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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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[Jul 24, 2016] The Immorality and Brutal Violence of Extreme Greed--

Notable quotes:
"... By #SlayTheSmaugs, an elected Bernie delegate in Philly. ..."
"... #STS believes that the billionaire class are Smaugs (the greed incarnate dragon of The Hobbit), immorally hoarding wealth for no reason beyond ego gratification. To "Slay" the Smaugs, we need a confiscatory wealth tax, stronger democratic institutions to impose it, and a shared moral agreement that #GreedIsEvil to justify it. ..."
"... More; charitable foundations are not the same thing, in many cases, as true charity. Instead foundations often function as hoard preservers as well, and enrich their leadership too. ..."
"... After a certain level of accumulation money is simply ego gratifying points, it's not money any more. ..."
"... Wealth on this scale has nothing to do with financial security or luxurious living. For the trivial, it is (as per D. Trump) a game and money is how you keep score. For the serious, it has to do with power, with the ability to affect other people's lives without their consent. That is why the Smaugs' wealth is absolutely our business. It should be understood that we're talking about taking very large amounts of money and power away from very rich people, people for whom money and power are pretty much the only things they value. It will not be pretty. ..."
"... If we fail to prevent the imposition of this transnational regime there will only be three classes of humans left: kleptocrats, their favored minions, and slaves. ..."
"... A more modern similarity of the US is Rome. Vassals have been going full retard for several years now, traitors sell international competitors military secrets while the biggest merchants buy off the Senate. ..."
"... Isn't there an idiom about cutting off the head of the snake? Once you deal with the strongest opponents, it's easier to go after the others. Too big to fail is nothing short of feeding the beast. ..."
"... I disagree strongly with your premise that some sort of pure and natural meritocracy has ever existed, or could ever exist in human society. Corrupt and oppressive people will always define as "meritorious" those qualities that they themselves possess– whether wealth, "gentle birth," "technical skills," or whatever. We all possess the same merit of being human. ..."
July 22, 2016 | Naked Capitalism

... ... ...

By #SlayTheSmaugs, an elected Bernie delegate in Philly.

#STS believes that the billionaire class are Smaugs (the greed incarnate dragon of The Hobbit), immorally hoarding wealth for no reason beyond ego gratification. To "Slay" the Smaugs, we need a confiscatory wealth tax, stronger democratic institutions to impose it, and a shared moral agreement that #GreedIsEvil to justify it.

Worshiping Wealth

When Gordon Gekko proclaimed that 'Greed is Good' in 1987, it was an obvious rejection of several millennia of teachings by traditional prophets and priests. Yet when Gekko preached greed, he was merely reinforcing the current cultural norm; greed had already been rebranded a virtue. (Still, the speech was to remind us Gekko was a bad guy). Consider that Madonna had proclaimed herself a Material Girl three years earlier, and "Living Large" was cool. Conspicuous consumption is walking the talk that greed is good.

Why had greed become good? I blame the creation of a credit-fueled culture of constant consumption that necessarily praises coveting stuff, plus the dismantling of the regulatory state that had kept Wall Street and wannabe oligarchs in check.

Our healthy cultural adoration of the self-made man, of respect for success, warped into worship of the rich. They are not the same. Wealth can be inherited, stolen through fraud and other illegal activities, or harvested from bubbles; none of these or myriad other paths to riches is due respect, much less worship. Paired with another 80's definition-government is the problem-worshiping wealth facilitates all the dysfunction in our government.

Remembering Greed is Evil

Thirty years later, the old social norm-the one that protected the many from the few, the one that demonized greed as a deadly sin-is resurgent. We have a Pope who preaches against greed, and who walks his talk . We had a Presidential candidate of a major party-Bernie Sanders-who railed against those living embodiments of greed, the Billionaire Class, and walked his talk by rejecting their money. At the convention, he has invited delegates to four workshops, one of which is "One Nation Now: Winning the Fight Against Racism and Greed". We have a late night comedian-John Oliver- ridiculing the prosperity gospel and taking on the debt industry . We have mass consciousness rising, reflected in Occupy, the label "the 99%", BLM and more.

But we need more voices insisting #GreedIsEvil. We need to teach that basic message at home, in school, and in houses of worship. We need to send the right signals in our social interactions. We need to stop coveting stuff, and start buying with a purpose: Shopping locally, buying American, buying green and clean, and buying less. We need to waste less, share more and build community. We need to re-norm-alize greed as evil, make it shameful again. Then we will have redefined ourselves as citizens, not consumers.

But make no mistake: America cannot become a just nation simply by the 99% becoming more virtuous. The cultural shift is necessary but not sufficient, for norms alone do not deliver social and economic justice. Shame will not slay the Smaugs; we need structural change in the political economy.

Extreme greed, the greed of Smaugs, is categorically different than the petit greed underlying the irrational, constant consumption and the worship of wealth. Extreme greed manifests as a hoard of wealth so great that "purchasing power" is an irrelevant concept; a hoard so great it lacks any utility other than to be sat upon as a throne, gratifying the Smaug's ego and symbolizing his power. That greed must be understood as an intolerable evil, something so base and malevolent that the full power of the state must be used against it.

This essay is my contribution to the cause of returning extreme greed to its rightful place in the pantheon of ultimate evils. Here is the thesis: extreme greed must be 'slain' by the state because extreme greed is brutally violent.

The Stealth Violence of False Scarcity and "Cutting Corners"

Greed's violence is quiet and deadly: The violence of false scarcity and of "corner cutting". Scarcity is not having enough because there just isn't enough to go round, like the nearly 50 million people who don't reliably have food during the year, including 15 million kids. False scarcity is when actually, there's plenty to go around, but people generally don't have enough because of hoarders.

It's a concentrated version of what happened to pennies in 1999. People keeping pennies in piggy banks created a shortage felt throughout New York City . If only people had broken open their piggy banks, and used their pennies, there would have been plenty of pennies in circulation, and shopkeepers wouldn't lose money by rounding purchases down. In this piece, I'm focusing on false scarcity of dollars, not pennies, and the maiming and premature death that results from false dollar scarcity. But the idea is essentially the same; there's just far fewer relevant piggy banks.

By the quiet violence of 'corner cutting', I'm referring to unsafe, even deadly, workplaces that could be safe if the employers invested in safety.

Sporadically, greed also drives overt, and sometimes profoundly bloody violence to protect the hoard. Think of employer violence against unions and union organizers, a la Henry Ford , or John D. Rockefeller . Nonetheless in this country now, the violence of greed tends to be more covert. It is that quiet violence, in both forms, I want you to hear now.

As Sanders often reminds us, in this, the richest nation in the world, nearly 50 million people are living in poverty; roughly one in seven Americans. And as Sanders explained, in a speech in West Virginia , 130,000 people die each and every year as a result of poverty. I have not read the study Sanders referred to, so I don't know how much it overlaps with the rise of suicide that accelerated after 2006 and which appears to be correlated with financial stress. Nor do I know how it overlaps with the documented increase in white mortality that also appears to correlate with financial stress. Regardless of overlap, however, each of these studies reflects the quiet violence of false scarcity. Naked Capitalism has featured many posts documenting the damage of greed; this is a recent one .

Chronic and acute financial stress from false scarcity maims, and kills. And Smaugs create false scarcity to feed money to their egos and maintain their oligarchic power.

As Lambert often says, they don't call it class warfare for nothing.

But wait, you might insist, how false is the scarcity, really? How much do a few billionaires matter? Ranting that greed is evil is all well and good, but really, can a relative handful of people be manufacturing scarcity where there is none, shortening and taking millions of lives in the process? Aren't you making your target too narrow in going after the Smaugs?

In order: Very false, a lot, yes and no.

The Falsity of Dollar Scarcity

In 2015 the Institute for Policy Studies determined that the richest 20 American billionaires had hoarded as much wealth as 152 million people had managed to scrape together combined. Think on that.

Twenty people had hoarded $732,000,000,000. America is a nation of about 300,000,000 people. That means 20 people could give a combined $2,370 to every American, and still hoard $1 billion each. I'm not suggesting that's how the redistribution should be done, but it's notable that in an era when some 200 million Americans haven't been able to save $1000 for an emergency, twenty people could give everyone over two grand while remaining fabulously wealthy.

Now, these 20 monstrous people, these full grown Smaugs, are not alone in their extreme greed. Adding in the assets of the next 380 richest Americans brings the total wealth hoarded to $2.34 trillion. That number is so large it's hard to process , so let's think this through.

First, imagine that we took all of that money with a confiscatory tax, except we again left each of the 400 people with $1 billion. They would still be obscenely rich, so don't pity them.* Our tax thus netted $1.94 trillion. Since that's still an unimaginable number, let's compare it to some recent government spending.

In December 2015, Congress funded five years' worth of infrastructure construction. Congress and President Obama were very self-congratulatory because our infrastructure is a mess, and building things involves good paying jobs. So, how much did five years of infrastructure building and job creation cost? $305 billion . That's less than the $400 billion we let the 400 Smaugs keep at the start of this thought experiment. With the $1.94 trillion we imagine confiscating, we could keep building at the 2015 pace for 32 years. Or we could spend it much faster, and create an economic boom the like of which this nation hasn't seen in generations.

Even Bernie Sanders, he of the supposedly overly ambitious, unable-to-be-paid for initiatives, only proposed spending $1 trillion on infrastructure over five years -a bit more than half what our tax would net. (Nor did this supposed radical call for a confiscatory wealth tax to fund his plan.) Sanders estimated his proposal would create 13 million good paying jobs. With nearly double the money, surely we get nearly double the jobs? Let's be conservative and say 22 million.

In sum, we could confiscate most of the wealth of 400 people-still leaving them obscenely rich with $1 billion each-and create 22 million good paying jobs over five years. But we don't; we let the Smaugs keep their hoards intact. Now consider this is only taxing 400 people; what if we taxed the richest 2,000 people more justly? What if we taxed corporations effectively? What if we stopped giving corporate welfare? A confiscatory wealth tax, however, simply isn't discussed in polite company, any more than a truly progressive income tax is, or even serious proposals to end corporate welfare. The best we can do is agree that really, someday soon, we should end the obscenity that is the carried interest loophole.

False scarcity isn't simply a failure of charity, a hoarding of wealth that should be alms for the poor. False scarcity is created through the billionaires' control of the state, of public policy. But the quiet violence of greed isn't visited on the 99% only through the failure to pay adequate taxes. Not even through the Smaugs' failure to have their corporations pay adequate wages, or benefits. Predatory lending, predatory servicing, fraudulent foreclosure, municipal bond rigging, and pension fund fleecing are just some of the many other ways immoral greed creates false scarcity.

While false scarcity has the broadest impact, it is not the only form of stealth violence used by the billionaires in their class war against the rest of us. The Ford and Rockefeller style violence of fists and guns may be rare in the U.S. these days, but a variant of it remains much too common: Unsafe workplaces, the quiet violence of "cutting corners". Whether it's the coal industry , the poultry industry , or the fracking and oil industries, or myriad other industries, unsafe workplaces kill, maim and sicken workers. Part of the political economy restructuring we must do includes transforming the workplace.

Feel the Greed

Let us remember why this stealth violence exists-why false scarcity and unsafe workplaces exist.

People who have more money than they hope to spend for the rest of their lives, no matter how many of their remaining days are "rainy"; people who have more money to pass on than their children need for a lifetime of financial security, college and retirement included; people who have more money to pass on than their grandchildren need for a similarly secure life–these people insist on extracting still more wealth from their workers, their clients, and taxpayers for no purpose beyond vaingloriously hoarding it.

Sure, some give away billions . But even so they retain billions. For what? More; charitable foundations are not the same thing, in many cases, as true charity. Instead foundations often function as hoard preservers as well, and enrich their leadership too.

In Conclusion

Greed is evil, but it comes in different intensities. Petit greed is a corrosive illness that decays societies, but can be effectively ameliorated through norms and social capital. Smaug greed is so toxic, so potent, that the state is the only entity powerful enough to put it in check. Greed, particularly Smaug greed, must be put in check because the false scarcity it manufactures, and the unsafe workplaces it creates, maim and kill people. The stealth violence of Smaug greed justifies a tax to confiscate the hoards.

#GreedIsEvil. It's time to #SlayTheSmaugs

*One of the arguments against redistribution is that is against the sacrosanct efficient market, which forbids making one person better off if the price is making someone else worse off. But money has diminishing returns as money after a certain point; the purchasing power between someone with one billion and ten billion dollars is negligible, though the difference between someone with ten thousand and a hundred thousand, or a hundred thousand and a million is huge. After a certain level of accumulation money is simply ego gratifying points, it's not money any more. Thus taking it and using it as money isn't making someone 'worse off' in an economic sense. Also, when considering whether someone is 'worse off', it's worth considering where their money comes from; how many people did they leave 'worse off' as they extracted the money? Brett , July 22, 2016 at 10:07 am

After a certain level of accumulation money is simply ego gratifying points, it's not money any more.

It quite literally isn't "money" as we regular folks know it beyond a certain point – it's tied up in share value and other assets. Which of course raises the question – when you decide to do your mass confiscation of wealth, who is going to be foolish enough to buy those assets so you actually have liquid currency to spend on infrastructure as opposed to illiquid assets? Or are you simply going to print money and spend it on them?

Thomas Hinds , July 22, 2016 at 10:33 am

Wealth on this scale has nothing to do with financial security or luxurious living. For the trivial, it is (as per D. Trump) a game and money is how you keep score. For the serious, it has to do with power, with the ability to affect other people's lives without their consent. That is why the Smaugs' wealth is absolutely our business. It should be understood that we're talking about taking very large amounts of money and power away from very rich people, people for whom money and power are pretty much the only things they value. It will not be pretty.

Ranger Rick , July 22, 2016 at 10:37 am

People become rich and stay that way because of a market failure that allows them to accumulate capital in the same way a constricted artery accumulates blood. What I'm wondering, continuing this metaphor, is what happens when all that money is released back into the market at once via a redistribution - toxic shock syndrome.

You can see what happens to markets in places where "virtual money" (capital) brushes up against the real economy: the dysfunctional housing situation in Vancouver, London, New York, and San Francisco.

It may be wiser to argue for wealth disintegration instead of redistribution.

a different chris , July 22, 2016 at 11:52 am

Yes I was thinking about that … money is just something the government prints to make the system work smoothly. But that, and pretty much any view of money, obscures the problem with the insanely "wealthy".

If these people, instead of having huge bank accounts actually had huge armies the government would move to disarm them. It wouldn't re-distribute the tanks and rifles. It would be obviously removing a threat to everybody.

Now there would be the temptation to wave your hands and say you were "melting it into plowshares" but that causes an accounting problem - that is, the problem being the use of accounting itself. Destroying extreme wealth and paying for say roads is just two different things and making them sound connected is where we keep getting bogged down. Not a full-on MMT'er yet but it really has illuminated that fact.

And no, as usual l have no solutions.

John Merryman , July 22, 2016 at 12:55 pm

The western assumption is that money is a commodity, from salt to gold, to bitcoin, we assume it can be manufactured, but the underlaying reality is that it is a social contract and every asset is presumably backed by debt.
Here is an interesting link which does make the point about the contractual basis of money in a succinct fashion;
http://rs79.vrx.palo-alto.ca.us/opinions/ideas/economics/jubilee/

Since the modern commodity of money is backed by debt and largely public debt, there is enormous pressure to create as much debt as possible.
For instance, the government doesn't really budget, it just writes up these enormous bills, attaches enough goodies to get the votes and the president can only pass or veto it and with all the backing and no other method, a veto is a weak protection.

To budget is to prioritize and spend according to ability. What they could do would be to break these bills into all their various "line items," have every legislator assign a percentage value to each one, put them back together in order of preference and then the president would draw the line.
It would balance the power and reduce the tendency to overspend, but it would blow up our financial system, which if anyone notices, is based on the sanctity of government debt.

If instead of borrowing the excess money out of the system, to spend on whatever, if the government threatened to tax it out, people would quickly find other ways to store value than as money in the financial system.

Since most of us save for the same general reasons, from raising children to retirement, we could invest in these as public commons, not try to save for our exact needs. This would serve to strengthen communities and their environments, as everyone would be more dependent on those around them, not just having a private bank account as their personal umbilical cord.

We treat money as both medium of exchange and store of value. As Rick points out above, a medium is like blood in the body and it needs to be carefully regulated. Conversely, the store of value in the body is fat and while many of us do carry an excess, storing it in the circulation system is not wise. Clogged arteries, poor circulation and high blood pressure are analogous to a bloated financial system, poor circulation and QE.
Money is not a commodity, but a contract.

Julian , July 22, 2016 at 11:00 am

Do you realize that this supposed billionaire wealth does not consist of actual US dollars and that, if one were to liquidate such wealth (in order to redistribute it in "fair" equal-dollars) that number might drastically change?

The main thing these people (and indeed your pension funds) are actually hoarding are financial assets, and those, it turns out, are actually "scarce". Or, well, I don't know what else you would call trillions of bonds netting a negative interest rate and an elevated P/E stock market in a low-growth environment.

It's a bit of a pickle from a macro environment. You can't just force them to liquidate their assets, or else the whole system would collapse. It also kind of escapes the point that someone has to hold each asset. I would be excited to see what happens when you ask Bill Gates to liquidate his financial assets (in order to distribute the cash). An interesting thought, for sure. And one that would probably bring the market closer to reasonable valuations.

It is simply a wrong conclusion to say "Wealth is x, and if we distribute it, everyone would get x divided by amount of recipients in dollar terms". Now if you wanted to redistribute Bill Gates' stake in Microsoft in some "fair" way, you could certainly try but that's not really what you proposed.

Either way you can't approach wealth policy from a macro perspective like this, because as soon as you start designing macro-level policy to adjust (i.e. redistribute) this wealth, the value of it will fluctuate very wildly in dollar terms and may well leave everyone less well off in some weird feedback loop.

JTMcPhee , July 22, 2016 at 11:05 am

"The full power of the state must be used against" #extremegreed: Except, of course, "L'etat c'est moi…"

Of course as a Bernie supporter, the writer knows that, knows that it is a long game to even start to move any of the hoard out of Smaug's cave, that there are dwarves with glittering eyes ready to take back and reduce to ownership and ornamentation the whole pile (maybe they might 'share" a little with the humans of Lake Town who suffered the Dragon's Fire but whose Hero drove a mystical iron arrow through the weak place in Smaug's armor, all while Sauron and Saruman are circling and plotting and growing hordes of genetically modified Orcs and Trolls and summoning the demons from below…

The Elves seem to be OK with a "genteel sufficiency," their wealth being useful durable stuff like mithril armor and those lovely houses and palaces up in the trees. Humans? Grabbers and takers, in Tolkien's mythology. I would second that view - sure seems to me that almost any of us, given a 1000-Bagger like Zuckerman or Jobs or that Gates creature fell into, or Russian or Israeli or African or European oligarchs for that matter (pretty universal, and expected given Davos and Bilderberg and Koch summits) the old insatiable lambic system that drives for pleasure-to-the-max and helps our baser tribal drives and penchant for violence to manifest and "thrive" will have its due. Like 600 foot motor yachts and private-jet escape pods and pinnacles islands with Dr. No-style security provided by guns and accountants and lawyers and faux-legitimate political rulers for hire…

Lots of analysis of "the problem." Not so much in the way of apparent remedies, other than maybe lots of bleeding, where the mopes will do most of it and if history is any guide, another Smaug will go on around taking all the gold and jewels and other concentrated wealth back to another pile, to sit on and not maybe even gloat over because the scales are just too large…

Still hoping for the emergence of an organizing principle that is more attractive that "take whatever you can and cripple or kill anyone who objects…"

Ulysses , July 22, 2016 at 11:38 am

"People who have more money than they hope to spend for the rest of their lives, no matter how many of their remaining days are "rainy"; people who have more money to pass on than their children need for a lifetime of financial security, college and retirement included; people who have more money to pass on than their grandchildren need for a similarly secure life–these people insist on extracting still more wealth from their workers, their clients, and taxpayers for no purpose beyond vaingloriously hoarding it."

These are people who are obscenely wealthy as opposed to merely wealthy. The fastest way to challenge their toxic power would be to help the latter group understand that their interests are not aligned with the former. Most millionaires (as opposed to billionaires) will eventually suffer when the last few drops of wealth remaining to the middle and working classes are extracted. Their future prosperity depends on the continued existence of a viable, mass consumer economy.

The billionaires imagine (in my view falsely) that they will thrive in a neo-feudal future– where they own everything and the vast majority of humanity exists only to serve their needs. This is the future they are attempting to build with the new TPP/TISA/TTIP regime. If we fail to prevent the imposition of this transnational regime there will only be three classes of humans left: kleptocrats, their favored minions, and slaves. Most neoliberal professionals, who imagine that they will be in that second group, are delusional. Did the pharaohs have any need for people like Paul Krugman or Maureen Dowd?

a different chris , July 22, 2016 at 11:59 am

Yeah unfortunately they did. It wasn't just the pharaoh and peasants, there was a whole priestly class just to keep the workers confused.

Now the individuals themselves weren't at all necessary, they have always been easily replaceable.

FluffytheObeseCat , July 22, 2016 at 12:36 pm

Pharaohs didn't need a middle/professional class as large as the ones in most western democracies today. But, we are going in the pharaonic direction.

The problem our polite, right wing professional classes face is that they are increasingly too numerous for society's needs. Hence the creeping gig-i-fication of professional employment. The wage stagnation in all but the most guild-ridden (medicine) professions.

It's so reminiscent of what happened to the industrial working class in the late 70s and 80s. I still remember the "well-reasoned", literate arguments in magazine op-eds proclaiming how line workers had become "excess" in the face of Asian competition and automation. How most just needed to retrain, move to where the jobs are, tighten their belts, etc. It's identical now for lawyers, radiologists, and many layers of the teaching professions. If I weren't part of that "professional" class I'd find the Schadenfreude almost too delicious.

HotFlash , July 22, 2016 at 1:54 pm
If we fail to prevent the imposition of this transnational regime there will only be three classes of humans left: kleptocrats, their favored minions, and slaves.

Sounds about right, but you are overlooking the fact that the largest class will be The Dead. They will not need nearly so many of Us, and we will be thinned, trimmed, pruned, marooned, or otherwise made to go away permanently (quietly, for preference, I assume, but any way will do).

Ergo, the violence of ineffectual health care, toxic environment, poisonous food, dangerous working conditions and violence (for instance, guns and toxic chemicals) in our homes, schools, streets, workplaces, cities and, well, everywhere are not only a feature, but a major part of the plan.

And I'm actually feeling rather optimistic today.

Tim , July 22, 2016 at 2:23 pm

It has been extensively documented that the merely wealthy are very upset at the obscenely wealthy.

If the author is truly focusing on a tax for obscene wealth I'd like to know a specific threshold. Is it 1 Billion and up? annual limit how many times the median income before it kicks in?

#SlayTheSmaugs Post author , July 22, 2016 at 3:30 pm

Well, I'm happy to have a discussion about at what threshold a confiscatory wealth tax should kick in; it's the kind of conversation we have with estate taxes.

I'm thinking a one off wealth tax, followed by a prevention of the resurrection of the problem with a sharply progressive income tax. Is $1 billion the right number for this initial reclamation? maybe. It is about the very top few, not the merely wealthy.

#SlayTheSmaugs

Vatch , July 22, 2016 at 5:32 pm

$1 billion is a reasonable amount of assets for determining whether to confiscate a portion of a person's wealth in taxes. Or perhaps we could base it on a percentage of GDP. The U.S. GDP in 2015 was approximately $17.9 trillion. Anyone with $1.79 billion or more in assets would have 1% of 1% of the U.S. GDP (0.01%). That's a lot of wealth, and surely justifies a heavy tax.

Quantum Future , July 22, 2016 at 4:15 pm

To your question Ulysses

'Professionals, who imagine that they will be in that second group, are delusional. Did the pharaohs have any need of Paul Krugman'

Sure they did. Those were called Priests who told the people what the gods were thinking. And since Pharoah's concluded themselves gods. The slaves revolt by working less. Anybody notice the dropping production levels the last couple of years? Whipping the slaves didn't turn out well for the Egyptians.

A more modern similarity of the US is Rome. Vassals have been going full retard for several years now, traitors sell international competitors military secrets while the biggest merchants buy off the Senate.

Ceasar becomes more a figurehead until one leads a coup which has not happened yet. Aquiring more slaves begins to cost more than what the return in general to the society brings but the Smaugs do not care about that until the barbarians begin to revolt (See Orlando for example, the shooter former employee of DHS. Probably pissed some of his comrades were deserted by US in some manner.

Ulysses , July 22, 2016 at 12:07 pm

My point was that the category of people in this priestly caste will likely be far, far smaller than the millions of credentialed neoliberal professionals currently living large in the top 10% of the developed world.

Interesting mental image– to see Paul Krugman chanting praises to the new Son of the Sun God the Donald!!

#SlayTheSmaugs , July 22, 2016 at 12:07 pm

Look, there's a simple way to #SlayTheSmaugs, and it's a confiscatory wealth tax coupled with a sharply progressive income tax, as part of an overall restructuring of the political economy.

Simple, is of course, not easy; indeed my proposal is currently impossible. But like Bernie I'm trying to change the terms of political debate, to normalize what would previously be dismissed as too radical to be countenanced.

I don't think the looting professional class needs to be slain, in the #SlayTheSmaugs sense. I think they can be brought to heel simply by enforcing laws and passing new ones that are already within acceptable political debate, such as one that defines corruption as using public office for private gain. I think norms matter to the looting professional class as well. Another re-norm-ilization that needs to happen is remembering what a "profession" used to be…

Sylvia Demarest , July 22, 2016 at 12:17 pm

Friends and neighbors!! Most of this "wealth" is ephemeral, it is based on the "value of assets" like stocks, bonds, real estate, et al. If all of this "wealth" gets liquidated at the same time, values would collapse. These people are fabulously wealthy because of the incredible inflation we have seen in the "assets" they hold.

Remember, during the Great Depression the "wealth" wasn't confiscated and redistributed, it was destroyed because asset values collapsed and over 2000 banks failed wiping out customer accounts. This also collapsed the money supply causing debt defaults, businesses failures, and worker laid offs. No one had any money because there was none.

The US was on the gold standard limiting the creation of liquidity. President Roosevelt went off the gold standard so that he could work to increase the money supply. It took a long time. The result of the depression was decades of low debt, cheap housing, and hard working people who remembered the hard times. The social mood gradually changed as their children, born in more prosperous times, challenged the values of their parents.

Yves Smith , July 22, 2016 at 10:02 pm

Even though the bulk of what the super rich hold is in paper assets, they still hold tons of real economy assets. They've succeeded in buying enough prime and even merely good real estate (like multiple townhouses in Upper West Side blocks and then creating one monster home behind the facade) to create pricing pressure on ordinary renters and homeowners in the same cities, bidding art through the roof, owning mega-yachts and private airplanes, and most important of all, using the money directly to reshape society along their preferred lines, witness charter schools.

GlassHammer , July 22, 2016 at 12:21 pm

If you are going to fight against the "Greed is Good" mentality, you are going to have to address the habits of the average middle class household. Just take a look at the over accumulation of amenities and creature comforts. The desire to signal ones status/wealth through "stuff" is totally out of control and completely divorced from means/income.

#SlayTheSmaugs , July 22, 2016 at 12:58 pm

Fair, and I do propose that:

"But we need more voices insisting #GreedIsEvil. We need to teach that basic message at home, in school, and in houses of worship. We need to send the right signals in our social interactions. We need to stop coveting stuff, and start buying with a purpose: Shopping locally, buying American, buying green and clean, and buying less. We need to waste less, share more and build community. We need to re-norm-alize greed as evil, make it shameful again. Then we will have redefined ourselves as citizens, not consumers."

dots , July 22, 2016 at 2:09 pm

Isn't there an idiom about cutting off the head of the snake? Once you deal with the strongest opponents, it's easier to go after the others. Too big to fail is nothing short of feeding the beast.

Punxsutawney , July 22, 2016 at 12:45 pm

There was a time not that long ago that I would have opposed a "confiscatory wealth tax". After looking at what most of those in the .1% are doing with their wealth, and their contempt for the average person, those days are long gone. Plus it's good economics.

The only question is what is "obscene wealth". Well like pornography, I think we know it when we see it.

Alfred , July 22, 2016 at 1:48 pm

I am wondering about the distribution of all this concentrated wealth; how much of it is spread around in the equities and bond markets?

And if that amount was redistributed to the general public how much of it would return to the equities and bond market?

I'm thinking not very much which would have catastrophic effects on both markets, a complete reordering. This would undoubtedly crush the borrowing ability of our Federal government, upset the apple cart in other words. With less money invested in the equities market it would undoubtedly return to a lower more realistic valuation; fortunes would be lost with no redistribution.

Oh the unintended consequences.

#SlayTheSmaugs Post author , July 22, 2016 at 3:34 pm

Fair to ask: How do we achieve a confiscatory wealth tax without catastrophic unintended consequences? But that's a very different question than: should we confiscate the Smaug's wealth?

One mechanism might be to have a government entity created to receive the stocks, bonds and financial instruments, and then liquidate them over time. E.g. Buffett has been giving stock to foundations for them to sell for awhile now; same kind of thing could be done. But sure, let's have the "How" conversation…

Quantum Future , July 22, 2016 at 4:34 pm

If lobbying were outlawed at the Federal level the billionaires and multi millionaires would need to invest in something else. That signal has a multiplier effect.so your right eboit enforcement of mostly what is on the books already. A 'wall' doesnt have to be built for illegal immigrants either. Fine a couple dozen up the wazoo and the signal gets passed the game is over.

But until a few people's daughters are kidnapped or killed like in other 3rd world countries, it wont change. That is sad but reality is most people do not do anything until it effects them. I started slightly ahead of the crowd in summer of 2007 but that is because a regional banker told me as we liked discussing history to look at debt levels of 1928 and what happened next. On top of that, we are the like the British empire circa 1933 so we get the downside of that as well.

Pain tends to be the catalyst of evolution that fully awakens prey to the predators.

juliania , July 22, 2016 at 1:53 pm

"As Sanders often reminds us. . ."

I am sorry, Sir Smaug slayer. The underlying theme of your lengthy disquisition is that Sanders is the legitimate voice of the 99%, and his future complicity within the Democratic Party is thereby ameliorated by his current proposals within it. This is the true meat of your discourse ranging so far and wide – even with the suggestion early on that we the 99% need tutoring on the evils of greed.

Not so. That ship has sailed. Our Brexit is not yet upon us, but that it is coming, I have no doubt. The only question is when. To paraphrase a Hannah Sell quote on such matters. . . for decades working class people have had no representation in the halls of Congress. All of the politicians . . . without exception, have stood in the interests of the 1% and the super-rich.

Bernie Sanders included. Hannah's remarks were more upbeat – she made an exception for Jeremy Corbyn. Unfortunately, I can't do that. Bernie has folded. We need to acknowledge that.

amousie , July 22, 2016 at 2:16 pm

One of the arguments against redistribution is that is against the sacrosanct efficient market, which forbids making one person better off if the price is making someone else worse off.

I think you mean downward redistribution here since upward redistribution seems to be rather sacrosanct and definitely makes one person better off at the price of making many someones worse off to make it happen.

Tim , July 22, 2016 at 2:18 pm

Confiscatory wealth tax is too blunt an instrument to rectify the root causes discussed in this article, and you do not want a blunt impact to the effect of disincentivizing pursuit of financial success.

Further Centralization the populous' money will incite more corruption which is what allows the have's to continue lording it over the have nots.

What are alternatives?
Instead Focus on minimizing corruption,
Then it will be possible to implement fair legislation that limits the options of the greed to make decisions that results in unfair impacts on the lower class.

Increase incentives to share the wealth, (tax deductible charitable giving is an example).

We do need to encourage meritocracy whenever possible, corruption and oppression is the antithesis to that.

We need to stop incentivizing utilization of debt, that puts the haves in control of the have nots.

JTMcPhee , July 22, 2016 at 6:25 pm

"Financial success. " As long as those words go together, and make an object of desire, the fundamental problem ain't going away.

Of course the underlying fundamental problem of human appetite for pleasure and power ain't going away either. Even if a lot of wealth was taken back (NOT "confiscated") from the current crop and hopeful horde of kleptocrats…

JTMcPhee , July 22, 2016 at 6:27 pm

How long before the adage "A fool and his money are soon parted" kicked in?

Ulysses , July 22, 2016 at 2:51 pm

"We do need to encourage meritocracy whenever possible, corruption and oppression is the antithesis to that."

I disagree strongly with your premise that some sort of pure and natural meritocracy has ever existed, or could ever exist in human society. Corrupt and oppressive people will always define as "meritorious" those qualities that they themselves possess– whether wealth, "gentle birth," "technical skills," or whatever. We all possess the same merit of being human.

An Egyptologist, with an Oxbridge degree and extensive publications has no merit– in any meaningful sense– inside a frozen foods warehouse. Likewise, the world's best frozen foods warehouse worker has little to offer, when addressing a conference focused on religious practices during the reign of Ramses II. Meritocracy is a neoliberal myth, intended to obscure the existence of oligarchy.

NeqNeq , July 22, 2016 at 4:03 pm

An Egyptologist, with an Oxbridge degree and extensive publications has no merit– in any meaningful sense– inside a frozen foods warehouse. Likewise, the world's best frozen foods warehouse worker has little to offer, when addressing a conference focused on religious practices during the reign of Ramses II. Meritocracy is a neoliberal myth, intended to obscure the existence of oligarchy.

I am confused.

You claim meritocracy is "a neoliberal myth, intended to obscure the existence of oligarchy", but (seemingly) appeal to meritocratic principles to claim a warehouse worker doesnt offer much to an academic conference. Can you clear up my misunderstanding?

I agree, btw, that Idealized meritocracy has never existed (nor can). Follow up question: There has never been an ideal ethical human, does that mean we should stop encouraging ethical behavior?

Ulysses , July 22, 2016 at 6:44 pm

Meritocracy is not the same as recognizing greater and lesser degrees of competence in various activities. It is absurd to deny that some are more skillful at some things than others. Assigning the relative "merit" to various competencies is what I find objectionable.

Encouraging ethical behavior has nothing to do with ranking the "merit" levels of different occupations. While some occupations are inherently unethical, like that of an assassin, most can be performed in such a way as to do no harm to others, and some are nearly always beneficial to society at large.

Someone who did nothing but drink whiskey all day, and tell funny stories in a bar, is far more beneficial to society at large than a busy, diligent economist dreaming up ways to justify the looting of the kleptocrats.

Pierre Robespierre , July 22, 2016 at 4:37 pm

Wealth Redistribution occurs when the peasants build a scaffold and frog march the aristocracy up to a blade; when massive war wipes out a generation of aristocracy in gas filled trenches or in the upcoming event.

Roland , July 22, 2016 at 10:23 pm

"Fair to ask: How do we achieve a confiscatory wealth tax without catastrophic unintended consequences?"

Answer: Do it and find out. Some things can only be determined empirically. First, do what needs doing. We can take care of the Utility afterwards.≥

Barry , July 22, 2016 at 11:00 pm

I would like to see a financial settlements tax like Scott Smith presidential candidate recommends. http://www.scottsmith2016.com/

[Jul 20, 2016] Bill Black: Mankiws Mythical Ten Commandments of Theoclassical Economics

Notable quotes:
"... Democrats: Please Renounce Mankiw's Myths ..."
"... Mankiw is a propagandist. ..."
"... The values and ideology represented in the Economics textbook Bill Black analyzed didn't arise in a vacuum. The points Black lists reflect the ideology, values, ethics and interests of a narrow segment of our society who have accumulated enormous personal wealth through a variety of extra-legal and illegal mechanisms, and who use a small portion of that wealth to fund "Economics Chairs" in our public and private universities; economics "think tanks"; and speeches, books, consulting engagements, and board memberships for "prominent economists". ..."
"... Mankiw is a shill/useful idiot for his oligarchs patrons. #11 explains the idiocy of the previous 10. ..."
"... Did the banks which loaned billions to the gas frackers of North Dakota know that production would exceed demand and cause a crash? Perhaps the loan officer might have such concern, but would more likely be most concerned with his/her own bottom line – a meme Yves explores in Econned. ..."
"... Newly-printed money CAN cause inflation, but WHERE the price rises happen depends greatly on the pockets in which the money lands. ..."
"... stocks, real estate, luxury goods, premium educations, etc. ..."
"... This kind of ignorant cluelessness is pretty prevalent among the oligarchy and its supporters like Mankiw. Just like that guy in Davos who simply couldn't understand why there's so much social unrest in the world today. They live in a completely different world. ..."
"... My first exposure to Mankiw's principles was actually an early version of the talk by Yoram Bauman in this video. It hits several of the points Mr. Black makes and is also pretty funny. It definitely demonstrates how Mankiw attempts to cloak his biases in supposedly neutral terms. ..."
"... I doubt Mankiw will accept 100% estate tax on the justification that the cost of bequests is zero to the recipient. (and thus a 100% estate tax doesn't incur large costs on the recipient) ..."
"... My paper lists four principles claimed to be at the core of modern economics by Mankiw and then shows how all four principles are false: Amir-ud-Din, Rafi and Zaman, Asad, Failures of the 'Invisible Hand' (July 15, 2013). Forum for Social Economics, Vol. 45, Iss. 1, 2016. Available at SSRN: http://ssrn.com/abstract=2293940 or http://dx.doi.org/10.2139/ssrn.2293940 ..."
May 17, 2016 | nakedcapitalism.com

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives

This is the second column in a series on the N. Gregory Mankiw's myths and dogmas that he spreads in his economic textbooks. The first column exposed the two (contradictory) meta-myths that begin his preface. This column de-mythologizes Mankiw's unprincipled " principles " of economics – the ten commandments of theoclassical economics' priestly caste. Some of these principles, correctly hedged, could be unobjectionable, but in each case Mankiw dogmatically insists on pushing them to such extremes that they become Mankiw myths.

To understand Mankiw's mythical 10 commandments, one must understand "Mankiw morality" – a morality that remains hidden in each of his textbooks. Few people understand how radically theoclassical economics has moved in the last thirty years. Milton Friedman famously argued that CEOs should operate exclusively in the interest of shareholders. Mankiw, however, is a strong supporter of the view that CEOs will not only defraud customers, but also shareholders and creditors by looting the firm. "[I]t would be irrational for savings and loans [CEOs] not to loot." "Mankiw morality" decrees that if you have an incentive as CEO to loot, and fail to do so, you are not moral – you are insane. Mankiw morality was born in Mankiw's response as discussant to George Akerlof and Paul Romer's famous 1993 article "Looting: The Economic Underworld of Bankruptcy for Profit."

Mankiw's textbooks preach the wonders of the indefensible a system he has helped design to allow elite CEOs to loot the shareholders with impunity – the antithesis of Friedman's stated goal. Mankiw morality helps create the "criminogenic environments" that produce the epidemics of "control fraud" that drive our recurrent, intensifying financial crises. It is essential to interpret Mankiw's ten myths in light of his unacknowledged immoral views about how CEOs will and should respond to incentives to rig the system against the firm's consumers, employees, creditors, and shareholders. His textbooks religiously avoid any disclosure of Mankiw morality or its implications for perverting his ten commandments into an unethical and criminogenic dogma that optimizes the design of a criminogenic environment.

Mankiw's myths

  1. People Face Tradeoffs. To get one thing, you have to give up something else. Making decisions requires trading off one goal against another.

    This can be true, but Mankiw pushes his principle to the point that it becomes a myth. Life is filled with positive synergies and externalities. If you study logic or white-collar criminology you will make yourself a far better economist. You may trade off hours of study, but not "goals." If your "goal" is to become a great economist you will not be "trading off one goal against another" if you become a multidisciplinary scholar – you will strongly advance your goal. If you study diverse research methods you will be a far better economist than if you study only econometrics.

  2. The Cost of Something is What You Give Up to Get It. Decision-makers have to consider both the obvious and implicit costs of their actions.

    "Opportunity costs" are an important and useful economic concept, but Mankiw's definition sneaks ideological baggage into both sentences that turns his principle into multiple myths. Mankiw implicitly assumes fraud and other forms of theft out of existence in the first sentence. "Cost" is often not measured in economics by "what you give up to get it." If your inherit a home that lacks fire insurance and immediately burns down there is a cost to you (and society) even though you gave up nothing to inherit the home. If the CEO loots "his" firm he gave up nothing to get the millions, but if he loses those millions he will consider it to have a "cost." Theoclassical economists have a primitive tribal taboo against even using the "f" word (fraud).

    Decision-makers frequently ignore the "costs of their actions." There is nothing in economic theory or experience that supports the claim that the "decision-makers" "have" to consider costs. It is rare that decision-makers must do – or not do – anything.

    It is likely that Mankiw means that optimization requires decision-makers to "consider" all "costs of their actions," but that too is a myth. Theoclassical optimization requires perfect, cost-free information, pure "rationality," and no externalities. None of these conditions exist. Car buyers have no means of knowing the costs of buying a particular car. If they bought a GM car the ignition mechanism defect could cause the driver to lose the ability to control the car – turning it into an unguided missile hurtling down (or off) a highway at 70 mph. The car buyer does not know of the defect, does not know who will be driving when the defect becomes manifest, does not know who the passengers will be, and does not know who and what else could be injured or damaged as a result of the defect. The theoclassical view is that the buyer who "considers" the costs of buying his defective car to others (negative externalities) and pays more money to buy a car that minimizes those negative externalities is not acting ethically, but irrationally.

    It is typically cheaper (for the producer, not society) to produce goods of inferior (but difficult to observe) quality. The inability of the consumer to "consider" even the true costs to the consumer and the consumer's loved ones of these hidden defects means that economists began warning 46 years ago that "market forces" could become criminogenic. George Akerlof's 1970 article on markets for "lemons" even coined the term "Gresham's" dynamic to describe the process. A Gresham's dynamic is a leading form of a criminogenic environment.

    [D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.

    Akerlof was made a Nobel laureate in economics in 2001 for this body of work. Economics is the only field in which someone would write a textbook ignoring a Nobel laureate whose work has proven unusually accurate on such a critical point. There is only one reason to exclude this reality from Mankiw's myths – Akerlof's work falsifies Mankiw's myths, so Akerlof's work disappears from Mankiw's principles, as does the entire concept of fraud.

  3. Rational People Think at the Margin . A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.

    The mythical nature of this principle flows from the multiple errors I have described. Mankiw is being deliberately disingenuous. Theoclassical economics does not claim, for example, that a firm produces a product "only if the marginal benefit of the action exceeds the marginal cost." Theoclassical economists claim that a firm sells a product "only if the marginal benefit of the action to the seller exceeds the marginal cost to the seller." The seller ignores social costs and benefits.

    For the sake of brevity, I will summarize that Mankiw's third principle is a myth for five reasons known to every economist. First, it implicitly assumes out of existence positive and negative externalities, which means that supposedly rational, self-interested decision-makers he postulates, even if they had perfect, cost-free information, would not contract to maximize social welfare.

    Second, as Mankiw morality implicitly admits, the actual optimization principle under theoclassical economics would be determined by the marginal benefits and costs of an action to the decision-maker – the CEO – not the firm, and certainly not society. Theoclassical economists, however, refuse to admit that explicitly, so it disappears from Mankiw's 10 commandments.

    Third, the information provided by CEOs is often not simply incomplete and costly, but deliberately deceptive. Where information is merely incomplete, consumers may pay far more for a product than they will benefit from the purchase. Where the seller provides deceptive information about quality, the buyer and members of the public may be harmed or even killed. The CEO may also be looting "his" firm as well as the customers. Mankiw has implicitly assumed perfect, cost-free information and implicitly assumed that fraud does not exist.

    Fourth, conflating rationality with optimization of personal costs and benefits is wrong on multiple grounds. It defines ethical behavior as "irrational" where the consumer or CEO takes into account social costs and benefits and protects the interests of others in an altruistic manner. Everything we know from behavioral economics also makes clear that humans are not "rational" in the manner predicted by theoclassical economics. Mankiw has implicitly assumed out of existence thirty years of economic research on how people actually behave and make decisions.

    Fifth, firms with monopoly power, according to theoclassical economics, maximize their profits by deliberately reducing production to a point that the social cost of producing the marginal unit is less than the marginal benefit to the consumer. Mankiw has implicitly assumed away monopolies.

  4. People Respond to Incentives. Behavior changes when costs or benefits change.

    I have responded to this myth in a prior article . The implications of his fourth principle in conjunction with Mankiw morality are devastating for theoclassical economics. CEOs create the incentives and understand how "behavior changes" among their agents, employees, and subordinate officers in response to those incentives. Under theoclassical principles this will unambiguously lead "rational" CEOs to set incentives to rig the system in favor of the CEO. Because fraud and abuse creates a "sure thing" that is certain to enrich the CEO, Mankiw's fourth commandment predicts that control frauds led by CEOs will be ubiquitous. Fortunately, many CEOs are ethical and remain ethical unless they are subjected to a severe Gresham's dynamic. As a result, Mankiw's commandments over-predict the incidence of fraud and abuse by CEOs. Similarly, experiments demonstrate that humans frequently act in altruistic manners despite financial incentives to act unfairly.

  5. Trade Can Make Everyone Better Off .
    Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services.

    See my article on faux "trade deals" that exposes this myth.

  6. Markets Are Usually a Good Way to Organize Economic Activity .
    Households and firms that interact in market economies act as if they are guided by an "invisible hand" that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.

    Again, the key interaction under theoclassical theory is between CEO and consumers, employees, creditors, shareholders, and the general public. "Markets" are vague constructs and they work best when ethical and legal provisions reduce fraud to minor levels. When these ethical and legal institutions are not extremely effective against fraud, the incentives created by the market can be so perverse that they create a criminogenic environment that produces epidemic levels of fraud. Mankiw's myth is to describe only one possible incentive and treat it as the sole possibility other than what he falsely describes as "the opposite" – a government planner. The opposite incentive to the so-called "invisible hand" is the Gresham's dynamic. Mankiw mythically presents the government as the threat to an effective economy rather than an institution that is essential to producing and enforcing the rule of law that prevents a Gresham's dynamic.

  7. Governments Can Sometimes Improve Market Outcomes .
    When a market fails to allocate resources efficiently, the government can change the outcome through public policy. Examples are regulations against monopolies and pollution.

    The myth here is that government only has a desirable role where there is a "market fail[ure]." Mankiw treats "markets" as the norm and implicitly assumes that the government normally has nothing to do with making markets succeed. Even conservative classical economists admitted that the rule of law was essential to an effective economy and required an effective government. Well-functioning governments always improve "market outcomes." Indeed, they are typically essential to making possible well-functioning "markets."

    Mankiw also fails to explain that "markets" will be fictional and massively distort resource allocation (that is what a hyper-inflated bubble does) when there is an epidemic of control fraud. As I have explained, Mankiw's own principles predict (indeed, over-predict) that deregulated "markets" will frequently prove so criminogenic that they will produce epidemics of control fraud.

  8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services. Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income.

    First, the CEOs of sectors such as finance that are immensely unproductive – so unproductive that they cause enormous losses rather than growth, and receive exceptional income because they loot. Income is often based not on productivity, but on the CEOs' wealth and economic and political power that allows them to rig the economy. A nation's standard of living also depends on its employment levels, which can be crushed by economic policies such as austerity.

    The issue is not what happens to "average income," but what happens to median income, wealth, the income and wealth of the lowest quartile or particular minorities, and to income and wealth inequality. A nation can have high average productivity, yet have poor performance for decades in these other critical measures.

    Consider what has happened to the folks who tried to do everything right to boost their productivity according to the theoclassical economic "experts'" advice. This is what has happened to Latino and black households where a head of the household has at least a college degree. The source is economists at the extremely conservative St. Louis Fed .

    Hispanic and black families headed by someone with a four-year college degree, on the other hand, typically fared significantly worse than Hispanic and black families without college degrees. This was true both during the recent turbulent period (2007-2013) as well as during a two-decade span ending in 2013 (the most recent data available).

    White and Asian college-headed families generally fared much better than their less-educated counterparts. The typical Hispanic and black college-headed family, on the other hand, lost much more wealth than its less-educated counterpart. Median wealth declined by about 72 percent among Hispanic college-grad families versus a decline of only 41 percent among Hispanic families without a college degree. Among blacks, the declines were 60 percent versus 37 percent.

    One of the reasons that college-educated Latino and black families lost so much wealth compared to their white and Asian-American counterparts is that they were more likely to get their degrees from the for-profit colleges that theoclassical economists touted – colleges that frequently provided a very expensive and very poor education, often involving defrauding the students. Another reason that college-educated Latino and black families lost so much wealth compared to their white and Asian-American counterparts is that they were far more likely to be the victims of predatory home lending – an activity for which theoclassical economists served as the primary apologists.

    Mankiw also ignores critical factors that determine "a country's standard of living." Yes, China reports higher growth, but it is also operating in an unsustainable fashion that has destroyed much of its environment and threatens to be a major contributor to the global suicide strategy of causing severe climate change.

  9. Prices Rise When the Government Prints Too Much Money . When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services.

    No, and Mankiw knew this was a myth when he wrote it. First, "prices rise" for many reasons. Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage others to do so in order to increase prices on existing drugs by hundreds, sometimes thousands of percent. Prices rise because accounting control fraud recipes hyper-inflated the largest bubble in history in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels cause oil shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.

    Inflation has not risen, indeed general price levels have often fallen (deflation) despite record creation of money by central banks and private banks. Theoclassical economists have regularly predicted hyper-inflation. As Paul Krugman emphasizes, virtually none of them even admits their serial prediction failures.

  10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment . Reducing inflation often causes a temporary rise in unemployment. This tradeoff is crucial for understanding the short-run effects of changes in taxes, government spending and monetary policy.

    Mankiw ends his ten myths with a series of myths. Foolish, counterproductive austerity often causes inflation to fall to harmfully low – even negative (deflation) – levels that can lead to prolonged recessions that cause severe damage to people and economies. Stimulus provides a win-win that improves economic growth and reduces human suffering without causing harmful inflation.

    A nation is able to operate at extremely high levels of employment without producing harmful inflation. Mankiw is a partisan Republican. When Republican presidents in the modern era are faced with recessions they junk their theoclassical dogmas and adopt stimulus programs, though they generally do so largely through the economically inefficient and less effective means of slashing tax rates for the wealthy.

Democrats: Please Renounce Mankiw's Myths

Unlike the Republicans, who always rise above their theoclassical principles when their president is in office and faces a recession, the "New Democrats" are the ones who seem to have drunk the theoclassical Kool-Aid and strive endlessly to create the self-inflicted wound of austerity when they are in power. New Democrats also love to bash Republican presidents for running deficits even when those deficits produced no harmful inflation and helped produce recovery. It is sensible and honest to point out that tax cuts for the wealthy are a far less effective form of stimulus and to present and support superior alternatives such as job guarantee and infrastructure programs. It would be superb if Democrats were to point out that by far the most effective, prompt means of cutting taxes to stimulate the economy in response to a recession is to cease collecting the Social Security taxes for several years. It is not fine to praise Bill Clinton for taking the harmful step of running a budget surplus or to bash Republicans because they – correctly – increased fiscal stimulus (and therefore the short-term deficit) in response to a recession.

Democrats also need to stop spreading the myth that Bill Clinton was an economic marvel. He was the luckiest president in history in terms of timing. His economic "success" was the product of two of the largest bubbles in history (the dot.com and real estate bubbles). The real estate bubble is the only thing that prevented his dot.com bubble from causing an economic collapse during his term. The real estate bubble was so enormous that it made it easy for the fraudulent CEOs to "roll" (refinance) the fraudulent loans they made, which helped cause the bubble to hyper-inflate. The saying in the trade is "a rolling loan gathers no loss." This meant that the bubble was Bill Clinton and George Bush's bubble, but it collapsed on George Bush's watch so Clinton gets the credit for the high employment produced by the twin bubbles and Bush gets the blame for the massive unemployment that a massive bubble will create when it collapses (if it is not replaced by an even larger bubble).

Selected Skeptical Comments
ke , May 17, 2016 at 1:10pm

The pots are calling the kettles black; standard politics, redundancy easily replaced by automation.

You do know that Bernie isn't going after Hillary because he has his skeletons, especially in the medical university complex, don't you. Ever live in Vermont. You did notice that Hillary just threatened him, to the core of his argument.

Jef , May 17, 2016 at 11:2am

Ke – Very insightful!

This… "Energy is information, most of which humans ignore."…and this… "Public Education policies are disgusting to anyone who really wants to learn…" are the important elements although I would add that humans don't ignore so much as don't know/are not taught, and I would say Public education has been purposefully corroded to the point of disgusting.

Left in Wisconsin , May 17, 2016 at 11:5am

Democrats: Please Renounce Mankiw's Myths

Good one.

Jim Haygood , May 17, 2016 at 12:14pm

"Prices rise" for many reasons.

Pharmaceutical prices rise because hedge fund managers take over pharma firms or encourage others to do so in order to increase prices on existing drugs by hundreds, sometimes thousands of percent. Prices rise because accounting control fraud recipes hyper-inflated the largest bubble in history in U.S. real estate. Prices rise because of cartels. Prices rise because oil cartels cause oil shocks. Prices rise due to real bottlenecks, e.g., shortages of a skill or material.

- Bill Black

----–

All of these examples treat relative price rises in the affected sector, not the general inflation which saw the U.S. CPI increase by a factor of ten (10) since 1950. Hedge funds and cartels couldn't do that, no matter how successful they were in increasing their share of the pie.

The same logic is used by union busters to claim that "greedy labor unions" cause inflation - an equally false notion. Labor can increase its share of national income at the expense of corporate profit, but it cannot cause a general inflation.

This unprecedented secular inflation did, however, coincide with government bonds surpassing gold as the Federal Reserve's largest holding in 1945, and with the dollar's gold link being severed in 1971.

Bill Black evidently hews to the scholarly tradition of the eminent Argentine economist and former central banker Mercedes Marcó del Pont:

"It is totally false to say that the printing more money generates inflation; price increases are generated by other phenomena like supply and external sector's behaviour," said Marcó del Pont.

http://tinyurl.com/jk5d64w

This from a country that lopped thirteen (13) zeros off its currency in the past century.

*takes another bong hit and blows a fat smoke ring*

ChrisPacific , May 17, 2016 at 6:35pm

I would argue that the real estate bubble caused genuine inflation because it was a credit bubble, but I agree on your other points. Intuitively I think of inflation as a rise in prices without a corresponding rise in (average) affordability. It's why a Big Mac today can cost multiple times what it did 30 years ago without being any less affordable for the average customer.

Mankiw's definition isn't precisely wrong but it's oversimplified. He doesn't address the role of banks in money creation, he doesn't define money (what about credit?) he doesn't discuss the factors that might cause government to print more or less money, and he doesn't say how much is too much. Without more rigor than he provides, it's only useful as a plausibility argument after the fact.

Regarding Black's comment:

Inflation has not risen, indeed general price levels have often fallen (deflation) despite record creation of money by central banks and private banks.

I would say this was because they were doing it during the deflation of a credit bubble on a large enough scale that money creation by the government was a drop in the bucket by comparison, and that was what caused deflation. Which again points to the importance of defining terms and operating constraints (why couldn't the government print money on a massive scale to compensate? What are the drawbacks and limitations on that approach?)

Economists do love to make doomsday hyperinflation predictions that never seem to pan out. As far as I can tell, that's because they think that the economy is inherently unstable and will lapse naturally into massive inflation (see: wage-price spiral) or some other disastrous state without the wise guiding hand of a central banker to prevent it. There seems to be very little evidence of this actually happening in reality, and the few genuine examples of hyperinflation (Weimar, Zimbabwe) have typically resulted from a collapse in production coupled with debts denominated in other currencies that (a) considerably exceed the country's ability to pay and (b) require the attempt to be made anyway.

Nathanael , May 21, 2016 at 8:0am

Notice that Mankiw managed to say nothing about "Economic instability or deflation, and eventually economic depression, is caused when the government prints TOO LITTLE money", which is actually true and happens quite reliably.

Mankiw is a propagandist.

TG , May 17, 2016 at 12:59pm

The true laws of economics:

  1. If it is physically impossible for something to occur, it won't, and finance be damned. Economics is first and foremost a branch of the physical sciences, though most economists have forgotten this.
  2. Supply and demand.
  3. Unintended consequences.
  4. High productivity does not create high wages. High wages create high productivity. If you spend a lot of money on water-conservation technology at the base of Niagara Falls, will it increase the economic value of water there?
  5. The physical utility of a commodity (including labor) is not related to its economic value. Adam Smith did get something right.
  6. Nothing in this universe can grow exponentially for very long. Societies with sustained high fertility rates will always be miserably poor, and only societies that have first reduced their fertility rate can hope to become rich.
  7. A (more-or-less) free market is indeed a powerful and essential optimization mechanism ("the invisible hand") but it is nonlinear. Like all such nonlinear optimization mechanisms, it can and does get stuck in local minima and require external directed efforts to move to a more optimal solution. This is basic math.
  8. Inflation occurs when prices go up. That's it.
  9. "Capitalism" guarantees neither poverty nor prosperity. The market is neutral. Even as the laws of physics are obeyed equally well by a building that stands tall as by one that collapses into a heap of rubble, the laws of the market are also obeyed in miserably poor Bangladesh as well as in prosperous Switzerland. With 100 desperate people competing for every job, wages for the many will be low and profits for the few will be high. And vice versa. Blaming "capitalism" for poverty is silly, as if I threw someone off a cliff and then blamed the law of gravity for their death. Trying to deny market forces is equally silly, like trying to legislate gravity out of existence. It simply must be worked with.
  10. "Free to choose to own or employ slaves", "Free trade includes the ability of big corporations to restrict trade to maximize their profits", "Free to buy politicians and have them loot the public treasury in your interest" … Strict libertarianism is logically incoherent and ethically vile.
bdy , May 18, 2016 at 12:3am

Nice.

I quibble with 6 & 8. "A more or less free market" is a well regulated market. How much "more free" or "less free" a market needs to be to best distribute its product depends entirely on its particular conditions and vagaries. The insinuation that a market should be "stuck in a local minima" before oversight can improve its performance echoes Mankiw's 7th misconstruction, that (in Bill Black's words) "government only has a desirable role when there is a market failure."

I especially disagree that markets are neutral. Markets exist at the pleasure of the Capitalists who create and smother them for profit. Capitalists are forever cajoling "market opportunities" out from under every rock they can turn over. They invent, shape, split, combine, dissect, analyze, produce, reproduce, abandon, corner and strangle markets in pursuit of lucre. There is no market for Ford electric cars in California beyond the handful required by statute, despite ample demand, because individuals at Ford have determined that creating that particular market will eat into the personal profit they might extract from other markets. "Efficient" markets, that only return a gazilionth of a point on investment because of optimal competition, cease to be because the margin is too low to justify the hassle or the capital risk. Switching gears, labor markets in Bangladesh & Switzerland exist when Capitalists decide to hire workers. Hirees agree to be paid what Capitalists choose to pay, whether "freely" or under the duress of the State.

There is no market equivalent to gravity or the law of planetary motion. The model of supply and demand is a hypothetical post rationalization of a shifting negotiation – while it's helpful to a degree, supply/demand doesn't make "lawfull" (or useful) predictions until demand nears infinity (see health care: "how much will that be, doc?" – "how much have you got?", or housing: "how much can you borrow from a fractional reserve player who lends without risk and won't verify your income?")

As the local monopolists of violence, States can engage markets as they see fit. They can supply (Volkswagon & the post office), demand (food stamps, R&D grants), regulate, open (ACA) or close them (pharmaceutical imports) to their hearts desire. Good or bad outcomes depend entirely on the wisdom of the policy.

Whoa. Exhale. To be sure, I inhaled. Too many words when I should just say:

Nice.

Its good we agree that policy should be just and compassionate.

Chauncey Gardiner , May 17, 2016 at 1:12pm

The values and ideology represented in the Economics textbook Bill Black analyzed didn't arise in a vacuum. The points Black lists reflect the ideology, values, ethics and interests of a narrow segment of our society who have accumulated enormous personal wealth through a variety of extra-legal and illegal mechanisms, and who use a small portion of that wealth to fund "Economics Chairs" in our public and private universities; economics "think tanks"; and speeches, books, consulting engagements, and board memberships for "prominent economists".

This matter is really about whose values will control government economic policy and law.

Excellent analysis. Thank you, Bill Black, for all you do and have done.

Lumpenproletariat , May 17, 2016 at 1:16pm

#11

Mankiw is a shill/useful idiot for his oligarchs patrons. #11 explains the idiocy of the previous 10.

steelhead23 , May 17, 2016 at 2:45pm

I see much of the underlying theory of classical economics as simplifications that make the math easier. One of my favorite examples of misallocation of resources was the market for Burbank Russet potatoes in 2001. Basically, producers wanted $6.50 per hundredweight for spuds. The big buyer, Simplot offered farmers $4.50 pre-season. Many farmers decided to wait until harvest, hoping the spot market would give them a better price. I should also mention that in Idaho, farmers not wishing to plant in a given year, could sell their water to other farmers, or to the federal government which uses the water to help salmon and to produce hydropower. Thus, producing potatoes carried the opportunity cost of water leasing. But leasing water leasing to the federal government is culturally taboo in the ag. community. 2001 was a dry year and most of the ag. water was consumed growing spuds.

The outcome was a banner year in production, driving the spot market price to $0.50 per hundredweight, far less than the cost of production. Many acres of potatoes were plowed under – a total loss – to everyone.

My point is – there is no way to know, in advance, what the price of a commodity will be in the future unless you know, or can limit, the rate of production and control demand.

Did the banks which loaned billions to the gas frackers of North Dakota know that production would exceed demand and cause a crash? Perhaps the loan officer might have such concern, but would more likely be most concerned with his/her own bottom line – a meme Yves explores in Econned.

I suppose I am a bit defensive of classical microeconomics because it is elegant. But I am also terribly suspicious of its answers because one never has either the information or the control to be anywhere near as certain as the calculus would suggest.

Mike Thorne , May 17, 2016 at 4:01pm

On point #9: "Prices Rise When the Government Prints Too Much Money". Recent inflation data suggests it's a myth. But if restated as "When government prints money, prices rise on the goods and services that the people who receive the money tend to buy", then it's NOT a myth.

That was the whole problem with the Federal Reserve's damned QE efforts. They printed gobs of money, and it all landed in the pockets of the wealthy. The stuff they buy (stocks, real estate, luxury goods, premium educations, etc.) has seen prices rise MUCH faster than nominal inflation. And the people who didn't get any of the newly printed money (i.e., most of us)… Well, these sad folks couldn't afford to spend any more than before, so anybody who attempted to impose prices hikes on low-end consumer goods saw a loss of sales volume.

Newly-printed money CAN cause inflation, but WHERE the price rises happen depends greatly on the pockets in which the money lands.

Jeff Z , May 17, 2016 at 6:24pm

Excellent Point!

TK421 , May 17, 2016 at 6:32pm

stocks, real estate, luxury goods, premium educations, etc.

But it's hard to produce more of those, so with an increase in money chasing them their prices will rise. If the government handed money to poor people, they would buy food, clothes, cars, televisions, etc. In other words, things that society can produce more of. That's my read, anyway.

Mike Thorne , May 18, 2016 at 8:2am

Partially. Prices for good where quantities are truly fixed (like acres of land in San Francisco) can rise sharply when extra money pours in.

But even when there is opportunity to increase production, manufacturers must purchase equipment (like farm equipment for more food) or hire more workers (thereby tightening the labor market and pushing wages up). These result in price hikes. More modest price hikes than San Francisco real estate, but still real hikes. It's the classic supply vs. demand curve from classic microeconomics.

That said, "QE to the people" is certainly less objectionable than the "QE to the bankers and the 1%" that we've seen over the past five years. Prices would go up, but people would get to buy more things they want or need, and hiring would likely go up as well. [And at a minimum, there needs to be at least *some* growth in the money supply to keep up with population growth. Otherwise we see deflation and the ability to become wealthier by hoarding cash.]

dao , May 17, 2016 at 5:07pm

This was Mankiw's "response" to OWS back in 2011:

"Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

"According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396."

This kind of ignorant cluelessness is pretty prevalent among the oligarchy and its supporters like Mankiw. Just like that guy in Davos who simply couldn't understand why there's so much social unrest in the world today. They live in a completely different world.

TK421 , May 17, 2016 at 6:33pm

And since then, nearly every penny of income gains has gone to the 1%.

Expat , May 18, 2016 at 2:3am

The big difference being that $70k to the 99th percentile means the difference between a new Beemer this year or next while $500 for the median family means choosing which child goes hungry for the second half of December.

And of course, Anonymous's excellent point. You are cherry picking old data based on a stock market and real estate bubble crash. Median income families don't "own" real estate and certainly don't own stocks.

Mankiw is either psychotic or was gleefully obfuscating when he presenting that out-dated analysis.

I say Kill the Rich and feed their bodies to the poor. It's not a solution at all (and I am rich myself) but it would be deeply, deeply satisfying!

Jayinbmore , May 18, 2016 at 8:5am

My first exposure to Mankiw's principles was actually an early version of the talk by Yoram Bauman in this video. It hits several of the points Mr. Black makes and is also pretty funny. It definitely demonstrates how Mankiw attempts to cloak his biases in supposedly neutral terms.

Erwin Gordon , May 18, 2016 at 10:2am

As for number 6, I couldn't disagree with you more. Organisational power is dependent on it being enforced BY THE GOVERNMENT. Without that coercion, individuals would find other solutions for the want provided for by that particular organisation. I would suggest that you look at the history of Pennsylvania circa 1681-1690 or Moresnet (in what is now Aachen) circa 1816 until the end of WWI to understand what is possible when the free market really operates.

Nontraditional Student , May 19, 2016 at 6:2am

I am actually a returning undergrad student and starting an econ course next week. I just looked at the text book… and its Mankiw. Should be a fun semester.

Yves Smith , May 19, 2016 at 8:2am

Don't argue with the PR. You need to be strategic. Regurgitate the BS but be sure to read enough corrective material that the toxins don't infect your brain.

Patrick , May 20, 2016 at 5:19pm

I doubt Mankiw will accept 100% estate tax on the justification that the cost of bequests is zero to the recipient. (and thus a 100% estate tax doesn't incur large costs on the recipient)

Asad Zaman , July 13, 2016 at 10:1am

My paper lists four principles claimed to be at the core of modern economics by Mankiw and then shows how all four principles are false: Amir-ud-Din, Rafi and Zaman, Asad, Failures of the 'Invisible Hand' (July 15, 2013). Forum for Social Economics, Vol. 45, Iss. 1, 2016. Available at SSRN: http://ssrn.com/abstract=2293940 or http://dx.doi.org/10.2139/ssrn.2293940

[Jul 20, 2016] Global elites must heed the warning of populist rage

Notable quotes:
"... Real income stagnation over a far longer period than any since the second world war is a fundamental political fact. But it cannot be the only driver of discontent. For many of those in the middle of the income distribution, cultural changes also appear threatening. So, too, does immigration - globalisation made flesh. Citizenship of their nations is the most valuable asset owned by most people in wealthy countries. They will resent sharing this with outsiders. Britain's vote to leave the EU was a warning. ..."
"... First, understand that we depend on one another for our prosperity. It is essential to balance assertions of sovereignty with the requirements of global co-operation. ..."
"... Second, reform capitalism. The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives. The interests of shareholders are given excessive weight over those of other stakeholders in corporations. ..."
"... Above all, recognise the challenge. Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. The candidacy of Mr Trump is a result. ..."
July 19, 2016 | ft.com

Real income stagnation over a longer period than any since the war is a fundamental political fact

For every complex problem, there is an answer that is clear, simple and wrong." HL Mencken could have been thinking of today's politics. The western world undoubtedly confronts complex problems, notably, the dissatisfaction of so many citizens. Equally, aspirants to power, such as Donald Trump in the US and Marine Le Pen in France, offer clear, simple and wrong solutions - notably, nationalism, nativism and protectionism.

The remedies they offer are bogus. But the illnesses are real. If governing elites continue to fail to offer convincing cures, they might soon be swept away and, with them, the effort to marry democratic self-government with an open and co-operative world order.

What is the explanation for this backlash? A large part of the answer must be economic. Rising prosperity is a good in itself. But it also creates the possibility of positive-sum politics. This underpins democracy because it is then feasible for everybody to become better off at the same time. Rising prosperity reconciles people to economic and social disruption. Its absence foments rage.

The McKinsey Global Institute sheds powerful light on what has been happening in a report entitled, tellingly, Poorer than their Parents?, which demonstrates how many households have been suffering from stagnant or falling real incomes. On average between 65 and 70 per cent of households in 25 high-income economies experienced this between 2005 and 2014. In the period between 1993 and 2005, however, only 2 per cent of households suffered stagnant or declining real incomes. This applies to market income. Because of fiscal redistribution, the proportion suffering from stagnant real disposable incomes was between 20 and 25 per cent. (See charts.)

McKinsey has examined personal satisfaction through a survey of 6,000 French, British and Americans. The consultants found that satisfaction depended more on whether people were advancing relative to others like them in the past than whether they were improving relative to those better off than themselves today. Thus people preferred becoming better off, even if they were not catching up with contemporaries better off still. Stagnant incomes bother people more than rising inequality.

The main explanation for the prolonged stagnation in real incomes is the financial crises and subsequent weak recovery. These experiences have destroyed popular confidence in the competence and probity of business, administrative and political elites. But other shifts have also been adverse. Among these are ageing (particularly important in Italy) and declining shares of wages in national income (particularly important in the US, UK and Netherlands).

Real income stagnation over a far longer period than any since the second world war is a fundamental political fact. But it cannot be the only driver of discontent. For many of those in the middle of the income distribution, cultural changes also appear threatening. So, too, does immigration - globalisation made flesh. Citizenship of their nations is the most valuable asset owned by most people in wealthy countries. They will resent sharing this with outsiders. Britain's vote to leave the EU was a warning.

So what is to be done? If Mr Trump were to become president of the US, it might already be too late. But suppose that this does not happen or, if it does, that the result is not as dire as I fear. What then might be done?

  1. First, understand that we depend on one another for our prosperity. It is essential to balance assertions of sovereignty with the requirements of global co-operation. Global governance, while essential, must be oriented towards doing things countries cannot do for themselves. It must focus on providing the essential global public goods. Today this means climate change is a higher priority than further opening of world trade or capital flows.
  2. Second, reform capitalism. The role of finance is excessive. The stability of the financial system has improved. But it remains riddled with perverse incentives. The interests of shareholders are given excessive weight over those of other stakeholders in corporations.
  3. Third, focus international co-operation where it will help governments achieve significant domestic objectives. Perhaps the most important is taxation. Wealth owners, who depend on the security created by legitimate democracies, should not escape taxation.
  4. Fourth, accelerate economic growth and improve opportunities. Part of the answer is stronger support for aggregate demand, particularly in the eurozone. But it is also essential to promote investment and innovation. It may be impossible to transform economic prospects. But higher minimum wages and generous tax credits for working people are effective tools for raising incomes at the bottom of the distribution.
  5. Fifth, fight the quacks. It is impossible to resist pressure to control flows of un­skilled workers into advanced economies. But this will not transform wages. Equally, protection against imports is costly and will also fail to raise the share of manufacturing in employment significantly. True, that share is far higher in Germany than in the US or UK. But Germany runs a huge trade surplus and has a strong comparative advantage in manufacturing. This is not a generalisable state of affairs. (See chart.)

Above all, recognise the challenge. Prolonged stagnation, cultural upheavals and policy failures are combining to shake the balance between democratic legitimacy and global order. The candidacy of Mr Trump is a result. Those who reject the chauvinist response must come forward with imaginative and ambitious ideas aimed at re-establishing that balance. It is not going to be easy. But failure must not be accepted. Our civilisation itself is at stake.

martin.wolf@ft.com

More on this topic

[Jul 19, 2016] The economy can grow as long as there is surplus affordable energy in that account. The economy stops growing when the cost of energy production becomes unaffordable.

peakoilbarrel.com

Javier , 07/15/2016 at 5:14 pm

Art Berman also has an article dealing with Peak Oil for economic reasons. It looks like a lot of agreement lately on this issue between experts.

Oil Prices Lower Forever? Hard Times In A Failing Global Economy

Ron Patterson , 07/15/2016 at 5:32 pm
Yeah, this is a very good article. Art understands how the world works.

Energy is the economy. Energy resources are the reserve account behind currency. The economy can grow as long as there is surplus affordable energy in that account. The economy stops growing when the cost of energy production becomes unaffordable. It is irrelevant that oil companies can make a profit at unaffordable prices.

[Jul 19, 2016] In the world of 50 dollar per barrel oil neither offshore nor shale are profitable

peakoilbarrel.com

texas tea , 07/13/2016 at 9:34 pm

Let's break a few hearts:
http://oilprice.com/Energy/Crude-Oil/In-World-Of-50-Oil-Shale-Beats-Deepwater.html
"U.S. shale is the lowest cost option for new oil production and is likely to be more competitive than conventional offshore drilling, according to a new report from Wood Mackenzie."
Reno Hightower , 07/14/2016 at 3:23 am
That sounds true tt but in the world of $50 oil, I do not think either one, offshore or shale, is profitable.
texas tea , 07/14/2016 at 6:57 am
http://fuelfix.com/blog/2016/07/13/report-cost-cuts-have-helped-texas-shale-drillers-find-profits/

"Worldwide, average oil production costs have fallen by $19 a barrel to $51 a barrel. At least for now, the oil industry has squeezed its production costs down to 2009 levels, and drillers could make a profit extracting 9 million barrels a day over the next decade, a 20 percent increase from the days of $100 oil.

In West Texas, oil companies could make money in the Bone Spring and Wolfcamp tight oil plays with $37 a barrel oil, while their rivals in the Eagle Ford Shale in South Texas could turn a profit at $48 a barrel. The average break-even price in North Dakota's Bakken Shale is $58 a barrel. In Oklahoma's Scoop region, it's $35 a barrel, Wood Mackenzie estimates."

I think I have mentioned here before, OKLA is happening, and "appears" to be the lost cost LTO play in US. Now that does not mean I know a damn thing about the oil business but it does mean you boys should keep a eye out in the future for considerable production coming out of this area as "development" gets underway.

[Jul 19, 2016] Bakken is trending towards the less spectacular wells with a lots of sub 1K, and more than a few sub 500 BO IP

Notable quotes:
"... it seem that the IP's out of the Bakken in the Daily reports are trending towards the "less spectacular"? Lots of sub 1,000, and more than a few sub 500 BO IP. ..."
"... I always thought that EOG was the "darling" of the group. But, they having the lowest % of remaining – 36% (64% produced). In that regard, with respect to the production remaining, can you advise "about" how many years of production is represented for an average producer that you note? ..."
peakoilbarrel.com

shallow sand , 07/13/2016 at 1:06 pm

This comment is without me doing any analysis, but does it seem that the IP's out of the Bakken in the Daily reports are trending towards the "less spectacular"? Lots of sub 1,000, and more than a few sub 500 BO IP.
Enno Peters , 07/13/2016 at 1:33 pm
I created a presentation where I show where oil production from existing shale US wells is heading in the coming years. It only includes the actual & projected production of horizontal wells that started production before 2016.
GoneFishing , 07/13/2016 at 1:52 pm
Excellent work Eno, thanks. I notice that the cumulative production of 2008 and 2009 wells is much higher than other years. Any explanation?
Enno , 07/14/2016 at 5:24 am
Thanks, the main reason for that is that those were mostly Bakken wells, and Bakken wells are more productive than the ones in other basins.
clueless , 07/13/2016 at 2:40 pm
Enno – Excellent information! I always thought that EOG was the "darling" of the group. But, they having the lowest % of remaining – 36% (64% produced). In that regard, with respect to the production remaining, can you advise "about" how many years of production is represented for an average producer that you note?
Enno , 07/14/2016 at 6:08 am
Thanks Clueless,

I don't get your question exactly, can you rephrase? The remaining production is all the production that is still expected from the legacy wells, in the coming 20 years, although most of it will of course be produced early on.

clueless , 07/14/2016 at 10:49 am
You answered it. Everything in the next 20 years. I was wondering if it was a truncated number of years, like next 5, etc.
Thanks.

[Jul 19, 2016] Russia is seriously hurting because of the low price of oil and Venezuela is dying because of the low price of oil. How can anyone on earth possibly believe that price does not matter?

peakoilbarrel.com
Greenbub , 07/13/2016 at 1:55 am
Watcher, doesn't Russian production reflect the strength of the dollar vs ruble rather than a disassociation from money altogether?
Watcher , 07/13/2016 at 2:42 am
It's not just Russia. It's KSA, too. Ron's numbers lay it out.

It's Been Two Full Years of price decline. There is no more . . . oh it's just some transitory effects and we should just wait. Hell, if you wait for anything you'll eventually see it, and declare that moment verification.

It's not about some "when". It's the area under the curve. All this time it's not happening, because it's all gone away since 2009. And it's never coming back.

shallow sand , 07/13/2016 at 6:47 am
It makes sense to me that in the areas where production costs more, production is declining, while where production costs less (Middle East and Russia) production is holding steady to rising.

Let's see where we end up at end of 2016.

shallow sand , 07/13/2016 at 7:01 am
Good point, which AlexS has verified previously.

Ron Patterson , 07/13/2016 at 6:57 am

Why should price matter when it's defined in what has been exposed as whimsically defined pieces of printed paper?

Only a tiny fraction of all money is in paper printed form. The vast majority of all money is just an electronic entry in a bank somewhere. The form money is in, either in paper notes or as an electronic entry in a bank account, does not change the value of that money. Lots of things can change the value of money, but the fact that it is either printed or in entry form changes nothing.

Russia is seriously hurting because of the low price of oil and Venezuela is dying because of the low price of oil. How can anyone on earth possibly believe that price does not matter?

The low price of oil has a different effect on different producers. In many places the cost of production is still below the price of production. So these folks are producing every barrel possible just to try to stay afloat. But in places where new production cost more than the current price, production is dropping drastically.

You cannot measure every barrel produced with the same ruler. Production costs differ and this difference has a corresponding difference in production.

AlexS , 07/13/2016 at 8:41 am
Watcher,

Russian oil companies are largely shielded from negative effects of low oil prices by:

1) the depreciation of the ruble, which makes oil prices higher in ruble terms and costs lower in dollar terms;
2) the Russian oil tax system, which imposes much higher taxes when oil prices are high and much lower when prices are low.

But Russia is not typical.
In most other countries producers are much more exposed to the price effects

Russian oil production vs. oil price, 2013-16

Watcher , 07/13/2016 at 9:49 am
And KSA up even more?

Production cost differential was true in mid 2014 as well as now.

The price is less than half what it was and two full years have passed. Production is up in the two countries that represent what, a full 25% of the global output.

You guys are contorting yourselves to make an overwhelming reality fit your preconception. These central banks don't have any idea what trillions upon trillions have done. Hell, Fed governors have explicitly said they don't.

PonziWorld , 07/13/2016 at 11:46 am
The "Financial System" is nothing but a bunch of Ponzi Systems.

How else does a small default trigger the collapse (Japan 1997, USA 2008) of the entire interbank market?

Shadow Banks
"Money" Markets
Goldman Sachs appointed central banks

Does that come across as legitimate? And that Shadow Banks are somehow disconnected from the regulated banks? Nonsense.

Short term debt in these "Money" markets is Private Money. Fake Money. Ponzi Money. The Ponzi Operators control the central banks, not the respective governments. Read the new legislation after 2008 where government was cut out of the loop.

Isn't it funny when their is a run in the Shadow system by the default of a small firm that it PERMANENTLY impairs the ENTIRE real economy.

The definition of Money is More Transactions (Bigger Ponzi) than anybody else. There is nothing real about it because relationship banking disappeared long ago.

Originate a loan, package it, get rid of it, and collect a fee. More loans (transactions), more fees to collect, more power. More subprime = Greater power.

Shale is Subprime Oil.

[Jul 19, 2016] Conventional producers no longer can significantly ramp up production when they like

Notable quotes:
"... There seems to be a general assumption that the larger conventional producers can choose to significantly ramp up production when they like, but I doubt that is true. Saudi have just bought on line the Shaybah extension which was a pretty big job to extend production facilities for 'just' 250,000 bpd. ..."
"... Usually in mature fields the wells become limiting. For example as water cut increases not only does the water displace the oil but also, as it is significantly heavier than the oil/gas mix in the wellbore, the overall flow rate declines rapidly. ..."
peakoilbarrel.com
George Kaplan , 07/14/2016 at 8:27 am
There seems to be a general assumption that the larger conventional producers can choose to significantly ramp up production when they like, but I doubt that is true. Saudi have just bought on line the Shaybah extension which was a pretty big job to extend production facilities for 'just' 250,000 bpd.

Production from a given field may be limited by different parts of the facilities at different times. Typically the limit will be the lowest nameplate capacity between each of: the reservoir / wells; oil processing; produced water handling; associated gas compression; total liquids flow; water (or gas) injection capacity. Overall power availability may also be limiting at some combination of oil/water/gas flow below each one of their individual limits.

Usually in mature fields the wells become limiting. For example as water cut increases not only does the water displace the oil but also, as it is significantly heavier than the oil/gas mix in the wellbore, the overall flow rate declines rapidly. However this need not always be the case. In Saudi I think they design and manage their facilities to keep the production at the oil flow design capacity, which is nominally set to give 2% depletion of the original estimated ultimate reserves per year. To maintain this they maintain excess capacity in the other key facilities. In particular they need to control the water cut by using intelligent wells, expandable liners, and recompletions, or when needed drill new wells higher in the formation. If they lose control of the water cut, which must happen one day (ideally for them it would be the day they flow the last barrel of oil and shut in but that is not going to happen) then the likely limit will be water injection capacity. Water has to be pumped in to maintain pressure to exactly balance the volume pumped out. For the produced water in the oil that is about one for one, for a stock tank barrel of oil it is higher because the oil shrinks as it cools, but mainly because of the gas that is lost. This is ratio is called the formation volume factor and typically is 1.1 to 1.8. Say for a field the water cut is 50% and the FVF is 1.5, this means 2.5 bbls of injection water are needed to give one bbl of oil. I don't know the Saudi figures but something like that for them means 25 mmbwpd injection (that represents a huge amount of large pipes and pumps, and power – the water isn't like domestic supply, it has to be at high pressure). It's not normally economic to build in much spare capacity for the piping systems (but who knows with Saudi). Once water can't be controlled in horizontal wells the cut increases quickly, if it can't be handled within the facilities and enough pressure maintenance from injected water supplied then the oil production has to fall (i.e. wells choked back) accordingly.

If at a capacity limit (or limits) increasing production may need new wells, but more than that completely new topsides facilities, anything more than a few tweaks would need at least 2 to 3 years engineering, procurement and construction effort.

Doug Leighton , 07/14/2016 at 9:35 am
Informative comment. Thanks George
Fernando Leanme , 07/14/2016 at 10:52 am
Very good overview. I worked with a field set up to handle extra water, but they forgot the water heat capacity requires more heaters. So as water cut climbed we had to use lots of chemicals to get clean oil, until we could install more heaters and heat exchangers. These bottlenecks can be really subtle, so I took to asking for full surface system simulation runs at 90 % field water cut to see where the troubles were bound to pop up.
Javier , 07/14/2016 at 3:01 pm
I think Survivalist and Petro have nailed a very good analysis of the situation. When prices crashed most National Oil Companies and many independent producers tried (and are trying) to produce more to maintain income. The real tragedy comes when prices remain low and production falls like in Venezuela. Lack of investments guarantees that this will happen eventually to most producers, and then once production falls enough we will get very destructive price spikes.
Petro , 07/14/2016 at 3:36 pm
Bingo!

…while indeed initiated by geology, this time "PEAK" shall be by the way – and in the form of low prices…

As I said before:
….more than $65-$75/brl/oil kills economy….less than $60brl/oil kills Shallow and his colleagues…. take your pick….

We have reached our limits…
Let's keep the party going for a little while longer and enjoy it responsibly.

Be well,

Petro

shallow sand , 07/14/2016 at 4:20 pm
$60 doesn't kill us. I have been hoping for a $55-$65 price band, but we are way below that.

We got $44 average for all of 2015, $32 average for first six months of 2016. We are around $5 off WTI.

That's why break even at $50 is crap. We haven't been there for 20 months on a sustained basis.

As AlexS notes elsewhere, I'm starting to think $50 breakeven refers to per BOE, which means $70+ WTI.

shallow sand , 07/14/2016 at 5:12 pm

Petro. I understand.

My point is our savior, US LTO, needs a higher price than our 111 year old stripper field.

Which means to me there is a real problem on the horizon.

Hickory , 07/14/2016 at 9:29 pm
Petro, we see eye to eye on much these issues, but I do think that the world economy will be able to pay much more for oil than 60$ without crashing. Probably more than $100.
The stuff is too useful, and money will be diverted from other uses to keep buying it.
We'll see, one way or another….

Javier , 07/15/2016 at 6:25 am

Hickory,

You cannot simply look at the oil price between 2010 and 2014 and deduce that those prices are sustainable for the World economy. You need to understand the situation under which those prices were made possible at the time. The period 2009-2014 was a time when Chinese debt was growing at unsustainable levels to fuel an oil demand that compensated the demand contraction from an overindebted Europe that could not accept those high oil prices and went into recession and debt crisis. The period 2009-2014 was also a time when central banks engaged in exceptional ZIRP and quantitative easing policies with most countries significantly increasing their public debt.

But there is only one China and all significant economies have now a high level of indebtment so a very rapid growth of debt has become a lot less likely. At the same time ZIRP and quantitative easing policies are a one way avenue of increasing risk, decreasing effect, and extremely difficult return.

The oil price crash has probably delayed the next economic crisis. However the world economy is in no position to assume the oil prices required to guarantee the level of investment required to increase oil production above 2015 levels.

Oil depletion, debt, and low economic growth, will all work to make 2015 the year of Peak Oil. If we enter a period of high oil price volatility due to mismatches between production and demand that will be very destructive both to the economy and to oil production.

Dennis Coyne , 07/15/2016 at 10:07 am
Hi Javier,

Possibly $100/b is a problem, but there is a lot of room between $50/b and $100/b. When oil supply decreases, oil price will increase. How much oil prices can increase without damaging the World economy is far from clear.

One can arbitrarily claim $75/b is the magic number that will make the economy crash, nobody knows. There might be a sweet spot between $75/b and $95/b where oil supply can either be maintained or possibly increase slightly and not cause World output to decline. World debt to GDP has been relatively stable since 2010 based on BIS data.

Hickory , 07/15/2016 at 11:30 pm
Javier- you (and Petro etc) may be right, and the civil difficulties of Venez and poverty of Moldova may be coming to places far and wide.
I'm thinking that most commerce will still churn on, even if oil is 100$. Maybe just wishful thinking.
Dennis Coyne , 07/15/2016 at 6:38 am
Hi Hickory,

I agree. There is very little evidence that oil over $75/b kills the economy, what it has done recently is result in too much oil production relative to demand.

What has changed is that there is no one willing to cut back on output. From 1930-1970, Texas was the World's swing producer and from 1985-2014 Saudi Arabia fulfilled that role. Now we will see volatility in oil prices unless some new cartel is formed, maybe OPPC (Organization of Petroleum Producing Countries).
US, Norway, UK, Russia, Brazil, and Canada could join the OPEC nations and have a production agreement to control oil prices.

This would never happen, but maybe each nation should regulate output as the RRC once did for Texas, it would help with oil price volatility. Reply

[Jul 19, 2016] E P spending is much lower this year than was expected even after the big cuts initially announced. US independents and Canada in particular are hurting

Notable quotes:
"... Survey of international spending reveals a 19% decline compared with an initial estimate of 14% in January. The Middle East remains an area of stability while the largest negative revisions come from large IOCs, Latin America, and the Asia Pacific region, excluding China. Latin America is still the weakest region, where spending is expected to decline 30%. ..."
"... IOCs and independents are projected to have spending declines of 24% this year, while other independents are expected to spend 45% less. This compares with prior decline estimates of 10% and 17%, respectively." ..."
peakoilbarrel.com

George Kaplan , 07/13/2016 at 1:48 am

E&P spending is much lower this year than was expected even after the big cuts initially announced. US independents and Canada in particular are hurting. Middle East is the only place holding up.

http://www.ogj.com/articles/2016/07/cowen-global-n-american-e-p-spending-fall-revised-downward.html

"In its midyear E&P spending update, Cowen & Co. now estimates global expenditures to fall 24% compared with a 16% decline in its January survey. The downward revisions were primarily driven by larger spending cuts from North America-focused E&Ps and major international oil companies.
In this update, Cowen & Co. expects US spending to decline 45%, reflecting oil prices of $40/bbl and natural gas prices of $2.50/MMbtu. This was down from a 22% estimate at the time of January's survey, which was based on $48.5/bbl oil and $2.50/MMbtu gas. Canada spending is expected to fall 33% compared with an earlier estimate of an 18% falloff.

Survey of international spending reveals a 19% decline compared with an initial estimate of 14% in January. The Middle East remains an area of stability while the largest negative revisions come from large IOCs, Latin America, and the Asia Pacific region, excluding China. Latin America is still the weakest region, where spending is expected to decline 30%.

IOCs and independents are projected to have spending declines of 24% this year, while other independents are expected to spend 45% less. This compares with prior decline estimates of 10% and 17%, respectively."

[Jul 19, 2016] Prices of contractors are low as long as nobody drills

Notable quotes:
"... That break-even bullshit is just nonsense. What is happening in oil industry is debt deflation aka "you have to eat less". That debt deflation is direct result of debt infused shale development by Wall Street in order to prevent debt deflation in the rest of economy. Wall Street kicked the can of debt deflation in economy for about 10 years with 3 major shale plays in US. That' all. ..."
"... Why do I need Wood Mackenzie's interpretation? Reality does not need any interpretation. US oil production is down 1 mil within a year from the peak and folding like cheap wall mart chair, oil price is still in the basement at $46, and shale has outstanding credit card debt of 300 billion. And you are dialling 1 – 800 VISA to finance more drilling of shale in OKLA hoping for different outcome. Priceless, as VISA would say. ..."
"... Their only purpose is to keep you in a dream. You are dreaming. If you are in oil business today the present is almost a hell. You can endure it only because of the hopes that you have projected into the future. You can live today because of the tomorrow. You are hoping something is going to happen tomorrow, some doors to paradise will open tomorrow. They never open today. And when tomorrow comes, it will not come as tomorrow, it will come as today – but by that time your hope have moved again. ..."
"... I again wish all would realize that OK resource plays are generally wet gas plays, not oil plays. Just did a quick search. Found 539 hz wells with first production in OK since 1/1/15. ..."
"... Again, another quick search, looks like over 1/3 of the OK Woodford wells with first production 1/13 or later have hit 1 million mcf. Also looks like most are producing over 30K mcf per month. ..."
peakoilbarrel.com

Fernando Leanme , 07/14/2016 at 8:17 am

Production costs dropped because the industry hit the fan and today there's contractors, subcontractors, and individuals willing to give bargain prices to survive as long as possible, hoping demand will rise and they can return to being profitable.
Eulenspiegel , 07/14/2016 at 8:23 am
Yes, a trillion $ old economy industry can't cut prices by 50% by "innovation" in a few years. It's all about subcontractors working for just cashflow to pay interrest on their loans.

When they all resume drillig to these low prices (and in shale all drill in the same few sweatspots with the low $ oil), prices will crash up since there are few workers left to do all this additional work.

Prices are low as long nobody drills…

Fernando Leanme , 07/14/2016 at 10:59 am
No kidding. Back in the 1980's I was a junior supervisor, but I was asked to cut budgets to the bone during the 1985-86 crash. The whole process was incredibly stressful, but we managed to achieve significant cuts by having rather forceful talks with service providers to get cuts. In some cases they had to sit down with unions and their subcontractors, but it seemed to work pretty well after we cancelled a platform painting contract on the spot after they refused to reduce their charges.
Eulenspiegel , 07/14/2016 at 3:11 pm
As I said.

I don't know any oil business here, since I sit in Germany, but we have lot's of industry. And in the last crisis 2007 you could produce for lots less than break even, just to maintain a cashflow. Workers have been on short labor here (It's a thing from the state to prevent firing, it paid out big time later).

But when the economy picked up prices got higher again. So – you get only the low prices when few people buy – if everyone and his dog would run out drilling new wells these low prices would be history again.

Ves , 07/14/2016 at 9:14 am
texas,

That break-even bullshit is just nonsense. What is happening in oil industry is debt deflation aka "you have to eat less". That debt deflation is direct result of debt infused shale development by Wall Street in order to prevent debt deflation in the rest of economy. Wall Street kicked the can of debt deflation in economy for about 10 years with 3 major shale plays in US. That' all.

OKLA plays maybe will get drilled but they will not make a dime like the rest of shale did not make dime by extracting oil, other than by doing the ponzi type of reselling of leases, companies to a greater fool.

texas tea , 07/14/2016 at 10:20 am
Ves,

you are ignorant, I personally have wells in this trend that will make money, that is working interest that I pay out of pocket money for and get a real after tax return. You should take a little time to learn and then think before you write, or you can continue to show the cyber world just how little you really know about the subjects you write about. decisions decisions…:-) I have not ask because i do not care but your understanding of the real world seems rather limited, do you profess to know more or have equal or better credentials, education and information, or more access to objective worldwide data within the oil and gas business than Wood Mackenzie? Thats what I thought

Ves , 07/14/2016 at 11:02 am
texas said: "Wood Mackenzie?… made of credentials, education and information…."

That is scary.

Why do I need Wood Mackenzie's interpretation? Reality does not need any interpretation. US oil production is down 1 mil within a year from the peak and folding like cheap wall mart chair, oil price is still in the basement at $46, and shale has outstanding credit card debt of 300 billion. And you are dialling 1 – 800 VISA to finance more drilling of shale in OKLA hoping for different outcome. Priceless, as VISA would say.

texas tea , 07/14/2016 at 6:54 pm
Ves,

I now must assume you may have graduated high school, and were in the bottom 1/4 of your class and you may have taken remedial reading. So here is a little help for someone who is just so special.

From the report:

"In West Texas, oil companies could make money in the Bone Spring and Wolfcamp tight oil plays with $37 a barrel oil, while their rivals in the Eagle Ford Shale in South Texas could turn a profit at $48 a barrel. The average break-even price in North Dakota's Bakken Shale is $58 a barrel. In Oklahoma's Scoop region, it's $35 a barrel, Wood Mackenzie estimates."

Do you see where it said Bakken @$58? This is in North Dakota, not OKLA.

Do you see where it said Eagle Ford @ $48. That is in South Texas. again not in OKLA, Those $$$ numbers were far higher last year.

Now can we name the two biggest LTO fields in the US, stay with me, I know this is hard for you. It is the Bakken and the Eagleford, both on a field wide basis are currently uneconomic and have been for well over 20 months. Most all LTO and conventional production world wide was uneconomic for the 4th 1/4 2015 and the first 1/4 2016, perhaps that explains why production has dropped.

With regard to the economics of my personal business, it will not matter what I say, because you are just plain to ignorant to understand our business. But I will again share, if at such time we see $4.00 nat gas and $75 oil, this play will have risk weighted returns that exceed most of any projects I have been associated with in my 30 years. That includes a number of very prolific trends within the lower 48

Ves , 07/14/2016 at 10:34 pm
Texas,

You really don't understand numbers. So let's leave at that. I will tell you the secret about these reports you religiously read by Wood Mackenzie, Citi, Bloomberg whatever.

Their only purpose is to keep you in a dream. You are dreaming. If you are in oil business today the present is almost a hell. You can endure it only because of the hopes that you have projected into the future. You can live today because of the tomorrow. You are hoping something is going to happen tomorrow, some doors to paradise will open tomorrow. They never open today. And when tomorrow comes, it will not come as tomorrow, it will come as today – but by that time your hope have moved again.

You go on moving ahead of yourself – this is what dreaming means. You are not one with the real, you are somewhere else ( like $4.00 nat gas and $75 oil), moving ahead, jumping ahead. You are dreaming.

Have a nice day.

Dennis Coyne , 07/14/2016 at 11:28 am
Hi Texas Tea,

And what has your ROI been so far on these wells after taxes?

Ves , 07/14/2016 at 3:44 pm
Dennis,

I have asked texas the same question few weeks ago and no answer so maybe he is still calculating ROI :-)

True story: Once I was standing in line for some Korean fast food and guy next to me start talking. "How yu duing?" , "What do yuo do"….. so the guy says "I am investor" for a living .

I said "Cool". So he starts talking about his investments in real estate, abraka-dabra …so he , "profit 200% in 2 years, so you can make 100% annually"

And my antennas start beeping right away. The guy was adding the percentages to calculate the profit after 2 years!!! Catastrophe. So he did not even know how to calculate a profit and he was "investor"!!!

If he was making 100% annually then 2*2=4, so he had 4 times more money than in the beginning. 4 times more is 300% and not 200% as he claimed. That was in 2005-6 when RE was "hot" and anyone was RE "investors", so maybe he is shale investor today :-)

Dennis Coyne , 07/14/2016 at 11:20 am
Hi Texas Tea,

I doubt those quoted costs are full cycle costs in those plays for the average well. They may be based on the fantasy type curves found in investor presentations. When one takes a close look at actual average well output data, the well profiles in investor presentations are usually about a factor of 2 higher than real world results. So the real world full cycle (vs point forward) cost per barrel would be roughly double what you quoted above.

shallow sand , 07/14/2016 at 11:28 am
I again wish all would realize that OK resource plays are generally wet gas plays, not oil plays. Just did a quick search. Found 539 hz wells with first production in OK since 1/1/15.

13 have hit 100,000 cumulative BO or more.

248 have hit 300,000 cumulative mcf gas or more.

It is a wet gas play, just like the Woodford has been for decades. Springer is the only one I would call an oil resource play, I think it is generally agreed to be uneconomic at present prices.

Woodford wells will produce a lot of gas, obtain a premium gas price due to high BTU, and produce little water, so LOE per mcf is low.

I cannot comment on the economics of these wells, but do believe the data, thus far, shows these to be gas. Yes, many have initial high % of liquids, but the liquids disappear quickly.

I think TT has generally agreed with me on these observations.

shallow sand , 07/14/2016 at 12:53 pm
Again, another quick search, looks like over 1/3 of the OK Woodford wells with first production 1/13 or later have hit 1 million mcf. Also looks like most are producing over 30K mcf per month.

OTOH, most did not produce any oil in the most recent month. The big oil producers currently are for wells less than 12 months old.

Safe to say these wells generally will produce a lot of gas. I am not able to discuss economics, do not have enough data.

Hope I'm not annoying anyone as I have typed this numerous times. My beef is the wells are advertised as oil wells, in an "oil window" with IP and cumulative production measured in BOE.

Kind of like calling driver assist function " Auto pilot".

Synapsid , 07/14/2016 at 4:20 pm
shallow sand,

Your posts are always solid information and useful. Anyone who might be annoyed is no-one you need even think about. I bet a lot of us here count on you.

For all:

Can we please see an end–an END–to the snotty tone in far too many of the comments here? There is no call for any comment of the "I see that you have no understanding of (fill in the blank)" type, or of anything like it.

Content and accuracy of post are important. Clarity of presentation is important. Civility and courtesy are important. What anyone posting here thinks of anyone else posting here is not important for the public discussion.

[Jul 19, 2016] Therefore overall the undiscovered resources might now be zero for maximum, median and minimum cases, which would be quite a bit different from USGS numbers of 4, 7 and 11 Gb

Notable quotes:
"... Therefore overall the undiscovered resources might now be zero for maximum, median and minimum cases, which would be quite a bit different from USGS numbers of 4, 7 and 11 Gb respectively, with a mean of 7.4 Gb. ..."
peakoilbarrel.com

George Kaplan , 07/15/2016 at 2:41 pm

The USGS should revisit their earlier estimate for undiscovered resources in Bakken / Three Forks now that about four times as many wells have been drilled since the first release.

The way USGS estimated the undiscovered resources was quite simple. Split the region into 6 production zones (which may be stacked); for each zone split into core (sweet spots) and non core areas to give twelve assessment units. For each unit estimate total area (A), drainage area for each well (a), EUR per well (U), the proportion of the area unexplored (p) and the chance of not getting a dry well when drilling (r). Then resource is (A/a)*U*p*r. The values are different for each zone and they actually give three alternatives: maximum, median, minimum. Then they add up all twelve (or 36) estimates to give the total (or 3 different totals). The values for A, a and U might have some reasonable chance of being correct but p and, especially, r are just best guesses; for the maximum cases r is greater than 80% for all areas and for some minimum cases 90% and higher is used.

In reality the E&Ps stopped wild cat permitting when they got to 50% success rate (and falling fast) in 2013/2014. Therefore, in the core areas p might be zero – the lease holders know what is there and have already included it in 'proven undeveloped', they don't need to drill to be confident – and in the non core areas p * r is zero – the lease holders drilled wildcats out from the core until they started hitting dry holes, and then they stopped because there is nothing else to find (r is zero for all the remaining p). Therefore overall the undiscovered resources might now be zero for maximum, median and minimum cases, which would be quite a bit different from USGS numbers of 4, 7 and 11 Gb respectively, with a mean of 7.4 Gb.

[Jul 19, 2016] US oil rigs up 6, gas rigs up 1. Permian up 2, Williston down 1, Eagle Ford unchanged.

peakoilbarrel.com

Ron Patterson , 07/15/2016 at 12:09 pm

The Baker Hughes Rig Count is out. US oil rigs up 6, gas rigs up 1. Permian up 2, Williston down 1, Eagle Ford unchanged.

[Jul 19, 2016] Oil is becoming much harder to find

Notable quotes:
"... Steve Kopits at Princeton energy advisors has shown that between 1998-2005 $1.5 Trillion was spent on oil CapEX to increase oil output by 8.4 Mbpd and that from 2005-2013, $4.0 Trillion was spent on CapEx to increase output by just 2.4 Mbpd. ..."
peakoilbarrel.com

VK , 07/13/2016 at 4:12 pm

The price of oil seems pretty darn important. Art Berman had an interview with Chris Martenson on peak prosperity that projects with some 20 Billion barrels of oil have been deferred due to the current low price. That's a pretty large amount of oil that's not coming online when required as a result of price.

Not to mention that oil is becoming much harder to find, Steve Kopits at Princeton energy advisors has shown that between 1998-2005 $1.5 Trillion was spent on oil CapEX to increase oil output by 8.4 Mbpd and that from 2005-2013, $4.0 Trillion was spent on CapEx to increase output by just 2.4 Mbpd.

Society is energy constrained and it's showing up in the economy with crazy effects like NIRP, where $13 Trillion worth of global bonds now yield negative returns from Zero just a few years ago, think about that, paying someone to borrow your money!! Also an economy where young people aren't getting decent jobs to pay for incredibly overpriced house prices as evidenced by affordability ratios, where populism and extremism is on the rise globally as well as large swathes of society are left out of prosperity. Energy is the ability to do work, without increasing energy supplies society has to fundamentally change.

[Jul 19, 2016] Has depletion finally gained the upper hand?

Notable quotes:
"... There are still a lot of projects due this year and next and even into 2018, but not quite enough to make up for the declines. ..."
"... Probably 2.5 to 3.5 mmbpd fall over the three years barring big, unexpected outages. In 2019, 2020 and 2021 there will be dramatic and accelerating falls unless a lot of expensive, and currently delayed, oil developments are fast tracked soon, or a lot of very cheap oil is found somewhere, or in fill drilling ramps up quickly on the big reservoirs. ..."
"... It's time lag. Simply said, when prices where at 100$+, everyone had lot's of money to invest and drilled like mad to get even more oil, explored, developed new fields. These operations have normally completion times of a few years, so they come alltogether online now. A typically pork circle. Price does matter – now new projects are delayed or canceled, ready to go into the next round. ..."
"... How can anyone possibly deny the effect the price of oil has on the production of oil? The very high price of oil brought on the shale revolution. Oil prices above $80 a barrel caused shale oil production to boom. However shale oil production is just uneconomical at prices below $60 a barrel, or somewhere in that neighborhood. ..."
"... Almost every barrel being produced cost a different amount to produce. There is a thing called "the margin". That is what it cost to produce the most expensive barrel of oil being produced. As the price of oil drops, barrels being produced "at the margin" starts to drop off. More expensive oil stops being produced, less expensive oil continues to be produced. Of course there is a delay between the price dropping below the margin and that marginal barrel dropping from production. ..."
peakoilbarrel.com

Florian Schoepp ,

07/12/2016 at 1:09 pm
Has depletion finally gained the upper hand? My back of the envelope calculation:
Conventional: 78 million barrels at 4% = 3.1 million barrels.
All other: 19 million barrels at 10% = 1.9 million barrels.
Total: 5 million barrels per year
2015 was a year where a lot of projects came online that were developed in previous years. There is less of that this year. So 2 million for this year seem reasonable. Next year will be interesting.
If demand keeps growing, there should be a substantial shortfall, draining storage. The only way to close the fast growing gap is a miraculous recovery of Libya and others that are currently hampered by political unrest.
George Kaplan , 07/12/2016 at 1:28 pm
There are still a lot of projects due this year and next and even into 2018, but not quite enough to make up for the declines.

Probably 2.5 to 3.5 mmbpd fall over the three years barring big, unexpected outages. In 2019, 2020 and 2021 there will be dramatic and accelerating falls unless a lot of expensive, and currently delayed, oil developments are fast tracked soon, or a lot of very cheap oil is found somewhere, or in fill drilling ramps up quickly on the big reservoirs.

We'll get to see the truth behind LTO sustainability and flexibility; that and depending on how demand goes, plus the real storage numbers will determine prices and therefore future supply developments. Overall though I agree, I think we will suddenly find ourselves short at some point in the next 5 years, and without many options.

Watcher , 07/12/2016 at 4:50 pm
Why would you want to drain storage when you can kill competing consumption with weapons.
Dave P , 07/12/2016 at 11:14 pm
Because the people you are trying to kill will then attempt to kill you?
clueless , 07/13/2016 at 3:51 pm
Watcher – I think that Ron "almost" has you pegged. Basically he notes that no one can be that Fu–ing stupid. But, he may be wrong. What in the hell are you talking about when you say "you can kill competing consumption with weapons?" Why would anyone in the supply chain want to kill "CONSUMPTION?"
Fernando Leanme , 07/13/2016 at 11:48 am
It's erroneous to decline "all other" at a fixed rate like you propose.
Watcher , 07/12/2016 at 4:54 pm
Output of KSA vs July 2014 at $100+ /b up about 600K bpd. Less than 1/2 price and up 600K bpd.

What's the latest Russia vs July 2014, Ron? Similar? Probably.

Imagine that. Price didn't matter.

Till , 07/12/2016 at 5:33 pm
It's time lag. Simply said, when prices where at 100$+, everyone had lot's of money to invest and drilled like mad to get even more oil, explored, developed new fields.

These operations have normally completion times of a few years, so they come alltogether online now. A typically pork circle. Price does matter – now new projects are delayed or canceled, ready to go into the next round.

Dennis Coyne , 07/12/2016 at 6:15 pm
Hi Till,

You won't convince Watcher that price matters, but most of us agree that price matters.

Ron Patterson , 07/12/2016 at 6:34 pm
How can anyone possibly deny the effect the price of oil has on the production of oil? The very high price of oil brought on the shale revolution. Oil prices above $80 a barrel caused shale oil production to boom. However shale oil production is just uneconomical at prices below $60 a barrel, or somewhere in that neighborhood.

Dammit, it is as plain as the nose on your face. Price determines production. Does Watcher really deny that simple fact? No, Dennis, you are simply mistaken. Watcher is not so dumb as to deny that simple fact…. Is he???

Oldfarmermac , 07/12/2016 at 8:48 pm
Watcher has BEEN denying it, as steadily as if somebody were paying him by the word, for as far back as I can remember.

Some people, quite a few actually, believe God looks after their lives for them on an every day basis, and no amount of evidence, good or bad, is enough to shake this conviction.

Watcher apparently believes in some UNIDENTIFIED POWER that keeps oil coming regardless of the price, or perhaps more accurately, keeps it coming even while controlling the price and forcing it down by half or three quarters.

Of course there might be another explanation. Maybe he just enjoys rubbing everybody nose in the apparent failure of the market system in the case of oil.

The explanation is simple enough, in principle. The oil industry is the biggest and slowest moving of all industries, when it comes to NECESSARILY operating on a five to ten year time scale in terms of making production decisions.

Being an orchardist, I am personally quite comfortable with such planning time scales, because my kind of work is planned on a very similar time scale. If I miscalculate , meaning guess, really, what the price of apples will be ten years down the road, and plant too many new trees, I am not just going to take a chainsaw or bulldozer to my orchard because the price collapses. I wait it out, and hopefully OTHER orchardists go broke first. Old trees will be dying, there is depletion in apples, lol.

The production decision making process is triply compounded in difficulty by what we usually forget , because in a forum such as this one, the discussion is centered around BUSINESSMEN out to make a living, folks such as Mike, Shallow Sand, Texas Tea, etc. They make rational decisions, as best they can.

What we forget is that the oil industry is an industry dominated by governments, and governments are notoriously clumsy in managing their business affairs when circumstances demand action.

Politicians, be they Saudi kings or socialist Venezuelans, or right wing dictators or more middle of the road types, are NOT going to do anything to upset their citizens, or piss them off, if it can be avoided. Laying off a few tens of thousands of people is just not DONE until there is NO OTHER choice.

Nobody would notice if we laid off half the people who work in the post office here in the USA. Every body I know , excepting my cousin who is a carrier, and the post master, thinks we could get along JUST FINE delivering the mail three days a week instead of six.

Politicians at the top of the heap are mostly interested in one thing, that thing being to stay in power, and to do that, they play an incredibly complicated, fluid game maintaining the network of supporters who ENABLE them to STAY in power.

Expecting them to act like BUSINESSMEN running a business is naive. As a rule, they will never do anything proactive in order to solve a problem that might just go away by itself. When they DO do something , it is to be expected that the doing will be undertaken much later than it ought to be, and that it will be inadequate to deal with the problem until the problem becomes an existential emergency.

ONCE all the chips are on the table, and it's literally do or die, or be sent home, out of office and out of power, governments can do some pretty spectacular things, such as mobilize to fight a flat out war.

Things aren't that bad yet, in the countries dependent on oil revenues,excepting Venezuela. Maduro is actively constructing a police state in hopes of staying in power.

The industry has excess capacity. It took years to build that capacity, and the economy couldn't absorb the amount of oil coming to market at a hundred bucks, so the price collapsed. The economy IS absorbing the oil coming to market, about the same amount , at about forty bucks.

It will take a WHILE for the excess capacity to dry up.Maybe another year or two, maybe less, maybe longer. If the economy turns sour, it will take longer.If the electric car revolution really comes to pass, on the GRAND SCALE, and very quickly, demand destruction will mean there is so much excess capacity that the price will stay low for a long time.

There is nothing involved in understanding the oil price question that requires more than a basic understanding of supply and demand, plus an additional understanding of the relevant time scales and the nature of GOVERNMENTS as opposed to BUSINESSMEN making decisions.

If businessmen were running the post office, we would have half as many postal employees, lol. Maybe even less.

Watcher , 07/12/2016 at 8:53 pm
OTOH, I notice 2 yrs later KSA is producing 600K bpd more oil at less than half the price.

And what is Russia producing now at less than half the price? (asking again since Ron tracks them)

Oh, and more fun, y'all recall the big drilling investment from the majors got cut in Jan 2014?

Frugal , 07/12/2016 at 9:08 pm
It`s called delayed effect.
Oldfarmermac , 07/13/2016 at 6:28 am
Farmers have generally done the same thing, collectively, when the price of whichever crop they produced crashed.

As an individual guy growing corn, or wheat, or rice, or apples, I cannot produce enough, or cut back far enough, to influence the market price. What I CAN do, is go flat out to produce every possible last bushel, going for the all important marginal dollar that might enable me to survive short term. This is what the SMALLER oil producers are doing, by and large.

While producing flat out individually, and collectively, we make the price crash even lower, and stay in the pits longer, but then this is what drowning men who cannot swim do in the water- try to survive by pushing themselves up by pushing another man under.

The game changes when one (or more) supplier is big enough and rich enough to have pricing power and staying power running at a loss. In that case, the big boy can "sweat" the little fellow , in the words of John D Rockefeller, running him out of business, deliberately.
Now this didn't take long at all while Rockefeller was running a small local company out back in the early days of big oil, but it can take a hell of a long time when the little guy is a sovereign government, or a giant corporation. I should say that SA and Russia are engaged in BOTH ways, producing flat out to maximize revenues, plus hoping to run some competitors out of the market, at least temporarily.

Folks who aren't TOO simple minded to think a little also realize there is such a thing as war and politics, and that war can be fought in markets as well as with guns. The USA basically broke the old USSR by making it impossible for that now dead empire to compete with us on building guns, never mind butter, plus encouraging the Saudis to flood the market and deprive the Soviets of oil revenue. Hard core D types will never admit that this is true however, because it is grounds for being kicked out of the party to admit that a Republican has ever succeeded at doing anything at all except creating more and bigger problems.

There is an element of WAR being played out in the oil markets now, and for the last year or two, and it will continue to be important for a while.

Anybody who thinks anybody in DC, excepting oil state congress critters and oil lobbyists, gives a flying fuck about the oil industries problems has a near zero understanding of economic politics. Cheap gasoline is an elixer that is damned good for the OVERALL economy, and as good as a zanax for soothing the nerves of consumers. To expect the Obama administration to do anything to raise the price of oil, when raising it would cost D 's elections, is tantamount to insanity. Who can remember this quote? "It's the economy, stupid"?

Hells bells, the R party rakes the D 's over the coals for LOWERING the price of oil by insisting on higher fuel economy standards, lol.

And one last little bit of ranting, and I will lay off for an hour or two , at least, so help me Jesus. This is history we are talking about, not a goddamned thirty minute tv show.

Things that matter take time in real life.

R DesRoches , 07/13/2016 at 8:10 am
Looking at what Ron has said that the threshold for LTO production is $60, what I find important is that just a few years ago that threshold was in the $80 to $100 range.

Even at today's prices, $45 to $50 range, we have seen the oil directed rig count, increase over the past few weeks.

This indicates that some of the better plays have a lower threshold.

As we go out in time I would not be surprised that the $60 threshold will move down again.

texas tea , 07/13/2016 at 1:27 pm
R DesRoches,
absence of some new technology, I expect we are at the lows of what LTO break-even cost will be for the best LTO plays. As oil prices pick up and balance sheets get better the drilling companies, Fracking co will begin to have some better pricing power and I expect they will use it. So for a time expect break even to stay low but begin to rise "somewhat" as prices move up. I still think $75 WTI is what the best companies in the best plays really need to MAKE MONEY not just break-even in a normal business environment. (lets says 1200 rigs running lower 48 ) I know I would be drilling in the areas I am active at that price, $50 not so much and only with a gun to my head :-)
clueless , 07/13/2016 at 3:45 pm
RDR – I am never sure of what anybody said about breakeven, unless it is accompanied by a complete financial statement.

If an oil company has undrilled land in an LTO area, that (1) needs production to "hold" the lease, and/or (2) has bank debt related to its lease acquisition, then: Their breakeven point and perspective is totally different (lower) than if you or I tried to determine our breakeven point if we went someplace, bought acreage and drilled a well.

Ron Patterson , 07/13/2016 at 10:43 am
OTOH, I notice 2 yrs later KSA is producing 600K bpd more oil at less than half the price.

And what is Russia producing now at less than half the price?

Watcher, you cannot measure every barrel produced with the same yard stick.

It cost KSA about $20 a barrel to produce oil, more in some places less in others. Therefore they want to produce every barrel possible in order to meet their budget.

It cost Russia pretty much the same to produce oil from their old fields. But it cost them much more to find new oil and produce it. The price of oil is hitting Russia very hard but will hit them much harder unless the price rises soon.

The low price of oil is killing Venezuela. Their production is dropping. It will drop much further unless the price starts to rise soon.

Almost every barrel being produced cost a different amount to produce. There is a thing called "the margin". That is what it cost to produce the most expensive barrel of oil being produced. As the price of oil drops, barrels being produced "at the margin" starts to drop off. More expensive oil stops being produced, less expensive oil continues to be produced. Of course there is a delay between the price dropping below the margin and that marginal barrel dropping from production.

Watcher, it is just fucking insane to claim that price has no effect on production. You have to know better than that. Why on earth do you think the number of oil rigs working in North Dakota dropped fro 215 rigs four years ago today, to 30 today? It was because the price of oil dropped and for no other reason. And that decline in the number of rigs is currently having a dramatic effect on oil production in North Dakota.

Dennis Coyne , 07/13/2016 at 1:09 pm
Hi Watcher,

Prices dropped in June 2014, maybe you mean Jan 2015?

Dennis Coyne , 07/13/2016 at 12:49 pm
Hi Ron,

It may be that I am misinterpreting Watcher. I have been mistaken in the past and history tends to repeat. :-)

Ron Patterson , 07/13/2016 at 3:09 pm
Dennis, I was just being sarcastic. I know that Watcher really does believe that the price of oil makes no difference. Imagine that! He also believes that money is just a piece of paper.
R DesRoches , 07/14/2016 at 8:35 am
If you go to any of the big LTO independent oil companies web sites and look at their investor presentations you will find two trends.

First the day to drill wells have come down in the last couple of years, in many cases by over 30%.

Second with bigger fracs and changes in the mix, IPs and EURs have gone up, in many cases above 25%.

What this means is that the break even price of oil has been coming down.

We are starting to see rigs coming back to the patch at oil prices below $50. IMO as the oil prices moves up towards the $60 level the rate of increase in rig counts will also increase.

Dennis Coyne , 07/14/2016 at 9:19 am
IPs have gone up due to more proppant and more frack stages, this increases well cost.

I doubt the breakevens have fallen below $75/b for full cycle costs.

R DesRoches , 07/14/2016 at 10:54 am
Yes they have added more stages with closer spacing, but total well cost to drill and complete have gone down.

According to EOG, 2/3 rds of the lower cost is from sustainable efficiency improvements and the rest is from lower service costs.

According to EOG spud to td has gone down by 43% to 59% (Bakken), and LOE has gone down 30% from $17.02 to $11.86.

At the same time 120 day production rates in 2014 has gone from 10.7 Bbl per foot to 20.9 Bbl in Q1 2016.

Bottom line more oil at lower cost has reduced break even oil price?

Dennis Coyne , 07/14/2016 at 2:31 pm
Hi R DesRoches,

Well costs went down and then back up as more esoteric well designs have become common. Note that supd costs may have gone down and LOE might also have gone down, but you are leaving out completion costs which is about 2/3 of the capital cost of the well, the decrease in spud cost has been more than offset by increases in completion costs (this includes the fracking). On balance total well cost has probably not decreased much and for the newer designs with more stages (up to 40 or so in the Bakken) and higher amounts of proppant, total well cost has probably increased.

The "lower well cost" presented in the investor presentations is for an older "standard well design". The newer well designs that have increased the output per well cost an extra 1 or 2 million per well (in the ND Bakken/Three Forks).

shallow sand , 07/14/2016 at 11:10 am
What does frac water cost per barrel, or at least a range? How many barrels of water are needed to drill and complete a hz well? How much does trucking the water cost.

I know all this can vary, so just some ranges will do.

Dennis Coyne , 07/14/2016 at 2:56 pm
Hi R DesRoches.

I took a look at oil rigs operating in the Permian, Bakken and Eagle Ford.

For those 3 plays we have:

Total oil rigs- 213
Horizontal-191
Vertical- 22

Bakken – 28T, 27H
EF- 27T, 26H
Permian-158T, 138H, 74% of oil rigs in the big 3 LTO plays.

Of the 28 oil rigs added since May 27, 2016, 22 were added to the Permian and all were horizontal rigs. The Bakken added 5 horizontal rigs and 1 vertical and the EF 1 vertical rig.

Based on this, Eagle Ford is probably the high cost play, then Bakken, with the Permian perceived as best at the moment of the LTO plays.

Data from Bakker Hughes pivot table.

http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother

Petro , 07/12/2016 at 11:49 pm
"…Imagine that. Price didn't matter…"

Watcher,

just like you were wrong when you wrote: "…countries with CBs cannot default…", you are incorrect with this one, as well.
(I clarified that for you here: http://peakoilbarrel.com/petroleum-supply-monthly-texas-cc-estimate-permian-and-eagle-ford/#comment-575038 )

-Not only price does matter, but It is PRECISELY due to the low prices that everybody is producing in a " …the last big party…" mode, … last oomph, if you will!
All in!
All they can!

….and has little to do with the "delayed effect"…. if there is such a thing.

Be well

Petro

[Jul 19, 2016] Oil Prices Lower Forever Hard Times In A Failing Global Economy

Notable quotes:
"... "Today, because of improvements in horizontal drilling technology, you've got a play that could be the largest onshore play in the country, not only in size of potential reserves but also in a real extent." ..."
"... The End of Normal ..."
"... The End of Normal ..."
www.forbes.com
by Arthur Berman

Forbes

When energy costs are low, the costs of doing business are correspondingly low. When energy prices are high, it is difficult to make a profit because the underlying costs of manufacture and distribution are high. This is particularly true in a global economy that requires substantial transport of raw materials, goods and services.

The global economy expanded in the mid-1980s through 1990s when oil prices averaged $33 per barrel. Then, oil prices nearly doubled to an average of $68 per barrel from 1998 to 2008, and subsequently increased after 2008 to 2.5 times more than in the 1990s. When oil prices exceed $90 per barrel, the global economy is no longer profitable.

... ... ...

America's Golden Age

The United States experienced a golden age of economic growth and prosperity during the 25 years following World War II. This period forms the basis for U.S. and indeed global expectations that growth is the norm and that recessions and slow growth are aberrations that result from mis-management of the economy. This is the America that today's populists want to return to.

The Golden Age, however, was a singular phenomenon that is unlikely to recur. After 1945, the economies and militaries of Europe and Japan were in ruins. The U.S. was the only major economy that survived the war intact. Having no competition is a huge competitive advantage.

The U.S. was the first country to fully convert to petroleum, another competitive advantage. A barrel of oil contains about the same amount of energy as a human would expend in calories in 11 years of manual labor . Crude oil contains more than twice as much energy as coal and two-and-a-half times more than wood . And it's a liquid that can be moved easily around the world and put in vehicles for transport.

In 1950, the U.S. produced 52% of the crude oil in the world and was largely self-sufficient. Texas was the largest U.S. producing state and the Texas Railroad Commission (TXRRC) controlled the world price of oil through a system of allowable production that also ensured spare capacity.

... ... ...

Tight oil used the same horizontal drilling and hydraulic fracturing technology that had been pioneered in earlier shale gas plays. The technology was expensive but once oil price topped $90 per barrel in late 2010 and stayed high for the next 4 years, the plays were deemed successful by producers and credit markets.

U.S. tight oil and deep-water production resulted in a second coming of sorts with monthly crude oil output reaching 9.69 million barrels per day in April 2015. That was 350,000 bopd less than the 1970 peak of 10.04 million bopd.

The difference of course was cost. In 1970, the market price of a barrel of oil in 2016 dollars was $20 per barrel versus $100 from 2011 to 2014, and $55 per barrel in 2015.

And this is precisely the problem with the almost universally held belief that technology will make all things possible, including making a finite resource like oil infinite. Technology has a cost that its evangelists forget to mention.

The reality is that technology allows us to extract tight oil from non-reservoir rock at almost 3 times the cost of high-quality reservoirs in the past. The truth is that we have no high-quality reservoirs left with sufficient reserves to move the needle on the high global appetite for oil. The consequence is that to keep consuming and producing as we always have will inevitably cost a lot more money. This is basic thermodynamics and not a pessimistic opinion about technology.

... ... ...

Nevertheless, in a zero-interest rate world, there was great enthusiasm for yields greater than conventional investments like U.S. Treasury bonds and savings accounts that continue to pay less than 2%. Bank and mezzanine debt, high-yield corporate ("junk") bonds and share offerings promised yields in the 6 to 10% range. As long as prices were high and the plays were marginally profitable, risks were downplayed and capital was almost unlimited. Two years into the oil-price collapse, capital is more limited because banks and investors have been burned.

Producers continue the mantra that costs keep going down and well performance keeps getting better. Those with some history and perspective, however, know and remember that they always say that but the balance sheets never reflect the claims.

In 1996, the late Aubrey McClendon made the following statement about the Louisiana Austin Chalk play:

"Today, because of improvements in horizontal drilling technology, you've got a play that could be the largest onshore play in the country, not only in size of potential reserves but also in a real extent."

That play was a total failure for McClendon's Chesapeake Energy Corporation and today Chesapeake is on the verge of bankruptcy for the second time.

People want to believe that things keep getting better and that they won't have to change their behavior-even if these beliefs defy common sense and the laws of nature.

... ... ...

Post-Financial Collapse monetary policies, the cumulative cost of nearly four decades of debt-financed growth, and the return of higher oil prices have exhausted the economy. Most debt is non-productive, interest rates cannot be increased, and 2016′s low oil prices are still one-third higher than in the 1990s (in 2016 dollars).

Producers and oil-field service companies are on life support. One-third of U.S. oil companies are in default . Yet some analysts who have no experience working in the oil industry proclaim break-even prices below $40 per barrel and breathlessly predict that the business will come roaring back when prices exceed $50. Producers don't help with outrageous claims of profitability at or below current oil prices that exclude costs and are not generally applicable to their portfolios.

As a result, the public and many policy makers believe that tight oil is a triumph of American ingenuity and that energy will be cheap and abundant going forward. The EIA forecasts that U.S. crude oil production will exceed the 1970 annual peak of 9.6 mmbpd by 2027 and that tight oil will account for almost 6 million barrels per day. Although I have great respect for EIA, these forecasts reflect a magical optimism based on what is technically possible rather than what is economically feasible.

Renewable energy will be increasingly part of the landscape but its enthusiasts are also magical thinkers.

In 2015, renewables accounted for only 3% of U.S. primary energy consumption. No matter the costs nor determination to convert from fossil to renewable energy, a transition of this magnitude is unlikely in less than decades.

Solar PV and wind provide much lower net energy than fossil fuels and have limited application for transport–the primary use of energy– without lengthy and costly equipment replacement. The daunting investment cost becomes critically problematic in a deteriorating economy. Although proponents of renewable energy point to falling costs, more than half of all solar panels used in the U.S. are from China where cheap manufacturing is financed by unsustainable debt.

It is telling that energy and its cost can hardly be found among the endless discussions about the economy and its failure to grow. Technology optimists have disparaged the existence of an energy problem since at least the 1950s. Neither unconventional oil nor renewable energy offer satisfactory, reasonably priced, timely solutions to the dilemma.

As political leaders and economic experts debate peripheral issues, the public understands that there is something horribly wrong in the world. It is increasingly difficult for most people to get by in a failing global economy. That is why there are political upheavals going on in Britain, the United States and elsewhere.

The oil industry is damaged and higher prices won't fix it because the economy cannot bear them. It is unlikely that sustained prices will reach $70 in the next few years and possibly, ever.

The British exit from the European Union adds another element of risk for investors. Lack of investment will inevitably lead to lower production, supply deficits and price spikes. These will further damage the economy.

The future for oil prices and the global economy is frightening. I don't know what beast slouches toward Bethlehem but I am willing to bet that it does not include growth. The best path forward is to face the beast. Acknowledge the problem, stop looking for improbable solutions that allow us live like energy is still cheap, and find ways to live better with less.

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

*J.K. Galbraith, 2014, The End of Normal , p.54. Much of the economic interpretation in this post is based on Galbraith's work.

**J.K. Galbraith, 2014, The End of Normal , p.57.

Art Berman
Petroleum Geologist and Professional Speaker
Visit my website for more information: artberman.com

[Jul 19, 2016] Republican Platform Unexpectedly Calls For A Return To Glass-Steagall

Notable quotes:
"... Manafort mentioned the return of Glass-Steagall specifically as a counterpoint against Hillary Clinton, arguing it was Democrats that were the ones actually beholden to big banks. "We believe the Obama-Clinton years have passed legislation that has been favorable to the big banks, which is why you see all the Wall Street money going to her," he said. "We are supporting the small banks and Main Street." ..."
"... Good! Screw the Clintons and crony capitalism. ..."
"... Bob Rubin already cashed the checks....Mission Accomplished. ..."
"... Laugh Track Deafening) ..."
"... How different would it be now if everyone in that photo had died simultaneously BEFORE Clinton signed it? ..."
"... Panic attacks and violent pangs on Wall Street tomorrow? Or will they just pour billions more into the Clinton corruption campaign? ..."
"... Hang the Clintons, Bushes, and all the damned banksters with them. Then your reforms might mean something ..."
Zero Hedge
While we know better than to trust politician promises, we were surprised to read that today the GOP joined the Democrats in calling for a repeal of Gramm-Leach-Bliley, the Financial Services Modernization Act of 1999 pushed through by none other than Bill Clinton, and will seek a return to Glass-Steagall, the banking law launched in 1933 in the aftermath of the Great Depression meant to prohibit commercial banks from engaging in the investment business, and which according to many was one of the catalysts that led to the Global Financial Crisis.

According to The Hill, Paul Manafort, Donald Trump's campaign manager, told reporters gathered in Cleveland Monday that the GOP platform would include language advocating for a return of that law, which was repealed under President Bill Clinton, husband of, well you know...

"We also call for a reintroduction of Glass-Steagall, which created barriers between what big banks can do," he said.

Including that language in the GOP platform comes shortly after Democrats agreed to similar language in their own, calling for an "updated and modernized version" of the law.

However before anyone gets their hopes up, recall that a party platform is not binding but is thought to reflect the values of the party.... until the values change as a result of Wall Street "incentives" because if there is one thing US "commercial banks" can not afford it is a separation of their depository and investment activities.

The GOP platform has not yet been officially released, although the convention is expected to approve it later Monday. Nonetheless, the embrace of Glass-Steagall by both parties is a telling indication of how unpopular Wall Street remains with the public, years after the financial crisis.

Manafort mentioned the return of Glass-Steagall specifically as a counterpoint against Hillary Clinton, arguing it was Democrats that were the ones actually beholden to big banks. "We believe the Obama-Clinton years have passed legislation that has been favorable to the big banks, which is why you see all the Wall Street money going to her," he said. "We are supporting the small banks and Main Street."

HRH of Aquitaine Jul 18, 2016 5:15 PM

Good! Screw the Clintons and crony capitalism.

onewayticket2 -> HRH of Aquitaine, Jul 18, 2016 5:19 PM

Bob Rubin already cashed the checks....Mission Accomplished.

Love,

sandy weil

ps.... So did I. Thanks Clintons

macholatte -> onewayticket2, Jul 18, 2016 5:24 PM

Just break-up the banks into little itsy-bitsy pieces so they can't hurt anyone anymore. – Mother Goose

JRobby -> macholatte, Jul 18, 2016 5:32 PM

What!!!! Is sanity breaking out!???!!!

Guess the big public utility banks are going to get broken up? (Laugh Track Deafening)

How different would it be now if everyone in that photo had died simultaneously BEFORE Clinton signed it?

californiagirl -> Timmay •Jul 18, 2016 7:10 PM

Panic attacks and violent pangs on Wall Street tomorrow? Or will they just pour billions more into the Clinton corruption campaign?

Perimetr -> californiagirl •Jul 18, 2016 7:24 PM

Hang the Clintons, Bushes, and all the damned banksters with them. Then your reforms might mean something.

[Jul 18, 2016] Automatic Braking Systems To Become Standard On Most U.S. Vehicles The Two-Way

NPR
Some 20 carmakers have committed to making automatic emergency braking systems a standard feature on virtually all new cars sold in the U.S. by 2022, according to a new plan from the National Highway Traffic Safety Administration and the Insurance Institute for Highway Safety.

Automatic brakes are designed to stop a vehicle before it collides with a car or another object. Experts say that making them standard could prevent as much as 20 percent of accidents.

NPR's Sonari Glinton reports for our Newscast unit:

"Many cars on the road now have automated brakes. And when you're new to them, it's pretty scary when the car stops on its own. But experts say automatic brakes could make the fender bender a thing of the past.

...

"It's part of a push to fight the growing problem of driver distraction and a step closer to driverless cars. Now carmakers have to figure out by 2022 how they'll integrate the systems."

NHTSA released a list of the car companies that have committed to the system:

"Audi, BMW, FCA US LLC, Ford, General Motors, Honda, Hyundai, Jaguar Land Rover, Kia, Maserati, Mazda, Mercedes-Benz, Mitsubishi Motors, Nissan, Porsche, Subaru, Tesla Motors Inc., Toyota, Volkswagen and Volvo."

"In 2012, one-third of all police-reported crashes involved a rear-end collision with another vehicle as the first harmful event in the crash," according to the government's information page on Automatic Emergency Braking systems. It adds that AEB systems can either avoid or reduce the severity of some of those rear-end crashes.

In a statement about the plan, NHTSA says the "unprecedented commitment" from the automakers will bring the safety technology to "more consumers more quickly than would be possible through the regulatory process."

[Jul 17, 2016] 07/16/2016 at 8:52 am

Notable quotes:
"... It looks like the increase in GOR has finally stopped, at least for wells earlier than 2015. GOR for 2015 is still increasing fast. 2008 and 2009 are on the other hand decreasing. ..."
"... Here we can see that for 2009 there is a huge drop, about 6%. As a comparison it would translate into more than 50% in one year. ..."
"... This graph looks like a mess, I know. I hope you can make something out if though. It shows the percentage of wells that are producing in a certain month. There is a downward trend over time, but the oil price is not affecting it much at all. ..."
peakoilbarrel.com
Hello guys. Here is my updated Bakken GOR graph. It looks like the increase in GOR has finally stopped, at least for wells earlier than 2015. GOR for 2015 is still increasing fast. 2008 and 2009 are on the other hand decreasing. So what does this mean for production? Lets see in my next graph bellow.

FreddyW , 07/16/2016 at 9:07 am
Here we can see that for 2009 there is a huge drop, about 6%. As a comparison it would translate into more than 50% in one year. But of course you should not extrapolate from a (cherry picked) single month like that. For 2008 there is instead a slight increase. At least some of that can be explained by that some wells that were previously not producing, are now back online. I don´t know how much of an effect that has though. I´ll show more about that in my next graph. 2013 has slowed down the decline since last month, but is still bellow 2012. So overall nothing dramatic except for 2009.

FreddyW , 07/16/2016 at 9:22 am
This graph looks like a mess, I know. I hope you can make something out if though. It shows the percentage of wells that are producing in a certain month. There is a downward trend over time, but the oil price is not affecting it much at all. It´s only this spring when the oil price was in the 30s that you can notice some decline. But it´s not more than 1-2% of the wells that were put offline. Never the less, there were some wells that were put back on production in May which should have a positive effect on production. Also ,the total producing "days" for all wells combined has increased by about 5% since last month (which I don´t show in any graph here).

[Jul 17, 2016] Ron Patterson

peakoilbarrel.com
, 07/15/2016 at 7:52 pm
Looking at Art Berman's chart below. World oil production since 2005, less US and Canada, has been pretty much flat. This is despite the fact that prices have risen dramatically in that period of time. So lets look at the other huge gainers since 2005.

Russia: See the EIA's take above. Even if they are wrong, Russia's huge gains are gone forever.

Angola, Brazil, China and Colombia: China and Colombia have definitely peaked. Angola peaked in 2010 and has declined slightly and been flat since then. Only Brazil has any hope of increasing production, and tat not by very much.

Iraq: I believe Iraq has peaked. Some may disagree but there is no doubt that their best days are behind them. They have far more downside potential than upside potential.

There is little doubt that all those countries will decline in the next few years regardless of what the price of oil is. After all, if oil above $100 a barrel in the past did not sent them producing massive amounts of oil, there is no reason to believe it will do so in the future.

That leaves the USA and Canada. To those massive high prices in the past few years, only the USA and Canada responded. So… will higher prices bring on enough US and Canadian production, to make up for the decline in the rest of the world… plus increase production enough to push production above the 2015 peak?

Not a snowball's chance in hell will that happen.

 photo CC Production by Cuntry_zpsmmrubi3z.jpg

Caelan MacIntyre , 07/15/2016 at 9:29 pm
Sobering, as Euan writes. Alarming I'd say.
In a possible future's retrospect, it may turn out to have come as a surprise how fast things unraveled sociogeopolitically so close after the peak.

Fossil fuel, within a certain EROEI range is, of course, power. It powers pseudoeconomies, governpimps, and their militaries. And now China and Russia, for two examples, are not nearly as 'backwoods' as they may have been, historically. They have become, 'Westernized'…

LTG , 07/15/2016 at 10:12 pm
Hi Ron,
What are your reasons for calling the Iraq peak?
Thanks
Ron Patterson , 07/16/2016 at 7:15 am
After a year of trying to increase their production they have been unable to do so. Now things are likely to get worse. Iraq depends almost entirely on outside contractors. Also there has been a steady stream of skeptical news coming out of Iraq.

Iraq struggles to match January's record oil production

Iraq is Opec's second-largest producer after Saudi Arabia and has ambitious plans to increase production capacity to between 5.5m b/d and 6m b/d by 2020.

This target, which has been revised downward in recent months, has been viewed with scepticism as a budget crisis is limiting the federal government's ability to pay companies that are producing oil in Iraq. These include from BP, Royal Dutch Shell and Russia's Lukoil.

Although they are developing some of the lowest cost easy-to-access deposits of oil in the world, the fields need more investment to maintain production at current levels and increase future capacity. At the same time, the government in Baghdad is requesting companies reduce spending.

"We're taking more risk to keep production the same, while not getting paid. We can't continue to produce for 2-3 years like this, it's not possible," said one executive at an oil company operating in Iraq. "Maybe they can achieve 6m b/d by 2030."

 photo Iraq_zpsmk9hg42n.png

These numbers are through June. As you can see they still have not matched January's numbers. And their contractors are not getting paid. Now what would you think would be the likely effect on Iraqi oil production?

LTG , 07/16/2016 at 11:23 am
Hi Ron,

My guess is that Iraq oil production will struggle to maintain current levels over the next couple of years and then drop rapidly as their ongoing religious civil war makes the situation too dangerous for continued foreign investment.

Another guess is that the global economy will be in recession by 2020, reducing demand, lowering world oil prices, and pushing many national economies into bankruptcy. The impact for countries highly dependent on oil revenue to maintain social services and stability will be devastating and we'll see the breakdown of societies and the rise of dictatorship.

All wags of course. But it seems to me, generally, that geopolitics and social/economic problems will begin to overtake any geologic and technological limitations in world oil production. Venezuela is a current example, and now Iraq, starting with their "budget crisis" and workers "not getting paid", as your article describes. In other words, above ground factors are determining production and not the lack of oil in place.

Thanks for your reply, always appreciate your clear-headed thinking.

Javier , 07/16/2016 at 5:05 am
Ron,

Matt Musalik has been making similar graphs for a long time showing the same:
http://crudeoilpeak.info/latest-graphs

Probably Art is basing his incremental graph in Matt's ones.
Also very noteworthy is Matt's graph on "Conventional Oil Plateau" from his May 2015 update on that link.

[Jul 17, 2016] The Stagnation Capitulation and The Taper Tantrum

Notable quotes:
"... He argues that what just happened is that investors suddenly decided that economies were not going to return to normal any time soon. ..."
July 12, 2016 | Angry Bear

Paul Krugman interpreted the recent decline of 10 year safe interest rates from extremely low to astonishingly low as a capitulation to stagnation. He argued (convincingly) that investors have decided that short term safe interest rates will remain extremely low for a long time (evidently at least 10 years) and that the post 2008 pattern of slack demand, low inflation and extremely low interest rates is the new normal. It is probably best to just read his op-ed, but he considered and rejected the arguments that the low safe interest rates are the result of a flight to quality.

I want to compare the recent sharp decline in interest rates to the sharp increase in 2013 which is called the "taper tantrum". I can't manage an alliteration however, stagnation capitulation rhymes and is (arguably) the mirror image of the taper tantrum.

I make the comparison for two reasons. The first is that the conventional term "taper tantrum" asserts that the cause of the 2013 increase is an announcement by the Federal Reserve Open Market Committee (FOMC) that they were considering tapering the monthly pace of quantitative easing (not reducing their assets but reducing the rate of increase). This interpretation would imply that I have been wrong for years as I argue that quantitative easing has only small effects. This is a silly personal reason for continuing to discuss the taper tantrum, so I will move that discussion after the jump.

The second reason is that there is an alternative interpretation of the 2013 increase which is the exact mirror image of Krugman's stagnation capitulation hypothesis. I tried to present it here. I expressed the idea even worse than usual so I will try again now (and ask the reader to trust me that this is what I had in mind then)

The story is that investors assumed back in 2012 and 2013 that the economy and interest rates would return to normal some time fairly soon. Then in Spring 2013, they decided that this time had come so they all demanded higher returns on bonds. This (not successfully written) story is the exact mirror image of Krugman's op-ed. He argues that what just happened is that investors suddenly decided that economies were not going to return to normal any time soon.

This is relevant to the old debate about QE, because if markets can shift one way without FOMC action, they could have shifted the other way for reasons other than a bland FOMC announcement. More grinding old axes after the jump.

... ... ...

[Jul 17, 2016] Cassandra's Legacy Some reflections on the Twilight of the Oil Age - part I

cassandralegacy.blogspot.in

If we had a whole century ahead of us to transition, it would be comparatively easy. Unfortunately, we no longer have that leisure since the second key challenge is the remaining timeframe for whole system replacement. What most people miss is that the rapid end of the Oil Age began in 2012 and will be over within some 10 years. To the best of my knowledge, the most advanced material in this matter is the thermodynamic analysis of the oil industry taken as a whole system (OI) produced by The Hill's Group (THG) over the last two years or so ( http://www.thehillsgroup.org ).

THG are seasoned US oil industry engineers led by B.W. Hill. I find its analysis elegant and rock hard. For example, one of its outputs concerns oil prices. Over a 56 year time period, its correlation factor with historical data is 0.995. In consequence, they began to warn in 2013 about the oil price crash that began late 2014 (see: http://www.thehillsgroup.org/depletion2_022.htm ). In what follows I rely on THG's report and my own work.
Three figures summarise the situation we are in rather well, in my view.
Figure SEQ Figure \* ARABIC 1 – End Game

For purely thermodynamic reasons net energy delivered to the globalised industrial world (GIW) per barrel by the oil industry (OI) is rapidly trending to zero. By net energy we mean here what the OI delivers to the GIW, essentially in the form of transport fuels, after the energy used by the OI for exploration, production, transport, refining and end products delivery have been deducted. However, things break down well before reaching "ground zero" ; i.e. within 10 years the OI as we know it will have disintegrated. Actually, a number of analysts from entities like Deloitte or Chatham House, reading financial tealeaves, are progressively reaching the same kind of conclusions. [1]

The Oil Age is finishing now, not in a slow, smooth, long slide down from "Peak Oil" , but in a rapid fizzling out of net energy. This is now combining with things like climate change and the global debt issues to generate what I call a "Perfect Storm" big enough to bring the GIW to its knees.

In an Alice world


At present, under the prevailing paradigm, there is no known way to exit from the Perfect Storm within the emerging time constraint (available time has shrunk by one order of magnitude, from 100 to 10 years). This is where I think that Doomstead Diner's readers are guessing right. Many readers are no doubt familiar with the so-called "Red Queen" effect illustrated in REF _Ref329530846 \h Figure 2 08D0C9EA79F9BACE118C8200AA004BA90B02000000080000000E0000005F005200650066003300320039003500330030003800340036000000 – to have to run fast to stay put, and even faster to be able to move forward. The OI is fully caught in it.
  1. Dominik Lenné July 13, 2016 at 12:51 PM

    I find in this article too many crass claims and too few simple facts, and even those questionable.
    Take graph 1. It suggests, that in 2015, i.e. a year ago, the EROI of oil were 1.17. In fact it was always more than 5, in most cases even more then 10, afaik, even for the "new sources", i.e. tar sands &c.
    Concerning the energetic cost of the transition: In a first approximation, energy investment in renewables and saving has paid for itself within a year. This means, that if we transform 10 % of our energy infrastructure to renewables and saving per year, we have to use 10 % of our available power for it. This is certainly a lot. But it is certainly doable, if we want. The latter, of course, is the nub of the matter.
    I have the feeling i have to wade through a rhetoric jungle to search for valuable information. May be a matter of taste, i admit.

    1. Dr Louis Arnoux July 14, 2016 at 1:02 AM

      It is important to not confuse EROi or EROEI at the well head and for the whole system up to the end-users. The Hill's Group people have shown that the EROIE as defined by them passed below the critical viability level of 10:1 around 2010 and that along current dynamics by circa 2030 it will be about 6.89:1, by which time no net energy per barrel will reach end-users (assuming there is still an oil industry at this point, which a number of us consider most unlikely, at least not the oil industry as we presently know it). Net energy here means what is available to end-users typically to go from A to B, the energy lost as waste heat (2nd principle) and the energy used by the oil industry having been fully deducted - as such it cannot be directly linked in reverse to evaluate an EROI.
      Re the necessary energy investments to build-up a renewable capacity, Parts 2 and 3 will elaborate on the matter. Let's just say for now that we are talking here of whole system replacement, globally, and not just considering the energy embodied in the implementation of this or that bit of renewable technology - the pictures look very different at the micro and macro levels.

[Jul 16, 2016] China's Oil Output Tanks , Hits 4 Year Low

Notable quotes:
"... In June alone, China pumped 8.9 percent less crude than a year earlier, with state-owned giants such as PetroChina and CNOOC shuttering unprofitable fields ..."
"... Crude oil imports in January-June jumped 14 percent, China's national Bureau of Statistics said ..."
Jul 15, 2016 | OilPrice.com

China's crude oil output over the first half of the year stood at 101.59 million metric tons, down 4.6 percent and the lowest six-month figure since 2012, Bloomberg reports. The decline reflects China's stated shift from an industry-focused economic model to a more service-oriented one. It is also related to a drive by the government to cut the country's environmental footprint, struggling with a reputation of China as one of the most polluted places on earth. Low oil prices were also a factor in the production trend.

In June alone, China pumped 8.9 percent less crude than a year earlier, with state-owned giants such as PetroChina and CNOOC shuttering unprofitable fields and turning to low-cost imports instead.

Crude oil imports in January-June jumped 14 percent, China's national Bureau of Statistics said, with June recording the weakest growth.

[Jul 16, 2016] Paul Krugman Bull Market Blues

Economist's View

High stock prices are "not evidence of a healthy economy":

Bull Market Blues, by Paul Krugman, NY Times : Like most economists, I don't usually have much to say about stocks. Stocks ... have a lot less to do with the state of the economy or its future prospects than many people believe. ...
Still, we shouldn't completely ignore stock prices. The fact that the major averages have lately been hitting new highs ... is newsworthy and noteworthy. What are those Wall Street indexes telling us?
The answer, I'd suggest, isn't entirely positive..., in some ways the stock market's gains reflect economic weaknesses, not strengths. ...
We measure the economy's success by the extent to which it generates rising incomes for the population. But stocks ... only reflect the part of income that shows up as profits.
This wouldn't matter if the share of profits in overall income were stable; but it isn't. The share of profits ... has been a lot higher in recent years than it was during the great stock surge of the late 1990s ... making the relationship between profits and prosperity weak at best. ...
When investors buy stocks, they're buying a share of future profits. What that's worth to them depends on what other options they have for converting money today into income tomorrow. And these days those options are pretty poor... So investors are willing to pay a lot for future income, hence high stock prices for any given level of profits. ...
This may seem, however, to present a paradox. If the private sector doesn't see itself as having a lot of good investment opportunities, how can profits be so high? The answer, I'd suggest, is that these days profits often seem to bear little relationship to investment in new capacity. Instead, profits come from some kind of market power... And companies making profits from such power can simultaneously have high stock prices and little reason to spend.
Consider the fact that the three most valuable companies in America are Apple, Google and Microsoft. None of the three spends large sums on bricks and mortar. ...
In other words, while record stock prices do put the lie to claims that the Obama administration has been anti-business, they're not evidence of a healthy economy. If anything, they're a sign of an economy with too few opportunities for productive investment and too much monopoly power.
So when you read headlines about stock prices, remember: What's good for the Dow isn't necessarily good for America, or vice versa.
anne : , Friday, July 15, 2016 at 09:16 AM
http://cepr.net/blogs/beat-the-press/paul-krugman-s-stock-market-advice

July 15, 2016

Paul Krugman's Stock Market Advice

Paul Krugman actually did not make any predictions on the stock market, so those looking to get investment advice from everyone's favorite Nobel Prize winning economist will be disappointed. But he did make some interesting comments * on the market's new high. Some of these are on the mark, but some could use some further elaboration.

I'll start with what is right. First, Krugman points out that the market is horrible as a predictor of the future of the economy. The market was also at a record high in the fall of 2007. This was more than a full year after the housing bubble's peak. At the time, house prices were falling at a rate of more than 1 percent a month, eliminating more than $200 billion of homeowner's equity every month. Somehow the wizards of Wall Street did not realize this would cause problems for the economy. The idea that the Wall Street gang has some unique insight into the economy is more than a bit far-fetched.

The second point where Krugman is right on the money (yes, pun intended) is that the market is supposed to be giving us the value of future profits, not an assessment of the economy. This is the story if we think of the stock market acting in textbook form where all investors have perfect foresight. The news that the economy will boom over the next decade, but the profit share will plummet as workers get huge pay increases, would be expected to give us a plunging stock market. Conversely, weak growth coupled with a rising profit share should mean a rising market. Even in principle the stock market is not telling us about the future of the economy, it is telling us about the future of corporate profits.

Okay, now for a few points where Krugman's comments could use a bit deeper analysis. Krugman notes the rise in profit shares in recent years and argues that this is a large part of the story of the market's record high, along with extremely low interest rates. Actually, the profit story is a bit different than Krugman suggests.

The profit share had soared in the early days of the recovery. The before tax share of net corporate income went from a recession low of 16.9 percent of net income to 27.0 percent in the second quarter of 2014. The after-tax share peaked at 20.4 percent in the first quarter of 2012. However since then the profit share has trended downward. In the most recent quarter the before-tax profit share was 23.9 percent, while the after-tax share was 17.5 percent. This is most of the way back to the mid-1990s shares when before-tax profits were around 21.0 percent of net corporate income and after-tax shares were around 15.5 percent.

So, while profits had soared, the current market high cannot be explained by a soaring profit share. We are substantially below the peak shares from earlier in the recovery. One caution here is that the quarterly data are erratic and subject to large revisions. It is possible that this picture will look very different when the Commerce Department releases revised data later in the month.

The next issue is how we should think about a market high. If the stock market moves in step with corporate profits (i.e. the price to earnings ratio remains constant), and the profit share of GDP remains constant, then we should expect the stock market to continually reach new highs. In other words, market peaks are not like a new world record time in the mile, they are more like the tree in the backyard growing each year. They should not come as a surprise, nor be any cause for celebration.

The third point is that the stock market highs of the late 1990s were definitely not cause for celebration. The stock market was in a gigantic bubble. This was serious bad news for the economy and millions of 401(k) holders who saw their savings plummet in the crash of 2000-2002. (Yes, they should have sat tight, but a lot of people didn't realize this and it's not their job to be professional investors.) From the standpoint of the economy it was bad news because the crash led to a serious downturn in the labor market.

The strong wage growth of the late 1990s quickly dissipated as the labor market weakened. While the recession officially ended in December of 2001, we didn't begin to create jobs again until the fall of 2003. We didn't get back the jobs lost in the downturn until January of 2005. At the time, this was the longest period without net job growth since the Great Depression.

For what it's worth, the Clinton crew was clueless on the bubble. They wanted to put Social Security money in the stock market assuming that the real returns would average 7.0 percent annually. The actual average has been about half of this rate.

Finally, Krugman notes that the most highly valued companies in today's market are Apple, Google, and Microsoft. Krugman points out that none of these companies "spends large sums on bricks and mortar" and all three are sitting on large cash hoards.

Both points are well taken. Investment in plant and equipment has actually been falling in recent quarters. This would be fine if the decline was offset by a boom in research and development spending, but it hasn't been. Our great idea companies don't have many good ideas about what to do with all of their money.

But there is another point worth noting about the Big Three. All three are companies that depend to a large extent on government-granted monopolies in the form of patent and copyright protection. We have made these protections much stronger and longer over the last four decades through a variety of laws and trade agreements.

Of course the point of these protections is to give an incentive for innovation and creative work. But in a period where we are supposedly troubled by an upward redistribution from people who work for a living to people who "own" the technology, perhaps we should not be giving those people ever stronger claims to ownership of technology. (Yes, this involves the Trans-Pacific Partnership, among other policies.)

Anyhow, perhaps our leading economists will one day take note of this issue. It took a long time to notice that we had an $8 trillion housing bubble and that yes, it could be a problem. But let's hope our economists is learning.

* http://www.nytimes.com/2016/07/15/opinion/bull-market-blues.html

-- Dean Baker

anne -> anne... , Friday, July 15, 2016 at 09:19 AM
http://www.multpl.com/shiller-pe/

Ten Year Cyclically Adjusted Price Earnings Ratio, 1881-2016

(Standard and Poors Composite Stock Index)

July 14, 2016 PE Ratio ( 26.92)

Annual Mean ( 16.68)
Annual Median ( 16.04)

-- Robert Shiller

anne -> anne... , Friday, July 15, 2016 at 09:20 AM
http://www.multpl.com/s-p-500-dividend-yield/

Dividend Yield, 1881-2016

(Standard and Poors Composite Stock Index)

July 14, 2016 Div Yield ( 2.03)

Annual Mean ( 4.39)
Annual Median ( 4.33)

-- Robert Shiller

RC AKA Darryl, Ron -> anne... , Friday, July 15, 2016 at 09:51 AM
THANKS! Dean's the best - as usual.
anne -> RC AKA Darryl, Ron... , Friday, July 15, 2016 at 04:16 PM
Dean Baker's response to Paul Krugman is excellent, and we might consider arguing the matter further along both lines with the need for increased domestic investment the focus.
anne -> RC AKA Darryl, Ron... , Friday, July 15, 2016 at 04:31 PM
https://research.stlouisfed.org/fred2/graph/?g=4D9o

January 15, 2016

Shares of Gross Domestic Product for Private Fixed Nonresidential & Residential Investment Spending, Government Consumption & Gross Investment and Exports of Goods & Services, 2007-2016


https://research.stlouisfed.org/fred2/graph/?g=4D9t

January 15, 2016

Shares of Gross Domestic Product for Private Fixed Nonresidential & Residential Investment Spending, Government Consumption & Gross Investment and Exports of Goods & Services, 2007-2016

(Indexed to 2007)

anne -> anne... , Friday, July 15, 2016 at 04:36 PM
The problem in fostering growth comes to either increasing nonresidential investment or government spending (hopefully for infrastructure formation). There is no reason to think exports will increase significantly given the relatively strong dollar and weak international growth and slower population growth should not allow for significant residential investment increases for some time.

Either nonresidential investment or government spending is the answer then.

sanjait -> RC AKA Darryl, Ron... , Friday, July 15, 2016 at 04:
Yeah, DB calls out Krugman for not mentioning monopoly rents right after Krugman explicitly mentions them, and the Bernista crowd trumpets how great Baker is.

*rolls eyes heavily*

JohnH -> anne... , Friday, July 15, 2016 at 11:27 AM
It's not just Apple, Google and Microsoft. The whole economy is increasingly dominated by monopolies and oligopolies who can raise prices irrespective of demand.

Think about phone companies (Verizon, AT&T), cable TV (Comcast, TimeWarner), Wall Street banks, soft drinks (Coke, Pepsi), consumer goods (Procter and Gamble, Unilever), airplanes (Boeing, Airbus), oil refineries, pharmaceuticals, etc. etc.

Krugman is right that "profits come from some kind of market power... And companies making profits from such power can simultaneously have high stock prices and little reason to spend."

For many of these companies, it is not about intellectual property monopoly. Rather, it is about lack of aggressive anti-trust enforcement over the last 30 years, the Obama years being about the worst on record.

pgl -> JohnH... , Friday, July 15, 2016 at 01:26 PM
Wow - liberal economist Paul Krugman got something right. As far as your last fact free claim, I'll leave this issue to those who actually know what they are talking about:


http://www.natlawreview.com/article/has-antitrust-enforcement-been-reinvigorated-under-obama

JohnH -> pgl... , Friday, July 15, 2016 at 02:09 PM
The article takes a circuitous route to show that Obama has been more aggressive than Bush was...hardly a resounding endorsement of Obama, given Bush's lax enforcement.

I stand corrected--Obama wasn't the worst...thanks only to Bush 43's dismal record.

pgl -> JohnH... , Friday, July 15, 2016 at 03:17 PM
Wow - a first for everything! You finally admit one of your fact free rants is not reality. Progress!
JohnH -> pgl... , Friday, July 15, 2016 at 04:05 PM
Classic 'lesser of two evils' thinking: Obama was not as bad as Bush, therefore Obama was great!

Kind of like declaring that Franklin Pierce was better that Millard Fillmore, both lousy presidents...or that Miller is better than Budweiser.

This is exactly the kind of logic you get from partisan hacks like pgl...a committed Obamabot and Wall Street Democrat.

anne -> anne... , Friday, July 15, 2016 at 01:06 PM
https://investor.vanguard.com/mutual-funds/list#/mutual-funds/asset-class/month-end-returns

July 15, 2016

The 3 month Treasury interest rate is at 0.27%, the 2 year Treasury rate is 0.70%, the 5 year rate is 1.14%, while the 10 year is 1.59%.

The Vanguard Aa rated short-term investment grade bond fund, with a maturity of 3.3 years and a duration of 2.6 years, has a yield of 1.57%. The Vanguard Aa rated intermediate-term investment grade bond fund, with a maturity of 6.4 years and a duration of 5.4 years, is yielding 2.29%. The Vanguard Aa rated long-term investment grade bond fund, with a maturity of 22.0 years and a duration of 13.2 years, is yielding 3.35%. *

The Vanguard Ba rated high yield corporate bond fund, with a maturity of 5.7 years and a duration of 4.5 years, is yielding 5.28%.

The Vanguard unrated convertible corporate bond fund, with an indefinite maturity and a duration of 5.4 years, is yielding 2.07%.

The Vanguard A rated high yield tax exempt bond fund, with a maturity of 17.0 years and a duration of 6.3 years, is yielding 2.13%.

The Vanguard Aa rated intermediate-term tax exempt bond fund, with a maturity of 8.7 years and a duration of 4.8 years, is yielding 1.22%.

The Vanguard Government National Mortgage Association bond fund, with a maturity of 5.7 years and a duration of 3.4 years, is yielding 1.89%.

The Vanguard inflation protected Treasury bond fund, with a maturity of 8.7 years and a duration of 8.2 years, is yielding - 0.26%.

* Vanguard yields are after cost. Federal Funds rates are no more than 0.50%.

sanjait -> anne... , Friday, July 15, 2016 at 04:41 PM
Nit picking Dean Baker, favorite of the disaffected Bernistas who still haven't forgiven Paul Krugman, sarcastically calls for Krugman to talk about monopolistic rents for the big three tech companies but doesn't seem to notice that Krugman explicitly mentioned monopolistic rents for the big three tech companies in his blog post.
anne -> sanjait... , Friday, July 15, 2016 at 04:47 PM
Nitpicking Dean Baker, favorite of the ----------- --------- ...

[ Creepy language is where I immediately stop reading... ]

anne : , Friday, July 15, 2016 at 01:22 PM
Possibly an aside, though I would argue this is related and is surely important:

There has long been a steady refrain from most Western economists that China is doomed. Lately the refrain has been that we will soon find Chinese growth if continuing still slowing dramatically. Today, it turns out that Chinese growth which was 6.7% on a yearly basis in the first quarter was 6.7% in the second quarter. For the New York Times and Wall Street Journal however...

anne -> anne... , Friday, July 15, 2016 at 01:22 PM
http://www.wsj.com/articles/massive-stimulus-keeps-china-gdp-steady-in-second-quarter-1468549521

July 15, 2016

China GDP Sends Troubling Signal on Economic Reform
Slower growth rate would have indicated country was tackling excess industrial production, rising corporate debt
By MARK MAGNIER - Wall Street Journal

BEIJING-China maintained its growth pace of 6.7% in the second quarter-a bad sign to those who were looking for indications of economic restructuring.

Economists say a slower growth rate in the second quarter over the first quarter's 6.7% pace would have sent a welcome signal that China was tackling excess industrial production, rising corporate debt and state-owned enterprise reform.

Instead, by ramping up government spending and opening the credit taps, Beijing is likely to fuel overcapacity and see private companies crowded out by risk-averse state banks and bloated state companies.

This comes despite repeated calls by Prime Minister Li Keqiang and other senior officials to foster innovation, entrepreneurship and structural reform in order to shift the economy from credit-fueled infrastructure to high-tech industry and services....

pgl -> anne... , Friday, July 15, 2016 at 01:28 PM
China is doomed? I don't think so. Talk to any multinational and China is the new future. Although they complain that the Chinese SAT is really tough on transfer pricing enforcement. Our tax authority should take lessons from their Chinese counterparts.
anne -> pgl... , Friday, July 15, 2016 at 01:36 PM
Talk to any multinational and China is the new future. Although they complain that the Chinese State Administration Of Taxation is really tough on transfer pricing enforcement....

[ Really interesting. ]

anne -> pgl... , Friday, July 15, 2016 at 03:06 PM
Talk to any multinational and China is the new future. Although they complain that the Chinese State Administration Of Taxation is really tough on transfer pricing enforcement....

[ Again, critical for China and just what Stephen Roach of Yale has noticed and several times argued when interviewed on Bloomberg. ]

anne -> anne... , Friday, July 15, 2016 at 01:30 PM
So Chinese growth less than 6.7% would mean China was nearing doom, while growth at 6.7% means China is doomed, because growth less than 6.7% would mean that even though China slowing growth means doom for China at least slowing growth would show that the advice to restructure the economy of so many Western economists was being listened to, but 6.7% growth shows China is not listening to the advice of so many Western economists and that means, well, you know...

I think I understand.

anne -> anne... , Friday, July 15, 2016 at 01:33 PM
http://www.nytimes.com/2016/07/16/business/international/china-gdp-growth-stimulus.html

July 15, 2016

As China's Economy Slows, Beijing's Growth Push Loses Punch
By NEIL GOUGH and OWEN GUO

High debt and a glut of unneeded factories are hindering the government's usual method of using spending and lending to create more activity.

sanjait -> anne... , Friday, July 15, 2016 at 04:52 PM
Chinese growth is 6.7% with massive and unsustainable government interventions, and potentially some book cooking.

Meanwhile, people like Anne self-righteously accuse anyone who points to China's poor econ fundamentals and trends as being Western Imperialists, or something.

But if you feel so confident, go ahead and invest your money in China. The opportunity cost is low, given low rates in the devloped world, and they would certainly welcome the cash influx.

JohnH : , Friday, July 15, 2016 at 01:33 PM
IOW the real interest rate (CPI now @ 1.0%) is negative for 3 month and two year treasuries, 0.14% for 5 years, .57% for 10 years. If you invest in anything longer, a saver runs the risk of losing your shirt if a) rates unexpectedly go up or b) inflation rises forcing interest rates up.

It seems that economists enamored with inflation are oblivious (willfully?) to the consequences of saddling peopling with as much poor yielding secure debt as possible. Sure it will cheapen the real value of government debt, their primary goal, but only by screwing savers.

Unfortunately, higher inflation will make a lot of long term lenders bankrupt (think mortgage companies) as interest rates on borrowing short term exceed the interest rates on mortgages, which are currently at historical lows. To make matters worse, mark-to-market accounting will decimate the value of their holdings.

IMO anyone who lends long term, institutions or individuals buying 30 year bonds, is completely nuts. Without long term lending to support economic growth, how can the economy possibly grow?

anne -> JohnH... , Friday, July 15, 2016 at 03:14 PM
Unfortunately, higher inflation will make a lot of long term lenders bankrupt (think mortgage companies) as interest rates on borrowing short term exceed the interest rates on mortgages, which are currently at historical lows. To make matters worse, mark-to-market accounting will decimate the value of their holdings....

[ The question to ask is how can and will a mortgage company such as a Wells Fargo handle an increase in long term interest rates. There is a reason Warren Buffett has Well as a key Berkshire Hathaway holding and has recently been buying more of the company. Wells will be fine, but how?

"How" is an important question. ]

pgl -> JohnH... , Friday, July 15, 2016 at 03:19 PM
"t seems that economists enamored with inflation are oblivious"

More dishonest intellectual garbage. Economist are not for high inflation. We are for full employment. OK, OK - we know you are against full employment but hey!

JohnH -> pgl... , Friday, July 15, 2016 at 03:53 PM
Oh, puleez! If 'liberal' economists were for full employment, they would obsess about the Fed's employment target. But they don't...they obsess about not enough inflation, witout being very fussy about how to get more of it.

Do 'liberal' economists have such difficulty with the English language that they constantly substitute the word ' inflation' for 'employment?' Reading economic papers or Yellen's statements, one might think so. it's easy to see how much they struggle expressing their ideas. But constantly substituting 'inflation' for 'employment' is a bit over the top, even for tongue tied economists.

sanjait -> JohnH... , Friday, July 15, 2016 at 04:49 PM
Raising rates creates jobs ... if it were opposite day.
sanjait : , Friday, July 15, 2016 at 04:47 PM
Technical but important point: it's not the *current* profit share that matters for stock prices but rather the way current share reflects on expectations of the future that really matter.

So while Dean Baker, in his quest to nit pick everything Paul Krugman says in order to bring cheer to butt hurt Sandernistas everywhere (Who still haven't forgiven PK for daring to criticize their Beloved), does correctly note that profit share has declined, he fails to realize that a cyclical factor moving cyclically doesn't mean expectations of future profit share haven't also risen.

kaleberg : , -1
The real weakness in investment is the lack of wage growth which has limited consumer demand. Flat, or even shrinking, consumer demand means flat or shrinking demand for investment. When there is nothing to invest in, your best bet is the stock market.

[Jul 16, 2016] Stats Watch

Notable quotes:
"... Game Players of Titan ..."
www.nakedcapitalism.com

naked capitalism

Stats Watch

Industrial Production, June 2016: "Vehicles held down industrial production in May but not in June, making for a big 0.6 percent gain that is just outside Econoday's high-end estimate" [ Econoday ]. "Looking at details deeper in the report, the output of business equipment rose a solid 0.7 percent but the year-on-year rate, in what is definitive evidence of weakness in business investment, is in the negative column at minus 0.6 percent. The output of consumer goods, up 1.6 percent on the year, rose 1.1 percent in the month in what is another good showing in this report." However: "The headlines say seasonally adjusted Industrial Production (IP) improved. The year-over-year data remains in contraction but the trend lines are now pointing towards improvement" [ Econintersect ]. "Economic downturns have been signaled by only watching the manufacturing portion of Industrial Production. Historically manufacturing year-over-year growth has been negative when a recession is imminent. This index is nearing the warning area for a recession."

Empire State Mfg Survey, July 2016: "The first anecdotal report on the factory sector for the month of July is not very promising as the Empire State index barely held in the plus column" [ Econoday ]

Business Inventories, May 2016: " Businesses are keeping their inventories in check amid slow sales. Inventories rose only 0.2 percent in May following April's even leaner 0.1 percent rise. Sales in May also rose 0.2 percent keeping the inventory-to-sales ratio unchanged at 1.40, which is a little less lean than this time last year when the ratio was at 1.37″ [ Econoday ]. "Retail inventories did rise an outsized 0.5 percent in May in a build, however, that looks to be drawn down by what proved to be very strong retail sales in June. Manufacturing inventories fell 0.1 percent in May with wholesalers up 0.1 percent." But: "Econintersect's analysis of final business sales data (retail plus wholesale plus manufacturing) shows unadjusted sales improved compared to the previous month – but due to backward revisions the rolling averages declined. Inventory growth was moderate. The inventory-to-sales ratios remain at recessionary levels" [ Econintersect ].

Retail Sales, June 2016: "June proved a fabulous month for the consumer though May, after revisions, proved only so so." Above consensus [ Econoday ]. "Ex-auto ex-gas offers a gauge on underlying trends in consumer spending, a dominant one of which is ecommerce as nonstore retailers popped a 1.1 percent surge in the month which follows even stronger gains in prior months. Department stores, up 0.9 percent, show a big comeback in the month with sporting goods & hobbies strong for a second month. An outsized gain, one that hints at adjustment issues and the risk of a downward revision, is a 3.9 percent surge in building materials & garden equipment, a component that had been lagging…. This report is a major plus for the second-half economic outlook not to mention coming data on the second quarter (sales for April, after the second revision, are at a standout plus 1.2 percent). The job market is healthy and the consumer is alive and spending." A little cold water: "Retail sales improved according to US Census headline data. Our view of this month's data is similar but there was a decline in the rolling averages – and downward revision to last month's data" [ Econintersect ]. This Maine bear sunk more money into shelter and did a lot of gardening. I hate to think I'm an ideal type.

Consumer Price Index, June 2016: "Price pressures evident the last two months down the supply chain are not yet appearing in consumer prices" [ Econoday ]. Caveat: "[I]nflation does not correlate well to the economy – and cannot be used as a economic indicator" [ Econintersect ].

Consumer Sentiment: "In perhaps an early indication of a U.S. Brexit effect, the consumer sentiment flash for July is down a sharp 4.0 points to 89.5. Weakness is centered in the expectations component which fell 5.3 points to 77.1 for one of the very weakest readings of the last two years. Weakness in expectations ultimately points to doubts over the jobs outlook" [ Econoday ]. But: ""Prior to the Brexit vote, virtually no consumer thought the issue would have the slightest impact on the U.S. economy. Following the Brexit vote, it was mentioned by record numbers of consumers, especially high income consumers," [Richard Curtin, the survey of consumers chief economist] said."

Shipping: "[T]he National Retail Federation is forecasting only a modest pickup at U.S. ports, with container volume that would hardly amount to a peak at all" [ Wall Street Journal ].

Shipping: "Transportation-sector analysts believe that rail volumes, which have declined over the past year, may be bottoming out. Things are looking brighter for the second half of the year, as natural gas and oil prices recover, driving more energy-related shipments. Seasonal grain exports should also provide a boost" [ Wall Street Journal , "Has U.S. Rail Traffic Found Its Rebound?"].

Supply Chain: "By creating a permanent record that can't be altered, blockchain is well-suited for tracking diamonds and other goods where buyers want to know the origins and previous owners, said Bill Fearnley Jr., a research director at International Data Corp" [ Wall Street Journal ].

Shipping: "UPS and FedEx expand pharmaceutical shipping channels to global market" [ DC Velocity ]. Seems to be optimized for clinical trials and testing, however. "The international drug market is swelling rapidly to accommodate the 20 to 30 million new Americans who have recently become insured under the Affordable Care Act and, more broadly, the "silvering" of an aging global population with growing medical needs." Because I don't get how the ACA spurs demands for international pharma shipments to patients.

Housing: "Big Wall Street investors stopped buying real estate in large quantities back in late 2014. In many cases big investors had front row seats at banks and were able to buy in bulk and for incredibly low prices not offered to the public. This crowding out of course has caused two major things to unfold: inventory to dwindle and a push up in prices for regular families looking to buy. For the first time in history many things happened in the housing market including nationally falling prices but also a large interest from Wall Street in single family homes. Now with prices near previous peak levels many of these large investors are making the full exit by offering to sell the homes to current tenants, for of course a modest increase. Those bailouts that were geared to helping the public actually created a system that has slammed the homeownership rate lower and has now jacked home prices up once again. Large investors are now making their final play by cashing out" [ Dr Housing Bubble ]. I'd want Yve's views on this, but selling to the little guy at the peak of the market sure looks like a PE scam to me. Readers, do any of you have direct experience with this?

Helicopter Money: "Monetary financing of public sector spending isn't a giant leap from where Japan is today – it could get there in a series of small steps. It would be more a case of 'drone money' than 'helicopter money' if the BOJ were to go from buying longer and longer-dated debt with lower and lower coupons to something indistinguishable from zero-coupon perpetuals. But away from such idle speculation, with monetary and fiscal policy working hand-in-hand to drive inflation expectations up, and to drive investors out of domestic assets, there's room for the yen to weaken (quite a lot) further; all the more so as the US economy stabilises" [SocGen, Across the Curve ]. You can borrow money for free and there's no government infrastructure program. Speaking of cashing out, is that what the elites are doing globally? Not that I'm foily. The best science fiction novel with autonomous vehicles that I can recall is Philip K. Dick's Game Players of Titan , and that was a depopulated world…

The Bezzle: "[F]or Google, the ultimate outcome does not look bright. A new EU competition chief is overseeing this barrage of cases, as European corporate giants line up against the Silicon Valley behemoth. Meanwhile, as Google relies more on artificial intelligence to automate a range of tasks that run its services behind the scenes, it could face a whole new round of conflict with Europe. In the end, Google in Europe could wind up as a very different thing than Google at home" [ Wired ].

The Bezzle: "BP announced on Thursday it believes the final pre-tax cost of its Deepwater Horizon spill will be $61.6bn or $44bn after tax" [ Splash247 ]. But no jail time for executives, since they have elite impunity, say for ecocide. I say let's look forward and not back.

Political Risk: "[S]hipping companies fear the [Hague Tribunal's] ruling [on the "Nine-Dash Line"] could embolden the Philippines and other smaller nations to assert their rights to the waters more aggressively and that any conflict would disrupt ship-borne trade in the waters between Hong Kong and Indonesia. Thousands of ships transit those waters daily, and a third of the world's liquefied natural gas passes through the Straits of Malacca to the South China Sea" [ Wall Street Journal ]. " Even if shipping isn't disrupted, companies say they face higher costs if the standoff escalates since insurance companies are likely to drive up rates."

[Jul 16, 2016] A Plea for Some Sympathy for Repentant Left Neoliberals...

www.bradford-delong.com

...As the very sharp Patrick Iber tweeted somewhere, the usual response to economic distress in democracies with broad franchises is: "Throw the bastards out!" Consider the Great Depression: Labour collapses in Britain in 1931. The Republicans collapse in the U.S. in 1932. And in Germany… shudder .

Then, I think, Dani firmly grasps the correct thread:

A greater weakness of the left [is] the absence of a clear program to refashion capitalism and globalization for the twenty-first century…. The left has failed to come up with ideas that are economically sound and politically popular, beyond ameliorative policies such as income transfers. Economists and technocrats on the left bear a large part of the blame. Instead of contributing to such a program, they abdicated too easily to market fundamentalism and bought in to its central tenets.

In retrospect, who can disagree? We misjudged the proper balance between state and market, between command-and-control and market-incentive roads to social democratic ends.

But then I must, again, dissent in part. Dani:

Worse still, [Economists and technocrats on the left] led the hyper-globalization movement at crucial junctures. The enthroning of free capital mobility-especially of the short-term kind-as a policy norm by the European Union, the Organization for Economic Cooperation and Development, and the IMF was arguably the most fateful decision for the global economy in recent decades. As Harvard Business School professor Rawi Abdelal has shown, this effort was spearheaded in the late 1980s and early 1990s not by free-market ideologues, but by French technocrats such as Jacques Delors (at the European Commission) and Henri Chavranski (at the OECD), who were closely associated with the Socialist Party in France. Similarly, in the US, it was technocrats associated with the more Keynesian Democratic Party, such as Lawrence Summers, who led the charge for financial deregulation. France's Socialist technocrats appear to have concluded from the failed Mitterrand experiment with Keynesianism in the early 1980s that domestic economic management was no longer possible, and that there was no real alternative to financial globalization. The best that could be done was to enact Europe-wide and global rules, instead of allowing powerful countries like Germany or the US to impose their own.

Tom aka Rusty said... Going back to 1997, Rodrik is one of the few economists who earned his pay.

Much of economics has not been worth reading and not been worth believing.

[Jul 12, 2016] The President of Belgian Magistrates Neoliberalism is a form of Fascism - Defend Democracy Press

Notable quotes:
"... Neoliberalism is a form of economism in our day that strikes at every moment at every sector of our community. It is a form of extremism. ..."
"... Every totalitarianism starts as distortion of language, as in the novel by George Orwell. Neoliberalism has its Newspeak and strategies of communication that enable it to deform reality. In this spirit, every budgetary cut is represented as an instance of modernization of the sectors concerned. If some of the most deprived are no longer reimbursed for medical expenses and so stop visiting the dentist, this is modernization of social security in action! ..."
"... Social Darwinism predominates, assigning the most stringent performance requirements to everyone and everything: to be weak is to fail. The foundations of our culture are overturned: every humanist premise is disqualified or demonetized because neoliberalism has the monopoly of rationality and realism. Margaret Thatcher said it in 1985: "There is no alternative." Everything else is utopianism, unreason and regression. The virtue of debate and conflicting perspectives are discredited because history is ruled by necessity. ..."
"... In spite of the crisis of 2008 and the hand-wringing that followed, nothing was done to police the financial community and submit them to the requirements of the common good. Who paid? Ordinary people, you and me. ..."
Defend Democracy

Neoliberalism is a species of fascism

By Manuela Cadelli, President of the Magistrates' Union of Belgium

The time for rhetorical reservations is over. Things have to be called by their name to make it possible for a co-ordinated democratic reaction to be initiated, above all in the public services.2

Liberalism was a doctrine derived from the philosophy of Enlightenment, at once political and economic, which aimed at imposing on the state the necessary distance for ensuring respect for liberties and the coming of democratic emancipation. It was the motor for the arrival, and the continuing progress, of Western democracies.

Neoliberalism is a form of economism in our day that strikes at every moment at every sector of our community. It is a form of extremism.

Fascism may be defined as the subordination of every part of the State to a totalitarian and nihilistic ideology. I argue that neoliberalism is a species of fascism because the economy has brought under subjection not only the government of democratic countries but also every aspect of our thought.1 The state is now at the disposal of the economy and of finance, which treat it as a subordinate and lord over it to an extent that puts the common good in jeopardy.

The austerity that is demanded by the financial milieu has become a supreme value, replacing politics. Saving money precludes pursuing any other public objective. It is reaching the point where claims are being made that the principle of budgetary orthodoxy should be included in state constitutions. A mockery is being made of the notion of public service.

The nihilism that results from this makes possible the dismissal of universalism and the most evident humanistic values: solidarity, fraternity, integration and respect for all and for differences.

There is no place any more even for classical economic theory: work was formerly an element in demand, and to that extent there was respect for workers; international finance has made of it a mere adjustment variable.

Every totalitarianism starts as distortion of language, as in the novel by George Orwell. Neoliberalism has its Newspeak and strategies of communication that enable it to deform reality. In this spirit, every budgetary cut is represented as an instance of modernization of the sectors concerned. If some of the most deprived are no longer reimbursed for medical expenses and so stop visiting the dentist, this is modernization of social security in action!

Abstraction predominates in public discussion so as to occlude the implications for human beings.

Thus, in relation to migrants, it is imperative that the need for hosting them does not lead to public appeals that our finances could not accommodate. Is it In the same way that other individuals qualify for assistance out of considerations of national solidarity?

The cult of evaluation

Social Darwinism predominates, assigning the most stringent performance requirements to everyone and everything: to be weak is to fail. The foundations of our culture are overturned: every humanist premise is disqualified or demonetized because neoliberalism has the monopoly of rationality and realism. Margaret Thatcher said it in 1985: "There is no alternative." Everything else is utopianism, unreason and regression. The virtue of debate and conflicting perspectives are discredited because history is ruled by necessity.

This subculture harbours an existential threat of its own: shortcomings of performance condemn one to disappearance while at the same time everyone is charged with inefficiency and obliged to justify everything. Trust is broken. Evaluation reigns, and with it the bureaucracy which imposes definition and research of a plethora of targets, and indicators with which one must comply. Creativity and the critical spirit are stifled by management. And everyone is beating his breast about the wastage and inertia of which he is guilty.1

The neglect of justice

The neoliberal ideology generates a normativity that competes with the laws of parliament. The democratic power of law is compromised. Given that they represent a concrete embodiment of liberty and emancipation, and given the potential to prevent abuse that they impose, laws and procedures have begun to look like obstacles.

The power of the judiciary, which has the ability to oppose the will of the ruling circles, must also be checkmated. The Belgian judicial system is in any case underfunded. In 2015 it came last in a European ranking that included all states located between the Atlantic and the Urals. In two years the government has managed to take away the independence given to it under the Constitution so that it can play the counterbalancing role citizens expect of it. The aim of this undertaking is clearly that there should no longer be justice in Belgium.

A caste above the Many

But the dominant class doesn't prescribe for itself the same medicine it wants to see ordinary citizens taking: well-ordered austerity begins with others. The economist Thomas Piketty has perfectly described this in his study of inequality and capitalism in the twenty-first century (French edition, Seuil, 2013).

In spite of the crisis of 2008 and the hand-wringing that followed, nothing was done to police the financial community and submit them to the requirements of the common good. Who paid? Ordinary people, you and me.

And while the Belgian State consented to 7 billion-euro ten-year tax breaks for multinationals, ordinary litigants have seen surcharges imposed on access to justice (increased court fees, 21% taxation on legal fees). From now on, to obtain redress the victims of injustice are going to have to be rich.

All this in a state where the number of public representatives breaks all international records. In this particular area, no evaluation and no costs studies are reporting profit. One example: thirty years after the introduction of the federal system, the provincial institutions survive. Nobody can say what purpose they serve. Streamlining and the managerial ideology have conveniently stopped at the gates of the political world.

The security ideal

Terrorism, this other nihilism that exposes our weakness in affirming our values, is likely to aggravate the process by soon making it possible for all violations of our liberties, all violations of our rights, to circumvent the powerless qualified judges, further reducing social protection for the poor, who will be sacrificed to "the security ideal".


Salvation in commitment

These developments certainly threaten the foundations of our democracy, but do they condemn us to discouragement and despair?

Certainly not. 500 years ago, at the height of the defeats that brought down most Italian states with the imposition of foreign occupation for more than three centuries, Niccolo Machiavelli urged virtuous men to defy fate and stand up against the adversity of the times, to prefer action and daring to caution. The more tragic the situation, the more it necessitates action and the refusal to "give up" (The Prince, Chapters XXV and XXVI).

This is a teaching that is clearly required today. The determination of citizens attached to the radical of democratic values is an invaluable resource which has not yet revealed, at least in Belgium, its driving potential and power to change what is presented as inevitable. Through social networking and the power of the written word, everyone can now become involved, particularly when it comes to public services, universities, the student world, the judiciary and the Bar, in bringing the common good and social justice into the heart of public debate and the administration of the state and the community.

Neoliberalism is a species of fascism. It must be fought and humanism fully restored.4

Published in the Belgian daily Le Soir, 3.3.2016

translated from French by Wayne Hall

Le néolibéralisme est un fascisme, par Manuela Cadelli

Read also:


[Jul 12, 2016] The Fiscal Times

www.thefiscaltimes.com
].

"That empowerment must be both economic and political. Workers deserve to be compensated fairly for their work, and have generous social support programs to rely upon when economic changes that are out of their control throw them out of work or force them to accept lower paying jobs. We should not hesitate to ask those who have gained so much from globalization and technological change to give something back to those who have paid the costs of their success." All this would have been especially great, say, forty or even thirty years ago.

[Jul 12, 2016] The Abdication of the Left by Dani Rodrik - Project Syndicate

Notable quotes:
"... As the world reels from the Brexit shock, it is dawning on economists and policymakers that they severely underestimated the political fragility of the current form of globalization. The popular revolt that appears to be underway is taking diverse, overlapping forms: reassertion of local and national identities, demand for greater democratic control and accountability, rejection of centrist political parties, and distrust of elites and experts. ..."
"... As an emerging new establishment consensus grudgingly concedes, globalization accentuates class divisions between those who have the skills and resources to take advantage of global markets and those who don't. Income and class cleavages, in contrast to identity cleavages based on race, ethnicity, or religion, have traditionally strengthened the political left. So why has the left been unable to mount a significant political challenge to globalization? ..."
"... Latin American democracies provide a telling contrast. These countries experienced globalization mostly as a trade and foreign-investment shock, rather than as an immigration shock. Globalization became synonymous with so-called Washington Consensus policies and financial opening. Immigration from the Middle East or Africa remained limited and had little political salience. So the populist backlash in Latin America – in Brazil, Bolivia, Ecuador, and, most disastrously, Venezuela – took a left-wing form. ..."
"... Economists and technocrats on the left bear a large part of the blame. Instead of contributing to such a program, they abdicated too easily to market fundamentalism and bought in to its central tenets. Worse still, they led the hyper-globalization movement at crucial junctures. ..."
"... The enthroning of free capital mobility – especially of the short-term kind – as a policy norm by the European Union, the Organization for Economic Cooperation and Development, and the IMF was arguably the most fateful decision for the global economy in recent decades. ..."
"... Similarly, in the US, it was technocrats associated with the more Keynesian Democratic Party, such as Lawrence Summers, who led the charge for financial deregulation. ..."
"... France's Socialist technocrats appear to have concluded from the failed Mitterrand experiment with Keynesianism in the early 1980s that domestic economic management was no longer possible, and that there was no real alternative to financial globalization. The best that could be done was to enact Europe-wide and global rules, instead of allowing powerful countries like Germany or the US to impose their own. ..."
"... The good news is that the intellectual vacuum on the left is being filled, and there is no longer any reason to believe in the tyranny of "no alternatives." Politicians on the left have less and less reason not to draw on "respectable" academic firepower in economics. ..."
"... Consider just a few examples: Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation; Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left. ..."
"... Economists have finally admitted that offshoring has resulted in the loss of American jobs. They no long mention that only a few years they claimed that offshoring created newer and higher paying American jobs. Isn't science wonderful. Middle and working class women went to work to maintain living standards, eventually the middle and working classes resorted to debt resulting in the Great Recession. ..."
"... In addition to economic instability and decline of the lower orders the federal government has sought to encourage immigration, H1-Bs, refugees and others. These people take jobs from Americans (economist dogma notwithstanding) or reduce American incomes if they are not on public assistance. ..."
"... Even Krugman has characterized America as a plutocracy. ..."
"... Yet the sudden success of Trump shows that many Americans are too angry to listen to plans for distant economic melioration or to tolerate cultural destabilization at the hands of government that no longer represents their interests, economic or cultural. Liberals can castigate them and dismiss their political judgment but it might help to spend some time trying to see the world from their perspective ..."
"... As they don't seem to fit into the equations and theories of the economists, both civic virtue and public trust have been assigned an economic value of zero and factored out of the "it's the ecomomy stupid" world view entirely. Or so it seems to me. ..."
"... "Who's rich?" is an easier question to answer than "who's trustworthy." ..."
"... The Washington consensus was pure Hayek. Summers was the purest of the pure on the Washington consensus. As Summers destroyed Yeltsin's good economic reform in 1993, Stiglitz was his chief adversary in government. Stiglitz wrote about how utterly ideological Summers was. And was under Obama. Now he is for the pittance of infrastructure Clinton wants in the hope she will name him Fed chief. ..."
"... The utter hysteria about Trump on the "left" is very illuminating . One judges a populist like Trump at one's peril. But the evidence strongly suggests that Hank Paulson and George Will--and others like them--understand Trump and Clinton quite well on domestic policy. She is the Republican--and as in 1964, a Goldwater Republican at that. He is on the left. The left does not want a left-wing policy. ..."
"... IS THERE THE MENTION OF THE WORD "LABOR UNION" IN THERE ANYWHERE -- ADMITTEDLY ONLY COMPLETELY MISSING IN THE US? ..."
"... When you have the US congress acting like a Roman senate but without a Ceasar, legislating left and right as if they are the supremos on the world stage and destroying anything and everything in their path and other world leaders following the orders of their masters in the US without questioning or even a say, how can one expect anything to work. ..."
www.project-syndicate.org
].

[T]he experience in Latin America and southern Europe reveals perhaps a greater weakness of the left: the absence of a clear program to refashion capitalism and globalization for the twenty-first century. From Greece's Syriza to Brazil's Workers' Party, the left has failed to come up with ideas that are economically sound and politically popular, beyond ameliorative policies such as income transfers.

Economists and technocrats on the left bear a large part of the blame. Instead of contributing to such a program, they abdicated too easily to market fundamentalism and bought in to its central tenets. Worse still, they led the hyper-globalization movement at crucial junctures.

As the world reels from the Brexit shock, it is dawning on economists and policymakers that they severely underestimated the political fragility of the current form of globalization. The popular revolt that appears to be underway is taking diverse, overlapping forms: reassertion of local and national identities, demand for greater democratic control and accountability, rejection of centrist political parties, and distrust of elites and experts.

This backlash was predictable. Some economists, including me, did warn about the consequences of pushing economic globalization beyond the boundaries of institutions that regulate, stabilize, and legitimize markets. Hyper-globalization in trade and finance, intended to create seamlessly integrated world markets, tore domestic societies apart.

The bigger surprise is the decidedly right-wing tilt the political reaction has taken. In Europe, it is predominantly nationalists and nativist populists that have risen to prominence, with the left advancing only in a few places such as Greece and Spain. In the United States, the right-wing demagogue Donald Trump has managed to displace the Republican establishment, while the leftist Bernie Sanders was unable to overtake the centrist Hillary Clinton.

As an emerging new establishment consensus grudgingly concedes, globalization accentuates class divisions between those who have the skills and resources to take advantage of global markets and those who don't. Income and class cleavages, in contrast to identity cleavages based on race, ethnicity, or religion, have traditionally strengthened the political left. So why has the left been unable to mount a significant political challenge to globalization?

One answer is that immigration has overshadowed other globalization "shocks." The perceived threat of mass inflows of migrants and refugees from poor countries with very different cultural traditions aggravates identity cleavages that far-right politicians are exceptionally well placed to exploit. So it is not a surprise that rightist politicians from Trump to Marine Le Pen lace their message of national reassertion with a rich dose of anti-Muslim symbolism.

Latin American democracies provide a telling contrast. These countries experienced globalization mostly as a trade and foreign-investment shock, rather than as an immigration shock. Globalization became synonymous with so-called Washington Consensus policies and financial opening. Immigration from the Middle East or Africa remained limited and had little political salience. So the populist backlash in Latin America – in Brazil, Bolivia, Ecuador, and, most disastrously, Venezuela – took a left-wing form.

The story is similar in the main two exceptions to right-wing resurgence in Europe – Greece and Spain. In Greece, the main political fault line has been austerity policies imposed by European institutions and the International Monetary Fund. In Spain, most immigrants until recently came from culturally similar Latin American countries. In both countries, the far right lacked the breeding ground it had elsewhere.

But the experience in Latin America and southern Europe reveals perhaps a greater weakness of the left: the absence of a clear program to refashion capitalism and globalization for the twenty-first century. From Greece's Syriza to Brazil's Workers' Party, the left has failed to come up with ideas that are economically sound and politically popular, beyond ameliorative policies such as income transfers.

Economists and technocrats on the left bear a large part of the blame. Instead of contributing to such a program, they abdicated too easily to market fundamentalism and bought in to its central tenets. Worse still, they led the hyper-globalization movement at crucial junctures.

The enthroning of free capital mobility – especially of the short-term kind – as a policy norm by the European Union, the Organization for Economic Cooperation and Development, and the IMF was arguably the most fateful decision for the global economy in recent decades. As Harvard Business School professor Rawi Abdelal has shown, this effort was spearheaded in the late 1980s and early 1990s not by free-market ideologues, but by French technocrats such as Jacques Delors (at the European Commission) and Henri Chavranski (at the OECD), who were closely associated with the Socialist Party in France. Similarly, in the US, it was technocrats associated with the more Keynesian Democratic Party, such as Lawrence Summers, who led the charge for financial deregulation.

France's Socialist technocrats appear to have concluded from the failed Mitterrand experiment with Keynesianism in the early 1980s that domestic economic management was no longer possible, and that there was no real alternative to financial globalization. The best that could be done was to enact Europe-wide and global rules, instead of allowing powerful countries like Germany or the US to impose their own.

The good news is that the intellectual vacuum on the left is being filled, and there is no longer any reason to believe in the tyranny of "no alternatives." Politicians on the left have less and less reason not to draw on "respectable" academic firepower in economics.

Consider just a few examples: Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation; Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left.

A crucial difference between the right and the left is that the right thrives on deepening divisions in society – "us" versus "them" – while the left, when successful, overcomes these cleavages through reforms that bridge them. Hence the paradox that earlier waves of reforms from the left – Keynesianism, social democracy, the welfare state – both saved capitalism from itself and effectively rendered themselves superfluous. Absent such a response again, the field will be left wide open for populists and far-right groups, who will lead the world – as they always have – to deeper division and more frequent conflict.

Dani Rodrik is Professor of International Political Economy at Harvard University's John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy and, most recently, Economics Rules: The Rights and Wrongs of the Dismal Science.


Tom Shillock JUL 12, 2016

The distribution of a society's benefits and burdens at any point in time is zero sum. Over the past four decades financial deregulation, tax laws and numerous federal government policies transferred the bulk of the gains from GDP to the upper class while causing numerous financial crises (100+ according to Martin Wolf, The Shifts and The Shocks). Economists have finally admitted that offshoring has resulted in the loss of American jobs. They no long mention that only a few years they claimed that offshoring created newer and higher paying American jobs. Isn't science wonderful. Middle and working class women went to work to maintain living standards, eventually the middle and working classes resorted to debt resulting in the Great Recession.

In addition to economic instability and decline of the lower orders the federal government has sought to encourage immigration, H1-Bs, refugees and others. These people take jobs from Americans (economist dogma notwithstanding) or reduce American incomes if they are not on public assistance. The effects are working their way up the 'skill' level. This at a time when middle and working class Americans lack universal health care, are being priced out of higher education, lack job security, lack decent unemployment benefits and have one of the worst social safety net in the OECD.

Self-styled American "liberals" don't seem to distinguish between the legitimate claims of their fellow citizens and the sympathy or empathy for foreigners. Surely, citizens, especially the middle and working classes, should have first claim to the country's resources; not the rich and not foreigners. Citizens of a country also have a right to their culture, to not have their taxes pay to suddenly impose large numbers of people from foreign cultures on them. Is it an wonder that many Americans feel abandoned by their government?

America has never been a "melting pot" (Cf. Beyond the Melting Pot by Nathan Glazer and Daniel Patrick Moynihan). Should it surprise that "liberals" provoke a backlash by trying to impose their utopian idea of American society on Americans who have seen their economic prospects decline for four decades with little prospect of improvement? Even Krugman has characterized America as a plutocracy. Piketty argues that inequality will increase absent countervailing policies. Yet the sudden success of Trump shows that many Americans are too angry to listen to plans for distant economic melioration or to tolerate cultural destabilization at the hands of government that no longer represents their interests, economic or cultural. Liberals can castigate them and dismiss their political judgment but it might help to spend some time trying to see the world from their perspective

Denis Drew JUL 12, 2016

" Consider just a few examples: Anat Admati and Simon Johnson have advocated radical banking reforms; Thomas Piketty and Tony Atkinson have proposed a rich menu of policies to deal with inequality at the national level; Mariana Mazzucato and Ha-Joon Chang have written insightfully on how to deploy the public sector to foster inclusive innovation; Joseph Stiglitz and José Antonio Ocampo have proposed global reforms; Brad DeLong, Jeffrey Sachs, and Lawrence Summers (the very same!) have argued for long-term public investment in infrastructure and the green economy. There are enough elements here for building a programmatic economic response from the left. "

J. Bradford DeLong JUL 12, 2016

As always, when the extremely sharp Dani Rodrick stuffs a book-length argument into an 800-word op-ed column, phrases acti as gestures toward what are properly chapter-long arguments. So there is lots to talk about... http://delong.typepad.com/delong_long_form/2016/07/a-plea-for-some-sympathy-for-repentant-left-neoliberals.html

Curtis Carpenter Jun 11, 2016

I wonder though if the hegemony of the economic perspective in modern society hasn't played a vital role in both the abdication of the left AND the corruption of the right?

As they don't seem to fit into the equations and theories of the economists, both civic virtue and public trust have been assigned an economic value of zero and factored out of the "it's the ecomomy stupid" world view entirely. Or so it seems to me.

"Who's rich?" is an easier question to answer than "who's trustworthy."

Perhaps it isn't that "economic globalizations" has been pushed too far, but that the reduction of all human values to economic terms has.

Jerry F. Hough Jun 11, 2016

I have long followed Dani's work and agreed with his general analysis. He has an unusual knowledge of developing country politics, especially in Turkey and the Middle East

As a person involved for 55 years--really 60 years- in Soviet-American relations and policy politics or now for the last 15 years research and teaching on American political history and presidential politics, I would like to add a few points.

First, there are very few left-wingers on the left-wing. Free trade is Hayek applied to the international sphere where there is no government at all and, except for some bankers and the like, not even the common norms that Hayek substituted for government.

The Washington consensus was pure Hayek. Summers was the purest of the pure on the Washington consensus. As Summers destroyed Yeltsin's good economic reform in 1993, Stiglitz was his chief adversary in government. Stiglitz wrote about how utterly ideological Summers was. And was under Obama. Now he is for the pittance of infrastructure Clinton wants in the hope she will name him Fed chief.

Second, as we in Soviet studies understood, the left and right meet at the extremes and are not that different. Nazi was appropriately named. Hitler was National Socialist -- truly awful on the Nationalist side, but also quite socialist in domestic economic policy. Mussolini began as a Communist.

The New Left and Goldwater right of the 1960s had a very different set of views from the nationalistic socialists, but they were alike in being very, very similar in their libertarian views. Russell KIrk and Gordon Tullock were right in calling them anarchisti.

The utter hysteria about Trump on the "left" is very illuminating . One judges a populist like Trump at one's peril. But the evidence strongly suggests that Hank Paulson and George Will--and others like them--understand Trump and Clinton quite well on domestic policy. She is the Republican--and as in 1964, a Goldwater Republican at that. He is on the left. The left does not want a left-wing policy.

In foreign policy the evidence is even stronger that Trump would transform American foreign policy in the Middle East. Just as Nixon attacked "Communism" to reconcile with the Soviet Union and, as his chief adviser on the Soviet Union says, Reagan had a military buildup to prepare the public to accept real peace with the Soviet Union (and Obama had pro-Muslim rhetoric to hide the giving of all power to Cheney's man Brenner and the killing of Muslims), Trump's anti Muslim talk is almost surely a set-up for an anti-Netanyahu policy. The utter, utter, utter hysteria of the Netanyahu lobby shows they understand.

But the American "left-wing" is the New Left of the 1960s. It rejected the Old Left and a positive role for government. It was as libertarian in economics as in cultural life. Summers, who was 18 years old in the 1972 of McGovern is the epitome. (Krugman was 19). Bill Clinton, who conducted the libertarian revolution of 1992 was 26 in 1972.

This generation is passing. Trump, born in 1946, unfortunately, was raised in the confrontational atmosphere and retains its spirit. but at least he was in business and not part of the politics of the street. By the 2020s the millennials of the 1980s who came of age from 2000 to 2015 will be in power for three decades and have a very different set of assumptions.

Let us just hope the West survives until then. Read less

IS THERE THE MENTION OF THE WORD "LABOR UNION" IN THERE ANYWHERE -- ADMITTEDLY ONLY COMPLETELY MISSING IN THE US?

As long as nobody else talks about re-unionization (as the beginning and the end of re-constituting the American dream) - nobody thinks it is possible to talk about …
… or something.

Easy as pie to make union busting a felony in our most progressive states f(WA, OR, CA, NV, IL, NY, MD) - and then get out of the way as the first 2000 people in the many telephone directories re-define our future.

Do this or do nothing.

M M Jun 11, 2016

Dani, one should stop blaming migration (which is totally different from the refugees influx) and the right, centre and left parties. Based on the latest UK and US events, it very clear to the wise that none of these factors is a cause of the rise in nationalism or the discontent by the population. When you have the US congress acting like a Roman senate but without a Ceasar, legislating left and right as if they are the supremos on the world stage and destroying anything and everything in their path and other world leaders following the orders of their masters in the US without questioning or even a say, how can one expect anything to work.

Enough of the passing of the buck and of blaming the abstract. All problems started since this US administration came to office and due to its weakness or concealed collusion in resolving the important issues affecting the US and the world economies.



[Jul 06, 2016] We Don't Need Trump or Brexit to Reject the Credo of Neoliberal Market Inevitability

Notable quotes:
"... Jihad vs. McWorld ..."
www.truth-out.org

In the wake of the June 23 Brexit vote, global media have bristled with headlines declaring the Leave victory to be the latest sign of a historic rejection of "globalization" by working-class voters on both sides of the Atlantic. While there is an element of truth in this analysis, it misses the deeper historical currents coursing beneath the dramatic headlines. If our politics seem disordered at the moment, the blame lies not with globalization alone but with the "There Is No Alternative" (TINA) philosophy of neoliberal market inevitability that has driven it for nearly four decades.

British Prime Minister Margaret Thatcher introduced the TINA acronym to the world in a 1980 policy speech that proclaimed "There Is No Alternative" to a global neoliberal capitalist order. Thatcher's vision for this new order was predicated on the market-as-god economic philosophy she had distilled from the work of Austrian School economists such as Friedrich Hayek and her own fundamentalist Christian worldview. Western political life today has devolved into a series of increasingly desperate and inchoate reactions against a sense of fatal historical entrapment originally encoded in Thatcher's TINA credo of capitalist inevitability. If this historical undercurrent is ignored, populist revolt will not produce much-needed democratic reform. It will instead be exploited by fascistic nationalist demagogues and turned into a dangerous search for political scapegoats.

The Rebellion Against Inevitability

Thatcher's formulation of neoliberal inevitability manifested itself in a de facto policy cocktail of public sector budget cuts, privatization, financial deregulation, tax cuts for the rich, globalization of capital flows and militarization that were the hallmarks of her administration and a template for the future of the world's developed economies. After the 1991 collapse of the Soviet Union, whose coercive state socialism represented capitalism's last great power alternative, the underlying philosophy of economic inevitability that informed TINA seemed like a prescient divination of cosmic design, with giddy neoconservatives declaring the "end of history" and the triumph of putatively democratic capitalism over all other historical alternatives.

Nearly four decades later, with neoliberalism having swept the globe in triumph through a mix of technological innovation, exploitative financial engineering and brute force, eclipsing its tenuous democratic underpinnings in the process, disgraced British Prime Minister David Cameron maintained his devotion to TINA right up to the moment of Brexit. In a 2013 speech delivered as his government was preparing a budget that proposed 40 percent cuts in social welfare spending , sweeping privatization, wider war in Central Asia and continued austerity, he lamented that "If there was another way, I would take it. But there is no alternative." Although they may want a change of makeup or clothes, every G7 head of state heeds TINA's siren song of market inevitability.

As the de facto test subjects for the inexorable media-fueled march of this ubiquitous global model, disparate groups worldwide have become the unwitting faces of revolt against inevitability. Anonymized behind the august facades of global financial institutions, neoliberal capitalism under TINA has produced political rage, confusion, panic and a worldwide search for scapegoats and alternatives across the political spectrum.

The members of ISIS have rejected the highest ideals of Islam in their search for an alternative. Environmental activists attempt to counter the end-of-history narrative at the heart of TINA with the scientific inevitability of global climate-induced ecological catastrophe. Donald Trump offers a racial or foreign scapegoat for every social and economic malady created by TINA, much like the far-right nationalist parties emerging across Europe, while Bernie Sanders focuses on billionaires and Wall Street. Leftist movements such as Podemos in Spain or Syriza in Greece also embody attempted declarations of revolt against the narrative of inevitability, as do the angry votes for Brexit in England and Wales.

Without judging or implying equality in the value of these varied expressions of resistance, except to denounce the murderous ethos of ISIS and any other call to violence or racism, it is clear that each offers seeming alternatives to TINA's suffocating inevitability, and each attracts its own angry audience.

"Jihad" vs. "McWorld" and the New Theology of Capital

Benjamin Barber's 1992 essay and subsequent book, Jihad vs. McWorld , is a better guide to the current politics of rage than the daily news media. Barber describes a historic post-Soviet clash between the identity politics of tribalism ("Jihad") and the forced financial and cultural integration of corporate globalism ("McWorld").

McWorld is the financially integrated and omnipresent transnational order of wired capitalism that has anointed itself the historic guardian of Western civilization. It is viciously undemocratic in its pursuit of unrestricted profits and violently punitive in response to any hint of economic apostasy. (See Greece .) This new economic order offers the illusion of modernity with its globally wired infrastructure and endless stream of consumerist spectacles, but beneath the high-tech sheen, it is spiritually empty , predicated on permanent war , global poverty and is destroying the biosphere .

McWorld cuts its destructive path under a self-promoting presumption of historic inevitability, because after more than four decades of the TINA narrative, the underlying rationale of market predestination is no longer economic. It is theological. A historic transformation of market-based economic ideology into theology underpins modern capitalism's instrumentalized view of human nature and nature itself.

Descriptions such as "free-market fundamentalism" and "market orthodoxy" are not mere figures of speech. They point to a deeper, technologically powered religious metamorphosis of capitalism that needs to be understood before a meaningful political response can be mounted. One does not have to be Christian, nor Catholic, to appreciate Pope Francis' warnings against the danger to Christian values from "a deified market" with its "globalization of indifference." The pope is explicitly acknowledging a new theology of capital whose core ethos runs counter to the values of both classical and religious humanism.

Under the radically altered metaphysics of theologized capitalism, market outcomes are sacred and inevitable. Conversely, humanity and the natural world have been desacralized and defined as malleable forms of expendable and theoretically inexhaustible capital. Even life-sustaining ecosystems and individual human subjectivity are subsumed under a market rubric touted as historically preordained.

This is a crucial difference between capitalism today and capitalism even 50 years ago that is not only theological but apocalyptic in its refusal to acknowledge limits. It has produced a global, social and economic order that is increasingly feudal, while also connected via digital technologies.

Economic historian Karl Polanyi warned in 1944 that a false utopian belief in the ability of unfettered markets to produce naturally balanced outcomes would produce instead a dystopian "stark utopia." Today's political chaos represents a spontaneous and uncoordinated eruption of resistance against this encroaching sense of inevitable dystopianism. As Barber noted, what he refers to as "Jihad" is not a strictly Islamic phenomenon. It is localism, tribalism, particularism or sometimes classical republicanism taking a stand, often violently, acting as de facto social and political antibodies against the viral contagions of McWorld.

Pessimistic Optimism

The historically ordained march of theologized neoliberal capitalism depends for its continuation on a belief by individuals that they are powerless against putatively inevitable forces of market-driven globalization. It is too early to know where the widely divergent outbreaks of resistance on display in 2016 will lead, not least because they are uncoordinated, often self-contradictory or profoundly undemocratic, and are arising in a maelstrom of confusion about core causation.

One lesson nonetheless seems clear. The "power of the powerless" has been awakened globally. Whether this awakening will spark a movement towards equitable, ecologically sustainable democratic self-governance is an open question. Many of today's leading political theorists caution against an outdated Enlightenment belief in progress and extol the virtues of philosophic pessimism as a hedge against historically groundless optimism. Amid today's fevered populist excitements triggered by a failure of utopian faith in market inevitability, such cautionary thinking seems like sound political advice. Copyright, Truthout. May not be reprinted without permission .

Michael Meurer

Michael Meurer is the founder of Meurer Education, a project offering classes on the US political system in Latin American universities while partnering with local education micro-projects to assist them with publicity and funding. Michael is also president of Meurer Group & Associates, a strategic consultancy with offices in Los Angeles and Denver.

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[Jul 05, 2016] A few good recent links

peakoilbarrel.com

Survivalist , 07/04/2016 at 1:26 pm

Sorry if it's a repost but here are a few good recent links

And this article. Interesting point that Saudi Arabia will have a dilemma when they attempt to represent the interests of future shareholders in Saudi Aramco as well as be a cartel member and cooperate with OPEC interests.

http://www.upi.com/Business_News/Energy-Industry/2016/07/01/Paper-OPEC-worked-to-derail-US-shale/7621467376151/?spt=sec&or=bn

[Jul 05, 2016] New estimate for reserves and resources from Rystad

Notable quotes:
"... The developed proved and probable is 655 Gb, which would equate to about 4.5% natural decay rate. ..."
peakoilbarrel.com

George Kaplan , 07/04/2016 at 1:25 pm

New estimate for reserves and resources from Rystad:

http://www.worldoil.com/news/2016/7/4/us-now-holds-more-oil-reserves-than-saudi-arabia-rystad

The developed proved and probable is 655 Gb, which would equate to about 4.5% natural decay rate.

There is supposed to be about 900 Gb undiscovered, which at last years rates would take about 300 years to find (and my guess is that if there is that much hydrocarbon it has a significant amount of gas).

And there are 500 Gb discovered and undeveloped, I don't follow that much but there is a country break down to check out, but the IOCs stopped development with prices at $110 per barrel so it's probably going to cost more than $8 trillion to put that much on line.

[Jul 05, 2016] Arthur Berman Why The Price Of Oil Must Rise Peak Prosperity

Notable quotes:
"... So he's covered. I'm about to publish something here maybe today and the sub title of this section is called "It's not a lie if we tell you it's a lie." That's the name of the game. As long as the investor presentation or the news release says somewhere that we're using language here that we would never ever use in an SEC filing because they'd put us in jail. And so you guys need to know that. In other words, "we're lying," then it's technically not a lie. It's not fraud because we told you it was a lie. ..."
"... Well we started this conversation with your important observation that we're only talking about a million or million and a half barrels a day of oversupply. So we could go from over supply to deficit pretty quickly ..."
"... So just the capital cuts in US companies have effectively deferred $20 billion-or maybe the world, I'm sorry-$20 billion barrels of development of known proven reserves. ..."
"... Well there's a big lag. There's a huge time lag between when the price responds and people actually get around to drilling and they actually start bringing the oil onto the market and it becomes available as supply, because they've been asleep at the wheel for how many months or years. You don't just turn a valve and all of a sudden everything is okay again. ..."
"... There's this tremendous gap between "okay we know there's a reserve," but what's it take to turn it into supply? Well it takes time and it takes money and it doesn't happen overnight. ..."
"... EIA says average price in 2016 will be $53 a barrel. They're not always right and in fact they're often wrong but they're not stupid either. They're doing the best they can. They have got some good people there. ..."
"... Well just turn the clock back to 2012-2013 when oil prices were sky high, were $100 a barrel or more, and what we saw was consistent negative cash flow from virtually all of the major players. So what that says is they weren't making money when oil prices were high, so is it a big shock that they're hemorrhaging when oil prices are lower? So oil prices go back up-the bottom line Chris is the only way that they were able to stay looking fairly good back then to somebody, not me, was that people were giving them money. They had infinite access to capital at almost no cost, and so they were spending it. But their income statements and balance sheets look like crap and the investment community I guess was willing to look past that or didn't want to look at it or whatever. ..."
www.peakprosperity.com

Chris Martenson: ... And still when I look at the operators in those plays they're claiming that they're going to get twice that, sometimes even more than twice that out of each well. When I've calculated the economics in that play myself-I got a little spreadsheet, I did my level best. And then I found that you had calculated what's going on in that play as well. So let's cut right to that. In the Bakken, how many wells that get drilled out here right now would be economic in today's prices?

Arthur Berman: Almost none at today's prices. The latest from the North Dakota Department of Mineral Resources says that wellhead prices are in the 20's so… I published a report not very long ago that said that 1% of the Bakken was breaking even at $30 oil prices. So now we're below that and I don't remember exactly what percentage of wells but it was something like maybe 5 or 6%. But so right now let's face it Chris, let's just get it right out there in the open: Everybody is losing their ass at current oil prices. I don't care what they say. I'm in this business, okay? I just drilled two discoveries in the last month or two at the bottom of the cycle and we can make a weak profit off of what we found-first of all they're conventional reservoirs so they didn't cost us $6-$10 million to drill. And we don't have to drill them horizontally. We don't have to frack them. And we have got no overhead and we have got no debt; so that puts us in kind of a really different situation for most public companies.

The truth is that everybody-the best positions in the best plays in the United States, the core of the core, if you will-nobody can break even at less than about $45 a barrel and that's just reality. That's not sticking them with their land costs that they sunk and wrote off long ago; that's just basic operating expenses and severance taxes and stuff that I publish in all of my reports and nobody ever argues with me about that. They may disagree with a lot of my conclusions or etc. but they never say "Oh no, your economic assumptions were way off base." No they're not off base.

So take that to the bank and let's just get that whole silly conversation off the table. Everybody is losing their ass at $20 or $30 oil, everybody. And that includes Saudi Arabia, Kuwait and everybody in the world is. But certainly US producers, very best of the best, they got to have $45 or $50, and that's a small subset of their wells in a play. And realistically $60-$65 is bare bones for the average well positioned company, all of their better wells or current wells in play. That's just the way it works. And if you hear something else, ask a lot of questions, like: "Tell me what costs you're excluding," because that's the only way to get there is just be excluding costs.

Chris Martenson: ... When I look at it that way, just sort of high level, I'm looking at 10 billion barrels, what are the reserves? Total reserves? Across all the plays that these operators are in? It can't be a whole heck of a lot more than that, can it?

Arthur Berman: Proven reserves in the United States as of EIA's latest report a couple weeks ago are 40 billion barrels of oil. Now there is a Proven Undeveloped which is another category that is also proven, which you can add another 40 or 50% but the number you're talking about there is a huge proportion of the total United States' proven reserves, any way you cut it. And so yeah, be scared. That's the message. .

... ... ...

Arthur Berman: There is no difference between what EIA is saying and the companies are saying, okay? So there's two realities here. There is the reality of truth, like go to jail truth-that's what the companies actually report in their quarterly and annual filings to the Securities and Exchange Commission. That's where EIA gets its data. That's where EIA's proven reserves come from; so there's that reality and that truth, and I think it's reasonably close to the truth. And then there's what companies tell investors, who believe almost anything and don't understand-again like Yergin's lifting cost. They don't understand, nor should they be required to understand that he's not actually talking about total cost. He's talking about a subset of costs. So your question: The proven reserves of the Bakken, according to the latest EIA, which comes from companies, is 6 billion barrels. The Eagle Ford is a little more than 5, and the Permian is about 700 million. You add up all the rest of them, the Niobrara and the whatever, the Mississippi Lime and you name it, and the total is about 13.5 billion barrels. That's the truth. And there's probably an almost – there's a slightly smaller but large proven undeveloped reserve category as well.

Chris Martenson: Art I was just reading an investor presentation where one company claimed to have access to almost that same number just in the Spraberry play.

Arthur Berman: Well yeah, Pioneer Natural Resources, that truthfully is not a bad company, if you just look at their financials. But their CEO, Scott Sheffield, has been making just absolutely preposterous claims for several years now about this Spraberry resource that they have out in the Permian Basin. The Spraberry was discovered in 1946 for God's sake. In the industry, we talk about and have talked about the Spraberry as being the largest non-commercial field in the world. And we've talked about that for 50 years because nobody can figure out how to make money off of that deal. So Sheffield says that they've got 10 billion barrels in the Spraberry. But listen to his words; what is he really saying? He's got himself protected. He says that they've got 10 billion net recoverable, resource potential. That's not a reserve.

Okay so what is a resource? Well a resource-and I'm going to the Society of Petroleum Engineers here. The definition is a known and yet-to-be-discovered accumulation. It's vapor. We kind of know it's there but we haven't found it yet. And so that's a resource, and now he's talking about a resource potential. So it's not even a resource; it's a potential resource. So what he's saying is that it's some vague number that we kind of think may be out there. And of course a resource has nothing whatever to do with price. It's absolutely not – it doesn't have anything – it's any price. It just says it's technically recoverable. So it means nothing, zero, zip. It means nothing.

So he's covered. I'm about to publish something here maybe today and the sub title of this section is called "It's not a lie if we tell you it's a lie." That's the name of the game. As long as the investor presentation or the news release says somewhere that we're using language here that we would never ever use in an SEC filing because they'd put us in jail. And so you guys need to know that. In other words, "we're lying," then it's technically not a lie. It's not fraud because we told you it was a lie.

... ... ...

Chris Martenson: Well yes with over 200 trillion dollars of debt outstanding of course you have to service that debt and high oil prices just don't help that. The model I've been working with for a long time is there's a price of oil at which the world economy chokes and there's a floor at which the energy company's don't want to pursue oil anymore and that ceiling and that floor have been coming closer and closer together. So here we are, we're clearly at a price below which oil and natural gas-in America here, I'm staring at natural gas at $1.83 is the quote I've got on my screen right now, yikes. That's way below the all-in costs for most companies that I've been looking at.

But let's dial this back a bit. Globally we've see this astonishing pull back in CAPEX spending by the oil majors, by the mids, the minors, national oil companies, all of them-over a trillion dollars, by a bunch of estimates. Talk to us about what's the impact on future oil supplies with this just absolute destruction of CAPEX spending globally?

Arthur Berman: Somewhere between profound and extreme [laughter]. We've got to be constantly discovering several million barrels of oil per day to make up for our consumption. It's easy to get confused and to say well geez, we've got such an oversupply right now, we don't have to worry about that. Well we started this conversation with your important observation that we're only talking about a million or million and a half barrels a day of oversupply. So we could go from over supply to deficit pretty quickly because we're not investing in finding that additional couple of million barrels a day that we need to be discovering. So we're deferring major, major investments and we're not just deferring exploration, we're deferring development of proven reserves. So just the capital cuts in US companies have effectively deferred $20 billion-or maybe the world, I'm sorry-$20 billion barrels of development of known proven reserves.

And so if we get to a point- and we will, we almost certainly will-where suddenly everybody wakes up and says "Oh my God we don't have enough oil." We're now half a million barrels a day low, and what happens? The price shoots up, okay? That's the way commodity markets work. And everybody says "Whoopee, let's get back to drilling big time." Well there's a big lag. There's a huge time lag between when the price responds and people actually get around to drilling and they actually start bringing the oil onto the market and it becomes available as supply, because they've been asleep at the wheel for how many months or years. You don't just turn a valve and all of a sudden everything is okay again.

We saw this during the Libyan Civil War. Saudi Arabia said "Don't worry guys, we've got all this spare capacity. We'll just turn it on and produce it and the world won't see a shortage." It never happened because they had to actually drill wells. Their spare capacity means they have got to drill wells to produce it and that takes time. They have got to drill it, they have to test it, they have to build pipelines, and by the time they actually got any of that work done, the Libyan conflict was over. We've now seen low production because the Civil War continues, but that's another story.

There's this tremendous gap between "okay we know there's a reserve," but what's it take to turn it into supply? Well it takes time and it takes money and it doesn't happen overnight.

Chris Martenson: Well no and as you mentioned it hasn't just been the exploration but the more pedestrian stuff like infill drilling-that's pretty much come to a complete halt in the North Sea as far as I can tell. And it looks like Mexico is not doing a lot with their investment down in their plays at this point in time, and Brazil doesn't even begin to know how to get started with their whole Petrobras scandal and drilling through those really, really expensive deep water finds they've got. Just don't make any sense at this price. So when I look across really where the oil supply growth is coming from, Art, I'm pretty much-like it's really down to the Middle East and this hope that the United States could rapidly ramp up its shale "miracle" if prices spike back up.

But I'm with you. I think that as much as people are focused on the oversupply right now-and in two or three years I'll be really surprised, unless the world economy crashes and demand goes down, with that caveat attached-I think the world will be equally surprised by the shortages that are coming, because you can't just… Here's what I see: I look at this chart and I talk about this in talks and I say "Hey look from 2005 to 2012 the world spent about three trillion dollars on upstream oil and gas exploration and production and basically got the same amount of crude and condensate out of ground for its trouble," right? We doubled our investment on a yearly basis from $300 to $600 billion and basically held production flat. I can only imagine what happens to production once you take a trillion in spend off of the top of that.

Obviously it looks like to me we're going to be facing a multi-million barrel a day shortfall, as long as things don't fall apart on the world economy stage.

Arthur Berman: And I think even if things do fall apart on the world economy stage. I haven't done this, because the records aren't there, but you go back to a period like the Great Depression in the world and it's not as if people stopped buying and selling goods or transporting themselves or materials. It was a big – it was a depression, and there were a lot of people out of work, but the world moves along and consumption of oil and natural gas isn't going to go to zero. I think the forecast that we've just recently seen from the International Energy Agency just last week, they're saying "okay so demand is probably going to be down from 1.8 million barrels a day of growth to 1.2 million barrels a day of growth," and that's awful. But wait a minute, 1.2 million barrels a day of growth is – you're still growing at a fairly high rate. So you have got to be replenishing your supply or else you reach this zero point where you're in deep trouble.

So I'm with you Chris. Even in my darkest view of where the economy could go, I find myself on a very different page than most of the forecasters who think that we're in for a decade or decades of low oil prices. I think we're going to be struggling under the yolk of much higher oil prices, probably beginning next year. I'm not a price forecaster but it's hard for me to see-I am a supply/demand kind of guy and I would be very surprised if by this time next year we're not seeing oil prices moving toward something like $60 a barrel. And you look at the forecast- EIA says average price in 2016 will be $53 a barrel. They're not always right and in fact they're often wrong but they're not stupid either. They're doing the best they can. They have got some good people there. So I think this notion that we're somehow stuck in $30 or $40 oil forever and ever, it just doesn't square with the reality.

Chris Martenson: Well it would mean that we're anticipating that oil is going to stay below its marginal cost of production for a very long time. It's very difficult for any commodity to stay there for long but oil in particular because of its stock versus flows. Yes there's 3 billion barrels above ground right now but hey, that's only so many days of consumption if you decided to stop producing. So yes, I'm with you. I think that obviously oil has to go up in price at some point and that's even exclusive of any geopolitical accidents that might happen in the Middle East; just simple supply/demand and all of that.

If oil does go back up, last question, you study the companies that are involved in this very carefully and I think a lot of investors, especially the banks who have put the lines of credit out there, are really double fingers crossed hoping that the price of oil moves back up and all these problems that these companies are facing economically will sort of be in the rear view mirror. Would you share that view or do you think that even if oil rebounds there's a number of companies here that have gotten themselves in over their heads with respect to debt versus assets?

Arthur Berman: Well just turn the clock back to 2012-2013 when oil prices were sky high, were $100 a barrel or more, and what we saw was consistent negative cash flow from virtually all of the major players. So what that says is they weren't making money when oil prices were high, so is it a big shock that they're hemorrhaging when oil prices are lower? So oil prices go back up-the bottom line Chris is the only way that they were able to stay looking fairly good back then to somebody, not me, was that people were giving them money. They had infinite access to capital at almost no cost, and so they were spending it. But their income statements and balance sheets look like crap and the investment community I guess was willing to look past that or didn't want to look at it or whatever.

So rearview mirror? No, these are companies that are highly leveraged and unless and until that changes-maybe that's one of the positive outcomes of this. Maybe we see a turnover of players. There are better companies whose balance sheets look better and they're the ones who can afford to say "Okay, we're going to slow down production right now because we don't have the same debt service that the guy next door does." So my hope is that like all crises this is going to flush out a lot of the bad players, or at least some of them. But will higher oil prices solve the problem and save the day for the people that hold the debt? No. It won't hurt, but if they couldn't make a profit at higher prices, going back to higher prices doesn't fix the problem.

Chris Martenson: So for many of these investors and players, in many cases, the best that they can hope for if oil prices rise is a higher recovery of cents on the dollar, but they're probably not going to get back to whole on this?

Arthur Berman: No. Unless somebody is willing to forgive debt. If we get that bad, then there's the solution of last recourse, right?


[Jul 05, 2016] Globalization and Neoliberalism

Notable quotes:
"... the US has been successful in dictating neoliberal policies, acting partly through the IMF and World Bank and partly through direct pressure. ..."
"... From roughly the mid 1930s to the mid 1970s a new "interventionist" approach replaced classical liberalism, and it became the accepted belief that capitalism requires significant state regulation in order to be viable. In the 1970s the Old Religion of classical liberalism made a rapid comeback, first in academic economics and then in the realm of public policy. ..."
"... Neoliberal theory claims that a largely unregulated capitalist system (a "free market economy" not only embodies the ideal of free individual choice but also achieves optimum economic performance with respect to efficiency, economic growth, technical progress, and distributional justice. ..."
"... The policy recommendations of neoliberalism are concerned mainly with dismantling what remains of the regulationist welfare state. ..."
"... This paper argues that the resurgence and tenacity of neoliberalism during the past two decades cannot be explained, in an instrumental fashion, by any favorable effects of neoliberal policies on capitalist economic performance. On the contrary, we will present a case that neoliberalism has been harmful for long-run capitalist economic performance, even judging economic performance from the perspective of the interests of capital. It will be argued that the resurgence and continuing dominance of neoliberalism can be explained, at least in part, by changes in the competitive structure of world capitalism, which have resulted in turn from the particular form of global economic integration that has developed in recent decades. The changed competitive structure of capitalism has altered the political posture of big business with regard to economic policy and the role of the state, turning big business from a supporter of state-regulated capitalism into an opponent of it. ..."
"... Second, the neoliberal model creates instability on the macroeconomic level by renouncing state counter-cyclical spending and taxation policies, by reducing the effectiveness of "automatic stabilizers" through shrinking social welfare programs,3 and by loosening public regulation of the financial sector. This renders the system more vulnerable to major financial crises and depressions. Third, the neoliberal model tends to intensify class conflict, which can potentially discourage capitalist investment.4 ..."
"... The evidence from GDP and labor productivity growth rates supports the claim that the neoliberal model is inferior to the state regulationist model for key dimensions of capitalist economic performance. There is ample evidence that the neoliberal model has shifted income and wealth in the direction of the already wealthy. However, the ability to shift income upward has limits in an economy that is not growing rapidly. Neoliberalism does not appear to be delivering the goods in the ways that matter the most for capitalism's long-run stability and survival. ..."
"... Once capitalism had become well established in the US after the Civil War, it entered a period of cutthroat competition and wild accumulation known as the Robber Baron era. In this period a coherent anti-interventionist liberal position emerged and became politically dominant. Despite the enormous inequalities, the severe business cycle, and the outrageous and often unlawful behavior of the Goulds and Rockefellers, the idea that government should not intervene in the economy held sway through the end of the 19th century. ..."
"... Small business has remained adamantly opposed to the big, interventionist state, from the Progressive Era through the New Deal down to the present. This division between big and small business is chronicled for the Progressive Era in Weinstein (1968). In the decades immediately following World War II one can observe this division in the divergent views of the Business Roundtable, a big business organization which often supported interventionist programs, and the US Chambers of Commerce, the premier small business organization, which hewed to an antigovernment stance. ..."
"... By contrast, the typical small business faces a daily battle for survival, which prevents attention to long-run considerations and which places a premium on avoiding the short-run costs of taxation and state regulation. This explains the radically different positions that big business and small business held regarding the proper state role in the economy for the first two-thirds of the twentieth century. ..."
"... This long-standing division between big business and small business appeared to vanish in the US starting in the 1970s. Large corporations and banks which had formerly supported foundations that advocated an active government role in the economy, such as the Brookings Institution, became big donors to neoliberal foundations such as the American Enterprise Institute and the Heritage Foundation. As a result, such right-wing foundations, which previously had to rely mainly on contributions from small business, became very wealthy and influential.10 It was big business=s desertion of the political coalition supporting state intervention and its shift to neoliberalism that rebuilt support for neoliberal theories and policies in the US, starting in the 1970s. With business now unified on economic policy, the shift was dramatic. Big grants became available for economics research having a neoliberal slant. The major media shifted their spin on political developments, and the phrase "government programs" now could not be printed except with the word "bloated" before it. ..."
"... Globalization is usually defined as an increase in the volume of cross-border economic interactions and resource flows, producing a qualitative shift in the relations between national economies and between nation-states (Baker et. al., 1998, p. 5; Kozul-Wright and Rowthorn, 1998, p. 1). Three kinds of economic interactions have increased substantially in past decades: merchandise trade flows, foreign direct investment, and cross-border financial investments. We will briefly examine each, with an eye on their effects on the competitive structure of contemporary capitalism. ..."
"... By the close of the twentieth century, capitalism had become significantly more globalized than it had been fifty years ago, and by some measures it is much more globalized than it had been at the previous peak of this process in 1913. The most important features of globalization today are greatly increased international trade, increased flows of capital across national boundaries (particularly speculative short-term capital), and a major role for large TNCs in manufacturing, extractive activities, and finance, operating worldwide yet retaining in nearly all cases a clear base in a single nation-state. ..."
"... Some analysts argue that globalization has produced a world of such economic interdependence that individual nation-states no longer have the power to regulate capital. However, while global interdependence does create difficulties for state regulation, this effect has been greatly exaggerated. Nation-states still retain a good deal of potential power vis-a-vis capitalist firms, provided that the political will is present to exercise such power. For example, even such a small country as Malaysia proved able to successfully impose capital controls following the Asian financial crisis of 1997, despite the opposition of the IMF and the US government. ..."
"... Globalization appears to be one factor that has transformed big business from a supporter to an opponent of the interventionist state. It has done so partly by producing TNCs whose tie to the domestic markets for goods and labor is limited. ..."
"... Globalization has produced a world capitalism that bears some resemblance to the Robber Baron Era in the US. Giant corporations battle one another in a system lacking well defined rules. Mergers and acquisitions abound, including some that cross national boundaries, but so far few world industries have evolved the kind of tight oligopolistic structure that would lay the basis for a more controlled form of market relations. Like the late 19th century US Robber Barons, today's large corporations and banks above all want freedom from political burdens and restraints as they confront one another in world markets.18 ..."
"... The existence of a powerful bloc of Communist-run states with an alternative "state socialist" socioeconomic system tended to push capitalism toward a state regulationist form. It reinforced the fear among capitalists that their own working classes might turn against capitalism. It also had an impact on relations among the leading capitalist states, promoting inter-state unity behind US leadership, which facilitated the creation and operation of a world-system of state-regulated capitalism.19 The demise of state socialism during 1989-91 removed one more factor that had reinforced the regulationist state. ..."
"... If state socialism re-emerged in one or more major countries, perhaps this might push the capitalist world back toward the regulationist state. However, such a development does not seem likely. Even if Russia or Ukraine at some point does head in that direction, it would be unlikely to produce a serious rival socioeconomic system to that of world capitalism. ..."
people.umass.edu
Department of Economics and Political Economy Research Institute Thompson Hall University of Massachusetts Amherst, MA 01003 U.S.A. Telephone 413-545-1248 Fax 413-545-2921 Email dmkotz@econs.umass.edu August, 2000 This paper was published in Rethinking Marxism, Volume 12, Number 2, Summer 2002, pp. 64-79.

Research assistance was provided by Elizabeth Ramey and Deger Eryar. Research funding was provided by the Political Economy Research Institute of the University of Massachusetts at Amherst. Globalization and Neoliberalism 1 For some two decades neoliberalism has dominated economic policymaking in the US and the UK. Neoliberalism has strong advocates in continental Western Europe and Japan, but substantial popular resistance there has limited its influence so far, despite continuing US efforts to impose neoliberal policies on them. In much of the Third World, and in the transition countries (except for China), the US has been successful in dictating neoliberal policies, acting partly through the IMF and World Bank and partly through direct pressure.

Neoliberalism is an updated version of the classical liberal economic thought that was dominant in the US and UK prior to the Great Depression of the 1930s. From roughly the mid 1930s to the mid 1970s a new "interventionist" approach replaced classical liberalism, and it became the accepted belief that capitalism requires significant state regulation in order to be viable. In the 1970s the Old Religion of classical liberalism made a rapid comeback, first in academic economics and then in the realm of public policy.

Neoliberalism is both a body of economic theory and a policy stance. Neoliberal theory claims that a largely unregulated capitalist system (a "free market economy" not only embodies the ideal of free individual choice but also achieves optimum economic performance with respect to efficiency, economic growth, technical progress, and distributional justice. The state is assigned a very limited economic role: defining property rights, enforcing contracts, and regulating the money supply.1 State intervention to correct market failures is viewed with suspicion, on the ground that such intervention is likely to create more problems than it solves.

The policy recommendations of neoliberalism are concerned mainly with dismantling what remains of the regulationist welfare state. These recommendations include deregulation of business; privatization of public activities and assets; elimination of, or cutbacks in, social welfare programs; and reduction of taxes on businesses and the investing class. In the international sphere, neoliberalism calls for free movement of goods, services, capital, and money (but not people) across national boundaries. That is, corporations, banks, and individual investors should be free to move their property across national boundaries, and free to acquire property across national boundaries, although free cross-border movement by individuals is not part of the neoliberal program. How can the re-emergence of a seemingly outdated and outmoded economic theory be explained? At first many progressive economists viewed the 1970s lurch toward liberalism as a temporary response to the economic instability of that decade. As corporate interests decided that the Keynesian regulationist approach no longer worked to their advantage, they looked for an alternative and found only the old liberal ideas, which could at least serve as an ideological basis for cutting those state programs viewed as obstacles to profit-making. However, neoliberalism has proved to be more than just a temporary response. It has outlasted the late 1970s/early 1980s right-wing political victories in the UK (Thatcher) and US (Reagan). Under a Democratic Party administration in the US and a Labor Party government in the UK in the 1990s, neoliberalism solidified its position of dominance.

This paper argues that the resurgence and tenacity of neoliberalism during the past two decades cannot be explained, in an instrumental fashion, by any favorable effects of neoliberal policies on capitalist economic performance. On the contrary, we will present a case that neoliberalism has been harmful for long-run capitalist economic performance, even judging economic performance from the perspective of the interests of capital. It will be argued that the resurgence and continuing dominance of neoliberalism can be explained, at least in part, by changes in the competitive structure of world capitalism, which have resulted in turn from the particular form of global economic integration that has developed in recent decades. The changed competitive structure of capitalism has altered the political posture of big business with regard to economic policy and the role of the state, turning big business from a supporter of state-regulated capitalism into an opponent of it.

The Problematic Character of Neoliberalism

Neoliberalism appears to be problematic as a dominant theory for contemporary capitalism. The stability and survival of the capitalist system depends on its ability to bring vigorous capital accumulation, where the latter process is understood to include not just economic expansion but also technological progress. Vigorous capital accumulation permits rising profits to coexist with rising living standards for a substantial part of the population over the long-run.2 However, it does not appear that neoliberalism promotes vigorous capital accumulation in contemporary capitalism. There are a number of reasons why one would not expect the neoliberal model to promote rapid accumulation. First, it gives rise to a problem of insufficient aggregate demand over the long run, stemming from the powerful tendency of the neoliberal regime to lower both real wages and public spending. Second, the neoliberal model creates instability on the macroeconomic level by renouncing state counter-cyclical spending and taxation policies, by reducing the effectiveness of "automatic stabilizers" through shrinking social welfare programs,3 and by loosening public regulation of the financial sector. This renders the system more vulnerable to major financial crises and depressions. Third, the neoliberal model tends to intensify class conflict, which can potentially discourage capitalist investment.4

The historical evidence confirms doubts about the ability of the neoliberal model to promote rapid capital accumulation. We will look at growth rates of gross domestic product (GDP) and of labor productivity. The GDP growth rate provides at least a rough approximation of the rate of capital accumulation, while the labor productivity growth rate tells us something about the extent to which capitalism is developing the forces of production via rising ratios of means of production to direct labor, technological advance, and improved labor skills.5 Table 1 shows average annual real GDP growth rates for six leading developed capitalist countries over two periods, 1950-73 and 1973-99. The first period was the heyday of state-regulated capitalism, both within those six countries and in the capitalist world-system as a whole. The second period covers the era of growing neoliberal dominance. All six countries had significantly faster GDP growth in the earlier period than in the later one.

While Japan and the major Western European economies have been relatively depressed in the 1990s, the US is often portrayed as rebounding to great prosperity over the past decade. Neoliberals often claim that US adherence to neoliberal policies finally paid off in the 1990s, while the more timid moves away from state-interventionist policies in Europe and Japan kept them mired in stagnation. Table 2 shows GDP and labor productivity growth rates for the US economy for three subperiods during 1948-99.6 Column 1 of Table 2 shows that GDP growth was significantly slower in 1973-90 B a period of transition from state-regulated capitalism to the neoliberal model in the US B than in 1948-73. While GDP growth improved slightly in 1990-99, it remained well below that of the era of state-regulated capitalism. Some analysts cite the fact that GDP growth accelerated after 1995, averaging 4.1% per year during 1995-99 (US Bureau of Economic Analysis, 2000). However, it is not meaningful to compare a short fragment of the 1990s business cycle expansion to the longrun performance of the economy during 1948-73.7

Column 2 of Table 1 shows that the high rate of labor productivity growth recorded in 1948- 73 fell by more than half in 1973-90. While there was significant improvement in productivity growth in the 1990s, it remained well below the 1948-73 rate, despite the rapid spread of what should be productivity-enhancing communication and information-management technologies during the past decade.

The evidence from GDP and labor productivity growth rates supports the claim that the neoliberal model is inferior to the state regulationist model for key dimensions of capitalist economic performance. There is ample evidence that the neoliberal model has shifted income and wealth in the direction of the already wealthy. However, the ability to shift income upward has limits in an economy that is not growing rapidly. Neoliberalism does not appear to be delivering the goods in the ways that matter the most for capitalism's long-run stability and survival.

The Structure of Competition and Economic Policy

The processes through which the dominant economic ideology and policies are selected in a capitalist system are complex and many-sided. No general rule operates to assure that those economic policies which would be most favorable for capitalism are automatically adopted. History suggests that one important determinant of the dominant economic ideology and policy stance is the competitive structure of capitalism in a given era. Specifically, this paper argues that periods of relatively unconstrained competition tend to produce the intellectual and public policy dominance of liberalism, while periods of relatively constrained, oligopolistic market relations tend to promote interventionist ideas and policies.

A relation in the opposite direction also exists, one which is often commented upon. That is, one can argue that interventionist policies promote monopoly power in markets, while liberal policies promote greater competition. This latter relation is not being denied here. Rather, it will be argued that there is a normally-overlooked direction of influence, having significant historical explanatory power, which runs from competitive structure to public policy. In the period when capitalism first became well established in the US, during 1800-1860, the government played a relatively interventionist role. The federal government placed high tariffs on competing manufactured goods from Europe, and federal, state, and local levels of government all actively financed, and in some cases built and operated, the new canal and rail system that created a large internal market. There was no serious debate over the propriety of public financing of transportation improvements in that era -- the only debate was over which regions would get the key subsidized routes.

Once capitalism had become well established in the US after the Civil War, it entered a period of cutthroat competition and wild accumulation known as the Robber Baron era. In this period a coherent anti-interventionist liberal position emerged and became politically dominant. Despite the enormous inequalities, the severe business cycle, and the outrageous and often unlawful behavior of the Goulds and Rockefellers, the idea that government should not intervene in the economy held sway through the end of the 19th century.

From roughly 1890 to 1903 a huge merger wave transformed the competitive structure of US capitalism. Out of that merger wave emerged giant corporations possessing significant monopoly power in the manufacturing, mining, transportation, and communication sectors. US industry settled down to a more restrained form of oligopolistic rivalry. At the same time, many of the new monopoly capitalists began to criticize the old Laissez Faire ideas and support a more interventionist role for the state.8 The combination of big business support for state regulation of business, together with similar demands arising from a popular anti-monopoly movement based among small farmers and middle class professionals, ushered in what is called the Progressive Era, from 1900-16. The building of a regulationist state that was begun in the Progressive Era was completed during the New Deal era a few decades later, when once again both big business leaders and a vigorous popular movement (this time based among industrial workers) supported an interventionist state. Both in the Progressive Era and the New Deal, big business and the popular movement differed about what types of state intervention were needed. Big business favored measures to increase the stability of the system and to improve conditions for profit-making, while the popular movement sought to use the state to restrain the power and privileges of big business and provide greater security for ordinary people. The outcome in both cases was a political compromise, one weighted toward the interests of big business, reflecting the relative power of the latter in American capitalism.

Small business has remained adamantly opposed to the big, interventionist state, from the Progressive Era through the New Deal down to the present. This division between big and small business is chronicled for the Progressive Era in Weinstein (1968). In the decades immediately following World War II one can observe this division in the divergent views of the Business Roundtable, a big business organization which often supported interventionist programs, and the US Chambers of Commerce, the premier small business organization, which hewed to an antigovernment stance.

What explains this political difference between large and small business? When large corporations achieve significant market power and become freed from fear concerning their immediate survival, they tend to develop a long time horizon and pay attention to the requirements for assuring growing profits over time.9 They come to see the state as a potential ally. Having high and stable monopoly profits, they tend to view the cost of government programs as something they can afford, given their potential benefits. By contrast, the typical small business faces a daily battle for survival, which prevents attention to long-run considerations and which places a premium on avoiding the short-run costs of taxation and state regulation. This explains the radically different positions that big business and small business held regarding the proper state role in the economy for the first two-thirds of the twentieth century.

This long-standing division between big business and small business appeared to vanish in the US starting in the 1970s. Large corporations and banks which had formerly supported foundations that advocated an active government role in the economy, such as the Brookings Institution, became big donors to neoliberal foundations such as the American Enterprise Institute and the Heritage Foundation. As a result, such right-wing foundations, which previously had to rely mainly on contributions from small business, became very wealthy and influential.10 It was big business=s desertion of the political coalition supporting state intervention and its shift to neoliberalism that rebuilt support for neoliberal theories and policies in the US, starting in the 1970s. With business now unified on economic policy, the shift was dramatic. Big grants became available for economics research having a neoliberal slant. The major media shifted their spin on political developments, and the phrase "government programs" now could not be printed except with the word "bloated" before it.

This switch in the dominant economic model first showed up in the mid 1970s in academic economics, as the previously marginalized Chicago School spread its influence far beyond the University of Chicago. This was soon followed by a radical shift in the public policy arena. In 1978- 79 the previously interventionist Carter Administration began sounding the very neoliberal themes B deregulation of business, cutbacks in social programs, and general fiscal and monetary austerity B that were to become the centerpiece of Reagan Administration policies in 1981. What caused the radical change in the political posture of big business regarding state intervention in the economy? This paper argues that a major part of the explanation lies in the effects of the globalization of the world capitalist economy in the post-World War II period.

Globalization and Competition

Globalization is usually defined as an increase in the volume of cross-border economic interactions and resource flows, producing a qualitative shift in the relations between national economies and between nation-states (Baker et. al., 1998, p. 5; Kozul-Wright and Rowthorn, 1998, p. 1). Three kinds of economic interactions have increased substantially in past decades: merchandise trade flows, foreign direct investment, and cross-border financial investments. We will briefly examine each, with an eye on their effects on the competitive structure of contemporary capitalism.

Table 3 shows the ratio of merchandise exports to gross domestic product for selected years from 1820 to 1992, for the world and also for Western Europe, the US, and Japan. Capitalism brought a five-fold rise in world exports relative to output from 1820-70, followed by another increase of nearly three-fourths by 1913. After declining in the interwar period, world exports reached a new peak of 11.2% of world output in 1973, rising further to 13.5% in 1992. The 1992 figure was over fifty per cent higher than the pre-World War I peak.

Merchandise exports include physical goods only, while GDP includes services, many of which are not tradable, as well as goods. In the twentieth century the proportion of services in GDP has risen significantly. Table 4 shows an estimate of the ratio of world merchandise exports to the good-only portion of world GDP. This ratio nearly tripled during 1950-92, with merchandise exports rising to nearly one-third of total goods output in the latter year. The 1992 figure was 2.6 times as high as that of 1913.

Western Europe, the US, and Japan all experienced significant increases in exports relative to GDP during 1950-92, as Table 3 shows. All of them achieved ratios of exports to GDP far in excess of the 1913 level. While exports were only 8.2% of the total GDP of the US in 1992, exports amounted to 22.0% of the non-service portion of GDP that year (Economic Report of the President, 1999, pp. 338, 444).

Many analysts view foreign direct investment as the most important form of cross-border economic interchange. It is associated with the movement of technology and organizational methods, not just goods. Table 5 shows two measures of foreign direct investment. Column 1 gives the outstanding stock of foreign direct investment in the world as a percentage of world output. This measure has more than doubled since 1975, although it is not much greater today than it was in 1913. Column 2 shows the annual inflow of direct foreign investment as a percentage of gross fixed capital formation. This measure increased rapidly during 1975-95. However, it is still relatively low in absolute terms, with foreign direct investment accounting for only 5.2 per cent of gross fixed capital formation in 1995.

Not all, or even most, international capital flows take the form of direct investment. Financial flows (such as cross-border purchases of securities and deposits in foreign bank accounts) are normally larger. One measure that takes account of financial as well as direct investment is the total net movement of capital into or out of a country. That measure indicates the extent to which capital from one country finances development in other countries. Table 6 shows the absolute value of current account surpluses or deficits as a percentage of GDP for 12 major capitalist countries. Since net capital inflow or outflow is approximately equal to the current account deficit or surplus (differing only due to errors and omissions), this indicates the size of net cross-border capital flows. The ratio nearly doubled from 1970-74 to 1990-96, although it remained well below the figure for 1910-14.

Cross-border gross capital movements have grown much more rapidly than cross-border net capital movements.11 In recent times a very large and rapidly growing volume of capital has moved back and forth across national boundaries. Much of this capital flow is speculative in nature, reflecting growing amounts of short-term capital that are moved around the world in search of the best temporary return. No data on such flows are available for the early part of this century, but the data for recent decades are impressive. During 1980-95 cross-border transactions in bonds and equities as a percentage of GDP rose from 9% to 136% for the US, from 8% to 168% for Germany, and from 8% to 66% for Japan (Baker et. al., 1998, p. 10). The total volume of foreign exchange transactions in the world rose from about $15 billion per day in 1973 to $80 billion per day in 1980 and $1260 billion per day in 1995. Trade in goods and services accounted for 15% of foreign exchange transactions in 1973 but for less than 2% of foreign exchange transactions in 1995 (Bhaduri, 1998, p. 152).

While cross-border flows of goods and capital are usually considered to be the best indicators of possible globalization of capitalism, changes that have occurred over time within capitalist enterprises are also relevant. That is, the much-discussed rise of the transnational corporation (TNC) is relevant here, where a TNC is a corporation which has a substantial proportion of its sales, assets, and employees outside its home country.12 TNCs existed in the pre-World War I era, primarily in the extractive sector. In the post-World War II period many large manufacturing corporations in the US, Western Europe, and Japan became TNCs.

The largest TNCs are very international measured by the location of their activities. One study found that the 100 largest TNCs in the world (ranked by assets) had 40.4% of their assets abroad, 50.0% of output abroad, and 47.9% of employment abroad in 1996 (Sutcliffe and Glyn, 1999, p. 125). While this shows that the largest TNCs are significantly international in their activities, all but a handful have retained a single national base for top officials and major stockholders.13 The top 200 TNCs ranked by output were estimated to produce only about 10 per cent of world GDP in 1995 (Sutcliffe and Glyn, 1999, p. 122).

By the close of the twentieth century, capitalism had become significantly more globalized than it had been fifty years ago, and by some measures it is much more globalized than it had been at the previous peak of this process in 1913. The most important features of globalization today are greatly increased international trade, increased flows of capital across national boundaries (particularly speculative short-term capital), and a major role for large TNCs in manufacturing, extractive activities, and finance, operating worldwide yet retaining in nearly all cases a clear base in a single nation-state.

While the earlier wave of globalization before World War I did produce a capitalism that was significantly international, two features of that earlier international system differed from the current global capitalism in ways that are relevant here. First, the pre-world War I globalization took place within a world carved up into a few great colonial empires, which meant that much of the so-called "cross-border" trade and investment of that earlier era actually occurred within a space controlled by a single state. Second, the high level of world trade reached before World War I occurred within a system based much more on specialization and division of labor. That is, manufactured goods were exported by the advanced capitalist countries in exchange for primary products, unlike today when most trade is in manufactured goods. In 1913 62.5% of world trade was in primary products (Bairoch and Kozul-Wright, 1998, p. 45). By contrast, in 1970 60.9% of world exports were manufactured goods, rising to 74.7% in 1994 (Baker et. al., 1998, p. 7).

Some analysts argue that globalization has produced a world of such economic interdependence that individual nation-states no longer have the power to regulate capital. However, while global interdependence does create difficulties for state regulation, this effect has been greatly exaggerated. Nation-states still retain a good deal of potential power vis-a-vis capitalist firms, provided that the political will is present to exercise such power. For example, even such a small country as Malaysia proved able to successfully impose capital controls following the Asian financial crisis of 1997, despite the opposition of the IMF and the US government. A state that has the political will to exercise some control over movements of goods and capital across its borders still retains significant power to regulate business. The more important effect of globalization has been on the political will to undertake state regulation, rather than on the technical feasibility of doing so. Globalization has had this effect by changing the competitive structure of capitalism. It appears that globalization in this period has made capitalism significantly more competitive, in several ways. First, the rapid growth of trade has changed the situation faced by large corporations. Large corporations that had previously operated in relatively controlled oligopolistic domestic markets now face competition from other large corporations based abroad, both in domestic and foreign markets. In the US the rate of import penetration of domestic manufacturing markets was only 2 per cent in 1950; it rose to 8% in 1971 and 16% by 1993, an 8-fold increase since 1950 (Sutcliffe and Glyn, 1999, p. 116).

Second, the rapid increase in foreign direct investment has in many cases placed TNCs production facilities in the home markets of their foreign rivals. General Motors not only faces import competition from Toyota and Honda but has to compete with US-produced Toyota and Honda vehicles. Third, the increasingly integrated and open world financial system has thrown the major banks and other financial institutions of the leading capitalist nations increasingly into competition with one another.

Globalization appears to be one factor that has transformed big business from a supporter to an opponent of the interventionist state. It has done so partly by producing TNCs whose tie to the domestic markets for goods and labor is limited. More importantly, globalization tends to turn big business into small business. The process of globalization has increased the competitive pressure faced by large corporations and banks, as competition has become a world-wide relationship.17 Even if those who run large corporations and financial institutions recognize the need for a strong nationstate in their home base, the new competitive pressure they face shortens their time horizon. It pushes them toward support for any means to reduce their tax burden and lift their regulatory constraints, to free them to compete more effectively with their global rivals. While a regulationist state may seem to be in the interests of big business, in that it can more effectively promote capital accumulation in the long run, in a highly competitive environment big business is drawn away from supporting a regulationist state.

Globalization has produced a world capitalism that bears some resemblance to the Robber Baron Era in the US. Giant corporations battle one another in a system lacking well defined rules. Mergers and acquisitions abound, including some that cross national boundaries, but so far few world industries have evolved the kind of tight oligopolistic structure that would lay the basis for a more controlled form of market relations. Like the late 19th century US Robber Barons, today's large corporations and banks above all want freedom from political burdens and restraints as they confront one another in world markets.18

The above interpretation of the rise and persistence of neoliberalism attributes it, at least in part, to the changed competitive structure of world capitalism resulting from the process of globalization. As neoliberalism gained influence starting in the 1970s, it became a force propelling the globalization process further. One reason for stressing the line of causation running from globalization to neoliberalism is the time sequence of the developments. The process of globalization, which had been reversed to some extent by political and economic events in the interwar period, resumed right after World War II, producing a significantly more globalized world economy and eroding the monopoly power of large corporations well before neoliberalism began its second coming in the mid 1970s. The rapid rise in merchandise exports began during the Bretton Woods period, as Table 3 showed. So too did the growing role for TNC's. These two aspects of the current globalization had their roots in the postwar era of state-regulated capitalism. This suggests that, to some extent, globalization reflects a long-run tendency in the capital accumulation process rather than just being a result of the rising influence of neoliberal policies. On the other hand, once neoliberalism became dominant, it accelerated the process of globalization. This can be seen most clearly in the data on cross-border flows of both real and financial capital, which began to grow rapidly only after the 1960s.

Other Factors Promoting Neoliberalism

The changed competitive structure of capitalism provides part of the explanation for the rise from the ashes of classical liberalism and its persistence in the face of widespread evidence of its failure to deliver the goods. However, three additional factors have played a role in promoting neoliberal dominance. These are the weakening of socialist movements in the industrialized capitalist countries, the demise of state socialism, and the long period that has elapsed since the last major capitalist economic crisis. There is space here for only some brief comments about these additional factors.

The socialist movements in the industrialized capitalist countries have declined in strength significantly over the past few decades. While Social Democratic parties have come to office in several European countries recently, they no longer represent a threat of even significant modification of capitalism, much less the specter of replacing capitalism with an alternative socialist system. The regulationist state was always partly a response to the fear of socialism, a point illustrated by the emergence of the first major regulationist state of the era of mature capitalism in Germany in the late 19th century, in response to the world=s first major socialist movement. As the threat coming from socialist movements in the industrialized capitalist countries has receded, so too has to incentive to retain the regulationist state.

The existence of a powerful bloc of Communist-run states with an alternative "state socialist" socioeconomic system tended to push capitalism toward a state regulationist form. It reinforced the fear among capitalists that their own working classes might turn against capitalism. It also had an impact on relations among the leading capitalist states, promoting inter-state unity behind US leadership, which facilitated the creation and operation of a world-system of state-regulated capitalism.19 The demise of state socialism during 1989-91 removed one more factor that had reinforced the regulationist state.

The occurrence of a major economic crisis tends to promote an interventionist state, since active state intervention is required to overcome a major crisis. The memory of a recent major crisis tends to keep up support for a regulationist state, which is correctly seen as a stabilizing force tending to head off major crises. As the Great Depression of the 1930s has receded into the distant past, the belief has taken hold that major economic crises have been banished forever. This reduces the perceived need to retain the regulationist state.

Concluding Comments

If neoliberalism continues to reign as the dominant ideology and policy stance, it can be argued that world capitalism faces a future of stagnation, instability, and even eventual social breakdown.20 However, from the factors that have promoted neoliberalism one can see possible sources of a move back toward state-regulated capitalism at some point. One possibility would be the development of tight oligopoly and regulated competition on a world scale. Perhaps the current merger wave might continue until, as happened at the beginning of the 20th century within the US and in other industrialized capitalist economies, oligopoly replaced cutthroat competition, but this time on a world scale. Such a development might revive big business support for an interventionist state. However, this does not seem to be likely in the foreseeable future. The world is a big place, with differing cultures, laws, and business practices in different countries, which serve as obstacles to overcoming the competitive tendency in market relations. Transforming an industry=s structure so that two to four companies produce the bulk of the output is not sufficient in itself to achieve stable monopoly power, if the rivals are unable to communicate effectively with one another and find common ground for cooperation. Also, it would be difficult for international monopolies to exercise effective regulation via national governments, and a genuine world capitalist state is not a possibility for the foreseeable future.

If state socialism re-emerged in one or more major countries, perhaps this might push the capitalist world back toward the regulationist state. However, such a development does not seem likely. Even if Russia or Ukraine at some point does head in that direction, it would be unlikely to produce a serious rival socioeconomic system to that of world capitalism.

A more likely source of a new era of state interventionism might come from one of the remaining two factors considered above. The macro-instability of neoliberal global capitalism might produce a major economic crisis at some point, one which spins out of the control of the weakened regulatory authorities. This would almost certainly revive the politics of the regulationist state. Finally, the increasing exploitation and other social problems generated by neoliberal global capitalism might prod the socialist movement back to life at some point. Should socialist movements revive and begin to seriously challenge capitalism in one or more major capitalist countries, state regulationism might return in response to it. Such a development would also revive the possibility of finally superceding capitalism and replacing it with a system based on human need rather than private profit.

[Jul 04, 2016] LTO is not a plague. The plague is development of same out of primarily debt, as opposed to primarily out of cash flow.

Notable quotes:
"... As I pointed out above, Q1 2016 wells were significantly more productive than Q1 2015 wells, in the wells' first 90 days or less. As time goes by, we will get a clearer picture of how much more oil they will produce during the critical 36-60 months when the wells need to payout. ..."
peakoilbarrel.com

texas tea , 07/03/2016 at 7:38 pm

This is interesting and I realize goes against many here who view LTO as a plague, I think the industry has it right, not the naysayers -- this is not to say the economies are like the East Texas field, but it is to say given the alternatives best of class LTO played will be the focus of activity/development coming out of this depression.

http://oilprice.com/Energy/Energy-General/Big-Oil-Could-Spark-A-Renaissance-In-US-Shale.html

Coffeeguyzz , 07/03/2016 at 9:34 pm
TT
That article (the referenced Reuters story describing a lessening of the decline curve) is only the tip of the iceberg.

Many of the operators are catching on to what EOG has been doing with their fracs, namely scouring/sandblasting the heck out of the near wellbore area with 100 mesh and then following up with larger proppant to maintain conductivity.

In addition, the increased formation pressure induced by new fracs is increasing output in nearby, older wells. This process has been repeated over and over again in numerous older wells in the core of the Bakken now that the drilling has contracted to a fairly small, highly productive area full of the older wells.

shallow sand , 07/04/2016 at 12:50 am
LTO is not a plague. The plague is development of same out of primarily debt, as opposed to primarily out of cash flow.

As I pointed out above, Q1 2016 wells were significantly more productive than Q1 2015 wells, in the wells' first 90 days or less. As time goes by, we will get a clearer picture of how much more oil they will produce during the critical 36-60 months when the wells need to payout.

$50 WTI looks to be a very hard ceiling last couple of months.

More important is the money made available to drill, complete and equip them. The banks appear to be wary. Equity investors like the Permian and SCOOP/STACK.

[Jul 04, 2016] Nationalism Isnt Replacing Globalism

Notable quotes:
"... In way, both side to this debate are warning that we are slipping into nightmare scenarios. The globalists believe that Britain exiting the EU and Donald Trump occupying the White House are the harbingers of things to come ..."
"... Mirror-imaging this vision of hell on Earth, nationalists predict that globalism and its four horses of the apocalypse-free trade, immigration, financial deregulation ..."
"... From that perspective, globalism, like Marxism, another example of the idea of economic determinism, failed to materialize and proved to be an illusion. The economic rewards provided through the process of globalization were not spread evenly in society: Turning the lords of finance and high-tech into super-billionaires who fashion themselves as the Master of the Universe, while decimating the large manufacturing industries and creating a new class of losers among the economically squeezed members of the middle class and blue-class workers. ..."
"... Brexit and Trumpism may be indication that a political backlash is taking place right now and that nationalism is on the rise. But we shouldn't conclude that nationalism is about to replace globalism as the new driving force in politics and economics. Instead it's a sign that a certain rebalancing between these two forces is creating a basis for a new equilibrium in industrialized societies. ..."
"... That means in practical terms that the political and economic elites may have to slow down their efforts to liberalize global trade, deregulate financial markets and open borders to new immigration. They need to reassess some aspects of the ambitious globalization agenda: supranational institutions, like the EU, will need to return more power to national governments. Some free trade agreements may have to be renegotiated. Immigration needs to be restricted based on economic, national security and cultural considerations. And celebrate the passage of same-sex legislation before trying to force schools to allow "trans" men to use the women's toilets. Easy does it! ..."
June 30, 2016 | The National Interest Blog
Much of the post-Brexit and primary election conventional wisdom seems to be stuck in a political narrative in which the Brexit vote and the rise of Trumpism in the United States are seen as symbols of the populist revolution. These symbols are combined with a nationalist tide has been sweeping not only the United Kingdom and the United States, but also many other parts of Europe, including Poland, Hungary, France, The Netherlands and Scandinavia, not to mention, Russia, Turkey, India and Israel.

According to this narrative, economic insecurity and cultural anxiety that reflect sociodemographic trends have given momentum to ethnonationalism and religious separatism in both the United States and the United Kingdom. The Rust Belt is pitted against New York City, and the Midlands against London.

The aging blue-collar workers and residents of the rural areas, remnants of the shrinking white English tribe-patriotic, God-fearing and hardworking-have lost their jobs in the declining manufacturing industries the never recovered from the Great Recession. They feel that they have been economically squeezed by the forces of globalization that are being promoted by the political and economic elites in New York and London, that they are culturally marginalized and threatened by nonwhite immigrants who are "taking over" their country, and that secular liberal elites are responsible for the cultural decadence that is supposedly inflicting their societies.

At the same time, gigantic metropolitan areas have been growing and prospering thanks to globalization and immigration: a flourishing globalized service economy; a concentration of young and educated professionals; immigrants that are mostly integrated into open societies; tolerance of the other and accommodation of changes in cultural mores, like same-sex marriage; a demographic balance that is swinging in the direction of unmarried men and women, the young and the purveyors of the "cognitive economy", rather than those with large families, the old and industrial workers.

Ironically, both the fans and the critics of globalism share versions of this narrative. The first are bashing the ignorant, nativists, racists and xenophobic voters who are allegedly trying to place obstacles on the way of the forces of political, economic and social change and progress. The latter counter that "the people" are winning the day by protecting their national sovereignty and re-embracing their national identity while challenging corrupt elites that are protecting their own political and economic interests.

In way, both side to this debate are warning that we are slipping into nightmare scenarios. The globalists believe that Britain exiting the EU and Donald Trump occupying the White House are the harbingers of things to come: Mussolini's brown-shirts are on their way; and we all know who is going to show in the not-so-distant future. Could it be…the Grand Wizard of the Ku Klux Klan? Or maybe Hitler?

Mirror-imaging this vision of hell on Earth, nationalists predict that globalism and its four horses of the apocalypse-free trade, immigration, financial deregulation and same-sex marriage-will destroy our families, communities and nations. The first phase is NAFTA and EU. Next, world government headed by the Antichrist and ruled by Sharia law.

This political narrative creates the impression the debate over the EU, Trumpism and globalism in general pits the forces of light against the legions of evil, between two hardened groups of anti and pro trade, immigration and secularism. If you support Brexit and plan vote for Trump you represent either the dark or glorious past, while the other side envisions a dark or glorious future. These deep political divisions in the UK, the United States and elsewhere would only end up with one side winning, and the other side losing. Thesis, antithesis. No synthesis.

The problem with this narrative is that it doesn't really capture the complexity of the politics and economics ushered by globalization since the early 1990s, when governments started to deregulate financial markets, to increase and size and fast-track the liberalization of the global trade system, and to remove the major restrictions on immigration.

From that perspective, globalism, like Marxism, another example of the idea of economic determinism, failed to materialize and proved to be an illusion. The economic rewards provided through the process of globalization were not spread evenly in society: Turning the lords of finance and high-tech into super-billionaires who fashion themselves as the Master of the Universe, while decimating the large manufacturing industries and creating a new class of losers among the economically squeezed members of the middle class and blue-class workers.

Moreover, the dogma of globalism assumed that humans who desire to preserve their individual identity, to have wings to fly and to gain economic freedom, would celebrate the dawn of a new age of economic liberty. Long live the economic man!

But humans also want to belong to a group, to maintain a sense of collective identity and to have roots in the past. When these two colliding needs are not in balance, the political man returns and a political backlash to achieve new equilibrium is inevitable.

Brexit and Trumpism may be indication that a political backlash is taking place right now and that nationalism is on the rise. But we shouldn't conclude that nationalism is about to replace globalism as the new driving force in politics and economics. Instead it's a sign that a certain rebalancing between these two forces is creating a basis for a new equilibrium in industrialized societies.

That means in practical terms that the political and economic elites may have to slow down their efforts to liberalize global trade, deregulate financial markets and open borders to new immigration. They need to reassess some aspects of the ambitious globalization agenda: supranational institutions, like the EU, will need to return more power to national governments. Some free trade agreements may have to be renegotiated. Immigration needs to be restricted based on economic, national security and cultural considerations. And celebrate the passage of same-sex legislation before trying to force schools to allow "trans" men to use the women's toilets. Easy does it!

Promoting and embracing such correction to the globalism project and the liberal principles it embodies doesn't amount to buying into the notions of ultranationalism, protectionism, nativism or racism. They seem to be sensible responses by political leaders to the legitimate concerns of their voters and a way to deny political demagogues the opportunity to exploit economic anxiety and social alienation.

[Jul 04, 2016] Brexit - the end of globalization

Notable quotes:
"... Viewed in economic terms, however, the Brexit marks the first tangible retreat from globalization since World War II. ..."
DW.COM 30.06.2016

The reasons for the British vote to leave the EU were diverse, ranging from discontent with the Brussels bureaucracy and hostility toward the political establishment to fear of immigration. Viewed in economic terms, however, the Brexit marks the first tangible retreat from globalization since World War II.

"For the first time, a major economy is saying: We will be better off doing things by ourselves, and making our own decisions," says Homi Kharas, Deputy Director for the Global Economy and Development program at the Brookings Institution, a Washington-based think tank. "And that's a bit of a shock to the system," he added.

For 70 years, globalization has been promoted as the answer to the world's problems. International trade, capital flows and cross-border movement of people have been steadily increasing.

The consensus was that more globalization was good for all - rich and poor alike. Countless studies and growing middle classes in China and India seem to prove that point. And Europe, with its single market and free movement of people, was "the shining example" of this trend, Kharas noted.

[Jul 03, 2016] Men Exiting Workforce as Low-Wage Jobs Vanish

Notable quotes:
"... The report dismisses the myths that access to Social Security disability or that men are not choosing to work as culprits. More than a third were in poverty. Fewer that 25% of the men not working have a spouse supporting them and that percentage has dropped in the last 50 years. The CEA's analysis find that Social Security disability explains at most 0.5% of the reduction. ..."
"... Similarly, the problem with European-style job training programs is that US employers do not want to hire people with general training, even in a particular skill area. Their strong preference is to hire someone who is doing the exact same job for a similar company, so as to minimize their effort (in theory; in practice, the extra time spent on the search probably offsets the theoretical savings). The cure for that is a much more robust job market, where employers realize they are not going to find the perfect candidate and take someone approximate and give them the training and other guidance they need to become productive. ..."
"... Friends of mine visited Germany last year, noticed that for curb, pothole repair where in the US you see 2-3 guys and a bunch of equipment, there he would see 8 guys with shovels and little to no equipment. ..."
"... Yes, when I was working at UT-Austin, they cut the janitorial staff so that offices were only vacuumed once a month. ..."
"... The reality of what is happening is on the economic/political level. It involves a small number of people, living in a rich, opulent high tower, who for years acted and enacted without the slightest bit of empathy or selflessness. These same people have literally no depth to their thought and are ruled by the very gluttony/ego so valued in todays consumerist society. This type used to live in Rome during Diocletian's rule, in Egypt during the Hyskos invasion, in the Mayan Empire during the Postclassic period, etc ad infinitum. The overall picture has repeated itself, as an empire is a microcosm of any living organism; it gets old and becomes very susceptible to change, that is, the ruling class become so removed from reality that their decision making begins to deviate further and further from the actuality of the current situation. The Housing Crisis is a prime example. The banks saw fit to literally scam their own customers with no government intervention! Twice! This type of thinking quickly affects the entire nation. People begin to see a futility in living morally and truthfully, and start to wonder if the entire system is a scam. ..."
"... I've visited enough towns in the Mid West where everyone is on some pharmaceutical, usually Percocet or valium, yet have no money for a proper house with heating and cooling. ..."
"... So entire industries now eschew people older than 30 in favor of being staffed entirely by 20 something's. This will surely end well. ..."
"... They are bring these workers from India where starting IT salaries are $10,000/year. Check early in the morning and late at night and you will see the buses delivering the workers who lived crammed in surrounding apartments. One told me his Indian outsourcers had eight of them living in a two-bedroom apartment with one bathroom - while working 80-100 hours per week. They are threatened with deportation if they complain, and in some cases, their families back home are physically threatened. ..."
"... granting automatic work authorization to all H-1B spouses. ..."
"... expanding Bush's "Optional Practical Training" now allowing stem graduates to work for three years ..."
"... lowered qualifying requirements for L-1B visas. L-1b visas allow corporations to import their foreign employee to work in the US at the home nation salaries. And has lead to widespread abuse such as foreign employees being paid $1.73/hour. ..."
"... modified the B-1 visa, used attended training and meetings, to incorporate the "B-1 in lieu of H-1B" which now allows some foreign workers to work in the US on the B-1 visa ..."
"... There are now well over a million foreign guest workers in the US and the numbers are growing. Curiously (ha ha!), DHS does not even keep count of the above admissions. ..."
"... Wow, didn't know they expanded the student work permission to three years. Used to be one year. Essentially if you go to college here you have bought yourself a ticket to live in America and take a job from an American. ..."
"... I was replaced by a 20-something. Actually, at my last job (3 years ago) both the older employees, myself and another employee, were replaced. One employee who had worked there for 15 years and was 60, so TWO years away from retirement, was let go. (I hope he sued the pants off that horrible firm!) ..."
"... Yes indeed, there's a reason big business doesn't want medicare for all – it would result in the ultimate 'flexible workforce'. Workers immediately bailing out of every shit show employment situation they manage to fall into at the drop of the hat with no COBRA or insurance dead zones. But on the other side of the coin, it would ramp up the Uber jitney economy of on-demand disposable workers lined up holding signs displaying their skill sets for a day's pay at the highway on-ramps at 6:30 AM (or, as the neo-liberal mindset would frame it – the entrepreneurs). ..."
"... Thats pretty much how the movie/tv industry operates in Hollywood. ..."
"... History of Work Comp as I remember it - speaking of how "the company" counts its beans: Johns Manville had a problem with people getting slowly sicker on the job (handling asbestos) starting late in the 1800s paid doctors to do studies that proved the asbestos-asbestosis-mesothelioma connection, and gave some rates of worsening of the diseases and hence points at which workers could no longer work. The researchers and doctors were paid for and threatened into silence on the findings, and required to ignore their Hippocratic obligations. Workers had to go to company doctors, who would nurse them along until they were fired for inability. ..."
"... All labor reform policies put forth by Republicans and their policy activation arm (Dems) have been to make life easier and richer for CEO's, not to help workers. So now economists are surprised by the results? What a useful profession they are. ..."
"... The 40 hour work week was established under Roosevelt. If you wish to reverse or stave off the declining Participation Rate, then decrease the required number of hours work to 32. We have agreed before that Labor is the lowest cost when compared to Overhead or Materials. In the end, the difference in cost would be made up by higher productivity. ..."
June 21, 2016 | nakedcapitalism.com

A new Council of Economic Advisers study released by the White House on the fall in labor force participation among men of prime working age (25 to 54) should be subtitled, "It's the Neoliberal Economy, Stupid."

The report does a useful job in documenting where the level and nature of the decline in male workforce participation, which peaked at 98% in 1954 and is now at 88%, the third lowest among OECD countries. The decline is concentrated among less educated:

Screen shot 2016-06-21 at 4.20.59 AM

Blacks have been hit harder than other groups:

Screen shot 2016-06-21 at 4.22.31 AM

And the general outlook for employment has been deteriorating over time. However, bear in mind that this decay somewhat overlaps with the story that less educated groups have been harder hit. US educational attainment has fallen over time.

Screen shot 2016-06-21 at 4.09.30 AM

The report dismisses the myths that access to Social Security disability or that men are not choosing to work as culprits. More than a third were in poverty. Fewer that 25% of the men not working have a spouse supporting them and that percentage has dropped in the last 50 years. The CEA's analysis find that Social Security disability explains at most 0.5% of the reduction.

The cause is the state of the job market:

• Participation has fallen particularly steeply for less-educated men at the same time as their wages have dropped relative to more-educated men, consistent with a decline in demand.

o In recent decades, less-educated Americans have suffered a reduction in their wages relative to other groups. From 1975 until 2014, relative wages for those with a high school degree fell from over 80 percent of the amount earned by workers with at least a college degree to less than 60 percent

While doing a fine job dimensioning profile of the groups that have been hit the worst, the authors, after invoking hoary neoliberal defenses, as in these workers are the losers in a globalized market, the paper gives a coded acknowledgment that policies that are hostile to workers have produced the expected result:

This reduction in demand, as reflected in lower wages, could reflect the broader evolution of technology, automation, and globalization in the U.S. economy.

Conventional economic theory posits that more "flexible" labor markets-where it is easier to hire and fire workers-facilitate matches between employers and individuals who want to work. Yet despite having among the most flexible labor markets in the OECD-with low levels of labor market regulation and employment protections, a low minimum cost of labor, and low rates of collective bargaining coverage-the United States has one of the lowest prime-age male labor force participation rates of OECD member countries.

It is remarkably cheeky to see the authors attempt to depict "flexible" labor markets, where workers can be tossed on the trash heap, as beneficial to laborers.

The recommendations are tepid, and the authors assert "A number of policies proposed by the Administration would help to boost prime-age male labor force participation." In other words, we are to believe the problem is those Republican meanies in Congress, as opposed to Obama not pushing hard for these measures in his first term, when he had the opportunity to pass wide-ranging reforms.

One proposal is the new conventional wisdom of more infrastructure spending to create more jobs for unskilled workers directly, improving community colleges and other training so workers will have skills that line up with hot job markets. The problem with the latter idea is that demand can shift quickly (look at how the oil patch was robust a few years back and is now just starting to get back on its feet). Moreover, employers are extremely prejudiced against both older people and people who've been out of the workforce, and the age which is deemed to be "older" has collapsed. Per Wolf Richter (emphasis original):

Now I've come across a fascinating piece on MarketWatch, an article on what to do to get into the cross hairs of a recruiter whose algos are combing through millions of profiles on LinkedIn.

No recruiter in his right might is personally clicking through LinkedIn profiles. They're all scanned by algos by the millions in nanoseconds. And so the trick is structuring your profile to get the algos to pay attention. This isn't a human-to-human scenario, but a human-to-algo scenario. You're trying to second-guess an algo that's going to decide your future….

But apparently the lifespan of a degree has been shortened from 20 or 25 years to just 10 years! Then it rots, and it has to be swept under the rug. The article put it this way (emphasis added):

Older job-seekers….

I mean, I'm already seething.

Older job-seekers need to walk a fine line. Unless you made the cover of "Time" or discovered a solar galaxy, experience has a shelf life on LinkedIn, says Scott Dobroski, career trends analyst at Glassdoor. There's no need to wax lyrical about a job that's more than 10 years old, he says. And those who g raduated from college a decade ago may want to exclude the date they graduated. "Your college graduation date will age you," he says, "and although ageism is illegal, it's happening all the time." On the other hand, if you're applying for a job as CEO of a Fortune 500 company and you graduated in 1986, it's okay to leave the date, Dobroski says.

Note the word "older job seekers" in connection with a college degree from 10 years ago. Those older job seekers are early Millennials!

Yves here. Admittedly, candidates on LinkedIn are more educated than the group this study is most concerned about, but consider the message: even among the educated, the shelf life of a degree has diminished greatly due to ageism. Why would it be less bad among the less well educated?

Similarly, the problem with European-style job training programs is that US employers do not want to hire people with general training, even in a particular skill area. Their strong preference is to hire someone who is doing the exact same job for a similar company, so as to minimize their effort (in theory; in practice, the extra time spent on the search probably offsets the theoretical savings). The cure for that is a much more robust job market, where employers realize they are not going to find the perfect candidate and take someone approximate and give them the training and other guidance they need to become productive.

And finally, the report claims that Obama has been pumping for one of the most needed remedies:

Increasing wages for workers by raising the minimum wage, supporting collective bargaining, and ensuring that workers have a strong voice in the labor market.

Help me.

So I'm at a loss to understand the political purpose of this report. It's useless as a policy driver given that this is an election year when Obama is a lame duck. Perhaps it is a weak effort at legacy-bolstering by showing that even though the decline in labor force participation among men was marked in the Obama Administration, it started long before he took office. But it still ignores some elephants in the room, like the fact that employers stopped sharing the benefits of productivity gains with workers starting in the mid-1970s and lack of sufficient demand in the economy. What it does reveal is one of the many time-bombs that Obama has left for the next President.

Marco , June 21, 2016 at 7:27 am

Time to start blaming those darn "stay-at-home" dads!! (PEW via CalculatedRisk) How much more evidence will it take for orthodox economists to stop manufacturing silly excuses for a crappy job market.

Benedict@Large , June 21, 2016 at 8:52 am

Economists since the 1970s have been primarily involved with explaining away unemployment; that is, saying it doesn't exist. This is because their theory of inflation (printing money = inflation) breaks the rules of elementary algebra if unemployment does exist. To normal people (non-economists) confronted with such a situation, the theory would quickly be abandoned as nonsense, but to economists this is not an option, because this theory also says that big government is bad, a truism that in the economics profession needs no explanation.

So you see, Marco, there is no crappy jobs market because there's no such thing as unemployment. Ask any economist. They'll tell you.

Simon , June 22, 2016 at 9:08 am

Here are some nice nuggets from the CEA study on the stay-at-home dad myth:

"Participation rates have fallen for both parents and nonparents alike, but prime-age males without children saw a larger decline of 9.4 percentage points since 1968 compared to 4.9 percentage points among prime-age males with children. This suggests that men dropping out of the labor force to be stay-at-home fathers is likely not an important factor in the overall decline; moreover, only around a quarter of prime-age men who are not in the labor force are parents (down from around 40 percent in 1968)."

and

"Based on [American Time Use Survey] data, there is little evidence that men are staying home to care for children or to do house work. "

Of course, I am preaching to the choir here!

ambrit , June 21, 2016 at 7:34 am

"Blame the victim."

av av , June 21, 2016 at 10:20 am

Blame technology. Low skilled workers are easiest to replace. Example, you used to have people sweeping and washing floors in shopping centers or subway stations.
Now you have one person on a sweeper or washer.

Pat , June 21, 2016 at 11:50 am

And how well is that working out? I'm serious. Perhaps they need a couple of more people ALONG with the washers and sweepers. Sorry to use Disney, but part of the reason the parks are pristine is because they have a whole lot of people going along picking up the trash and sweeping up.

It is not just technology, it is a management that doesn't understand how much labor they really need and ignore the signs they do not have enough, because then their numbers might be down. And this is even when their numbers are already down.

jsn , June 21, 2016 at 3:06 pm

It's really about how the priorities are set and by whom.

In a sane society, the issuer of the currency would pay people to do things people like to do or benefit from doing themselves and pay for equipment/robots to do things people don't like.

We live a long way from there.

collins , June 21, 2016 at 4:26 pm

Friends of mine visited Germany last year, noticed that for curb, pothole repair where in the US you see 2-3 guys and a bunch of equipment, there he would see 8 guys with shovels and little to no equipment.

SpringTexan , June 21, 2016 at 4:27 pm

Yes, when I was working at UT-Austin, they cut the janitorial staff so that offices were only vacuumed once a month.

There is work to do. But not willingness to have people do it.

Steve Gunderson , June 21, 2016 at 5:08 pm

Maybe teaching people to pickup after themselves should be a Freshman level course?

Michael , June 21, 2016 at 8:19 pm

Carpets need to be vacuumed.

inhibi , June 22, 2016 at 4:26 pm

It is not as simple as "technology". I often find that those who say lines like "robots are going to take away all the jobs!" are those without actual degrees in those subjects. Technology simply moves the plane of thought, processing, manufacturing, etc to the next level. The invention of the computer spawned an entire multi-TRILLION dollar industry with millions of jobs. Robotics will be/is the same.

The reality of what is happening is on the economic/political level. It involves a small number of people, living in a rich, opulent high tower, who for years acted and enacted without the slightest bit of empathy or selflessness. These same people have literally no depth to their thought and are ruled by the very gluttony/ego so valued in todays consumerist society. This type used to live in Rome during Diocletian's rule, in Egypt during the Hyskos invasion, in the Mayan Empire during the Postclassic period, etc ad infinitum. The overall picture has repeated itself, as an empire is a microcosm of any living organism; it gets old and becomes very susceptible to change, that is, the ruling class become so removed from reality that their decision making begins to deviate further and further from the actuality of the current situation. The Housing Crisis is a prime example. The banks saw fit to literally scam their own customers with no government intervention! Twice! This type of thinking quickly affects the entire nation. People begin to see a futility in living morally and truthfully, and start to wonder if the entire system is a scam.

Now imagine the modern US economy as a sinking ship. The top level execs, elites, are busy pillaging as much as they can, because they all see that US supremacy isn't going to last. Manufacturing all moved to China, now Mexico, retail is dead in the water, the US consumer is getting weaker and weaker. Only healthcare is staying afloat, due more to political reasons than anything else.

The easiest and most common method to increase your salary as a corporate exec is to get rid of overhead: sell off portions of the business, layoffs, etc. They are all doing it regularly with no impunity. US manufacturing is all but GONE. Its all been sold to PE firms that install a puppet as the CEO, who then begins the extraction process of selling off parts of the business, instating capital controls, and layoffs. Now it moved to retail. Eventually, America will be a literal husk. Every place will just have the same options of a few fast food and retail chains. The entire Midwest is already there, hence "Rust Belt". The only places that will be spared in America will be the bubble of wealth concentrated on the coasts, but even these will begin to whither as wealth starts to move to other, happier countries.

So in this milieu, put yourself in the place of a average HS educated American. You have two options for your career: work your ass off and make next to nothing, or go to college and graduate a debt-slave, also making next to nothing. However, a third option presents itself, complements of the Welfare State: collect unemployment and have all the free time in the world. Then imagine what you see and hear everyday. Banks illegally foreclosing on homes, executives getting away with fraud in the hundreds of millions, a militarized police, potent pharmaceuticals given away like candy, a plant that causes mild decrease in heart pressure illegalized, politicians lying again and again, the wealthy talking on TV about how "easy" it is to open a business and selling books about it, etc. It all concentrates down to the worst of all emotions: depression, self-loathing, and envy.

The depression comes from the hopelessness of most American's situation: poorly educated with no future career, not even a path to take which will ensure a brighter future. The self-loathing comes from the media, as most people get an HOURLY reminder of how shitty they look, how poor they are. Even shows like Shameless don't touch on the reality of being poor in America. It isn't a day to day struggle to pay bills. Its a day to day struggle to even feel worth something. To feel part of society.

Then there's envy. You feel envious of the wealth, the attractiveness of others you see in the media, which you misplace as being the vast majority of people in America because you see them everyday and everywhere: online, on billboards, in movies, commercials, etc. You begin to feel like SOMETHING should be given to you. The Government, fearing rebellion, realized this during the last Great Depression when they began to expand the Welfare State. Welfare is a form of suppression. It keeps people on the lowest rung just happy enough to forget about rebelling. Big Pharma is a BIG factor in this as well. I've visited enough towns in the Mid West where everyone is on some pharmaceutical, usually Percocet or valium, yet have no money for a proper house with heating and cooling.

So in summary, the extraction of wealth by the upper class, (through "global" trade agreements, stock market manipulation, tax evasion, offshoring, etc) along with lax regulation & prosecution by the political body (they are very much one and the same these days) caused immense physical (monetary) and mental depression/suppression of the masses, which are steadily moving toward Welfare as it becomes the only of options with a glimmer of stability & free time.

FedUpPleb , June 21, 2016 at 8:10 am

So entire industries now eschew people older than 30 in favor of being staffed entirely by 20 something's. This will surely end well.

Arizona Slim , June 21, 2016 at 8:55 am

I would like to see where all of these highly skilled and motivated 20-somethings are coming from. Because I am not seeing them around here.

NoGig , June 21, 2016 at 11:06 am

They are bring these workers from India where starting IT salaries are $10,000/year. Check early in the morning and late at night and you will see the buses delivering the workers who lived crammed in surrounding apartments. One told me his Indian outsourcers had eight of them living in a two-bedroom apartment with one bathroom - while working 80-100 hours per week. They are threatened with deportation if they complain, and in some cases, their families back home are physically threatened.

With the defeat of H-1B expansion, Obama has now vastly increased foreign guest workers through executive actions that include:

  1. granting automatic work authorization to all H-1B spouses.
  2. expanding Bush's "Optional Practical Training" now allowing stem graduates to work for three years in the US on a student visa. The OPT has no caps, little labor protections, and no salary requirement.
  3. lowered qualifying requirements for L-1B visas. L-1b visas allow corporations to import their foreign employee to work in the US at the home nation salaries. And has lead to widespread abuse such as foreign employees being paid $1.73/hour.
  4. modified the B-1 visa, used attended training and meetings, to incorporate the "B-1 in lieu of H-1B" which now allows some foreign workers to work in the US on the B-1 visa

There are now well over a million foreign guest workers in the US and the numbers are growing. Curiously (ha ha!), DHS does not even keep count of the above admissions.

America, this is not YOUR government.

John , June 21, 2016 at 11:00 pm

Wow, didn't know they expanded the student work permission to three years. Used to be one year. Essentially if you go to college here you have bought yourself a ticket
to live in America and take a job from an American.

perpetualWAR , June 21, 2016 at 11:25 am

I was replaced by a 20-something. Actually, at my last job (3 years ago) both the older employees, myself and another employee, were replaced. One employee who had worked there for 15 years and was 60, so TWO years away from retirement, was let go. (I hope he sued the pants off that horrible firm!)

weinerdog43 , June 21, 2016 at 11:51 am

Oh, they're all out beating down the door over in Philadelphia to work as substitute teachers for $75 per day. Just google 'substitute teacher shortage' and you'll see plenty of job opportunities.

snark

inhibi , June 22, 2016 at 4:36 pm

Its called "turnover" and companies use it nowadays to suppress wages. Why pay a 30 yr old 85K when you can pay a 20 yr old 50k?

Most of the work is simple anyways, unless you work in the STEM field. And unfortunately, in the STEM field, the largest industry (software) takes this approach to the next level.

flora , June 21, 2016 at 8:14 am

Great post. Thanks.

mark , June 21, 2016 at 9:08 am

Yes it is.

"supporting collective bargaining"

Guffaw.

fresno dan , June 21, 2016 at 8:17 am

Incentives matter – if the end all and be all is GDP, you get GDP. TPP is an "industrial" policy, or more accurately a re-distribution policy – yeah – re-distribution – the fact that it is re-distribution from the poorer to the richer is a novel use of the concept, but we should never under estimate the cleverness of Davos man.

The fact that it is espoused by those who incessantly yammer about how government policy should be "neutral" exposes that these people are just making the rules for their own benefit. The fact that so many laws ("reforms") must be instituted to advance this agenda just exposes the intellectual dishonesty. Or would they have us believe that the advent of neoliberalism and the increase in inequality is just a happy (sarc) coincidence? The idea that this is some unstoppable force of nature just wants to make me puke.

If you think that work matters, that participation in society is important, and that a nation is more than airbnb beds for Davos man conference attendees, you can have policies that punish outsourcing, decide that limiting H4B workers increases demand for workers here with commensurate increases in wages. There are a zillion ways the tax code as well as other laws are inimical to US workers. It STARTS with the idea that paying labor more does NOT harm society….

These policies are not a function of physics or of God's will – they are made by men at the behest of the few to reward the few. It can be changed if we choose to change it – although I fear we are rapidly reaching a point, and may have already reached it, where we are a defacto plutocracy and any "reform" is mere window dressing.

Linda , June 21, 2016 at 8:41 am

I agree with you wholeheartedly. We are on a straight path to plutocracy and I too fear we have already passed the point of no return. I hear (read) daily the awful word, redistribution; always in the context of taking a small amount away from the rich and powerful to give to those not as fortunate; but never in the context of what is actually happening on a grand scale; the taking from the lower classes and giving it to the upper 1% and above. When will it stop? I don't know; I do know that unless we continue to try and make the masses actually understand what is happening to them and to get them off their apathetic arses and involved in the political process, thereby voting out of office the scrads of politicians devoted to and enamored of neoliberalism, we will continue down this prophetic road of self destruction. It is our choice. It will be hard. It may, in fact, already be too late. But, we have to try. We have to keep working; working to explain the awful policies of neoliberalism.

templar555510 , June 21, 2016 at 9:20 am

Agreed. So what MUST the demand be ? Let the capitalist go after FULL AUTOMATION and balance that with UNIVERSAL BASIC INCOME . Everything to do with money can be defined as a balance sheet so this should be the balance sheet for the 21st Century . The demand should come from all . And it's coming. I know the Swiss just rejected it , but the fact that they just called a referendum to decide it ( for now ) tells us it's there in the ether and the Swiss are not alone ; the Dutch, the Finns are all working on this . It's the genuine great leap forward.

tegnost , June 21, 2016 at 9:52 am

sorry but basic income guarantee is simply creating demand for the plutocrats, and is exactly why food stamps are in the agriculture budget. This is why the 13,000/yr BIG floated a week or two ago already, at it's inception, takes 3,000 and puts it towards medical care-oops, i mean insurance- you won't get care unless you pay extra, don't kid yourself. And this gravy train will have as many cars attached to it as it can carry, how much will your BIG be in the form of food stamps? rent subsidy? by the time it's implemented the person at the root of the issue won't get a thin dime, but the cronies will have a basic income guarantee, the true purpose of this terrible idea, I and others like me want things to do, not a snap card (more likely digital wallet brought generously to you by apple and jp morgan, which of course will charge a fee, and conveniently keep track of where you are at all times) that allows me to buy gmo food (yes, there will be foods that are for the poor and foods for the rich, want organic? what's your net worth?) The silicon valley parlors where these moronic ideas are hatched are filled with people who are trying to cement their presence in the upper class which is funny on the meritocrat side because many of my tech friends didn't go to college, they were good at video games and now it's robots robots robots because that's their gravy train and the BIG is their lame ass apology, while getting some demand into the economy to pay for their craptastic junk toys.

TheCatSaid , June 21, 2016 at 11:59 am

Great observations about BIG. I never thought of it that way, and you make it very obvious. Thank you.

lightningclap , June 21, 2016 at 1:21 pm

++ I have long been in favor of BIG but you point to the obvious strings that would be attached if formulated by our Valley "disruptors".

jrs , June 21, 2016 at 4:03 pm

then instead provide the basics of life to people, like healthcare and shelter, rather than money? That completely solves that problem doesn't it?

samhill , June 21, 2016 at 8:10 pm

Excellent, my vote post of the week. The best answer is to pay people to actually work, the work would be to pay them to undo the damage of the last 300 years of industrial revolution. We had created a large middle middle class and secure working class destroying the planet, we can create the same wealth cleaning it up. Instill hope on a dying planet, and for the first time in its history give humanity a reason to get up in the morning other than just exploiting each other in a rat race.

Norb , June 22, 2016 at 2:35 am

One way of looking at how a BIG can be manipulated by owners is considering slavery. It seems we are entering a new phase in the never ending capitalist struggle to secure cheep labor. Cheep labor and resources are the driving force of the current system. The logical end result is to have a self-sustaining labor force. One that makes just enough to survive and work- with little room for anything else. That is where we are headed.

Advancing technology and the desire to shed costs related to slave upkeep can be argued as important factors in slavery's demise in it's original social form as one individual owning another as property. Why bother taking on the responsibility for slave upkeep when you can rig the system in ways that require workers to enslave themselves to businesses and the system as a whole. You need the labor power, not the person.

A BIG will be sold for all the typical humanitarian half-truths, but in reality is a natural development to maintain the capitalist system. The powers that be have demonstrated no interest in maintaining a middle class workforce. Debt bondage and BIG coercion are on the horizon.

As Goethe observed: None are more hopelessly enslaved than those who falsely believe they are free.

lin1 , June 22, 2016 at 1:47 pm

Your using an abstract moral excuse to argue against fulfilling a real actual need.Until the revolution comes, BIG is a solution I will support.

Fred Rucker , June 21, 2016 at 10:52 am

How wonderfully well stated, thank you

Bill Smith , June 21, 2016 at 8:34 am

Why does there have to be a political purpose for the release of the report? I would guess that the end of a presidency works a little like late Friday afternoon when stuff get dumped to the public at their point of lowest interest.

Raising the minimum wage works at cross purposes. It helps in the short run but in the longer run – other things held constant – it makes automation more likely.

When the small company I worked for years ago was faced with replacing a piece of equipment, at some point after the minimum wage had been raised, the company replaced it with one that was more automated and took few people to operate. The cost of labor had moved up and cost of capital was lower due the interest rates. The numbers were close enough that it could have gone either way but the feeling was that the cost of labor would continue to go up. Going with the more automated equipment locked in more of our costs.

a different chris , June 21, 2016 at 9:02 am

It's weird how people can pretend to conflate technology assisting labor with replacing labor with cheaper labor, in order to derail the subject.

As far as your "point", they invented the nail and hammer and now we don't have to drill holes and put pegs in. Fine. Nobody is talking about going technologically backwards, in fact just the opposite. We are talking about the race to the bottom in labor itself. I suspect a bit of looking around can find a lot of places where 1 American + 1 machine is slightly more expensive than 4 third-worlders + shipping + no machine. Sometimes the machines have progressed so fast that work has moved back onshore (and funny that all the moaning about "helping people that live on 2cents/day" isn't heard when that happens), which is cool but it still is the exception.

But: how limited is the number of "capitalists" that are going to bother to invest in bringing down the cost of that machine when you can drive the cost of humans down in almost unlimited fashion? - there are actually limits, and we will eventually hit them but it will get a lot uglier if we do it that way.

Cry Shop , June 21, 2016 at 9:32 am

And the whole issue is treating fellow human beings as less deserving, less worthy of employment just because of their nationality.

There will always be that other half of the working class that can be used to kill the other half when pushed hard enough, any definition will do for separating the class in to us vs them, so that the war can start. Unions blew it when in the 1970s when their leadership sold out, refused to go international with trade agreements, and focused on protecting an indefensible position, indefensible from both an economics view and from an ethics view.

Jay M , June 21, 2016 at 3:48 pm

During the cold war the American Labor union movement was thoroughly anti-communist and in bed with the CIA as far coordinating with international labor. See wiki on Jay Lovestone for a bit of the flavor of the times.

Bill Smith , June 21, 2016 at 11:41 am

My point was that we ended up with one less minimum wage job because the cost of labor made it better for the company to buy the more automated piece of equipment.

That example had nothing to do with off-shoring – though I now work in a company of about two dozen people who has off-shored some work. I am going to guess about the equivalent of two full time jobs.

I was quite surprised when that decision was made given our small size but it has worked as explained to us when it started.

Steve Gunderson , June 21, 2016 at 5:12 pm

How many things does the new machine buy?

cnchal , June 21, 2016 at 11:40 pm

Looked at that way, the machine buys it's consumables and raw material used in the process. It would have done that anyway, were Bill's company to decide to buy a simpler machine and employ one more person, but because of the automation, and as long as sales justify it, the more advanced machine will process more raw material and use more consumables because it has the potential to run 24 hours per day, whereas an employee would be seeing stars after an eight hour shift, due to repetitious boring work.

Felix_47 , June 21, 2016 at 9:26 am

Good point. Also consider litigation costs which to most employers in Ca at least is a huge financial and management burder. A couple of worker's comp sore backs or knees combined with chiropractor, "pain management doctors," surgeons, secondary psychic stress etc. makes a lot of employers including me realize that every employee is a ticking liability time bomb just waiting to call that 1-800-hurt at work number. No business can hire Americans in this legal environment unless they are very well paid well beyond their value so they have no option but to do the job. In fact, in my business litigation/medical/disability costs are far more significant than hourly wages. We just can't take the risk and we outsource everything and hire as few as possible and I am not alone.. We do everything possible to avoid hiring low level workers and when we do we want young recent immigrants who are not "Americanized" and lawyer prone. Even then we get burned more often than not with claims for age related conditions. Then it is simply 1-800-Lastimado en Trabajo and you can see the ads all over the busses in TJ before they come over….ads for Ca worker's comp attorneys!!!! Lawyers, since they control the democratic party are a huge part of our unemployment problem. No employer can take the worker's comp risk of an older employee. If they feel back ache or knee ache or neck ache on the job…it is "aggravated" and the employer is often out hundreds of thousands….thanks to the lawyers who write the laws. Don't count on this lawyer in chief or the next one to do anything about it. Age discrimination and automation and outsourcing are survival tactics for most of the businesses I work with, including my own.

tegnost , June 21, 2016 at 9:58 am

medicare for all

JohnnySacks , June 21, 2016 at 10:41 am

Yes indeed, there's a reason big business doesn't want medicare for all – it would result in the ultimate 'flexible workforce'. Workers immediately bailing out of every shit show employment situation they manage to fall into at the drop of the hat with no COBRA or insurance dead zones. But on the other side of the coin, it would ramp up the Uber jitney economy of on-demand disposable workers lined up holding signs displaying their skill sets for a day's pay at the highway on-ramps at 6:30 AM (or, as the neo-liberal mindset would frame it – the entrepreneurs).

Steve Gunderson , June 21, 2016 at 5:13 pm

Thats pretty much how the movie/tv industry operates in Hollywood.

armchair , June 21, 2016 at 10:17 am

Damn it, we could unleash potent forces if we just got rid of the lawyers. When a person's knee gets torn up on the job, give em' a couple grand, an aspirin and tell them to get over it. That's all you need to do.

Think about this. If the states weren't so desperate for money, they wouldn't have to run the system on the cheap. If health costs were lowered, then the system wouldn't be so expensive. A worker's comp agency has to balance its objectives between not bankrupting the state and not screwing over hurt people. A hurt worker without an advocate is a sitting duck. One way to make lawyers go away is to abolish worker's rights. Alternatively the worker's comp system would be cheaper if health costs were cheaper, and realistic settlements without the assistance of a lawyer might be possible if states had more revenue to pay bills.

JTMcPhee , June 21, 2016 at 12:41 pm

History of Work Comp as I remember it - speaking of how "the company" counts its beans: Johns Manville had a problem with people getting slowly sicker on the job (handling asbestos) starting late in the 1800s paid doctors to do studies that proved the asbestos-asbestosis-mesothelioma connection, and gave some rates of worsening of the diseases and hence points at which workers could no longer work. The researchers and doctors were paid for and threatened into silence on the findings, and required to ignore their Hippocratic obligations. Workers had to go to company doctors, who would nurse them along until they were fired for inability.

At first, the court system's tort law provided the persistent with some compensation and support commensurate with the harm. Many cases settled, but all contained non-disclosure mousetraps (tell anyone and you lose everything.) And of course the "experts" who testified for both sides were sworn to secrecy too, for money or from fear. But Manville and other corporate creatures got inspired, starting around the 1890s I think, to pitch and successfully write (lobby) into law that "workers comp" system that persists - places an administratively determined value on the "injury," percent of disability, and the rest, bars tort litigation for WC-"covered" injuries. Even with all that, a lawyer is often needed because the fokking corporate swine do everything in their considerable power and corrupting reach to avoid even paying out the pittance WC provides, especially long-term treatments and care for the many horrific injuries. Once again, the hope is that the injured worker will GO DIE. And yes, there are cheaters, but gee, how surprising that the profits from fokking over the workers so far outweigh the little bits that a few people scam from the other side. Many of the patients I tried to help when I worked as a nurse were WC, and the treatment they got from the insurers, and the "employee advocates" and "nurse case managers" and defense lawyers acting on screw-the-worker policies of long standing, was amazingly cruel.

"Bankrupting the state?" WC is paid, far as I know, at least in FL, out of an insurance pool that is funded by employers. Subject to the same kinds of actuarial calculations that any other large-pool insurance game undertakes in underwriting. And yes, universal health care (not Obamacare) would, if it could be managed without the full usual apparently inescapable corruption by neoliberal interests and thinking, reduce EVERYONE's costs. And states are "desperate for money" largely because the Chamber of Commerce and other neoliberal fokkers like the Kochs have strangled the public general-welfare income stream and diverted most of what is left to various kinds of "white man's welfare" and corporate gifts.

Here in FL, "worker's rights" are already largely abolished, and the mopping up continues. Just so's you know. There are still lawyers who will (for a cut of the limited amounts that WC will pay out if they finally prevail, to the worker's and family's detriment, "take cases." What I learned in law school, first week in Contracts and Torts and Constitutional Law, is that "There are no rights without effective remedies." What remedies do workers have?

And for those who want to shoot at the VA, on "inefficiency" grounds and the other neoliberal overt and covert assaults, VA disability is a Workers Comp program too. Max payout for a GI who is 100% permanently and totally disabled is around $30,000 a year. There is no component as with other kinds of insurance structures for enhanced damages for "bad faith" on the part of the government and the privatized functions that make up the disability administration. "Thank you for your service, Sucker!!" And that "award" usually only comes after a decade or more of fighting with a well documented opposition from the people who administer the "system" and requires persistence, luck, and occasionally benefits (not so much any more) from intervention by the injured GI's elected representative…

animalogic , June 21, 2016 at 8:57 pm

All this talk of workplace injury, lawyers and workers comp misses the obvious point that some of these workplaces must be UNSAFE. (It's always the other workplace that's unsafe–"our" worker comp payouts are always rorts).

The answer to all worker comp issues is the same: universal mandatory insurance run by the state and work that minimises physical/psychological injury.
Naturally it won't occur as its a cost to business….

reslez , June 21, 2016 at 1:03 pm

Heaven forbid employers pay for the body parts they use up and destroy in their workers.

I agree with Anon, universal health care would resolve a lot of these issues. When the cost is spread out employers whine less when their workers are hurt.

allan , June 21, 2016 at 8:36 am

Yet despite having among the most flexible labor markets in the OECD-with low levels of labor market regulation and employment protections, a low minimum cost of labor, and low rates of collective bargaining coverage-the United States has one of the lowest prime-age male labor force participation rates of OECD member countries.

Francois Hollande to the white courtesy phone.

Larry , June 21, 2016 at 9:56 am

This song was made in 1983…and the same crap that Run-DMC mention in the lyrics still exists today:

Unemployment at a record highs
People coming, people going, people born to die
Don't ask me, because I don't know why
But it's like that, and that's the way it is
People in the world tryin to make ends meet
You try to ride car, train, bus, or feet
I said you got to work hard, you want to compete
It's like that, and that's the way it is
Huh!
Money is the key to end all your woes
Your ups, your downs, your highs and your lows
Won't you tell me the last time that love bought you clothes?
It's like that, and that's the way it is
Bills rise higher every day
We receive much lower pay
I'd rather stay young, go out and play
It's like that, and that's the way it is
Huh!
Wars going on across the sea
Street soldiers killing the elderly
Whatever happened to unity?
It's like that, and that's the way it is

https://www.youtube.com/watch?v=_hN1SKVx31s

tony , June 21, 2016 at 3:36 pm

https://www.youtube.com/watch?v=yUoiFH6Aw7o

I like old Ice-T.

The thing about being a man near the bottom in a country with low social mobility means it is extremely hard to get girls. Jordan B Peterson said in The Age of Unequals discussion that the primary motivation for men to become criminals is because it is the only way to have a chance at attractive women. That has been my personal experience with crime too.

Enquiring Mind , June 21, 2016 at 9:56 am

Ageism takes many forms, some more subtle than others. When your friendly local HR department makes a few tweaks to benefits, the newer employees don't notice, but the wizened veterans take notice. They see the handwriting earlier, and brace themselves for the next steps.

The HR folks are acting rationally in their supply-side worldview as they look out for shareholders first and consider employees well down the list, if not at the bottom. That treatment of personnel represents a policy of a very high effective discount rate on human capital in the aggregate. When parsed out, there are a few nuances that make the picture clearer. When the top handful get outsized payouts, they are incentivized to reinforce that high human capital discount rate, to the detriment of those down range.

The graphics showed an acceleration in the ominous trends in the early and mid 1990s. That coincided with the great outsourcing, re-engineeing, re-euphemising of jobs and the economy. In that era, Fortune magazine published a series of articles about the changing nature of the social contract at work.

One takeaway reflected the new bargain: companies needed to provide interesting work to retain employees, and the latter had to continue to make themselves employable. Those veteran employees referenced above discerned that there wasn't a bargain but a mandate to become more efficient, all presented with the window dressing of so-called interesting work.

A more honest presentation would have said work that meets the interest or discount rate, as part of the increasing financialization of the world. The decline in trust also accelerated during that period, whether in companies or the media. We continue to reap the results of that widespread mistrust and discontent during the current election cycle.

wobblie , June 21, 2016 at 10:08 am

A result of blind Liberal/Conservative policies.

https://therulingclassobserver.wordpress.com/2016/06/15/ruling-class-axioms/

Winston , June 21, 2016 at 10:16 am

a different Chris , please listen (see below) and read what Clayton Christensen has been saying. Big companies are mostly brands now. Have offshored main parts of company. Last stage in that development is decline of company, as in case of steel. IBM is presently also classic case as on road to failure as well for same reason. It started at IBM with Gerstner.

http://www.forbes.com/sites/stevedenning/2011/11/18/clayton-christensen-how-pursuit-of-profits-kills-innovation-and-the-us-economy/#3e737b19992a

Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy

Christensen at Gartner Symposium:
http://gartner.mediasite.com/mediasite/play/9cfe6bba5c7941e09bee95eb63f769421d?t=1320659595

Gartner Symposium ITExpo

Oh and state/local gopvts favor large companies over small companies!

http://www.forbes.com/sites/stevedenning/2014/05/30/why-ibm-is-in-decline/#5aaa6e284c53

Why IBM Is In Decline

http://finance.yahoo.com/news/no-end-in-sight-for-ibm-decline-as-shares-near-six-year-low-141729837.html
No end in sight for IBM decline as shares near six-year low

http://www.goodjobsfirst.org/shortchanging
Shortchanging Small Business: How Big Businesses Dominate State Economic Development Incentives

Denis Drew , June 21, 2016 at 10:59 am

In a labor market that contains for the sake of argument 50% rich country workers (e.g., American raised) and 50% poor country workers (anywhere else raised) - must be something like Chicago which is 40% white, 40% black, 20% Hispanic …

… where pay is set by what I call "subsistence-plus"; meaning set STARTING at the absolute minimum pay workers will tolerate (e.g., $800/wk for American born taxi drivers, me; $400 for foreign born) and then PLUS some more for each additional level of skill (bottom for McDonald's, more for better English in Starbucks, more for college English and more competent organizing in Whole foods?) …
instead of pay set by the highest price the consumer is willing to pay - by collective bargaining or a minimum wage …

… a huge dropout of low skilled, rich country workers will occur as low skilled work pays much below what rich country workers look at as "minimum subsistence" (the labor market will not clear). E.g., American born taxi drivers (me again) and the Crips and the Bloods. How else explain that 100,000 out of my guesstimate 200,000 Chicago, gang-age males are in street gangs?

To make the psychological point about "minimum subsistence", today's rich county labor would gladly work for half of today's poor country minimum - if it were 100 years ago and that's the best a much less productive economy could pay. It's psychological, but a lot of psychological if DNA immutable.

Now here's the wind-up - that should implant permanently the unquestionable need for collective bargaining in all labor transactions: A what I call subsistence-plus labor market with 100% rich country workers will have lower pay levels than a collective bargaining labor market with 50% rich/50% poor country workers.

That's the whole law and the profits about the need to make union busting a felony (starting in progressive states) as far as I'm concerned.

PS. This is not an endorsement of Donald Trump's anti-immigration bender - that would kick down the pillars that our whole civilization is built on (sorry Native Americans) - that could mean 250 million Americans by 2050 instead of the anticipated 500 million. This IS an endorsement or rebuilding high labor union density - the missing balance-of-power pillars of our civilization. (Don't forget centralized bargaining - the "compleat" balance-of-power pillar of a unionized labor market.

Charger01 , June 22, 2016 at 2:48 pm

David Simon covered this in "The Wire" and "Show me a Hero", you have entire sections of the population that are forced to leave or participate in crime as a viable form of employment. We have a surplus population now- and going forward that are not supporter by their labor or any other resource other than transfer payments.
Please pause a moment and consider that concept. We have a paucity of credible jobs that people can cobble together a living, let alone increase their opportunities going forward.

nothing but the truth , June 21, 2016 at 11:33 am

when everyone is trying to game the system no one has the right to cry morality.

i have some small businesses that i am selling off. Too many overhead, insurance and legal costs. The line of business is becoming a slave to govt mandated costs and regulations. Customers more interested in injury lawsuits. IQ and attitude of younger employees noticeably poor.

not looking good.

Sandwichman , June 21, 2016 at 11:44 am

"THE LONG-TERM DECLINE IN PRIME-AGE MALE LABOR FORCE PARTICIPATION" report states:

"Conventional economic theory posits that more 'flexible' labor markets-where it is easier to hire and fire workers-facilitate matches between employers and individuals who want to work. Yet despite having among the most flexible labor markets in the OECD-with low levels of labor market regulation and employment protections, a low minimum cost of labor, and low rates of collective bargaining coverage-the United States has one of the lowest prime-age male labor force participation rates of OECD member countries."

I have been following this so-called "conventional economic theory" closely for nearly 20 years now and can attest that it is not a theory but a hollow assertion. Empirical "evidence" for this assertion is based on "strong priors": models containing assumptions that generate outcomes consistent with the assertions. GIGO!

At the core of the flexible labour markets dogma is obeisance to the great god NAIRU, which Jamie Galbraith exposed in all its Emperor's New Clothes nakedness 20 long years ago: "Time to Ditch the NAIRU"

https://www.aeaweb.org/articles?id=10.1257/jep.11.1.93

"The concept of a natural rate of unemployment, or non-accelerating inflation rate of unemployment (NAIRU), remains controversial after twenty-five years. This essay presents a brief for no-confidence, in four parts. First, the theoretical case for the natural rate is not compelling. Second, the evidence for a vertical Phillips curve and the associated accelerationist hypothesis that lowering unemployment past the NAIRU leads to unacceptable acceleration of inflation is weak. Third, economists have failed to reach professional consensus on estimating the NAIRU. Fourth, adherence to the concept as a guide to policy has major social costs but negligible benefits."

In "Unemployment: Macroeconomic Performance and the Labour Market" Richard Layard, Stephen Nickell and Richard Jackman grafted the dubious NAIRU concept onto the anachronistic lump-of-labor fallacy claim to create the hybrid chimera "LUMP-OF-OUTPUT FALLACY" in which central banks enforcing NAIRU anti-inflation policy would ensure that you couldn't redistribute working time. You can't make this stuff up. But Layard, Nickell and Jackman did. Nonsense on stilts.

"To many people, shorter working hours and early retirement appear to be common-sense solutions for unemployment. But they are not, because they are not based on any coherent theory of what determines unemployment. The only theory behind them is the lump-of-output theory: output is a given. In this section we have shown that output is unlikely to remain constant."

This is simply not true. Shorter working hours is based on the same theory as the theory of full employment fiscal policy. Keynes's theory. But don't take my word for it. In an April 1945 letter to T.S. Eliot, Keynes wrote:

"The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result just as well by consuming more or working less. Personally I regard the investment policy as first aid. In U.S. it almost certainly will not do the trick. Less work is the ultimate solution."

Galbraith's "Time to Ditch NAIRU" has 293 citations on Google Scholar. Layard et al's "Unemployment" has 5824. Economists flock to dogma like flies to shit.

Jefe , June 21, 2016 at 12:01 pm

Old and in the way….

dc , June 21, 2016 at 12:30 pm

The Oxycontin Report

Ishmael , June 21, 2016 at 2:00 pm

Some strong starting points without requiring additional govt interference:

Shut down both legal and illegal immigration. When you can not employ the ones who are here why let more in.

Inforce the borders and deport people who are here illegally.

Get rid of anchor babies

Put tariffs on imports and I mean substantial tariffs. Worrying about Smoot Hawley is a canard. At that time the US was the biggest exporter now we are the biggest importer. I would also have a sliding scale depending upon labor rights. Some would scream we need to worry about the poor in these countries. How about worrying about the poor in this country. It has reached the point that you need to look around at your family and friends and say what would you do so that these people prosper. If you are not willing to say practically anything legally then you will probably not prosper.

Cut back govt at all levels. This is a major misallocation of resources. This is especially true of the military industrial security area. Come up with new health care laws. Focus resources to generate more doctors in the US and less people with unproductive degrees.

Close down overseas bases. Stop wars.

Ishmael , June 21, 2016 at 2:10 pm

One other thing, if you look at a lot of the jobs that men use to take and make a good living it was construction, plumbing, gardening, janitorial, cooks and etc. All of these jobs have been filled by illegal aliens who live 25 to a house, pay no taxes, get free health care and suppress wages.

I know, I am a racist!

tony , June 21, 2016 at 3:23 pm

Assuming there are enough natural resources, it is quite possible to arrange an economy in a way that benefits the population of the recipient country. Think about it. The immigrants are healthy, hardworking adults. So you get their labour without investing in twenty years of raising them and then taking on the burden of those who are unhealthy or anti-social.

The US is an immigrant country with a weak safety net so an intelligent policy could easily benefit both parties.

hunkerdown , June 21, 2016 at 4:10 pm

With respect, if your givens were in the least interesting or useful to the greater good, rather than articles of faith (which is just a polite term for self-delusion that benefits the power structure) designed to benefit your imaginary friends, satisfy your need to dominate and abuse others, and give your poor lonely misery some company, you might have something worth a detailed, thoughtful response. As it is, I think you need to explain yourself a bit better.

Ishmael , June 21, 2016 at 4:52 pm

Seems very clear to me. You must have a low IQ if you need someone to explain it to you.

Illegal aliens generally do not pay taxes because they get paid with cash! Sorry, if they have to pay such taxes like sales tax that everyone else needs to pay.

hunkerdown , June 21, 2016 at 5:52 pm

"Stupid" is typical American conformist speak for "would offend my bosses".

You had two points that sounded reasonable: "Shut down both legal and illegal immigration. When you can not employ the ones who are here why let more in." Because markets. Those who own a government that was designed to be bought want to drive down the price and increase the availability ("flexibility") of all labor, of course. Plenty of Americans would be happy to work off the books for a less demeaning wage under less demeaning conditions and less demeaning people. (As if Social Security isn't going to be looted by the oligarchs by the time I'm of age to retire) They wouldn't risk death and torture to come here if EMPLOYERS weren't withdrawing the benefits of employment from those already here and offering those benefits to others. While stopping the influx would be a fine idea, until you get control over those who are paying them to come here - making EMPLOYERS into felons for any support of immigration violations would be a far, far more effective use of enforcement power than beating down brown people at arm's length to satisfy your cultural conceits - supply and demand works both ways.

And "Put tariffs on imports and I mean substantial tariffs" is in the right spirit, but fails to acknowledge, with the usual hostility to self-awareness and past actions that defines the USAmerican "mind", that other nations have just as much right to respond any way they feel like, and the "trade agreements" the USA has signed grant them contractual grounds (pacta sunt servandum, remember?) to respond disproportionately with their own tariffs, penalties against the USG, and other demerits in the international sphere which are not constrained by your triumphalism in any way. Those means would not be as effective as simply repudiating every multilateral "trade"-related agreement the USA has ever signed and not, quite literally, pawning the USA for a mess of bourgeois pottage.

It's ridiculous that you should be depending on the US government to evaluate human rights conditions, when human authorities are never bound by evidence unless they want to be. Malaysia's admission into the TPP, and the politically-driven mulligan they received on their human rights conditions, shows the utter folly of letting ambitious bourgeois careerists hide behind corporate veils of any sort.

If you only believe that people who pay taxes should have rights, you support the very definition of plutocracy, and that makes you a disease vector.

ProNewerDeal , June 21, 2016 at 4:25 pm

"illegal aliens…pay no taxes, get free health care"

You have it back-a*ward. Undocumented workers pay taxes (FICA, SS, etc deductions), that they will not receive when they reach old/SS age, even if they are in the US at that future time. There is no "free health care" for undocumented workers, not eligible for Medicaid or ACA. Emergency room service does not qualify as health care.

Even US citizens have to go through a bureaucratic nightmare to get & maintain Medicaid or ACA, which is CRAPPY INSURANCE, not ACTUAL HEALTH CARE. At the point of needing actual health care, USians are often denied the service or the insurance refuses to pay after the service is done & face another bureaucratic nightmare in fighting the payment refusal. Undocumented workers lack access to even this crapified level of "health coverage".

I do agree that increasing supply (H1-B for STEM pros, undocumented for HS-degreed workers) lowers wages. Also, restricting supply (AMA restricting physician graduates such that US physicians per capita lower than OECD levels) increases wages. Econ101 supply & demand, perhaps neoliberal economists need "retraining" & should enroll in Econ101 at the local community college.

If there was an actual desire to limit undocumented immigration, the solution is large fines on Illegal Employers. How about $100K per undocumented worker found. In addition, end the Drug War, which causes violence & refugees, especially in Mexico & Central America. Revoke or at least amend NAFTA to un-decimate the MEX agricultural industry.

Ishmael , June 21, 2016 at 4:53 pm

Generally I have no problem wit