, September 25, 2016 at 10:52 AM
JPMorgan has seen a 25% increase in stock prices.

https://finance.yahoo.com/quote/JPM?ltr=1

Wells Fargo fairly flat and big stock declines for BofA and Citigroup. And yet we here from JohnH some incessant spin about record bank profits.

So many misconceptions so easily debunked.

JohnH -> pgl... , -1
More BS from pgl. Banks were able to take advantage of the Fed's historically low interest rates and post record profits in 2014 and 2015, while median real household income was back where it was a generation ago.
http://www.bloomberg.com/news/articles/2015-09-02/u-s-banks-posted-record-profits-in-second-quarter-fdic-says

Sad part, is that now pgl will tell us about the woes of one or two of his favorite banks and try to project that to the industry...or he'll put in a link showing declines in net interest margins...because he's a dissembling sleazebag.

This dude is so confused that he doesn't even know the difference between net INCOME margin (profit) and net INTEREST margin!

[Sep 26, 2016] The geopolitical reasons for [TPP], from America's point of view, are pretty clear. It's designed to make sure that the future of the Asia-Pacific region, economically, is not totally dominated by China

Sep 26, 2016 | www.nakedcapitalism.com

Bill Clinton: "The geopolitical reasons for [TPP], from America's point of view, are pretty clear. It's designed to make sure that the future of the Asia-Pacific region, economically, is not totally dominated by China" [ CNBC ]. "However, he stopped short [by about an inch, right?] of supporting the TPP. He added that his wife [who is running for President' has said provisions on currency manipulation must be enforced and measures put in place in the United States to address any labor market dislocations that result from trade deals." Oh. "Provisions enforced" sounds like executive authority, to me. And "measures put in place" sounds like a side deal. In other words, Bill Clinton just floated Hillary's trial balloon for passing TPP, if Obama can't get it done in the lame duck. Of course, if you parsed her words, you knew she wasn't lying , exactly….

" The full 40-page paper (PDF) [from the Global Development And Environment Institute at Tufts University] goes into the details [of projected economic gains from trade deals]. Along the way, it provides a highly critical analysis of the underlying econometric model used for almost all of the official studies of CETA, TPP and TTIP - the so-called "computable general equilibrium" (CGE) approach. In particular, the authors find that using the CGE model to analyze a potential trade deal effectively guarantees that there will be a positive outcome ("net welfare gains") because of its unrealistic assumptions" [ TechDirt ].

"Conservative lawmakers looking for a way to buck Donald Trump's populist message on trade may have gotten a little more cover with more than 30 conservative and libertarian groups sending a letter today to Congress expressing strong support for free trade" [ Politico ]. National Taxpayers Union, Club for Growth, FreedomWorks…

"France is set to arrive at the meeting with a proposal to suspend TTIP negotiations, our Pro Trade colleagues in Brussels report. But for the deal's supporters, there's hop'e: 'France will not win the day,' Alberto Mucci, Christian Oliver and Hans von der Burchard write. 'Britain [???], Italy, Spain, Poland, the Nordic countries and the Baltics will thwart any attempt to end the Transatlantic Trade and Investment Partnership in Bratislava'" [ Politico ].

[Sep 26, 2016] The global pivot towards fiscal policy Gavyn Davies

Notable quotes:
"... After several years of deliberate fiscal austerity, designed to bring down budget deficits and stabilise public debt ratios, the fiscal stance in the developed economies became broadly neutral in 2015. There are now signs that it is turning slightly expansionary , with several major governments apparently heeding the calls from Keynesian economists to boost infrastructure expenditure. ..."
"... [1] Fiscal easing remains very conntentious in political circles throughout the western economies. At a recent meeting behind closed doors in Washington DC, I was surprised to hear a very senior, and generally intelligent, Republican politician declare that "Keynesian demand management has been shown to be useless by a bunch of Austrian academics". I am not sure what he had in mind, but he did make a more defensible point when he added that supply side policies might be more important for growth in the long run. ..."
"... 108 people listening ..."
Sep 26, 2016 | blogs.ft.com

Another nail in the coffin of neoliberalism...

The global pivot towards fiscal policy

Gavyn Davies Loading data... Notice: Author Alerts This service is moving to our new website . You will still be able to follow your favourite authors via myFT . Following authors will create Instant Alerts, which can also be created for any other topic. Try it now . | Sep 25 14:33 | 15 comments | Share Fiscal policy activism is firmly back on the agenda. After several years of deliberate fiscal austerity, designed to bring down budget deficits and stabilise public debt ratios, the fiscal stance in the developed economies became broadly neutral in 2015. There are now signs that it is turning slightly expansionary , with several major governments apparently heeding the calls from Keynesian economists to boost infrastructure expenditure.

This seems an obvious path at a time when governments can finance public investment programmes at less than zero real rates of interest. Even those who believe that government programmes tend to be inefficient and wasteful would have a hard time arguing that the real returns on public transport, housing, health and education are actually negative [1].

With monetary policy apparently reaching its limits in some countries, and deflationary threats still not defeated in Japan and the Eurozone, we are beginning to see the emergence of packages of fiscal stimulus with supply side characteristics, notably in Japan and China.

Investors are asking whether this pivot towards fiscal activism is a reason to become more bullish about equities and more bearish about bonds, on the grounds that the new policy mix will be better for global GDP growth. This is directionally right, but it is important not to exaggerate the extent of the pivot.

The phase of fiscal austerity peaked in 2013, and ended last year, but firm announcements of more stimulative budgetary policy have been fairly minor up to now. In 2016, budgetary policy in the developed economies will be slightly expansionary and the latest plans suggest that the same will be true next year.

J.P. Morgan has recently estimated that budgetary policy in the major developed economies, measured by the structural budget balance, will be eased by 0.2 per cent of GDP both this year and next. With feasible further policy changes, it could turn out to be a little more than this, but only a little:

What effect would that have on GDP growth? In part, that depends on the monetary policy reaction.

In the US, the Federal Reserve could raise short rates slightly more rapidly if fiscal policy is eased, curtailing the GDP benefits somewhat. Elsewhere, monetary policy would not react at all, and central banks would probably prevent any crowding out of private investment by keeping long bond yields stable.

It is now well established that the fiscal multiplier is probably fairly large when interest rates are at the zero lower bound. A recent lecture by Paul Krugman suggests, as a rule of thumb, that the multiplier might be around 1.5, compared to standard estimates of 0.5 or less in previous eras. That seems to be as good an estimate as any other, and it would suggest that the fiscal easing in 2017 might raise GDP growth by more than a quarter percentage point, compared to a GDP growth drag of over 1.8 per cent in 2013.

That is useful, but scarcely ground breaking. Yet Keynesians seem optimistic that the beneficial effects of a fiscal pivot might be much more significant than this. How might this happen?

There are two possibilities. The first is that a fiscal stimulus might shock the economies into a new equilibrium in which private sector confidence is restored and the level of output settles permanently at a new, higher level. Economists can show that almost anything is possible by using multiple equilibrium models (and Keynes certainly had such mechanisms in mind in the 1930s) but it surely strains credulity to suggest that the modest fiscal changes currently planned would have a dramatic effect on corporate or consumer confidence.

A second possibility is that easier fiscal policy would simultaneously make the existing stance of monetary policy more stimulative. Recent work on R*, the equilibrium real rate of interest, suggests that fiscal policy can shock R* upwards, by raising investment relative to savings. This would have an effect opposite to the global savings glut, which is sometimes held to have reduced R* in the past decade.

If that occurred, then the gap between current interest rates and R* would be increased, making the monetary stance (in theory) more stimulative without the central bank taking any action at all. But would a moderate and temporary increase in the budget deficit have a large and permanent effect on R*? It seems rather doubtful.

It is true that eventually there could be changes in fiscal strategy that could be powerful enough to shock the global economy into a different path for growth and inflation. Chris Sims' work on fiscal dominance suggests that a major regime change in which fiscal policy is aimed at achieving a rise in inflation towards the 2 per cent target could be very powerful.

But, in the real world, politicians (except possibly in Japan) are nowhere near accepting the need to throw overboard everything they have believed for decades. It would probably take another global recession to change that.

----------------------------

Footnote

[1] Fiscal easing remains very conntentious in political circles throughout the western economies. At a recent meeting behind closed doors in Washington DC, I was surprised to hear a very senior, and generally intelligent, Republican politician declare that "Keynesian demand management has been shown to be useless by a bunch of Austrian academics". I am not sure what he had in mind, but he did make a more defensible point when he added that supply side policies might be more important for growth in the long run. Tags: central banks , Fiscal policy , Monetary policy
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Robo63 5pts Featured
28 minutes ago

This idea is not new nor has it ever worked. See Japan and China for recent examples, NZ tried it in the 80's and almost went bust.

It maybe possible to get some short term uptick in economic measurements following a big government spend up, but it is well proven that when the fiscal spend up slows so does the economy. There are many reason for this, least not, that most often Government projects are wrecked by politics, unions see them as an opportunity to leverage political capital for the benefit of their members and inevitably push up costs of the project. The private sector see it for what it is, a temporary spend up on the public purse and milk it for all they can get, much of the spending goes off shore via profits and expenditure on raw materials. Unless resources are sitting around idle inflation will reduce the expected returns and ultimately these types of projects reflect the under lying issue in economies that try them, these are usually related to declining productivity driven by regulation and monetary driven asset inflation. If economic wealth creation was as simple as spending more then we would not be talking about it.

The economic philosophy/theory of Keynes and monetarism as land us where we are today. Unfortunately it seems like populist political outcomes will raise there ugly head with who knows what outcome. The establishment will blindly blame the populist politician and not reflect on how we got here. The FT seems to be leading the charge in that regard.

Brian Reading 5pts Featured
1 hour ago
It is great to read sop-histicated articles not afraid to mention the equilibrium real rate of interest and structural budget balances. Perhaps the message is that the combination of conventional fiscal policy with unconventional monetary polcy is doing more harm than good and has the makings of the next crisis. It is possibly now time to try unconventional fiscal with conventional money.
slimfairview 5pts Featured
14 hours ago

After almost 6 years of inveighing against Merkelism, an economic system based on the fear that someone, somewhere is earning a living, and after youngsters majoring in Economics tried running Ken Rogoff's numbers through a computer and failed to duplicate the results, the EuroCrats have--with their last gasp--embraced austerity.


Nonetheless, that the EuroUnion may be unraveling is indicated in part by Dr. Rogoff back-pedaling on austerity in a recent interview, the hysterical rants by EuroCrats against the impending Brexit Vote, the petulant and bitter invective after the Brexit Vote, the "open and public and effusive" support for the Chancellor by, among others, Madame Lagarde; Draghi's rebuke to Merkel on her attempted interference in the activities of the ECB.....


Perhaps the EuroCrats from the "EXIT" Nations: Britain, Greece, Italy, Portugal, Spain, and now Ireland, will consider the proposal in Brexit? Now What?

http://sidestreetjournal.blogspot.com/2016/06/brexit-now-what.html

Warmest regards,

Slim.

The SidestreetJournal is an unsupported, unfunded, non-profit web log by the Blogger Slim Fairview.

Neil at home 5pts Featured
15 hours ago
So the nice easy solution of lowering interest rates hasn't stimulated growth and throwing a few trillion on infrastructure wont help much either.
Ye olde sweetie shoppe 5pts Featured
5 hours ago
@ Neil at home I respectfully disagree. Infrastructure spending should at the very least stimulate wage growth, increase employment and ultimately stoke inflation. Zero interest rates have done none of this because in a balance sheet recession corporations tend rather perversely to pay down debt rather than issue more of it. I recommend you watch one of Ricard Koo's presentations on Youtube.
genauer 5pts Featured
15 hours ago

Inflation targeting to less than 2% has been Bundesbank policy for a long time, and with them most of mainland Europe.

Krugman claiming that "And my team won three out of three. Goooaaal!" is his typical brand of strawmen dishonesty.

Krugman trying to diparage "Academics like Niall Ferguson and John Cochrane ", that has really something to it.

Still showing the discgraced garbage "analysis" solely depending on one false data point Greece (Fig. 2) shows that the disgraced Krugman and his Krugtron "team" are intellectual and character garbage, specifically including formerly IMF Olivier Blanchard.

http://www.ft.com/cms/s/0/85a0c6c2-1476-11e2-8cf2-00144feabdc0.html?siteedition=intl#axzz4Kctynkdq

Last updated: October 12, 2012 11:00 pm

Robustness of IMF data scrutinised

By Chris Giles in London

To the honesty and accurateness of the same usual suspect de Grauwe, please see my detailed comment at

http://www.ft.com/cms/s/0/45b7a0ca-1ea5-11e6-a7bc-ee846770ec15.html#axzz4Kctynkdq

May 20, 2016 7:26 pm

Greece's creditors eye IMF debt deal

Alex Barker in Brussels and Shawn Donnan in Washington

which had to wait 18 hours in pending .... : - )

Ralph Musgrave 5pts Featured
16 hours ago
So after several years during which monetary policy has proved less than brilliantly effective at giving us stimulus, the "experts" are now going to try fiscal policy. Have the "experts" yet caught up with the fact that the Earth revolves round the Sun?
Andrew Baldwin 5pts Featured
17 hours ago
I haven't read the paper by Chris Sims but there is no reason that fiscal policy should set itself the task of raising the inflation rate to two percent. The two percent inflation target is a relic of the original inflation control agreement of the Governor of the Bank of Canada and the Minister of Finance in February 1991. The upward bias in the Canadian CPI at that time was probably greater by 25 basis points than it is today, and probably in excess of 50 basis points as compared to the US target inflation indicator, the PCEPI. In any case, two percent was never intended to define price stability, which the 1991 agreement clearly stated would be some inflation rate lower than two percent. The developed world should forget about a two percent target. It is long past time to move the target rate down.
duvinrouge 5pts Featured
17 hours ago

Expansionary fiscal policy solution for those who think the problem is capitalists hoarding money.

Expansionary fiscal policy, just like expansionary monetary policy, will only further diverge aggregate prices from aggregate values - a crisis of 'overproduction'. But, of course, economists today have no comprehension of the difference between price & value, even if some recognise an 'asset-price bubble'.

There is no way of avoiding a recession that destroys fictitious capital, along with productive capital & with all the mass unemployment & human suffering. Not because boom-bust is an act of nature, rather it is part & parcel of the capitalist system. Only a post-capitalist system where the means of production are commonly owned/controlled can we liberate humanity.

Hollow Man 5pts Featured
7 hours ago
@ duvinrouge Interesting! But you've teased us before with comments that would suggest you have more up your sleeve. Why not lay out a fuller explanation --presumably it's some kind of modern variant of Marxian theory -- so that we can judge for ourselves what sort of alternative it really is to to Gavyn Davies' stale, jargon-ridden analysis?

[Sep 26, 2016] Class War by Other Means: Tennessee, Volkswagen and the Future of Labor

Notable quotes:
"... The political logic is pretty clear: massive subsidies are just the price that the public is expected to pay in exchange for the limited number of jobs made available to them within the "free enterprise" system. ..."
"... In fact, President Obama came to Chattanooga to join in on Tennessee's bi-partisan economic consensus. During his 2013 jobs tour, the President delivered a speech at the Chattanooga Amazon distribution facility, praising the company for doing its part to restore the middle class through "good jobs with good wages." The starting wage at the Chattanooga warehouse is $11.25 an hour. ..."
www.truth-out.org
In 2008, the governments of the city of Chattanooga, Hamilton County, the state of Tennessee, and the United States all collaborated to provide Volkswagen (VW) with a $577 million subsidy package, the largest taxpayer handout ever given to a foreign-headquartered automaker in U.S. history. The bulk of the subsidy package, $554 million, came from local and state sources. The federal government also threw in $23 million in subsidies, bringing the grand total of taxpayer money that VW received in 2008 to $577 million. According to the Subsidy Tracker at the website of watchdog group Good Jobs First, the package provided to VW included "$229 million from the state for training costs and infrastructure; $86 million in land and site improvements from the city and the county; state tax credits worth $106 million over 30 years; and local tax abatements worth $133 million over the same period." In exchange for this massive infusion of public wealth onto Volkswagen's corporate balance sheets, the company promised to create 2,000 jobs in Chattanooga, bringing the price tag for each promised job to $288,500.

When asked to respond to concerns about VW's record-shattering subsidy package, then-Tennessee Governor Phil Bredesen, a Democrat, unabashedly replied, "I don't know whether it's fair that a Mercedes Benz costs $90,000, I just know if I want one that's what I've got to pay." Tennessee's U.S. Senator Lamar Alexander, a Republican, applauded the deal as another significant mile marker on the way towards "Tennessee's future" of becoming the "the No. 1 auto state in the country."

The political logic is pretty clear: massive subsidies are just the price that the public is expected to pay in exchange for the limited number of jobs made available to them within the "free enterprise" system. The VW subsidy deal is just one example of how large corporations leveraged the widespread suffering caused by the Great Recession, the longest and deepest economic crisis since the 1930s, to bleed the funds of state governments in exchange for jobs. In a 2013 report studying the rise of "megadeals" -- subsidy deals with a local and state subsidy cost of $75 million or more -- Good Jobs First found that "since 2008, the average number of megadeals per year has doubled (compared to the previous decade) and their annual cost has roughly doubled as well, averaging around $5 billion." This was certainly the trend in Tennessee, where VW was the first of three separate megadeals negotiated in the state from 2008 to 2009. The same year that the VW deal was announced, Hemlock Semiconductor received over $340 million in government giveaways to develop a $1.2 billion polycrystalline silicon manufacturing plant in Clarksville, Tenn. By 2014, the plant was shuttered and all 500 promised jobs evaporated. Wacker Chemie received over $200 million in subsidies to build a billion-dollar plant in Bradley County, just outside of Chattanooga, to produce materials used in solar panels and semiconductors. Another megadeal was brokered with Amazon, which received over $100 million in local and state subsidies to build a distribution center in Chattanooga's industrial development park, which is shared with the Volkswagen plant.

The Bipartisan Consensus

The subsidy deals with Volkswagen, Hemlock, Wacker, and Amazon were all originally negotiated by Tennessee Governor Phil Bredesen, a Democrat, and U. S. Senators Lamar Alexander and Bob Corker, both Republicans, and was approved by the Tennessee General Assembly, which in 2008 came under Republican control for the first time since Reconstruction. These deals were drafted in collaboration between state politicians (both Democratic and Republican) and business elites in total secrecy. Tom Rowland, mayor of Cleveland City in Bradley County, the location for the Wacker plant just outside of Chattanooga, revealed the frequency of such secret meetings: "You don't know how many times we have slipped Gov. Bredesen, Sen. [Bob] Corker and [Tennessee Economic and Community Development commissioner] Matt Kisber into the Chamber office."

By 2010, the state was firmly under the control of a Republican governor, Bill Haslam, and a Republican super-majority in the General Assembly. By 2012, the Republicans held over two-thirds of all state government offices in what they called a "super duper majority." The parties might have changed, but the love for corporate welfare did not, as the Republicans continued to build upon and extend all of the agreements from the previous governor's administration.

In fact, President Obama came to Chattanooga to join in on Tennessee's bi-partisan economic consensus. During his 2013 jobs tour, the President delivered a speech at the Chattanooga Amazon distribution facility, praising the company for doing its part to restore the middle class through "good jobs with good wages." The starting wage at the Chattanooga warehouse is $11.25 an hour.

"Good Jobs" and Concessionary Unionism

According to a 2015 study by the Center for Automotive Research, auto workers at VW in Chattanooga had the lowest hourly pay and benefits of any employees in a U.S. car factory. The starting hourly wage rate for an assembly line worker at Volkswagen is about $15 an hour, or approximately $31,000 a year. A full-time production employee can top out their pay in seven years at a wage rate of $23 an hour, or about $48,000 a year. That makes the top pay at Volkswagen less than 80% of the estimated annual median income for Hamilton County. Third-party contractors hired by Volkswagen to work on the line in the plant and the network of auto suppliers servicing the factory pay even lower hourly wage rates. Yet U.S. Senator Corker describes production jobs at VW as "good paying," Hamilton County Mayor Jim Coppinger prefers the term "family-wage jobs," and Chattanooga Mayor Andy Berke describes VW as providing "living-wage jobs" that are helping to "build our middle class."

Tennessee's billionaire governor, Bill Haslam, who happens to be the richest politician in the country, has expressed little concern over whether or not the jobs brought to the state were high paying. In fact, it appears that he is proud that they are not. In official material directed to foreign companies by the Haslam administration, the governor touted a pro-business environment in which companies can exploit a "low-cost labor force" thanks to the state's "very low unionization rates." (That's alongside the boon of state and local taxes that are "some of the lowest in the region.")

Since the Great Recession, the United Auto Workers (UAW) has been overseeing the erosion of gains made by auto workers in previous decades. The union has been able to maintain higher wages and benefits for the auto workers they represent when compared to manufacturing overall, but the difference has shrunk dramatically in recent years. According to the Detroit Free Press, "Back in 1960, a Detroit Three UAW autoworker was paid 16% more than the average U.S. manufacturing worker. By the early 2000s, that wage gap had grown to nearly 70% in favor of the UAW worker, but shrank back to 33% by this year."

The union, to be sure, is operating under difficult conditions in the auto industry: trade deficits in manufacturing that were growing even prior to the Great Recession, the relative increase of jobs in parts plants that pay less than assembly plants, the growth in auto employment at nonunion "transplants" (belonging to non-U.S. headquartered companies like Volkswagen and Toyota), and the rise of temp agencies and "just in time" production as part of the overall lean production management processes in the industry. All of these changes, however, have taken place in the context of the UAW's top-down brand of business unionism, which has led to its deeply concessionary approach to collective bargaining and new organizing. For example, an Economic Policy Institute (EPI) report jointly authored by a former UAW leader, a former vice president from Ford, and an academic expert on "workplace innovation," lauded the UAW for being "a full partner for more than a decade in experimenting with innovations in work organization" and working with corporate management at the Big Three to reduce a "major portion" in the "cost differential" with non-union foreign-headquartered auto makers:

In 2005, there was a gap of $3.62 between the average hourly wage of $27.41 at Ford and $23.79 for the transplants. When fringe benefits, legally required payments, pension benefits, retiree health care, and other post-employment labor costs are added in, the gap grew to $20.55 ($64.88 versus $44.33) .... In 2010, following the 2007 introduction of the entry wage and concessions made during the 2009 government bailout, the wage gap stood at $4 ($28 for Ford versus $24 for the transplants), and the gap when including fringe benefits and post-employment costs stood at $6 ($58 for Ford versus $52 for the transplants).

Incredibly, the UAW leadership has continued to proudly highlight how contract concessions have induced an ever-closer wage convergence between transplants -- located largely in low-wage, Republican-dominated states in the southeastern United States -- and U.S.-headquartered automakers in historically union-dense strongholds, like Michigan. They hold this up as proof of their labor-management partnership credentials while simultaneously championing the auto industry as lifting up "good jobs" and "the middle class." Despite the reality of declining wages, benefits, and jobs, the public appears to believe the same. According to an analysis of several polls by the National Employment Law Project (NELP), a majority of the general public believes that "manufacturing is the most important job sector, in terms of strengthening the economy."

At the Chattanooga VW plant, workers also face a brutal lean-production management model on the assembly-line floor that works to squeeze higher productivity from a scant and beleaguered workforce. The working conditions on the assembly line are so physically demanding that many production workers cannot see working at VW as a long-term career. Yet in 2013, when the UAW announced that they were seeking to organize the Chattanooga plant, the union decided against organizing around the salient issues in the plant and instead chose to frame their entire organizing campaign around collaboration with the company to form the first German-style "works council" in the history of the United States. The UAW's strategy was exclusively predicated on advancing what the union championed as an innovative form of labor-management partnership.

The UAW even went so far as to sign a neutrality agreement with Volkswagen which committed the union to "maintaining and where possible enhancing the cost advantages and other competitive advantages that [Volkswagen] enjoys relative to its competitors." When pressed to account for why the union would make such a shocking concession, then-UAW president Bob King issued this reply:

Our philosophy is, we want to work in partnership with companies to succeed. Nobody has more at stake in the long-term success of the company than the workers on the shop floor, both blue collar and white collar. With every company that we work with, we're concerned about competitiveness. We work together with companies to have the highest quality, the highest productivity, the best health and safety, the best ergonomics, and we are showing that companies that succeed by this cooperation can have higher wages and benefits because of the joint success.

Continued Investments, Too-Big-to-Fail and Too-Big-to-Jail

In July 2014, Volkswagen announced that it was planning to invest $600 million into expanding the Chattanooga plant, adding additional assembly lines for the production of an SUV for the North American market. According to local news reports:

More than a third of that investment will initially come from state and local governments who agreed to pump more than $230 million of upfront tax dollars into the project to woo VW into expanding in Chattanooga rather than at its other major North American plant in Puebla, Mexico, where labor costs are far lower. Combined with other property tax breaks, TVA incentives, road projects and other potential tax credits, Volkswagen could qualify for more than $300 million of grants, credits and other government assistance over the next decade....

The expansion of the Chattanooga plant brings the total subsidy package provided to Volkswagen up to about $877 million dollars. Following the official announcement of the expanded subsidy deal, Tennessee House Majority Leader Gerald McCormick, whose district includes Chattanooga, told the press, "I think it is a good investment and we will convince the Legislature of that because there are just so many ripple effects from this investment that will help so much of our state." The ripple effects of such an enormous single investment took on a completely different character with the announcement, in September 2015, that the EPA was fining Volkswagen for installing "defeat devices" on their automobiles, allowing the diesel cars produced at the Chattanooga plant to temporarily hide the emissions they produce.

Since the EPA's announcement, VW has acknowledged that it produced over 11 million diesel vehicles worldwide that contained software allowing them to cheat nitrogen oxide tests. This software, installed on 2009–2015 diesel VWs, reduced emissions while the cars were hooked up to testing devices, only to let pollution "spill out of the tail pipe at up to 40 times the allowable level" when cars were on the road. An analysis performed by the Associated Press (AP) estimates that about 100 people in the United States have likely died as a result of the pollution produced by VW's diesel Passat over the last few years. AP's analysis estimates that the death toll in Europe is substantially higher, likely resulting in hundreds of deaths for every year the cars were on the road.

After the EPA's announcement in September 2015; VW's stock price plummeted and VW Group CEO Martin Winterkorn resigned. Volkswagen Group of America President and CEO Michael Horn admitted, during his official testimony before Congress in October, that the defeat devices were installed for the express purpose of beating emissions tests. In November 2015, the Chattanooga VW plant stopped the production of the diesel Passat. More recently, VW has agreed to a partial settlement with federal and state authorities of over $15 billion as new lawsuits and government investigations from around the world continue to make headlines. How have the local and state government responded to the news of VW's rampant criminality and corruption? Speaking to reporters about VW and the scandal, Governor Haslam said, "We're married to them. We want this plant to be a success."

Hamilton County Mayor Jim Coppinger, meanwhile, told reporters, "We need for the plant to be successful. It's important to our economy." The state is too invested in VW -- politically and financially -- to be in any position to truly hold the company accountable for its actions.

A New Road Forward

Put it all together and we have a formula for maximizing corporate profits that mixes equal parts political opportunism with class collaboration. Following the Great Recession, voters were desperate for jobs. Politicians, campaigning on bringing jobs to voters, are willing to provide massive subsidies to companies willing to locate in their voting districts. The union, desperate to organize new bargaining units from which to collect dues and to be seen as a legitimate partner with corporate and political elites, actually agrees to "maintain" and "enhance" the competitive advantages corporations gain by pushing private business costs off onto the public while providing jobs with lower wages, reduced benefits, and deteriorating working conditions. Meanwhile, the public believes they are getting "good jobs," while the actual quality of those jobs continues to decline. The companies laugh all the way to the bank. With their backs to the wall, unions like the UAW can no longer put off organizing auto makers and suppliers that choose to locate their plants in the South, but they will not succeed by promising to "work in partnership" with the companies. Labor organizers in the South will usually be working in an environment in which both business and government are hostile to unions. When the UAW narrowly lost the VW vote in 2014, the union should have learned a valuable lesson. The company might have formally committed to being "neutral," but the business and political elites in the South made no such agreement. If unions fail to win over the broader working class, they have no chance of winning representation elections -- especially in states like Tennessee, where only 6% of all workers belong to a union, and in cities like Chattanooga, where the unionization rate is even lower, at an abysmal 3.4% of all workers.

To win, unions will not only have to jettison the pipedream of courting management with promises of maximizing worker productivity and containing costs. Rather, they will have to return to their militant roots: connecting shop-floor fights with community organizing. This approach has been successfully exemplified by the Chicago Teachers Union (CTU) and the Grassroots Collaborative, a labor-community alliance that has become a permanent fixture in Chicago politics and generated immense public support for CTU's militant fights with the city's investor class and mayor. CTU's combination of bottom-up work-site organizing and authentic, non-transactional support for community organizations and their struggles were critical preludes to the union's relatively successful 2012 strike. A long-term strategy focused on this kind of organizing would go a long way towards building the kind of movement infrastructure that labor needs to win in the South.

All of this is easier said than done. But we are currently faced with the atrocious working conditions and ever-diminishing wages and benefits of manufacturing jobs, the spread of poverty throughout our communities, the deep underfunding of public services, and the rising tide of anger and resentment (especially among young people) towards the economic and political elite. The time is ripe for organizers to begin harvesting the fruits of our exploited labor.

Shouldering the Subsidy: Tennessee's Regressive Tax System

Tennessee has one of the most regressive tax systems in the country. Currently, Tennessee has no state income tax and a constitutional amendment, passed by referendum in 2014, prevents the state government from ever establishing an income or payroll tax. Moreover, earlier this year the state legislature passed a bill to phase out the state's tax on dividends and income from bonds by 2022, resulting in millions of dollars in tax revenue being stripped from city budgets. This will likely result in city governments raising revenue by hiking property taxes, further shifting the burden of raising revenues for the state onto the working and middle classes.

The lack of an income tax means that the Tennessee state government relies to a large degree on sales taxes to raise revenue. The sales tax is especially regressive due to the state's refusal to exempt essentials like groceries (though groceries are at least taxed at a lower rate than the overall sales tax), while completely exempting luxury goods such as "attorneys' fees, services such as haircuts and massages, and goods for horses and airplanes." Additionally, the state fails to offer any tax credits to low-income taxpayers to offset either sales or property taxes.

This means that the primary form of wealth for the working and middle classes -- a family home -- is taxed to provide the vast majority of revenue for local governments. Meanwhile, major forms of wealth for the ruling class -- corporate stocks and bonds -- are not. Tennessee's working and middle classes are being squeezed under the highest average combined state-local sales tax rate in the country, while the owners of capital skirt any responsibility for paying their share.

This regressive system is compounded with every tax abatement given to a large multinational corporation, such as Volkswagen. When the state increases its reliance on sales taxes to offset the holes punched into the budget by corporate tax breaks, this increases the overall tax burden on the poor and working class. The only other option to raising revenue through regressive taxes is for the state to cut services. Cuts to services, such as healthcare, public education, infrastructure, and transportation, are just another way to shift the burden onto the working class. While public services diminish, highly profitable multinational corporations, such as Volkswagen, benefit from direct state supports, like state-financed job training and capital-improvement grants, which improve their bottom-line and further entrench wealth inequality.

The federal tax system, on the whole, is progressive, according to a 2016 Tax Policy Center report. Economists with the Federal Reserve Bank studied the impact of state taxes on income inequality and found that Tennessee's regressive tax system "reverses around one-third of the compression [in the income spread] caused by federal taxes" -- the most of any state in the country.

Inequality's Racial Disparities

According to the 2015 report "State of Black Chattanooga," by the Ochs Center for Metropolitan Studies, the median wealth of white households in Tennessee bounced back in the years after the Great Recession, increasing by 2.4% between 2010 and 2013, to $141,900. Contrast that with the median wealth of Black households in the state, which continued to spiral down in the same time period, falling more than 33% to $11,000.

The arrival of Volkswagen, Wacker, and Amazon has failed to fundamentally alter the overall low-wage economy in Chattanooga and Hamilton County. When these "megadeals" combine with the further subsidies provided to land developers for luxury condos and apartments in Chattanooga's urban core and the expanding priority placed by local governments on police and jails, the results are gentrification, displacement, and incarceration. Currently, 27% of Chattanoogans overall live in poverty, almost double the national average, and that number jumps to 36% in the city's Black community. In the eleven lowest-income neighborhoods in the city, in which about three-quarters of residents identify as Black, the poverty rate is 64%. Only 17% of the Tennessee population is Black, yet Black people are 44% of our state's prison population.

Concerned Citizens for Justice, a grassroots organization dedicated to Black liberation in Chattanooga, describes this underlying systemic approach by politicians and business leaders as "an arrangement that is good for rich financiers and developers and bad for Chattanooga's working class and oppressed majority." The numbers certainly bear out their analysis.

Sources:

Frank Ahrens and Sholnn Freeman 2007. "GM, Union Agree on Contract to End Strike," Washington Post, Sept. 27, 2015 http://www.washingtonpost.com/wp-dyn/content/article/2007/09/26/AR2007092600155.html ; Associated Press, "TN touts 'low-cost labor force' to lure foreign business," Sept. 2, 2015 http://www.tennessean.com/story/news/2015/09/02/tn-touts-low-cost-labor-force-lure-foreign-business/71617998/ ; Associated Press, "Volkswagen now under investigation for tax evasion," Nov. 24, 2015 http

[Sep 25, 2016] Popular Acceptance of Inequality Due to Brute Luck

Notable quotes:
"... By Matthew Weinzierl, Assistant Professor of Business Administration, Harvard Business School. Originally published at VoxEU ..."
"... The trick or con being played by the elite is to convince enough of us that the game of life is being played fair. And when that fails, the con or lie becomes that its the fault of (insert target minority group). ..."
"... From two complementary sociological points of view -- conflict theory and symbolic interactionism -- this article is naive -or a red herring- in the ways you suggest. ..."
"... Indeed, the issue is about people accepting a "definition of the situation" that is in fact detrimental to their material interests (Pierre Bourdieu terms this "misrecognition"). Erving Goffman, who was trained as an interactionist, studied con artists to describe how they successfully created a definition of situation -- which means a version of social reality -- that their marks would internalize as reality itself. A sociologist would not begin a discussion of socioeconomic inequality with tax policy. ..."
"... Control over arguments regarding political economy in the public sphere have to be wrested from economists, so that we can start to talk about what actually matters. Sanders' popularity, despite his numerous problems, lay in how he took control of the argument and laid bare the absurdities of those who benefit from the status quo. ..."
"... I say we boycott economists. Sure some of them are not terrible, but in the main the discipline needs to be torn down and rebuilt from the ground up. ..."
"... Many economists function as members of the courtier class, justifying what the rich and powerful want to occur. Most citizens already boycott economists in that they don't use their services except when required to attend an Econ class at school. ..."
"... But economists do influence average citizens lives via their justification of tax policy, land use policy, labor policy, trade policy and law implementation. ..."
"... Economic education has been a failure of the left. Everyone needs to know how money and finance works. Only then can that power be put to various uses. It is not that you don't need economists, you need economists working in your interest. ..."
"... I could get behind this. And I would have to agree that harping against the evils of capitalism, which are very real, often comes from those who don't really understand how it works. ..."
"... The post indicates this guy is Assistant Professor of Business Administration - at Harvard Business School - so I'm not sure I would give him even so much regard as I might give an economist. I wonder how he and his will regard the fairness of luck while they wait in line to be serviced at the guillotine they're building - much as Scrooge crafted his chain and weights for his afterlife. ..."
"... Interesting reference to Scrooge -- the power of art to enlighten the human condition cannot be underestimated. As I get older, it seems to me that the capitalism system debases everything it touches. Anything of real value will be found outside this system. It has become the box that confines us all. ..."
"... It's also worth noting how his examples are still a function of the neoliberal canard that privilege is simply a boost on the ladder of meritocracy. The game is still implicitly understood to be fair. ..."
"... Yet, it's not clear to me what Alice Walton, for instance, has done to justify being a multi-billionaire. People who are born not just with spoons but entire silver foundries in their mouths could redistribute 90% of the wealth they acquired by virtue of being someone's baby and still be absurdly rich. ..."
"... Learning must be for its own sake. Like you, I spent many hours in the library. BUT it was to scratch an itch I have not been able to quell - even in these many years since I was in that library. ..."
"... "The putative "father of the Euro", economist Robert Mundell is reported to have explained to one of his university of Chicago students, Greg Palast: "the Euro is the easy way in which Congresses and Parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system" Michael Hudson "Killing the Host" ..."
"... The neoclassical economists didn't have a clue as the Minsky Moment was approaching. ..."
Sep 24, 2016 | www.nakedcapitalism.com
Yves here. This article argues that people don't mind inequality due to "brute luck"…but is one man's brute luck another man's rigged system?

By Matthew Weinzierl, Assistant Professor of Business Administration, Harvard Business School. Originally published at VoxEU

Tax policy to correct inequality assumes that nobody is entitled to advantages due to luck alone. But the public largely rejects complete equalisation of 'brute luck' inequality. This column argues that there is near universal public support for an alternative, benefit-based theory of taxation. Treating optimal tax policy as an empirical matter may help us to close the gap between theory and reality.

... .... ...

In this case, the optimal tax policy aggressively offsets inequality. Only the need to retain incentives to work and the desire to reward extra effort justify allowing inequality to persist.

... ... ...

Brute Luck and Economic Inequality

What explains the gap between scholarly and popular views of the moral status of pre-tax income? A clue might be our attitude to luck.

The view that individuals have no moral claim to their pre-tax incomes relies on the ethical assumption that nobody is entitled to advantages due to factors outside his or her control. Philosophers such as Cohen (2011) call this 'brute luck'. Given the importance of brute luck (for example, natural ability, childhood home environment, and early schooling) to a person's economic status, this assumption directly leads to a rejection of moral claims to pre-tax income.

... ... ...

The 2016 US presidential campaign's attention to inequality fits these findings. Some candidates complain of a 'rigged system' and rich individuals and corporations who do not pay their 'fair' share. Critically, gains due to a rigged system or tax avoidance are due to unjust actions, not brute luck. They are due to the toss of a loaded coin, not a fair one.

... ... ...

These are early steps in developing a new approach to tax theory that I have called 'positive optimal taxation'. This approach modifies the standard optimal tax analysis by treating the objective for taxation as an empirical matter. It uses a variety of sources – including opinion surveys, political rhetoric, and analysis of robust policy features – to highlight gaps between the standard theory and prevailing reality of tax policy. It also identifies and incorporates into the theory alternative goals – and the philosophical principles behind them – that better describe the public's views on policy.

.... .... ...

Robert Hahl September 24, 2016 at 6:13 am

"I stole it fair and square" is not a form of brute luck, but I saw no recognition of that fact while skimming the article. Sorry if I missed it.

Adam1 September 24, 2016 at 6:17 am

One piece of logic missing from the research analysis is accounting for the game itself. If I agree to play a game of chance that is fairly played I am by default also agreeing that I accept the possibility that the outcomes will not be equal, otherwise why would I play. It shouldn't be a surprise that in the end people are willing to maintain that inequality because they originally agreed to it by the fact that they agreed to play.

As Yves points out, if you change the scenario where one of the players was allowed to collude with the person executing the game and the other player was informed of this you might get a very different answer. You might even get a punishing answer.

The trick or con being played by the elite is to convince enough of us that the game of life is being played fair. And when that fails, the con or lie becomes that its the fault of (insert target minority group).

DanB September 24, 2016 at 7:34 am

From two complementary sociological points of view -- conflict theory and symbolic interactionism -- this article is naive -or a red herring- in the ways you suggest.

Indeed, the issue is about people accepting a "definition of the situation" that is in fact detrimental to their material interests (Pierre Bourdieu terms this "misrecognition"). Erving Goffman, who was trained as an interactionist, studied con artists to describe how they successfully created a definition of situation -- which means a version of social reality -- that their marks would internalize as reality itself. A sociologist would not begin a discussion of socioeconomic inequality with tax policy.

Uahsenaa September 24, 2016 at 9:21 am

A sociologist would not begin a discussion of socioeconomic inequality with tax policy.

But an economist would, and therein lies the problem. Control over arguments regarding political economy in the public sphere have to be wrested from economists, so that we can start to talk about what actually matters. Sanders' popularity, despite his numerous problems, lay in how he took control of the argument and laid bare the absurdities of those who benefit from the status quo.

I say we boycott economists. Sure some of them are not terrible, but in the main the discipline needs to be torn down and rebuilt from the ground up.

John Wright September 24, 2016 at 10:06 am

Many economists function as members of the courtier class, justifying what the rich and powerful want to occur. Most citizens already boycott economists in that they don't use their services except when required to attend an Econ class at school.

But economists do influence average citizens lives via their justification of tax policy, land use policy, labor policy, trade policy and law implementation.

Even if we tore down the profession, it could likely regrow to provide the same functionality.

The profession provides a valuable service, as it is valued by the class with power and money throughout the world.

Norb September 24, 2016 at 10:35 am

Economic education has been a failure of the left. Everyone needs to know how money and finance works. Only then can that power be put to various uses. It is not that you don't need economists, you need economists working in your interest.

All knowledge and technology works this way. It is the purposeful use of information that matters, not the information itself. The left wastes time, effort, and resources trying to convince people to change their minds. Instead, they need to focus on building things in the real world, using all the economic tools at their disposal.

Uahsenaa September 24, 2016 at 11:02 am

I could get behind this. And I would have to agree that harping against the evils of capitalism, which are very real, often comes from those who don't really understand how it works.

Maybe the solution is more co-ops and less rhetoric.

Norb September 24, 2016 at 11:50 am

Using the power of the boycott is another. The powerless need to rediscover what power they truly wield in this system. That was the other failure of the left. Yes, they were actively crushed by corporate power, but the ideas live on. They can only be exterminated through lack of use.

A new ideology needs to be born of the ashes. If the predictions of climate disruption are anywhere near accurate, a proactive, and positive direction can be undertaken. My experience is that caring, healthy people are driven to help others in times of adversity. Well, those times are coming. We are once again going to have to face the choice between choosing abject fear or rolling up our sleeves and getting back to work making everyones lives better.

You don't need corporate sponsorship to do that. They need us more than we need them. In the end, I have a feeling that the current system will come down very quickly. Being prepared for that outcome is what should be driving the actions of those not vested in keeping the status quo going.

Jeremy Grimm September 24, 2016 at 11:42 am

The post indicates this guy is Assistant Professor of Business Administration - at Harvard Business School - so I'm not sure I would give him even so much regard as I might give an economist. I wonder how he and his will regard the fairness of luck while they wait in line to be serviced at the guillotine they're building - much as Scrooge crafted his chain and weights for his afterlife.

Norb September 24, 2016 at 12:34 pm

For a historian, making connections between past and present situations is the root of their insight. As in all walks of life, your efforts can gain value to your fellow citizens or they can be used as a tool for your own self interest- whatever that might be. How interesting are these repeating cycles in the human drama.

Interesting reference to Scrooge -- the power of art to enlighten the human condition cannot be underestimated. As I get older, it seems to me that the capitalism system debases everything it touches. Anything of real value will be found outside this system. It has become the box that confines us all.

When your viewpoint of the world and your relationship to it shrink to only seeking profits, the depravity of that situation is hidden from view unless shocked back to awareness.

As Peter Gabriel would say- Shock the Monkey

Shock the monkey to life
Shock the monkey to life

Cover me when I run
Cover me through the fire
Something knocked me out' the trees
Now I'm on my knees
Cover me darling please
Monkey, monkey, monkey
Don't you know you're going to shock the monkey

Fox the fox
Rat on the rat
You can ape the ape
I know about that
There is one thing you must be sure of
I can't take any more
Darling, don't you monkey with the monkey
Monkey, monkey, monkey
Don't you know you're going to shock the monkey

Wheels keep turning
Something's burning
Don't like it but I guess I'm learning

Shock! – watch the monkey get hurt, monkey

Cover me, when I sleep
Cover me, when I breathe
You throw your pearls before the swine
Make the monkey blind
Cover me, darling please
Monkey, monkey, monkey
Don't you know you're going to shock the monkey

Too much at stake
Ground beneath me shake
And the news is breaking

Shock! – watch the monkey get hurt, monkey

Shock the monkey
Shock the monkey
Shock the monkey to life

Jeremy Grimm September 24, 2016 at 1:07 pm

This is tangential to topic of this thread:
I was particularly struck by your comment about art: "the power of art to enlighten the human condition cannot be underestimated." I recall a similar assertion made in one of Howard Zinn's speeches - sorry I can't recall the exact phrasing of his statement or its context.

I'm retired and found a strange calling to make art - a calling I never listened to when I had to worry about supporting a household. I find it difficult to make art that isn't political, satirical or in some way didactic. Whether anyone else would regard my works as art I don't know and in a way I don't care. Art has become a way in which I must express something inside me I don't understand but whose direction I must follow. I suppose similar feeling drive many expressions of art. Perhaps that explains something of the power of art you refer to.

Spencer September 24, 2016 at 7:12 am

For the erosion in income inequality to be fixed, economic policies need fixed. The disparity between income quintiles will continue to widen. Social unrest will continue to proliferate. This situation will simply never get corrected until the commercial banks are driven out of the savings business (however bizarre one might think that solution is).

Vladimir Lenin, leader of the 1917 Russian Revolution said: "The best way to destroy the capitalist system is to debauch the currency." Not so. The best way to destroy capitalists is the deregulation of deposit caps for saver-holders' accounts in the commercial banking system. This policy error simply increased the bank's costs with no increase in their income. Bottling up savings, is first observed by the decline in money velocity, then by a decline in AD (secular stagnation), and when the Fed attempts to offset this decline, by an increase in stagflation.

Moneta September 24, 2016 at 7:43 am

The beliefs come first, then the system reflects these. Creeping individualism and the belief in the self made man will do the trick.

Alejandro September 24, 2016 at 10:52 am

""[V]elocity" is just a dummy variable to "balance" any given equation – a tautology, not an analytic tool."

http://michael-hudson.com/2012/05/paul-krugmans-economic-blinders/

How can the "code" be modified to restrain usurious AND sociopathic behaviour?

Spencer September 24, 2016 at 9:44 pm

Vi is contrived. Vt is money actually exchanging counterparties. But since Ed Fry discontinued the G.6 debit and demand deposit turnover release in Sept. 1996, the Fed has no rudder or anchor.

Required reserves are a surrogate, though the underweight Vt. But RRs are based on payments (money turning over). And 95 percent of all demand drafts clear thru transaction based accounts.

The "code" you speak of relates to the volume of financial transactions consummated. Financial transactions are not random. Financial speculation is a function of money flows. The volume of bank debits during the housing crisis would have stood out like a sore thumb (as it captured both new and existing real-estate transactions).

Only price increases generated by demand, irrespective of changes in supply, provide evidence of inflation. There must be an increase in aggregate demand which can come about only as a consequence of an increase in the volume and/or transactions velocity of money. The volume of domestic money flows must expand sufficiently to push prices up, irrespective of the volume of financial transactions, the exchange value of the U.S. dollar, and the flow of goods and services into the market economy.

The "administered" prices would not be the "asked" prices, were they not "validated" by (M*Vt), i.e., "validated" by the world's Central Banks.

- Michel de Nostredame

Alejandro September 24, 2016 at 10:28 pm

I'm not sure that what you just spewed even makes sense to you, or that you even bothered to read the link provided…but the "code" is about concurrent monetary AND fiscal policy to serve a purpose other than making the rich richer and the poor poorer…

Moneta September 24, 2016 at 7:40 am

If someone gets the waterfront property just because he/she was born first so got there first, he better do something positive for the next generation… The next generation will understand the luck factor as not everyone can be standing in the same spot at the same time, but it will not accept the scrooge.

HotFlash September 24, 2016 at 7:53 am

Prof Weinzieri says

If people are entitled, even in part, to their pre-tax incomes, the optimal tax policy would no longer offset inequality as aggressively. Taxes would, instead, be focused on raising funds for government activities in a way that tries to respect those entitlements.

which seems fair-ish, but also

Given the importance of brute luck (for example, natural ability, childhood home environment, and early schooling)

Oh my! Childhood home environment and (gasp!) early schooling are matters of luck? Oh those Haaahvaahd guys! No, professor, winning the lottery is a matter of luck, and can happen to anyone at any point in their life. Being born in poverty, into a class 15% of whose male population is incarcerated or having to go to a crappy school are *systemic* results of deliberate social structures, the elites just prefer to call it "bad luck". Thus we see how the Ivies serve the elites.

Eclair September 24, 2016 at 9:32 am

Yes, HotFlash. And these 'deliberate social structures,' the 'red-lining' policies, the wildly unequal sentences for crack versus cocaine, the casual brutality of the prison system (over 200,000 male rapes per year), the laws preventing people who have served their sentence for a felony from voting, public housing, scholarship aid, welfare .. in other words, from living and improving their lives .. are structural violence. And then we are 'surprised' when people who have lived their lives under a regime of these subtle but unrelenting acts of economic, social and spiritual violence, finally hit back.

Uahsenaa September 24, 2016 at 9:32 am

It's also worth noting how his examples are still a function of the neoliberal canard that privilege is simply a boost on the ladder of meritocracy. The game is still implicitly understood to be fair.

Yet, it's not clear to me what Alice Walton, for instance, has done to justify being a multi-billionaire. People who are born not just with spoons but entire silver foundries in their mouths could redistribute 90% of the wealth they acquired by virtue of being someone's baby and still be absurdly rich.

Banana Breakfast September 24, 2016 at 9:49 am

The paper seems totally oblivious to the fact that in the scenario presented, all the gains enjoyed by both players are due to luck. Player B is getting a windfall either way, so there's no sense of real unfairness. The perception would be quite different if it was only the difference between A and B that was assigned randomly, while each had to earn some baseline.

OpenThePodBayDoorsHAL September 24, 2016 at 5:28 pm

And I think the "popular acceptance" part is given a huge boost when the young, black, nominally-Democrat president keeps insisting everything is awesome and anyone who says otherwise is "peddling fiction".

Jeremy Grimm September 24, 2016 at 11:45 pm

I think this paper goes to great lengths to build a question around the ideas of the fairness behind progressive taxation. This post hardly seems to pose a question worthy of study. Our tax systems so much favor Corporations and the wealthy that considerations of "fairness" are at best comical - and I'm not laughing.

Rodger Malcolm Mitchell September 24, 2016 at 10:20 am

The most important problem in economics is the widening Gap between the rich and the rest. A solution is: https://mythfighter.com/2014/11/09/a-brief-reference-what-you-need-to-know-when-discussing-economics/

kgw September 24, 2016 at 10:35 am

As William Godwin says, if people actually knew who they were, all would be peaceable…

https://www.amazon.com/Enquiry-Concerning-Political-Justice-Influence-ebook/dp/0140400303/ref=la_B000APJ4OS_1_5?s=books&ie=UTF8&qid=1474727648&sr=1-5

From Cold Mountain September 24, 2016 at 11:14 am

Yes, the outcome of self awareness will always be Anarchism. I came be an advocate, not through economics or politics, but thought Buddhism and Daoism. It is a story older than humanity that we are just starting to remember.

So here I am sitting, watching, waiting for the rest of the world to catch up.

Jeremy Grimm September 24, 2016 at 11:48 pm

What kind of self-knowledge did Hitler find in his imprisonment? It didn't lead to anything I would call peaceable. Was there some inner Hitler he didn't reach in his prison contemplations?

Ivy September 24, 2016 at 10:56 am

If I had only known it was luck, I would not have spent so many late nights in the library during undergrad and grad schools. However, I enjoyed those nights and was enriched by them. Is that taxable?

Jeremy Grimm September 24, 2016 at 11:40 pm

Learning must be for its own sake. Like you, I spent many hours in the library. BUT it was to scratch an itch I have not been able to quell - even in these many years since I was in that library.

Norb September 24, 2016 at 11:24 am

Will future generations, if there are any, be able to look back and reflect," what were these people thinking?"

There is no justification for the levels of inequality and environmental destruction we are experiencing. Period. We can all consider ourselves fools, even for entertaining debating these issues much longer. We need to be discussing concrete actions, not theoretical justifications.

Everyone must face the randomness of the universe every day. The only certainty know is the one WE create as human beings- one and together. Why is it do you think that the elite never break ranks. They are creating their own certainty in an uncertain world. Heads I win, tails you loose. TBTF. Race to the bottom. The new normal. Political capture using the revolving door techniques.

Human evolution is racing toward a crisis point. Ending inequality and world conflict are at the focal point of this outcome. Leaders that continue to use the outdated modes of social control will either drive us over the cliff to destruction, or will loose the ability to control outcomes as their numbers dwindle. The day the revelation is made that the elite are full of crap, is the day change becomes possible.

It seems large social structures will always come crashing down. The weakness in human nature and flaws in our social structures lead to eventual failure. Greed and selfish action is seldom tolerated is smaller structures.

Jeremy Grimm September 24, 2016 at 11:36 pm

I think there will always be inequality between people on many many dimensions. I am constantly humbled by how much I don't know that other people know, people less well educated and I suspect less intelligent - whatever that means - than I am. I celebrate this inequality and sincerely hope this larger knowledge shared with mine and the knowledge of many others will suffice to address the great challenges we face in the all too near future.

HOWEVER - inequality as a matter of power relations - that is different matter. If I were my great great grandson I could never forgive what I have allowed through my cowardice and intent to have a surviving great great grandson - or granddaughter.

sd September 24, 2016 at 11:32 am

I am not sure I really understand the intention of this paper. The example used, that 20% of $90,000 income must be paid in taxes, and then taking surveys of how that distribution should work seems to ignore whether or not the respondents actually understand basic math.

Why do I say this?

The "easy" answer is that Person A pays $15,000 and person B pays $3,000 which is the equivalent of a flat tax. And yet, that's not how most responded. Only 5% selected the easy answer. Which makes me wonder if the targets of the survey even understand basic math.

So I guess I am questioning the questioning….

Vatch September 24, 2016 at 5:43 pm

Actually the easiest answer is for person A to pay the whole $18,000. He's the one who is getting more money before taxes, and if he pays the $18,000, he's still getting $12,000 more than person B. The "flat tax" is probably the second easiest answer. However, since neither person is doing any tangible work to receive the money, the fairest result is for both to get the same after "taxes". If person A pays $24,000, $18,000 will go to the "state", and $6,000 will go to person B, and both A and B will each get $36,000. Person B can force person A to agree to this, because if they don't agree, then person A only gets $600 and person B gets $300.

If we want to get complicated, then the result should be such that the difference between person A's portion and person B's portion is $300, whether they agree or not. So if they agree, person A would pay $23,850 ($18,000 to the "state" and $5,850 to person B), and person A would get $36,150. In that case, person B would get $35,850. The difference between person A's income and person B's income is $300, just as it would have been if they had not agreed.

Vatch September 24, 2016 at 9:52 pm

The "easy" answer is that Person A pays $15,000 and person B pays $3,000 which is the equivalent of a flat tax.

Wait a minute. 20% of $60,000 is $12,000, and 20% of $30,000 is $6,000. Not $15,000 and $3,000.

Anyhow, I still like my solution where person A pays $23,850.

Jeremy Grimm September 24, 2016 at 11:13 pm

Why not question the $90K - of income? - instead.

In terms of the money and wealth of the people who run our government and economy, and control and direct our lives and the lives of millions of others - $90K barely registers.

Jeremy Grimm September 24, 2016 at 11:19 pm

I read this post as questioning the basis for progressive taxation - a rationale for taxation we sorely lack.

knowbuddhau September 24, 2016 at 12:47 pm

I have little faith in studies like these. My first question is always, "What's a respondent?" Define Person, please.

Notice how they're treated as entirely substitutable standardized parts. That is, as if people were molecules or atoms. But try as it might, social science ain't physics. You can't just grab the nearest few people, sit them down at a keyboard to play your game (for credit? for fun? on assignment?) and then substitute their behavior for the behavior of all people everywhere.

Which people, where, under what conditions, and how many? Was the sample representative? Did the author go to prisons, ghettos, farm fields, etc. and ask them? Or was it proximity and ease of access that defined it?

It's the old "college sophomores in the lab" problem. As an undergrad psych student, I saw time and time again how people gamed the system, yet PhD candidates and professors took the data as gospel. It's only too often more a demonstration of ability to work the method, to play the academic game, than testing hypotheses.

Or I guess as coders say, GIGO.

Jeremy Grimm September 24, 2016 at 11:23 pm

Also you might ask what meaning to attribute to a questionable measure of human opinions about a concept like "what is fair" in an environment completely dominated by promotion of ideas of fairness which to my mind are quite unfair.

So I agree with you and wonder why you don't pres further.

Jeremy Grimm September 24, 2016 at 12:53 pm

This post frames inequality in terms of "fairness" and luck/pluck and treats money as some form of prize in an economic "game". I suppose this way of looking at things works up to a point as long as we look to those below us and congratulate our merit while accepting some greater luck of those above us which help rationalize our merit. But any concepts of fairness or the justice things rapidly fractures if we look past those in our own neighborhood. Riding a bubble through the slums here and elsewhere in the world it becomes very difficult to rationalize justice and merit. Looking in the other direction toward the high rises and gated estates and manifestations of wealth I can't even imagine and the fragments of the fairness or justice of things evaporates completely. The "findings" of this post do not scale - at all.

Aside from the living standard which money/wealth affords the notions of "fairness" "merit" and "luck" this post contemplates there is no discussion of other aspects of money/wealth conveniently passed over and ignored.

In our society our money-culture money/wealth is equated with merit. It packages demand for automatic respect and deference. This pecuniary one-size-fits all measure for character, intellect, excellence, creativity, leadership, even physical attractiveness undermines all these values reducing them to commodities of the marketplace.

But the ability of money/wealth to control and command the lives of others and the collective resources of society is far more pernicious. What concept of "fairness" or "justice" can justify this aspect of inequality?

Emma September 24, 2016 at 9:47 pm

JG – Rogge covers this in his book: "World Poverty and Human Rights: Cosmopolitan Responsibilities and Reforms" ( https://en.wikipedia.org/wiki/World_Poverty_and_Human_Rights ) using the perfect example of the acquisition and management of natural resources.

Jeremy Grimm September 24, 2016 at 10:47 pm

Your comment to mine leaves me quizzical. Though I value any comments to mine given my wondering how far I am from what is reasonable - global poverty is far beyond the complexity of anything I might address in my comments. I grant global poverty is not a problem beyond solution - but first we need to address the problems of economic philosophy used to justify and enable the gross inequalities of our world.

I have not read Rogge's book. There are far too many books I have not read and of the books i have read there are far too many I have not really understood. I am also concerned by how little this post seems to have stimulated our commentariat - an entity I have come to greatly respect.

Please elaborate on what you mean. I am concerned by this post's lack of consideration of the political power money/wealth confers - something beyond and to some degree outside considerations of poverty and the suffering inequality fosters - even celebrates.

Adar September 24, 2016 at 5:43 pm

My poor non-economist head reels at this article. OK, it's a mind exercise to determine attitudes toward taxation. But it's completely made up – Fig. 1 Tossing a fair coin, doesn't scan for me, it's like a crap game. At the random flip of a coin, A gets twice as much as B, but where did the $18k penalty come from? Is it arbitrary? Why "could" one have to pay more, and who decides? And where did the $24k figure come from? Seems obvious to me A got twice as much, and so should pay 2 out of 3 parts of the penalty. So, re brute luck and tax policy, if inherited wealth or investment income (i.e. rent) vs. wage income is really what's meant here, please say so.

Jeremy Grimm September 24, 2016 at 11:06 pm

I view this post - at least in part - as questioning the basis for a progressive tax rate based on attitudes toward what is "fair" in turn based on a - sorry - hokey experiment to test attitudes about what is fair. To me the problem is a problem of scale. If we're talking about my place opposed to that of the fellow in the house on the hill or the house down the street - I might - on a good day - buy-in to this post's notions about "fairness". Those notions do NOT scale and they don't give any consideration to the powers of control and command which great wealth confers.

What I can accept in the way of inequality between myself and the guy on the hill does NOT scale when the guy on the hill doesn't live on the hill and only owns the house on the hill as a reminder of his lowly beginnings. He lives in a multi-million dollar 10,000 sq. ft. condominium high in New York City and a similar flat in London, and in Tai Pei and Shanghai and Paris and … and lives in none of them really. And I cannot accept the poverty and oppression found in Camden, New Jersey, Southside Chicago, … in Brazilian favelas or the slums of Seoul.

Doug September 25, 2016 at 6:46 am

Perhaps the failure to scale arises from the compounded flaws that, first, this post is all about "I" and speaks not at all to "we"; and, second, as your comments point out, uses money in typical fashion as the lowest common denominator determining utility and fairness when, 'we' demands a focus on the highest not lowest common denominator (and that's not mathematically or logically convenient).
Further, 'we' must be something more meaningful than a mere agglomeration of "I's". Those are at best 'thin we's' easily seduced into theoretical constructs that, in fact, have nothing to do with the actual experience of 'we' in any meaningful way.

Real, 'thick' we's comprised of actual people who persistently interact and truly know they share some to a lot of their shared fates respond to questions of brute luck, fairness and inequality together (whether democratically or otherwise or blends of ways). They don't determine their shared fates with an eye on abstract individualism grounded in lowest common denominators of 'utility'. They actually care about 'what makes most sense for us together' and balk at devices, questions - indeed swindles - aimed at tearing apart the fabric of 'we'.

Sound of the Suburbs September 25, 2016 at 3:47 am

Milton Freidman, the man that wrecked the world with bad economics.

Milton Freidman's charm, energy and charisma seduced his students and global elites alike into believing he had come up with an economics that could transform the world. His students loved the idea of transforming the world through economics as it made them feel so important. Global elites loved his economics as it worked so well for them and gave a scientific backing for a world that was one that they had always wanted.

Unfortunately, there were a lot of problems with his economics that are making themselves felt today.

His economics was missing:

1) The work of the Classical Economists
2) The true nature of money and debt
3) The work of Irving Fischer in the 1930s

The Classical Economists were the first economists to look at and analyse the world around them, a world of small state, raw capitalism.

They noted how the moneyed classes were always rent seeking and looking to maintain themselves in luxury and leisure, through rent and interest. This sucked money out of the productive side of the economy, reducing the purchasing power within the nation.

They noted how the cost of living must be kept low, to keep the basic minimum wage low, so nations could be competitive in the international arena.

This knowledge is missing today.

The UK dream is to live like the idle, rich rentier, with a BTL portfolio extracting "unearned" rental income from the "earned" income of generation rent.

In the US they removed all the things that kept the cost of living down, not realising these costs would have to be covered by wages. The US now has a very high minimum wage due to soaring costs of housing, healthcare and student loans and US businesses are squealing.

The true nature of money and debt were understood in the 1930s when the Chicago Plan was put forward after a thorough investigation into the 1929 bust.

Money and debt are opposite sides of the same coin.
If there is no debt there is no money.
Money is created by loans and destroyed by repayments of those loans.

This knowledge is missing today.

Today's ubiquitous housing boom is like a printing press creating more and more money as the new mortgage debt comes into existence.

The money supply expands and pours into the real economy making everything look really good.

The only thing that is really happening is the inflation of the price of things that exist already, houses. All the debt being created is not productive investment.

The cost of living goes up and more and more money gets sucked into mortgage and rent payments sucking purchasing power out of the economy. The increasing cost of living, raises the basic minimum wage pricing labour out of international labour markets.

Irving Fisher also looked into the 1929 bust and developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble.

Irving Fisher looked into debt inflated asset bubbles and realised the huge danger they pose to the whole economy. This knowledge is missing today. The ubiquitous housing boom is a debt inflated asset bubble, with huge amounts of debt spread through the whole economy, when it bursts there is hell to pay.

This was first seen in Japan in 1989, its economy has never recovered.

It was repeated in the US and leveraged up with derivatives leading to 2008.

Ireland and Spain have also wrecked their economies with housing bubbles.

There are housing bubbles around the world, ready to burst and pull that nation into debt deflation.

Milton Freidman, the man that wrecked the world with bad economics.

Sound of the Suburbs September 25, 2016 at 5:20 am

Milton Freidman worked at the Chicago School of Economics and was the global ambassador for his dire economics. This dire economics and the University of Chicago were also behind the design of the Euro, no wonder it doesn't work.

"The putative "father of the Euro", economist Robert Mundell is reported to have explained to one of his university of Chicago students, Greg Palast: "the Euro is the easy way in which Congresses and Parliaments can be stripped of all power over monetary and fiscal policy. Bothersome democracy is removed from the economic system" Michael Hudson "Killing the Host"

Their dire economics predicts the Euro-zone economies will converge into a stable equilibrium.

The reality – the economies are diverging and the poorer nations are going under. It's bad. 2008 – How did that happen?

The neoclassical economists didn't have a clue as the Minsky Moment was approaching.

Two people who did see 2008 coming (there aren't many).

Steve Keen – A whole book "Debunking Economics" on this dire neoclassical economics and the problems of not using realistic assumptions on money and debt.

Michael Hudson – Calls it "junk" economics and has written a whole book on the problems of forgetting the world of Classical Economics – Killing the Host.

Naomi Klein "Shock Doctrine" goes into the brutality of the Chicago Boys and Berkeley Mafia in implementing their economic vision. A right wing "Khmer Rouge" that descended on developing nations to wipe away left wing thinking.

It's bad and Milton Freidman was behind it.

Skippy September 25, 2016 at 6:20 am

Goes a bit deeper than just the Chicago boys imo…

Marginalist economics tends to be characterised primarily by a couple of distinct axioms that operate 'under the surface' to produce its key results. these are simplistically characterise as: the axiom of methodological individualism; the axiom of methodological instrumentalism; and the axiom of methodological equilibration, where models derived from them have ex-ante predictive power.

This is historically Epicurean philosophy, example, Epicurus wrote,

"The magnitude of pleasure reaches its limit in the removal of all pain. When such pleasure is present, so long as it is uninterrupted, there is no pain either of body or of mind or of both together."

Which is a reflection of its materialistic atomism which is basically identical with the marginalist focus on atomistic individuals and makes it an atomistic doctrine. Thorstein Veblen where he wrote in his Why is Economics Not an Evolutionary Science?:

"The hedonistic conception of man is that of a lightning calculator of pleasure and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated definitive human datum."

Which in turn is just Epicurean ontology where everything becomes objects and not subjects where Epicurean ethics involves individuals maximising pleasure and minimising pain - or, as the marginalists would put it, maximising utility and minimising disutility - it simply follows from the basic ontological position that is put forward.

Just to put a more modern perspective on it – see: Note that the patient suffering from schizophrenia tends not to answer the questions directed at him but rather responds with complete non-sequiturs.

"In his book, King lays out how economists have tried to establish supposedly disaggregated "microfoundations" with which to rest their macroeconomics upon. The idea here is that Keynesian macroeconomics generally deals with large aggregates of individuals – usually entire national economies – and draws conclusions from these while largely ignoring the actions of individual agents. As King shows in the book, however, the idea that a macro-level analysis requires such microfoundations is itself entirely without foundation. Unfortunately though, since mainstream economists are committed to methodological individualism – that is, they try to explain the world with reference to what they think to be the rules of individual behaviour – they tend to pursue this quest across the board and those who proclaim scepticism about the need for microfoundations can rarely articulate this scepticism as they too are generally wedded to the notion that aggregative behaviour can only be explained with reference to supposedly disaggregated behaviour."

http://www.nakedcapitalism.com/2013/02/philip-pilkington-of-madness-and-microfoundationsm-rational-agents-schizophrenia-and-a-noble-attempt-by-one-noah-smith-to-break-through-the-mirror.html

You might also like – Le Bon, Gustave. The Crowd: A Study of the Popular Mind, you can get it free online.

Additionally – The Myth of the Rational Market: Wall Street's Impossible Quest for Predictable Markets – by Justin Fox

Chronicling the rise and fall of the efficient market theory and the century-long making of the modern financial industry, Justin Fox's "The Myth of the Rational Market" is as much an intellectual whodunit as a cultural history of the perils and possibilities of risk. The book brings to life the people and ideas that forged modern finance and investing, from the formative days of Wall Street through the Great Depression and into the financial calamity of today. It's a tale that features professors who made and lost fortunes, battled fiercely over ideas, beat the house in blackjack, wrote bestselling books, and played major roles on the world stage. It's also a tale of Wall Street's evolution, the power of the market to generate wealth and wreak havoc, and free market capitalism's war with itself.

The efficient market hypothesis -- long part of academic folklore but codified in the 1960s at the University of Chicago -- has evolved into a powerful myth. It has been the maker and loser of fortunes, the driver of trillions of dollars, the inspiration for index funds and vast new derivatives markets, and the guidepost for thousands of careers. The theory holds that the market is always right, and that the decisions of millions of rational investors, all acting on information to outsmart one another, always provide the best judge of a stock's value. That myth is crumbling.

Disheveled Marsupial…. Main stream econnomics is an extenuation of much deeper metaphysical and resultant ideological beliefs….

[Sep 24, 2016] Backlash Against Trade Deals: The End of U.S.-Led Economic Globalisation?

Notable quotes:
"... By Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Originally published at The Frontline ..."
"... President Obama has been a fervent supporter of both these deals, with the explicit aim of enhancing and securing US power. "We have to make sure America writes the rules of the global economy. We should do it today while our economy is in the position of global strength. …We've got to harness it on our terms. If we don't write the rules for trade around the world – guess what? China will!", he famously said in a speech to workers in a Nike factory in Oregon, USA in May 2015. But even though he has made the case for the TPP plainly enough, his only chance of pushing even the TPP through is in the "lame duck" session of Congress just before the November Presidential election in the US. ..."
"... The official US version, expressed on the website of the US Trade Representative, is that the TPP "writes the rules for global trade-rules that will help increase Made-in-America exports, grow the American economy, support well-paying American jobs, and strengthen the American middle class." This is mainly supposed to occur because of the tariff cuts over 18,000 items that have been written into the agreement, which in turn are supposed to lead to significant expansion of trade volumes and values. ..."
"... But this is accepted by fewer and fewer people in the US. Across the country, workers view such trade deals with great suspicion as causing shifts in employment to lower paid workers, mostly in the Global South. ..."
"... But in fact the TPP and the TTIP are not really about trade liberalisation so much as other regulatory changes, so in any case it is hardly surprising that the positive effects on trade are likely to be so limited. What is more surprising is how the entire discussion around these agreements is still framed around the issues relating to trade liberalisation, when these are in fact the less important parts of these agreements, and it is the other elements that are likely to have more negative and even devastating effects on people living in the countries that sign up to them. ..."
"... Three aspects of these agreements are particularly worrying: the intellectual property provisions, the restrictions on regulatory practices and the investor-state dispute settlement provisions ..."
"... All of these would result in significant strengthening of the bargaining power of corporations vis-à-vis workers and citizens, would reduce the power of governments to bring in policies and regulations that affect the profits or curb the power of such corporations ..."
"... So if such features of US-led globalisation are indeed under threat, that is probably a good thing for the people of the US and for people in their trading partners who had signed up for such deals. ..."
"... The question arises: is Trump evil? Or merely awful? If Trump is merely awful, then we are not faced with voting for the Lesser Evil or otherwise voting Third Party in protest. If we are faced with a choice between Evil and Awful, perhaps a vote for Awful is a vote against Evil just by itself. ..."
"... Trump has backpedaled and frontpedaled on virtually everything, but on trade, he's got Sanders-level consistency. He's been preaching the same sanity since the 90s. https://www.youtube.com/watch?v=GZpMJeynBeg ..."
"... While I do not disagree with your comments, they must be placed in proper context: there is no substantive difference between Mike Pence and Tim Kaine, and the people who staff the campaigns of Trump and Clinton are essentially the same. (Fundamentally a replay of the 2000 election: Cheney/Bush vs. Lieberman/Gore.) ..."
"... Great Comment. Important to knock down the meme that "this is the most significant or important election of our time" - this is a carbon copy of what we have seen half a dozen times since WW2 alone and that's exactly how our elite handlers want it. Limit the choices, stoke fear, win by dividing the plebes. ..."
"... Let's face it, trade without the iron fist of capitalism will benefit us schlobs greatly and not the 1%. I'm all for being against it (TPP etc) and will vote that way. ..."
"... We'd also have put in enough puppet dictators in resource rich countries that we'd be able to get raw materials cheaply. The low labor/raw material cost will provide a significant advantage for exports but alas, our 99% won't be able to afford our own products. ..."
"... the TPP will completely outlaw any possibility of a "Buy America" clause in the future! ..."
"... The cynic in me wonders if under say NAFTA it would be possible for a multinational to sue for lost profits via isds if TPP fails to pass. That the failure to enact trade "liberalizing" legislation could be construed as an active step against trade. the way these things are so ambiguously worded, I wonder. ..."
"... Here's Obama's actual speech at the Nike headquarters (not factory). http://www.americanrhetoric.com/speeches/barackobama/barackobamatradenike.htm ..."
"... It should be noted that the Oregon Democrats who were free traitors and supported fast track authority were called out that day: Bonamici, Blumenauer, Schrader and Wyden. The only Oregon Ds that opposed: Sen. Merkley and Congressman DeFazio. ..."
"... The Market Realist is far more realistic about Oregon's free traitors' votes. http://marketrealist.com/2015/05/trans-pacific-partnership-affects-footwear-firms/ "US tariffs on footwear imported from Vietnam can range from 5% to 40%, according to OTEXA (Office of Textiles and Apparel). Ratification of the TPP will likely result in lower tariffs and higher profitability for Nike." ..."
"... So what's the incentive for Oregon's free traitors to support the TPP now? ..."
"... Perhaps they still need to show loyalty to their corporate owners and to the principle of "free trade". ..."
"... Obama: "We have to make sure America writes the rules of the global economy." ..."
"... Thank you, Mr. President, for resolving any doubts that the American project is an imperialist project! ..."
"... Yes, and I would add a jingoistic one as well. Manifest destiny, the Monroe doctrine, etc. are not just history lessons but are alive and well in the neoliberal mindset. The empire must keep expanding into every nook and cranny of the world, turning them into good consumerist slaves. ..."
"... Funny how little things change over the centuries. ..."
"... The West Is The Best, Subhuman Are All The Rest. The perpetual mantra of the Uebermensch since Columbus first made landfall. Hitler merely sought to apply the same to some Europeans. ..."
"... "How the West Came to Rule: The Geopolitical Origins of Capitalism", 2015, Alexander Anievas and Kerem Nisancioglu. ..."
"... The Dem candidate's husband made it appallingly clear what the purpose of the TPP is: "It's to make sure the future of the Asia-Pacific region is not dominated by China". ..."
"... Bill Clinton doesn't even care about "the rise of China". That's just a red herring he sets up to accuse opponents of TPP of soft-on-China treasonism. It's just fabricating a stick to beat the TPP-opponents with. Clinton's support for MFN for China shows what he really thinks about the "rise of China". ..."
"... Clinton's real motivation is the same as the TPP's real reason, to reduce America to colonial possession status of the anti-national corporations and the Global OverClass natural persons who shelter behind and within them. ..."
"... Obama. Liar or stupid? When Elizabeth Warren spoke out about the secrecy of the TPP, Obama, uncharacteristically, ran to the cameras to state that the TPP was not secret and that the charge being leveled by Warren was false. Obama's statement was that Warren had access to a copy so how dare she say it was secret. ..."
"... Obama (and Holder) effectively immunized every financial criminal involved in the great fraud and recession without bothering to run for a camera, and to this day has refused and avoided any elaboration on the subject, but he wasted no time trying to bury Warren publicly. The TPP is a continuation of Obama's give-away to corporations, or more specif