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Science, PseudoScience and Society

Advance of Zombie ideas in XX and XXI centuries

News Recommended books Recommended Links Financial_skeptic Political skeptic Groupthink Neoliberalism as a New Form of Corporatism
Lysenkoism and politization of science Harvard Mafia Cargo Cult Science Cargo cult programming IT offshoring Skeptic Deception Deception as an art form
Obscurantism and Mayberry Machiavelli Mayberry Machiavellians Leo Strauss and the Neocons Pseudoscience and Scientific Press Pollyanna creep Belief coercion within religious groups  
Casino Capitalism Corruption of Regulators Neoclassical Pseudo Theories and Crooked and Bought Economists as Fifth Column of Financial Oligarchy Rational Fools vs. Efficient Crooks: The efficient markets hypothesis Friedman --founder of Chicago school of deification of market Supply Side or Trickle down economics Invisible Hand Hypothesys: The Theory of Self-regulation of the Markets
Neoliberal Brainwashing -- Journalism in the Service of the Powerful Few In Foreign Events Coverage The Guardian Presstitutes Slip Beyond the Reach of Embarrassment Neo-theocracy as a False Drive to a Simpler Society Dumbing down america Information Technology Wonderland Pseudoscience and Scientific Press Scientific Fraud
Skeptical view on Programmers Health Secular Humanism Anti-intellectualism Skeptical quotes Humor Financial Humor Etc
  Programmers have a very precise understanding of truth. You can’t lie to a compiler. Try it sometime. Garbage in, garbage out. Booleans, the ones and zeros, trues and falses, make up the world programmers live in. That’s all there is! I think programming is deep, it teaches us about the non-cyber universe we live in. There’s something spiritual about computers, and I want to understand it.

Nick Geoghegan

Science has been misused for political purposes many times in history. However, the most glaring examples of politically motivated pseudoscience happened just recently, in XX century. That means that it is useful to review historic examples of "Zombie ideas" used for political purposes and the pattern that defines that abuse.

The important lesson of XX century is that discredited economic and political ideas, no matter how absurd,  don't die as long as they serve well power that be.  In a way they are real living dead, sucking blood from humans.  Those ideas that should have died long ago, still shamble forward, like Zombies. Usage of such ideas is one of the most dangerous deception schemes practiced  by modern elites

It's not easy to write about pseudo science. The problem has to do with the fluid nature of the concept. It has no single, precise meaning and there is little agreement about its constituent elements. But first and foremost it involved subjugation of scientific aims to political goals and deliberate attempt in deception and subsequent cover up. But recently almost all social and economic science became political and all politics involved deception: to say that a politician is not lying is the same as to say that an alcoholic is not drinking. Still there are different degrees of lies and different level of density of the "cloud of deception".

Discredited ideas with political support or "Zombies" can be extremely dangerous for people who oppose them.  Lysenkoism probably represents classic early example when an set of obvious lies was supported by repressive apparatus of state and dissenters were prosecuted and sentenced to Gulag.  For nearly 45 years, the Soviet government used propaganda to foster unproven theories of agriculture promoted by Trofim Lysenko. Scientists seeking favor with the Soviet hierarchy produced fake experimental data in support of Lysenko’s false claims. Contradicting scientific evidence from the fields of biology and genetics was simply banned. University programs taught only Lysenkoism . This state supported attempt to suppress generics  continued for over forty years, until 1964, and even managed to spread to other communist countries, such as  China.

What we saw it as a tragedy in Stalin's Russia genetics, we now see it as a farce in USA economics with neo-classical economics flourishing with the supportive guidance of neoliberal state and financial oligarchy.

The whole neoclassical economics is essentially a set of zombie ideas which are kept in the forefront by financial oligarchy. The financial crisis of 2008 buried key ideas of  'free market liberalism' (aka neoliberalism), such as the 'Efficient Markets Hypothesis', yet these zombie ideas still were dug our, dressed and continue to be sold via major newspapers and journals. Much like Lysenkoism in the USSR by CPSU. See

This is  a real Faustian bargain for academic scholars. One can trade the independence for political influence, good salary and other perks. It is also helps in the power grab. And despite popular image of scientists, they proved to be as corruptible, if not more corruptible, as anybody else. Historically the scientific community is generally held together and all its affairs are peacefully managed through its joint acceptance of the same fundamental scientific beliefs. Science is best practiced in a voluntary, peaceful and free atmosphere.

But that idyllic arrangement firmly belongs to  the past. Now we can talk only about the level of political pressure on scientists via research grants, not so much about presence or absence of such a pressure.  What really matters as far as politics and science is concerned is what type of environment the individual scientists have to work in and what degree of freedom they can enjoy.

Historically the situation changed irrevocably since early XX contrary, which signified discovery of atomic particles.  It should be understood that the modern scientist, built in the modern "neoliberal" democracies, is at the same time - and it is possible that even in the first place - a political agent, a manipulator. For the unwashed masses a public scientist represent the ultimate carrier of truth for a given discipline, so his opinion have a distinct political weight. And the architects of these systems use this values of scientists to the fullest extent possible. Like we can see with neoclassical economics, scientists have turned into an instrument of cognitive manipulation, when  under the guise of science financial oligarchy promote beneficial to itself a false and simplistic picture of the world, which brainwash the masses into "correct" thinking.

In this sense one can say that Lysenkoism represented a natural side effect of  shrinking of freedom of the scientific community and growing influence of political power on science. As by Frederick Seitz noted in his The Present Danger To Science and Society

Everyone knows that the scientific community faces financial problems at the present time. If that were its only problem, some form of restructuring and allocation of funds, perhaps along lines well tested in Europe and modified in characteristic American ways, might provide solutions that would lead to stability and balance well into the next century. Unfortunately, the situation is more complex, made so by the fact that the scientific establishment has become the object of controversy from both outside and inside its special domain. The most important aspects of the controversy are of a new kind and direct attention away from matters that are sufficiently urgent to be the focus of a great deal of the community's attention.

The assaults on science from the outside arise from such movements as the ugly form of "political correctness" that has taken root in important portions of our academic community. There are to be found, in addition, certain tendencies toward a home-grown variant of the anti-intellectual Lysenkoism that afflicted science in the Stalinist Soviet Union. So-called fraud cases are being dealt with in new, bureaucratic ways that cut across the traditional methods of arriving at truth in science. From inside the scientific community, meanwhile, there are challenges that go far beyond those that arise from the intense competition for the limited funds that are available to nourish the country's scientific endeavor.

The critical issue of arriving at a balanced approach to funding for science is being subordinated to issues made to seem urgent by unhealthy alliances of scientists and bureaucrats. Science and the integrity of its practitioners are under attack and, increasingly, legislators and bureaucrats shape the decisions that determine which paths scientific research should take. There is, in addition, a sinister tendency, especially in environmental affairs, toward considering the undertaking of expensive projects that are proposed by some scientists to remedy worst-case formulations of problems before the radical and expensive remedies are proven to be needed. They are viewed seriously though they are based on the advice of opportunistic alarmists in science who leap ahead of what is learned from solid research to encourage support for the expensive remedies they perceive to be necessary. The potential for very great damage to science and society is real.

Of course, the rise of 'Lysenkoism' in the Soviet Union in the late 40th of the twentieth century is one of the most tragic pages of the history of science.  Trofim Lysenko, a Soviet agronomist, came to prominence as the proponent of a theory of heredity that stood in direct opposition to Mendelianism. The details of this theory need not concern us, except to note that it was 'Larmarckist' in its contention that it is possible for organisms to inherit acquired characteristics.  This was wrong and the principles of Mendelianism - the theory of heredity - were well understood by then. But Lysenko theory fitted nicely with the Soviet ideology. Particularly, the idea that acquired characteristics could be inherited held out the promise of the perfectibility of mankind which as strange as it may sound was the necessary precondition to irreversible victory of socialism/communism (later when nationalistic forces  tore apart the USSR  it became clear that such hopes are completely misplaced). 

So the Stalinist state intervened in the pre-exiting scientific struggle by declaring the victor and the consequences, certainly for many of the scientists involved and arguably also for the USSR agriculture, were disastrous.  The essence of Lysenkoism is that pseudo-scientific theory became a pseudo-religious cult and the power of state was used to suppress dissidents. Many scientists were exiled; some killed. Unfortunately we cannot dismiss the obviously pernicious use of ideology by Lysenko and his supporters simply as an aberration of the era that is often brushed aside as 'the cult of personality' (with or without naming the personality in question). This proved to be much more dangerous and at the same time remarkably resilient phenomenon that survived the dissolution of the USSR. Actually the situation repeated with the USA economics when anything that was not neo-classic was suppressed was by-and-large similar although this time this time it happened without any killings.

Do not fool yourself that Lysenkoism is irrevocably connected with communist ideology. The link was poorly accidental. In reality Lysenkoism emerged more like a cult which was extremely convenient for the control freaks in high position in government. It's not a secret that a lot of high-level administrators in academic institutions belong to the category of micromanagers and as such they are naturally predisposed to Lysenkoism.  

In general "Lysenkovisation of  science" occurs when the state tries to control both the methodologies and goals of scientific activity and that happens all over the world, although to different degree.

In the USSR huge bureaucratic institutions such as VASKhNIL and VIEM had been set up with the specific goal to control resources and, especially, scientific press.  Part of the reason that Lysenkoism gained official support in the Soviet Union was because the Mendelian approach to genetics contradicted official ideology, in particular, Engels's dialectical materialism. In early 50th, just before his death Stalin began to sense that Lysenkoism can hinder practical science by interfering with the academic atmosphere of toleration of dissent most conducive to scientific accomplishment. He even went as far as to declare that

“no science can develop and proper without the clash of opinions, without freedom of criticism.”

But it was too late...

Other governments are also far from being immune from this kind of tendency to select between scientific theories on the basis of ideology rather than the balance of evidence.

More benign variant of Lysenkoism that does not rely on the power of the state is usually called Cargo Cult ScienceAnother related term is "Mayberry Machiavellis". A long time ago -- well, actually it was just a year, but it seems like a lot longer than that -- a former Bush advisor John DiIulio got into quite a bit of trouble for revealing to Esquire that the White House did not possess, in any conventional definition of the term, a policy-making process:

...on social policy and related issues, the lack of even basic policy knowledge, and the only casual interest in knowing more, was somewhat breathtaking—discussions by fairly senior people who meant Medicaid but were talking Medicare; near-instant shifts from discussing any actual policy pros and cons to discussing political communications, media strategy, et cetera. Even quite junior staff would sometimes hear quite senior staff pooh-pooh any need to dig deeper for pertinent information on a given issue...

This gave rise to what you might call Mayberry Machiavellis—staff, senior and junior, who consistently talked and acted as if the height of political sophistication consisted in reducing every issue to its simplest, black-and-white terms for public consumption, then steering legislative initiatives or policy proposals as far right as possible.

Dan Gardner - Senior Writer for The Ottawa Citizen writes: "Cabinet meetings were scripted, Mr. O'Neill discovered, by White House staffers who sent advance notes to cabinet secretaries telling them when they were 'supposed to speak, about what, and for how long.'" Is this the shadow of Politburo or what?

There are also strong analogies between Reaganomics and Lysenkoism. Useful discussion is at  "The Financial Crisis and the Systemic Failure of Academic Economics"

The Financial Crisis and the Systemic Failure of Academic Economics, by David Colander, Hans Föllmer, Armin Haas, Michael Goldberg, Katarina Juselius, Alan Kirman, and Thomas Lux: [From the conclusion] ..."We believe that economics has been trapped in a sub-optimal equilibrium in which much of its research efforts are not directed towards the most prevalent needs of society. Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis. It has failed in its duty to society to provide as much insight as possible into the workings of the economy and in providing warnings about the tools it created. It has also been reluctant to emphasize the limitations of its analysis. We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises."

While at the surface it looks like rent-seeking behavior of dishonest economists the analogy is pretty strong. A broad critique of Neoclassical economics has been put forward in the book Debunking Economics by Steve Keen  See, for example:

Dr. Nikolai Bezroukov


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If history repeats itself...how incapable must Man be of learning from experience

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"No science is immune to the infection of politics and the corruption of power."

Jacob Bronowski (1908-1974),
British scientist, author.
Encounter (London, July 1971).

[Feb 27, 2017] Kenneth Arrow has died

Feb 27, 2017 | crookedtimber.org
The person who had promoted general equilibrium fallacy and mathiness in economics

Patrick S. O'Donnell 02.22.17 at 3:34 pm

I won't dispute the accolades (and not only because it's in bad taste), especially the long-standing consensus that he was "a very good guy."

All the same, I'm inclined to believe that Arrow's undoubtedly clever if not brilliant "impossibility theorem" (Amartya Sen describes it as a 'result of breathtaking brilliance and power') had, and speaking generally, a pernicious effect on the discipline of economics, captured in part by Deirdre (né Donald) McCloskey's comment that it, along with other qualitative general theorems in the discipline, "do not, strictly speaking, relate to anything an economist would actually want to know," in other words, "axiomatizing economics" (which Arrow alone cannot be held responsible for) was a turn for the worse, no doubt motivated by a desire to bring (natural) scientific respectability and putative "rigor" (of the sort believed to characterize physics) to a field not amenable to same (to put it bluntly if not mildly).

For a different sort of critique of his work in this regard in economics and the "social choice" literature, see Hausman and McPherson's Economic Analysis, Moral Philosophy, and Public Policy (Cambridge University Press, 2nd ed., 2006).

There is also a vigorous critique of the use of this theorem by professional economists and political scientists in S.M. Amadae's Rationalizing Capitalist Democracy: The Cold War Origins of Rational Choice Liberalism (University of Chicago Press, 2003).

Sen has a decidedly more favorable assessment of the "impossibility theorem" in his book, Rationality and Freedom (Belknap Press of Harvard University Press, 2002).

Alas, it was mischievous interpretations and application of his famous "impossibility theorem" that unequivocally did enormous harm to the discipline of political science, particularly with regard to democratic theory (and by implication, praxis as well): see Gerry Mackie's Democracy Defended (Cambridge University Press, 2003). Donald A. Coffin 02.22.17 at 4:16 pm ( 5 )

Links abound of course. For an excellent discussion of his contributions, this (the first of four posts that will appear this week) is a good place to start.
https://afinetheorem.wordpress.com/2017/02/22/the-greatest-living-economist-has-passed-away-notes-on-kenneth-arrow-part-i/
peterv 02.23.17 at 10:57 pm ( pnee:

For us members of the general public, the return of Jobs to Apple was a complete surprise. It was not rumored in any way in any public forum, to my knowledge. The futures for the company considered possible by external observers (ie, non-insiders) were many more than before. Exactly as I said and as you agree, the public announcement of Jobs' return was new information which increased public uncertainty.

Lee A. Arnold 02.24.17 at 11:45 am ( 19 )
"Information" has different definitions in different disciplines. One of Arrow's last lectures explains his use of the word, and also his view of the current state of many other things. Only 9 pages, no math:

http://www.wifo.ac.at/jart/prj3/wifo/resources/person_dokument/person_dokument.jart?publikationsid=47076&mime_type=application/pdf

likbez 02.26.17 at 11:20 pm (

Two questions to esteemed commenters here:

1. Is not the idea of permanent equilibrium a fallacy?

2. If not excessive use of mathematics in economics called mathiness?

[Feb 26, 2017] The EPA that neoliberals want to destory was created by Nixon, more or less our last New Deal consensus President. The point of the EPA was to force industry to price in environmental externalities

Feb 26, 2017 | www.nakedcapitalism.com
jsn , February 24, 2017 at 12:04 pm

The EPA was created by Nixon, more or less our last New Deal consensus President. The point of the EPA was to force industry to price in environmental externalities which in the high price/high inflation vision of the New Deal would have created new jobs and real wealth while fostering investment in real innovation. The Reagan Revolution started by taking the ideological mush of Carter Administration proto-NeoLiberal thinking about anti-trust, monetarism and wage push inflation and applied Thatchers full bore "there is no such thing as society" NeoLiberalism. This new ideology justified gutting organized Labor, enforcing anti-trust FOR "efficiency" rather than AGAINST monopolistic, power concentrating, job eliminating industry consolidation and rationalized choking any growth in wages, labor power, as inflationary.

Once these policies were in place, the Government that implemented them went on a crusade against itself, the "big government" necessary to repair the damage it had itself just done: wages decoupled from productivity, consumer debt began its inexorable climb, government was branded "the problem, not the solution" and the Treasury inventory held at the Fed, necessary to underwrite the outstanding stock of the worlds dollar denominated, privately held (non USG) wealth, was re-branded, falsely, as a "burdensome debt on future generations". To that point, the Institutionalists and residual Functional Finance people responsible for fiscal and monetary policy clearly understood this "debt" was the necessary liability side to the assets held in dollar instruments outside the Federal Government (which continues to be the case: to reduce the Federal "debt" is to reduce the outstanding holdings of dollar wealth: every liability has its matching asset somewhere and to be rid of one is to be rid of the other).

The transfer of power from Labor to Corporations was a very apparent reality in industrialized areas, but an invisible shift outside the lives of the newly precariat industrial workers (I remember being mystified and frightened when laid off auto workers, some living in their cars, showed up in Austin in the mid 70s looking for work). Newly stagnant wages were blamed on "regulations" to convince the half of the population that lived outside the urban economies where the benefits of New Deal high cost, high inflation fiscal and monetary policy delivered the bulk of its benefits, that the new costs created by fiscal and monetary austerity were in fact caused by the EPA and work safety rules. In the new ideology of low costs and low inflation, incentives reversed and investment to to clean manufacturing was presented as a cost that industry couldn't afford that in fact caused industry to fire workers or reduce wages to pay for.

The low cost, low inflation rationale makes intuitive sense to conservative rural populations and was easily internalized by worker/producers who were now told to think of themselves as "consumers": for a consumer low cost low inflation is good, for a worker/producer, high wages and costs were good. High prices and high wages with moderately high inflation were a mechanism whereby growth was used to encourage investment in the public interest: environmental and safety regulations. Investments in these areas created new, better and safer processes and under the old anti-trust regime ensured productivity gains were shared with labor through the wage competition of full employment.

It's a long, complicated mess, but its an integrated problem. Real wealth, health, education and a clean environment are in the most important ways synonyms. They need to be pursued together and thought of holistically. Universal education; universal healthcare; universal, free, continuing education; a life sustaining environment are all real wealth and should never be confused with money or costs.

Dead Dog , February 24, 2017 at 3:06 pm

Good post, Sport. It's a mess that doesn't seem like it will fixed

There is no way US residents should put up with this shit.

I'd be movin if I could

jsn , February 24, 2017 at 4:20 pm

Where to? The environment is global, you can run but you can't hide.

I'll stay here and duke it out, if could just get a clear swing at something that would make a difference!

[Feb 25, 2017] Tyler Cowen as a yet another corrupt neoliberal economist

Feb 25, 2017 | www.nytimes.com

Peter K. said...February 25, 2017 at 08:20 AM

https://www.bloomberg.com/view/articles/2016-09-12/debating-government-s-role-in-boosting-growth

September 12, 2016

Tyler Cowen: There are a few reasons, but the internet may be the biggest. It is easier to have fun while unemployed. That's a social problem for some people.

Noah Smith: If that's true -- if we're seeing a greater preference for leisure -- why are we not seeing wages go up as a result? Is that market also broken?

Cowen: Maybe employers just aren't that keen to hire those males who prefer to live at home, watch porn and not get married. Is that more of a personal failure on the part of the worker than a market failure?

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

And Sanjait likes Tyler Cowen. He's a scumbag.

[Feb 25, 2017] DeLong as t enured prima donna who is immune from his own damage.

Feb 25, 2017 | economistsview.typepad.com
Tom aka Rusty -> Peter K.... February 21, 2017 at 10:51 AM , 2017 at 10:51 AM
If I'm not mistaken Delong seems to think the US government has a greater interest in aiding Chinese workers than Us workers.

Tenured prima donna who is immune from his own damage.

[Feb 21, 2017] Our situation with neoliberalism reminds me lines from the Hotel California

Feb 21, 2017 | economistsview.typepad.com
libezkova -> libezkova... February 20, 2017 at 08:36 PM , 2017 at 08:36 PM
Our situation with neoliberalism reminds me lines from the "Hotel California " ;-)

http://www.azlyrics.com/lyrics/eagles/hotelcalifornia.html
== quote ==
Last thing I remember, I was
Running for the door
I had to find the passage back
To the place I was before
"Relax, " said the night man,
"We are programmed to receive.
You can check-out any time you like,
But you can never leave! "

[Feb 21, 2017] Globalisation and Economic Nationalism naked capitalism

Notable quotes:
"... Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers', and is bound to harm growth especially in emerging economies. The world rather needs a more inclusive model of globalisation. ..."
"... From an energy point of view globalisation is a disaster. The insane level of fossil fuels that this current world requires for transportation of necessities (food and clothing) is making this world an unstable world. Ipso Facto. ..."
"... Those who believe that globalisation is bringing value to the world should reconsider their views. The current globalisation has created both monopolies on a geopolitical ground, ie TV make or shipbuilding in Asia. ..."
"... Do you seriously believe that these new geographical and corporate monopolies does not create the kind bad outcomes that traditional – country-centric ones – monopolies have in the past? ..."
"... Then there is the practical issue of workers having next to no bargaining power under globalization. Do people really suppose that Mexican workers would be willing to strike so that their US counterparts, already making ficew times as much money, would get a raise? ..."
"... Basically our elite sold us a bill of goods is why we lost manufacturing. Greed. Nothing else. ..."
"... So proof is required to rollback globalization, but no proof was required to launch it or continue dishing it out? It's good to be the King, eh? ..."
"... America hasn't just gotten rid of the low level jobs. It has also gotten rid of supervisors and factory managers. Those are skills you can't get back overnight. For US plants in Mexico, you might have US managers there or be able to get special visas to let those managers come to the US. But US companies have shifted a ton, and I meant a ton, to foreign subcontractors. Some would put operations in the US to preserve access to US customers, but their managers won't speak English. How do you make this work? ..."
"... The real issue is commitment. Very little manufacturing will be re-shored unless companies are convinced that it is in their longterm interest to do so. ..."
"... There is also what I've heard referred to as the "next bench" phenomenon, in which products arise because someone designs a new product/process to solve a manufacturing problem. Unless one has great foresight, the designer of the new product must be aware there is a problem to solve. ..."
"... When a country is involved in manufacturing, the citizens employed will have exposure to production problems and issues. ..."
"... After his speech he took questions. I asked "Would Toyota ever separate design from manufacturing?" as HP had done, shipping all manufacturing to Asia. "No" was his answer. ..."
"... In my experience, it is way too useful to have the line be able to easily call the designer in question and have him come take a look at what his design is doing. HP tried to get around that by sending part of the design team to Asia to watch the startup. Didn't work as well. And when problems emerged later, it was always difficult to debug by remote control. ..."
"... How about mass imports of cheap workers into western countries in the guise of emigrants to push down worker's pay and gut things like unions. That factor played a decisive factor in both the Brexit referendum and the US 2016 elections. Or the subsidized exportation of western countries industrial equipment to third world countries, leaving local workers swinging in the wind. ..."
"... The data sets do not capture some of the most important factors in what they are saying. It is like putting together a paper on how and why white men voted in the 2016 US elections as they did – and forgetting to mention the effect of the rest of the voters involved. ..."
"... I had a similar reaction. This research was reinforcing info about everyone's resentment over really bad distribution of wealth, as far as it went, but it was so unsatisfying ..."
"... "Right to work" is nothing other than a way to undercut quality of work for "run-to-the-bottom competitive pay." ..."
"... I've noticed that the only people in favor of globalization are those whose jobs are not under threat from it. ..."
"... First off, economic nationalism is not necessarily right wing. I would certainly classify Bernie Sanders as an economic nationalist (against open borders and against "free" trade). Syriza and Podemos could arguably be called rather ineffective economic nationalist parties. I would say the whole ideology of social democracy is based on the Swedish nationalist concept of a "folkhem", where the nation is the home and the citizens are the folk. ..."
"... So China is Turmpism on steroids. Israel obviously is as well. Why do some nations get to be blatantly Trumpist while for others these policies are strictly forbidden? ..."
"... One way to look at Globalization is as an updated version of the post WW1 Versailles Treaty which imposed reparations on a defeated Germany for all the harm they caused during the Great War. The Globalized Versailles Treaty is aimed at the American and European working classes for the crimes of colonialism, racism, slavery and any other bad things the 1st world has done to the 3rd in the past. ..."
"... And yes, this applies to Bernie Sanders as well. During that iconic interview where Sanders denounced open borders and pushed economic nationalism, the Neoliberal interviewer immediately played the global guilt card in response. ..."
"... During colonialism the 3rd world had a form of open borders imposed on it by the colonial powers, where the 3rd world lost control of who what crossed their borders while the 1st world themselves maintained a closed border mercantilist regime of strict filters. So the anti-colonialist movement was a form of Trumpist economic nationalism where the evil foreigners were given the boot and the nascent nations applied filters to their borders. ..."
"... Nationalism (my opinion) can do this – economic nationalism. And of course other people think oh gawd, not that again – it's so inefficient for my investments- I can't get fast returns that way but that's just the point. ..."
"... China was not a significant exporter until the 2001 inclusion in WTO: it cannot possibly have caused populist uprisings in Italy and Belgium in the 1990s. It was probably too early even for Pim Fortuyn in the Netherlands, who was killed in 2002, Le Pen's electoral success in the same year, Austria's FPOE in 1999, and so on. ..."
"... In the 1930s Keynes realized, income was just as important as profit as this produced a sustainable system that does not rely on debt to maintain demand. ..."
"... "Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system." ..."
"... The Romans are the basis. Patricians, Equites and Plebs. Most of us here are clearly plebeian. Time to go place some bets, watch the chariot races and gladiatorial fights, and get my bread subsidy. Ciao. ..."
"... 80-90% of Bonds and Equities ( at least in USA) are owned by top 10 %. 0.7% own 45% of global wealth. 8 billionaires own more than 50% of wealth than that of bottom 50% in our Country! ..."
"... Globalisation has caused a surge in support for nationalist and radical right political platforms. ..."
"... Trump's withdrawal from the Trans-Pacific Partnership seems to be a move in that direction. ..."
"... Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers' ..."
"... and is bound to harm growth especially in emerging economies. ..."
"... The world rather needs a more inclusive model of globalisation. ..."
Feb 21, 2017 | www.nakedcapitalism.com
DanielDeParis , February 20, 2017 at 1:09 am

Definitely a pleasant read but IMHO wrong conclusion: Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers', and is bound to harm growth especially in emerging economies. The world rather needs a more inclusive model of globalisation.

From an energy point of view globalisation is a disaster. The insane level of fossil fuels that this current world requires for transportation of necessities (food and clothing) is making this world an unstable world. Ipso Facto.

We need a world where goods move little as possible (yep!) when smart ideas and technology (medical, science, industry, yep that's essential) move as much as possible. Internet makes this possible. This is no dream but a XXIth century reality.

Work – the big one – is required and done where and when it occurs. That is on all continents if not in every country. Not in an insanely remote suburbs of Asia.

Those who believe that globalisation is bringing value to the world should reconsider their views. The current globalisation has created both monopolies on a geopolitical ground, ie TV make or shipbuilding in Asia.

Do you seriously believe that these new geographical and corporate monopolies does not create the kind bad outcomes that traditional – country-centric ones – monopolies have in the past?

Yves Smith can have nasty words when it comes to discussing massive trade surplus and policies that supports them. That's my single most important motivation for reading this challenging blog, by the way.

Thanks for the blog:)

tony , February 20, 2017 at 5:09 am

Another thing is that reliance on complex supply chains is risky. The book 1177 B.C.: The Year Civilization Collapsed describes how the ancient Mediterranian civilization collapsed when the supply chains stopped working.

Then there is the practical issue of workers having next to no bargaining power under globalization. Do people really suppose that Mexican workers would be willing to strike so that their US counterparts, already making ficew times as much money, would get a raise?

Is Finland somehow supposed to force the US and China to adopt similar worker rights and environmental protections? No, globalization, no matter how you slice it,is a race to the bottom.

digi_owl , February 20, 2017 at 10:12 am

Sadly protectionism gets conflated with empire building, because protectionism was at its height right before WW1.

Altandmain , February 20, 2017 at 1:35 am

I do not agree with the article's conclusion either.

Reshoring would have 1 of 2 outcomes:

Basically our elite sold us a bill of goods is why we lost manufacturing. Greed. Nothing else.

Ruben , February 20, 2017 at 3:07 am

The conclusion is the least important thing. Conclusions are just interpretations, afterthoughts, divagations (which btw are often just sneaky ways to get your work published by TPTB, surreptitiously inserting radical stuff under the noses of the guardians of orthodoxy).

The value of these reports is in providing hardcore statistical evidence and quantification for something for which so many people have a gut feeling but just cann't prove it (although many seem to think that just having a strong opinion is sufficient).

Yves Smith Post author , February 20, 2017 at 3:27 am

Yes, correct. Intuition is great for coming up with hypotheses, but it is important to test them. And while a correlation isn't causation, it at least says the hypothesis isn't nuts on its face.

In addition, studies like this are helpful in challenging the oft-made claim, particularly in the US, that people who vote for nationalist policies are bigots of some stripe.

KnotRP , February 20, 2017 at 10:02 am

So proof is required to rollback globalization, but no proof was required to launch it or continue dishing it out? It's good to be the King, eh?

WheresOurTeddy , February 20, 2017 at 1:05 pm

KnotRP, as far as the Oligarchy is concerned, they don't need proof for anything #RememberTheHackedElectionOf2016

/s

Yves Smith Post author , February 20, 2017 at 6:48 am

You are missing the transition costs, which will take ten years, maybe a generation.

America hasn't just gotten rid of the low level jobs. It has also gotten rid of supervisors and factory managers. Those are skills you can't get back overnight. For US plants in Mexico, you might have US managers there or be able to get special visas to let those managers come to the US. But US companies have shifted a ton, and I meant a ton, to foreign subcontractors. Some would put operations in the US to preserve access to US customers, but their managers won't speak English. How do you make this work?

The only culture with demonstrated success in working with supposedly hopeless US workers is the Japanese, who proved that with the NUMMI joint venture with GM in one of its very worst factories (in terms of the alleged caliber of the workforce, as in many would show up for work drunk). Toyota got the plant to function at better than average (as in lower) defect levels and comparable productivity to its plants in Japan, which was light years better than Big Three norms.

I'm not sure any other foreign managers are as sensitive to detail and the fine points of working conditions as the Japanese (having worked with them extensively, the Japanese hear frequencies of power dynamics that are lost on Westerners. And the Chinese do not even begin to have that capability, as much as they have other valuable cultural attributes).

Katharine , February 20, 2017 at 10:24 am

That is really interesting about the Japanese sensitivity to detail and power dynamics. If anyone has managed to describe this in any detail, I would love to read more, though I suppose if their ability is alien to most Westerners the task of describing it might also be too much to handle.

Left in Wisconsin , February 20, 2017 at 10:39 am

I lean more to ten years than a generation. And in the grand scheme of things, 10 years is nothing.

The real issue is commitment. Very little manufacturing will be re-shored unless companies are convinced that it is in their longterm interest to do so. Which means having a sense that the US government is serious, and will continue to be serious, about penalizing off-shoring.

Regardless of Trump's bluster, which has so far only resulted in a handful of companies halting future offshoring decisions (all to the good), we are nowhere close to that yet.

John Wright , February 20, 2017 at 10:52 am

There is also what I've heard referred to as the "next bench" phenomenon, in which products arise because someone designs a new product/process to solve a manufacturing problem. Unless one has great foresight, the designer of the new product must be aware there is a problem to solve.

When a country is involved in manufacturing, the citizens employed will have exposure to production problems and issues.

Sometimes the solution to these problems can lead to new products outside of one's main business, for example the USA's Kingsford Charcoal arose from a scrap wood disposal problem that Henry Ford had.

https://www.kingsford.com/country/about-us/

If one googles for "patent applications by countries" one gets these numbers, which could be an indirect indication of some of the manufacturing shift from the USA to Asia.

Patent applications for the top 10 offices, 2014

1. China 928,177
2. US 578,802
3. Japan 325,989
4. South Korea 210,292

What is not captured in these numbers are manufacturing processes known as "trade secrets" that are not disclosed in a patent. The idea that the USA can move move much of its manufacturing overseas without long term harming its workforce and economy seems implausible to me.

marku52 , February 20, 2017 at 2:55 pm

While a design EE at HP, they brought in an author who had written about Toyota's lean design method, which was currently the management hot button du jour. After his speech he took questions. I asked "Would Toyota ever separate design from manufacturing?" as HP had done, shipping all manufacturing to Asia. "No" was his answer.

In my experience, it is way too useful to have the line be able to easily call the designer in question and have him come take a look at what his design is doing. HP tried to get around that by sending part of the design team to Asia to watch the startup. Didn't work as well. And when problems emerged later, it was always difficult to debug by remote control.

And BTW, after manufacturing went overseas, management told us for costing to assume "Labor is free". Some level playing field.

The Rev Kev , February 20, 2017 at 2:00 am

Oh gawd! The man talks about the effects of globalization and says that the solution is a "a more inclusive model of globalization"? Seriously? Furthermore he singles out Chinese imports as the cause of people being pushed to the right. Yeah, right.

How about mass imports of cheap workers into western countries in the guise of emigrants to push down worker's pay and gut things like unions. That factor played a decisive factor in both the Brexit referendum and the US 2016 elections. Or the subsidized exportation of western countries industrial equipment to third world countries, leaving local workers swinging in the wind.

This study is so incomplete it is almost useless. The only thing that comes to mind to say about this study is the phrase "Apart from that Mrs. Lincoln, how was the play?" And what form of appropriate compensation of its 'losers' would they suggest? Training for non-existent jobs? Free moving fees to the east or west coast for Americans in flyover country? Subsidized emigration fees to third world countries where life is cheaper for workers with no future where they are?

Nice try fellas but time to redo your work again until it is fit for a passing grade.

Ruben , February 20, 2017 at 3:00 am

How crazy of them to have used generalized linear mixed models with actual data carefully compiled and curated when they could just asked you right?

The Rev Kev , February 20, 2017 at 4:19 am

Aw jeez, mate – you've just hurt my feelings here. Take a look at the actual article again. The data sets do not capture some of the most important factors in what they are saying. It is like putting together a paper on how and why white men voted in the 2016 US elections as they did – and forgetting to mention the effect of the rest of the voters involved.

Hey, here is an interesting thought experiment for you. How about we apply the scientific method to the past 40 years of economic theory since models with actual data strike your fancy. If we find that the empirical data does not support a theory such as the theory of economic neoliberalism, we can junk it then and replace it with something that actually works then. So far as I know, modern economics seems to be immune to scientific rigour in their methods unlike the real sciences.

Ruben , February 20, 2017 at 4:38 am

I feel your pain Rev.

Not all relevant factors need to be included for a statistical analysis to be valid, as long as relevant ignored factors are randomized amongst the sampling units, but you know that of course.

Thanks for you kind words about the real sciences, we work hard to keep it real, but once again, in all fairness, between you and me mate, is not all rigour, it is a lot more Feyerabend than Popper.

The Rev Kev , February 20, 2017 at 5:41 am

What you say is entirely true. The trouble has always been to make sure that that statistical analysis actually reflects the real world enough to make it valid. An example of where it all falls apart can be seen in the political world when the pundits, media and all the pollsters assured America that Clinton had it in the bag. It was only after the dust had settled that it was revealed how bodgy the methodology used had been.

By the way, Karl Popper and Paul Feyerabend sound very interesting so thanks for the heads up. Have you heard of some of the material of another bloke called Mark Blyth at all? He has some interesting observations to make on modern economic practices.

susan the other , February 20, 2017 at 12:03 pm

I had a similar reaction. This research was reinforcing info about everyone's resentment over really bad distribution of wealth, as far as it went, but it was so unsatisfying and I immediately thought of Blyth who laments the whole phylogeny of economics as more or less serving the rich.

The one solution he offered up a while ago was (paraphrasing) 'don't sweat the deficit spending because it is all 6s in the end' which is true if distribution doesn't stagnate. So as it stands now, offshoring arms, legs and firstborns is like 'nothing to see here, please move on'. The suggestion that we need a more inclusive form of global trade kind of begs the question. Made me uneasy too.

Ruben , February 20, 2017 at 10:58 pm

Please don't pool pundits and media with the authors of objective works like the one we are commenting :-)

You are welcome, you might also be interested in Lakatos, these 3 are some of the most interesting philosophers of science of the 20th century, IMO.

Blyth has been in some posts here at NC recently.

relstprof , February 20, 2017 at 4:30 am

"Gut things like unions." How so? In my recent interaction with my apartment agency's preferred contractors, random contractors not unionized, I experienced a 6 month-long disaster.

These construction workers bragged that in 2 weeks they would have the complete job done - a reconstructed deck and sunroom. Verbatim quote: "Union workers complete the job and tear it down to keep everyone paying." Ha Ha! What a laugh!

Only to have these same dudes keep saying "next week", "next week", "next week", "next week". The work began in August and only was finished (not completely!) in late January. Sloppy crap! Even the apartment agency head maintenance guy who I finally bitched at said "I guess good work is hard to come by these days."

Of the non-union guys he hired.

My state just elected a republican governor who promised "right to work." This was just signed into law.

Immigrants and Mexicans had nothing to do with it. They're not an impact in my city. "Right to work" is nothing other than a way to undercut quality of work for "run-to-the-bottom competitive pay."

Now I await whether my rent goes up to pay for this nonsense.

bob , February 20, 2017 at 11:24 pm

They look at the labor cost, assume someone can do it cheaper. They don't think it's that difficult. Maybe it's not. The hard part of any and all construction work is getting it finished. Getting started is easy. Getting it finished on time? Nah, you can't afford that.

Karl Kolchak , February 20, 2017 at 10:22 am

I've noticed that the only people in favor of globalization are those whose jobs are not under threat from it. Beyond that, I think the flood of cheap Chinese goods is actually helping suppress populist anger by allowing workers whose wages are dropping in real value terms to maintain the illusion of prosperity. To me, a more "inclusive" form of globalization would include replacing every economist with a Chinese immigrant earning minimum wage. That way they'd get to "experience" how awesome it is and the value of future economic analysis would be just as good.

The Trumpening , February 20, 2017 at 2:27 am

I'm going to question a few of the author's assumptions.

First off, economic nationalism is not necessarily right wing. I would certainly classify Bernie Sanders as an economic nationalist (against open borders and against "free" trade). Syriza and Podemos could arguably be called rather ineffective economic nationalist parties. I would say the whole ideology of social democracy is based on the Swedish nationalist concept of a "folkhem", where the nation is the home and the citizens are the folk.

Secondly, when discussing the concept of economic nationalism and the nation of China, it would be interesting to discuss how these two things go together. China has more billionaires than refugees accepted in the past 20 years. Also it is practically impossible for a non Han Chinese person to become a naturalized Chinese citizen. And when China buys Boeing aircraft, they wisely insist on the production being done in China. A close look at Japan would yield similar results.

So China is Turmpism on steroids. Israel obviously is as well. Why do some nations get to be blatantly Trumpist while for others these policies are strictly forbidden?

One way to look at Globalization is as an updated version of the post WW1 Versailles Treaty which imposed reparations on a defeated Germany for all the harm they caused during the Great War. The Globalized Versailles Treaty is aimed at the American and European working classes for the crimes of colonialism, racism, slavery and any other bad things the 1st world has done to the 3rd in the past.

Of course during colonialism the costs were socialized within colonizing states and so it was the people of the colonial power who paid those costs that weren't borne by the colonial subjects themselves, who of course paid dearly, and it was the oligarchic class that privatized the colonial profits. But the 1st world oligarchs and their urban bourgeoisie are in strong agreement that the deplorable working classes are to blame for systems that hurt working classes but powerfully enriched the wealthy!

And so with the recent rebellions against Globalization, the 1st and 3rd world oligarchs are convinced these are nothing more than the 1st world working classes attempting to shirk their historic guilt debt by refusing to pay the rightful reparations in terms of standard of living that workers deserve to pay for the crimes committed in the past by their wealthy co-nationals.

And yes, this applies to Bernie Sanders as well. During that iconic interview where Sanders denounced open borders and pushed economic nationalism, the Neoliberal interviewer immediately played the global guilt card in response.

Ruben , February 20, 2017 at 3:23 am

Interesting. Another way to look at it is from the point of view of entropy and closed vs open systems. Before globalisation the 1st world working classes enjoyed a high standard of living which was possible because their system was relatively closed to the rest of the world. It was a high entropy, strongly structured socio-economic arrangement, with a large difference in standard of living between 1st world and 3rd world working classes. Once their system became more open by virtue (or vice) of globalisation, entropy increased as commanded by the 2nd Law of Thermodynamics so the 1st world and 3rd world working classes became more equalised. The socio-economic arrangements became less structured. This means for the Trumpening kind of politicians it is a steep uphill battle, to increase entropy again.

The Trumpening , February 20, 2017 at 3:56 am

Yes, I agree, but if we step back in history a bit we can see the colonial period as a sort of reverse globalization which perhaps portends a bit of optimism for the Trumpening.

I use the term open and closed borders but these are not precise. What I am really saying is that open borders does not allow a country to filter out negative flows across their border. Closed borders does allow a nation to impose a filter. So currently the US has more open borders (filters are frowned upon) and China has closed borders (they can filter out what they don't want) despite the fact that obviously China has plenty of things crossing its border.

During colonialism the 3rd world had a form of open borders imposed on it by the colonial powers, where the 3rd world lost control of who what crossed their borders while the 1st world themselves maintained a closed border mercantilist regime of strict filters. So the anti-colonialist movement was a form of Trumpist economic nationalism where the evil foreigners were given the boot and the nascent nations applied filters to their borders.

So the 3rd world to some extent (certainly in China at least) was able to overcome entropy and regain control of their borders. You are correct in that it will be an uphill struggle for the 1st world to repeat this trick. In the ideal world both forms of globalization (colonialism and the current form) would be sidelined and all nations would be allowed to use the border filters they think would best protect the prosperity of their citizens.

Another good option would be a version of the current globalization but where the losers are the wealthy oligarchs themselves and the winners are the working classes. It's hard to imagine it's easy if you try!

What's interesting about the concept of entropy is that it stands in contradiction to the concept of perpetual progress. I'm sure there is some sort of thesis, antithesis, synthesis solution to these conflicting concepts.

Ruben , February 20, 2017 at 6:07 am

To overcome an entropy current requires superb skill commanding a large magnitude of work applied densely on a small substratum (think of the evolution of the DNA, the internal combustion engine). I believe the Trumpening laudable effort and persuasion would have a chance of success in a country the size of The Netherlands, or even France, but the USA, the largest State machinery in the world, hardly. When the entropy current flooded the Soviet system the solution came firstly in the form of shrinkage.

We need to think more about it, a lot more, in order to succeed in this 1st world uphill struggle to repeat the trick. I am pretty sure that as Pierre de Fermat famously claimed about his alleged proof, the solution "is too large to fit in the margins of this book".

susan the other , February 20, 2017 at 12:36 pm

My little entropy epiphany goes like this: it's like boxes – containers, if you will, of energy or money, or trade goods, the flow of which is best slowed down so everybody can grab some. Break it all down, decentralize it and force it into containers which slow the pace and share the wealth.

Nationalism (my opinion) can do this – economic nationalism. And of course other people think oh gawd, not that again – it's so inefficient for my investments- I can't get fast returns that way but that's just the point.

Ruben , February 20, 2017 at 10:51 pm

I like your epiphany susan.

John Wright , February 20, 2017 at 1:25 pm

Don't you mean "It was a LOWER entropy (as in "more ordered"), strongly structured socio-economic arrangement, with a large difference in standard of living between 1st world"?

The entropy increased as a consequence of human guided globalization.

Of course, from a thermodynamic standpoint, the earth is not a closed system as it is continually flooded with new energy in the form of solar radiation.

Ruben , February 20, 2017 at 10:49 pm

Yes, thank you, I made that mistake twice in the post you replying to.

Hemang , February 20, 2017 at 4:54 am

The Globalized Versailles Treaty ! Permit me a short laughter . The terms of the crippling treaty were dictated by the victors largely on insecurities of France.

The crimes of the 1st against the 3rd go on even now- the only difference is that some of the South like China and India are major nuclear powers now.

The racist crimes in the US are even more flagrant- the Blacks whose labour as slaves allowed for cotton revolution enabling US capitalists to ride the industrial horse are yet to be rehabilitated , Obama or no Obama. It is a matter of profound shame.

The benefits of Globalization have gone only to the cartel of 1st and 3rd World Capitalists. And they are very happy as the lower classes keep fighting. Very happy indeed.

DorDeDuca , February 20, 2017 at 1:22 pm

That is solely class (crass) warfare. You can not project the inequalities of the past to the unsuspecting paying customers of today.

Hemang , February 20, 2017 at 1:35 pm

The gorgon cry of the past is all over the present , including in " unsuspecting" paying folks of today! Blacks being brought to US as slave agricultural labour was Globalisation. Their energy vibrated the machinery of Economics subsequently. What Nationalism and where is it hiding pray? Bogus analysis here , yes.

dontknowitall , February 20, 2017 at 5:40 am

The reigning social democratic parties in Europe today are not the Swedish traditional parties of yesteryear they have morphed into neoliberal austerians committed to globalization and export driven economic models at any cost (CETA vote recently) and most responsible for the economic collapse in the EU

https://www.washingtonpost.com/news/wonk/wp/2017/02/15/austerity-was-a-bigger-disaster-than-we-thought/?utm_term=.e4b799b14d81

disc_writes , February 20, 2017 at 4:22 am

I wonder they chose Chinese imports as the cause of the right-wing shift, when they themselves admit that the shift started in the 1990s. At that time, there were few Chinese imports and China was not even part of the WHO.

If they are thinking of movements like the Lega Nord and Vlaams Blok, the reasons are clearly not to be found in imports, but in immigration, the welfare state and lack of national homogeneity, perceived or not.

And the beginnings of the precariat.

So it is not really the globalization of commerce that did it, but the loss of relevance of national and local identities.

Ruben , February 20, 2017 at 4:41 am

One cause does not exclude the other, they may have worked synergistically.

disc_writes , February 20, 2017 at 5:34 am

Correlation does not imply causation, but lack of correlation definitely excludes it.

The Lega was formed in the 1980s, Vlaams Blok at the end of the '70s. They both had their best days in the 1990s. Chinese imports at the time were insignificant.

I cannot find the breakdown of Chinese imports per EU country, but here are the total Chinese exports since 1983:

http://www.tradingeconomics.com/china/exports

China was not a significant exporter until the 2001 inclusion in WTO: it cannot possibly have caused populist uprisings in Italy and Belgium in the 1990s. It was probably too early even for Pim Fortuyn in the Netherlands, who was killed in 2002, Le Pen's electoral success in the same year, Austria's FPOE in 1999, and so on.

The timescales just do not match. Whatever was causing "populism", it was not Chinese imports, and I can think of half a dozen other, more likely causes.

Furthermore, the 1980s and 1990s were something of an industrial renaissance for Lombardy and Flanders: hardly the time to worry about Chinese imports.

And if you look at the map. the country least affected by the import shock (France) is the one with the strongest populist movement (Le Pen).

People try to conflate Trumpism and Brexit with each other, then try to conflate this "anglo-saxon" populism with previous populisms in Europe, and try to deduce something from the whole exercise.

That "something" is just not there and the exercise is pointless. IMHO at least.

The Trumpening , February 20, 2017 at 5:05 am

European regionalism is often the result of the rise of the EU as a new, alternative national government in the eyes of the disgruntled regions. Typically there are three levels of government, local, regional (states) and national. With the rise of the EU we have a fourth level, supra-national. But to the Flemish, Scottish, Catalans, etc, they see the EU as a potential replacement for the National-level governments they currently are unhappy being under the authority of.

Sound of the Suburbs , February 20, 2017 at 4:28 am

Why isn't it working? – Part 1

Capitalism should be evolving but it went backwards. Keynesian capitalism evolved from the free market capitalism that preceded it. The absolute faith in markets had been laid low by 1929 and the Great Depression.

After the Keynesian era we went back to the old free market capitalism of neoclassical economics. Instead of evolving, capitalism went backwards. We had another Wall Street Crash that has laid low the once vibrant global economy and we have entered into the new normal of secular stagnation. In the 1930s, Irving Fisher studied the debt deflation caused by debt saturated economies. Today only a few economists outside the mainstream realise this is the problem today.

In the 1930s, Keynes realized only fiscal stimulus would pull the US out of the Great Depression, eventually the US implemented the New Deal and it started to recover. Today we use monetary policy that keeps asset prices up but cannot overcome the drag of all that debt in the system and its associated repayments.

In the 1920s, they relied on debt based consumption, not realizing how consumers will eventually become saturated with debt and demand will fail. Today we rely on debt based consumption again, Greece consumed on debt. until it maxed out on debt and collapsed.

In the 1930s Keynes realized, income was just as important as profit as this produced a sustainable system that does not rely on debt to maintain demand. Keynes was involved with the Bretton-Woods agreement after the Second World War and recycled the US surplus to Europe to restore trade when Europe lay in ruins. Europe could rebuild itself and consume US products, everyone benefitted.

Today there are no direct fiscal transfers within the Euro-zone and it is polarizing. No one can see the benefits of rebuilding Greece, to allow it to carry on consuming the goods from surplus nations and it just sinks further and further into the mire. There is a lot to be said for capitalism going forwards rather than backwards and making the same old mistakes a second time.

Sound of the Suburbs , February 20, 2017 at 5:25 am

Someone who has worked in the Central Bank of New York and who Ben Bernanke listened to, ensuring the US didn't implement austerity, Richard Koo:

https://www.youtube.com/watch?v=8YTyJzmiHGk

The ECB didn't listen and killed Greece with austerity and is laying low the Club-Med nations. Someone who knows what they are doing, after studying the Great Depression and Japan after 1989. Let's keep him out of the limelight; he has no place on the ship of fools running the show.

sunny129 , February 20, 2017 at 6:42 pm

DEBT on Debt with QEs+ ZRP ( borrowing from future) was the 'solution' by Bernanke to mask the 2008 crisis and NOT address the underlying structural reforms in the Banking and the Financial industry. He was part of the problem for housing problem and occurred under his watch! He just kicked the can with explosive credit growth ( but no corresponding growth in the productive Economy!)and easy money!

We have a 'Mother of all bubbles' at our door step. Just matter of time when it will BLOW and NOT if! There is record levels of DEBT ( both sovereign, public and private) in the history of mankind, all over the World.

DEBT has been used as a panacea for all the financial problems by CBers including Bernanke! Fed's balance sheet was than less 1 Trillion in 2008 ( for all the years of existence of our Country!) but now over 3.5 Trillions and climbing!

Kicking the can down the road is like passing the buck to some one (future generations!). And you call that solution by Mr. Bernanke? Wow!

Will they say again " No one saw this coming'? when next one descends?

Sound of the Suburbs , February 20, 2017 at 4:31 am

Why isn't it working? – Part 2

The independent Central Banks that don't know what they are doing as can be seen from their track record.

The FED presided over the dot.com bust and 2008, unaware that they were happening and of their consequences. Alan Greenspan spots irrational exuberance in the markets in 1996 and passes comment. As the subsequent dot.com boom and housing booms run away with themselves he says nothing.

This is the US money supply during this time:
http://www.whichwayhome.com/skin/frontend/default/wwgcomcatalogarticles/images/articles/whichwayhomes/US-money-supply.jpg

Everything is reflected in the money supply.

The money supply is flat in the recession of the early 1990s.

Then it really starts to take off as the dot.com boom gets going which rapidly morphs into the US housing boom, courtesy of Alan Greenspan's loose monetary policy.

When M3 gets closer to the vertical, the black swan is coming and you have an out of control credit bubble on your hands (money = debt).

We can only presume the FED wasn't looking at the US money supply, what on earth were they doing?

The BoE is aware of how money is created from debt and destroyed by repayments of that debt.

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneyc
reation.pdf

"Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system."

The BoE's statement was true, but is not true now as banks can securitize bad loans and get them off their books. Before 2008, banks were securitising all the garbage sub-prime mortgages, e.g. NINJA mortgages, and getting them off their books. Money is being created freely and without limit, M3 is going exponential before 2008.

Bad debt is entering the system and no one is taking any responsibility for it. The credit bubble is reflected in the money supply that should be obvious to anyone that cares to look.

Ben Bernanke studied the Great Depression and doesn't appear to have learnt very much.

Irving Fisher studied the Great Depression in the 1930s and comes up with a theory of debt deflation. A debt inflated asset bubble collapses and the debt saturated economy sinks into debt deflation. 2008 is the same as 1929 except a different asset class is involved.

1929 – Margin lending into US stocks
2008 – Mortgage lending into US housing

Hyman Minsky carried on with his work and came up with the "Financial Instability Hypothesis" in 1974.

Steve Keen carried on with their work and spotted 2008 coming in 2005. We can see what Steve Keen saw in 2005 in the US money supply graph above.

The independent Central Banks that don't know what they are doing as can be seen from their track record.

Jesper , February 20, 2017 at 4:51 am

Good to see studies confirming what was already known.

This apparently surprised:

On the contrary, as globalisation threatens the success and survival of entire industrial districts, the affected communities seem to have voted in a homogeneous way, regardless of each voter's personal situation.

It is only surprising for people not part of communities, those who are part of communities see how it affects people around them and solidarity with the so called 'losers' is then shown.

Seems like radical right is the preferred term, it does make it more difficult to sympathize with someone branded as radical right . The difference seems to be between the radical liberals vs the conservative. The radical liberals are too cowardly to propose the laws they want, they prefer to selectively apply the laws as they see fit. Either enforce the laws or change the laws, anything else is plain wrong.

Disturbed Voter , February 20, 2017 at 6:31 am

Socialism for the upper classes, capitalism for the lower classes? That will turn out well. Debt slaves and wage slaves will revolt. That is all the analysis the OP requires. The upper class will respond with suppression, not policy reversal every time. Socialism = making everyone equally poor (obviously not for the upper classes who benefit from the arrangement).

J7915 , February 20, 2017 at 11:15 am

Regrettably today we have socialism for the wealthy, with all the benefits of gov regulations, sympathetic courts and legislatures etc. etc.

Workers are supposed to take care for themselves and the devil take the hind most. How many workers get fired vs the 1%, when there is a failure in the company plan?

Disturbed Voter , February 20, 2017 at 11:59 am

The Romans are the basis. Patricians, Equites and Plebs. Most of us here are clearly plebeian. Time to go place some bets, watch the chariot races and gladiatorial fights, and get my bread subsidy. Ciao.

Sound of the Suburbs , February 20, 2017 at 5:39 am

Globalization created winners and losers throughout the world. The winners liked it, the losers didn't. Democracy is based on the support of the majority.

The majority in the East were winners. The majority in the West were losers.

The Left has maintained its support of neoliberal globalisation in the West. The Right has moved on. There has been a shift to the Right. Democracy is all about winners and losers and whether the majority are winning or losing. It hasn't changed.

sunny129 , February 20, 2017 at 6:54 pm

CAPITAL is mobile and the Labor is NOT!

Globalization( along with communication -internet and transportation) made the Labor wage arbitration, easy in favor of capital ( Multi-Nationals). Most of the jobs gone overseas will NEVER come back. Robotic revolution will render the remaining jobs, less and less!

The 'new' Economy by passed the majority of lower 80-90% and favored the top 10%. The Losers and the Winners!

80-90% of Bonds and Equities ( at least in USA) are owned by top 10 %. 0.7% own 45% of global wealth. 8 billionaires own more than 50% of wealth than that of bottom 50% in our Country!

The Rich became richer!

The tension between Have and Have -Nots has just begun, as Marx predicted!

Sound of the Suburbs , February 20, 2017 at 5:50 am

In the West the rewards of globalisation have been concentrated at the top and rise exponentially within the 1%.

How does this work in a democracy? It doesn't look as though anyone has even thought about it.

David , February 20, 2017 at 6:33 am

I think it's about time that we stopped referring to opposition to globalization as a product or policy of the "extreme right". It would be truer to say that globalization represents a temporary, and now fading, triumph of certain ideas about trade and movement of people and capital which have always existed, but were not dominant in the past. Fifty years ago, most mainstream political parties were "protectionist" in the sense the word is used today. Thirty years ago, protectionism was often seen as a left)wing idea, to preserve standards of living and conditions of employment (Wynne Godley and co). Today, all establishment political parties in the West have swallowed neoliberal dogma, so the voters turn elsewhere, to parties outside the mainstream. Often, it's convenient politically to label them "extreme right", although in Europe some left-wing parties take basically the same position. If you ignore peoples' interests, they won't vote for you. Quelle surprise! as Yves would say.

financial matters , February 20, 2017 at 8:00 am

Yes, there are many reasons to be skeptical of too much globalization such as energy considerations. I think another interesting one is exchange rates.

One of the important concepts of MMT is the importance of having a flexible exchange rate to have full power over your currency. This is fine as far as it goes but tends to put hard currencies against soft currencies where a hard currency can be defined as one that has international authority/acceptance. Having flexible exchange rates also opens up massive amounts of financial speculation relative to fluctuations of these currencies against each other and trying to protect against these fluctuations.

""Keynes' proposal of the bancor was to put a barrier between national currencies, that is to have a currency of account at the global level. Keynes warned that free trade, flexible exchange rates and free movement of capital globally were incompatible with maintaining full employment at the local level""

""Sufficiency provisioning also means that trade would be discouraged rather than encouraged.""

Local currencies can work very well locally to promote employment but can have trouble when they reach out to get resources outside of their currency space especially if they have a soft currency. Global sustainability programs need to take a closer look at how to overcome this sort of social injustice. (Debt or Democracy)

Gman , February 20, 2017 at 6:35 am

As has already been pointed out so eloquently here in the comments section, economic nationalism is not necessarily the preserve of the right, nor is it necessarily the same thing as nationalism.

In the UK the original, most vociferous objectors to EEC membership in the 70s (now the EU) were traditionally the Left, on the basis that it would gradually erode labour rights and devalue the cost of labour in the longer term. Got that completely wrong obviously .

In the same way that global trade has become synonymous with globalisation, the immigration debate has been hijacked and cynically conflated with free movement of (mainly low cost, unskilled) labour and race when they are all VERY different divisive issues.

The other point alluded to in the comments above is the nature of free trade generally. The accepted (neoliberal) wisdom being that 'collateral damage' is unfortunate but inevitable, but it is pretty much an unstoppable or uncontrollable force for the greater global good, and the false dichotomy persists that you either embrace it fully or pull up all the drawbridges with nothing in between.

One of the primary reasons that some competing sectors of some Western economies have done so badly out of globalisation is that they have adhered to 'free market principles' whilst other countries, particularly China, clearly have not with currency controls, domestic barriers to trade, massive state subsidies, wage suppression etc

The China aspect is also fascinating when developed nations look at the uncomfortable 'morality of global wealth distribution' often cited by proponents of globalisation as one of their wider philanthropic goals. Bless 'em. What is clear is that highly populated China and most of its people, from the bottom to the top, has been the primary beneficiaries of this global wealth redistribution, but the rest of the developing world's poor clearly not quite so much.

Eustache de Saint Pierre , February 20, 2017 at 7:11 am

The map on it's own, in terms of the English one time industrial Midlands & North West being shown as an almost black hole, is in itself a kind of " Nuff Said ".

It is also apart from London, where the vast bulk of immigrants have settled.

The upcoming bye-election in Stoke, which could lead to U-Kip taking a once traditionally always strong Labour seat, is right in the middle of that dark cloud.

Anonymous2 , February 20, 2017 at 7:51 am

The problem from the UK 's position, I suggest, is that autarky is not a viable proposition so economic nationalism becomes a two-edged sword. Yes, of course, the UK can place restrictions on imports and immigration but there will inevitably be retaliation and they will enter a game of beggar my neighbour. The current government talks of becoming a beacon for free trade. If we are heading to a more protectionist world, that can only end badly IMHO.

Eustache de Saint Pierre , February 20, 2017 at 11:30 am

Unless we get some meaningful change in thinking on a global scale, I think we are heading somewhere very dark whatever the relative tinkering with an essentially broken system.

The horse is long gone, leaving a huge pile of shit in it's stable.

As for what might happen, I do not know, but I have the impression that we are at the end of a cycle.

sunny129 , February 20, 2017 at 7:04 pm

That 'CYCLE" was dragged on ' unnaturally' with more DEBT on DEBT all over the World by criminal CBers.
Now the end is approaching! Why surprise?

Ignacio , February 20, 2017 at 8:15 am

This is quite interesting, but only part of the story. Interestingly the districts/provinces suffering the most from the chinese import shock are usually densely populated industrial regions of Europe. The electoral systems in Europe (I think all, but I did not check) usually do not weight equally each district, favouring those less populated, more rural (which by the way tend to be very conservative but not so nationalistic). These differences in vote weigthing may have somehow masked the effect seen in this study if radical nationalistic rigth wing votes concentrate in areas with lower weigthed value of votes. For instance, in Spain, the province of Soria is mostly rural and certainly less impacted by chinese imports compared with, for instance, Madrid. But 1 vote in Soria weigths the same as 4 votes in Madrid in number of representatives in the congress. This migth, in part, explain why in Spain, the radical rigth does not have the same power as in Austria or the Netherlands. It intuitively fits the hypothesis of this study.

Nevertheless, similar processes can occur in rural areas. For instance, when Spain entered the EU, french rural areas turned nationalistic against what they thougth could be a wave of agricultural imports from Spain. Ok, agricultural globalization may have less impact in terms of vote numbers in a given country but it still can be politically very influential. In fact spanish entry more that 30 years ago could still be one of the forces behind Le Penism.

craazyman , February 20, 2017 at 8:44 am

I dunno aboout this one.

All this statistical math and yada yada to explain a rise in vote for radical right from 3% in 1985 to 5% now on average? And only a 0.7% marginal boost if your the place really getting hammmered by imports from China? If I'm reading it right, that is, while focusing on Figure 2.

The real "shock" no pun intended, is the vote totals arent a lot higher everywhere.

Then the Post concludes with reference to a "surge in support" - 3% to 5% or so over 30 years is a surge? The line looks like a pretty steady rise over 3 decades.

Maybe I'm missing sommething here.

Also what is this thing they're callling an "Open World" of the past 30 years? And why is that in danger from more balanced trade? It makes no sense. Even back in the 60s and 70s people could go alll over the world for vacations. Or at least most places they coould go. If theh spent their money they'd make friends. Greece even used to be a goood place people went and had fun on a beach.

I think this one is a situation of math runing amuck. Math running like a thousand horses over a hill trampling every blade of grass into mud.

I bet the China factor is just a referent for an entire constellatio of forces that probably don't lend themselves (no pun intended) partiicularly well to social science and principal component analysis - as interesting as that is for those who are interested in that kind of thing (which I am acctually).

Also, I wouldn't call this "free trade". Not that the authors do either, but trade means reciprocity not having your livelihood smashed the like a pinata at Christmas with all your candy eaten by your "fellow countrymen". I wouldn't call that "trade". It's something else.

Ruben , February 20, 2017 at 12:36 pm

Regarding your first point, it is a small effect but it is all due to the China imports impact, you have to add the growth of these parties due to other reasons such as immigration to get the full picture of their growth. Also I think the recent USA election was decided by smaller percentage advantages in three States?

Steve Ruis , February 20, 2017 at 9:00 am

Globalisation is nothing but free trade extended to the entire world. Free trade is a tool used to prevent competition. By flooding countries with our cheaper exports, they do not develop the capacity to compete with us by making their own widgets. So, why are we shocked when those other countries return the favor and when they get the upper hand, we respond in a protectionist way? It looks to me that those countries who are now competing with us in electronics, automobiles, etc. only got to develop those industries in their countries because of protectionism.

Why is this surprising to anyone?

craazyman , February 20, 2017 at 10:41 am

Frank would never have sung this, even drunk! . . . .even in Vegas . .

Trade Be a Lady

They say we'll make a buck
But there is room for doubt
At times you have a very unbalanced way of running out

You say you're good for me
Your pickins have been lush
But before this year is over
I might give you the brush

Seems you've forgot your manners
You don't know how to play
Cause every time I turn around . . . I pay

So trade get your balances right
Trade get your balances right
Trade if you've ever been in balance to begin with
Trade get your balances right

Trade let a citizen see
How fair and humane you can be
I see the way you've treated other guys you've been with
Trade be a lady with me

A lady doesn't dump her exports
It isn't fair, and it's not nice
A lady doesn't wander all over the world
Putting whole communities on ice

Let's keep this economy polite
let's find a way to do it right
Don't stick me baby or I'll wreck the world you win with
Trade be a lady or we'll fight

A lady keeps it fair with strangers
She'd have a heart, she'd be nice
A lady doesn't spread her junk, all over the world
In your face, at any price

Let's keep society polite
Go find a way to do it right
Don't screw me baby cause i know the clowns you sin with
Trade be a lady tonight

Gaylord , February 20, 2017 at 10:56 am

Refugees in great numbers are a symptom of globalization, especially economic refugees but also political and environmental ones. This has strained the social order in many countries that have accepted them in and it's one of the central issues that the so-called "right" is highlighting.

It is no surprise there has been an uproar over immigration policy in the US which is an issue of class as much as foreign policy because of the disenfranchisement of large numbers of workers on both sides of the equation - those who lost their jobs to outsourcing and those who emigrated due to the lack of decent employment opportunities in their own countries.

We're seeing the tip of the iceberg. What will happen when the coming multiple environmental calamities cause mass starvation and dislocation of coastal populations? Walls and military forces can't deter hungry, desperate, and angry people.

The total reliance and gorging on fossil energy by western countries, especially the US, has mandated military aggression to force compliance in many areas of the world. This has brought a backlash of perpetual terrorism. We are living under a dysfunctional system ruled by sociopaths whose extreme greed is leading to world war and environmental collapse.

sunny129 , February 20, 2017 at 7:01 pm

Who created the REFUGEE PROBLEMS in the ME – WEST including USA,UK++

Obama's DRONE program kept BOMBING in SEVEN Countries killing innocents – children and women! All in the name of fighting Terrorism. Billions of arms to sale Saudi Arabia! Wow!

Where were the Democrats and the Resistance and Women's march? Hypocrites!

Anon , February 21, 2017 at 12:12 am

"Our lifestyle is non-negotiable." - Dick Cheney.

Ignacio , February 20, 2017 at 2:40 pm

What happened with Denmark that suddenly dissapeared?

fairleft , February 21, 2017 at 8:08 am

Globalisation has caused a surge in support for nationalist and radical right political platforms.
Just a reminder that nationalism doesn't have to be associated with the radical right. The left is not required to reject it, especially when it can be understood as basically patriotism, expressed as solidarity with all of your fellow citizens.

Trump's withdrawal from the Trans-Pacific Partnership seems to be a move in that direction.
Well, that may be true as far as Trump's motivations are concerned, but a major component (the most important?) of the TPP was strong restraint of trade, a protectionist measure, by intellectual property owners.

Yet, a return to protectionism is not likely to solve the problems of those who have lost ground due to globalisation without appropriate compensation of its 'losers'
Japan has long been 'smart' protectionist, and this has helped prevent the 'loser' problem, in part because Japan, being nationalist, makes it a very high priority to create/maintain a society in which almost all Japanese are more or less middle class. So, it is a fact that protectionism has been and can be associated with more egalitarian societies, in which there are few 'losers' like we see in the West. But the U.S. and most Western countries have a long way to go if they decide to make the effort to be more egalitarian. And, of course, protectionism alone is not enough to make most of the losers into winners again. You'll need smart skills training, better education all around, fewer low-skill immigrants, time, and, most of all strong and long-term commitment to making full employment at good wages national priority number one.

and is bound to harm growth especially in emerging economies.
Growth has been week since the 2008, even though markets are as free as they've ever been. Growth requires a lot more consumers with willingness and cash to spend on expensive, high-value-added goods. So, besides the world finally escaping the effects of the 2008 financial crisis, exporting countries need prosperous consumers either at home or abroad, and greater economic security. And if a little bit of protectionism generates more consumer prosperity and economic stability, exporting countries might benefit overall.

The world rather needs a more inclusive model of globalisation.
Well, yes, the world needs more inclusivity, but globalization doesn't need to be part of the picture. Keep your eyes on the prize: inclusivity/equality, whether latched onto nationally, regionally, 'internationally' or globally, any which way is fine! But prioritization of globalization over those two is likely a victory for more inequality, for more shoveling of our wealth up to the ruling top 1%.

[Feb 21, 2017] Mainstream economists, being a stooges of financial oligarchy, have depicted capitalism as natural, as though God-given rather than as a product of institutions and/or politics.

Feb 21, 2017 | economistsview.typepad.com
Peter K. : February 20, 2017 at 12:34 PM , 2017 at 12:34 PM
"Larry sees the coming of globalization as bringing with it a sharp reduction in the market power of American blue-collar workers in mass-production industries, and thus as exerting significant downward pressure on middle class wages and upward pressure on inequality. The live question, he thinks, is how large and significant these pressures have been."

As if this was natural and ordained by God. Can't argue with economics.

And hence the populist backlash.

pgl -> Peter K.... , February 20, 2017 at 12:49 PM
Catholic economics? Lord - the troll parade continues.
RGC -> pgl... , February 20, 2017 at 01:32 PM
Peter K is exactly right.

Mainstream economists have depicted capitalism as natural, as though God-given rather than as a product of institutions and/or politics.

That's how they became mainstream and got jobs at "elite" universities and columns in major newspapers.

Peter K. -> pgl... , February 20, 2017 at 03:14 PM
They say don't feed trolls so I guess I shouldn't feed you and your constant need for attention.
libezkova -> pgl... , February 20, 2017 at 06:04 PM
Did you ever read Evangelii Gaudium ?

http://www.vatican.va/holy_father/francesco/apost_exhortations/documents/papa-francesco_esortazione-ap_20131124_evangelii-gaudium_en.html

If not, you probably can benefit from reading it.

It looks like there should strict external "moral" constrains on economic activity, like they were most of human history. For some activities which are now legal you can spend life in jail even in rather relaxed 30th ( for example, credit cards interest rates are usury rates, no question about it)

All this mathiness junk and operating with unreliable and politically fudged (as in employment numbers and GDP) statistics (as in "There are three kinds of lies: lies, damned lies, and statistics."

We already saw to what economic outcomes neoliberals have led us. While neoliberal were eating the carcass of New Deal things were not that bad.

Now it's over and they are in deep trouble. Election of Trump is just the fist sign of troubles ahead. One swallow does not a summer make.

The problem is that financial oligarchy does not want to part with their illicit gains.

In the past this dilemma, especially in case Jewish bankers, was resolved by killing some part and exiling another part. It would be nice for our Masters of the Universe to remember this historical fact.

[Feb 21, 2017] Roger Farmer's ideas are a combination of market monetarism and New Keynesianism.

Feb 21, 2017 | economistsview.typepad.com
rayward : February 20, 2017 at 05:21 AM , 2017 at 05:21 AM
Roger Farmer's ideas are a combination of market monetarism and New Keynesianism. I recommend his interview by David Beckworth. https://soundcloud.com/macro-musings/rogerfarmer

[Feb 19, 2017] Privilege: still exorbitant. An analysis of the international role of the dollar.

Notable quotes:
"... Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar. This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last summer. The Economist* says it better: ..."
"... "Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves Global reserves have grown from under $1trn in the 1980s to more than $10trn today. ..."
"... Dollar-denominated assets account for much of those reserves. Governments worry more about big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some measures, more central to the global system now than it was immediately after the second world war. ..."
"... America wields enormous financial power as a result. It can wreak havoc by withholding supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects ripple across the global economy. Hélène Rey of the London Business School argues that, despite their reserve holdings, many economies have lost full control over their domestic monetary policy, because of the effect of Fed policy on global appetite for risk. ..."
"... America's return on its foreign assets is markedly higher than the return foreign investors earn on their American assets That flow of investment income allows America to run persistent current-account deficits -- to buy more than it produces year after year, decade after decade." ..."
Feb 19, 2017 | economistsview.typepad.com
Peter K. : February 18, 2017 at 06:50 AM
J.W. Mason has some interesting links at his blog:

http://jwmason.org/slackwire/links-and-thoughts-for-feb-17/

Privilege: still exorbitant. Here's a nice analysis of the international role of the dollar. This is the same argument I tried to make in my Roosevelt Institute piece on trade policy last summer. The Economist* says it better:

"Unlike other aspects of American hegemony, the dollar has grown more important as the world has globalised, not less. As economies opened their capital markets in the 1980s and 1990s, global capital flows surged. Yet most governments sought exchange-rate stability amid the sloshing tides of money. They managed their exchange rates using massive piles of foreign-exchange reserves Global reserves have grown from under $1trn in the 1980s to more than $10trn today.

Dollar-denominated assets account for much of those reserves. Governments worry more about big swings in the dollar than in other currencies; trade is often conducted in dollar terms; and firms and governments owe roughly $10trn in dollar-denominated debt. the dollar is, on some measures, more central to the global system now than it was immediately after the second world war.

America wields enormous financial power as a result. It can wreak havoc by withholding supplies of dollars in a crisis. When the Federal Reserve tweaks monetary policy, the effects ripple across the global economy. Hélène Rey of the London Business School argues that, despite their reserve holdings, many economies have lost full control over their domestic monetary policy, because of the effect of Fed policy on global appetite for risk.

During the heyday of Bretton Woods, Valéry Giscard d'Estaing, a French finance minister (later president), complained about the "exorbitant privilege" enjoyed by the issuer of the world's reserve currency. America's return on its foreign assets is markedly higher than the return foreign investors earn on their American assets That flow of investment income allows America to run persistent current-account deficits -- to buy more than it produces year after year, decade after decade."

Exactly right. You can have free capital mobility, or you can have a balanced trade for the US. But you can't have both, as long as the world depends on dollar reserves."

Darryl noted Keynes's Bancor.

https://en.wikipedia.org/wiki/Bancor

[Feb 19, 2017] Neoclassical economics rests on the assumption that economies have a natural propensity to equilibrium

Notable quotes:
"... As we discussed long form in ECONNED, orthodox economics rests on the assumption that economies have a natural propensity to equilibrium, and that equilibrium is full employment. ..."
"... their mathematical exposition enables them to dismiss lay critics. ..."
www.nakedcapitalism.com

I hate to come off like a nay-sayer, because I have no doubt that the underlying methodology is useful. But this sounds an awful lot like a new improved version of system dynamics, which the economics profession successfully beat back in the 1970s.

As we discussed long form in ECONNED, orthodox economics rests on the assumption that economies have a natural propensity to equilibrium, and that equilibrium is full employment.

As Paul Samuelson stressed, that assumption is necessary for economics to be science, as in mathed up, and the dominance that economists have achieved is due to their scientific appearances and the fact that their mathematical exposition enables them to dismiss lay critics.

[Feb 19, 2017] Beware of Consultants Bearing Rosy News About Mergers

Notable quotes:
"... They focused on Dennis Carlton , a professor at the University of Chicago's Booth School of Business, and a senior managing director at the consulting firm Compass Lexecon . According to Eisinger and Elliott, Carlton has been paid more than $100 million from consulting activities during his career. ..."
"... Mergers can hurt consumers by giving companies increased market power. The less competitive an industry is, the more the big companies can raise prices, which not only makes life more painful for consumers, but limits the size of the market itself, reducing economic productivity. ..."
"... Obviously, if consultants like Carlton are being paid by the companies that want to merge, they have an incentive to use economics to predict a rosy outcome instead of a bad one. But how easy is that? In an ideal world, it would be very difficult to get away with using economic models to make slanted forecasts. If a certain type of model repeatedly got things wrong in biology or electrical engineering, professors would toss it out, and it would probably no longer be used in most court cases. ..."
"... Does this mean that the theoretical models used by merger consultants like Carlton are wrong? Not necessarily. It just means that it's very hard to know either way. As Eisinger and Elliott demonstrate, however, the models have been known to make some pretty big mistakes. One example they cite is the merger of appliance makers Maytag Corp. and Whirlpool Corp. in 2005. Carlton, hired by those companies, wrote that international competition would prevent the new super-company from raising prices. But he was wrong, and prices went up. ..."
"... The threat of excessive industrial concentration is worth paying more attention to. Economists increasingly are focusing on the harms that monopoly power might be causing. In addition to the well-known effect of higher prices, industrial concentration might exacerbate inequality and decrease labor's share of national income. It might also be reducing business dynamism, which has taken a dive since 2000. ..."
Feb 19, 2017 | www.bloomberg.com
Amid the blizzard of election news last November, two writers at the nonprofit news organization ProPublica came out with a startling investigative report . Jesse Eisinger and Justin Elliott wrote about a small but very wealthy group of American economists who make millions of dollars helping companies deal with the federal government on antitrust cases.

They focused on Dennis Carlton , a professor at the University of Chicago's Booth School of Business, and a senior managing director at the consulting firm Compass Lexecon . According to Eisinger and Elliott, Carlton has been paid more than $100 million from consulting activities during his career.

That's an astounding sum, and it demonstrates how lucrative the economics profession can be for those who reach the top echelons. But the ProPublica reporters suggest that much of this fortune may have been made at the public's expense. Carlton and economists like him are mostly hired by companies that want to do big mergers and acquisitions. This basically involves convincing the government -- which reviews all large corporate acquisitions -- that the merger won't hurt consumers.

Mergers can hurt consumers by giving companies increased market power. The less competitive an industry is, the more the big companies can raise prices, which not only makes life more painful for consumers, but limits the size of the market itself, reducing economic productivity. Any time two companies want to merge, there's the possibility that the result could be a more efficient company, which would lead to lower prices as production costs decline. But there's also the possibility of a less efficient market, where prices rise because of increased monopoly power. You need economics to predict which of these will happen.

Obviously, if consultants like Carlton are being paid by the companies that want to merge, they have an incentive to use economics to predict a rosy outcome instead of a bad one. But how easy is that? In an ideal world, it would be very difficult to get away with using economic models to make slanted forecasts. If a certain type of model repeatedly got things wrong in biology or electrical engineering, professors would toss it out, and it would probably no longer be used in most court cases.

Econ is different. Despite a recent turn away from pure theory and toward empirical work, the profession doesn't always insist on the most rigorous standards of evidence. Economists Joshua Angrist and Jörn-Steffen Pischke have criticized the field of industrial organization, which deals with competition and monopoly power. They say that it still relies on obsolete theoretical models laden with questionable assumptions.

Does this mean that the theoretical models used by merger consultants like Carlton are wrong? Not necessarily. It just means that it's very hard to know either way. As Eisinger and Elliott demonstrate, however, the models have been known to make some pretty big mistakes. One example they cite is the merger of appliance makers Maytag Corp. and Whirlpool Corp. in 2005. Carlton, hired by those companies, wrote that international competition would prevent the new super-company from raising prices. But he was wrong, and prices went up.

This sort of result seems to be the norm in recent years. Northwestern University economist John Kwoka has written an entire book in which he documents how lax U.S. antitrust policy has resulted in less competition and higher prices -- the kind of thing the high-flying consultants are paid to say won't happen.

The threat of excessive industrial concentration is worth paying more attention to. Economists increasingly are focusing on the harms that monopoly power might be causing. In addition to the well-known effect of higher prices, industrial concentration might exacerbate inequality and decrease labor's share of national income. It might also be reducing business dynamism, which has taken a dive since 2000.

So it probably makes sense to take a harder look at antitrust policy in general and merger consultants more specifically. The U.S. system may simply be too lenient. It may rely too much on the testimony of well-paid experts, who are able to use their models to reach the desired conclusion. One solution might be for the government to review the predictions of expert consultants, and see whether they end up being right or wrong -- something that Eisinger and Elliott say isn't done now. The results of these follow-up studies could be made public, so courts and regulators know the track record of a given model or consultant.

That's just one possibility. Any solution to this problem, though, should follow the principle of greater empiricism. The more weight is given to evidence, and the less to theoretical assumptions, the better it will be for the American consumer. Economics is becoming more empirical, and the lucrative world of legal consulting should follow suit.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story: Noah Smith at nsmith150@bloomberg.net

[Feb 19, 2017] These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Merger

Feb 19, 2017 | economistsview.typepad.com
pgl : , February 18, 2017 at 02:21 AM
Here is the story Noah Smith writes about:

https://www.propublica.org/article/these-professors-make-more-than-thousand-bucks-hour-peddling-mega-mergers

"These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Mergers - The economists are leveraging their academic prestige with secret reports justifying corporate concentration. Their predictions are often wrong and consumers pay the price."

That is just the headline. Way down in the discussion comes the most damning statement:

"These complex mathematical formulations carry weight with the government because they purport to be objective. But a ProPublica examination of several marquee deals found that economists sometimes salt away inconvenient data in footnotes and suppress negative findings, stretching the standards of intellectual honesty to promote their clients' interests."

Of course the government is supposed to hire its own world class economists to review the evidence as well. The problem, however, is that these government agencies are often underfunded. It is hard to compete with the mega-firms who pay $1000 an hour for a consultant when the entire budget for the government review agency is only $100,000. Penny wise, pound foolish.

[Feb 18, 2017] John Kenneth Galbraith, like John Maynard Keynes, was a giant among midgets both figuratively and literally.

Notable quotes:
"... John Kenneth Galbraith laid out the problem of companies with too much market/political power back in the 1950s and 60s. I never read Galbraith in an economics course, only on my own. Economists were not interested...not enough mathematics and marginal this equals marginal that. ..."
Feb 18, 2017 | economistsview.typepad.com
RC AKA Darryl, Ron... , February 16, 2017 at 07:35 AM
John Kenneth Galbraith laid out the problem of companies with too much market/political power back in the 1950s and 60s. I never read Galbraith in an economics course, only on my own. Economists were not interested...not enough mathematics and marginal this equals marginal that.

Nothing like overlooking the elephant is the room...something that economists are better at doing than trying to do their jobs.

RC AKA Darryl, Ron -> JohnH... , February 16, 2017 at 08:27 AM
Totally. John Kenneth Galbraith, like John Maynard Keynes, was a giant among midgets both figuratively and literally.

[Feb 15, 2017] Mankiw's Ten Principles of Economics, Translated

Feb 15, 2017 | www.improbable.com

by Yoram Bauman [1]
University of Washington, Seattle, Washington

The cornerstone of Harvard professor N. Gregory Mankiw's introductory economics textbook, Principles of Economics, is a synthesis of economic thought into Ten Principles of Economics (listed in the first table below). A quick perusal of these will likely affirm the reader's suspicions that synthesizing economic thought into Ten Principles is no easy task, and may even lead the reader to suspect that the subtlety and concision required are not to be found in the pen of N. Gregory Mankiw.


I have taken it upon myself to remedy this unfortunate situation. The second table below summarizes my attempt to translate Mankiw's Ten Principles into plain English, and in doing so to provide the uninitiated with an invaluable glimpse of the economic mind at work. Explanations and details can be found in the pages that follow, but the average reader is advised to simply cut out the table below and carry it around for assistance in the (hereafter unlikely) event of confusion about the basic Principles of Economics.

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

Mankiw's Principles

#1. People face tradeoffs.
#2. The cost of something is what you give up to get it.
#3. Rational people think at the margin.
#4. People respond to incentives.
#5. Trade can make everyone better off.
#6. Markets are usually a good way to organize economic activity.
#7. Governments can sometimes improve market outcomes.
#8. A country's standard of living depends on its ability to produce goods and services.
#9. Prices rise when the government prints too much money.
#10. Society faces a short-run tradeoff between inflation and unemployment.

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

Yoram's Translations

#1. Choices are bad.
#2. Choices are really bad.
#3. People are stupid.
#4. People aren't that stupid.
#5. Trade can make everyone worse off.
#6. Governments are stupid.
#7. Governments aren't that stupid.
#8. Blah blah blah.
#9. Blah blah blah.
#10. Blah blah blah.

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

Explanations and Details

At first glance, the reader cannot but be impressed by the translation's simplicity and clarity. Accessibility, however, should not be mistaken for shallowness: further study will reveal hidden depths and subtleties that will richly reward the attentive student. Indeed, a moment's reflection will identify any number of puzzles and mysteries. Chief among them is probably this: Why do Principles #8, #9, and #10 have identical translations?

The immediately obvious explanation is that these are macro-economic principles, and that I, as a micro-economist, am ill equipped to understand them, let alone translate them.[2] As is often the case in this complex world we live in, this immediately obvious explanation is also wrong. The true reason I have provided identical translations of "Blah blah blah" for Principles #8, #9, and #10 is that these principles say exactly the same thing, namely, "Blah blah blah." Sometime when you've got a few hours to spare, go and ask an economist -- preferably a macro-economist -- what he or she really means by "standard of living" or "goods and services" or "inflation" or "unemployment" or "short-run" or even "too much." You will soon realize that there is a vast difference between, say, what Principle #10 says -- "Society faces a short-run tradeoff between inflation and unemployment" -- and what Principle #10 means: "Society faces blah between blah and blah." My translations are simply concise renderings of these underlying meanings.

Having cleared up that issue, let us go back to Mankiw's

PRINCIPLE #1
People face tradeoffs.
TRANSLATION: Choices are bad.

The reasoning behind this translation is obvious. For example, imagine that somebody comes up to you and offers you a choice between a Snickers bar and some M&Ms. You now have a tradeoff, meaning that you have to choose one or the other. And having to trade one thing off against another is bad; President Truman supposedly asked for a one-armed economics advisor because his two-armed economics advisors were always saying, "On the one hand...but on the other hand..."

People who have not received any economics education might be tempted to think that choices are good. They aren't. The (mistaken) idea that choices are good perhaps stems from the (equally mistaken) idea that lack of choices is bad. This is simply not true, as Mancur Olson points out in his book, The Logic of Collective Action: "To say a situation is 'lost' or hopeless is in one sense equivalent to saying it is perfect, for in both cases efforts at improvement can bring no positive results."

Hence my translation of Mankiw's first principle of economics: Choices are bad. This concept can be a little difficult to grasp -- nobody ever said economics was easy -- but the troubled reader will undoubtedly gain clarity from Mankiw's

PRINCIPLE #2
The cost of something is what you give up to get it.
TRANSLATION: Choices are really bad.

Beyond transforming Mankiw's semantic deathtrap into simplicity itself, this translation has the advantage of establishing a connection between Principle #1 (Choices are bad) and Principle #2 (Choices are really bad).

To continue to deepen the reader's understanding of why choices are bad -- really bad -- let's return to our previous example, in which somebody offers you a choice between a Snickers bar and a package of M&Ms. Suppose, for the sake of argument, that you take the M&Ms. According to Mankiw, the cost of those M&Ms is the Snickers bar that you had to give up to get the M&Ms. Your gain from this situation -- what economists call "economic profit" -- is therefore the difference between the value you gain from getting the M&Ms (say, $.75) and the value you lose from giving up the Snickers bar (say, $.40). In other words, your economic profit is only $.35. Although you value the M&Ms at $.75, having the choice of the Snickers bar reduces your gain by $.40. Hence Principle #2: Choices are really bad.

Indeed, the more choices you have, the worse off you are. The worst situation of all would be somebody coming up to you and offering you a choice between two identical packages of M&Ms. Since choosing one package (which you value at $.75) means giving up the other package (which you also value at $.75), your economic profit is exactly zero! So being offered a choice between two identical packages of M&Ms is in fact equivalent to being offered nothing.

Now, a lay person might be forgiven for thinking that being offered a choice between two identical packages of M&Ms is in fact equivalent to being offered a single package of M&Ms. But economists know better. Being offered a single package of M&M effectively means having to choose between a package of M&Ms (which you value at $.75) and nothing (which you value at $0). Choosing the M&Ms gives you an economic profit of $.75, which is $.75 more than your economic profit when you are offered a choice between two identical packages of M&Ms.

At this point it is worth acknowledging that (1) there may be readers who have failed to grasp the above subtleties in their entirety, and (2) such readers may well be beginning to wonder whether they are, in a word, stupid. Any lingering doubts should be eliminated by the Mankiw's

PRINCIPLE #3
Rational people think at the margin.
TRANSLATION: People are stupid.

One point that is immediately obvious to the most casual observer with the meanest intelligence is that most people do not think at the margin. For example, most people who buy oranges at the grocery store think like this: "Hmmm, oranges are $.25 each. I think I'll buy half a dozen." They do not think like this: "Hmmm, oranges are $.25 each. I'm going to buy one, because my marginal value exceeds the market price. Now I'm going to buy a second one, because my marginal value still exceeds the market price..." We know most people don't think like this because most people don't fill their shopping baskets one orange at a time!

But we are now led inexorably toward a most unhappy conclusion. If -- as Mankiw says -- rational people think at the margin, and if -- as we all know -- most people do not think at the margin, then most people are not rational. Most people, in other words, are stupid. Hence my translation of the third principle of economics: People are stupid.

Before sinking into despair for the fate of the human race, however, the reader would be wise to consider Mankiw's

PRINCIPLE #4
People respond to incentives.
TRANSLATION: People aren't that stupid.

The dictionary says that incentive, n., is 1. Something that influences to action; stimulus; encouragement. SYN. see motive.

So what Mankiw is saying here is that people are motivated by motives, or that people are influenced to action by things that influence to action. Now, this may seem to be a bit like saying that tautologies are tautological -- the reader may be thinking that people would have to be pretty stupid to be unmotivated by motives, or to be inactive in response to something that influences to action. But remember Principle #3: People are stupid. Hence the need for Principle #4, to clarify that people aren't that stupid.

Only truly stupid people can fail to understand my translation of Mankiw's

PRINCIPLE #5
Trade can make everyone better off.
TRANSLATION: Trade can make everyone worse off.

But, the reader may well be asking, isn't the translation of the fifth principle the exact opposite of the principle itself? Of course not.

To see why, first note that "trade can make everyone better off" is patently obviously: if I have a Snickers bar and want M&Ms and you have M&Ms and want a Snickers bar, we can trade and we will both be better off. Surely Mankiw is getting at something deeper than this? Indeed, I believe he is. To see what it is, compare the following phrases:

A: Trade can make everyone better off.
B: Trade will make everyone better off.

Now, Statement B is clearly superior to Statement A. Why, then, does Mankiw use Statement A? It can only be because Statement B is false. By saying that trade can make everyone better off, Mankiw is conveying one of the subtleties of economics: trade can also not make everyone better off. It is a short hop from here to my translation, "Trade can make everybody worse off." (A numerical example can be found in Note #3, below.)

The subtlety evident in Principle #5 is even more clearly visible in the next two principles.

PRINCIPLE #6
Markets are usually a good way to organize economic activity.
TRANSLATION: Governments are stupid.

and

PRINCIPLE #7
Governments can sometimes improve market outcomes.
TRANSLATION: Governments aren't that stupid.

To see the key role that Principle #5 plays in both of these statements, note that the original phrasing of Principle #5 ("Trade can make everyone better off") leads to Principle #6 ("Governments are stupid"). After all, if trade can make everyone better off, what do we need government for? But the translation of Principle #5 ("Trade can make everyone worse off") leads to Principle #7 ("Governments aren't that stupid"). After all, if trade can make everyone worse off, we better have a government around to stop people from trading!

Like the first five principles, Principles #6 and #7 demonstrate the fine distinctions inherent in the economic way of thinking. People are stupid, but not that stupid; trade can make everyone better off, but it can also make everyone worse off; governments are stupid, but not that stupid. Exploring, refining, and delineating these distinctions is the subject matter of upper-level economics classes, doctoral dissertations in economics, and the vast majority of papers in the American Economic Review and other scholarly journals. Should the reader decide to follow this path, the fundamental principles described on the first page of this article will provide invaluable guidance.

Acknowledgement

Thank you to Ivars Skuja for assistance in taking and preparing the photographs[4] that accompany this article.

Notes

1. My own microeconomics text, Quantum Microeconomics, can be found online at <http://www.smallparty.org/quantum>.

2. The exact meanings of the terms "micro" and "macro" may be lost on the reader -- or, more likely, may never have been found in the first place. This should not be cause for concern: absence of these terms from Mankiw's Ten Principles indicates that they are not of fundamental economic importance.

3. Many non-economists (and some economists) are intimidated by numerical examples. To make it easier for those people to recognize that the following is a numerical example, it is formatted in very small type.

Consider a small town with three families. It just so happens that Family #1 needs a snowblower, Family #2 needs a leafblower, and Family #3 needs a lawnmower; each family values their particular need at $200. Fortune appears to be smiling on this town, because it also just so happens that Family #1 owns a leafblower, Family #2 owns a lawnmower, and Family #3 owns a snowblower. These sit unused in their respective garages; each family has no use for its current piece of equipment, and therefore values it at $0.

The situation appears ripe for gains from trade: Family #1 could buy a snowblower from Family #3 for $100, Family #2 could buy a leafblower from Family #1 for $100, and Family #3 could buy a lawnmower from Family #2 for $100. Each family would be $200 better off.

Unfortunately, life in this small town is not so simple; the town is located in a valley that is susceptible to severe air pollution problems. Blowers and mowers emit large quantities of air pollutants, and in fact each blower or mower that is used will make air pollution so bad that hospital bills (for asthma, etc.) will increase by $80 for each family. Three additional blowers and mowers will therefore increase each family's bills by $240.

Two results follow. First, the trades will still take place. For example, Family #1 and Family #3 will both be better off by $100 - $80 = $20 if Family #3 sells Family #1 its snowblower for $100. Second, the three trades together make everyone worse off: each family gains $200 from buying and selling, but loses $240 in hospital bills, for a net loss of $40.

4. To accommodate schools that teach micro and macro separately, Mankiw's Principles of Economics is also published in separate pieces; the accompanying photographs are of the micro piece, Principles of Microeconomics. Note that the same Ten Principles of Economics (some micro, some macro) appear in all versions of the book.

© Copyright 2003 Annals of Improbable Research (AIR)

[Feb 15, 2017] Lysenkoism in the US economics: Mainstream economists who get paid well for their services are not that diverse

Notable quotes:
"... Yes economists are diverse as a group, but the opinions of the majority of that group might be described as having moved to the right since 1970. ..."
Feb 15, 2017 | economistsview.typepad.com
sanjait -> Jerry Brown... , February 15, 2017 at 10:38 AM
Economists are enormously diverse as a group. Any piece that explicitly or implicitly describes them as being homogeneous is being reductionist at best.

But Noah makes good points. Though it's probably worth emphasizing that if there exists a problem of communication between professionals and the public, there is probably mutual blame to be assigned. Economists should talk better to the general public, but as citizens we don't serve ourselves well when we expect the world to cater to our lack of knowledge and interest in complex but important issues.

DrDick -> sanjait... , February 15, 2017 at 10:51 AM
I have to disagree. It is the professionals who need to do a better job of educating the public. It is ridiculous to assume that the general public has the time or resources to discover this for themselves.
Peter K. -> sanjait... , February 15, 2017 at 11:19 AM
"Economists are enormously diverse as a group.

Mainstream economists who get paid well for their services are not that diverse. For one thing, most are white males.

That was Hillary's one good idea about the Fed. One.

Peter K. -> sanjait... , February 15, 2017 at 11:20 AM
"there is probably mutual blame to be assigned."

What a masochist.

Stockholm syndrome.

Jerry Brown -> sanjait... , February 15, 2017 at 11:31 AM
Yes economists are diverse as a group, but the opinions of the majority of that group might be described as having moved to the right since 1970. And often certain types of economists are described as fringe and there is a reluctance to discuss their ideas. That is somewhat understandable because any one economist has only so much time, but it seems to go deeper than that very often. Trade has been one of those areas, and I am happy to see many economists doing some re-evaluation of the free trade mantra, among other things. I would include Paul Krugman in that group.

As far as being a knowledge lacking citizen- well we all are. Ain't no economist got it all completely figured out as far as I know. That's how I read Noah Smith's article, as a call to re-examine some previously sacred ideas with maybe a goal of keeping in mind their effects on different segments of society. And economists or anyone else who wants to impact public policy in a democracy certainly should expect to cater somewhat to those who are less knowledgeable about their theories.

[Feb 15, 2017] Science advances one funeral at a time

Feb 15, 2017 | economistsview.typepad.com
Peter K. -> Jerry Brown... , February 15, 2017 at 05:42 AM
I have come around to the idea to the idea that the people and the left have been ill-served by economists. Whether on trade or on other issues, they are used for their supposed expertise to argue against "populist" solutions. "Populist" solutions aren't efficient. Most center-left economists attacked Sanders for being unserious.

People no longer trust them after being played.

Krugman and others want it just to be about the blue time versus the red team, Keynesianism versus neoclassical. That's the acceptable frame of debate.

But as the election of Trump has shown, it's more complicated than that.

The left needs better economists. It's nice to see Piketty join the campaign of France's Bernie Sanders, who just beat their center-left Hillary in the Socialist primary. He knows things need to change.

If he had joined Bernie Sanders campaign he would have been attacked by the center-left economists as "unserious" and "populist."

Economists mostly argue from authority and people no longer trust their authority. Smith is suggesting they can fall back on empirics and science to boost their legitimacy only if their science backs the truth. Unfortunately economics is too political.

Mike S -> Peter K.... , February 15, 2017 at 06:01 AM
"The left needs better economists."

Really? Offhand, I can think of Dr Krugman and Joe Stiglitz having won Nobel prizes. How many right wing economists have won a nobel in, say the last 25 years?

Tom aka Rusty -> Mike S... , February 15, 2017 at 06:14 AM
Krugman was wrong on the impact of trade on US blue collar workers, a more than minor error.

But who cares about blue collar workers (except on voting day)?

pgl -> Tom aka Rusty... , February 15, 2017 at 06:18 AM
Care to provide a link to where Krugman declared no one would be hurt by a movement to free trade?
Peter K. -> pgl... , February 15, 2017 at 07:10 AM
Krugman made his career by bashing leftwing "populists" over trade and industrial policy.

Rustbucket is right.

BenIsNotYoda -> Peter K.... , February 15, 2017 at 07:15 AM
Peter K is absolutely correct here in his criticism. Krugman made the transition in the 90s with the Clinton/Rubin economic regime. Their day is over. Obama embraced the same and we are all paying the price. By shooting down Bernie, they killed their chances in the election. We need a change. and yes, I agree with Noah. Economists should hold their head in shame. Not for not predicting the crisis. But for doing little afterwards than boosting asset prices.

Repeat after me - High stock prices do NOT cure cancer.

pgl -> BenIsNotYoda... , February 15, 2017 at 07:27 AM
"Krugman made the transition in the 90s with the Clinton/Rubin economic regime."

Check again - Krugman did not serve in the Clinton White House.

Tom aka Rusty -> pgl... , February 15, 2017 at 07:45 AM
Such clever use of language, of course he did not say that exact thing.

You and I both have Rodrik's 1997 both, you know where the exceprt is, so don't be a #$%^.

pgl -> Tom aka Rusty ... , February 15, 2017 at 08:16 AM
I do have Rodrik's excellent book. Might you tell us which page this alleged statement is?
JohnH -> pgl... , February 15, 2017 at 10:33 AM
pgl's usual denial: "Care to provide a link to where Krugman declared no one would be hurt by a movement to free trade?"

pgl intentionally ignores the link I posed many times wherein Krugman stated that labor would benefit from China's accession to WTO...3 million jobs lost later, Krugman finally started to rethink his full throated embrace of 'free' trade, but not pgl!

All too often, economists posing as leftists, like PK, champion investor friendly policies, claiming that they will help labor. And then, when people finally start to catch onto the bait and switch, they wonder why people don't trust economists!

pgl -> JohnH... , February 15, 2017 at 11:04 AM
You provided a link? Really? Where is it?
Mike S -> Tom aka Rusty... , February 15, 2017 at 06:24 AM
Don't remember when this occurred; maybe you could provide a link. Lots of economists get things wrong occasionally, left and right wingers alike.

But, being wrong occasionally doesn't support your reply. Dr Krugman is still a Nobel laureate.

sanjait -> Tom aka Rusty... , February 15, 2017 at 10:42 AM
Tom has no idea how much of the loss of blue collar labor demand in recent decades was due to trade policy vs non-policy related trade trends vs technology shifts.

Further, he has no interest in even beginning to attempt to assess the issue.

So I don't think he has any room to talk about who was "wrong" about the impact of trade on workers.

And he is far from alone in this failing.

DrDick -> Tom aka Rusty... , February 15, 2017 at 10:49 AM
To the extent that he actually was wrong (he did minimize distributional effects in much of his earlier work), he has admitted it and changed his ways.
Peter K. -> Mike S... , February 15, 2017 at 07:12 AM
Stiglitz is good but he didn't stick his neck out and back Bernie Sanders.

Krugman is bad in many ways. As I said in my comment, it's not just about Donkeys versus Republicans.

kthomas -> Peter K.... , February 15, 2017 at 07:29 AM
(yawn)
RC AKA Darryl, Ron -> Mike S... , February 15, 2017 at 09:13 AM
"...How many right wing economists have won a nobel in, say the last 25 years?"

[Economists don't designate conservative or liberal when they hand up their shingle, so one must use supply side, Austrian School, and neoclassical orientations as a proxy for conservative ideology. New Keynesian is a little on the fence, say centrist.]

Ronald Coase - 1991

Gary Becker - 1992

Robert Fogel (jointly with Douglass North, but North can only be definitively classified as eclectic with a whiff of neoclassical general equilibrium) -1993

John Harsanyi, John Nash, and Reinhard Selten won jointly in 1994. They were the game theory guys, which along with their theory of non-cooperative games made considerable contributions to utilitarian ethics, which do no always lead to happy endings for broadly shared social welfare. They were NOT conservatives themselves by any stretch of the imagination, but they were not notably liberals either. Crazy people in search of impossible perfection but willing to cut off a few limbs to get there is my impression.

Robert Lucas - 1995 ('nuff said)

Praise the lord, holy Jesus in 1996 William Vickrey and James Mirrlees who ARE actual liberals were award the Nobel "for their fundamental contributions to the economic theory of incentives under asymmetric information," a topic of great interest to conservatives.

Robert Merton (a social scientist) and Myron Sholes (a financial economist) won in 1997 "for a new method to determine the value of derivatives."

I almost had a heart attack when I got to this one. Amartya Sen won in 1998 "for his contributions to welfare economics." Of course he is from India.

Robert Mundell won in 1999 "for his analysis of monetary and fiscal policy under different exchange rate regimes and his analysis of optimum currency areas." Yep, this is the supply sider that gave the world the EU crisis.

James Heckman "for his development of theory and methods for analyzing selective samples" and Daniel McFadden "for his development of theory and methods for analyzing discrete choice" won jointly in 2000, another case of two liberals getting awarded for research that was of interest to conservatives while being almost entirely unrelated to their own major contributions.

Similarly in 2001, George Akerlof, Michael Spence, and Joseph Stiglitz won jointly "for their analyses of markets with asymmetric information." This one actually had liberal application, but my guess is they got it because conservatives were scratching their heads about where they went wrong with the dot-com bubble.

OK, I got other stuff to do now, but you can take the link and figure it out for yourself. Clearly winning a Nobel still does not make an economists a champion of the liberal political cause. Still to go is Ed Prescott in 2004 if you get my drift.

https://en.wikipedia.org/wiki/List_of_Nobel_Memorial_Prize_laureates_in_Economics


There is actually a book that discusses this in far greater detail that I only discovered well into my own analysis with Google and Wikipedia, but where I looked the experts that wrote the book had the same judgements and misgivings as I did.


https://books.google.com/books?id=Qoj8CwAAQBAJ&pg=PA114&lpg=PA114&dq=James+Mirrlees+conservative+or+liberal&source=bl&ots=MHH0gXsjSP&sig=q387P51rcY372uI2SjAOZMb9Gvk&hl=en&sa=X&ved=0ahUKEwip4p3jw5LSAhWG8oMKHcOtCAUQ6AEILzAD#v=onepage&q=James%20Mirrlees%20conservative%20or%20liberal&f=false

RGC -> Mike S... , February 15, 2017 at 09:36 AM
I agree with Peter K.
...........
The "Nobel prize" was established as 'The Swedish National Bank's Prize in Economic Sciences in Memory of Alfred Nobel".

Some critics argue that the prestige of the Prize in Economics derives in part from its association with the Nobel Prizes, an association that has often been a source of controversy.

Among them is the Swedish human rights lawyer Peter Nobel, a great-grandson of Ludvig Nobel.[27] Nobel criticizes the awarding institution of misusing his family's name, and states that no member of the Nobel family has ever had the intention of establishing a prize in economics.[28]

According to Samuel Brittan of the Financial Times, both of the former Swedish ministers of finance, Kjell-Olof Feldt and Gunnar Myrdal, wanted the prize abolished, saying, "Myrdal rather less graciously wanted the prize abolished because it had been given to such reactionaries as Hayek (and afterwards Milton Friedman)."[25]

Avner Offer's and Gabriel Söderberg's The Nobel factor: the prize in economics, social democracy, and the market turn (Princeton University Press 2016) argues that there has been a dramatic shift in the dominant macroeconomic theories among the academia, and that the creation of the Nobel in 1969 was the cause of this, as it enhanced the prestige of free market ideology and conferred upon it the status of science.

https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economic_Sciences
...........
As for right wing winners, check out all the U of Chicago recipients.

The 'Nobel" prize was established by a bank to promote the objectives of banks.

And btw, Krugman is no leftwing economist.

RC AKA Darryl, Ron -> RGC... , February 15, 2017 at 09:42 AM
Excellent! THANKS!
Peter K. -> RGC... , February 15, 2017 at 10:18 AM
"I agree with Peter K."

"Science advances one funeral at a time."
- Max Planck

[Feb 12, 2017] Austerity The History of a Dangerous Idea

See also Mark Blyth--"Liberalisms' great trick has been to naturalize very difficult political contests."
Feb 12, 2017 | www.amazon.com

Selected as a Financial Times Best Book of 2013

Governments today in both Europe and the United States have succeeded in casting government spending as reckless wastefulness that has made the economy worse. In contrast, they have advanced a policy of draconian budget cuts--austerity--to solve the financial crisis. We are told that we have all lived beyond our means and now need to tighten our belts. This view conveniently forgets where all that debt came from. Not from an orgy of government spending, but as the direct result of bailing out, recapitalizing, and adding liquidity to the broken banking system. Through these actions private debt was rechristened as government debt while those responsible for generating it walked away scot free, placing the blame on the state, and the burden on the taxpayer.

That burden now takes the form of a global turn to austerity, the policy of reducing domestic wages and prices to restore competitiveness and balance the budget. The problem, according to political economist Mark Blyth, is that austerity is a very dangerous idea. First of all, it doesn't work. As the past four years and countless historical examples from the last 100 years show, while it makes sense for any one state to try and cut its way to growth, it simply cannot work when all states try it simultaneously: all we do is shrink the economy. In the worst case, austerity policies worsened the Great Depression and created the conditions for seizures of power by the forces responsible for the Second World War: the Nazis and the Japanese military establishment. As Blyth amply demonstrates, the arguments for austerity are tenuous and the evidence thin. Rather than expanding growth and opportunity, the repeated revival of this dead economic idea has almost always led to low growth along with increases in wealth and income inequality. Austerity demolishes the conventional wisdom, marshaling an army of facts to demand that we austerity for what it is, and what it costs us.

Metallurgist TOP 1000 REVIEWER on April 20, 2013 Format: Hardcover Vine Customer Review of Free Product ( What's this? )

An interesting Keynesian view of the current EU austerity programs

" I found this to be a very interesting and thought provoking book. The author makes his viewpoint very clear with the book's subtitle "The History of a Dangerous Idea". The essence of the author's argument is that austerity is unfair because it makes workers pay for the mistakes of banks, and even more importantly, dangerous because it does not lead to prosperity, but only to decreased economic growth and increased unemployment. This thesis is backed up by an analysis of the banking crisis of 2008, how it spread from the US to the EU, why the single currency Euro has made the problem worse for the EU and why using austerity to solve the problems will not work. It also discusses the history of the idea of austerity, both in terms of the economic theory that promotes it and the economic history that does not. Conservatives, who find Keynesian economics to be not only wrong, but also the road to economic ruin, will likely be turned off by the book's subtitle and many of the arguments that Professor Blyth utilizes. However, there is a lot of data in this book that they should look at, if only to criticize it. I found this book very enlightening and while I do not agree with all of Professor Blyth's ideas (particularly those of the last chapter), I learned a lot, so for me it was 5-stars.

What is in the book?
The book is divided into 7 chapters, which cover the following:

Chapter 1 - A Primer on Austerity. This is a short chapter that summarizes the main thesis of the book (mentioned above), and sets the stage for the more detailed discussions in subsequent chapters.

Chapter 2 - America: To Big to Fail? This is an excellent chapter that summarizes the origins and unfolding of the 2008-banking crisis in the US. This is a very complicated story, which Professor Blyth tells in a clear manner. The story revolves around repurchase agreements (Repos), mortgage backed securities (MBS), collateralized debt obligations (CDO), credit default swaps (CDS), and how all these interacted in a climate of deregulation to produce the crisis. Professor Blyth does a good job of explaining these terms and how the interaction worked.

Chapter 3 - Europe: Too Big to Bail? This is another very illuminating chapter. It shows how Europe, which first believed it was not going to be affected by the US banking crisis, became a major casualty of it and their own internal banking problems. All these factors were compounded by the single currency Euro, which has removed devaluation as a solution to the crisis, instead fostering the idea that governmental austerity was the only way to correct a problem produced by the private banking sector.

Chapter 4 - Intellectual History of a Dangerous Idea 1692-1942. This chapter goes back to the writings of John Locke, David Hume and Adam Smith to see how the idea of austerity developed. It also covers the idea in the early 20th century and the development of anti-austerity Keynesian economic theory. It is a nice primer on classical economic ideas.

Chapter 5 - Intellectual History of a Dangerous Idea 1942-2012. This chapter carries the story of the idea of austerity into the present time. It shows how the idea of austerity, discredited by the Great Depression and the success of the Keynesian solution (although conservatives would argue these successes were illusory and set the stage for future economic problems), has been resurrected by economists writing in the latter part of the 20th century and early 21st.

Chapter 6. Austerity's Natural History 1914-2012. Blyth presents a lot of data that shows that, contrary to the theories presented in the previous chapter, austerity has not worked in practice. Much of the chapter is spent it refuting the writings of several economists that say that the recent historical data does support the idea. Blyth contends that in general it does not and if is does in a few cases it either does not when all the data is considered, or worked only marginally under a very limited set of conditions.

Chapter 7 - The End of Banking, New Tales and a Taxing Time Ahead. This is a very short eleven-page chapter, but perhaps the most controversial on in the book. Blyth, initially a supporter of bank bailouts as absolutely necessary to prevent a complete collapse of the banking system and with it the whole capitalist economic system and with it democratic society as a whole, now questions whether in might not have been better to let the banks fail. He cites the case of Iceland where the banks were allowed to fail and society has recovered. This was done by making the bank's creditors bear the cost of failure, instead of all of Iceland's citizens. He notes that most of this loss was borne by foreign creditors of a very small country, whose banking system was an immense part of the country's economy, but was small compared to the economies of the US or the EU. Unfortunately, he fails to say how a banking collapse in the US or EU could be handled when the systems are huge compared to Iceland's and where the creditors are largely internal. He does not explain how the failure of these huge banking systems, with their internal creditors, would not result in the scenario he originally envisioned. I found this analysis to be poor and not in keeping with the thoroughness of the rest of the book. Blyth also floats the idea of huge tax increases, either through a one-time tax on assets or a very large increase in higher bracket tax rates. Conservatives, and many not quite so conservative, will likely blanch at these ideas. There is no discussion of the political difficulties of doing this or very much development of the idea, which is contained in only the last four pages of the book.

David Lindsay on September 25, 2016 Format: Paperback Verified Purchase
Brilliant Overview

" Mark Blyth is a professor at Brown University and he explains why austerity doesn't work. He points out that whenever austerity has been tried in the past it has usually proven to be disastrous. What its supporters often seem to forget is that one person's spending is another's income and demand in the economy would collapse if everyone stopped spending. The book is a sobering read because Blyth is not optimistic about the future. However, the book is well written and is often funny.

Blyth shows that the case for austerity does not add up. The US did not pursue austerity during the recession and its economy has been growing. US GDP is 10% higher than it was in 2007. The EU has pursued austerity with vigor, but GDP in the euro zone is still lower than it was in 2007. Blyth shows that countries that cut the most have had lower rates of growth. Blyth claims that all the countries that cut public spending in response to the financial crises had significantly more debt in 2012 than when they started. For example, Ireland's debt to GDP ratio more than quadrupled, from 24.8% in 2007 to 106.4% in 2012. The other problem is that austerity increased unemployment. Throughout southern Europe, unemployment has been at levels not seen since the Great Depression. It is still over 20% in Spain and Greece. As a result of cutting public expenditure Greece's GDP dropped by 30% in four years. There is no evidence that austerity improves growth.

Blyth spends a lot of time trashing the pro-austerity thinking that took place in Europe. Germany is driving economic policy for the euro zone and they have never believed in Keynesian economics. Keynes advised that austerity was a bad idea during a recession. German politicians seem to believe that all nations could have trade surpluses if only they tried hard enough, despite the fact that it is impossible for all countries to have a surplus. Only one European country can be Germany. The Germans have often advocated the sort of solutions that failed in the 1930s. They argue that budget deficits and government debt have to be kept under strict control. The Maastricht Treaty, which established the EU, required that national debt should not exceed 60% of GDP and the deficit should not exceed 3.0%. Entry to the euro also requires a budget deficit of 3.0%.

Blyth points out that when you have a deficit, you can either raise taxes or cut spending to fill the gap. The British government of David Cameron favored the latter in 2010. The British deficit had reached 10% in 2010. However, UK government debt went up, not down, despite the cuts, from 52.3% of GDP in 2009 to 90.7% in 2013. The same pattern was repeated throughout the euro zone. Cutting public expenditure shrank the underlying economy.

The German argument is that running large deficits increases the risk of high inflation. Blyth points out that the Germans have selective amnesia about their past. It was the Wall Street Crash in 1929 not hyper-inflation in 1924 that led to Hitler. Before the crash, 1.25 million people were unemployed in Germany. Hitler was an accidental Keynesian and by 1937 German unemployment had fallen from six million to one million. Unfortunately, much of his spending involved preparing for war. Blyth argues that Germany's continuing insistence on austerity is the biggest threat to the euro zone.

According to Blyth, the current version of the austerity argument was created by a group of Italian economists, originating from Bocconi University, in Milan. He explains why their arguments are deeply flawed. Blyth argues that, apart from Greece, public sector debt in the euro zone countries was not out of control before the financial crises. Blyth rubbishes the theory of "expansionary austerity," that cutting spending will lead to higher economic growth. The "austerians" believed that large spending cuts would be followed by expansion rather than contraction. The reason, they suggested, was that decisive fiscal austerity created confidence in the private sector. Keynesians agreed that insufficient private spending was the cause of the problem, but only governments could stimulate demand on the scale needed. Austerity failed to stimulate demand in Europe. Blyth also argues that everybody cannot cut their way to growth at the same time. The IMF once went along with austerity but it has recently concluded that austerity has had major adverse economic effects.

Blyth is worried that inequality could become a serious problem in the US. The 400 richest Americans own more assets than the poorest 150 million. He argues that both major parties have written off the bottom 30% of society. He claims that the American working class has not had a pay rise since 1979, and globalization has failed them. He believes this explains the anger behind the Trump phenomenon. Blyth points out that rich Americans and the country's biggest companies are reluctant to pay tax, so government borrowing has had to go up. Blyth claims that he pays more tax than GE.

Blyth is critical of Republicans who advocated austerity. Republicans in the US also favored balancing the budget and cutting taxes. Keynesians, like Paul Krugman, argued that this is what Herbert Hoover tried to do in the early 1930s and the result was a 25% unemployment rate. Obama inherited an 11.4% budget deficit in 2009. The Republicans wanted to cut government expenditure but Blyth argues the reason the US has recovered faster than Europe is because it cut less. He makes it clear that it is poorer people who usually rely on government services to make ends meet that are the hardest hit when public expenditure is cut. He believes that the rich and corporate America need to start paying more tax. He also argues that the US government should probably have let its banks go bankrupt – as the Icelandic government did – rather than bail them out.

Blyth reminds us that 2008 was a private sector crisis. The debts of the banks landed on the balance sheet of the public sector through bank bailouts and quantitative easing. In other words, taxpayers bailed out the bankers. He calls this the "greatest bait-and-switch in modern history." The EU is imposing austerity on southern Europe and dismantling the welfare state in Greece in order to protect German banks that made stupid decisions.

Blyth in recent interviews has argued that the EU may have a sinister agenda and it really wants to drag wages in Western Europe down to East European levels so that it can better compete with China. I assumed this must be an exaggeration but it might not be. The Guardian mapped labor costs across the euro zone from 1999 to 2013. What they found is that German workers have barely seen wages rise for that 14-year stretch, despite Germany having massive trade surpluses. We could be in for real trouble.

Fang on September 27, 2016 Format: Paperback Verified Purchase
The Richness of Austerity

" Mark Blyth tries to convey a simple message: austerity simply does not work. Defining austerity as "voluntary deflation in which the economy adjusts through the reduction of wages, prices and public spending to restore competitiveness .best achieved by cutting the state's budget, debts and deficits" (p.2), Blyth argued that austerity's fallacies lies in the impossibility of having everybody to be thrift at the same time and the cyclical nature of debt (pp.7 and 12).

Blyth also suggests that austerity efforts unevenly hurt the lower strata of societies (p.8), and conflates debt and financialization problems in private sector (primarily referring to bank and financial institutions) into state (sovereign) issues (p.6 and p.23). In the first three chapters, Blyth strives to demonstrate that the financial and economic turmoil since 2008 is largely a crisis of financialization, lack of regulation, slow growth and imbalance between monetary policy and final creditor of printing press (in the case of Europe), not that of austerity (save the marginal case of Greece). Blyth argues that it is a mentality of treating these crises as endogenous and private actors as "rational" that underlay the bad policy choices in America and Europe (pp.91-93).

In chapters 4 through 6, Blyth provides an intellectual and practical history of austerity. It is suggested that a spirit of thrift and aversion towards state and state spending runs through the vein of economic liberalism, ranging from classical liberalism to neoclassical economics and to the Austrian school. In more contemporary era, it is public choice theory, neoliberalism and Milton Friedman's monetarism that carries this tradition forward to construct a pro-market and private-sector-favoring package that turns public spending into a corporate calculation of costs and benefits. Blyth goes on to illustrate the history of austerity in practice, arguing that it is usually the Keynesian expansionary policies that couple austerity that reinvigorated economy amid crises; austerity, carried out on its own, constitutes massive redistribution consequences.

Blyth obviously attempts to engage as wide an audience as possible in the public intellectual realm. As much as he is successful in his empirical chapters, Blyth appears to fight a deflationary economic policy with his own inflationary writing strategy. From chapters 4 to 5, he constantly conflates the moral teaching of thrift and financial prudence from Adam Smith to avoidance of debt, the Ordoliberalism's quest for order and proper state function to aversion of democratic politics, the methodological insights of public choice to a general fear of bureaucracy and government, and so on. These inflations, while sometimes credited, are bound to subject to scrutiny and questions.

Moreover, by glossing over the details of this rich intellectual history, Blyth dodges some key questions that his empirical chapters also fail to articulate: what is the distinction between private and public debt, and personal thrift and public austerity, when we talk about austerity, and how significant is it? How does this distinction play out in more classical economic philosophy?

And amid crisis, who should be considered the "ultimate creditor" or "final guarantor" of debt (and money)? There questions certainly exceeds the scope and intention of Blyth's book, but they should be instrumental in deepening our understanding of austerity.

[Feb 12, 2017] The CIA as Organized Crime How Illegal Operations Corrupt America and the World

Notable quotes:
"... By illuminating CIA programs and systems of surveillance, control, and assassination utilized against the civilian population of South Vietnam, we are presented with parallels with operations and practices at work today in America's seemingly perpetual war against terror. ..."
"... Through the policies of covert infiltration and manipulations, illegal alliances, and "brute force" interventions that wreak havoc on designated enemy states, destroy progress and infrastructure under the claim of liberation, degrade the standards of living for people in the perceived hostile nations, "...America's ruling elite empowers itself while claiming it has ensured the safety and prestige of the American people. Sometimes it is even able to convince the public that its criminal actions are 'humanitarian' and designed to liberate the people in nations it destroys." ..."
"... Want to know why the DEA is losing the war on drugs, how torture has become policy? Want to know why the government no longer represents your interests? Look no further. ..."
Feb 12, 2017 | www.amazon.com
Alan Dale on November 27, 2016

5.0 out of 5 stars An Essential Addition to an Essential Body of Work

Of the extraordinarily valuable and informative works for which Mr. Valentine is responsible, his latest, CIA As Organized Crime, may prove to be the best choice as an introduction to the dark realm of America's hidden corruptions and their consequences at home and around the world. This new volume begins with the unlikely but irrevocable framework by which Mr. Valentine's path led to unprecedented access to key Agency personnel whose witting participation is summarized by the chapter title: "How William Colby Gave Me the Keys to the CIA Kingdom."

By illuminating CIA programs and systems of surveillance, control, and assassination utilized against the civilian population of South Vietnam, we are presented with parallels with operations and practices at work today in America's seemingly perpetual war against terror.

Through the policies of covert infiltration and manipulations, illegal alliances, and "brute force" interventions that wreak havoc on designated enemy states, destroy progress and infrastructure under the claim of liberation, degrade the standards of living for people in the perceived hostile nations, "...America's ruling elite empowers itself while claiming it has ensured the safety and prestige of the American people. Sometimes it is even able to convince the public that its criminal actions are 'humanitarian' and designed to liberate the people in nations it destroys."

Mr. Valentine has presented us with a major body of work which includes: The Strength of the Wolf; The Strength of the Pack; The Pheonix Program, to which we may now add The CIA as Organized Crime, and for which we are profoundly indebted.

felixnola on December 6, 2016

5.0 out of 5 stars The Truth About the CIA and What is Instore For You

If you want the inside scoop on the CIA and it's criminal past; this is the book. Additionally, why the Phoenix Program is pertinent for our own times. This book connects the dots.

If you have been wondering why Homeland Security has fusion centers; why the USA Anti-Patriot Act, NDAA and Rex 84 have been passed by Congress; you will get your answer here.

A book every intelligent American needs to read and place in a prominent place in their library. Oh, and don't forget after you read it; spread the word !!! (this book is based upon actual face to face interviews and documents)

Jay Trout on January 2, 2017

5.0 out of 5 stars A crucial tool to understanding present reality. An absolute must read.

Run, don't walk, and get yourself a copy of this book. The author has been warning us for decades about the clear and present danger that is the CIA. I was unaware of Valentine's work for most of those years, perhaps because our media outlets (even the "anti-establishment" ones like Democracy Now and The Intercept) have been compromised. Valentine's work has been suppressed since his ground-breaking book on the Phoenix Program.

Not that I didn't know anything about the sordid history. I knew about MK-Ultra, some of the agency's drug running and empire-building exploits. This work goes much deeper and paints a much bigger picture. The extent of the agency's influence is much greater than I had imagined.

This is not another history book about dirty tricks. It is not just about our insane foreign policy and empire building. The cancer of corruption, of outright crime, has metastasized into every agency of the government right here in the US itself. Those dirty tricks and crimes have become domestic policy- in fusion centers and Homeland Security, in the militarization of local police and in Congress, from Wall Street to Main Street. Border Patrol, the DEA, Justice and State have all been compromised.

Want to know why the DEA is losing the war on drugs, how torture has become policy? Want to know why the government no longer represents your interests? Look no further.

The problem is now. We are the new targets.

Read it and weep, but for God's sake, please read it.
A highly informative and comprehensive book, and a scathing, fearless indictment of government corruption.
I cannot overstate it's importance.

Andrew E. Belshaw on December 6, 2016

Disguising Obama's Dirty War Chapter 22

I just picked up this book and have not read it yet--but I am writing this to CORRECT THE RECORD regarding very basic information.

There are 446 PAGES (not 286, as listed above). 160 Pages is a big difference--obviously, QUALITY is more important than quantity--but I do feel the listing needs be corrected.

The "Inside Look" feature is also cutting off the last 9 chapters of the book, which are as follows:

Chapter 16: Major General Bruce Lawlor: From CIA Officer in Vietnam to Homeland Security Honcho

Chapter 17: Homeland Security: The Phoenix Comes Home to Roost

PART IV: MANUFACTURING COMPLICITY: SHAPING THE AMERICAN WORLDVIEW

Chapter 18: Fragging Bob Kerrey: The CIA and the Need for a War Crimes Tribunal

Chapter 19: Top Secret America Shadow Reward System

Chapter 20: How Government Tries to Mess with Your Mind

Chapter 21: Disguising Obama's Dirty War

Chapter 22: Parallels of Conquest, Past and Present

Chapter 23: Propaganda as Terrorism

Chapter 24: The War on Terror as the Greatest Covert Op Ever

John C. Landon on January 2, 2017

Expose of the CIA mafia

This is a devastating and must-read study of the social and political calamity created by the CIA over the last sixty years. The portrait shows the criminal character of the agency and finally of the government it is said to serve. The portrait is a double shock because it shows not just a sordid corruption but a malevolent 'dark side' mafia-style corruption of american civilization and government. That the CIA controls the drug trade is not the least of the stunning revelations of this history.

[Feb 12, 2017] Neoliberal economists themselves were largely responsible for the unpleasant political consequences typified by Trump and Brexit due to their efforts to promote globalization as stooges of financial oligarchy, who pays them

Feb 12, 2017 | economistsview.typepad.com
Floxo : February 11, 2017 at 01:11 PM

, 2017 at 01:11 PM
I originally tried to post this comment on Mainly Macro. It is in reply to some critical comments I received when I posted a comment suggesting economists themselves were largely responsible for the unpleasant political consequences typified by Trump and Brexit. I argued there has been a failure to properly communicate the serious distributional implications of trade and globalization. This has led people to become disillusioned with stagnant living standards and growing inequality. For some reason, my reply was disallowed, making it appear as though I had no answer to my critics. As my reply addresses issues of concern here I am hoping it will be published .

Thankyou for your replies to my comment.

Stéphane, I did not say trade gain arises from price convergence; neither do trade gains arise from differences in opportunity costs (I think that is what you meant). Trade gain can arise from several sources, these include relative differences in productive efficiency (Ricardian comparative advantage), differences in relative factor abundance (HO theory), from tradeable goods where production exhibits increasing returns to scale and from monopolistic competition (Krugman).

When trade gain is exhausted it is possible to derive further gains from factor mobility. For example, shifting capital from a capital abundant region to a capital poor region will typically result in further gains. An example of this process is off-shoring, where a firm shifts production to another country where wages are lower and rent (the return on capital invested) is higher.

So why are potential gains from globalization a problem? The challenge is the sheer size of the population industrializing from a very low capital base. Economically big regions with abundant labour and scarce capital mean low wages and high rents extending into the long term. For a developed economy, adopting a policy of free trade without capital controls with these regions will have two significant consequences:

1. There is a trade induced shift to more capital intensive production driven by the factor advantage of having a relative abundance of capital. This lowers the domestic labour share of GDP.

2. Capital abundance implies a capital drain as domestic saving is increasingly used to finance foreign investment in productive capacity, driven by the higher foreign return. This correspondingly lowers domestic investment which also slows growth. Labour now has less capital applied to it, reducing labour productivity and also wages.

What are called "magnification effects" virtually guarantee wage earners are big losers in these scenarios, whereas, capital owners are big winners; hence the rise in inequality.

The theoretical support for this view is very robust. I became interested in the debate when such effects showed up strongly in the numerical trade models I develop. Economists, generally, have not supported this basic theoretical perspective, preferring a grab bag of miscellaneous empirically based models. Rapid technological change, too little technological change, skills biased technological change, union demise, banks unwilling to lend, demographics, austerity, labour hoarding, financialization, shift in consumer preference to services and on and on. Personally, I prefer basic economic theory and regard all of these thought bubbles as garbage.

In answer to Anonymous, it is true; many economists assert automation is the principle cause of our economic woes. This is theoretically baseless. I cannot describe a model of how technological improvement is supposed to give rise to the above effects, because no such model exists. Improved technology means we get more goods and services from the same resources of capital and labour, boosting growth and wages and rents.


anne -> Floxo... , February 11, 2017 at 01:23 PM
Where is the precise reference? Mainlymacro must however be separate as "mainly" and Macro" in posting the link.
Floxo -> anne... , February 11, 2017 at 05:09 PM
Thankyou Anne, here is the reference you requested.

https://mainlymacro.blogspot.com.au/2017/01/why-voting-for-article-50-may-ruin-mps.html


anne -> Floxo... , February 12, 2017 at 04:59 AM
https://mainlymacro.blogspot.com.au/2017/01/why-voting-for-article-50-may-ruin-mps.html

January 29, 2017

Why voting for Article 50 * may ruin an MP's career

The last time I did something like this was to urge Labour party members to vote for Smith rather than Corbyn, knowing full well that Corbyn was almost certain to win. Being proved right on that occasion is no consolation, because I would rather have been wrong. This is even more futile, but now as then I feel a decision is about to be made that is both disastrous and irreversible. I also want to say something about the longer term interests of MPs that I have not seen said elsewhere.

There are so many principled reasons for MPs to vote against triggering Article 50. Let me summarise what I see as the main ones here, but this is far from comprehensive....

* https://en.wikipedia.org/wiki/Article_50_of_the_Treaty_on_European_Union

Article 50 of the Treaty on European Union is a part of European Union law that sets out the process by which member states may withdraw from the European Union.

-- Simon Wren-Lewis

anne -> anne... , February 12, 2017 at 05:01 AM
Correcting:

Mainlymacro can now be linked to directly. There is no need to separate "mainly" and "macro" in posting a link.

anne -> Floxo... , -1
Interesting response to an interesting argument. I am grateful for this post.
libezkova -> anne... , February 12, 2017 at 10:34 AM
I do not share your enthusiasm.

A couple of points

1. Neoliberal economists are stooges of financial oligarchy (much like Soviet economists were stooges of Communist Party) and if they do not promote Washington consensus on trade and globalization they would be ostracized and replaced by other no less talented puppets. They all are replaceable and they understand that perfectly well and behave accordingly. Being puppets they have no degrees of freedom to express the discontent with neoliberalism.

2. The author himself is still in completely under the spell of neoclassical economic framework. that's why his critique is so superficial. As in "There is a trade induced shift to more capital intensive production driven by the factor advantage of having a relative abundance of capital. This lowers the domestic labour share of GDP. " What a "neoliberal speak." Reminds me 1984 Newspeak. That was a political decision to shift capital to developing countries in order to destroy union power and decimate "trade unionism" as political force opposing to neoliberalism. As simple as that.

[Feb 11, 2017] The Paradox of Financialized Industrialization

Notable quotes:
"... More than any other economist of his century, Marx tied together the three major kinds of crisis that were occurring. His Theories of Surplus Value explained the two main forms of crises his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought over. These crises were the result of survivals from Europe's feudal epoch of landed aristocracy and banking fortunes. ..."
"... Financially, Marx pointed to the tendency of debts to grow exponentially, independently of the economy's ability to pay, and indeed faster than the economy itself. The rise in debt and accrual of interest was autonomous from the industrial capital and wage labor dynamics on which Volume I of Capital focused. Debts are self-expanding by purely mathematical rules – the "magic of compound interest." ..."
"... Industrial companies profit from labor not only by employing it, but by lending to customers. General Motors made most of its profits for many years by its credit arm, GMAC (General Motors Acceptance Corp.), as did General Electric through its financial arm. Profits made by Macy's and other retailers on their credit card lending sometimes accounted for their entire earnings. ..."
"... This privatization of rents and their transformation into a flow of interest payments (shifting the tax burden onto wage income and corporate profits) represents a failure of industrial capitalism to free society from the legacies of feudalism. ..."
"... Marx expected economies to act in their long-term interest to increase the means of production and avoid unproductive rentier income, underconsumption and debt deflation. Believing that every mode of production was shaped by the technological, political and social needs of economies to advance, he expected banking and finance to become subordinate to these dynamics. ..."
"... It seemed that the banking system's role as allocator of credit would pave the way for a socialist organization of economies. Marx endorsed free trade on the ground that industrial capitalism would transform and modernize the world's backward countries. Instead, it has brought Western rentier finance and privatization of the land and natural resources, and even brought the right to use these country's currencies and financial systems as casinos. And in the advanced creditor nations, failure of the U.S. and European economies to recover from their 2008 financial crisis stems from leaving in place the reckless "junk mortgage" debts, whose carrying charges are absorbing income. Banks were saved instead of industrial economies, whose debts were left in place. ..."
"... No observer of Marx's epoch was so pessimistic as to expect finance capital to overpower industrial capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis, Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators seemed to be in his day. "The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values." [6] ..."
"... Marx wrote this reductio ad absurdum not dreaming that it would become the Federal Reserve's policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.'s gambles and other counterparty "casino capitalist" losses at taxpayer expense, followed by the Federal Reserve buying junk mortgage packages at par. ..."
"... The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet Russia after 1991, letting its natural resources and industrial economy be financialized while failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs and Western investors buying on credit with their own banks or in association with Western banks. This bank credit was simply created on computer keyboards. Such credit creation should be a public utility, but it has broken free from public regulation in the West. That credit is now reaching out to China and the post-Soviet economies as a means of appropriating their resources. ..."
"... Note: Marx described productive capital investment by the formula M–C–M´, signifying money (M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of "usury capital" – government bond financing for war deficits, and consumer lending (mortgages, personal loans and credit card debt) – consist of the disembodied M–M´, making money simply from money in a sterile operation. ..."
Jan 26, 2017 | newscontent.cctv.com
RGC -> RGC... January 26, 2017 at 05:44 AM

The Paradox of Financialized Industrialization
By Michael Friday, October 16, 2015

These remarks were made at the World Congress on Marxism, 2015, at the School of Marxism, Peking University, October 10, 2015. The presentation was part of a debate with Bertell Ollman (NYU). I was honored to be made a permanent Guest Professor at China's most prestigious university.

When I lectured here at the Marxist School six years ago, someone asked me whether Marx was right or wrong. I didn't know how to answer this question at the time, because the answer is so complex. But at least today I can focus on his view of crises.

More than any other economist of his century, Marx tied together the three major kinds of crisis that were occurring. His Theories of Surplus Value explained the two main forms of crises his classical predecessors had pointed to, and which the bourgeois revolutions of 1848 were fought over. These crises were the result of survivals from Europe's feudal epoch of landed aristocracy and banking fortunes.

Financially, Marx pointed to the tendency of debts to grow exponentially, independently of the economy's ability to pay, and indeed faster than the economy itself. The rise in debt and accrual of interest was autonomous from the industrial capital and wage labor dynamics on which Volume I of Capital focused. Debts are self-expanding by purely mathematical rules – the "magic of compound interest."

We can see in America and Europe how interest charges, stock buybacks, debt leveraging and other financial maneuverings eat into profits, deterring investment in plant and equipment by diverting revenue to economically empty financial operations. Marx called finance capital "imaginary" or "fictitious" to the extent that it does not stem from within the industrial economy, and because – in the end – its demands for payment cannot be met. Calling this financial accrual a "void form of capital." [1] It was fictitious because it consisted of bonds, mortgages, bank loans and other rentier claims on the means of production and the flow of wages, profit and tangible capital investment.

The second factor leading to economic crisis was more long-term: Ricardian land rent. Landlords and monopolists levied an "ownership tax" on the economy by extracting rent as a result of privileges that (like interest) were independent of the mode of production. Land rent would rise as economies became larger and more prosperous. More and more of the economic surplus (profits and surplus value) would be diverted to owners of land, natural resources and monopolies. These forms of economic rent were the result of privileges that had no intrinsic value or cost of production. Ultimately, they would push up wage levels and leave no room for profit. Marx described this as Ricardo's Armageddon.

These two contributing forces to crisis, Marx pointed out, were legacies of Europe's feudal origins: landlords conquering the land and appropriating natural resources and infrastructure; and banks, which remained largely usurious and predatory, making war loans to governments and exploiting consumers in petty usury. Rent and interest were in large part the products of wars. As such, they were external to the means of production and its direct cost (that is, the value of products).

Most of all, of course, Marx pointed to the form of exploitation of wage labor by its employers. That did indeed stem from the capitalist production process. Bertell Ollman has just explained that dynamic so well that I need not repeat it here.

Today's economic crisis in the West: financial and rent extraction, leading to debt deflation Bertell Ollman has described how Marx analyzed economic crisis stemming from the inability of wage labor to buy what it produces. That is the inner contradiction specific to industrial capitalism. As described in Volume I of Capital, employers seek to maximize profits by paying workers as little as possible. This leads to excessive exploitation of wage labor, causing underconsumption and a market glut.

I will focus here on the extent to which today's financial crisis is largely independent of the industrial mode of production. As Marx noted in Volumes II and III of Capital and Theories of Surplus Value, banking and rent extraction are in many ways adverse to industrial capitalism.

Our debate is over how to analyze the crisis the Western economies are in today. To me, it is first and foremost a financial crisis. The banking crisis and indebtedness stems mainly from real estate mortgage loans – and also from the kind of massive fraud that Marx found characteristic of the high finance of his day, especially in canal and railroad financing.

So to answer the question that I was asked about whether Marx was right or wrong, Marx certainly provided the tools needed to analyze the crises that the industrial capitalist economies have been suffering for the past two hundred years.

But history has not worked out the way Marx expected. He expected every class to act in its own class interest. That is the only way to reasonably project the future. The historical task and destiny of industrial capitalism, Marx wrote in the Communist Manifesto, was to free society from the "excrescences" of interest and rent (mainly land and natural resource rent, along with monopoly rent) that industrial capitalism had inherited from medieval and even ancient society. These useless rentier charges on production are faux frais, costs that slow the accumulation of industrial capital. They do not stem from the production process, but are a legacy of the feudal warlords who conquered England and other European realms to found hereditary landed aristocracies. Financial overhead in the form of usury-capital is, to Marx, a legacy of the banking families that built up fortunes by war lending and usury.

Marx's concept of national income differs radically from today's National Income and Product Accounts (NIPA). Every Western economy measures "output" as Gross National Product (GNP). This accounting format includes the Finance, Insurance and Real Estate (FIRE) sector as part of the economy's output. It does this because it treats rent and interest as "earnings," on the same plane as wages and industrial profits – as if privatized finance, insurance and real estate are part of the production process. Marx treated them as external to it. Their income was not "earned," but was "unearned." This concept was shared by the Physiocrats, Adam Smith, John Stuart Mill and other major classical economists. Marx was simply pressing classical economics to its logical conclusion.

The interest of the rising class of industrial capitalists was to free economies from this legacy of feudalism, from the unnecessary faux frais of production – prices in excess of real cost-value. The destiny of industrial capitalism, Marx believed, was to rationalize economies by getting rid of the idle landlord and banking class – by socializing land, nationalizing natural resources and basic infrastructure, and industrializing the banking system – to fund industrial expansion instead of unproductive usury.

If capitalism had achieved this destiny, it would have been left primarily with the crisis between industrial employers and workers discussed in Volume I of Capital: exploiting wage labor to a point where labor could not buy its products. But at the same time, industrial capitalism would be preparing the way for socialism, because industrialists needed to conquer the political stranglehold of the landed aristocracy and the financial power of banking. It needed to promote democratic political reform to overcome the vested interests in control of Parliaments and hence the tax system. Labor's organization and voting power would press its own self-interest and turn capitalism into socialism.

China has indeed exemplified this path. But it has not occurred in the West.
All three kinds of crisis that Marx described are occurring. But the West is now in a chronic depression – what has been called Debt Deflation. Instead of banking being industrialized as Marx expected, industry is being financialized. Instead of democracy freeing economies from land rent, natural resource rent and monopoly rent, the rentiers have fought back and taken control of Western governments, legal systems and tax policy. The result is that we are seeing a lapse back to the pre-capitalist problems that Marx described in Volumes II and III of Capital and Theories of Surplus Value.

This is where the debate between Bertell Ollman and myself centers. My focus is on finance and rent overwhelming industrial capitalism to impose a depression stemming from debt deflation. This over-indebtedness is making the labor/capital problem worse, by weakening labor's political and economic position. To make matters worse, labor parties in the West no longer are fighting over economic issues, as they were prior to World War I.

My differences with Ollman and Roemer: I focus on non-production costs
Bertell follows Marx in focusing on the production sector: hiring labor to produce products, but trying to get as much markup as possible – while underselling rivals. This is Marx's great contribution to the analysis of capitalism and its mode of production – employing wage labor at a profit. I agree with this analysis.

However, my focus is on the causes of today's crisis that are independent and autonomous from production: rentier claims for economic rent, for income without work – "empty" pricing without value. This focus on rent and interest is where I differ from that of Ollman, and also of course from that of Roemer. Any model of the crisis must tie together finance, real estate (and other rent-seeking) as well as industry and employment.

The rising debt overhead can be traced mathematically, as can the symbiosis of the Finance, Insurance and Real Estate (FIRE) sector. But the interactions are too complex to be made into a single economic "model." I am especially worried that Roemer's model might be followed here in China, because it overlooks the most dangerous tendencies threatening China today: Western financial practice and its pro-rentier tax policy.

China has spent the last half-century solving Marx's "Volume I" problem: the relations between labor and its employers, recycling the economic surplus into new means of production to provide more output, higher living standards, and most obviously, more infrastructure (roads, railways, airlines) and housing.

But right now, it is experiencing financial problems from credit creation going into the stock market instead of into tangible capital formation and rising consumption standards. And of course, China has experienced a large real estate boom. Land prices are rising in China, much as they are in the West.

What would Marx have said about this? I think that he would have warned China not to relapse into the pre-capitalist problems of finance funding real estate – turning the rising land rent into interest – and into permitting housing prices to rise without taxing them away.

Soviet planning failed to take the rent-of-location into account when planning where to build housing and factories. But at least the Soviet era did not force labor or industry to pay interest or for rising housing prices. Government banks simply created credit where it was needed to expand the means of production, to build factories, machinery and equipment, homes and office buildings.

What worries me about the political consequences of Roemer's model is that it focuses only on what Marx said about the production sector and employer-labor relations. It does not ask how "endowments" come into being – or how China has changed so radically in the past generation. It therefore neglects the danger of industrial capitalism lapsing back into a rent-and-interest economy. And by the same token, it underplays the threat to China and other socialist economies of adopting the West's surviving pre-feudal practices of predatory Bubble Finance (debt leveraging to raise prices) and wealth in the form of land-rent charges.

These two dynamics – interest and rent – represent a privatization of banking and land that rightly are public utilities. Marx expected industrial capitalism to achieve this transition. Certainly socialist economies must achieve it!

China has no need of foreign bank credit – except to cover the cost of imports and the foreign-exchange cost of investment in other countries. But China's foreign exchange reserves already are large enough to be basically independent of the U.S. dollar and euro. Meanwhile, the American and European economies are suffering from chronic debt deflation and depression that will reduce their ability to serve as markets – for their own producers as well as for China.

Today's debt-wracked economies throw into question just what kind of crisis the capitalist countries are experiencing. Marx's analysis provides the tools to analyze its financial, banking and rent-extraction problems. However, most Marxists still view the 2008 financial and junk mortgage crash as resulting ultimately from industrial employers squeezing wage labor. Finance capital is viewed as a derivative of this exploitation, not as the autonomous dynamic Marx described.

The costs of carrying the rising debt burden (interest, amortization and penalties) deflate the market for commodities by absorbing a growing wedge of disposable business and personal income. This leaves less to be spent on goods and services, causing gluts that lead to crises in which businesses scramble for money. Banks fail as bankruptcy spreads. By depleting markets, finance capital is antithetical to the expansion of profits and tangible physical capital investment.

Despite this sterility, finance capital has achieved dominance over industrial capital. Transfers of property from debtors to creditors – even privatizations of public assets and enterprises – are inevitable as the growth of financial claims surpasses the ability of productive power and earnings to keep pace. Foreclosures follow in the wake of crashes, enabling finance to take over industrial companies and even governments.

China has largely solved the "Volume I" problem – that of expanding its internal market for labor, investing the economic surplus in capital formation and rising living standards. It is confronted by Western economies that have failed to solve this problem, and also have failed to solve the "Volumes II and III" problem: finance and land rent. Yet few Western Marxists have applied his theories to the present downturn and its rentier problem. Following Marx, they view the task of solving this problem to be solved by industrial capitalism, starting with the bourgeois revolutions of 1848.

Already in 1847, Marx's Poverty of Philosophy described the hatred that capitalists felt for landlords, whose hereditary rents siphoned off income to an idle class. Upon being sent copies of Henry George's Progress and Poverty a generation later, in 1881, he wrote to John Swinton that taxing land rent was "a last attempt to save the capitalist regime." He dismissed the book as falling under his 1847 critique of Proudhon: "We understand such economists as Mill, Cherbuliez, Hilditch and others demanding that rent should be handed over to the state to serve in place of taxes. That is a frank expression of the hatred the industrial capitalist bears towards the landed proprietor, who seems to him a useless thing, an excrescence upon the general body of bourgeois production." [2]

As the program of industrial capital, the land tax movement stopped short of advocating labor's rights and living standards. Marx criticized Proudhon and other critics of landlords by saying that once you get rid of rent (and usurious interest by banks), you will still have the problem of industrialists exploiting wage labor and trying to minimize their wages, drying up the market for the goods they produce. This is to be the "final" economic problem to be solved – presumably long after industrial capitalism has solved the rent and interest problems.

Industrial capitalism has failed to free economies from rentier interest and rent extraction
In retrospect, Marx was too optimistic about the future of industrial capitalism. As noted above, he viewed its historical mission as being to free society from rent and usurious interest. Today's financial system has generated an overgrowth of credit, while high rents are pricing American labor out of world markets. Wages are stagnating, while the One Percent have monopolized the growth in wealth and income since 1980 – and are not investing in new means of production. So we still have the Volume II and III problems, not just a Volume I problem.

We are dealing with multiple organ failure.

Instead of funding new industrial capital formation, the stock and bond markets to transfer ownership of companies, real estate and infrastructure already in place. About 80 percent of bank credit is lent to buyers of real estate, inflating a mortgage bubble. Instead of taxing away the land's rising rental and site value that John Stuart Mill described as what landlords make "in their sleep," today's economies leave rental income "free" to be pledged to banks. The result is that banks now play the role that landlords did in Marx's day: obtaining for themselves the land's rising rental value. This reverses the central thrust of classical political economy by keeping such rent away from government, along with natural resource and monopoly rents.

Industrial economies are being stifled by financial and other rentier dynamics. Rising mortgage debt, student loans, credit card debt, automobile debt and payday loans have made workers afraid to go on strike or even to protest working conditions. To the extent that wages do rise, they must be paid increasingly to creditors (and now to privatized health insurance and drug monopolies), not to buy the consumer goods they produce. Labor's debt dependency thus aggravates the "Volume I" problem of labor's inability to purchase the products it produces. To top matters, when workers seek to join the middle class "homeowner society" by purchasing their homes on mortgage instead of paying rent, the price entails locking themselves into debt serfdom.

Industrial companies profit from labor not only by employing it, but by lending to customers. General Motors made most of its profits for many years by its credit arm, GMAC (General Motors Acceptance Corp.), as did General Electric through its financial arm. Profits made by Macy's and other retailers on their credit card lending sometimes accounted for their entire earnings.

This privatization of rents and their transformation into a flow of interest payments (shifting the tax burden onto wage income and corporate profits) represents a failure of industrial capitalism to free society from the legacies of feudalism.

Marx expected industrial capitalism to act in its own self-interest by industrializing banking, as Germany was doing along the lines that the French reformer Saint-Simon had urged. However, industrial capitalism has failed to break free of pre-industrial usurious banking practice. And in the sphere of tax policy, it has not shifted taxes away from land and natural resource rent. It has inverted the classical reformers' idea of "free markets" as being free from economic rent and predatory moneylending. The slogan now means economies free for the rentier class to extract interest and rent.

Mode of production or mode of parasitism?

Instead of serving industrial capitalism, today's financial sector is bleeding it to death. Instead of seeking profits by employing labor to produce goods at a markup, it doesn't even want to hire labor or engage in the process of production and develop new markets. The epitome of this postindustrial economics is Enron: its' managers wanted no capital at all – no employment, only traders at a desk (and crooked accountants).

Today's characteristic mode of accumulating wealth is more by financial than industrial means: riding the wave of debt-financed asset-price inflation to reap "capital" gains. This seemed unlikely in Marx's era of the gold standard. Yet today, most academic Marxists still concentrate on his "Volume I" crisis, neglecting finance capitalism's failure to free economies from the rentier dynamics surviving from European feudalism and the colonial lands conquered by Europe.

Marxists who went into Wall Street have learned their lessons from Volumes II and III. But academic Marxism has not focused on the FIRE sector – Finance, Insurance and Real Estate. It is as if interest and rent extraction are secondary problems to the dynamics of wage labor.

The great question today is whether post-feudal rentier capitalism will stifle industrial capitalism instead of serving it. The aim of finance is not merely to exploit labor, but to conquer and appropriate industry, real estate and government. The result is a financial oligarchy, neither industrial capitalism nor a tendency to evolve into socialism.

Marx's optimism that industrial capital would subordinate finance to serve its own needs

Having provided a compendium of historical citations describing how parasitic "usury capital" multiplied at compound interest, Marx announced in an optimistic Darwinian tone that the destiny of industrial capitalism was to mobilize finance capital to fund its economic expansion, rendering usury an obsolete vestige of the "ancient" mode of production. It is as if "in the course of its evolution, industrial capital must therefore subjugate these forms and transform them into derived or special functions of itself." Finance capital would be subordinated to the dynamics of industrial capital rather than growing to dominate it. "Where capitalist production has developed all its manifold forms and has become the dominant mode of production," Marx concluded his draft notes for Theories of Surplus Value, "interest-bearing capital is dominated by industrial capital, and commercial capital becomes merely a form of industrial capital, derived from the circulation process." [3]

Marx expected economies to act in their long-term interest to increase the means of production and avoid unproductive rentier income, underconsumption and debt deflation. Believing that every mode of production was shaped by the technological, political and social needs of economies to advance, he expected banking and finance to become subordinate to these dynamics. "There is no doubt," he wrote, "that the credit system will serve as a powerful lever during the transition from the capitalist mode of production to the production by means of associated labor; but only as one element in connection with other great organic revolutions of the mode of production itself." [4]

The financial problem would take care of itself as industrial capitalism mobilized savings productively, subordinating finance capital to serve its needs. This already was happening in Germany and France.

It seemed that the banking system's role as allocator of credit would pave the way for a socialist organization of economies. Marx endorsed free trade on the ground that industrial capitalism would transform and modernize the world's backward countries. Instead, it has brought Western rentier finance and privatization of the land and natural resources, and even brought the right to use these country's currencies and financial systems as casinos. And in the advanced creditor nations, failure of the U.S. and European economies to recover from their 2008 financial crisis stems from leaving in place the reckless "junk mortgage" debts, whose carrying charges are absorbing income. Banks were saved instead of industrial economies, whose debts were left in place.

Irving Fisher coined the term debt deflation in 1933. He described it as occurring when debt service (interest and amortization) to pay banks and bondholders diverts income from being spent on consumer goods and new business investment. [5] Governments use their tax revenues to pay bondholders, cutting back public spending and infrastructure investment, education, health and other social welfare.

No observer of Marx's epoch was so pessimistic as to expect finance capital to overpower industrial capitalism, engulfing economies as the world is seeing today. Discussing the 1857 financial crisis, Marx showed how unthinkable anything like the 2008-09 Bush-Obama bailout of financial speculators seemed to be in his day. "The entire artificial system of forced expansion of the reproduction process cannot, of course, be remedied by having some bank, like the Bank of England, give to all the swindlers the deficient capital by means of its paper and having it buy up all the depreciated commodities at their old nominal values." [6]

Marx wrote this reductio ad absurdum not dreaming that it would become the Federal Reserve's policy in autumn 2008. The U.S. Treasury paid off all of A.I.G.'s gambles and other counterparty "casino capitalist" losses at taxpayer expense, followed by the Federal Reserve buying junk mortgage packages at par.

Socialist policy regarding financial and tax reform

Marx described the historical destiny of industrial capitalism as being to free economies from unproductive and predatory finance – from speculation, fraud and a diversion of income to pay interest without funding new means of production. On this logic, it should be the destiny of socialist economies to treat bank credit creation as a public function, to be used for public purposes – to increase prosperity and the means of production to give populations a better life. Socialist nations have freed their economies from the internal contradictions of industrial capitalism that stifle wage labor.

China has solved the "Volume I" problem. But it still must deal with the West's unsolved "Volume II and III" problem of privatized finance, land rent and natural resource rent. Western economies seek to extend these neoliberal practices to use finance as a lever to pry away the economic surplus, to finance the transfer of property at interest, and to turn profits, rent, wages and other income into interest.

The failure to socialize banking (or even to complete its industrialization) has become the most glaring economic tragedy of Western industrial capitalism. It became the tragedy of post-Soviet Russia after 1991, letting its natural resources and industrial economy be financialized while failing to tax land and natural resource rent. The commanding heights were sold to domestic oligarchs and Western investors buying on credit with their own banks or in association with Western banks. This bank credit was simply created on computer keyboards. Such credit creation should be a public utility, but it has broken free from public regulation in the West. That credit is now reaching out to China and the post-Soviet economies as a means of appropriating their resources.

The eurozone seems incapable of saving itself from debt deflation, and the United States and Britain likewise are limping along as they de-industrialize. That is what leads them to hope that perhaps socialist China can save them – as long as it remains free of the financial disease. asset stripping and debt deflation. Western neoliberal economists claim that this financialization of erstwhile industrial capitalism is "progress," and even the end of history. Yet having watched China grow while their economies have remained stagnant since 2008 (except for the One Percent), their hope is that socialist China's market can save their financialized economies driven too deeply into debt to recover on their own.

Note: Marx described productive capital investment by the formula M–C–M´, signifying money (M) invested to produce commodities (C) that sell for yet more money (M´). But the growth of "usury capital" – government bond financing for war deficits, and consumer lending (mortgages, personal loans and credit card debt) – consist of the disembodied M–M´, making money simply from money in a sterile operation.

Footnotes

http://michael-hudson.com/2015/10/the-paradox-of-financialized-industrialization/

RC AKA Darryl, Ron -> RGC... January 26, 2017 at 07:32 AM

THANKS! It was awesome, Dude and easy enough to read.

[Feb 04, 2017] Why the Maximize Shareholder Value Theory Is Bogus

Notable quotes:
"... to the corporation ..."
"... The 1970s stagflation hit these companies particularly hard, with the result that the whole was worth less than the sum of the parts. This made for an easy formula for takeover artists: buy a conglomerate with as much debt as possible, break it up and sell off the pieces. ..."
"... But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock awards or option-type compensation. They wanted a piece of the action. ..."
"... It produces short-termism, underinvestment, and a preoccupation with image management . We wrote in 2005 for the Conference Board Review about how the preoccupation with quarterly earnings led companies to underinvest on a widespread basis . Richard Davies and Andrew Haldane of the Bank of England demonstrated that companies were using unduly high discount rates, which punished long-term investment. Pearlstein provides more confirmation: ..."
"... Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations. ..."
"... It is our social capital that is now badly depleted. This erosion manifests in the weakened norms of behavior that once restrained the most selfish impulses of economic actors and provided an ethical basis for modern capitalism. ..."
"... A capitalism in which Wall Street bankers and traders think peddling dangerous loans or worthless securities to unsuspecting customers is just "part of the game," a capitalism in which top executives believe it is economically necessary that they earn 350 times what their front-line workers do, a ..."
"... I think that you seriously underestimate Trump. Napoleon excelled in an environment where military success was primary; Trump excels in a mediated environment where PR and imagery are primary. IMVHO, there are some eerie parallels between the two men; whether you like them or not, both men could be characterized by: ambition, vision, vindictiveness, and a willingness obliterate traditional social and political boundaries. ..."
"... Many elite professionals are deeply upset with Trump's win. Yet the ideology that he represents is very much in line with the logic of corporate raiders, many of whom, like him, went to Wharton Business School. And many elite professionals, in particular lawyers and consultants, profited handsomely from the adoption of the buccaneer capitalist view of the world and actively enabled much of its questionable thinking and conduct. ..."
"... That Wharton Business School model is oblivious to the human needs for: fairness, reciprocity, culture, and the need to penalize duplicity. (I would argue that the Wharton model exalts duplicity, if only to pass it off as some kind of exceptional superpower wielded only by Business Elites.) When you corrode trust, you damage economies. ..."
"... Trump is the apotheosis of neoliberal economics + junk-bond fueled casino empires in a media environment that worships 'shareholder value' and has lost sight of what genuinely creates sustainable value over the long term. ..."
"... did Friedman capture the growing political aggressiveness of capital, as capital gradually overcame the Great Fear of the 30s and prepared to mount, as Streeck has argued, a counteroffensive against the constraints of welfare capitalism? Likely all of the above, but in what proportions? ..."
"... It is that acme of Liberalism, Warren Buffett that created this fad. At a time when corporate dividends were taxed as ordinary income, whereas a stock price bump would be tax deferred - and ultimately taxed at long term capital gains rates - the scheme was merely tax avoidance. Warren Buffett's entire empire is based on this and other tax avoidence schemes. ..."
"... The maximize shareholder value ideology in practice looks like maximize CEO compensation and to heck with the company's long term prospects. imo. ..."
"... Considering relationship between share's liquidity and short-termism , any measure which reduces share's liquidity, for example a high tax on short term capital gain, will greatly reduce both short-termism and corporate governance issues as share holders will be forced to assume the risk they were supposed to bear in exchange of supermacy of their interest. ..."
"... While it has damaged corporate social responsibilities and banks' and corporations' long-term financial stability, actions taken pursuant to the Shareholder Value optimization model have served well many individuals on Wall Street, at private equity firms, CEOs of large publicly traded corporations, hedge funds, networked board members, their academic and professional servicers, and the political elite ..."
"... Reflecting back on developments like the dotcom bubble of 1999-2000; the underlying causes of the financial collapse of 2007-09; massive debt-leveraged corporate stock buybacks; socially damaging private equity LBOs; the current volumes of opaque OTC derivatives at large financial institutions; repeated episodes of environmental damage caused by firms in extractive industries seeking short-term financial returns; and the license it provides to exert power over legislation and regulation by those who own and control these corporations in a Citizens United legal framework; etc., it is difficult to see much in the way of redeeming social value in this corporate governance model. ..."
"... Is it simple greed, stupidity, cynicism, groupthink, false consciousness, sociopathy, the 'attractions' of a certain lifestyle, daddy-didn't-love-them-enough or what that leads certain types to behave the ways they do and seek to justify it? ..."
Feb 04, 2017 | www.nakedcapitalism.com

From the early days of this website, we've written from time to time about why the "shareholder value" theory of corporate governance was made up by economists and has no legal foundation. It has also proven to be destructive in practice, save for CEO and compensation consultants who have gotten rich from it.

Further confirmation comes from a must-read article in American Prospect by Steven Pearlstein, When Shareholder Capitalism Came to Town. It recounts how until the early 1990s, corporations had a much broader set of concerns, most importantly, taking care of customers, as well as having a sense of responsibility for their employees and the communities in which they operated. Equity is a residual economic claim. As we wrote in 2013:

Directors and officers, broadly speaking, have a duty of care and duty of loyalty to the corporation. From that flow more specific obligations under Federal and state law. But notice: those responsibilities are to the corporation , not to shareholders in particular ..Equity holders are at the bottom of the obligation chain. Directors do not have a legal foundation for given them preference over other parties that legitimately have stronger economic interests in the company than shareholders do.

And even in the early 1980s, common shares were regarded as a speculative instrument. And rightly so, since shares are a weak and ambiguous legal promise: "You have a vote that we the company can dilute whenever we feel like it. And we might pay you dividends if we make enough money and are in the mood."

However, 1900s raiders who got rich by targeting companies that had gotten fat, defended their storming of the corporate barricades by arguing that their success rested on giving CEOs incentives to operate in a more entrepreneurial manner. In reality, most of the 1980s deals depended on financial engineering rather than operating improvements. Ironically, it was a form of arbitrage that reversed an earlier arb play in the 1960s. Diversified corporations had become popular in the 1960s as a borderline stock market scam. Companies like Teledyne and ITT, that looked like high-fliers and commanded lofty PE multiples, would buy sleepy unrelated businesses with their highly-valued stock. Bizzarely, the stock market would value the earnings of the companies they acquired at the same elevated PE multiples. You can see how easy it would be to build an empire that way.

The 1970s stagflation hit these companies particularly hard, with the result that the whole was worth less than the sum of the parts. This made for an easy formula for takeover artists: buy a conglomerate with as much debt as possible, break it up and sell off the pieces.

But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock awards or option-type compensation. They wanted a piece of the action.

One of their big props to this campaign was the claim that companies existed to promote shareholder value. This had been a minority view in the academic literature in the 1940s and 1950s. Milton Friedman took it up an intellectually incoherent New York Times op-ed in 1970 . Michael Jensen of Harvard Business School and William Meckling of the University of Rochester argued in 1976 that corporate managers needed to have their incentives better aligned with those of shareholders, and the way to do that was to have most of their pay be equity-linked. In the late 1980s, Jensen in a seminal Harvard Business Review article, claimed that executives needed to be paid like entrepreneurs. Jensen has since renounced that view.

Why The Shareholder Value Theory Has No Legal Foundation

Why do so many corporate boards treat the shareholder value theory as gospel? Aside from the power of ideology and constant repetition in the business press, Pearlstein, drawing on the research of Cornell law professor Lynn Stout, describes how a key decision has been widely misapplied:

Let's start with the history. The earliest corporations, in fact, were generally chartered not for private but for public purposes, such as building canals or transit systems. Well into the 1960s, corporations were broadly viewed as owing something in return to the community that provided them with special legal protections and the economic ecosystem in which they could grow and thrive.

Legally, no statutes require that companies be run to maximize profits or share prices. In most states, corporations can be formed for any lawful purpose. Lynn Stout, a Cornell law professor, has been looking for years for a corporate charter that even mentions maximizing profits or share price. So far, she hasn't found one. Companies that put shareholders at the top of their hierarchy do so by choice, Stout writes, not by law

For many years, much of the jurisprudence coming out of the Delaware courts-where most big corporations have their legal home-was based around the "business judgment" rule, which held that corporate directors have wide discretion in determining a firm's goals and strategies, even if their decisions reduce profits or share prices. But in 1986, the Delaware Court of Chancery ruled that directors of the cosmetics company Revlon had to put the interests of shareholders first and accept the highest price offered for the company. As Lynn Stout has written, and the Delaware courts subsequently confirmed, the decision was a narrowly drawn exception to the business–judgment rule that only applies once a company has decided to put itself up for sale. But it has been widely-and mistakenly-used ever since as a legal rationale for the primacy of shareholder interests and the legitimacy of share-price maximization.

How the Shareholder Value Theory Has Been Destructive

The shareholder value theory has proven to be a bust in practice. Here are some of the reasons:

It produces short-termism, underinvestment, and a preoccupation with image management . We wrote in 2005 for the Conference Board Review about how the preoccupation with quarterly earnings led companies to underinvest on a widespread basis . Richard Davies and Andrew Haldane of the Bank of England demonstrated that companies were using unduly high discount rates, which punished long-term investment. Pearlstein provides more confirmation:

A recent study by McKinsey & Company, the blue-chip consulting firm, and Canada's public pension board found alarming levels of short-termism in the corporate executive suite. According to the study, nearly 80 percent of top executives and directors reported feeling the most pressure to demonstrate a strong financial performance over a period of two years or less, with only 7 percent feeling considerable pressure to deliver strong performance over a period of five years or more. It also found that 55 percent of chief financial officers would forgo an attractive investment project today if it would cause the company to even marginally miss its quarterly-earnings target.

As we've stated before, we've been hearing this sort of thing from McKinsey contacts for more than a decade. And the "55 percent" figure likely understates the amount of short-termism. First, even in a presumably anonymous survey, some CFOs might be loath to admit that. Second, for any project big enough to impact quarterly earnings, the CFO is almost certain not to have the final say. So even if his team approves it, it could be nixed by the CEO out of concern for earnings impact.

It empirically produces worse results . We've written from time to time about the concept of obliquity, that in a complex system that is affected by interactions with it, it is impossible to map out a simple path to a goal. As a result, other approaches are typically more successful. From a 2007 Financial Times article by John Kay , who later wrote a book about the concept:

Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations.

Merck and Pfizer was one such comparison. Collins and Porras compared the philosophy of George Merck ("We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been") with that of John McKeen of Pfizer ("So far as humanly possible, we aim to get profit out of everything we do").

Collins and Porras also paired Hewlett Packard with Texas Instruments, Procter & Gamble with Colgate, Marriott with Howard Johnson, and found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.

Some more commonly-cited reasons for why a focus on shareholder value hurts performance is that it dampens innovation. Pearlstein describes another, how it demotivates workers:

Perhaps the most ridiculous aspect of shareholder–über-alles is how at odds it is with every modern theory about managing people. David Langstaff, then–chief executive of TASC, a Virginia–based government-contracting firm, put it this way in a recent speech at a conference hosted by the Aspen Institute and the business school at Northwestern University: "If you are the sole proprietor of a business, do you think that you can motivate your employees for maximum performance by encouraging them simply to make more money for you?" Langstaff asked rhetorically. "That is effectively what an enterprise is saying when it states that its purpose is to maximize profit for its investors."

And on a societal level, it erodes social capital and trust, which are the foundations for commerce:

It is our social capital that is now badly depleted. This erosion manifests in the weakened norms of behavior that once restrained the most selfish impulses of economic actors and provided an ethical basis for modern capitalism.

A capitalism in which Wall Street bankers and traders think peddling dangerous loans or worthless securities to unsuspecting customers is just "part of the game," a capitalism in which top executives believe it is economically necessary that they earn 350 times what their front-line workers do, a capitalism that thinks of employees as expendable inputs, a capitalism in which corporations perceive it as both their fiduciary duty to evade taxes and their constitutional right to use unlimited amounts of corporate funds to purchase control of the political system-that is a capitalism whose trust deficit is every bit as corrosive as budget and trade deficits.

As economist Luigi Zingales of the University of Chicago concludes in his recent book, A Capitalism for the People, American capitalism has become a victim of its own success. In the years after the demise of communism, "the intellectual hegemony of capitalism, however, led to complacency and extremism: complacency through the degeneration of the system, extremism in the application of its ideological premises," he writes. "'Greed is good' became the norm rather than the frowned-upon exception. Capitalism lost its moral higher ground."

Many elite professionals are deeply upset with Trump's win. Yet the ideology that he represents is very much in line with the logic of corporate raiders, many of whom, like him, went to Wharton Business School. And many elite professionals, in particular lawyers and consultants, profited handsomely from the adoption of the buccaneer capitalist view of the world and actively enabled much of its questionable thinking and conduct. As CEO pay rose, so to did the pay of top advisers. They couldn't be all that good, after all, if they were in a wildy different income strata.

So as Lambert has warned, unless we hear a different economic and social vision from The Resistance, which looks troubling to have more failed Democratic party influence behind it than either of us like, the best we are likely to get is a restoration. And if you remember the French Revolution, strongman Napoleon was succeeded by the Bourbon Restoration, which then led to the Second Empire under his nephew. So if we want better outcomes, status quo ante is not good enough.

I beg to differ. First, you ignore the fact that equity is a residual claim. Everyone else comes first. Every party that holds more senior instruments than equity, along with other parties that have enforceable claims, like the IRS and those with solid contracts that would give them the rights to damages in certain circumstances, have rights that are more enforceable under the law. You can't overturn that via exchange rules.

Second, Amar Bhide explained in the Harvard Business Review in 1994 why public companies will always have deficient governance. My recap of his main points:

Disenfranchised shareholders are an inherent feature of liquid stock markets. In 1994, Amar Bhide argued in a Harvard Business Review article that efficient equity markets inevitably led inevitably to deficient corporate governance. Bhide explained that an ambiguous promise like equity is not suitable to be traded on an arm's length basis. Historically, equity investors typically acted like venture capitalists: they knew the owners personally and were involved in the company's affairs. The securities laws of 1933 and 1934 tried to make it safe for distant, transient shareholders to invest by providing for timely, audited financial statements, disclosure of information about top executives and board members, and prohibiting insider trading and other forms of market manipulation.

But that turns out to be inadequate. No outsider can be told enough to make an informed judement about a company's prospects; critical information, like acquisition and plans for new products, must be kept secret until well advanced because they are competitively sensitive. Boards are protected from liability by directors' and officers' insurance (plus hardly anyone even bothers pursuing board members. For instance, have any Lehman board members been sued?). Moreover, only a comparatively small cohort of people are deemed public-company-board worthy. Their incentives are to make nice in their community and not rock the boat, which means not making life difficult for the CEOs, since a nominating committee (of the current board) is responsible for nominating directors, which means the entire process is incestuous.

This system has been fairly impervious to outside challenge. Once in a while, a company is so abysmally run that an activist investor will take up a proxy fight. But that dog seldom catches the car; instead, they might get a bad CEO to exit or force a restructuring. The stock trades up and the rabble-rousers take their winnings and depart. More polite efforts, even by large, powerful shareholders, are much less effective. For instance, some major institutional investors met with Goldman to object to the idea that the firm would pay lavish bonuses for 2009. The session appears to have had no impact.

Josh Stern , February 3, 2017 at 10:22 am

Main categories of complain about "Maximize Shareholder Value":

Category 1 – Other things should get more weight alongside shareholder value – e.g. societal responsibility – this is valid, but not our current topic/issue.

Category 2- Current practices aren't leading to the election of smart, capable BOD members acting primarily for shareholder value in their decision-making including hiring/fire of executives and voting on their proposals. This shown by, among other things, the very high levels of executive compensation relative to profit, the lack of correlation between executive compensation and profit, and the huge severance packages for released executives. This is my topic – what would improve that.

Your points don't seem to fall in those categories. Seniority of debtto equity is a respected feature of the common business landscape, not normally thought of as a problem. Lack of complete information when voting on corporate actions is also a feature of the corporate setup – representational government. It doesn't stand in the way of the possibility of smart, conscientious executives. Other issues like cronyism, bad BODs, etc. are in the way, poor rules, poor communication, lack of interest by short term stakeholders, etc. are viewed as much more problematic.

Yves Smith Post author , February 3, 2017 at 7:16 pm

You are omitting a key point in the post, which is that seeking to maximize shareholder value results in lower returns for shareholders. It is empirically a bad idea.

There are many views as to why this is so, but the biggest are likely the short-termism and obliquity. Electing more outspoken board members won't solve that.

My narrower point was addressing why this notion had never been enshrined in any corporate charter: it would be seen as created undue conflicts regarding directors making sure clearly senior obligations are met. Again, under very well settled law, directors and officers have duties of loyalty and care to the corporation, and those take precedence to serving shareholders. Go read any law firm guide to director duties.

aab , February 3, 2017 at 6:03 am

One picky point: the analogy to Bonaparte really doesn't hold up. We haven't had our French Revolution yet. And I'm rusty on my nineteenth century French history, but I don't think there's much of a valid comparison between him and Trump anyway. "Strong man" is way too vague. Whatever is going on with Trump, he's not a brilliant military tactician and strategist moving into a power vacuum from inside the existing government.

Agree about the "Resistance." But I don't see how the corporate Democrats return to power at this point - I mean real, governing power. Whatever comes next, it won't be that.

I don't know yet whether to hope for oaths on tennis courts or not. That's a really, really last resort, obviously. These people running around punching alt-right Teen Beat cover boys and breaking windows are either fools or something worse.

Also, it's nice to have data to go with my loathing of this "theory." I feel like we need a different word for this stuff, though. All these intersecting economic beliefs that are not based in facts and are easily repudiated by facts can't really be called theories, can they? They're more like belief systems. They were never really about figuring out something about reality. They were always about manipulating behavior through assertion to get desired outcomes, weren't they?

readerOfTeaLeaves , February 3, 2017 at 9:02 pm

I think that you seriously underestimate Trump. Napoleon excelled in an environment where military success was primary; Trump excels in a mediated environment where PR and imagery are primary. IMVHO, there are some eerie parallels between the two men; whether you like them or not, both men could be characterized by: ambition, vision, vindictiveness, and a willingness obliterate traditional social and political boundaries.

I thought this was particularly brilliant:

Many elite professionals are deeply upset with Trump's win. Yet the ideology that he represents is very much in line with the logic of corporate raiders, many of whom, like him, went to Wharton Business School. And many elite professionals, in particular lawyers and consultants, profited handsomely from the adoption of the buccaneer capitalist view of the world and actively enabled much of its questionable thinking and conduct.

That Wharton Business School model is oblivious to the human needs for: fairness, reciprocity, culture, and the need to penalize duplicity. (I would argue that the Wharton model exalts duplicity, if only to pass it off as some kind of exceptional superpower wielded only by Business Elites.) When you corrode trust, you damage economies.

Trump is the apotheosis of neoliberal economics + junk-bond fueled casino empires in a media environment that worships 'shareholder value' and has lost sight of what genuinely creates sustainable value over the long term.

Disturbed Voter , February 3, 2017 at 6:56 am

Isn't this just a side effect of optimization for one variable? And which variable to optimize is a question of governance? Since the invention of quantifiable economy, and the move from haggling to fixed price, particularly since the invention of monetary valuation in place of barter the mathematics becomes relentless to get the last drop of blood out of whatever turnip you are squeezing. And the invention of spreadsheets makes it that much easier to lean toward the quantitative, over the qualitative. We saw a similar process in "value engineering" in automotive engineering in that case to get the last ounce of weight out of the car, in order to optimize mileage, regardless of less quantifiable values.

Clearpoint , February 3, 2017 at 8:44 am

Awesome article. Great explanation of how wall street orchestrated casino capitalism controls today's economy, and in a manner that is detrimental to everyone but the casino operators. Milton Friedman's perverse views on "free markets", have turned the economy into a casino, first by destroying the controls on the money supply, and then by destroying corporate governance and responsibility. And we all know who makes all the money in any casino operation.

David Apgar , February 3, 2017 at 1:09 pm

Agree, awesome article. And interesting Clearpoint addition that the Street has every incentive to orchestrate volatility, to the detriment of many firms' greatest stakeholders, the neglected employees.

RBHoughton , February 3, 2017 at 9:15 pm

Agreed. I have copied it to all those poor chaps I know who are still in harness.

readerOfTeaLeaves , February 3, 2017 at 9:05 pm

Oh, I'd include Greenspan in the List of Dishonorables. Friedman had compadres.

hemeantwell , February 3, 2017 at 9:04 am

This question is of central importance, I only wish you'd find reason to bring it up more often. It raises another important question, although one that cannot be addressed so neatly: why has the capitalist project tended to turn away from long term commitments to profit-seeking through the production of (material) commodities?

Was Friedman's short-termist view simply foolish, a mistake that has had very damaging impact but which can be reversed?

Or, was it an idea that somehow picked up on declining opportunities for profit via sales of commodities, as writers like Amin and Harvey variously argue?

Or - and the article skips over this - did Friedman capture the growing political aggressiveness of capital, as capital gradually overcame the Great Fear of the 30s and prepared to mount, as Streeck has argued, a counteroffensive against the constraints of welfare capitalism? Likely all of the above, but in what proportions?

readerOfTeaLeaves , February 3, 2017 at 9:26 pm

A lot of corporate governance is controlled by legal decisions. These legal decisions are rendered by judges. Future judges are well-socialized into free market views long before they ever hear cases or render judgments. We are seeing this trend continue with the current SCOTUS nomination in the hands of a GOP controlled Congress.

Some of these people truly believe that 'free markets' can somehow 'improve and perfect' Human Nature. (See also: Ayn Rand, 'John Galt', Alan Greenspan) In other words, it's has more than a whiff of Nietzsche's 'Uber-man' ideology in the mix. It's an ideal system for equating human worth with net worth, and justifying vast inequalities in money and power.

Thus does the snake swallow its tail. These judges fail to notice there is a large bump somewhere in the snake's body; at some point, it ate the Golden Goose, and is slowly digesting.

oho , February 3, 2017 at 9:16 am

index investing/etfs have made things worse. with such a big pool of ownership in passive hands, lots of rubber stamping going on

John Wright , February 3, 2017 at 9:54 am

This does not directly mention the "increase shareholder value" action of a company buying its own stock.

That should be viewed as a red-flag admission from the senior executives that the company doing a share buyback does not see a way to grow its markets, does not see suitable investments for R&D. sees no pressing need to improve corporate infrastructure, sees no reason to train their workers, and can't find suitable acquisitions that would enhance their business.

Effectively, the management team has scoured the globe searching for the best use of their spare cash, and, surprisingly, determined that one financial security, THEIR own company's stock, was the best use of the corporation's cash.

A share buyback plan could be viewed as a warning shot indicating that management lacks ideas and is poorly managing the corporation.

Instead it falls under a "increase shareholder value" tactic.

flora , February 3, 2017 at 11:39 am

+1. Used as an attempt to ward off a hostile takeover stock buybacks might be justifiable. Mostly, however, this usually looks like a simple attempt to prop up prices.

blert , February 4, 2017 at 3:29 pm

It is that acme of Liberalism, Warren Buffett that created this fad. At a time when corporate dividends were taxed as ordinary income, whereas a stock price bump would be tax deferred - and ultimately taxed at long term capital gains rates - the scheme was merely tax avoidance. Warren Buffett's entire empire is based on this and other tax avoidence schemes.

Then, coupled with stock options for corporate management, the path was set.

Josh Stern , February 3, 2017 at 10:39 am

Common criticisms of "Maximize Shareholder Value: 1) Should give more weight to something else – e.g. societal concerns. 2) Execs – prioritize other things; 3) BOD's prioritize other things, including their personal relationship to execs. Improving corporate governance can, in theory, setup procedures and rules to fix 2) and 3) by making sure BOD's in publicly listed corporations really have the legal power, and by making elections more open, including the selection of the initial selection of BOD candidates. However, this still requires interest from a majority of voting shareholders – it would be better to ask people not interested to not vote at all. (I tried to thread this comment as a reply above but it repeatedly disappeared).

caloba , February 3, 2017 at 10:56 am

For a UK example of a company choosing not to maximise shareholder value, the disastrous acquisition of HBOS by Lloyds is instructive. Management claimed to be looking through the (ridiculously underestimated) short-term issues to the resulting long-term competitive advantages which the government assured them (falsely) wouldn't subsequently be challenged.

Of the c95% acceptances supporting this lunatic deal, some proportion of the institutional shareholders must have been idiots, a few must have feared for the stability of the banking system were the deal rejected, and a great many must also have been HBOS bondholders

flora , February 3, 2017 at 11:30 am

"But CEOs recognized how the newly-installed leaders of LBO acquisitions got rich through stock awards or option-type compensation. They wanted a piece of the action. "

The maximize shareholder value ideology in practice looks like maximize CEO compensation and to heck with the company's long term prospects. imo.

Great post. Thanks.

Vedant Desai , February 3, 2017 at 11:59 am

I doubt that any of the CEOs which have said that they are being pressurized to short-termism are actually willing this stupid concept to be removed considering they are the prime benefactor of this.

I believe that supermacy of shareholders interest was originally adopted because they were bearing risk. Shares being an illiquid asset were supposed to be a source of income not capital gain. Due to this shareholders were forced to ensure that short-termism is avoided and corporate governance is adequate. Things started to reverse slowly as liquidity of shares increased gradually.

Presently, when shares can be sold in seconds of owning them, risk a share-holder bear is greatly lower than they beared a century ago. Also , shares are bought for capital gain not income.

Considering relationship between share's liquidity and short-termism , any measure which reduces share's liquidity, for example a high tax on short term capital gain, will greatly reduce both short-termism and corporate governance issues as share holders will be forced to assume the risk they were supposed to bear in exchange of supermacy of their interest.

John Wright , February 3, 2017 at 12:08 pm

HP was mentioned in the above text. I found it interesting to view the old HP Corporate Objectives as published in the HP employee magazine "Measure" in July 1974 See http://www.hp.com/hpinfo/abouthp/histnfacts/publications/measure/pdf/1974_07.pdf ,

pages 7, 8, 9, 10

Hewlett-Packard objectives

1. Profit – Objective: to achieve sufficient profit to finance our company growth and to provide the resources we need to achieve our other objectives

2. Customers- Objective: To provide products and services of the greatest possible value to our customers, thereby gaining and holding their respect and loyalty.

3. Fields of Interest- Objective: To enter new fields only when the ideas we have, together with our technical, manufacturing and marketing skills, assure that we can make a needed and profitable contribution to the field.

4. Growth – Objective: To let our growth be limited only by our profits and our ability to develop and produce technical products that satisfy real customer needs.

5. Our people: Objective: To help HP people share in the company's success, which they make possible; to provide job security based on their performance; to recognize their individual achievements; and to insure the personal satisfaction that comes from a sense of accomplishment in their work

6. Management- Objective: To foster initiative and creativity by allowing the individual great freedom of action in attaining well-defined objectives,

7. Citizenship – Objective: To honor our obligations to society by being an economic, intellectual and social asset to each nation and each community in which we operate.

*****
Note, Hewett and Packard, themselves, may have owned 40-50% of the company stock at this time, so they had great control of the company's direction at this time.

No corporate objective about shareholder value even though they were very large shareholders.

mle detroit , February 3, 2017 at 2:02 pm

Yes, but. I remember someone from UMichigan business school (Gary Hamel, I think) speaking to a group of top 2% Ford Motor Co. execs in the late 1980s. He asked, "Come on, guys how many of you were thinking about shareholder value in the shower this morning?" The room laughed, but one pudgy hand in the back went up. It belonged to Edsel Ford.

susan the other , February 3, 2017 at 2:41 pm

This takes us back, HP was so honest it almost sounds quaint. And 1974 was just before Reagan's supply side economics stuff in the aftermath of the awful stagflation that hit us after Vietnam.

According to Paul Craig Roberts, supply side was embraced because it was thought to prevent inflation (wage price spiral) and still provide sufficient jobs and products.

He goes on to say that supply-side/trickle-down was a reasonable idea but it was hijacked by Wall Street who took it to heart and then used it to justify offshoring jobs to enhance corporate profits, and eventually shareholder value. Because, as PCR puts it, Wall Street forced companies to get lean and competitive and if they didn't nobody invested in them: aka no shareholders if no timely shareholder value. So it was almost an extortion racket. This was accompanied by all the corporate raiders and the real prosperity of the country was quickly retarded and siphoned off. Great post, thanks Yves.

Expat , February 3, 2017 at 1:48 pm

I have a rather naive question which I should have asked long ago in my one and only finance class at college. Why does it matter if a share price drops all other things being equal? A company sells shares, effectively handing out "residual claims" against cold, hard cash. If the cash is invested in a business – and assuming the business is at least "break-even" plus the risk-free rate of return- other than investor panic and CEO's getting "refreshed" stock options, why would this matter?

John Wright , February 3, 2017 at 4:20 pm

Some reasons are frequently given for preferring a high stock price.

1. A low share price encourages others to acquire the company
2. A high price is good when stock is used as currency to buy other companies.
3. Executive compensation schemes are sometimes tied to stock price.

But if a company is not selling stock to fund current operations, then the stock price could go to zero with no operational effect. The employees who own stock would not be pleased. However, an apparent artificially low price could help with hiring new employees who may be granted low priced options.

Occasionally I see someone claiming a company is being killed by short sellers driving the stock price down. I don't see how this could damage the ongoing operations or cash flow EXCEPT if the company is selling stock to fund operations or is trying to make a truly worthwhile acquisition with their stock.

If a company is doing well and cash flow positive and short sellers drive the stock price down too low, the company should use their cash to buy their shares and squeeze the shorts.

In the case of Hewlett-Packard there was no official stock price set by the investment community for years, as the company waited a few years before doing an IPO.

The company was founded in 1939 and IPO'ed eighteen years later in 1957.

Imagine, operating for 18 years without Wall Street supervision.

Yves Smith Post author , February 4, 2017 at 4:55 am

Agreed with your point and John Wright's explanation. The idea that a stock price must be high is dogma that is never questioned. The big reason is for concern re a low stock price is it is seen as the market voting against management and an invitation for raiders to take the company over.

But otherwise, if a company can raise enough money to fund expansion through its own cash flow (which is the biggest source of investment fund) and debt (the next biggest source), there is no reason to issue more stock (save your point re employee/executive stock options) and hence no reason to care regarding the price.

skippy , February 3, 2017 at 3:22 pm

Equity is a form of HPM these days, for C-corps, which can be used as a tool of pleasure [c-suite bonuses et al] or a weapon of destruction [excuse for diminishing labour and the enviroment].

disheveled . the religion of free markets has become the dominate meme in society and those that benefit the most from it . wellie see history .

Chuck , February 3, 2017 at 4:28 pm

I'm struggling with the short termism argument. The cash flows from equity don't have a maturity. Bonds due. If a company sought to maximize bond holder value, they would minimize risk (and R&D) to make sure sufficient funds were available to pay the bond holders. Equity maximization should be longer term focused than the maximization of limited life securities.

Yves Smith Post author , February 4, 2017 at 4:58 am

Bonds are simply a promise to pay interest and principal on fixed dates. There is NO value to equity if you don't meet that promise.

Chauncey Gardiner , February 3, 2017 at 6:02 pm

While it has damaged corporate social responsibilities and banks' and corporations' long-term financial stability, actions taken pursuant to the Shareholder Value optimization model have served well many individuals on Wall Street, at private equity firms, CEOs of large publicly traded corporations, hedge funds, networked board members, their academic and professional servicers, and the political elite

Reflecting back on developments like the dotcom bubble of 1999-2000; the underlying causes of the financial collapse of 2007-09; massive debt-leveraged corporate stock buybacks; socially damaging private equity LBOs; the current volumes of opaque OTC derivatives at large financial institutions; repeated episodes of environmental damage caused by firms in extractive industries seeking short-term financial returns; and the license it provides to exert power over legislation and regulation by those who own and control these corporations in a Citizens United legal framework; etc., it is difficult to see much in the way of redeeming social value in this corporate governance model.

Josh Ster , February 3, 2017 at 6:04 pm

Topical article highlighting a way to subvert corporate governance: Corrupt US govt. supports secret oil company payments/bribes to corrupt foreign govts., whose autocratic leaders may be major shareholders in the oil company too.

http://www.telesurtv.net/english/news/US-Senate-Guts-Anti-Corruption-Law-for-Big-Oil-Companies-20170203-0011.html

Harold , February 4, 2017 at 11:27 am

Not by usury maybe, but wealth came to Renaissance Italy through use of interest , hitherto prohibited. And advances in book keeping. This wealth financed the great artists mentioned by Pound.

b1daly , February 4, 2017 at 2:17 am

Thanks for this post. I always found the notion of "maximizing shareholder value" to be very strange, and counter to common sense. The concept of "stakeholders" always made more sense. For a company to be managed with a focus on the wellbeing of workers, customers, and community, in addition to owners, struck me as being obviously the way it should work. (And sometimes does.)

The idea that parties who happen to own a share of the company should have their interests served above all is counter intuitive, as employees will almost always have a greater stake in the company than any individual owner, if shares are widely distributed.

If you think of an sole proprietor who ventures forth to do business who has made clear to all that his interests are paramount in any transaction, I do not envision customers flocking to such an individual.

The apparent lack of basic decency in corporate/management decisions that we see so often is just hard to reconcile with how most of us intuitively feel about how we see ourselves in the context of our community: most people have a significant level of self interest, but we are always aware of the need to consider the interests of others when we act. Even for something as basic as waiting in line for something.

Somehow people at the elite levels of, finance for example, feel quite OK about heavily prioritizing their own interest above all.

As someone not privy to this social realm, I am just mystified about the social dynamics that, if not encourage this, at least consider it a fine way to do business.

In a small example, from my personal experience, I am a professional user of audio software from Avid. Avid has been losing money year after year. Over the past five years the company as taken actions that have outraged the user base, far more than any other software company I know of. Their forum is over run with vitriolic ranting, from longtime customers. (In fairness, this has abated a bit, as the company has finally been making moves that are sensible, and that meet the needs of the users.)

There have been several rounds of significant layoffs, and the frontline workers bear the brunt of the customers wrath. Morale has been low.

In conversation, a previous employee told me he considered management to be white collar criminals, who were looting the company.

This type of product has a unique feature of having very strong platform lock-in effects. In few other product categories would you see such angry customers continue to buy the products.

Yet the board has been approving generous compensation increases for C level management, and for themselves for the past few years.

I'm fascinated from an everyday, social point of view, how the board and management make these decisions. Do they really think they are doing a good job? From the outside, it appears to me that they do it simply because they can, and have little concern for the long term well being of any of the other stakeholdes.

Does anyone here have insight about the social dynamics that enable this behavior?

broadsteve , February 4, 2017 at 5:21 am

This is something I'd welcome some insights on too as I find certain behaviours and attitudes impossible to understand.

Is it simple greed, stupidity, cynicism, groupthink, false consciousness, sociopathy, the 'attractions' of a certain lifestyle, daddy-didn't-love-them-enough or what that leads certain types to behave the ways they do and seek to justify it? If they acted with a degree of shame or embarrassment, or even full on chutzpah , I'd understand them more, but it's the ordinary types, those who outwardly seem to be of the same species as oneself and otherwise appear to be perfectly normal people that I just don't understand. I can believe almost anything of them, except for the possibility that they actually, genuinely, believe that they are on the right side of things.

I have similar brain fade when it comes to much of what politicians of the Right have to say on most things. So often, and try as I might, I just can't understand how supposedly sentient beings can honestly believe the drivel they come out with, still less have the brass-neck to stand up in public and display just how effing stupid and cynical they are. Feel much the same about all shades of politician but it's far worse on the Right.

blert , February 4, 2017 at 3:35 pm

At bottom, Control Fraud is the issue.

Word games// rationalizations are used to numb the public - while the crooks loot the collective wealth of the corporation in a systematic way.

It's the ability of the corporate suite to grant itself stock options - in almost unlimited amounts - that's causing the trouble. They are a looting.

MUCH would be solved by just taking such grants in equity out of the equation: make them illegal. Period.

Suddenly, the CEO's desire to juice the price would fade.

[Feb 01, 2017] Its time to bury supply-side economics

Jun 08, 2012 | marketwatch.com

It's been the prevailing economic philosophy of the Republican Party since Ronald Reagan was elected president in 1980.

Supply-side economics held that reducing marginal tax rates would spur economic growth, create jobs and even generate tax revenue for the government.

Reuters A statue of former U.S. President Ronald Reagan near the American Embassy in Budapest, Hungary.

And it makes sense in theory: If people keep more of what they make, they would logically work harder, spend more and hire more people, right?

When you listen to supply-siders like Arthur Laffer, Stephen Moore and Larry Kudlow, they always extol the Kennedy-Johnson tax cut of the 1960s and especially President Reagan's tax cuts of the 1980s.

But they rarely mention the 1990s or the 2000s.

Maybe that's because those two decades were almost a perfect controlled experiment that shattered their pet theories: President Bill Clinton raised marginal tax rates and the economy boomed and jobs were plentiful. President George W. Bush cut them and we got only modest job growth.

In fact, there's more and more evidence suggesting that lowering marginal tax rates doesn't create many jobs at all.

Read Howard Gold's earlier take on the failed Bush tax cuts on MoneyShow.com.

For years I've tried to find any economist - left, right, or center - who could estimate the number of jobs created by the Bush tax cuts, but without success.

So, I'm taking a crack at it myself.

Tax hikes vs. tax cuts

Using data from the Bureau of Labor Statistics CES survey, I compared the number of jobs created in the years following the balanced budget bill signed by President Clinton in August 1993 and after the second round of Bush tax cuts, which went into effect in May 2003. (Supply-siders think that was the real deal, not the earlier 2001 cuts.)

Nearly 20 million private sector jobs were created from the August 1993 tax increase until the end of the Clinton administration in December 2000. The number following the Bush tax cuts, in a shorter time period (May 2003 to December 2007, when the Great Recession began), was above seven million.

But when I actually counted the jobs created in various industries and eliminated those that clearly had nothing to do with lower marginal tax rates, I was left with a much smaller number: two million at most, a dreadful performance by any measurement.

This isn't an academic exercise. A 20% cut in marginal tax rates, including reducing the top tax rate to 28% from 35%, is a key plank of Republican presidential candidate Mitt Romney's economic growth plan (along with cuts in business taxes and reduced regulation, which I won't cover in this column).

Read Howard Gold's analysis of what Mitt Romney really did at Bain Capital in the Independent Agenda.

One of former Gov. Romney's top economic advisers, Glenn Hubbard, the dean of the Columbia Business School, wasn't available for an interview, nor could the Romney campaign provide another adviser by deadline. Top Bush economist Lawrence Lindsey also wasn't available.

Yet Hubbard, along with former Sen. Phil Gramm (Mr. Banking Deregulation of the late 1990s), penned an op-ed Thursday in the Wall Street Journal comparing the current recession with "the superior job creation and income growth" of - wait for it - the 1980s.

Again, no mention of the Clinton 1990s or the Bush tax cuts, of which Hubbard was a prime architect as chairman of the president's Council of Economic Advisers.

Isn't it curious how so many smart people have such complete amnesia about the last 20 years?

The Clinton delivery

Yet there's a growing consensus that cuts in marginal income-tax rates don't deliver the goods:

Robert Moffitt and Mark Wilhelm found "no evidence" that high-income U.S. taxpayers increased their work hours in response to the 1986 Reagan tax cuts. This undercuts a central premise of supply-side economics, that cutting taxes gives people incentives to work more.

A 2010 report by the nonpartisan Congressional Budget Office found that cutting income taxes produced the least bang for the buck among 11 proposed policy options aimed at boosting employment. David and Christina Romer, economists at the University of California-Berkeley (she was President Obama's CEA chairman), found that changes in marginal tax rates had little effect on U.S. economic growth in the 1920s and 1930s, either.

But the most striking evidence is the glaring contrast between the 1990s and 2000s.

A 2008 study by the liberal Center for American Progress and Economic Policy Institute showed that private investment, GDP, wages, household income, employment and federal revenue all grew faster - sometimes much faster - during the high-tax Clinton years than they did during the low-tax Reagan and Bush eras.

In August 1993, President Clinton signed a law that boosted the top personal income tax rate dramatically, to 39.6% from 31%.

But rather than die out, the nascent economic recovery picked up speed and never looked back. By the time this giant boom ended, the U.S. economy had added nearly 20 million private-sector jobs in every sector from manufacturing to retail trade to finance to information technology.

Marginalizing marginal tax rates

Of course, higher taxes didn't cause this boom. That's the whole point: other economic forces were so powerful that marginal tax rates didn't matter.

And they didn't matter a decade later when President Bush signed the second of two tax cuts in May 2003, accelerating the 2001 act's provisions, reducing the top rate to 35%, and cutting capital gains and dividend tax rates.

But something else was brewing: In July 2003, the Federal Reserve cut the federal funds rate to 1% and kept it there for a year.

By doing so, the Fed pumped hot air into a speculative real estate bubble, with far-flung effects. As Martin N. Baily, Susan Lund and Charles Atkins wrote in a 2010 paper for the McKinsey Global Institute:

"From 2003 through the third quarter of 2008, U.S. households extracted $2.3 trillion of equity from their homes in the form of home-equity loans and cash-out refinancings. Nearly 40% of this - $897 billion, an amount bigger than the 2008 U.S. government stimulus package - went directly to finance home improvement or personal consumption." (Italics added.)

The two Bush tax cuts caused an estimated $1 trillion loss of federal tax revenues - and each year the revenue shortfall is an additional $100 billion. It's the gift that keeps on giving.

So, here's how I'm calculating the jobs created by these cuts.

First, to the 7.33 million net new private-sector jobs, I'm adding back a million jobs lost in manufacturing and technology, for about 8.3 million new jobs created.

Job growth under Bill Clinton and George W. Bush
After Clinton tax hike Aug. 1993-Dec. 2000 After Bush tax cut May 2003-Dec. 2007
Total private employment (thousands) 19,586 7,333
Manufacturing 437 (812)
Information 1,031 (169)
Retail Trade 2,321.4 674
Wholesale Trade 812.9 422.1
Leisure & Hospitality 2,201 1,458
Transportation 887.9 372.1
Finance (incl. real estate finance) 1,008 236
Professional & Business Services 5,300 2,131
Construction 1,986 784
Residential Construction 214.4 295.3
Health & Education Services 2,925 1,971
(Selected categories, may not add up)
Source: Bureau of Labor Statistics, CES

Then I'd subtract the two million new jobs in health and education, which grew steadily in both the Clinton and Bush years with no impact from tax policy.

I'd also remove the 400,000 jobs added in residential real estate and home building, obviously a result of lower interest rates and the housing bubble.

Then, I'd subtract two million new jobs in professional and business services, also the result of a structural move to a service economy. Five million of those jobs were added under President Clinton.

That leaves us with four million jobs added in cyclical industries like retail and wholesale trade, leisure and hospitality, transportation and securities, as well as nonresidential construction.

My best guess is that half of those jobs were the result of the housing bubble, cash-out refinancing and rock-bottom interest rates while the rest may have come from the additional animal spirits and cash in consumers' pockets as a result of the Bush tax cuts.

My unscientific estimate, then, is that the Bush tax cuts were responsible for maybe two million jobs at most. Pathetic is an understatement.

I welcome your input and would be glad to revise this number in a future column if you provide a better estimate.

Supply-side economics is not the only economic philosophy that has come up short in the Great Recession. As I wrote here last year, Keynesian stimulus and Friedmanesque monetary policy both haven't done the job.

Read Howard Gold's take on Keynes and Friedman, the economics gods that failed, in MoneyShow.com.

Surely supply-side economics worked better when the top tax rate was slashed from 70% to 28% under President Reagan. It might be more justified at the state level, where crippling tax burdens have made some states uncompetitive. And raising taxes too high would likely hurt growth, so it may work better in reverse.

But clearly this is a theory with diminishing returns that has outlived its usefulness.

Because after the last two decades, believing that cuts in marginal personal tax rates will create jobs and revive our economy is like still believing the sun orbits the earth.

Howard R. Gold is a columnist at MarketWatch and editor at large for MoneyShow.com. Follow him on Twitter @howardrgold and read his commentary on politics and economics at www.independentagenda.com.

[Feb 01, 2017] Selling the Supply-Side Myth

Notable quotes:
"... "I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked." ..."
"... Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future. ..."
"... Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has been the absence of "demand-side" consumers, not the availability of money to build more productive capacity. ..."
"... And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories. ..."
"... Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup. ..."
"... After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit. ..."
"... The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote "states' rights" the near opposite of what the framers actually were doing. ..."
Jan 27, 2012 | consortiumnews.com

Exclusive: Any rational assessment of America's economic troubles would identify Ronald Reagan's reckless "supply-side" economics as a chief culprit, but that hasn't stopped Republican presidential hopefuls, led by Newt Gingrich, from selling this discredited theory to a gullible GOP base, reports Robert Parry.

Despite Newt Gingrich's claim that "supply-side" economic theories have "worked," the truth is that America's three-decade experiment with low tax rates on the rich, lax regulation of corporations and "free trade" has been a catastrophic failure, creating massive federal debt, devastating the middle class and off-shoring millions of American jobs.

It has "worked" almost exclusively for the very rich, yet the former House speaker and the three other Republican presidential hopefuls are urging the country to double-down on this losing gamble, often to the cheers of their audiences - like one Florida woman who said she had lost her job and medical insurance but still applauded the idea of more "free-market" solutions.

Former House Speaker Newt Gingrich posing with his third wife, Callista

Gingrich even boasts of his role in pioneering these theories of massive tax cuts favoring the rich, combined with sharp reductions in the role of government. That approach, once famously mocked by George H.W. Bush as "voodoo economics," was supposed to spur businesses to expand production (the "supply side"), thus creating jobs and boosting revenues from all the commercial activity.

"I worked with Ronald Reagan to develop supply-side economics in the late '70s, along with Jack Kemp and Art Laffer and Jude Wanniski and others," Gingrich declared at a recent town hall event. "We ended up passing it into law in '81. At the time it was very bold. People called it 'voodoo economics.' It had one great virtue: it worked."

But that is not what the historical record really shows.

In 1980, I was working as an Associated Press correspondent covering budget and economic issues on Capitol Hill and at the time, the "supply-siders" had two key arguments in their favor: first, the economy had stagnated in the 1970s largely due to oil price shocks, inflation and an aging industrial base.

Their second key advantage was that nobody could say for sure what the results of the "supply-side" experiment would be. There was little empirical data to assess how radical tax cuts would play out in the modern economy. One could make common-sense judgments, as George H.W. Bush had done with his "voodoo" remark, but you couldn't see the future.

No More Mystery

Now, however, with three decades of experience with the experiment, the fallacies of "supply-side" economics are no longer a mystery. For instance, a major obstacle to today's economic recovery has been the absence of "demand-side" consumers, not the availability of money to build more productive capacity.

And the reason that there are fewer consumers is that the Great American Middle Class, which the federal government helped build and nourish from the New Deal through the GI Bill to investments in infrastructure and technology in the Sixties and Seventies, has been savaged over the past three decades.

Though many Americans were able to cover up for their declining economic prospects with excessive borrowing for a while, the Wall Street crash of 2008 exposed the hollowing out of the middle class. So today, businesses are sitting on vast sums of cash some estimates put the amount at about $2 trillion.

And the reasons for this dilemma are now well-known: first, when companies have expanded in recent years, the modern factories have relied on robotics with few humans required; second, the companies put many manufacturing sites offshore so they can exploit cheap labor; and third, the shrinking middle class has meant fewer customers, leaving corporations little motivation to build more factories.

For Americans, this has represented a downward spiral with no end in sight. American workers, whether blue- or white-collar, know that computers and other technological advancements have made many of their old jobs obsolete. And modern communications have allowed even expert service jobs, like computer tech advice, to go to places like India.

While painful to millions of Americans who find their talents treated as surplus, these developments do not by themselves have to be negative. After all, humans have dreamed for centuries about technology freeing them from the grind of tedious work and freeing up society to invest in a higher quality of life, for today's citizens and for posterity.

The problem is that the only practical way for a democratic society to achieve that goal is to have a vibrant government using the tax structure to divert a significant amount of the super-profits from the rich into the public coffers for investments in everything from infrastructure to education to arts and sciences, including research and development for future generations, even possibly Gingrich's "big idea" of a colony on the moon.

In fact, that kind of virtuous cycle was the experience of the United States from the 1930s through the 1970s, with the federal government taxing the top tranches of wealth at up to 90 percent and using those funds to build major electrification projects like the Hoover Dam and the Tennessee Valley Authority, to educate World War II veterans through the GI Bill, to connect the nation through the Interstate Highway system, to launch the Space Program, and to create today's Internet.

Out of those efforts emerged robust economic growth as private corporations took advantage of the nation's modern infrastructure and the technological advancements. Millions of good-paying jobs were created for the world's best-trained work force, giving rise to the Great American Middle Class. The obvious answer was to keep this up, with the government investing in new productive areas, like renewable energy.

Demonizing 'Guv-mint'

Instead, facing economic headwinds in the 1970s, caused in part by rising energy costs, Americans grew anxious about their futures, making them ripe for a new right-wing propaganda campaign demonizing "guv-mint" and telling white men, in particular, that the "free market" was their friend.

Blessed with a talented pitch man named Ronald Reagan, "supply-side" became the new product to sell. After taking office, Reagan pressed for a sharp reduction in the marginal tax rates, slashing the top rates for the wealthy from around 70 percent to 28 percent. Along with the tax cuts, Reagan also initiated an aggressive military buildup.

The results were devastating to the U.S. fiscal position. The federal debt soared, quadrupling during the 12 years of Reagan and Bush Sr. As a percentage of the gross domestic product, federal debt was actually declining in the 1970s, dropping to 26 percent of GDP, before exploding under Reagan, rising to 41 percent by the end of the 1980s. The shared wealth of the country also diverged, with the rich claiming a bigger and bigger piece of the national economic pie.

The nation's debt crisis only began to subside after tax increases were enacted under President George H.W. Bush and President Bill Clinton, with Clinton's tax hike pushing the top marginal rate back up to 39.6 percent. At the time, Gingrich warned that the Clinton tax hike would lead to an economic catastrophe.

The actual result was a booming economy, spurred strongly by the federal government's new "information super-highway," the Internet. The Clinton years also saw low unemployment and a balanced budget by the late 1990s. The debt-to-GDP measure declined from about 43 percent to 33 percent and was on course toward zero within a decade.

Ironically Gingrich also claims credit for that because as House speaker he worked with Clinton on some cost-cutting measures, but Clinton credits the 1993 tax increase, which passed without a single Republican vote, as the key factor in the budget turnaround.

After George W. Bush claimed the White House in 2001, "supply-side" dogma was back in vogue. Bush pushed through more tax cuts mostly for the rich, reducing the top marginal rate to 35 percent and creating an even bigger tax break for investors, cutting the capital gains rate to 15 percent. Combined with Bush's two wars and other policies, the surplus soon disappeared and was replaced by another yawning deficit.

Even as most Americans struggled to hold a job and pay their bills, America's super-rich lived a life of unparalleled luxury. With this concentration of money also had come a concentration of power, as right-wing operatives were hired to build a sophisticated media apparatus and think tanks to push often with populist rhetoric the policies that were dividing the country along the lines of a pampered one percent and a pressured 99 percent.

Many Americans, especially white men, heard their personal grievances echoed in the angry voices of Rush Limbaugh, Sean Hannity, Michael Savage and Glenn Beck all well-compensated propagandists for "the one percent."

Lesson Unlearned

Now, looking back over the economic and fiscal history of the past three decades, you might think that few Americans would be fooled again by this sucker bet on "supply-side." But the Tea Partiers and many rank-and-file Republicans seem ready to put what's left of their money back down on the gambling table.

All four remaining Republican hopefuls Mitt Romney, Rick Santorum, Ron Paul and Gingrich have proposed lower tax rates especially on the rich with the same enduring but fanciful faith in "supply-side" economics.

Gingrich has gone so far as to advocate eliminating the capital gains tax entirely. It's already down to 15 percent, meaning that many super-rich, from financier Warren Buffett to Mitt Romney, can live off their investments and pay a lower tax rate than what many middle-class Americans pay on their wages and salaries. In a recent Florida debate, Romney noted he would pay virtually no federal income tax under Gingrich's plan.

The Republicans seem to be counting on the parallel propaganda campaign of demonizing "guv-mint." They're pinning their hopes on an ill-informed electorate (especially white men) siding with "the one percent" over their own working- and middle-class interests.

The GOP hopes also may hinge significantly on how determined some whites are to get the country's first black president out of the White House. Historically, demagogic U.S. politicians have had great success in exploiting racial resentments, although these days often with coded language like Gingrich calling Barack Obama "the food-stamp president."

The Right also has worked diligently to create false narratives to convince many Americans that their hatred of a strong federal government links them to the Founders. Many Tea Partiers have bought into the historical lie that the Founders wrote the Constitution to limit the power of the federal government and to promote "states' rights" the near opposite of what the framers actually were doing.

Led by Virginians Gen. George Washington and James Madison, the Constitutional Convention in 1787 threw out the Articles of Confederation, which had made the states supreme and the federal government a supplicant.

The Constitution reversed that situation, eliminating state "independence" and bestowing national sovereignty onto the federal Republic representing "we the people of the United States." Contrary to the Tea Party's false narrative, the Constitution represented the single biggest assertion of federal power in U.S. history.

When the Tea Partiers dress up in Revolutionary War costumes, they apparently don't know that their notion of a weak central government and state "sovereignty" was anathema to the key framers of the Constitution, especially to Washington who had watched his soldiers suffer under the ineffectual Articles of Confederation.

And, when the Tea Partiers wave their "Don't Tread on Me" flags of a coiled snake, they don't seem to know that the warning was directed at the British Empire and that the banner aimed at fellow Americans was Benjamin Franklin's image of a snake severed into various pieces representing the colonies/states with the admonishment "Join, or Die."

Nevertheless, false narratives and false arguments can be as effective as real ones to a thoroughly misinformed population. Thus, many middle- and working-class Americans still cheer when Newt Gingrich references Ronald Reagan and his "supply-side" economics.

But the failure of Reagan's economic strategy should be obvious to anyone who is not fully deluded by right-wing propaganda. Not only has the national debt skyrocketed over the past three decades, but whatever economic benefits that have been produced have gone overwhelmingly to the wealthy while the nation as a whole has suffered.

[For more on related topics, see Robert Parry's Lost History, Secrecy & Privilege and Neck Deep , now available in a three-book set for the discount price of only $29. For details, click here .]

Robert Parry broke many of the Iran-Contra stories in the 1980s for the Associated Press and Newsweek. His latest book, Neck Deep: The Disastrous Presidency of George W. Bush, was written with two of his sons, Sam and Nat, and can be ordered at neckdeepbook.com . His two previous books, Secrecy & Privilege: The Rise of the Bush Dynasty from Watergate to Iraq and Lost History: Contras, Cocaine, the Press & 'Project Truth' are also available there.

[Feb 01, 2017] George H. W. Bush and Voodoo Economics Stan Collenders Capital Gains and Games

Notable quotes:
"... He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy. And he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'" ..."
"... Let me just emphasize that the words "voodoo economic policy" are Bush's words. The source is a reputable one that is easily available even at second-tier universities, so I think this counts as pretty strong evidence to anyone with a reasonably open mind. I think even someone with a Ph.D. in history from Harvard might concede that it is at least a scrap of evidence. ..."
Dec 21, 2010 | capitalgainsandgames.com

Sam Houston State University historian, writing on the Forbes web site, has a very odd blog post this morning. He criticizes MIT economist Simon Johnson for attributing the term "voodoo economics" to George H.W. Bush. Domitrovic calls it a "myth" that the elder Bush ever uttered those words. "You'd think there'd be a scrap of evidence dating from 1980 in support of this claim. In fact there is none," he says.

Perhaps down in Texas they don't have access to the Los Angeles Times. If one goes to the April 14, 1980 issue and turns to page 20, one will find an articled by Times staff reporter Robert Shogan, entitled, "Bush Ends His Waiting Game, Attacks Reagan." Following is the 4th paragraph from that news report:

"He [Bush] signaled the shift [in strategy] in a speech here [in Pittsburgh] last week when he charged that Reagan had made 'a list of phony promises' on defense, energy and economic policy. And he labeled Reagan's tax cut proposal 'voodoo economic policy' and 'economic madness.'"

I've attached a PDF file of the Times article to this post for the benefit of the skeptical.

Let me just emphasize that the words "voodoo economic policy" are Bush's words. The source is a reputable one that is easily available even at second-tier universities, so I think this counts as pretty strong evidence to anyone with a reasonably open mind. I think even someone with a Ph.D. in history from Harvard might concede that it is at least a scrap of evidence.

I suppose that is one wanted to be pedantic, one could continue to argue that Bush never said the precise words "voodoo economics," that somehow or other "voodoo economic policy" is something completely different. I will allow others to debate the point.

[Feb 01, 2017] General equilibrium thinking is the enemy of understanding

Notable quotes:
"... General equilibrium thinking is the enemy of understanding - it requires as the interview shows (and he seems unaware of) a cascade of absurd assumptions. He also seems unaware that a series of unreal assumptions can't cancel out - their effects multiply. ..."
"... One of my finds in economic efficiency is to not read articles by George Farmer. Unlike Greg Mankiw, whom I never read, it is not a hard fast prohibitive rule. I sometimes allow myself to get sucked into reading George Farmer by an enticing title but such actions always come with a pang of guilt. ..."
Feb 01, 2017 | economistsview.typepad.com
reason : January 31, 2017 at 01:45 AM , 2017 at 01:45 AM
Roger Farmer showing that he is part of the problem, not part of the solution again:

http://www.rogerfarmer.com/rogerfarmerblog/2017/1/30/post-keynesian-dynamic-stochastic-general-equilibrium-theory

He shouldn't humor such complete nonsense with so much respect.

General equilibrium thinking is the enemy of understanding - it requires as the interview shows (and he seems unaware of) a cascade of absurd assumptions. He also seems unaware that a series of unreal assumptions can't cancel out - their effects multiply.

RC AKA Darryl, Ron -> reason ... , January 31, 2017 at 03:39 AM
One of my finds in economic efficiency is to not read articles by George Farmer. Unlike Greg Mankiw, whom I never read, it is not a hard fast prohibitive rule. I sometimes allow myself to get sucked into reading George Farmer by an enticing title but such actions always come with a pang of guilt.

One can argue that reading Mankiw or Farmer is useful just to see what others are saying, what other people read, and preventing oneself from isolation in the bubble chamber, but I don't buy that argument. I get enough open mindedness just from Dani Rodrik, Dean Baker, Jared Bernstein, and Menzie Chinn. I used to read Krugman, but that is mostly in the past now with exceptions a little less rare than Farmer. I also skip reading most of the comments once the day gets going.

I am planting my last 25 daffodil bulbs today. It's a bit late. I already have over a dozen coming up from earlier planting. I get up every morning to fix my wife coffee and the just wait around doing this until the sun rises. Practicing good economics is worth more to me now that reading bad economics.

RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 31, 2017 at 03:48 AM
Today, I just read Tim Duy. He had nothing stupid to say. I like that.
Jerry Brown -> RC AKA Darryl, Ron... , January 31, 2017 at 09:25 AM
Ron, what about these consecutive sentences from Duy- "That said, the central bank tends to react fairly nimbly to changing economic conditions. It has repeatedly delayed action in response to deteriorating economic or financial conditions."

Which one is it? Act nimble, or fail to act? I know what Duy means but I find the sentences contradictory in a humorous way.

Peter K. -> Jerry Brown... , January 31, 2017 at 10:07 AM
I don't think it's contradictory.

The Fed was signaling they were going to "normalize" and raise rates but held off because of unforeseen, changing economic conditions.

RC AKA Darryl, Ron -> Jerry Brown... , January 31, 2017 at 10:21 AM
What Peter K said, at least in the terms that Duy would consider realistic. One can also posit that the Fed failed to do enough or react soon enough in 2006-2007 or a host of other criticisms, but all those criticisms would be out of bounds for central bank behavioral expectations in general and Fed-watcher Tim Duy in specific. Market monetarists are less generous in that respect.
Jerry Brown -> RC AKA Darryl, Ron... , January 31, 2017 at 11:18 AM
Ron (and Peter), I know. I just found the sentences one after the other to be somewhat humorous. Apparently, I have an odd sense of humor :).
Jerry Brown -> Jerry Brown... , January 31, 2017 at 11:56 AM
Economists are not noted for their sense of humor and I have a theory that exposure to economists impairs the sense of humor in normal people. I am afraid mine has been badly damaged at this point. Anyone here a lawyer? Maybe we can do a class action suit?
Jerry Brown -> Jerry Brown... , January 31, 2017 at 12:04 PM
Anne can no doubt provide statistics favorable to our case on this. :)
Chris Lowery -> Jerry Brown... , January 31, 2017 at 03:11 PM
Jerry, you and Ron just made my day! My wife and are in lake Placid celebrating out 47th wedding anniversary, and during our pre-dinner cocktail hour were depressing one another with excerpts from today's news, and then I came across your Ron's comments. We nearly fell of our chairs laughing! Thanks guys, we really needed this!
Jerry Brown -> Chris Lowery ... , January 31, 2017 at 04:58 PM
Darn it, you wont be able to join as a plaintiff if you keep that up Chris. Falling out of your chair laughing does not demonstrate impaired humor- you will ruin my case! Perhaps you can maintain that you were being very sarcastic? Sarcasm is the last bit of humor to be affected by economism in my theory...

Congrats to you and the wife on your anniversary!

Chris Lowery -> Jerry Brown... , January 31, 2017 at 05:27 PM
Thanks Jerry! I can modify my story to fit whatever narrative thats helpful. It comes from decades in finance, for which Im still doing penance...

Chris Lowery

JF -> RC AKA Darryl, Ron... , January 31, 2017 at 11:18 AM
He neglected to bring illumination to his mention of cash replacing the maturing bond, and where this cash comes from and what happens with the cash in light if the remittance requirements (where excess cash is swept into the Treasury's accounts).

They cannot destroy the cash. The redeeming cash will come, in the case of a Treasury bond, from Treasury who must borrow this amount to pay the Fed. If they are permitted to hokd the cash on their books, and not remit, we still have borrowing by the public (and this sweeps excess off of the books of buyers of this new debt) fir it to be placed somewhere if not remitted.

As I have said for quite some time it makes basic common sense to have a mature bond redeemed via an accounting offset with Treasury as this avoids the need to borrow the money just to then have it remitted back to Treasury. And why would the Fed and Treasury not do this??? I would like someone to explain.

For example, why is the Fed doing this now when it could have been redeeming by offset during the Obama administration (lowering the amount of public borrowing but financing the same nominal spending).

This piece by Duy misses the absolutely most critical part of the redemption story.

Peter K. -> RC AKA Darryl, Ron... , January 31, 2017 at 05:34 AM
"One can argue that reading Mankiw or Farmer is useful just to see what others are saying"

You need to read more, Farmer is miles away from the establishment Mankiw. He's more "Post-Keynesian" than "New Keynesian." More Baker than Krugman.

RC AKA Darryl, Ron -> Peter K.... , January 31, 2017 at 06:09 AM
OK for you, but still not for me.
Peter K. -> RC AKA Darryl, Ron... , January 31, 2017 at 06:24 AM
Yes you have such high standards...
RC AKA Darryl, Ron -> Peter K.... , January 31, 2017 at 07:18 AM
Not what I meant. I have limited time and limited interest. Economics is secondary to politics as it stands. I don't have sufficient means to become more politically involved yet though. So, this is something rather than just nothing, but I cut my losses short. You are younger and apparently more involved in this aspect of thought about the political economy. I am older and more intent on positive action in my remaining time. There is not much new for me to think about that will matter at all to me.
Peter K. -> reason ... , January 31, 2017 at 05:31 AM
I don't understand the hostility towards Farmer. He seems like an interesting heterodox thinker to me who questions mainstream equilibrium thinking.
Jerry Brown -> Peter K.... , January 31, 2017 at 09:43 AM
Well the other day Farmer said he rejects the Keynesian concept of Aggregate Demand and the consumption function based on income. And provides no evidence except a recommendation to go and buy his book to find out. That about does it for me.
Peter K. -> Jerry Brown... , January 31, 2017 at 10:05 AM
Fair enough.

[Feb 01, 2017] Regression analysis and heteroskedasticity

Feb 01, 2017 | economistsview.typepad.com
Chris G : , January 31, 2017 at 03:37 AM
Good post by Bellamare on heteroskedasticity. Heteroskedasticity and Its Content - Marc Bellemare Anyone doing regression analysis needs to keep it in mind.
RC AKA Darryl, Ron -> Chris G ... , January 31, 2017 at 04:27 AM
No, no, no, no, I don't do it no more. Sometimes in the mornings waiting for the sun to rise then I actually miss my work in SAS language programming. I was always a bigger fan of PROC FASTCLUS than PROC REG, but definitely PROC FASTCLUS with PROC GPLOT presentation color coding the cluster group number assignments in an overlay scatter plot. That is because I could estimate the expected degree of change in activity from the expected change in natural business units or hardware or software making historical data of use only for establishing a baseline, hopefully a clean baseline, rather than for estimating the degree of change itself. I used PROC REG to generate 95% confidence intervals around the linear regression means of predicted data points.
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 31, 2017 at 04:40 AM
In my cases the heteroskedasticity was merely considered in the application of outliers from the central cluster(s). Outliers that constituted some type of risk had to be considered discretely, one by one, but only those that with predicted change would overshoot capacity limits. Undershooting was just an isolated outage or collapse in demand and certainly not a capacity risk.
Chris G -> RC AKA Darryl, Ron... , January 31, 2017 at 04:56 AM
Outlier detection is a whole other kettle of fish. Once upon a time I spent most of my time finding outliers in multivariate data and trying to figure out more effective methods for finding them. (Turns out the world isn't multivariate-normal distributed. Who knew?)
RC AKA Darryl, Ron -> Chris G ... , January 31, 2017 at 05:40 AM
For system performance data, which was my domain, an outlier could be an effect on the response variable at the extreme range of the independent variable, or just an unordinary event. The heteroskedasticity type outliers were things like increased CPU overhead at high utilizations, a feature of the MVS IBM mainframe operating system, or elongated service times for Fiber channels and Ethernet or elongated response times for a device having excessive utilization and queueing delays. Outliers could also be bugs or system recovery events as well as work scheduled outside its normal window of operation including systems programmers screwing around in production logical partitions. The heteroskedasticity type outliers were actually my job to prevent and I did a good job of that. My occasional undoing was almost always because of application changes that exceeded the developers expected resource requirements. A couple of times my system programmer coworker that controlled MVS performance misinterpreted a software constraint until it manifested itself in extreme ways for long enough until I was consulted for analysis.

So what I am getting at is that all exceptions to normal expectations can be considered as outliers, but then those that demonstrate only a difference in the reaction function of the response variable accorded by the range of the independent variable can also be considered heteroskedasticity.

In any case, I am about at the end of my analysis of outliers on my daffodil bulb planting now. I sure hope that I don't encounter any heteroskedasticity with the chain saw later this week.

RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 31, 2017 at 06:29 AM
The authors are using a study of heteroskedasticity to inform their forecasting ability. In such a case outliers would be very different from heteroskedasticity in the response variable over certain ranges of the independent variable. In other applications, such as large computer system performance, heteroskedasticity exists as something to be avoided because elongation of response variables follow a hyperbolic curve and we don't want to be kneed by the curve. Classic outliers are to ignored for forecasting even if not solved by protective measures but heteroskedasticity occurs as a response to demand in excess to expected and provisioned. Either resources per business unit of work must be reduced or more resources must be provisioned. In the former case then the historical baseline must be readjusted and in the later capacity limits must be increased.
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 31, 2017 at 06:32 AM
I would think that there would be an analog to this in money supply and interest rates, but that is outside my domain.
Chris G -> RC AKA Darryl, Ron... , January 31, 2017 at 04:47 AM
:-)

[Jan 22, 2017] Neoliberalism may have been in part so successful because it appeals to (and tries to explain many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement) by merit

Neoliberals seem very concerned not to have a label. I posit this is because the founders of the malign ideology didn't want their victims be able to reliably identify them. The deliberately and misleadingly promote the view of the economy as an isolated scientific subject, like the interior of a test tube, and treat politics and policy as a sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one side. Neoclassic economists consistently and deliberately blinds itself to politics and the dynamics of power, despite the deep entanglement of politics with everything economic. "I look at politics and the economy and see one thing, not two things, and I am astonished at the extent to which economists focus on the part they like to play with intellectually, while deliberately looking away from what is probably the more important part. "
Notable quotes:
"... when left-wing people say that economists are defenders and supporters of the current order of things, they have a point: ignoring power relationships and their impact on the world supports the continued existence of those relationships. ..."
"... Neoliberalism may have been in part so successful because it appeals to (and tries to explain many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement) by merit. ..."
"... Most people, esp. when young (still largely sheltered) or (still) successful, probably have an exaggerated assessment of their own merit (absolute and relative) - often actively instilled and encouraged by an "enabling" environment. ..."
"... It promises a lake Wobegon of sorts where everybody (even though not all!) are above average, and it is finally recognized. ..."
Jan 22, 2017 | economistsview.typepad.com

William Meyer, Saturday, January 21, 2017 at 12:49 PM

What Wren-Lewis misses, I think, is that something I've noticed in my roughly a decade of reading economic blogs on the Internet. Economists have blinkers on. They want to view the economy as an isolated scientific subject, like the interior of a test tube, and treat politics and policy as a sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one side. It seems fairly clear to me that the two elements--politics and the economy--are obviously continuously co-mingled, and have all sorts of feedback loops running between them.

The discipline really consistently and deliberately blinds itself to politics and the dynamics of power, despite the deep entanglement of politics with everything economic. Wren-Lewis admits that macroeconomists "missed" the impacts of very high financial sector leverage, but finds that now that economists have noticed it, and suggested remedies, that the power of bank lobby prevents those remedies from being enacted. But shouldn't the political power of the finance lobby been a part of economic analysis of the world along with the dangers of the financial sector's use of extreme leverage? Does he think the two phenomena are unrelated?

Shouldn't economics pay more attention to the ongoing attempts of various groups to orient government policy in their favor, just like they pay attention to the trade deficit and GDP numbers?

I look at politics and the economy and see one thing, not two things, and I am astonished at the extent to which economists focus on the part they like to play with intellectually, while deliberately looking away from what is probably the more important part. Its like economists obsessively focus on the part that can be studied via numbers (money) and don't' want to think about the part that is harder to look quantify (political policy). And there is a political issue there, which Mr. Wren-Lewis, keeps ignoring in his defense of "mainstream economics."

The neoclassical economics tendency of not looking at power relationships makes power imbalances and their great influence on economics seem like "givens" or "natural endowments", which is clearly an intellectual sin of omission.

Many people, even within the halls of mainstream economics, note economists are "uncomfortable" with distributional issues.

Whether they like the implication or not, economists need to acknowledge that this discomfort has a profoundly conservative intellectual bias, in the sense that it make the status quo arrangement of society seem "natural" and "normal", when it is obviously humanly constructed and not in any sense "natural." So when left-wing people say that economists are defenders and supporters of the current order of things, they have a point: ignoring power relationships and their impact on the world supports the continued existence of those relationships.

Mr. Wren-Lewis seems like a nice guy, but he needs to take that simple home truth in. I'm not sure why he seems to struggle so with acknowledging it.

KPl, January 21, 2017 at 11:37 PM

"...but failing to ignore their successes,..."

Oh you mean the success of being able to raise asset prices without the growth in wages, make education costly and unaffordable without student loans, not chargeable under bankruptcy, spruce up employment figures by not counting the people who have stopped look for jobs because they cannot find one, make people debt serfs, make savers miserable by keeping interest rates at zero and making them take risks that they may not want to take though it is picking pennies in front of a steamroller, keeping wages stagnant for decades and thus impoverishing people.

The list of successes is endless and you should be glad we are NOT talking about them. Because if we do, the clan called economists might well be torched.

cm -> cm... , January 22, 2017 at 08:40 AM
Neoliberalism may have been in part so successful because it appeals to (and tries to explain many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement) by merit.

Most people, esp. when young (still largely sheltered) or (still) successful, probably have an exaggerated assessment of their own merit (absolute and relative) - often actively instilled and encouraged by an "enabling" environment.

A large part is probably the idea that "markets" are "objective" or at least "impartial" in bringing out and rewarding merit - also technology and "data driven" technocratic management, which are attributed "objectivity". All in the explicitly stated or implied service of impartially recognizing merit and its lack.

It promises a lake Wobegon of sorts where everybody (even though not all!) are above average, and it is finally recognized.

libezkova : , January 22, 2017 at 07:11 PM
"Neoliberalism may have been in part so successful because it appeals to (and tries to explain many things in terms of) a narrative of competition (and assignment of reward and acknowedlgement) by merit."

A very important observation. Thank you !

[Jan 22, 2017] why many non-experts believe academic economists' pretensions to science and accuracy is BS.

Notable quotes:
"... Starting with three classic papers in the same 1982 issue of the Journal of Economic Theory, a large literature in economics has dealt with the implications for rational behavior of interacting with parties who, with small likelihood, may not be rational." ..."
"... It's why many non-experts believe academic economists' pretensions to science and accuracy is BS. ..."
Jan 22, 2017 | economistsview.typepad.com
Peter K, January 22, 2017 at 11:46 AM
http://rajivsethi.blogspot.com/2016/12/thomas-schelling-methodological.html

Sethi on Shelling:

"Similarly, in bargaining situations, "the sophisticated negotiator may find it difficult to seem as obstinate as a truly obstinate man." And when faced with a threat, it may be profitable to be known to possess "genuine ignorance, obstinacy or simple disbelief, since it may be more convincing to the prospective threatener."

Starting with three classic papers in the same 1982 issue of the Journal of Economic Theory, a large literature in economics has dealt with the implications for rational behavior of interacting with parties who, with small likelihood, may not be rational."

It's why many non-experts believe academic economists' pretensions to science and accuracy is BS.

Like Simon Wren-Lewis's blog-post the other day defending mainstream economics.

It's like they come up with the political answer they want and then rationalize it via math and rhetoric in a way that would make Kellyanne Conway proud.

[Jan 22, 2017] Economist's View Attacking Economics is a Diversionary Tactic

Simon Wren-Lewis does not understand (or more correctly does not want to understand) that there is no economics, only political economy and that neoclassical economics are stooges and propagandists of the Grand neoliberal Party, which pay them handsomely for role they are playing. Hiding ideology under the smoke screen of economics is not new, but under neoliberalism it is became status quo.
Notable quotes:
"... I have had a sense that during the 1970s conservative economists, "Chicago School" economists, become distinctly influential both in the field of economics and for policy makers. ] ..."
"... Economists have blinkers on. They want to view the economy as an isolated scientific subject, like the interior of a test tube, and treat politics and policy as a sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one side. ..."
"... It seems fairly clear to me that the two elements--politics and the economy--are obviously continuously co-mingled, and have all sorts of feedback loops running between them. The discipline really consistently and deliberately blinds itself to politics and the dynamics of power, despite the deep entanglement of politcs with everything economic. ..."
"... Wren-Lewis admits that macroeconomists "missed" the impacts of very high financial sector leverage, but finds that now that economists have noticed it, and suggested remedies, that the power of bank lobby prevents those remedies from being enacted. But shouldn't the political power of the finance lobby been a part of economic analysis of the world along with the dangers of the financial sector's use of extreme leverage? Does he think the two phenomena are unrelated? Shouldn't economics pay more attention to the ongoing attempts of various groups to orient government policy in their favor, just like they pay attention to the trade deficit and GDP numbers? ..."
"... I look at politics and the economy and see one thing, not two things, and I am astonished at the extent to which economists focus on the part they like to play with intellectually, while deliberately looking away from what is probably the more important part. Its like economists obsessively focus on the part that can be studied via numbers (money) and dont' want to think about the part that is harder to look quantify (political policy). And there is a political issue there, which Mr. Wren-Lewis, keeps ignoring in his defense of "mainstream economics." ..."
"... The neoclassical economics tendency of not looking at power relationships makes power imbalances and their great influence on economics seem like "givens" or "natural endowments", which is clearly an intellectual sin of omission. Many people, even within the halls of mainstream economics, note economists are "uncomfortable" with distributional issues. ..."
"... I don't see it as attacking economics as science tied to nature, as much as attacking economists who pick one "natural law" and apply it generally far outside the limits for which it applies, ignoring all the other laws that constrain it. ..."
"... "...but failing to ignore their successes,..." ..."
"... Oh you mean the success of being able to raise asset prices without the growth in wages, make education costly and unaffordable without student loans, not chargeable under bankruptcy, spruce up employment figures by not counting the people who have stopped look for jobs because they cannot find one, make people debt serfs, make savers miserable by keeping interest rates at zero and making them take risks that they may not want to take though it is picking pennies in front of a steamroller, keeping wages stagnant for decades and thus impoverishing people. The list of successes is endless and you should be glad we are NOT talking about them. Because if we do, the clan called economists might well be torched. ..."
Jan 22, 2017 | economistsview.typepad.com
Attacking Economics is a Diversionary Tactic Simon Wren-Lewis :
... ... ..

7. So given all this, why do some continue to attack economists? On the left there are heterodox economists who want nothing less than revolution, the overthrow of mainstream economics. It is the same revolution that their counterparts were saying was about to happen in the early 1970s when I learnt my first economics. They want people to believe that the bowdlerised version of economics used by neoliberals to support their ideology is in fact mainstream economics.

8. The right on the other hand is uncomfortable when evidence based economics conflicts with their politics. Their response is to attack economists. This is not a new phenomenon, as I showed in connection with the famous letter from 364 economists. With austerity they cherry picked the minority of economists who supported it, and then implemented a policy that even some of them would have disagreed with. (Rogoff did not support the cuts in public investment in 2010/11 which did most of the damage to the UK economy.) The media did the rest of the job for them by hardly ever talking about the majority of economists who did not support austerity.

... ... ...

anne -> anne... , January 21, 2017 at 12:39 PM
So given all this, why do some continue to attack economists? On the left there are heterodox economists who want nothing less than revolution, the overthrow of mainstream economics. It is the same revolution that their counterparts were saying was about to happen in the early 1970s when I learnt my first economics. They want people to believe that the bowdlerised version of economics used by neoliberals to support their ideology is in fact mainstream economics.

-- Simon Wren-Lewis

[ This is an important criticism that as such can surely be further explained and analyzed at length.

The reference to the work of "heterodox economists" in the 1970s is completely unknown to me and I would be interested in knowing more. After all, I have had a sense that during the 1970s conservative economists, "Chicago School" economists, become distinctly influential both in the field of economics and for policy makers. ]

anne -> anne... , January 21, 2017 at 02:28 PM
On the left there are heterodox economists who want nothing less than revolution, the overthrow of mainstream economics....

[ Since my understanding of heterodox economics is that it ranges from cultural to ecological perspectives to various degrees of institutional planning, I do not understand what revolution Simon Wren-Lewis has in mind. Also, again I do not understand what heterodox economics was in the 1970s. ]

pgl -> anne... , January 21, 2017 at 03:21 PM
"heterodox economists" is sort of like "neoliberal". We are talking what political types call a Big Tent. Alas the hyper political types here cast this tent over everyone they might disagree with. Which is sort of Simon's point.
William Meyer : , January 21, 2017 at 12:49 PM
What Wren-Lewis misses, I think, is that something I've noticed in my roughly a decade of reading economic blogs on the Internet. Economists have blinkers on. They want to view the economy as an isolated scientific subject, like the interior of a test tube, and treat politics and policy as a sort of exterior force, that can be isolated from the world of the chemist and pushed off-to-one side.

It seems fairly clear to me that the two elements--politics and the economy--are obviously continuously co-mingled, and have all sorts of feedback loops running between them. The discipline really consistently and deliberately blinds itself to politics and the dynamics of power, despite the deep entanglement of politcs with everything economic.

Wren-Lewis admits that macroeconomists "missed" the impacts of very high financial sector leverage, but finds that now that economists have noticed it, and suggested remedies, that the power of bank lobby prevents those remedies from being enacted. But shouldn't the political power of the finance lobby been a part of economic analysis of the world along with the dangers of the financial sector's use of extreme leverage? Does he think the two phenomena are unrelated? Shouldn't economics pay more attention to the ongoing attempts of various groups to orient government policy in their favor, just like they pay attention to the trade deficit and GDP numbers?

I look at politics and the economy and see one thing, not two things, and I am astonished at the extent to which economists focus on the part they like to play with intellectually, while deliberately looking away from what is probably the more important part. Its like economists obsessively focus on the part that can be studied via numbers (money) and dont' want to think about the part that is harder to look quantify (political policy). And there is a political issue there, which Mr. Wren-Lewis, keeps ignoring in his defense of "mainstream economics."

The neoclassical economics tendency of not looking at power relationships makes power imbalances and their great influence on economics seem like "givens" or "natural endowments", which is clearly an intellectual sin of omission. Many people, even within the halls of mainstream economics, note economists are "uncomfortable" with distributional issues.

Whether they like the implication or not, economists need to acknowledge that this discomfort has a profoundly conservative intellectual bias, in the sense that it make the status quo arrangement of society seem "natural" and "normal", when it is obviously humanly constructed and not in any sense "natural."

So when left-wing people say that economists are defenders and supporters of the current order of things, they have a point: ignoring power relationships and their impact on the world supports the contined existence of those relationships. Mr. Wren-Lewis seems like a nice guy, but he needs to take that simple home truth in. I'm not sure why he seems to struggle so with acknowledging it.

anne -> William Meyer... , January 21, 2017 at 01:04 PM
Really fine criticism.

The sense that the study of economics is a political-economic study appears as a rejection of what is supposed to be technocratic, supposed to be the study of the mechanics of capitalism in a pure frame as though capitalist mechanics were not continually defined. The mechanics of pure capitalism dictates a technocratic politics:

http://delong.typepad.com/sdj/2012/08/should-erskine-bowles-be-treasury-secretary-i-say-no.html

August 10, 2012

My judgment isn't a left-wing judgment: it is a technocratic-political judgment. I speak as a card-carrying neoliberal long-run budget-balancer....

-- Brad DeLong

pgl -> William Meyer... , January 21, 2017 at 03:23 PM
The point being we cannot ignore the politics? Simon gets the politics but he still tries to get the analysis straight. I find this to be a very important thing to do but then the hyper political types call getting the analysis right lying. Or something like that.
William Meyer -> pgl... , January 21, 2017 at 05:26 PM
No, you pretty much seem to be missing my point completely. It's not about getting the economics right and the politics right as two separate exercises, it's about taking seriously the interactions between the two. Who knows, maybe if someone had modelled the positive feedback loops between lobbying expenditures, industry-friendly public policy, and industry profits for, say, the financial industry, someone might have correctly predicted the financial crisis of 2008, and perhaps even predicted that it would also be almost impossible for the government to take the necessary action to correct the problem politically, and that this would result in a sluggish economy post-crisis. Whereas, keeping these issues separate as we currently do makes it pretty much a sure bet that no one will have a very good insight into how the real world will unfold in the future.
anne -> William Meyer... , January 21, 2017 at 05:33 PM
https://www.nytimes.com/2017/01/20/business/dealbook/george-osborne-britain-blackrock-adviser.html

January 19, 2017

Former Top British Official to Join BlackRock as an Adviser
By CHAD BRAY

The move by George Osborne, the former chancellor of the Exchequer, is the latest example of British politicians taking financial jobs.

anne -> William Meyer... , January 21, 2017 at 05:36 PM
https://www.nytimes.com/2017/01/20/business/dealbook/george-osborne-britain-blackrock-adviser.html

January 19, 2017

Former Top British Official to Join BlackRock as an Adviser
By CHAD BRAY

Other recent moves from Westminster, where Britain's government is based, to the City, as the historical London financial district is known, include:

William Hague, the former British foreign minister, who this week announced that he was joining Citigroup as a senior adviser.

Alistair Darling, a former member of Parliament and the chancellor before Mr. Osborne, joined Morgan Stanley's board of directors last year.

Gordon Brown, the former British prime minister, joined a global advisory board at Pimco last year. The advisory board's members include Ben Bernanke, the former Federal Reserve chairman.

Tony Blair, the British prime minister before Mr. Brown, joined JPMorgan Chase as a part-time senior adviser in 2008.

Gibbon1 -> pgl... , January 21, 2017 at 06:21 PM
You think what's needed is a perfect plan. You are so wrong because you lack life experience. Tip for the neoliberal pgl from the world of business, engineering, war and politics.

A bad plan executed well beats a good plan executed badly.

pgl -> Gibbon1... , January 22, 2017 at 03:01 AM
A perfect plan? Sorry dude but this is a complete misrepresentation of what we "neoliberals" are saying.
BenIsNotYoda : , January 21, 2017 at 12:58 PM
You want to know why economists are being attacked. The Yellen Fed is rapidly digressing into a political entity. The Fed is allegedly independent of politics, but Janet Yellen's latest statements leave no doubt that she is more of a political operative than an economist.

Three months ago, on October 14 2016, Yellen stated the following:

Yellen Cites Benefits to Running Economy Hot for Some Time

Federal Reserve Chairwoman Janet Yellen offered an argument for running the U.S. economy hot for a period to ensure moribund growth doesn't become an entrenched feature of the business landscape. That would mean letting unemployment fall lower and spurring faster growth to boost consumer spending and business investment.

Source: Wall Street Journal

Compare this language to Yellen's statement from last week.

Federal Reserve Chair Janet Yellen backed a strategy for gradually raising interest rates, arguing that the central bank wasn't behind the curve in containing inflation pressures but nevertheless can't afford to allow the economy to run too hot. Still, she saw dangers in permitting the economy to overheat and inflation expectations to get out of control. "Allowing the economy to run markedly and persistently 'hot' would be risky and unwise," she said.

Source: Bloomberg.

So three months ago, running the economy "hot" was a good idea. But today, it's a massive risk that we cannot afford to take.

What changed in those three months?

Core inflation rose 0.1%. And the US closed 2016 with a sub-2% growth rate for the year. Neither of those would qualify as remotely "hot."

The main change? The GOP took the House, Senate, and White House.

Bear in mind, Yellen's statement came a mere 24 hours after then President-elect Donald Trump commented that the US Dollar was "too strong."

So we have a Fed chair performing a 180% on running a "hot" economy within three months and openly defying the new administration's views on the US Dollar at a time when the data doesn't support any of her claims.

Yellen may be seeing something everyone else is not, but it is difficult to see this as anything other than political hackery.

TrumpisaJew -> BenIsNotYoda... , January 21, 2017 at 02:09 PM
Uh dude, CPI is running at 2.1% yry and will rise further when the 2016 oil "mirage" is removed unless we can get another price collapse. Inflation was firming right under your noise.

The economy from a monetary pov is indeed running hot. This is what you do not understand. The structural issues deal with the plutocratic tyranny that began under Reagan and the zionist Trump cabal want to take to another level. Jack London called it the Iron Heel.

BenIsNotYoda -> TrumpisaJew... , January 21, 2017 at 02:40 PM
First of all, core CPI (which according to the Fed is a better measure) has been above 2% level since Nov 2015. So CPI inflation around 2% level is NOT NEW NEWS. If rates should rise because of inflation, then why did she not raise them a lot before? Answer - because Obama was in office. The plan was to get HRC into office and run a high pressure economy with low unemployment and high inflation. That all changed when the GOP won. Those are the facts. Yellen is nothing but a disgusting political operative.

Your handle is offensive. But hey, this is a free country. Or was, till the liberal left decided that the first amendment only applies if you agree with them.

TrumpisaJew -> BenIsNotYoda... , January 21, 2017 at 02:51 PM
liberal left? maybe if you would stop being a fixated little shit and understand how bad "hot" monetary expansions are, you would grow a pair.

The Friedman era is over.

mulp -> BenIsNotYoda... , January 21, 2017 at 03:02 PM
Yet again, bad economics are behind most Fed related policy proclamations justifying and criticizing Fed policy.

Do don't think even Milton Friedman would accept any of it, unless he let politics blind him to what was clear to him in the 50s and 60s.

In the 50s and 60s, he would be debating the cratering velocity, it's causes, and remedies. He would not be blindly calling for increasing or decreasing the growth in money supply.

Scott summer is calling blindly for higher growth in money supply by blindly advocating "NGDP targeting" while ignoring the exporting of "capital" and importing of labor, and ignoring the falling velocity of money.

The two are likely closely tied, in that money created that flows out of the US as "capital" where is pays no workers in the US, thus never adding to US GDP, means the Fed can't boost NGDP.

The reality is the Fed can have no significant impact on the economy by any normal policy moves. Changing the interest rates by purchase and repo trades to US Treasuries at 4% would not impact the economy because of the new market interest rates, but the reaction of interest payers will impact the economy. Everyone assumes higher interest payments will mean less paid to workers, because the way to cut the burden of interest payments is to cut revenue so interest becomes a higher share of revenue. In reality, what is cut is buying goods with future wages and working hard to repay borrowed labor costs. Keynes notes that the individual self interest reaction is both collectively and individually harmful.

The high level of debt from consumption in a growing economy is extremely harmful, yet Fed policy has been promoting job killing debt funded consumption by doing less of what Scott Summer advocates it should do to create jobs.

BenIsNotYoda -> mulp... , January 21, 2017 at 03:12 PM
I am not debating policy. Just pointing out how Yellen has changed her colors as soon as her beloved HRC lost.
pgl -> BenIsNotYoda... , January 21, 2017 at 03:18 PM
She would claim we are now at full employment. But as you may well know - I think we are far from full employment.
BenIsNotYoda -> pgl... , January 21, 2017 at 03:31 PM
You and I are in full agreement that we are NOT at full employment.
BenIsNotYoda -> BenIsNotYoda... , January 21, 2017 at 03:32 PM
and I am incensed that Yellen would think of raising rates quicker just because Trump won.
pgl -> BenIsNotYoda... , January 21, 2017 at 03:36 PM
Fair enough. I think we are in agreement that monetary policy should be based on the state of the economy and not politics even if we have a genuine disagreement about the state of the economy. But at least you and I are having a principled discussion. Something others here should emulate.
anne : , January 21, 2017 at 01:57 PM
https://en.wikipedia.org/wiki/Heterodox_economics

Heterodox economics refers to methodologies or schools of economic thought that are considered outside of "mainstream economics", often represented by expositors as contrasting with or going beyond neoclassical economics. "Heterodox economics" is an umbrella term used to cover various approaches, schools, or traditions. These include socialist, Marxian, institutional, evolutionary, Georgist, Austrian, feminist, social, post-Keynesian (not to be confused with New Keynesian), and ecological economics among others.

Mainstream economics may be called orthodox or conventional economics by its critics. Alternatively, mainstream economics deals with the "rationality–individualism–equilibrium nexus" and heterodox economics is more "radical" in dealing with the "institutions–history–social structure nexus". Many mainstream economists dismiss heterodox economics as "fringe" and "irrelevant", with little or no influence on the vast majority of academic economists in the English-speaking world.

mulp -> anne... , January 21, 2017 at 02:14 PM
Heterodox is in the eye of the beholder.

It seems mainstream to argue that a high tax rate and costly regulations kill jobs, and that cutting taxes and regulations will create jobs because rewarding higher profits from reducing labor costs far below prices, and eliminating all the labor costs to comply with regulations will create jobs, because lower labor costs mean more workers being paid higher wages.

But can someone explain the mainstream economic theory of reducing labor costs resulting in more workers getting paid more??? Looks like voodoo to me.

anne -> mulp... , January 21, 2017 at 03:00 PM
But can someone explain the mainstream economic theory of reducing labor costs resulting in more workers getting paid more???

[ This is precisely what technological progress has allowed since the beginning of the industrial revolution. ]

Gibbon1 -> anne... , January 21, 2017 at 10:43 PM
Last 40 years though proves that increase in productivity != high wages.
mulp : , January 21, 2017 at 02:08 PM
Echoing Simon, and rehashing my criticisms:

I don't see it as attacking economics as science tied to nature, as much as attacking economists who pick one "natural law" and apply it generally far outside the limits for which it applies, ignoring all the other laws that constrain it.

For example demand price theory and elasticity is sound natural law. It's like Boyles Law of gases. Boyles law applies over a range of pressures and temperature for which the gas remains a gas. It has limits, the point the "gas" becomes liquid or solid.

The idea that lower prices will create jobs applies only for a limited range of prices and quantities, but once outside those bound, lower prices MUST KILL JOBS.

The Laffer curve is an elasticity curve that covers the entire range of tax rates. A carbon tax works by moving up the curve to the point zero tax revenue is generated. The higher the tax, the cheaper it is to pay workers to build substitutes that do not burn fossil fuels, and instead of paying taxes, you pay the cheaper payroll of more workers.

Likewise, a high tax rate on economic aka monopoly profits, and on rents, the cheaper paying workers to build tax dodging depreciating capital becomes, which in the long run increases the capital stock, the product quantity, and thus prices are driven to cost eliminating economic profit and economic rents.

The point of high tax rates, tax rates of 50% and up, is not to raise revenue but to cause paying workers for substitutes.

On the other hand, government is a product, the general welfare, so, to increase the quantity of general welfare, tax rates need to be high enough to pay workers. The cost of general welfare is certainly much less than 50% of the economy in the long run, so tax rates are at all points in the lower part of the Laffer curve so lowering rates will reduce the quantity of general welfare that can be produced. And the general welfare is always from paying workers.

So, economists across the board are pretty universally wrong about tax rates and about prices levels, and the impact of raising and lowering them.

At the micro level, the theory is clear. At the micro level, the principle of zero sum is held as a natural law constraint.

Moving to macro does not eliminate any of the natural laws of micro, but instead moves economics from the micro theory of the two body problem, two bodies of mass rotating about each other, to macro theory of the n-body problem of sun, planets, solar systems, galaxies all rotating around each other. At this level, many natural laws come into play, like general relativity in its many forms including imputing mass to energy, going far beyond Newtonian physics, yet not discarding it.

Macro economists have either blindly and wishfully forgotten or ignored fundamental micro laws, or intentionally eliminated them from the macro proclamations to deceive.


When Bernie Sanders argues a carbon tax can pay for vast welfare state benefits, is he intentionally lying, or has he been deceived by self deceiving economists who wishfully seek a free lunch economic system where money comes from nothing?

When Milton Friedman argued in 1970 lower tax rates would generate the same tax revenue and create more jobs and output, was he intentionally lying, or self deceiving himself?

Milton Friedman in arguing against high tax rates made a point of all the jobs and wage income that resulted from the high tax rates, jobs and income he considered wasteful spending promoted by the tax policy. He even noted that the high wage income increased demand for goods and services, consumption he considered wasteful.

So, as the father of the macro economic policy of tax (rate) cuts, how can it be a policy to boost gdp and jobs to cut taxes as Friedman argued?

Trump seems to latch onto simplified macro economic half baked policy ideas an run with them to the max. The economists who crafted the policy statements he has extracted his proclamations from are horrified by what he is doing with their policy proclamations. Proclamations that are half baked and thus violate natural law.

Take the economists at Econlog from which Trump gets a lot of his economics. They are horrified. Yet their economic "theory" clearly does not work. Trade theory in particular. The micro theory of trade exchanges labor for labor, ie, your labor makes goods traded for goods I make with my labor. But trade today swaps labor for capital, so jobs are moved from one nation to another in exchange for reducing the wealth of the other.

Saudi Arabia is the simplest example. It sells it's natural capital and then imports labor goods at prices lower than Saudi workers can hope to produce them, thus killing jobs in Saudi Arabia. The crisis in Saudi Arabia is a lack of opportunity for the Saudi people who are multiplying as if it were still an undeveloped nation with high mortality rate.

Since Reagan, the US has become more like Saudi Arabia, selling off capital to buy cheap goods from less developed economies where labor is relatively cheaper and sending back capital, killing jobs in the process and eliminating economic opportunity to Trump voters.

Milton Friedman argued that this was a good policy because we as a nation were better off from China effectively gifting us cheap goods and that on the whole, the US is better off from jobs lost in the US. He hinted at using the consumer surplus of cheap imports to pay welfare to those who lost jobs, but those advocating job killing trade imbalance also condemn welfare payments, blaming those who lost jobs as being at fault.

So, Trump is going back to micro economics and promising to make sure trade is going to create jobs in the US. But he also grabs onto and clings to the cheap price concept that requires killing jobs. Trump is going to ensure energy is cheap, which means he will never ban oil imports or put a $50 a barrel tariff on oil imports.

What policy could Trump do to create jobs quickly? A $50 a barrel tariff on imported oil, say phase it in over a year, $20 starting April 1, $30 July 1, $40 Oct 1, $50 Jan 1 2018. This time, ExxonMobil will not have high profits from $4 gasoline and heating oil because they will be paying 25,000 more direct workers to drill baby frack, plus ten times as many supporting jobs, as they build assets they can rapidly depreciate or expense to wipe out taxable profits. At the same time, incumbents drillers will return to high gear. If Trump rebates a tariff on exported refined oil products, it would delay NAFTA sanctions as oil products consumed in Mexico and Canada will be cheaper but exports will not be reduced much. On the global market, the results will be devastating with oil prices crashing. Putin would likely target Trump for going to war on the Russian people and economy.

Bernie would likely attack Trump for his policy hiking the price of heating oil to the working poor of Vermont. But you can't pay more American workers without higher energy prices. Vermont's working poor will end up with better pay if energy efficiency investments are made in Vermont because neither Chinese nor Saudi workers can eliminate the need for oil to keep housing warm in Vermont.

And the $50 a barrel tariff on imported oil will generate no revenue for government to spend by 2020 if oil product exports get tariff rebates.

anne : , January 21, 2017 at 02:19 PM
https://mainly macro.blogspot.com/2017/01/attacking-economics-is-diversionary.html

January 21, 2017

Attacking economics is a diversionary tactic

The financial crisis in the UK was the result of losses by banks on overseas assets, originating from the collapse in the US subprime market. It was not a result of excessive borrowing by UK consumers, firms or our government. As the Bank's Ben Broadbent points out, "Thanks to the international exposure of its banks the UK has been, in some sense, a "net importer" of the financial crisis." This overseas lending caused a crisis because banks were far too highly levered, and so could not absorb these losses and had to be bailed out by the government.

This is why UK macroeconomists failed to pick up the impending crisis. They did routinely monitor personal, corporate and government borrowing, but not the amount of bank leverage. Macroeconomists generally acknowledge that they were at fault in ignoring the crucial role that financial sector leverage can play in influencing the macroeconomy. There has been a huge increase in the amount of research on these finance-macro linkages since the crisis.

But supposing economists had ensured that they knew about the increase in bank leverage and had collectively warned of the dangers of excessive risk taking that this represented. Would it have made any difference? There are good reasons for thinking it would not.

The main evidence for this is what has happened after the crisis. Admati and Hellweg have written persuasively that we need a huge increase in bank capital requirements to bring the 'too big to fail' problem to an end and avoid a future banking crisis, and the work of David Miles in the UK has a similar message. I have not come across an academic economist who seriously dissents from this analysis, but it has no impact on policy at all. The power of the banking lobby is just too strong....

KPl : , January 21, 2017 at 11:37 PM
"...but failing to ignore their successes,..."

Oh you mean the success of being able to raise asset prices without the growth in wages, make education costly and unaffordable without student loans, not chargeable under bankruptcy, spruce up employment figures by not counting the people who have stopped look for jobs because they cannot find one, make people debt serfs, make savers miserable by keeping interest rates at zero and making them take risks that they may not want to take though it is picking pennies in front of a steamroller, keeping wages stagnant for decades and thus impoverishing people. The list of successes is endless and you should be glad we are NOT talking about them. Because if we do, the clan called economists might well be torched.

DeDude : , January 22, 2017 at 06:51 AM
If you attack the idea of facts, knowledge and expertise, then it becomes a lot easier to manipulate people and society.

[Jan 21, 2017] I seriously question the assumption of FOREX adjustments perfectly offsetting policy changes such that the balance of trade remains unchanged

Notable quotes:
"... I seriously question the assumption of FOREX adjustments perfectly offsetting policy changes such that the balance of trade remains unchanged. It seems like an article of faith that things work this way, based on logic, intelligence, and economic analysis based on various models of how the world works. ..."
"... Do economists have solid models that accurately predict the movement of FOREX rates in the first place? I mean, all else being equal, and given no policy changes at all, can economists accurately forecast the exchange rates between, say, Canada and the US over the next 10 years? And, if so, why do these economists have to work for a living? Shouldn't they be enormously wealthy people by now if they possess this level of predictive capabilities? ..."
"... My personal thinking on the matter is to take a more humble approach. Given some solid reasons to believe the proposed border adjustment tax will increase the value of the dollar, but lacking a way to accurately predict FOREX, I would guess that exchange rates would adjust to cancel out only half the policy change. I'll assume trade flows adjust a bit and FOREX rates adjust a bit. And since it is just a guess, I'd be quite cautious in drawing any strong conclusions. ..."
Jan 21, 2017 | economistsview.typepad.com

pgl, Friday, January 20, 2017 at 01:37 AM

Team Trump needs to listen to Miles Kimball:

"border adjustability. In the eurozone, where there is a fixed exchange rate of 1 between the member countries, relying more heavily on a value-added tax-for which international rules allow taxing imports while exempting exports from the tax-and less on other taxes, is understood as a way to get the same effect as devaluing to an exchange rate that makes foreign goods more expensive to people in a country and domestic goods cheaper to foreigners. But in a floating exchange rate setup as the US has, most of the effects of border adjustment can be canceled out by an explicit appreciation in the dollar that cancels out the implicit devaluation from the tax shift. And indeed, such an appreciation of the dollar is exactly what one should expect."

The architect of this Destination Based Cash Flow Tax with "Border Adjustments" (is that like sprinkles on top) is Alan Auerbach and even he admits this. Miles moves onto something else I have been saying:

"A way to push down the value of the dollar and stimulate net exports for a much longer time is to increase saving rates in the US As greater saving pushed down US rates of return, some of that extra saving would wind up in foreign assets, putting extra US dollars in the hands of folks abroad, so they would have US dollars to buy US goods. This effect can be enhanced if the regulations for automatic enrollment are favorable to a substantial portion (say 30%) of the default investment option being in foreign assets. Note that an increase in US saving would tend to push down the natural interest rate, and so needs to be accompanied by the elimination of the zero lower bound in order to avoid making it hard for monetary policy to respond to recessions."

OK – it might not be so easy to lower the natural rate now but back in 1981, real interest rates soared as the Reagan tax cuts lowered national savings. This led to a massive dollar appreciation and a large drop in net exports.

Ed Brown -> pgl... , January 20, 2017 at 07:31 AM
I seriously question the assumption of FOREX adjustments perfectly offsetting policy changes such that the balance of trade remains unchanged. It seems like an article of faith that things work this way, based on logic, intelligence, and economic analysis based on various models of how the world works.

But while this view seems to be held by intelligent people with far more economic education that I will ever have, I am wondering if there is any empirical evidence that supports this reasoning? I am sceptical.

Do economists have solid models that accurately predict the movement of FOREX rates in the first place? I mean, all else being equal, and given no policy changes at all, can economists accurately forecast the exchange rates between, say, Canada and the US over the next 10 years? And, if so, why do these economists have to work for a living? Shouldn't they be enormously wealthy people by now if they possess this level of predictive capabilities?

My personal thinking on the matter is to take a more humble approach. Given some solid reasons to believe the proposed border adjustment tax will increase the value of the dollar, but lacking a way to accurately predict FOREX, I would guess that exchange rates would adjust to cancel out only half the policy change. I'll assume trade flows adjust a bit and FOREX rates adjust a bit. And since it is just a guess, I'd be quite cautious in drawing any strong conclusions.

I welcome comments that would help educate me on this subject. Best wishes to all.

Peter K. -> Ed Brown... , January 20, 2017 at 07:46 AM
As I understand it Peter Dorman agrees with you here:

http://econospeak.blogspot.com/2016/12/paul-krugman-on-protectionism-and-trade.html

As does economics superstar Dean Baker.

PGL replied to Dorman twice, but Dorman ignored him.

JohnH -> Peter K.... , January 20, 2017 at 08:17 AM
I love PK's summary: ".... trade deficits are always a temporary phenomenon, to be followed eventually by surpluses, and vice versa."

After 30 years of trade deficits, I wonder about PK's definition of temporary...

Oh well, in the long run, we're all dead...and the trade deficit will swing to a surplus...

Ed Brown -> JohnH... , January 20, 2017 at 08:28 AM
:-)
Old Opossum's Practical Cat -> Ed Brown... , January 20, 2017 at 08:39 AM
As The Clock Ticks Down

Stand by your data
"
~~Country & Western Song~

Before the opportunity-window slams shut, harvest your data from the market! You need to record a baseline from the last moments of the O'Bummer World. Sure!

You will wish him back, but that is beside the point. We are scientists not wishers.

I wish you
well
!

Ed Brown -> Peter K.... , January 20, 2017 at 08:26 AM
Hello. Thank you for this link. I found this comment by Peter Dornman to be interesting: "And also, yes, any theory that implies a known relationship between macro variables and forex rates is *very* counter-empirical."

If his comment is correct, it makes me wonder about the reliability of Miles Kimball's analysis.

There are certain types of problems we just can't reliably analyze, as they are too complicated, or the underlying physics is subject to extreme sensitivity to accuracy of the inputs (chaos theory, basically). For instance, our ability to make meaningful forecasts of the weather is limited to a few days. Maybe FOREX predictions are like that? If so, we should be cautious about making any strong statements about FOREX adjustments precisely offsetting policy changes.

I mean, doesn't it seem like hubris when you can't predict what a variable will do given no changes to current conditions, but you decide that you can predict *precisely* what it will do if we make changes to current conditions?

JohnH -> Ed Brown... , January 20, 2017 at 07:54 AM
"Do economists have solid models that accurately predict the movement of FOREX rates in the first place?"

Meese-Rogoff showed that exchange rates are disconnected from fundamentals. It's called the 'foreign exchange puzzle.'

Yet pgl keeps insisting on an 'if x then y' approach to most problems. His key variable is interest rates, which are at the root of most every change in pglian universe.

I'm actually surprised that he departs from his rate-centric universe to suggest that Trump might be responsible for something like the fall of the peso, though he stridently rejects the idea that Trump's bully pulpit might shame American companies into keeping more jobs at home.

JohnH -> JohnH... , January 20, 2017 at 07:58 AM
Meese-Rogoff found that f-x rates are a random walk.

[Jan 21, 2017] The Devious Ways That Neoliberal Economists Hurt America

Jan 21, 2017 | economistsview.typepad.com
anne :
im1dc -> anne... , January 20, 2017 at 10:11 AM
"The Ways That Pop Economics Hurt America"

should properly read

'The Ways That Economists Hurt America'

libezkova -> im1dc... , January 20, 2017 at 10:36 AM
Even more properly

"The Devious Ways That Neoliberal Economists Hurt America"

im1dc -> libezkova... , January 20, 2017 at 11:17 AM
Milton Friedman is a Neoliberal Economist?
pgl -> im1dc... , January 20, 2017 at 11:29 AM
On monetary economics - he is closer to Krugman than to Phil Gramm. But some people here hate Friedman as much as they hate Krugman and they have decided "neoliberal" is the ultimate put down. Even though they have no working definition of "neoliberal".
RC AKA Darryl, Ron -> pgl... , January 20, 2017 at 02:25 PM
neoliberal = low taxes + small government + MNC favorable trade deals + financial deregulation
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 20, 2017 at 02:26 PM
neoliberal = Reagan/Thatcher policy
ilsm -> RC AKA Darryl, Ron... , January 20, 2017 at 04:46 PM
Wm Clinton/Rubin were Reagan not so lite. Except Bill did not borrow for the war machine.

My observation having been there: Reagan weapons were all busts which laid the ground work for $100B into the F-35 and we got nothing.

[Jan 20, 2017] What is Economism and why it is so damaging

Notable quotes:
"... For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for. ..."
"... But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework. ..."
"... An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme. ..."
"... Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes. ..."
"... It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists. ..."
"... And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers. ..."
Jan 20, 2017 | economistsview.typepad.com

Peter K. : January 20, 2017 at 04:35 AM

Noah Smith: The Ways That Pop Economics Hurt America - Noah Smith

"So I wonder if economism was really as unrealistic and useless as Kwak seems to imply. Did countries that resisted economism -- Japan, for example, or France [Germany?] -- do better for their poor and middle classes than the U.S.? Wages have stagnated in those countries, and inequality has increased, even as those countries remain poorer than the U.S. Did the U.S.'s problems really all come from economism, or did forces such as globalization and technological change play a part? Cross-country comparisons suggest that the deregulation and tax cuts of the 1980s and 1990s, although ultimately excessive, probably increased economic output somewhat."

Ugh what an awful display of pop economism. Globalization and technology are "impersonal forces." No mention of the rise of inequality or the SecStags. No mention of monetary policy fail in Europe. The biggest lies of economism are the lies of omission.

libezkova -> Peter K.... , -1
Thank you !

Looks like this concept of "Economism" introduced by James Kwak in his book Economism is very important conceptual tool for understanding the tremendous effectiveness of neoliberal propaganda.

I think it is proper to view Economism as a flavor of Lysenkoism. As such it is not very effective in acquiring the dominant position and suppressing of dissent, but it also can be very damaging.

https://www.bloomberg.com/view/articles/2017-01-19/the-ways-that-pop-economics-hurt-america

== quote ==

...When competitive free markets and rational well-informed actors are the baseline assumption, the burden of proof shifts unfairly onto anyone proposing a government policy. For far too many years, free-marketers have gotten away with winning debates by just sitting back and saying "Oh yeah? Show me the market failure!" That deck-stacking has long forced public intellectuals on the left have to work twice as hard as those safely ensconced in think tanks on the free-market right, and given the latter a louder voice in public life than their ideas warrant.

It's also true that simple theories, especially those we learn in our formative years, can maintain an almost unshakeable grip on our thinking.

For example, the basic Econ 101 theory of supply and demand is fine for some products, but it doesn't work very well for labor markets. It is incapable of simultaneously explaining both the small effect of minimum wage increases and the small impact of low-skilled immigration. Some more complicated, advanced theory is called for.

But no matter how much evidence piles up, people keep talking about "the labor supply curve" and "the labor demand curve" as if these are real objects, and to analyze policies -- for example, overtime rules -- using the same old framework.

An idea that we believe in despite all evidence to the contrary isn't a scientific theory -- it's an infectious meme.

Academic economists are unsure about how to respond to the abuse of simplistic econ theories for political ends. On one hand, it gives them enormous prestige. The popularity of simplistic econ ideas has made economists the toast of America's intellectual classes.

It has sustained enormous demand for the undergraduate econ major, which serves, in the words of writer Michael Lewis, as a "standardized test of general intelligence" for future businesspeople. But as Kwak points out, the simple theories promulgated by politicians and on the Wall Street Journal editorial page often bear little resemblance to the sophisticated theories used by real economists.

And when things go wrong -- when the financial system crashes, or millions of workers displaced by Chinese imports fail to find new careers -- it's academic economists who often get blamed, not the blasé and misleading popularizers.

... ... ...

Russia and China have given up communism not because they stopped having working classes, but because it became obvious that their communist systems were keeping them in poverty. And Americans are now starting to question economism because of declining median income, spiraling inequality and a huge financial and economic crisis.

[Jan 20, 2017] The architect of supply-side economics is now a professor at Columbia University, former University of Chicago economist Robert Mundell is an academic charlatan

Notable quotes:
"... For the architect of the euro, taking macroeconomics away from elected politicians and forcing deregulation were part of the plan ..."
"... The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do. ..."
Jan 20, 2017 | economistsview.typepad.com
RC AKA Darryl, Ron :

Thanks to New Deal democrat, who made me curious about yesterday's "comment section in re Summers' piece." Then thanks to Ron Waller for his comment which closed with: (Good read: "Robert Mundell, evil genius of the euro".)

https://www.theguardian.com/commentisfree/2012/jun/26/robert-mundell-evil-genius-euro

Robert Mundell, evil genius of the euro

Greg Palast

For the architect of the euro, taking macroeconomics away from elected politicians and forcing deregulation were part of the plan

The idea that the euro has "failed" is dangerously naive. The euro is doing exactly what its progenitor – and the wealthy 1%-ers who adopted it – predicted and planned for it to do.

That progenitor is former University of Chicago economist Robert Mundell. The architect of "supply-side economics" is now a professor at Columbia University, but I knew him through his connection to my Chicago professor, Milton Friedman, back before Mundell's research on currencies and exchange rates had produced the blueprint for European monetary union and a common European currency.

Mundell, then, was more concerned with his bathroom arrangements. Professor Mundell, who has both a Nobel Prize and an ancient villa in Tuscany, told me, incensed:

"They won't even let me have a toilet. They've got rules that tell me I can't have a toilet in this room! Can you imagine?"

As it happens, I can't. But I don't have an Italian villa, so I can't imagine the frustrations of bylaws governing commode placement.

But Mundell, a can-do Canadian-American, intended to do something about it: come up with a weapon that would blow away government rules and labor regulations. (He really hated the union plumbers who charged a bundle to move his throne.)

"It's very hard to fire workers in Europe," he complained. His answer: the euro.

The euro would really do its work when crises hit, Mundell explained. Removing a government's control over currency would prevent nasty little elected officials from using Keynesian monetary and fiscal juice to pull a nation out of recession.

"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business."

He cited labor laws, environmental regulations and, of course, taxes. All would be flushed away by the euro. Democracy would not be allowed to interfere with the marketplace – or the plumbing.

As another Nobelist, Paul Krugman, notes, the creation of the eurozone violated the basic economic rule known as "optimum currency area". This was a rule devised by Bob Mundell.

That doesn't bother Mundell. For him, the euro wasn't about turning Europe into a powerful, unified economic unit. It was about Reagan and Thatcher.

"Ronald Reagan would not have been elected president without Mundell's influence," once wrote Jude Wanniski in the Wall Street Journal. The supply-side economics pioneered by Mundell became the theoretical template for Reaganomics – or as George Bush the Elder called it, "voodoo economics": the magical belief in free-market nostrums that also inspired the policies of Mrs Thatcher.

Mundell explained to me that, in fact, the euro is of a piece with Reaganomics:

"Monetary discipline forces fiscal discipline on the politicians as well."

And when crises arise, economically disarmed nations have little to do but wipe away government regulations wholesale, privatize state industries en masse, slash taxes and send the European welfare state down the drain.

Thus, we see that (unelected) Prime Minister Mario Monti is demanding labor law "reform" in Italy to make it easier for employers like Mundell to fire those Tuscan plumbers. Mario Draghi, the (unelected) head of the European Central Bank, is calling for "structural reforms" – a euphemism for worker-crushing schemes. They cite the nebulous theory that this "internal devaluation" of each nation will make them all more competitive.

Monti and Draghi cannot credibly explain how, if every country in the Continent cheapens its workforce, any can gain a competitive advantage.
But they don't have to explain their policies; they just have to let the markets go to work on each nation's bonds. Hence, currency union is class war by other means.

The crisis in Europe and the flames of Greece have produced the warming glow of what the supply-siders' philosopher-king Joseph Schumpeter called "creative destruction". Schumpeter acolyte and free-market apologist Thomas Friedman flew to Athens to visit the "impromptu shrine" of the burnt-out bank where three people died after it was fire-bombed by anarchist protesters, and used the occasion to deliver a homily on globalization and Greek "irresponsibility".

The flames, the mass unemployment, the fire-sale of national assets, would bring about what Friedman called a "regeneration" of Greece and, ultimately, the entire eurozone. So that Mundell and those others with villas can put their toilets wherever they damn well want to.

Far from failing, the euro, which was Mundell's baby, has succeeded probably beyond its progenitor's wildest dreams.

[Needless to say, I am not a fan of Robert Mundell's.]

Reply Friday, January 20, 2017 at 07:07 AM Peter K. -> RC AKA Darryl, Ron... , January 20, 2017 at 07:19 AM
Excellent article!

"It puts monetary policy out of the reach of politicians," he said. "[And] without fiscal policy, the only way nations can keep jobs is by the competitive reduction of rules on business."

Reminded me of a point made by J.W. Mason:

http://jwmason.org/slackwire/what-does-crowding-out-even-mean/

"..It's quite reasonable to suppose that, thanks to dependence on imported inputs and/or demand for imported consumption goods, output can't rise without higher imports. And a country may well run out of foreign exchange before it runs out of domestic savings, finance or productive capacity. This is the idea behind multiple gap models in development economics, or balance of payments constrained growth. It also seems like the direction orthodoxy is heading in the eurozone, where competitiveness is bidding to replace inflation as the overriding concern of macro policy."

Peter K. -> RC AKA Darryl, Ron... , January 20, 2017 at 07:30 AM
I wonder how this fits with the national savings rate discussion of Miles Kimball and Brad Setser.

Like would they advise Greece to boost their national savings rate or doesn't it matter since Germany controls monetary policy?

RC AKA Darryl, Ron said in reply to Peter K.... , January 20, 2017 at 08:58 AM
"I wonder how this fits with the national savings rate discussion of Miles Kimball and Brad Setser."

[Don't know and it sounds like way too much work for me to try to figure out. Savings rate is not a problem for us and it is difficult to see how Greece could realistically increase theirs sufficient to change anything without some other intervention being made first to decrease unemployment and increase output.]

pgl -> RC AKA Darryl, Ron... , January 20, 2017 at 09:47 AM
It is also too much work for PeterK. If he can't cherry pick it, he don't bother.

But note our net national savings rate has been less than 2% for a long, long time.

[Jan 19, 2017] Fake Economics and the media

Jan 19, 2017 | mainlymacro.blogspot.com
If there is Fake News, is there such a thing as Fake Economics? I thought about this as a result of two studies that have received considerable publicity in the press and broadcast media over the last few weeks. Both, needless to say, involve Brexit. The first are two bits of analysis by 'Change Britain', saying Brexit would generate 400,000 new jobs and "boost the UK by £450 million a week". The second is a more substantial piece of work by economists at the Centre for Business Research (CBR) in Cambridge, which was both very critical of the Treasury's own analysis of the long term costs of Brexit and came up with much smaller estimates of its own for these costs.
Defining exactly what Fake News is can be difficult , although we can point to examples which undoubtedly are fake, in the sense of reporting things to be true when it is clear they are not. Fake News often constitutes made up facts that are designed for a political purpose. You could define Fake economics in a similar way: economic analysis or research that is obviously flawed but whose purpose is to support a particular policy. (Cue left wing heterodox economists to say the whole of mainstream economics is fake economics.) We can equally talk about evidence based policy and its fake version, policy based evidence.

[Jan 18, 2017] FRBSF The Current Economy and the Outlook

Jan 18, 2017 | economistsview.typepad.com
libezkova : , -1
Mathiness and "number racket" are two feature of neoliberalism that are especially damaging.

I like how neoclassical economics works: bought economists operate with fake models that use fake data.

It probably would be more interesting to discuss how US government measures unemployment those days. And all those "not in labor force" tricks.

Just seasonal adjustment make winter figures highly suspect.

Only U6 still has some connections to reality and if this measure shows "close to full employment", you can call any half empty glass "full".

http://unemploymentdata.com/current-u6-unemployment-rate/

== quote ==

Current U-6 Unemployment Rate is 9.1% (BLS) or 13.7% (Gallup)

Current U-6 Unemployment Rate:

Unemployment U6 vs U3 For December 2016 the official Current U-6 unemployment rate was 9.1% up from last month's 9.0% but still below the recent low of 9.3% in April and September and October's 9.2%.

On the other hand the independently produced Gallup equivalent called the "Underemployment Rate" was up to 13.7 in December from 13.0% in November nearing the 13.8% of April. The current differential between Gallup and BLS on supposedly the same data is 4.6%!

jonny bakho : , January 18, 2017 at 05:07 AM
"The labor market remains near its sustainable, full employment level."

This is a hope not a fact
There is plenty of slack if the underemployed move into jobs and we return the 20-50 yr olds to pre-recession participation rates.

pgl -> jonny bakho... , January 18, 2017 at 07:28 AM
Yep. Which is why I focus on the employment to population ratio. We are far from full employment.
John San Vant -> pgl... , January 18, 2017 at 09:54 AM
nope,nope,nope. you don't get how employment to population ratio is calculated. it can't rise and should not rise unless the calculations are adjusted.
John San Vant -> jonny bakho... , January 18, 2017 at 09:52 AM
Sorry, but it is a fact. Capital is at full employment.

Underemployed is cost savings adjustment made 30+ years ago and the pre-recession trend is always the end of the expansion.

urban legend -> John San Vant... , January 18, 2017 at 11:09 AM
Let's see:
SUPPORTING the belief that we are "close" to full employment is the U-3 measure of unemployment, a measure with an arbitrary cut-off that excludes from the official labor force as many people as possible who are not employed but do want jobs -- by requiring (1) an "active" search effort only within the last four weeks, based on (2) a definition of "active" that probably does not fit rational behavior by the unemployed who now have access to comprehensive Internet jobs databases that did not exist 20 years ago. (It is not terribly hard to surmise the institutional interests that are served by keeping the size of the labor force for purposes of determining the official unemployment rate as small as possible.)

NOT SUPPORTING the belief that we are close to full employment:

(1) the lowest employment-to-population ratio in almost half a century;
(2) negating the intellectually-lazy demographic excuse that invariably gets raised to point No. 1, the lowest employment-to-population ratio in 30 years in the prime working age group (25-54), a group that is 99.99% unaffected by the phenomenon of voluntary retirement;
(3) a U-6 (that counts many more of the unemployed in the labor force) that is still three percentage points higher than the low point reached in 2000 (three percentage points is a lot, representing about 7.5 million people who want jobs but are not counted in the labor force for calculating the U-3);
(4) an aggregate growth in full-time jobs of only 9% since the relative high point in 2000 even though the working age population has grown by 20%;
(5) average weeks unemployed among those who are counted as part of the labor force (26 weeks) that is still more than twice as high as it was in 2000 (under 13 weeks) and is still 10 weeks higher than it was before the Great Recession;
(6) involuntary part-time employment still 75% higher than it was in 2000, 33% higher than before the Great Recession;
(7) whereas in 2000, the U.S. was near the top in employment rate among the OECD countries, in 2017 it is close to the bottom; most OECD countries have recovered in their employment rates since the depths of the Great Recession, and many have moved to new levels (even supposedly sick France has a higher employment rate in the 25-54 prime working age group than te U.S.).

With this array of negative date to overcome, it takes a lot of wise monkeys who neither speak, hear nor see any evil to expound a belief that we are close to full employment.

RW said... January 18, 2017 at 07:05 AM

Inflation for the 4th quarter of 2016 is zero -- no change Oct through Dec -- and real interest rates remain near the zero boundary. Republican history WRT governing particularly as it pertains to the economy is sufficiently poor that optimism appears entirely unwarranted. I hear a lot of investors are adjusting their portfolio allocations to favor equities over bonds. Two years ago that was a smart move; now, not so much.

mulp said...

"All else equal, tax cuts boost household and business income."

In 2001, I was rif'd from my 100K++ job and got a $20,000 tax cut.

That tax cut did not boost my household income.

That economists have been bamboozled into thinking this way is beyond my comprehension.

Economies are zero sum. For every action, there is a reaction. Tax cuts mean revenue cuts which means spending cuts and spending cuts mean lower household income.

Very few sectors of the economy are subject to demand price elasticity that results in higher revenue from price reduction due to the quantity increasing explosively from a small reduction in price.

For example, cutting the profit tax by 30% on $100 oil so gasoline falls from $4.05 to $4.00 and thus doubles the quantity of gasoline sold to boost profit taxes is an impossibility.

And cutting the tax on economic profits from restricting oil production to drive up prices and profits can only increase tax revenue if oil production is cut further by cutting jobs so gasoline prices can be increased from $4 to $5 to $6 per gallon.

Since Reagan, economists seem to have self lobotomized so they spout totally illogical nonsense like "All else equal, tax cuts boost household and business income."

Might as well say "if you believe, you can fly when tinker bell hits you with pixie dust."


Reply Wednesday, January 18, 2017 at 11:07 AM

[Jan 18, 2017] The idea of equilibrium is a neoclassical fallacy as financial sector introduces the positive feedback loop leading to system instability

Jan 18, 2017 | economistsview.typepad.com
reason : , January 16, 2017 at 02:03 AM
I know I will completely offside with my view on this, but I think the behavioural/rational expectations debate is rather besides the point. The much bigger issues are uncertainty and disequilibrium.

http://noahpinionblog.blogspot.de/2017/01/cracks-in-anti-behavioral-dam.html

pgl -> reason ... , January 16, 2017 at 02:06 AM
Not offside. Spot on.
reason -> reason ... , January 16, 2017 at 02:09 AM
The fundamental problem is in trying to model an evolutionary system as though it was a quasi stationary system (with exactly proportional growth).
New Deal democrat -> reason ... , January 16, 2017 at 05:31 AM
As I noted the other day, and Johnnny Bakho refers to below, the essence of this problem is that the thing being observed, observes back and adapts.

The only kind of model that might work in the long run, is a model that works even after everybody becomes aware of it and adapts their behavior to it.

As to the issue of uncertainty, if we assume that most people operate with formal or informal budgets, anything that causes them to think that their budget is about to increase or decrease is going to change their consumption. And since people *hate* to sustain and realise losses, the change is going to be disproportionately intense if the uncertainty include an possible increase to the downside.

reason -> New Deal democrat... , January 16, 2017 at 07:14 AM
No that isn't enough. Sure people might change their behavior as their understanding changes. But other things are changing as well as the behavior. In particular, technology and available resources change.

As I said the system is evolutionary (which means an adaptive system - which includes behavior changes), and evolution is never easy to anticipate, which implies uncertainty. And the existence of uncertainty leads to persistent disequilibrium (as people adopt defensive contingent strategies to cope with uncertainty). The big errors in macro are all associated with the general equilibrium paradigm and the assumptions that come with it.

New Deal democrat -> reason ... , January 16, 2017 at 07:38 AM
Point taken re technology and resources, although behavioral adaptation is a big part of why models fail.

I had a big long response worked out re the biggest endemic problem with "the assumptions that come with" macro's paradigm. Then my iPad decided to randomly pop up a keyboard screen and when I touched to get rid of it, deleted the entire comment!

The screaming at crapified Apple has passed now. I am zen again.

reason -> New Deal democrat... , January 16, 2017 at 08:40 AM
P.S. Rational expectations IS an attempt to build in behavioral adaptation. It is just that it turns out not very useful (it is empirically a complete flop).
JohnH -> New Deal democrat... , January 16, 2017 at 07:36 AM
I thought we were in a time of uncertainty right now due to Trump.

Anybody see any slowing of the economy? Markets are up.

New Deal democrat -> JohnH... , January 16, 2017 at 07:39 AM
Well-to-do GOPers foreseeing unfettered capitalist nirvana. It will pass.
JohnH -> New Deal democrat... , January 16, 2017 at 08:11 AM
So there is 'uncertainty' and 'uncertainty.' Which kind of uncertainty leads to a slower economy? Why wouldn't unknown after-shocks from repealing Obamacare have current economic repercussions?

Republicans used to claim that the roll-out of Obamacare was causing economic uncertainty and hurting the economy.

Seems to me that the whole foundation of 'economic uncertainty' is rather shaky, particularly if the promised, disruptive actions of Trump don't cause economic repercussions.

reason -> JohnH... , January 16, 2017 at 08:45 AM
Uncertainty (as for instance PK pointed out) can work in different ways in the short and long terms. In the short term it can result in hedging behavior which might actually promote some investment. In the longer term it will push up risk margins which will probably push growth rates down.
ilsm -> reason ... , January 16, 2017 at 04:39 AM
football
jonny bakho -> reason ... , January 16, 2017 at 04:49 AM
Humans evolved as social animals.
If rational expectations focuses on the individual and ignores that humans act as members of groups, not individuals, then it will not accurately predict human behavior or outcomes.
point -> reason ... , January 16, 2017 at 06:07 AM
Perhaps your comment is similar to supposing that perhaps "equilibrium" is a not always useful concept when the modeled surface may have multiple local maxima, minima and saddles.
reason -> point... , January 16, 2017 at 07:18 AM
Nope. I think we are trying to model a system converging to an equilibrium that is changing faster than the system can possibly adapt. We should forget all about equilibrium in macro-economics. It only misdirects.

I once tried to explain this with an analogy to flying a plane - the plane is always sinking and rising and net path the outcome of the sum of different (constantly varying) forces. This is quite distinct for instance, from the way that a boat floats on the ocean (which is much closer to how we are trying to model things today). The stochastic shocks in economic models are like waves on the sea - where the net effect in the end is that the average position remains the same. I don't think the economy is like that.

libezkova -> reason ... , -1
The idea of equilibrium is a neoclassical fallacy. financial sector introduced in the system systemic instability, the positive feedback loop.

Cassidy called it "Utopian economics".

As you wrote in 2015

reason :

The problem in thinking here is the equilibrium paradigm. Equilibrium NEVER exists. If there is a glut the price falls below the marginal cost/revenue point, if the seller is desperate enough it falls to zero!

Ignoring disequilibrium dynamics means this obvious (it should be obvious) point is simply ignored. The assumption of general equilibrium leads to the assumption of marginal productivity driving wages. You are not worth what you produce, you are worth precisely what somewhat else would accept to do your job.

See also

"The Virtues and Vices of Equilibrium, and the Future of Financial Economics"
J. Doyne Farmer and John Geanakoplos (2008)
http://cowles.econ.yale.edu/~gean/art/p1274.pdf

[Jan 17, 2017] Is Krugman another economic charlatan like Mankiw?

Jan 17, 2017 | economistsview.typepad.com
All those notions like "full employment" (when employment metrics are completely screwed) are very questionable indeed. And role of federal reserve in enforcing neoliberal policies is often underestimated. Greenspan was a neoliberal stooge. A servant of Wall Street.

Peter K. : , January 17, 2017 at 08:02 AM

JW Mason remembers a famous episode that the progressive neoliberals would have us forget:

http://jwmason.org/slackwire/what-does-crowding-out-even-mean/

What Does Crowding Out Even Mean?
by J.W. Mason
Posted on January 16, 2017

Paul Krugman is taking some guff for this column where he argues that the US economy is now at potential, or full employment, so any shift in the federal budget toward deficit will just crowd out private demand.

...

...In the more sophisticated textbooks, this becomes a central bank reaction function - the central bank's actions change from being policy choices, to a fundamental law of the economic universe. The master parable for this story is the 1990s, when the Clinton administration came in with big plans for stimulus, only to be slapped down by Alan Greenspan, who warned that any increase in public spending would be offset by a contractionary shift by the federal reserve. But once Clinton made the walk to Canossa and embraced deficit reduction, Greenspan's fed rewarded him with low rates, substituting private investment in equal measure for the foregone public spending. In the current contest, this means: Any increase in federal borrowing will be offset one for one by a fall in private investment - because the Fed will raise rates enough to make it happen."

...

[Jan 15, 2017] The Stumbling and Mumbling article raises a fundamental point about economics: forecasting *must* inevitably be generally wrong.

Notable quotes:
"... But the application is broader. There are two types of economics: positive economics vs. normative economics. Basically, " here is what people do" vs. "here is what people *should* do." The better economics gets at explaining what people actually do, the more people can adapt their behavior based on the accuracy of economics. ..."
"... "War is regarded as nothing but the continuation of state policy with other means." ..."
Jan 15, 2017 | economistsview.typepad.com
New Deal democrat : , January 14, 2017 at 05:49 AM
The Stumbling and Mumbling article raises a fundamental point about economics: forecasting *must* inevitably be generally wrong.

The reason is that you are predicting human behavior, but the humans under observation also get to observe back! They can and will adapt their behavior based on your forecasts. For example, let's say that everyone knows that I am a 100% accurate economic prognosticator. I forecast that while the economy is doing well now, one year from now there will be a recession.

What do you as a producer or consumer do? Since you know I am 100% accurate, you alter your behavior because you know a recession is coming in one year. Result: the recession comes now! Because you curtailed production or consumption in anticipation of the recession you knew was coming.

But the application is broader. There are two types of economics: positive economics vs. normative economics. Basically, " here is what people do" vs. "here is what people *should* do." The better economics gets at explaining what people actually do, the more people can adapt their behavior based on the accuracy of economics.

Result: the better positive and normative economics get, the more positive and to some extent* normative economics must fail!

(*I think there are some normative concepts that would be correct even if everyone knew about them and acted on them, e.g., efficiently allocating time.)

P.S.: As an aside and a real-world example, I am just finishing a dense 800 page tome on Napoleon. It has been a godsend since the election! As a young general, Napoleon was brilliant, adopting and using the newest and novel tactics and formations advocated by military scholars against his geriatric and monarchically-connected opponents.

But over time his adversaries, especially Tsar Alexander, learned. They appointed more military generals and strategists on merit, adopted Napoleon's reforms, and in a strategy that the Chinese and Japanese (and Karl Rove) would have approved, actually used his strengths against him.

Humans are remarkably cunning chimpanzees. When enough of them learn a strategy, it loses its effectiveness.

anne -> New Deal democrat... , January 14, 2017 at 06:57 AM
I am just finishing a dense 800 page tome on Napoleon...

[ A mystery tome, that might of course be referenced but where would the mystery be then? ]

New Deal democrat -> anne... , January 14, 2017 at 07:10 AM
Napoleon had a blind spot for naval warfare.
Anne, you have a blind spot for google. ;)

The book is mysteriously titled "Napoleon." The author is Andrew Roberts.

ilsm -> New Deal democrat... , January 14, 2017 at 07:53 AM
von Clauswitz recorded and expanded on a lot of what Napoleon did from a Prussian perspective.

Sadly US ignore von C and Napoleon's lessons.

libezkova -> ilsm... , January 14, 2017 at 10:17 AM
Very True. Some of his observations stood the test of the time.

Such as "War is regarded as nothing but the continuation of state policy with other means."

anne -> New Deal democrat... , January 14, 2017 at 08:16 AM
https://www.nytimes.com/2014/11/16/books/review/napoleon-a-life-by-andrew-roberts.html

November 16, 2014

'Napoleon: A Life,' by Andrew Roberts
By DUNCAN KELLY

On July 22, 1789, a week after the storming of the Bastille in Paris, Napoleon Bonaparte wrote to his older brother, Joseph, that there was nothing much to worry about. "Calm will return. In a month." His timing was off, but perhaps he took the misjudgment to heart because he spent the rest of his life trying to bring glory and order to France by building a new sort of empire. By the time he was crowned emperor on Dec. 2, 1804, he could say, "I am the Revolution." It was, according to the historian Andrew Roberts's epically scaled new biography, "Napoleon: A Life," both the ultimate triumph of the self-made man, an outsider from Corsica who rose to the apex of French political life, and simultaneously a "defining moment of the Enlightenment," fixing the "best" of the French Revolution through his legal, educational and administrative reforms. Such broad contours get at what Napoleon meant by saying to his literary hero Goethe at a meeting in Erfurt, "Politics is fate."

Napoleon didn't mean fatalism by this, rather that political action is unavoidable if you want personal and national glory. It requires a mastery of fortune, and a willingness to be ruthless when necessary. If this sounds Machiavellian, that's because it is - Machiavelli's arguments about politics informed Napoleon's self-consciousness, whether in appraising fortune as a woman or a river to be tamed and harnessed, or assuming that in politics it is better to be feared than loved. Such views went hand in hand with the grand visions of politics outlined in the ancient histories and biographies Napoleon revered as a young man. "Bloodletting is among the ingredients of political medicine" was Napoleon's cool if brutal reminder of an ever-present item on his exhausting schedule.

His strategy always included dashing off thousands of letters and plans, in a personal regime calling for little sleep, much haste and a penchant for being read to while taking baths so as not to waste even a minute. He compartmentalized ruthlessly, changing tack between lobbying for more shoes and brandy for the army at one minute, to directing the personal lives of his siblings or writing love letters to the notorious Josephine at another; here ensuring extravagant financial "contributions" from those whom he had vanquished, there discussing the booty to send back to Paris, particularly from the extraordinary expedition in Egypt where his "savants had missed nothing." The personal and the political ran alongside each other in his mind.

Yet when his longtime collaborator but fair-weather political friend, the diplomat Charles-Maurice de Talleyrand, suggested that Napoleon try to make those he conquered learn to love France, Napoleon replied that this was an irrelevance. "Aimer: I don't really know what this means when applied to politics," he said. Still, if grand strategy and national interest lay behind foreign affairs, there were nevertheless personal rules of conduct to uphold. Talleyrand was a party to Napoleon's strategy since supporting his coup d'état against the French Directory in 1799. That was O.K. And by short-selling securities he made millions for himself. But he was called out by Napoleon and dismissed as vice grand elector when found facing both ways politically at a crucial moment.

Napoleon understood those temptations because he was also flexible enough to tilt toward the winning side, regularly supporting any form of local religion that could help him militarily. Nonetheless, Roberts's Napoleon is a soldier, statesman and "bona fide intellectual," who rode his luck for longer than most intellectuals in politics ever do....


Duncan Kelly teaches political thought at the University of Cambridge.

[Jan 14, 2017] What is full employment is also debatable issue

Notable quotes:
"... What is full employment is also debatable issue. For example, if workers or a good portion of workers are not earning a living wage, is that full employment? ..."
"... If production is reduced because people cannot afford the products, when in fact we have the capacity and people have the appetites and time to get utility out of the consumption is that full employment? ..."
"... Central bankers today irresistibly bring to mind the Wizard of Oz. It's the characters' missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three. ..."
"... The Fed took risks to save the banking system, but is already telling us we are close to full employment and professing to be alarmed about "inflation," when anyone can see that banks, insurers, and pension funds are clamoring for rate rises, just as in the 1930s. Both institutions need to start thinking about someone besides the financial community. If they don't, I do not doubt that we will not have seen the last of the anger that Donald Trump and Senator Bernie Sanders mobilized in such disparate ways in the United States..." ..."
Jan 14, 2017 | economistsview.typepad.com
Peter K. -> Peter K.... January 13, 2017 at 07:10 AM

Really what SWL is saying he and Krugman are against fiscal expansion because the Fed will negate it with higher interest rates.

"Paul Krugman and I say no, using the following logic. The Fed thinks we are close to full employment, if we use the term to denote the level of employment that keeps inflation constant. Generalised tax cuts (rather than just tax cuts to the very rich) will tend to raise aggregate demand, which will lead inflation to increase. The Fed will therefore raise interest raise rates further to offset this increase in demand before it happens. As a result, the tax cuts will have no impact on demand, but simply make funding investment more expense."

Maybe Trump will then fire Yellen? Did the clever little progressive neoliberals ever consider that?

(Probably not since Obama never mad filling open slots on the FOMC a priority.)

Or he'll swamp her with reflationary nominations to the FOMC.

djb -> Peter K....
What is full employment is also debatable issue. For example, if workers or a good portion of workers are not earning a living wage, is that full employment?

If production is reduced because people cannot afford the products, when in fact we have the capacity and people have the appetites and time to get utility out of the consumption is that full employment?

So full employment definition is a whole field in itself

JohnH -> Peter K.... , January 13, 2017 at 08:31 AM
Thomas Ferguson: "Central bankers today irresistibly bring to mind the Wizard of Oz. It's the characters' missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three.

First, the brain. Two generations ago, almost every economist knew what a catastrophe a deficiency of effective demand could create. And in a real crunch, they knew what to do about that. They realized you couldn't push on a string, so somebody - the government - had to borrow and spend when private markets would not. From the 1980s on, though, the fundamental Keynesian point - the Principle of effective Demand -disappeared in a cloud of statistical double-talk that, when you deconstruct it, turns out to imply estimating potential output as a lagged function of whatever foolish policy is being pursued.

Central bankers didn't take this giant step backwards to pre-Keynesian economics by themselves. In that sense, it's unfair to say they have only themselves to blame. But they swallowed it whole, helped subsidize it, and cheered it on. Now that they have rediscovered that monetary policy can't levitate a broken economy, except by beggaring the neighbors, it's time they admitted their errors and stopped acting like they could control everything...

Next, courage. In the good old days, central bankers were given to heady talk about "taking away the punch bowl" before the party really got going. That may have been mostly rhetoric, but it at least paid lip service to some value bigger than banking...

The Fed took risks to save the banking system, but is already telling us we are close to full employment and professing to be alarmed about "inflation," when anyone can see that banks, insurers, and pension funds are clamoring for rate rises, just as in the 1930s. Both institutions need to start thinking about someone besides the financial community. If they don't, I do not doubt that we will not have seen the last of the anger that Donald Trump and Senator Bernie Sanders mobilized in such disparate ways in the United States..."

Meanwhile 'liberal' worshippers of unsubstantiated 'crowding out' theories are eager to stifle fiscal stimulus by having the Fed take away the punch bowl before the party starts.

JohnH -> JohnH... , -1
Link: http://www.nakedcapitalism.com/2017/01/tom-ferguson-monetary-policy-cant-levitate-broken-economy.html

[Jan 13, 2017] what is full employment is also debatable issue

Jan 13, 2017 | economistsview.typepad.com
Peter K. -> Peter K.... , January 13, 2017 at 07:10 AM
Really what SWL is saying he and Krugman are against fiscal expansion because the Fed will negate it with higher interest rates.

"Paul Krugman and I say no, using the following logic. The Fed thinks we are close to full employment, if we use the term to denote the level of employment that keeps inflation constant. Generalised tax cuts (rather than just tax cuts to the very rich) will tend to raise aggregate demand, which will lead inflation to increase. The Fed will therefore raise interest raise rates further to offset this increase in demand before it happens. As a result, the tax cuts will have no impact on demand, but simply make funding investment more expense."

Maybe Trump will then fire Yellen? Did the clever little progressive neoliberals ever consider that?

(Probably not since Obama never mad filling open slots on the FOMC a priority.)

Or he'll swamp her with reflationary nominations to the FOMC.

djb -> Peter K.... , -1
what is full employment is also debatable issue

for example, if workers or a good portion of workers are not earning a living wage, is that full employment?

if production is reduced because people cannot afford the products, when in fact we have the capacity and people have the appetites and time to get utility out of the consumption

is that full employment?

so full employment definition is a whole field in itself

[Jan 13, 2017] They pretend to make statements that corresponded to reality, and we pretend to believe them.

Notable quotes:
"... For him, the Soviet Union was once a stable, entrenched, conservative state and the majority of Russian people -- actually myself included -- thought it would last forever. But the way people employ language and read ideologies can change. That change can be undetectable at first, and then unstoppable. ..."
Jan 08, 2017 | www.amazon.com

Igor Biryukov on November 1, 2012

A cautionary tale

" In America there was once a popular but simplistic image of the Soviet Russia as the Evil Empire destined to fall, precisely because it was unfree and therefore evil. Ronald Reagan who advocated it also once said that the Russian people do not have a word for "freedom". Not so fast -- says Alexei Yurchak. He was born in the Soviet Union and became a cultural anthropologist in California. He employs linguistic structural analysis in very interesting ways. For him, the Soviet Union was once a stable, entrenched, conservative state and the majority of Russian people -- actually myself included -- thought it would last forever. But the way people employ language and read ideologies can change. That change can be undetectable at first, and then unstoppable.

Yurchak's Master-idea is that the Soviet system was an example of how a state can prepare its own demise in an invisible way. It happened in Russia through unraveling of authoritative discourse by Gorbachev's naive but well-meaning shillyshallying undermining the Soviet system and the master signifiers with which the Soviet society was "quilted" and held together. According to Yurchak "In its first three or four years, perestroika was not much more than a deconstruction of Soviet authoritative discourse". This could a cautionary tale for America as well because the Soviet Union shared more features with American modernity than the Americans themselves are willing to admit.

The demise of the Soviet Union was not caused by anti-modernity or backwardness of Russian people. The Soviet experiment was a cousin of Western modernity and shared many features with the Western democracies, in particular its roots in the Enlightenment project. The Soviet Union wasn't "evil" in late stages 1950-1980s. The most people were decent. The Soviet system, despite its flaws, offered a set of collective values. There were many moral and ethical aspects to Soviet socialism, and even though those values have been betrayed by the state, they were still very important to people themselves in their lives. These values were: solidarity, community, altruism, education, creativity, friendship and safety. Perhaps they were incommensurable with the "Western values" such as the rule of law and freedom, but for Russians they were the most important. For many "socialism" was a system of human values and everyday realities which wasn't necessarily equivalent of the official interpretation provided by the state rhetoric.

Yurchak starts with a general paradox within the ideology of modernity: the split between ideological enunciation, which reflects the theoretical ideals of the Enlightenment, and ideological rule, which are the practical concerns of the modern state's political authority. In Soviet Union the paradox was "solved" by means of dogmatic political closure and elevation of Master signifier [Lenin, Stalin, Party] but it doesn't mean the Western democracies are immune to totalitarian temptation to which the Soviet Union had succumbed. The vast governmental bureaucracy and Quango-state are waiting in the shadows here as well, may be ready to appropriate discourse.

It is hard to agree with everything in his book. But it is an interesting perspective. I wish Alexei Yurchak would explore more implications of Roman Jacobson's "poetic function of language" and its connection to Russian experiment in communism. It seems to me, as a Russian native speaker, that Russians put stress on form, sound, and poetics. The English-language tradition prioritizes content and meaning. Can we speak of "Hermeneutics" of the West versus "Poetics" of Russia? Perhaps the tragedy of Russia was under-development of Hermeneutics? How does one explain the feeble attempts to throw a light of reason into the loopy texts and theories of Marks, Lenin, Trotsky and Stalin? Perhaps the Russians read it as a kind of magical text, a poetry, a bad poetry -- not Pasternak or Blok -- but kind of poetry nevertheless?

Nils Gilman on April 23, 2014

A brilliant account of the interior meaning of everyday life for ordinary soviet citizens

Just loved this -- a brilliant study of how everyday citizens (as opposed to active supporters or dissidents) cope with living in a decadent dictatorship, through strategies of ignoring the powerful, focusing on hyperlocal socialities, treating ritualized support for the regime as little more than an annoying chore, and withdrawal into subcultures. Yurchak demolishes the view that the only choices available to late Soviet citizens were either blind support (though his accounts of those figures who chose this path are deeply chilling) or active resistance, while at the same time showing how many of the purported values of Soviet socialism (equality, education, friendship, community, etc) were in fact deeply held by many in the population. While his entire account is a tacit meditation on the manifold unpleasantnesses of living under the Soviet system, Yurchak also makes clear that it was not all unpleasantness and that indeed for some people (such as theoretical physicists) life under Soviet socialism was in some ways freer than for their peers in the West. All of which makes the book function (sotto voce) as an explanation for the nostalgia that many in Russia today feel for Soviet times - something inexplicable to those who claim that Communism was simply and nothing but an evil.

The theoretical vehicle for Yurchak's investigation is the divergence between the performative rather than the constative dimensions of the "authoritative discourse" of the late Soviet regime. One might say that his basic thesis is that, for most Soviet people, the attitude toward the authorities was "They pretend to make statements that corresponded to reality, and we pretend to believe them." Yurchak rightly observes that one can neither interpret the decision to vote in favor of an official resolution or to display a pro-government slogan at a rally as being an unambiguous statement of regime support, nor assume that these actions were directly coerced. People were expected to perform these rituals, but they developed "a complexly differentiating relationship to the ideological meanings, norms, and values" of the Soviet state. "Depending on the context, they might reject a certain meaning, norm or value, be apathetic about another, continue actively subscribing to a third, creatively reinterpret a fourth, and so on." (28-29)

The result was that, as the discourse of the late Soviet period ossified into completely formalist incantations (a process that Yurchak demonstrates was increasingly routinized from the 1950s onwards), Soviet citizens participated in these more for ritualistic reasons than because of fervent belief, which in turn allowed citizens to fill their lives with other sources of identity and meaning. Soviet citizens would go to cafes and talk about music and literature, join a rock band or art collective, take silly jobs that required little effort and thus left room for them to pursue their "interests." The very drabness of the standardizations of Soviet life therefore created new sorts of (admittedly constrained) spaces within which people could define themselves and their (inter)subjective meanings. All of which is to say that the book consists of a dramatic refutation of the "totalitarianism" thesis, demonstrating that despite the totalitarian ambitions of the regime, citizens were continually able to carve out zones of autonomy and identification that transcended the ambitions of the Authoritative discourse.

[Jan 13, 2017] Hypernormalisation

Notable quotes:
"... Normalisation is what has historically happened in the wake of financial crises. During the booms that precede busts, low interest rates encourage people to make investments with borrowed money. However, even after all of the prudent investment opportunities have been taken, people continue borrowing to invest in projects and ideas that are unlikely to ever generate profits. ..."
"... Eventually, the precariousness of some of these later investments becomes apparent. Those that arrive at this realization early sell up, settle their debts and pocket profits, but their selling often triggers a rush for the exits that bankrupts companies and individuals and, in many cases, the banks which lent to them. ..."
"... By contrast, the responses of policy-makers to 2008's financial crisis suggest the psychology of hypernormalisation. Quantitative easing (also known as money printing) and interest rate suppression (to zero percent and, in Europe, negative interest rates) are not working and will never result in sustained increases in productivity, income and employment. However, as our leaders are unable to consider alternative policy solutions, they have to pretend that they are working. ..."
"... Statistical chicanery has helped understate unemployment and inflation while global cooperation has served to obscure the currency depreciation and loss of confidence in paper money (as opposed to 'hard money' such as gold and silver) that are to be expected from rampant money printing. ..."
"... The recent fuss over 'fake news' seems intended to remove alternative news and information sources from a population that, alarmingly for those in charge, is both ever-more aware that the system is not working and less and less willing to pretend that it is . Just this month U.S. President Barack Obama signed the Countering Disinformation and Propaganda Act into law. United States, meet your Ministry of Truth. ..."
"... Great article. I think it does describe the USSA at the present time. Everything works until it doesn't. ..."
"... The funny thing is I had almost identical thoughts just a few days ago. But I was thinking in comparison more of East Germany's last 20 years before they imploded - peacefully, because not a single non-leading-rank person believed any of the official facts anymore (and therefore they even simply ignored orders from high command to crush the Leipzig Monday demonstrations.) ..."
"... I'm ok with a world led by Trump and Putin. ..."
"... I recall the joke from the old Soviet Union: "They pretend to pay us, we pretend to work." In the USSA these last few years, Barry pretends to tell the truth. Libtards pretend to believe him. ..."
"... Wrong. They believe him. Look at the gaggle of libtard/shiteaters at Soetero's Friday night bash at the White House. ..."
"... Reagan used to quip that in the Soviet Union, the people pretend to work and the government pretends to pay them. We're not the Soviet Union, but we have become a farce. Next stop - the fall. Followed by chaos, then onto something new. The new elites will just be the old elites, well, the ones that escape the noose. ..."
"... The real ugly problem with the Soviet Union is that whatever they broke it into isn't working well either. ..."
"... Russia's problem post collapse was the good ol' USSA and its capitalist, plunderer banking mavens. ..."
"... The only way to normalize banking in a contemporary banking paradigm of QE Infinity & Beyond is to start over again without the bankers & accountants that knowingly bet the ranch for a short term gain at the expense of long term profitability. In Japan an honourable businessman/CEO would suicide for bringing this kind of devastation to the company shareholders. ..."
"... In America they don't give a shit because it is always someone else other than the CEO that takes the fall. ..."
"... This, after I'd point out his evasion and deflection every time I addressed his bias and belief in the MSM propaganda mantras of racism, misogyny, xenophobia - all the usual labeling bullshit up to insinuating Russia hacked the election ..."
"... I've been using the term Hypernormalisation to describe aspects of western society for the last 15 years, before Adam Curtis's brilliant BBC documentary Hypernormalisation , afflicting western society and particularly politics. There are lies and gross distortions everywhere in western society and it straddles/effects all races, colours, social classes and the disease is most acute in our politics. ..."
"... We all know the hypernoprmalisation in politics, as we witness stories everyday on Zerohedge of the disconnect from reality ..."
"... It is called COGNITIVE DISSONANCE .. ..."
"... "When they are presented with evidence that works against that belief, the new evidence cannot be accepted. It would create a feeling that is extremely uncomfortable, called cognitive dissonance. And because it is so important to protect the core belief, they will rationalize, ignore and even deny anything that doesn't fit with the core belief." ..."
"... During their final days as a world power, the Soviet Union allowed cognitive dissonance to rule its better judgment as so many Americans are doing in 2012. The handwriting on the wall was pretty clear for Gorbachev. The Soviet economy was failing. They did none of the necessary things to save their economy. In 2012, the handwriting on the wall is pretty clear for the American people. The economy is failing. The people and the Congress do none of the necessary things to save their economy. Why? Go re-read the definition of cognitive dissonance. That's why. We have a classic fight going on between those who want government to take care of them who will pay the price of lost freedom to get that care, and those who value freedom above all else. ..."
"... to me the PTB are "Japanifying" the u.s. (decades of no growth, near total demoralization of a generation of worker bees (as in, 'things will never get any better, be glad for what little you've got' etc... look what they've done to u.s. millenials just since '08... fooled (crushed) them TWICE already) ..."
"... But the PTB Plan B is to emulate the USSR with a crackup, replete with fire sale to oligarchs of public assets. ..."
Jan 08, 2017 | www.zerohedge.com
Submitted by Bryce McBride via Mises Canada,

This past November, the filmmaker Adam Curtis released the documentary Hypernormalisation.

https://www.youtube.com/embed/-fny99f8amM

The term comes from Alexei Yurchak's 2006 book Everything was Forever, Until it was No More: The Last Soviet Generation. The book argues that over the last 20 years of the Soviet Union, everyone knew the system wasn't working, but as no one could imagine any alternative, politicians and citizens were resigned to pretending that it was. Eventually this pretending was accepted as normal and the fake reality thus created was accepted as real, an effect which Yurchak termed "hypernormalisation."

Looking at events over the past few years, one wonders if our own society is experiencing the same phenomenon. A contrast with what economic policy-makers term "normalisation" is instructive.

Normalisation is what has historically happened in the wake of financial crises. During the booms that precede busts, low interest rates encourage people to make investments with borrowed money. However, even after all of the prudent investment opportunities have been taken, people continue borrowing to invest in projects and ideas that are unlikely to ever generate profits.

Eventually, the precariousness of some of these later investments becomes apparent. Those that arrive at this realization early sell up, settle their debts and pocket profits, but their selling often triggers a rush for the exits that bankrupts companies and individuals and, in many cases, the banks which lent to them.

In the normalisation which follows (usually held during 'special' bank holidays) auditors and accountants go through financial records and decide which companies and individuals are insolvent (and should therefore go bankrupt) and which are merely illiquid (and therefore eligible for additional loans, pledged against good collateral). In a similar fashion, central bank officials decide which banks are to close and which are to remain open. Lenders made freshly aware of bankruptcy risk raise (or normalise) interest rates and in so doing complete the process of clearing bad debt out of the system. Overall, reality replaces wishful thinking.

While this process is by no means pleasant for the people involved, from a societal standpoint bankruptcy and higher interest rates are necessary to keep businesses focused on profitable investment, banks focused on prudent lending and overall debt levels manageable.

By contrast, the responses of policy-makers to 2008's financial crisis suggest the psychology of hypernormalisation. Quantitative easing (also known as money printing) and interest rate suppression (to zero percent and, in Europe, negative interest rates) are not working and will never result in sustained increases in productivity, income and employment. However, as our leaders are unable to consider alternative policy solutions, they have to pretend that they are working.

To understand why our leaders are unable to consider alternative policy solutions such as interest rate normalization and banking reform one only needs to understand that while such policies would lay the groundwork for a sustained recovery, they would also expose many of the world's biggest banks as insolvent. As the financial sector is a powerful constituency (and a generous donor to political campaigns) the banks get the free money they need, even if such policies harm society as a whole.

As we live in a democratic society, it is necessary for our leaders to convince us that there are no other solutions and that the monetary policy fixes of the past 8 years have been effective and have done no harm.

Statistical chicanery has helped understate unemployment and inflation while global cooperation has served to obscure the currency depreciation and loss of confidence in paper money (as opposed to 'hard money' such as gold and silver) that are to be expected from rampant money printing.

Looking at unemployment figures first, while the unemployment rate is currently very low, the number of Americans of working age not in the labour force is currently at an all-time high of over 95 million people. Discouraged workers who stop looking for work are no longer classified as unemployed but instead become economically inactive, but clearly many of these people really should be counted as unemployed. Similarly, while government statistical agencies record inflation rates of between one and two percent, measures that use methodologies used in the past (such as John Williams' Shadowstats measures) show consumer prices rising at annual rates of 6 to 8 percent. In addition, many people have noticed what has been termed 'shrinkflation', where prices remain the same even as package sizes shrink. A common example is bacon, which used to be sold by the pound but which is now commonly sold in 12 ounce slabs.

Meanwhile central banks have coordinated their money printing to ensure that no major currency (the dollar, the yen, the euro or the Chinese renminbi) depreciates noticeably against the others for a sustained period of time. Further, since gold hit a peak of over $1900 per ounce in 2011, central banks have worked hard to keep the gold price suppressed through the futures market. On more than a few occasions, contracts for many months worth of global gold production have been sold in a matter of a few minutes, with predictable consequences for the gold price. At all costs, people's confidence in and acceptance of the paper (or, more commonly, electronic) money issued by central banks must be maintained.

Despite these efforts people nonetheless sense that something is wrong. The Brexit vote and the election of Donald Trump to the White House represent to a large degree a rejection of the fake reality propagated by the policymaking elite. Increasingly, people recognize that a financial system dependent upon zero percent interest rates is not sustainable and are responding by taking their money out of the banks in favour of holding cash or other forms of wealth. In the face of such understanding and resistance, governments are showing themselves willing to use coercion to enforce acceptance of their fake reality.

The recent fuss over 'fake news' seems intended to remove alternative news and information sources from a population that, alarmingly for those in charge, is both ever-more aware that the system is not working and less and less willing to pretend that it is . Just this month U.S. President Barack Obama signed the Countering Disinformation and Propaganda Act into law. United States, meet your Ministry of Truth.

Meanwhile, in India last month, people were told that the highest denomination bills in common circulation would be 'demonetized' or made worthless as of December 30th. People were allowed to deposit or exchange a certain quantity of the demonetized bills in banks but many people who had accumulated their savings in rupee notes (often the poor who did not have bank accounts) have been ruined. Ostensibly, this demonetization policy was aimed at curbing corruption and terrorism, but it is fairly obvious that its real objective was to force people into the banking system and electronic money. Unsurprisingly, the demonetization drive was accompanied by limits on the quantity of gold people are allowed to hold.

Despite such attempts to influence our thinking and our behaviour, we don't need to resign ourselves to pretending that our system is working when it so clearly isn't. Looking at the eventual fate of the Soviet Union, it should be clear that the sooner we abandon the drift towards hypernormalisation and start on the path to normalisation the better off we will be.

DontGive Jan 7, 2017 9:03 PM

CB's printing is not a bug. It's a feature.

Long debt bitches.

Doña K TBT or not TBT Jan 8, 2017 12:05 AM

I did not learn anything from that movie. One man's collage of events.

We just take revenge on the system by living well.

Luc X. Ifer TBT or not TBT Jan 8, 2017 12:06 AM

Correct. I seen with sufficient level of comprehending consciousness the last 5 years of it - copy-cat perfection with the current times in US(S)A, terrifying how similar the times are as it is a clear indication of the times to come.

HRH Feant Jan 7, 2017 9:06 PM

Great article. I think it does describe the USSA at the present time. Everything works until it doesn't.

malek HRH Feant Jan 7, 2017 11:40 PM

The funny thing is I had almost identical thoughts just a few days ago. But I was thinking in comparison more of East Germany's last 20 years before they imploded - peacefully, because not a single non-leading-rank person believed any of the official facts anymore (and therefore they even simply ignored orders from high command to crush the Leipzig Monday demonstrations.)

navy62802 Jan 7, 2017 9:14 PM

I'm ok with a world led by Trump and Putin.

christiangustafson Jan 7, 2017 9:17 PM

Great piece!

I was just thinking that the whole economic world sees us in a sort of equilibrium at the moment. There will be some adjustments under Trump, but nothing serious. We shall see ..

Eeyores Enigma Jan 7, 2017 9:17 PM

Repeat something often enough and it becomes hypernormalised. With that in mind the number of eyes/minds/hits is all that matters. This has been known and exploited for hundreds of years.

That a handful of individuals can have a monopoly over the single most important aspect of whether you live or die is the ultimate success of hypernormalisation. CENTRAL BANKING.

Manipuflation Jan 7, 2017 9:22 PM

Mrs.M is of the last Soviet generation. Her .gov papers say so. There is never a day when I don't hear something soviet. She still has a her red pioneer ribbon. I have tried to encourage her to write about it on ZH so that we know. Do you think she will? No. She's says that we can't understand what it was like no matter what she says.

Mrs.M was born in 1981 so she has lived an interesting life. I married her in 2004 after much paperwork and $15000. I wanted that female because we got along quite well. She is who I needed with me this and I would do it all over again.

Needless to say, I do not support any aggression towards Russia. And to my fellow Americans, I advise caution because the half you are broke ass fucks and are already ropes with me.

That is the only news anyone needs to know.

wisebastard Jan 7, 2017 9:25 PM

the monkeys made me think ZH should make a post with monkeys evolving into humans that then de-evolve into Paul Krugman

GeezerGeek Jan 7, 2017 9:34 PM

I recall the joke from the old Soviet Union: "They pretend to pay us, we pretend to work." In the USSA these last few years, Barry pretends to tell the truth. Libtards pretend to believe him.

BabaLooey GeezerGeek Jan 7, 2017 11:05 PM

Wrong. They believe him. Look at the gaggle of libtard/shiteaters at Soetero's Friday night bash at the White House.

http://www.breitbart.com/big-hollywood/2017/01/07/stars-obamas-white-hou...

Fucks. ALL of them.

max_leering GeezerGeek Jan 7, 2017 11:35 PM

Geezer, I'd change only one thing... I believe libtards bought Barry's bullshit hook, line and sinker... it was the rest of us who not-so-subtly were saying WTF!!!

Salzburg1756 Jan 7, 2017 9:35 PM

White Nationalists have lived in the real world for decades; the rest of you need to catch up.

JustPastPeacefield Jan 7, 2017 10:06 PM

Reagan used to quip that in the Soviet Union, the people pretend to work and the government pretends to pay them. We're not the Soviet Union, but we have become a farce. Next stop - the fall. Followed by chaos, then onto something new. The new elites will just be the old elites, well, the ones that escape the noose.

evokanivo JustPastPeacefield Jan 7, 2017 10:23 PM

what noose? you think joe 6p is going to identify the culprits? i think not. "no one saw this coming!!!" is still ringing in my ears from the last time.

jm Jan 7, 2017 10:14 PM

I really don't know how people can keep on getting clicks with this tired crap. It didn't happen in 2008 just get over it. The delusional people are the people that think the world is going to end tomorrow.

wwxx jm Jan 8, 2017 6:08 AM

Maybe the world has ended, for 95 million? I haven't paid a single Fed income tax dollar in over 8 yrs., for a specific reason, I refuse to support the new normal circus, and quite frankly I would have gotten out during the GWBush regime, but I couldn't afford to at the time.

wwxx

EndOfDayExit Jan 7, 2017 10:17 PM

The real ugly problem with the Soviet Union is that whatever they broke it into isn't working well either. Same with the USSA. No one really knows what to do. Feudalism would probably work, but it is not possible to go back to it. My bet is that we will end up with some form of socialism, universal income and whatever else, just because there is no good alternative for dealing with lots and lots of people who are not needed anymore.

BingoBoggins EndOfDayExit Jan 8, 2017 6:15 AM

Do you mean useless eaters or fuckers deserving the guillotine? Russia's problem post collapse was the good ol' USSA and its capitalist, plunderer banking mavens.

NAV Jan 7, 2017 10:23 PM

The Soviet Union pushed its old culture to near destruction but failed to establish a new and better culture to replace it, writes Angelo M. Codevilla in "The Rise of Political Correctness," and as a result the U.S.S.R fell, just as America's current "politically correct" and dysfunctional "progressive utopia" will implode.

As such, Codevilla would agree that the US population " is both ever-more aware that the system is not working and less and less willing to pretend that it is."

As for the U.S.S.R., "this step turned out instead to destroy the very basis of Soviet power," writes Codevilla. "[C]ontinued efforts to force people to celebrate the party's ersatz reality, to affirm things that they know are not true and to deny others they know to be true – to live by lies – requires breaking them , reducing them to a sense of fearful isolation, destroying their self-esteem and their capacity to trust others. George Orwell's novel 1984 dramatized this culture war's ends and means : nothing less than the substitution of the party's authority for the reality conveyed by human senses and reason. Big Brother's agent, having berated the hapless Winston for preferring his own views to society's dictates, finished breaking his spirit by holding up four fingers and demanding that Winston acknowledge seeing five.

"Thus did the Soviet regime create dysfunctional, cynical, and resentful subjects. Because Communism confused destruction of 'bourgeois culture' with cultural conquest, it won all the cultural battles while losing its culture war long before it collapsed politically. As Communists identified themselves in people's minds with falsehood and fraud, people came to identify truth with anything other than the officials and their doctrines. Inevitably, they also identified them with corruption and privation. A nd so it was that, whenever the authorities announced that the harvest had been good, the people hoarded potatoes; and that more and more people who knew nothing of Christianity except that the authorities had anathematized it, started wearing crosses."

And if you want to see the ruling class's culture war in action today in America, pick up the latest issues of Vogue Magazine or O, The Oprah Magazine with their multitude of role reversals between whites and minorities. Or check out the latest decisions by the U.S. Supreme Court forcing people to acknowledge that America is not a Christian nation, or making it "more difficult for men, women and children to exist as a family" or demanding via law "that their subjects join them in celebrating the new order that reflects their identity."

As to just how far the ruling class has gone to serve the interests and proclivities of its leaders and to reject the majority's demand for representation, Codevilla notes, "In 2012 no one would have thought that defining marriage between one man and one woman, as enshrined in U.S. law, would brand those who do so as motivated by a culpable psychopathology called 'homophobia,' subject to fines and near-outlaw status. Not until 2015-16 did it occur to anyone that requiring persons with male personal plumbing to use public bathrooms reserved for men was a sign of the same pathology

"On the wholesale level, it is a war on civilization waged to indulge identity politics."

http://www.claremont.org/crb/article/the-rise-of-political-correctness/

Yen Cross Jan 7, 2017 11:11 PM

This article is so flawed! People[impoverished] aren't trying to jump over a wall patrolled by guards into Mexico -YET. Tyler, why do you repost shit like this?

daveO Yen Cross Jan 8, 2017 12:56 AM

That's because the Yankees, fleeing high taxes, can move to the sunbelt states w/o freezing. The USA went broke in 2008. Mexico got a head start by 22 years when oil prices collapsed in '86.

MASTER OF UNIVERSE Jan 7, 2017 11:28 PM

The only way to normalize banking in a contemporary banking paradigm of QE Infinity & Beyond is to start over again without the bankers & accountants that knowingly bet the ranch for a short term gain at the expense of long term profitability. In Japan an honourable businessman/CEO would suicide for bringing this kind of devastation to the company shareholders.

In America they don't give a shit because it is always someone else other than the CEO that takes the fall. 08 was proof that America is not equipped to participate in a Multinational & Multipolar world of business & investment in business. America can't get along in business in this world anymore. Greed has rendered America unemployable as a major market participant in a Globally run network of businesses.

America is the odd man out these days even though the next POTUS promises better management from a business perspective. Whilst the Mafia Cartel bosses trust TrumpO's business savvy the rest of the planet Earth does not.

Yen Cross Jan 7, 2017 11:53 PM

Are you kidding me??? >

Hypernormalisation I think we need a few MOAR syllables connected by fake verb/adjective < reverse /destruction- of the English language.

Manipuflation Yen Cross Jan 8, 2017 1:23 AM

Yen, I have a bottle of Bacardi rum here. It was on sale. Should I open it up? We could become experts....well at least I could.:-)

BingoBoggins Jan 8, 2017 8:12 AM

A liberal friend laid this movie on me to show me why he supported Hillary. A smart cookie, a PHd teaching English in Japan. A Khazarnazi Jew, he even spent time in Kyiv, Ukraine pre-coup, only mingling with "poets and writers". He went out of his way to tell me how bad the Russians were, informed as he was prior to the rejection of the EU's usurious offer.

He even quite dramatically pulled out the Anti-Semite card. I had to throw Banderas in his face and the US sponsored regime. I had respect for this guy and his knowledge but he just - could - not - let - go the cult assumptions. I finally came to believe Liberal Arts educators are victims of inbred conditioning. In retaliation, he wanted to somehow prove Putin a charlatan or villian and Trump his proxie.

This, after I'd point out his evasion and deflection every time I addressed his bias and belief in the MSM propaganda mantras of racism, misogyny, xenophobia - all the usual labeling bullshit up to insinuating Russia hacked the election. Excerpts from a correspondence wherein I go full asshole on the guy follow. Try and make sense of it if you watch this trash:

HyperNormalization 50:29 Not Ronald Rayguns, or Quadaffi plays along. Say what? They're, i.e. Curtis, assuming what Q thought?

1:15 USSR collapses. No shit. Cronyism in a centralized organization grown too large is inevitable it seems. So the premise has evolved to cultural/societal "management". Right. USSR collapses but let's repeat the same mistakes 'cause "it's different this time". We got us a computer!

Then Fink the failed Squid (how do Squids climb the corporate ladder?) builds one and programs historical data to,,,, forecast? I heard a' this. Let me guess. He couldn't avoid bias, making his models fallacious. Whoops. Well, he does intend to manipulate society, or was that not the goal? Come again? Some authority ran with it and ... captured an entire nation's media, conspired with other like-minded sycophants and their mysterious masters to capture an election by ... I may be getting ahead of myself.

Oh, boy, I have an inkling of where this is going. Perceptions modified by the word, advanced by the herd, in order to capture a vulnerable society under duress, who then pick sides, fool themselves in the process, miss the three hour tour never to live happily ever after on a deserted isle because they eschew (pick a bias here from the list provided). The one you think the "others" have, 'cause, shit, we're above it all, right? " Are we not entertained" is probably not the most appropriate question here.

Point being, Curtis, the BBC documentarian, totally negates the reality of pathological Imperialism as has been practiced by the West over the last half century, causing so many of the effects he so casually eludes to in the Arab Spring, Libya, Syria, Russia, the US and elsewhere. Perhaps the most blatant is this; Curtis asserts that Trump "defeated journalism" by rendering its fact-checking abilities irrelevant. Wikipedia He Hypernormalizes the very audience that believes itself to be enlightened. As for my erstwhile friend, the fucker never once admitted all the people *killed* for the ideals he supported. I finally blew him off for good.

To Hell In A Ha... Jan 8, 2017 7:06 AM

I've been using the term Hypernormalisation to describe aspects of western society for the last 15 years, before Adam Curtis's brilliant BBC documentary Hypernormalisation , afflicting western society and particularly politics. There are lies and gross distortions everywhere in western society and it straddles/effects all races, colours, social classes and the disease is most acute in our politics.

We all know the hypernoprmalisation in politics, as we witness stories everyday on Zerohedge of the disconnect from reality...

jcdenton Jan 8, 2017 7:44 AM

It is called COGNITIVE DISSONANCE ..

Allow me to quote something here ..

Enter Operation Stillpoint: William Colby, William Casey and Leo Emil Wanta.

At the time it started, President Reagan wanted to get a better handle on ways to keep the Soviets from expansionary tactics used to spread Vladimir Ilyich Ulyanov Lenin's philosophy of communism around the world. He looked to his Special Task Force to provide a means of doing so. One thing was certain: The economy of the Soviets had never been strong and corruption, always present in government and always growing at least as fast as a government grows, made the USSR vulnerable to outside interference just as the United States is today.

According to Gorbachev's Prime Minister, Nikolai Ryzhkov, the "moral [nravstennoe] state of the society" in 1985 was its "most terrifying" feature: "[We] stole from ourselves, took and gave bribes, lied in the reports, in newspapers, from high podiums, wallowed in our lies, hung medals on one another. And all of this – from top to bottom and from bottom to top."

Again, it sounds like today's America, doesn't it?

Foreign Minister Eduard Shevardnadze made equally painful comments about the lawlessness and corruption dominating the Soviet Union. During the winter months of 1984-85, he told Gorbachev that "Everything is rotten. It has to be changed."

"Sometimes people hold a core belief that is very strong," Frantz Fanon said in his 1952 book Black Skin, White Masks (originally published in French as Peau Noire, Masques Blancs). "When they are presented with evidence that works against that belief, the new evidence cannot be accepted. It would create a feeling that is extremely uncomfortable, called cognitive dissonance. And because it is so important to protect the core belief, they will rationalize, ignore and even deny anything that doesn't fit with the core belief."

COGNITIVE DISSONANCE

During their final days as a world power, the Soviet Union allowed cognitive dissonance to rule its better judgment as so many Americans are doing in 2012. The handwriting on the wall was pretty clear for Gorbachev. The Soviet economy was failing. They did none of the necessary things to save their economy. In 2012, the handwriting on the wall is pretty clear for the American people. The economy is failing. The people and the Congress do none of the necessary things to save their economy. Why? Go re-read the definition of cognitive dissonance. That's why. We have a classic fight going on between those who want government to take care of them who will pay the price of lost freedom to get that care, and those who value freedom above all else.

On one day we have 50 state attorneys general suing Bank of America for making fraudulent mortgages, and on the next we have M.F. Global losing billions upon billions of customer dollars because they got mixed with the firm's funds – which is against the law – or we have J.P. Morgan Chase losing $2 billion (or is it $5 billion?) in bad investments. As Eduard Shevardnadze said, "Everything is rotten. It has to be changed." As I would say it, "There is no Rule of Law in America today. There has been no real Rule of Law since George Herbert Walker Bush took office."

No one listened then; no one is listening in America now. The primary reason? Cognitive dissonance. -- Chapter 2, "Wanta! Black Swan, White Hat" (2013)

Okay then, forget what was said in 1985, that was later reported in 2013 ..

Let's fast forward to Oct. 30, 2016 ..

Shall we? I mean, it is a bit MOAR -- relevant!

https://youtu.be/8tYTSR9gheQ

And, for those that must have further amplification .. (And, some .......... fun!)

https://www.youtube.com/user/fooser77/playlists

BingoBoggins jcdenton Jan 8, 2017 8:20 AM

You reminded me I bookmarked this on Chrome, so I dared to venture there to retrieve it;

https://books.google.com/books?id=cbC_AwAAQBAJ&pg=PP21&lpg=PP21&dq=crony...

Vageling jcdenton Jan 8, 2017 9:16 AM

Lee Wanta. I've heard of him before. He was screwed over for some bullshit charges. And the CIA made a firm warning... How long did that dude spent in jail?

Just looked up his story as it was blurry. Cronyism at its finest. So now that I got my refreshing course. Trump stole/adopted (however you want to look at that) his plan and the project the gov (DOT) proposes sucks donkey balls compared to Wanta's.

So where are all the climate hoaxers now by the way? You'd figure they'd be all over this.

American Gorbachev Jan 8, 2017 10:10 AM

to me the PTB are "Japanifying" the u.s. (decades of no growth, near total demoralization of a generation of worker bees (as in, 'things will never get any better, be glad for what little you've got' etc... look what they've done to u.s. millenials just since '08... fooled (crushed) them TWICE already)

But the PTB Plan B is to emulate the USSR with a crackup, replete with fire sale to oligarchs of public assets. They will Japan as long as they can (so it will be difficult to forecast any crackup anymore than six months beforehand). Hope they have a Gorbachev lined up, to limit the bloodshed

[Jan 12, 2017] From economic crisis to crisis in economics

Notable quotes:
"... Andy Haldane , Chief Economist and Executive Director, Monetary Analysis & Statistics, ​Bank of England ..."
"... The Architecture of Complexity ..."
"... Andy Haldane addresses OECD New Approaches to Economic Challenges (NAEC) Roundtable ..."
"... This article draws on contributions to the OECD NAEC Roundtable on 14 December 2016; ..."
"... The GLS Shackle Biennial Memorial Lecture ..."
"... on 10 November 2016; and " ..."
"... On microscopes and telescopes ..."
"... ", at the Lorentz centre, Leiden, workshop on socio-economic complexity on 27 March 2015. ..."
Jan 11, 2017 | oecdinsights.org
Andy Haldane , Chief Economist and Executive Director, Monetary Analysis & Statistics, ​Bank of England

It would be easy to become very depressed at the state of economics in the current environment. Many experts, including economics experts, are simply being ignored. But the economic challenges facing us could not be greater: slowing growth, slowing productivity, the retreat of trade, the retreat of globalisation, high and rising levels of inequality. These are deep and diverse problems facing our societies and we will need deep and diverse frameworks to help understand them and to set policy in response to them. In the pre-crisis environment when things were relatively stable and stationary, our existing frameworks in macroeconomics did a pretty good job of making sense of things.

But the world these days is characterised by features such as discontinuities, tipping points, multiple equilibria, and radical uncertainty. So if we are to make economics interesting and the response to the challenges adequate, we need new frameworks that can capture the complexities of modern societies.

We are seeing increased interest in using complexity theory to make sense of the dynamics of economic and financial systems. For example, epidemiological models have been used to understand and calibrate regulatory capital standards for the largest, most interconnected banks, the so-called "super-spreaders". Less attention has been placed on using complexity theory to understand the overall architecture of public policy – how the various pieces of the policy jigsaw fit together as a whole in relation to modern economic and financial systems. These systems can be characterised as a complex, adaptive " system of systems ", a nested set of sub-systems, each one itself a complex web. The architecture of a complex system of systems means that policies with varying degrees of magnification are necessary to understand and to moderate fluctuations. It also means that taking account of interactions between these layers is important when gauging risk.

Although there is no generally-accepted definition of complexity, that proposed by Herbert Simon in The Architecture of Complexity – "one made up of a large number of parts that interact in a non-simple way" – captures well its everyday essence. The whole behaves very differently than the sum of its parts. The properties of complex systems typically give rise to irregular, and often highly non-normal, statistical distributions for these systems over time. This manifests itself as much fatter tails than a normal distribution would suggest. In other words, system-wide interactions and feedbacks generate a much higher probability of catastrophic events than Gaussian distributions would imply.

For evolutionary reasons of survival of the fittest, Simon posited that "decomposable" networks were more resilient and hence more likely to proliferate. By decomposable networks, he meant organisational structures which could be partitioned such that the resilience of the system as a whole was not reliant on any one sub-element. This may be a reasonable long-run description of some real-world complex systems, but less suitable as a description of the evolution of socio-economic systems. The efficiency of many of today's networks relies on their hyper-connectivity. There are, in the language of economics, significantly increasing returns to scale and scope in a network industry. Think of the benefits of global supply chains and global interbank networks for trade and financial risk-sharing. This provides a powerful secular incentive for non-decomposable socio-economic systems.

Moreover, if these hyper-connected networks do face systemic threat, they are often able to adapt in ways which avoid extinction. For example, the risk of social, economic or financial disorder will typically lead to an adaptation of policies to prevent systemic collapse. These adaptive policy responses may preserve otherwise-fragile socio-economic topologies. They may even further encourage the growth of connectivity and complexity of these networks. Policies to support "super-spreader" banks in a crisis for instance may encourage them to become larger and more complex. The combination of network economies and policy responses to failure means socio-economic systems may be less Darwinian, and hence decomposable, than natural and biological systems.

Andy Haldane addresses OECD New Approaches to Economic Challenges (NAEC) Roundtable

Video Player 00:00 00:00 02:57 Use Up/Down Arrow keys to increase or decrease volume.

What public policy implications follow from this complex system of systems perspective? First, it underscores the importance of accurate data and timely mapping of each layer in the system. This is especially important when these layers are themselves complex. Granular data is needed to capture the interactions within and between these complex sub-systems.

Second, modelling of each of these layers, and their interaction with other layers, is likely to be important, both for understanding system risks and dynamics and for calibrating potential policy responses to them.

Third, in controlling these risks, something akin to the Tinbergen Rule is likely to apply: there is likely to be a need for at least as many policy instruments as there are complex sub-components of a system of systems if risk is to be monitored and managed effectively. Put differently, an under-identified complex system of systems is likely to result in a loss of control, both system-wide and for each of the layers.

In the meantime, there is a crisis in economics. For some, it is a threat. For others it is an opportunity to make a great leap forward, as Keynes did in the 1930s. But seizing this opportunity requires first a re-examination of the contours of economics and an exploration of some new pathways. Second, it is important to look at economic systems through a cross-disciplinary lens. Drawing on insights from a range of disciplines, natural as well as social sciences, can provide a different perspective on individual behaviour and system-wide dynamics.

The NAEC initiative does so, and the OECD's willingness to consider a complexity approach puts the Organisation at the forefront of bringing economic analysis policy-making into the 21 st century.

Useful links

This article draws on contributions to the OECD NAEC Roundtable on 14 December 2016; The GLS Shackle Biennial Memorial Lecture on 10 November 2016; and " On microscopes and telescopes ", at the Lorentz centre, Leiden, workshop on socio-economic complexity on 27 March 2015.

The OECD organised a Workshop on Complexity and Policy, 29-30 September, OECD HQ, Paris, along with the European Commission and INET. Watch the webcast: 29/09 morning ; 29/09 afternoon ; 30/09 morning

[Jan 12, 2017] If people see "expert" opinion as either wrong or irrelevant then they will ignore it. Nature abhors a vacuum so rather adopt experts' stories they'll create their own narrative.

Jan 12, 2017 | economistsview.typepad.com
Chris G : January 12, 2017 at 03:57 AM

Re Wolfers: Having an opinion is not the same as being able to predict or infer accurately. (Nominally) informed opinion hasn't performed particularly well with respect to either at the macro level and many see no connection with their lives at the micro level. If people see "expert" opinion as either wrong or irrelevant then they will ignore it. Nature abhors a vacuum so rather adopt experts' stories they'll create their own narrative. Confidence of small business owners that their lot will improve? That's what they'd like to believe and what evidence do they have that it won't? (Stories matter more to most people than facts or models. We ignore that at our peril.)

Chris G -> Chris G ... , January 12, 2017 at 04:10 AM
Claudia Sahm's piece is very good. +1 for self-awareness and another +1 for candor.
jonny bakho -> Chris G ... , January 12, 2017 at 05:12 AM
Small business is optimistic based on current trends with demand improving and people having more money to spend. Their optimism has nothing to do with Trump
Wall Street sees opportunity for profits. Big Tax cuts for the wealthy will inflate stock prices. It reflects the opportunity for short term gains, not long term economic improvement
Economist influence on policy is overrated
Since when have our ruling elites followed advice?
Medical research can thrive in spite of a government of short earth creationists
A key battle is giving cities more control over spending
Local control can better direct infrastructure spending than state agencies concerned with freeways
It is a mistake to look to the Federal Government as savior. Urbanization is the future. Let the cities invest in themselves and stop subsidizing the unsustainable suburban and exurban development.
Peter K. -> jonny bakho... , -1
"It is a mistake to look to the Federal Government as savior. Urbanization is the future. Let the cities invest in themselves and stop subsidizing the unsustainable suburban and exurban development."

Social Darwinism!

Fred C. Dobbs -> Chris G ... , January 12, 2017 at 05:49 AM
Why Most Economists Are So Worried About Trump
http://nyti.ms/2ij9VRP via @UpshotNYT
NYT - Justin Wolfers - January 11

I feared that I might have been talking with an unrepresentative group until I stumbled upon a recent survey of leading academic economists showing a similar pattern. Of the 31 respondents to the University of Chicago's IGM Economic Experts Panel, 28 disagreed with the claim that the "seven actions to protect American workers" in Mr. Trump's 100-day plan would improve the economic prospects of middle-class Americans. The dissenters were two economists who were uncertain, and one who had no opinion.

('recent survey': http://www.igmchicago.org/surveys/100-day-plan )

The pervasive pessimism among professional economists stands in stark contrast with the judgment of financial markets, which rose strongly in the wake of Mr. Trump's election, and have remained buoyant since.

It also puts economists at odds with the judgments of small-business owners. According to the latest survey from the National Federation of Independent Businesses, the balance of members who expect general business conditions to improve has moved drastically. In October, the pessimists who saw business conditions as likely to worsen outnumbered the optimists by seven percentage points; the latest survey from December shows that the optimists now outnumber the pessimists by 50 percentage points. It's an extraordinary shift - one the association described as "stratospheric."

I'm not quite sure how to reconcile these conflicting signals. One possibility is that Mr. Trump remains something of an unknown, and each group is filling in the blanks differently. Small businesses, pleased to see a businessman in the White House, might be tempted to believe the best. By contrast, there's a reason that economics is called the dismal science, and few economists trust politicians - of either stripe - to get things right. Greater uncertainty gives economists a broader canvas upon which to project their pessimism. ...

Julio -> Fred C. Dobbs... , January 12, 2017 at 12:17 PM
I don't see where he finds the "conflicting signals".

The economists were asked about the prospects for the middle class (Question A) and low-income workers (Question B).

The optimism is all about business conditions.

These two have been divergent forever. The proposed policies are likely to exacerbate the divergence.

Fred C. Dobbs -> Chris G ... , January 12, 2017 at 05:53 AM
JW: ... 'According to the latest survey from the National Federation of Independent Businesses, the balance of members who expect general business conditions to improve has moved drastically.' ...

Small Business Economic TrendsNFIB | NFIB http://www.nfib.com/surveys/small-business-economic-trends/

Small business optimism rocketed to its highest level since 2004, with a stratospheric 38-point jump in the number of owners who expect better business conditions, according to the monthly National Federation of Independent Business (NFIB) Index of Small Business Optimism, released today.

"We haven't seen numbers like this in a long time," said NFIB President and CEO Juanita Duggan. "Small business is ready for a breakout, and that can only mean very good things for the U.S. economy."

The Index reached 105.8, an increase of 7.4 points. Leading the charge was "Expect Better Business Conditions," which shot up from a net 12 percent in November to a net 50 percent last month. ...

Brick Bootloop -> Chris G ... , January 12, 2017 at 08:07 AM
Confidence of small business owners that their lot will improve?
"

Could *small business confidence index* work same as *odd lot investor's confidence*? Odd lot buying index? The little people registering their wrong opinions? A contrary indicator? Do you see how small business confidence curve has begun to raise a red flag?

Think, My
People
!

[Jan 12, 2017] Philip Pilkington: To What Extent Is Economics an Ideology and to What Extent Is It a Useful Theory?

Notable quotes:
"... By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory . The views expressed in this interview are not those of his employer ..."
"... The Reformation in Economics ..."
"... Once the theory is assumed to be true it can then be applied everywhere and anywhere in an entirely uncritical manner. Anything can then be interpreted in terms of utility-maximisation. This is most obvious in popular publications like Freakonomics: A Rogue Economist Explores the Hidden Side of Everything ..."
"... To paraphrase from Yes Minister, real economists don't sully their elevated minds with anything as sordid as data. It's much easier to make a a bunch of unrealistic assumptions, for example "trade deals don't affect trade balance and employment", and just to build their model from there. The fact that these kind of missteps are not stamped out by the profession shows that fire is the only answer. ..."
"... I abandoned Econ. as a major when I was a senior in college (mid 70's) because what was being taught had little to no relationship to what I observed in the real world of human beings (as opposed to the "Homo Economicus" that econ. theory depended on). ..."
Jan 12, 2017 | www.nakedcapitalism.com
Posted on January 12, 2017 by Yves Smith By Philip Pilkington, a macroeconomist working in asset management and author of the new book The Reformation in Economics: A Deconstruction and Reconstruction of Economic Theory . The views expressed in this interview are not those of his employer

... ... ...

In my book The Reformation in Economics I take the position that modern economics is more similar to phrenology than it is to, say, physics. This is not at all surprising as it grew up in the same era and out of remarkably similar ideas. But what is surprising is that this is not widely noticed today. What is most tragic, however, is that there is much in economics that can and should be salvaged. While these positive aspects of economics probably do not deserve the title of 'science' they at least provide us with a rational toolkit that can be used to improve political and economic governance in our societies.

The Ideology at the Heart of Modern Economics

The curious thing about modern economics is its almost complete insularity. Its proponents appear to have very little notion of how it applies to the real world. This is not the case in normal sciences. Take physics, for example. It is extremely clear how, say, the inverse squares law applies to experienced reality. In the case of gravitation, for example, the inverse squares law makes experimentally testable predictions about the force exerted by, say, the gravitational pull between the sun and the earth.

Modern economics – by which I mean neoclassical or marginalist economics which relies on the notion of utility-maximisation as its central pillar – completely lacks this capacity to map itself onto the real world. As philosophers of science like Hans Albert have pointed out , the theory of utility-maximisation rules out such mapping a priori , thus rendering the theory completely untestable. Since the theory is untestable it cannot be falsified and this allows economists to simply assume that it is true.

Once the theory is assumed to be true it can then be applied everywhere and anywhere in an entirely uncritical manner. Anything can then be interpreted in terms of utility-maximisation. This is most obvious in popular publications like Freakonomics: A Rogue Economist Explores the Hidden Side of Everything . Such books read in an almost identical way to the fashionable books of 19 th century phrenology. The economists address everything from parenting to crime to the Ku Klux Klan by filtering it through the non-experimental theory of utility-maximisation – a theory that has not and cannot be verified and so the author and reader alike take it entirely on trust.

Such systems of ideas are ideological to the core. They are cooked up independently of the evidence and are then imposed upon the material of experienced reality. We are encouraged to 'read' the world through the interpretive lens of economics – and when we ask for evidence that this lens uncovers factually accurate information we are confounded with circular arguments from the economists.

Large-scale public policy is also filtered through this lens. This is done by constraining the study of macroeconomics – that is, GDP growth, unemployment, inflation and so on – by tying it to the theories of utility-maximisation. All macroeconomics today must be 'microfounded'. This means that it must have microeconomic – read: 'utility-maximising' – foundations. In reality, as I show in the book, these foundations are anything by 'micro'. Rather, what is done is that the entire economy is seen to be dominated by a single uber-utility-maximiser and all the conclusions flow from there.

This may seem like odd stuff but it is built into the theory as a sort of foundational delusion. The arbitrary, non-empirical theory of utility-maximisation assumes primacy to all considerations of actual statistical facts, intuitions about human motivations and even basic assumptions about what should constitute a properly moral view of man. What we end up with is not just a crushing, anti-inquiry ideology but also a lumbering failure of a system of ideas that has no hope in extracting relevant information about the real world.

What Is To Be Done?

Is economics then to be thought of as a failure? Must we scrap economics and try to find other ways to describe and address our economic and political problems? In this regard, my book claims to lay out a new path – albeit one that has been intuitively followed by some economists, most notably those in the heterodox camp. This new path is based on two key interrelated premises.

The first is that we have little insight into what actually motivates human beings. For this reason theories that rest on assumptions about human motivation – like utility-maximisation – must be thrown out and the study of the economy must be undertaken by examining large economic aggregates. In short, micro must be tossed off the throne and the crown must be handed to macro. The second premise is that we must not be overly concerned with highly precise 'models' of the economy. Instead we must take what I have come to call a 'schematic' approach. A schematic approach involves building tools that can be integrated into how we understand the world around us without assuming that these tools provide us with an exact description of this world. This schematic toolkit – which I begin to lay out in the later chapters of the book – can then be used to approach the study of actual economies.

These may seem like rather simple rules. But when applied to economic theory they generate rather radical results. At the same time they greatly constrain the amount of wisdom that we can assume economists to have; given these premises no book like Freakonomics should ever be taken seriously and should probably even be written in the first place. In that sense, they may appear to militate against Enlightenment optimism. This may well be so, but I would argue that they are arrived at through rational Enlightenment-style inquiry and so should be taken seriously even by proponents of Enlightenment Progress. After all, phrenology eventually fell in the face of rationalistic criticism.

In the book some of the issues around uncertainty and free will are also explored. Implicit in some of the book's central criticisms is that societies are not to be understood in a deterministic manner. Unlike billiard balls, social forces are not subject to deterministic laws. In one sense this is unfortunate as it means that our understandings of social and economic processes must always be of a contingent and not-too-precise nature. But on the other hand it is optimistic in the sense that it attributes an agency to human beings to create the world around them that mainstream marginalist economics stripped away by imposing the limited utility-maximiser framework on everyone from Mother Theresa to Hitler.

This also creates an opening for a proper discussion of ethics and morality. Although this is not dealt with directly in the book – it would surely require another ten volumes – the framework does reopen awkward questions surrounding morality and ethics. Some self-professed social scientists, nervous that these questions have been passed to us from the world religions, would prefer to do away with any moral and ethical questions. But this was always a fantasy – even the most hardened anti-ethicist, unless they are serving life for serial-killing, has a system by which they determine right from wrong.

All that I have said here is rather abstract. But a good portion of the book is not and I do not want to give that impression. It contains chapters that deal with inflation, profits, income distribution, income determination, financial markets, interest rates, investment and employment. It is not simply a book of methodology but rather one that tries to also provide the basic building blocks of a theory that can be applied to understand really-existing economies. In this sense, I hope that it is again more optimistic than many mainstream economics books that leave the reader without any capacity to apply the supposed ideas that they have absorbed by reading them beyond mere chest-puffing at dinner parties and moral condemnations of the social safety net.

David , January 12, 2017 at 10:12 am

We dont have Departments of Astrology. Just dump it call it business data and stick it in business schools or departments. It is not science or social science it is the worst ever pseudoscience with blood all over its hands see previous post.

Praedor , January 12, 2017 at 3:45 pm

You could call it a branch of political "science" (also not a science). At least it would be honest. Everything proposed or concluded in economics classes will be known to simply be political preferences or ideas, not real or valuable beyond that.

Alex , January 12, 2017 at 10:22 am

In my perception, giving something an economic value is best explained as being an exercise of moral judgement.

Gaylord , January 12, 2017 at 10:49 am

A holistic understanding of the natural world is needed, therefore I believe the first rule of economics that should override all others is one that would correct the false assumption that humans are separate from our environment and superior to all other species. That separation and illusion of independence, particularly endemic to the European mentality, has caused us to denigrate nature as though we must dominate and subdue it to satisfy our needs and desires, and the result now in full evidence is the wholesale destruction of habitat and ecocide that inevitably lead to omnicide. We have allowed our population to exceed the carrying capacity of the earth and have used technology without regard for the consequences, thus contradicting the meaning of homo sapiens and assuring our extinction.

Alex , January 12, 2017 at 11:07 am

Um, what's your evidence that this is somehow a European mentality?

Robert Hahl , January 12, 2017 at 11:20 am

I think he means "Western" mentality, which seem true enough. Here is a nice piece of phrenology, a portrait of Henry James.

http://n7.alamy.com/zooms/a5fad1324a3b45fe9417ff65912ff8d7/henry-james-american-born-british-novelist-and-writer-1843-1916-most-af8heb.jpg

Jamie , January 12, 2017 at 12:19 pm

Phillip's comments regarding the "Great Chain of Being" are apropo. This is "Western" in a sense, "Christian" more particularly. It tells the underclass they are special while at the same time justifying and encouraging their subservience (i.e., the underclass is told they are disconnected on the one hand, but totally "connected" (that is, have a "place") on the other hand (which they should not try to rise above)).

The implication that other societies where greater "connection" is somehow recognized are somehow immune to stratification and dominance by a ruling elite, somehow more "wholesome" or "gentle" or "sane", has very little evidence in its favor that I have ever seen. It's rather faddish to criticize "the West" for all the ills of the world. And "the West" certainly has left a trail of suffering and destruction across the face of the planet. But other societies have their own mechanisms for justifying and encouraging subservience. And a religious "feeling" of the connectedness of all things is not a substitute for the scientific insights of the discipline of ecology, brought to us by a "Western" mode of thought and enquiry.

No matter what society we live in, the problem of just governance, the aggrandizement of the elite and the suffering of the masses, remains the same.

Paul O'Sullivan , January 12, 2017 at 11:25 am

I am though the first two chapters of Philip's book. So far so good – likable prose style and promising subject matter.

voislav , January 12, 2017 at 11:25 am

What passes for the science of economics has become politicized and scientifically compromised to the point that the only thing that makes sense is to burn it with fire. Data has stopped playing a role in development of economic theory and selected snippets of it are occasionally dragged out only if they support the latest concoction that comes to their mind.

To paraphrase from Yes Minister, real economists don't sully their elevated minds with anything as sordid as data. It's much easier to make a a bunch of unrealistic assumptions, for example "trade deals don't affect trade balance and employment", and just to build their model from there. The fact that these kind of missteps are not stamped out by the profession shows that fire is the only answer.

Larry Y , January 12, 2017 at 11:46 am

Economics is to ecology as phrenology is to neuroscience?

Always thought the problem was that economics should be descriptive, not prescriptive. Maybe a parallel in how science came out of "natural philosophy".

j , January 12, 2017 at 11:47 am

In the book some of the issues around uncertainty and free will are also explored. Implicit in some of the book's central criticisms is that societies are not to be understood in a deterministic manner. Unlike billiard balls, social forces are not subject to deterministic laws.

This seems to me to be an over reaction to the specious nature of current mainstream economics, compounded by a misunderstanding of the role of determinism and uncertainty in physics. What most characterizes physics is not the absence of uncertainty, but the specification of it. Just because the current dominant economic dogma has it wrong is no reason to throw out determinism.

The analogy to billiard balls is a poor analogy to social systems. The physical forces that determine an earthquake, for example, may not allow us to precisely predict the moment in time when the quake will trigger, but that doesn't make earthquakes "non-deterministic". OK, the point is taken that societies are not billiard balls. There is still plenty of room to hope that social forces may be sufficiently specified to allow useful predictions. Throwing out determinism is not a royal road to morality. The moral quandary of the present day is how to reconcile determinism and morality, each of us as individuals and all of us as a society, not to force a choice between them.

Because we are not billiard balls, we do not have to accept that the morality of society is merely the sum of all the individual moralities of all the individuals composing it ("market" morality). We can allow for the social construction of a moral code and the imposition of that code on society's constituent individuals. None of that necessarily takes us outside of determinism. Because previous generations got some of the laws of physics wrong does not mean the laws of physics did not exist at that time. Because current economists make absurd assumptions does not mean no science of economy is possible. But a "non-deterministic" 'science' is no science at all.

shinola , January 12, 2017 at 12:53 pm

I abandoned Econ. as a major when I was a senior in college (mid 70's) because what was being taught had little to no relationship to what I observed in the real world of human beings (as opposed to the "Homo Economicus" that econ. theory depended on).

My father made the money that paid for my tuition & books through sales. As a sales manager for a major insurance co. he was always looking for recruits who could "sell air conditioners to Eskimos". If, in fact, the "information symmetry" that econ. theory depends on existed, then his job could not have existed.

I was also influenced by an econ. prof. who told me that an econ. degree was worthless unless I wanted to teach it or work for the gov't.
I think most NC readers will understand the "shorthand" phrase "First, assume a can opener"

Generalfeldmarschall von Hindenburg , January 12, 2017 at 2:12 pm

Elites always invent ideologies, which are like operating systems, in order to maintain control over the minds of their subjects. Economics, great chains of being, Mandate of Heaven. It's all the same.

Synoia , January 12, 2017 at 2:32 pm

I agree with the author, but am dismayed as well.

Rant Warning:

Does he not understand Science and the Scientific method?

Hypothesis
Thesis
Experiment – Repeatable by independent parties, Experiments.
Proof.

That's Science, That's physics. Read Joule's biography to understand the method.

Economics is NO science because there is no way to conduct an experiment, a repeatable experiment.

In addition the mathematicians have discovered and codified Chaos or Catastrophe Theory, and the attendant Black Swans, in the last 50 years, which provides a solid foundation to understand economics, and its absolute unpredictability.

Because us humans are driven by fear and greed, consequently: Presume a rational actor (economics 101) is invalid.

There is not ONE mention of chaos in this article, which is the governing mathematics behind Economics in the world we inhabit, work, play, are born and die.

There is an old expression: Before putting pen to paper, please engage mind.

End Rant.

Synoia , January 12, 2017 at 2:35 pm

If one wants to asserts that humans are rational, please explain the fashion industry.

Or "boys and their toys."

Bob Stapp , January 12, 2017 at 2:42 pm

In an even larger sense, we have substituted ideology for religion. Consider capitalism, privatization, democracy, the profit motive, materialism, utility maximisation, and, yes, even the scientific method. We worship these just as ardently as we did the Grecian or Egyptian pantheon of gods in the years b.c.e., and the Christian, Jewish, and Islamic characterizations of god/Allah up to the present era.

The unquestioning acceptance of these belief systems filters our perceptions of reality and blinds us to the infinite number of possibilities that exist outside of those frames of reference. In fact, those systems have indeed become our religion and stepping outside of them frequently incurs the same stigma and scorn formerly accorded to religious heretics who were often burned at the stake. One doesn't need to spend more than a day reading a layperson's guide to quantum mechanics to get an idea of what happens when you set your mind free of those confining boxes.

I highly recommend Morris Berman's book, Coming to Our Senses , where he traces western history from the beginnings of Christendom to the modern day in the context of heresy. (That's a simplistic but reasonably accurate synopsis.) It's a dense read and when I first sat down with it in the early 90s, I could only manage a few pages at a time and then had to take two or three days to digest before coming back for more. I read it again ten years later and it made even more of an impact the second time around. Without exaggerating, I can honestly say that it profoundly shaped my world view to the point that I now view all belief systems skeptically and try to place them in a larger context.

Pilkington's description of economics as an unassailable belief system rings true to me. Not unlike religion (the Crusades, the Inquisition, the Conquistadors, right on up to ISIS), economics has wreaked and is wreaking havoc across the globe. Who knows what wonders await us when we start thinking out of that box.

Oguk , January 12, 2017 at 4:18 pm

A schematic approach involves building tools that can be integrated into how we understand the world around us without assuming that these tools provide us with an exact description of this world.

I am perhaps most interested in this. Will look for the book. I always get something from reading Pilkington's posts.

[Jan 09, 2017] Labor Market Monopsony

Notable quotes:
"... reduced competition can also give employers power to dictate wages-so- called "monopsony" power in the labor market. ..."
"... While monopoly in product markets and monopsony in labor markets can be related and share some common causes, the latter has some distinct causes and policy implications. ..."
"... This issue brief explains how monopsony, or wage-setting power, in the labor market can reduce wages, employment, and overall welfare ..."
Jan 09, 2017 | www.whitehouse.gov
A growing literature has documented several indicators of declining] competition in the United States, and economists have begun to explore the links between these trends and rising income inequality (Furman and Orzag 2015). While recent discussions have highlighted rising concentration among producers and monopoly pricing in sellers markets (The Economist 2016), reduced competition can also give employers power to dictate wages-so- called "monopsony" power in the labor market.

While monopoly in product markets and monopsony in labor markets can be related and share some common causes, the latter has some distinct causes and policy implications.

This issue brief explains how monopsony, or wage-setting power, in the labor market can reduce wages, employment, and overall welfare...

[Jan 08, 2017] Samuelson bastard Keynesianism

Jan 08, 2017 | economistsview.typepad.com
RGC : January 07, 2017 at 11:45 AM
, 2017 at 11:45 AM
By Asad Zaman
January 7, 2017

P8 Keynesian Complexity
................
"But no one appears to have understood the fundamental insights of Keynesian complexity: the system as whole does not act as a simple aggregate of the actions of the individual agents within the system. Pre-Keynesian macroeconomics was based centrally on the misunderstanding that the macroeconomy can be understood by scaling up the microeconomic behaviors of individual agents. While Keynes forcefully rejected this thesis, and created a complex system view of the macroeconomy, simple-minded followers failed to understand complexity, and went back to the pre-Keynesian views."
........................
https://weapedagogy.wordpress.com/2017/01/07/p8-keynesian-complexity/

RGC -> RGC... , -1
Paul Samuelson on Keynes (same link):

Ironically, failure to understand Keynes led to dismissal and contempt "Paul Samuelson felt he could say that "it is remarkable that so active a brain would have failed to make any contribution to economic theory . .." (cited in John Foster 2006).

Because Samuelson could not understand the complexity of Keynesian theory, he wrote that: "[The General Theory] is a badly written book, poorly organized; any layman who, beguiled by the author's previous reputation, bought the book was cheated of his 5 shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgements. It abounds with mares' nests and confusions: involuntary unemployment, wage units, the equality of savings and investment, the timing of the multiplier, interactions of marginal efficiency upon the rate of interest, forced savings, own rates of interest, and many others. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors."

Samuelson's arrogance in believing that he understood the Keynesian system better than Keynes created the biggest barrier to understanding Keynes for 20th Century economists. Because of his stature, he became the authorized interpreter of Keynes, and very few went back to original writings to try to understand them. Those who did also failed to come to grips with complexity, and as a result, it is impossible to count the variety of interpretations of Keynes - see for example, Backhouse and Bateman. The Keynesian elephant has a huge number of parts, it seems.

Libezkova -> RGC... , January 07, 2017 at 01:39 PM
Thank you for this link and quote.

That was my problems with Samuelson too, but I never was able to express is with such a clarity,

RGC -> RGC... , January 07, 2017 at 02:24 PM
This blogger is discussing The General Theory chapter by chapter. This post is chapter 2 of 24.
anne -> anne... , January 07, 2017 at 10:26 AM
http://krugman.blogs.nytimes.com/2013/08/20/coalmines-and-aliens-again/

August 20, 2013

Coalmines and Aliens, Again
By Paul Krugman

Brad DeLong * catches John Cochrane ** being remarkably dense:

"Paul Krugman recommended, with refreshing clarity, that the US government fake an alien invasion so we could spend trillions of dollars building useless defenses. (I'm not exactly sure why he does not call for real defense spending. After all, if building aircraft carriers saved the economy in 1941, and defenses against imaginary aliens would save the economy in 2013, it's not clear why real aircraft carriers have the opposite effect. But I'm still working on the nuances of new-Keynesianism, so I'll let him explain the difference. I'm not a big fan of huge defense spending anyway.)"

As I've explained before, *** the alien thing was a modern riff on Keynes's coalmine thought experiment. **** It's worth quoting that one in full:

"It is curious how common sense, wriggling for an escape from absurd conclusions, has been apt to reach a preference for wholly 'wasteful' forms of loan expenditure rather than for partly wasteful forms, which, because they are not wholly wasteful, tend to be judged on strict 'business' principles. For example, unemployment relief financed by loans is more readily accepted than the financing of improvements at a charge below the current rate of interest; whilst the form of digging holes in the ground known as gold-mining, which not only adds nothing whatever to the real wealth of the world but involves the disutility of labour, is the most acceptable of all solutions.

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."

In a way, I'm amazed by economists who find this sort of thing absurd on its face. Leave macroeconomics on one side: what about the theory of the second best? This theory - which is just basic micro - says that when some markets are distorted, for whatever reason, social costs and benefits across the economy don't correspond to private costs, so that unprofitable, even seemingly wasteful activities can sometimes be beneficial. And an economy in which millions of willing workers can't find work is surely one with massive distortions of some kind.

Oh, and let's always remember that Keyensians like me don't believe that thing like the paradox of thrift and the paradox of flexibility are the way the economy normally works. They're very much exceptional, applying only when interest rates are up against the zero lower bound. Unfortunately, that happens to be the world we're currently living in.

* http://delong.typepad.com/sdj/2013/08/paul-krugman-prepare-for-alien-invasion-and-spend-our-way-to-economic-recovery.html

** http://johnhcochrane.blogspot.com/2013/01/more-new-keynesian-paradoxes.html

*** http://krugman.blogs.nytimes.com/2011/08/24/coalmines-and-aliens/

**** https://ebooks.adelaide.edu.au/k/keynes/john_maynard/k44g/chapter10.html

anne -> anne... , -1
A series of superb short essays by Paul Krugman.

[Jan 07, 2017] Samuelson bastard Keynesianism

Jan 07, 2017 | economistsview.typepad.com
RGC : January 07, 2017 at 11:45 AM , 2017 at 11:45 AM
By Asad Zaman
January 7, 2017

P8 Keynesian Complexity
................
"But no one appears to have understood the fundamental insights of Keynesian complexity: the system as whole does not act as a simple aggregate of the actions of the individual agents within the system. Pre-Keynesian macroeconomics was based centrally on the misunderstanding that the macroeconomy can be understood by scaling up the microeconomic behaviors of individual agents. While Keynes forcefully rejected this thesis, and created a complex system view of the macroeconomy, simple-minded followers failed to understand complexity, and went back to the pre-Keynesian views."
........................
https://weapedagogy.wordpress.com/2017/01/07/p8-keynesian-complexity/

RGC -> RGC... , -1
Paul Samuelson on Keynes (same link):

Ironically, failure to understand Keynes led to dismissal and contempt "Paul Samuelson felt he could say that "it is remarkable that so active a brain would have failed to make any contribution to economic theory . .." (cited in John Foster 2006).

Because Samuelson could not understand the complexity of Keynesian theory, he wrote that: "[The General Theory] is a badly written book, poorly organized; any layman who, beguiled by the author's previous reputation, bought the book was cheated of his 5 shillings. It is not well suited for classroom use. It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgements. It abounds with mares' nests and confusions: involuntary unemployment, wage units, the equality of savings and investment, the timing of the multiplier, interactions of marginal efficiency upon the rate of interest, forced savings, own rates of interest, and many others. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties; and certainly he is at his worst when expounding its relations to its predecessors."

Samuelson's arrogance in believing that he understood the Keynesian system better than Keynes created the biggest barrier to understanding Keynes for 20th Century economists. Because of his stature, he became the authorized interpreter of Keynes, and very few went back to original writings to try to understand them. Those who did also failed to come to grips with complexity, and as a result, it is impossible to count the variety of interpretations of Keynes - see for example, Backhouse and Bateman. The Keynesian elephant has a huge number of parts, it seems.

[Jan 03, 2017] Some problems with ISLM model

Jan 03, 2017 | economistsview.typepad.com
JF -> Peter K.... January 03, 2017 at 09:46 AM
Krugman believes deeply in the ISLM model and cant seem to admit that there are stunning implications to the following :

1. Credit creation and the financialization above the consumer level of this new-money creation is an unlimited privlege held by financial system actors, we saw this blatantly in 2000-2006, so IS is demonstrably not true, the amount of available Investment funds Is unlimited. There is no such thing as loanable funds at the macro level, the financial system can make financial positions then manages the cash liquidity (until ... .).

2. Defining currency as a liability on a set of books for a thing called a central bank and talking about Quantity Theories of Money, are all demonstrably weak notions, at keast in huge economies. The approach by China ignores a lot of this theory in practice as they Spend to improve the economic potential of their people, a ka Keynes. They do care about closing the supply gaps in housing and transport, and clean power, sure, but they care more about helping more and more and more chinese to get a connection to a modernizing economy. Sure wish Krugman cared the same way rather than caring fir the cloture of the ISLM theory. He may have been kinder to Sanders and more challenging of Clinton too.

Krugman is willing to explain that the US can borrow at low rates to build public goods and other assets and get it paid for by returns, but somehow direct Spending, even using phoney debt processes to push the financing outward as the chinese do (which is simply helicopter money) cant do the same.

Right now I see the chinese approaches as undermining credility to monetary theories while it is consistent with Keynes not so the extended theories.

 

JF -> JF... , January 03, 2017 at 09:59 AM

And of course I hope I am right for the chinese, no surprise to me if this is the case.

The sky is falling view does come to mind if you believe some of the economic theories, oh look, so much debt. But as Adair wrote this week,and I commented upon it a year or so ago probably, if you dont believe in these theoretic tales you can just erase the 'debt' held by the chinese people via their government when it makes sense, no harm, almost all good.

But I have to say, without the US as its major buyer and without their ability to accumulate dollar-asset in reserve to the level they have, one wonders if there would be less lattitude. This raises the question about why Trump continues to voice that the rug will be pulled out soon. Why? I am pretty sure it isnt because he wants to prove the economic theorests to be right.

anne -> Peter K.... , January 03, 2017 at 10:47 AM
http://www.nytimes.com/2016/01/08/opinion/when-china-stumbles.html

January 7, 2016

When China Stumbles
By Paul Krugman


http://www.bradford-delong.com/2015/12/ever-since-i-became-an-adult-in-1980-i-have-been-a-stopped-clock-with-respect-to-the-chinese-economy-i-have-said-alw.html

December 1, 2015

China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run
By Brad DeLong

Now that 90 days have passed, from the Huffington Post from Last August: China's Market Crash Means Chinese Supergrowth Could Have Only 5 More Years to Run *

Ever since I became an adult in 1980, I have been a stopped clock with respect to the Chinese economy. I have said--always--that Chinese supergrowth has at most ten more years to run, and more probably five or less. There will then, I have said, come a crash--in asset values and expectations if not in production and employment. After the crash, China will revert to the standard pattern of an emerging market economy without successful institutions that duplicate or somehow mimic those of the North Atlantic: its productivity rate will be little more than the 2%/year of emerging markets as a whole, catch-up and convergence to the North Atlantic growth-path norm will be slow if at all, and political risks that cause war, revolution, or merely economic stagnation rather than unexpected but very welcome booms will become the most likely sources of surprises....


* http://www.huffingtonpost.com/brad-delong/china-market-crash-5-years_b_8045742.html

anne -> anne... , January 03, 2017 at 10:52 AM
http://www.bradford-delong.com/2016/04/must-read-i-do-not-understand-china-but-it-now-looks-more-likely-than-not-to-me-that-xi-jinpings-rule-will-lose-china.html

April 5, 2016

I do not understand China. But it now looks more likely than not to me that Xi Jinping's rule will lose China a decade, if not half a century... *

* http://www.economist.com/news/china/21695923-his-exercise-power-home-xi-jinping-often-ruthless-there-are-limits-his

-- Brad DeLong

[ Losing a decade, if not half a century? ]

sanjait -> Peter K.... , January 03, 2017 at 11:59 AM
If you want to put money in China given their still extant massive imbalances ... go right ahead.

I'm still predicting a massive slowdown, if not a crash.

The central government in China has a big warchest and a lot of catchup growth that can keep it afloat, but at a macro level there simply must be big adjustments (i.e., investment to consumption demand), which can be put off but not avoided entirely.

Julio -> sanjait... , January 03, 2017 at 03:54 PM
Why should an adjustment from investment to consumption cause a massive slowdown or a crash?
anne -> Julio ... , -1
Why should an adjustment from investment to consumption cause a massive slowdown or a crash?

[ No matter, after 40 years of an average 9.7% yearly real Gross Domestic Product growth and 8.6% yearly per capita GDP growth, Western analysts been all but unconcerned with how such growth was managed, especially since no other developing country came anywhere close. Why no other developing country has come close to matching China in growth, I would think, would make for an important extensive study, but evidently not. ]

[Jan 02, 2017] Milton Friedman, Unperson

Notable quotes:
"... If the Fed were to buy treasuries directly, then Wall Street would be losing a big fat paycheck for the horrendous work of two keystrokes. That is why Wall Streets little sock puppets in Congress has not done anything. ..."
"... Academics at least theoretically seek to discourage group think while politicians seek to cultivate group think. Nonetheless, peer review processes instill group think in academics regardless of intentions. Elite groups only think that they are better when in fact they are hardly any different in essential and existential ways, just in customs, habits, and aesthetics. Individual results may vary though in the general population and among elites. ..."
"... In a democratically electoral republic if the mainstream or status quo is the result of majority opinion then how can the opposition be characterized as populist? ..."
"... When we pursue technocrats, elitists, and oligarchs to advance the cause of socialism we do not get social democracy, but we may get liberal policy aimed at quelling discontent when necessary to prevent a popular uprising. That was the catch-22 omitted from Schumpeter's "Capitalism, Socialism and Democracy". Corporatism does not naturally lead to socialism in republican governments as Joseph Schumpeter said that it would. If we want social democracy then we must start by pursuing the electorate to advance the cause of democracy first. ..."
"... But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. ..."
"... Still, nothing regarding the monopoly over the money supply. Not addressed. Ignored. That the Treasury can inject debt free money into the money supply, is ignored! That we could have a job guaranteed program is ignored. That we never needed to produce debt for deficit financing is ignored. What the hell! ..."
Jan 02, 2017 | economistsview.typepad.com
anne : January 01, 2017 at 01:54 AM
http://krugman.blogs.nytimes.com/2013/08/08/milton-friedman-unperson/

August 8, 2013

Milton Friedman, Unperson
By Paul Krugman

David Glasner * has been making a series of posts on the legacy of Milton Friedman, some of them in response to Scott Sumner; they're interesting if you want to delve into the intellectual history. I'm not personally big on such things - in general, what people thought Keynes or Friedman meant ends up being more important than what they turn out, on close reading, to (maybe, possibly) actually have meant. For what it's worth, I think Glasner makes a good case that Friedman was indeed more or less a Keynesian, or maybe Hicksian - certainly that was the message everyone took from his "Monetary Framework," which was disappointingly conventional. And Friedman's attempts to claim that Keynes added little that wasn't already in a Chicago oral tradition don't hold up well either.

But never mind. What I think is really interesting is the way Friedman has virtually vanished from policy discourse. Keynes is very much back, even if that fact drives some economists crazy; Hayek is back in some sense, even if one has the suspicion that many self-proclaimed Austrians bring little to the table but the notion that fiat money is the root of all evil - a deeply anti-Friedmanian position. But Friedman is pretty much absent.

This is hardly what you would have expected not that long ago, when Friedman's reputation bestrode the economic world like a colossus, when Greg Mankiw ** declared Friedman, not Keynes, the greatest economist of the 20th century, when Ben Bernanke concluded a speech praising Friedman *** with the famous line,

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

"Best wishes for your next ninety years."

So what happened to Milton Friedman?

Part of the answer is that at this point both of Friedman's key contributions to macroeconomics look hard to defend.

First, on monetary policy: Even if you give him a pass on the 3 percent growth in M2 thing, which was abandoned by almost everyone long ago, Friedman was still very much associated with the notion that the Fed can control the money supply, and controlling the money supply is all you need to stabilize the economy. In the wake of the 2008 crisis, this looks wrong from soup to nuts: the Fed can't even control broad money, because it can add to bank reserves and they just sit there; and money in turn bears little relationship to GDP. And in retrospect the same was true in the 1930s, so that Friedman's claim that the Fed could easily have prevented the Great Depression now looks highly dubious.

Second, on inflation and unemployment: Friedman's success, with Phelps, in predicting stagflation was what really pushed his influence over the top; his notion of a natural rate of unemployment, of a vertical Phillips curve in the long run, became part of every textbook exposition. But it's now very clear that at low rates of inflation the Phillips curve isn't vertical at all, that there's an underlying downward nominal rigidity to wages and perhaps many prices too that makes the natural rate hypothesis a very bad guide under depression conditions.

So Friedman's economic analysis has taken a serious hit. But that's not the whole story behind his disappearance; after all, all those economists who have been predicting runaway inflation still have a constituency after being wrong year after year.

Friedman's larger problem, I'd argue, is that he was, when all is said and done, a man trying to straddle two competing world views - and our political environment no longer has room for that kind of straddle.

Think of it this way: Friedman was an avid free-market advocate, who insisted that the market, left to itself, could solve almost any problem. Yet he was also a macroeconomic realist, who recognized that the market definitely did not solve the problem of recessions and depressions. So he tried to wall off macroeconomics from everything else, and make it as inoffensive to laissez-faire sensibilities as possible. Yes, he in effect admitted, we do need stabilization policy - but we can minimize the government's role by relying only on monetary policy, none of that nasty fiscal stuff, and then not even allowing the monetary authority any discretion.

At a fundamental level, however, this was an inconsistent position: if markets can go so wrong that they cause Great Depressions, how can you be a free-market true believer on everything except macro? And as American conservatism moved ever further right, it had no room for any kind of interventionism, not even the sterilized, clean-room interventionism of Friedman's monetarism.

So Friedman has vanished from the policy scene - so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote.

* http://uneasy money.com/2013/08/05/second-thoughts-on-friedman/

** http://gregmankiw.blogspot.com/2006/11/milton-friedman.html

*** http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/

anne -> anne... , January 01, 2017 at 01:56 AM
"Uneasymoney" can only be linked to directly by separating "uneasy" and "money."
anne :
http://krugman.blogs.nytimes.com/2013/08/09/more-on-the-disappearance-of-milton-friedman/

August 9, 2013

More On the Disappearance Of Milton Friedman

By Paul Krugman

It seems that many people misunderstood my post * on Milton Friedman. It was not intended as Friedman-bashing, as a claim that MF was a bad economist; in fact, I'm on record ** declaring Friedman a "great economists' economist". His work aimed primarily at a professional audience - the permanent income theory of consumption, the case for flexible exchange rates, the natural rate (even if it does break down at low inflation), the optimum quantity of money - was often, maybe even usually, brilliant, and will live on.

What isn't living on, however, is Friedman's role as a guiding light for conservative economic policy.

Think about Paul Ryan, who is, like it or not, the leading economic intellectual of the modern GOP. Ryan sometimes drops Friedman's name - but when he does, it's to cite "Capitalism and Freedom," not "A Monetary History of the United States." When it comes to monetary policy, Ryan has said that his views are based on fictional characters in "Atlas Shrugged." No, really.

Or think about the economics rap video of "Keynes versus Hayek" everyone had fun with. Never mind that back in the 30s nobody except Hayek would have considered his views a serious rival to those of Keynes; the real shock should be, what happened to Friedman?

Partly this disappearance reflects real problems with Friedman's analysis. His views on the omnipotence of monetary policy,let alone the adequacy of a simple quantity-of-money rule, haven't withstood the test of time. As far as stabilization policy is concerned, he was indeed, as Brad DeLong archly puts it, a minor post-Hicksian. ***

But the bigger issue, I'd argue, is that modern conservatives can't accept the things Friedman was right about. Take, in particular, his essay on flexible exchange rates, in which he argued that a country that finds its wages and prices out of line should devalue its currency rather than rely on unemployment to push wages down, "until the deflation has run its sorry course." Contrast this with Ryan's declaration that "There is nothing more insidious that a country can do to its citizens than debase its currency."

The point is that Friedman was, when all is said and done, a pragmatist; he leaned right ideologically, but was willing to make room for awkward realities. And these days reality has a well-known liberal bias. Hence, Friedman has become an unperson.

* http://krugman.blogs.nytimes.com/2013/08/08/milton-friedman-unperson/

** http://www.nybooks.com/articles/archives/2007/feb/15/who-was-milton-friedman/?pagination=false

*** http://delong.typepad.com/sdj/2013/08/paul-krugman-milton-friedman-as-a-minor-post-hicksian-noted-for-august-9-2013.html

Jay : , January 01, 2017 at 08:31 AM
"What's odd about Friedman's absolutism on the virtues of markets and the vices of government is that in his work as an economist's economist he was actually a model of restraint."

What's ironic is if you read Krugman pre-2000 his work as an economist was actually a model of restraint. Then BDS (Bush Derangement Syndrome) kicked in and he turned into a political "science" crank.

pgl -> Jay... , January 01, 2017 at 12:21 PM
2000 was when George W. Bush lied his way into office. Krugman called out Bush's lies and was tagged as the Shrill One. Over time - a lot of progressives began to wear being shrill as a badge of honor.
Jay -> pgl... , January 01, 2017 at 02:52 PM
Kind of like Obama, Clinton and the likes lied to intervene in Libya? They hate us for our freedom? No they hate us because we fight proxy wars in their territory and kill innocent civilians. As long as Assad is around Obama can drone bomb innocent people in Yemen and Proggers hail him as a saint.
Chris Herbert : , January 01, 2017 at 08:31 AM
Does anyone have any comments about the constitutional monopoly over the money supply awarded to the Treasury? I don't understand what an economist means when he uses the word 'monetarist' to describe a set of ideas, but I do understand what it would mean if the Treasury (or a national Central Bank) stopped issuing debt for net government spending. Why we do issue this debt is beyond my comprehension. It's incredibly expensive, and there are no guidelines that make any sense to me when it comes to what is paid for by deficit spending. That we have piled up $17 trillion or whatever amount of debt when most of it was unnecessary is astonishing.
Paul Mathis -> Chris Herbert... , January 01, 2017 at 09:01 AM
"the constitutional monopoly over the money supply awarded to the Treasury"

You have heard of bitcoin, right?

RGC -> Chris Herbert... , January 01, 2017 at 09:04 AM
Why doesn't the Federal Reserve just buy Treasury securities directly from the U.S. Treasury?

The Federal Reserve Act specifies that the Federal Reserve may buy and sell Treasury securities only in the "open market."

https://www.federalreserve.gov/faqs/money_12851.htm
.................
Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks

Kenneth D. Garbade Federal Reserve Bank of New York

Abstract

Until 1935, Federal Reserve Banks from time to time purchased short-term securities directly from the United States Treasury to facilitate Treasury cash management operations. The authority to undertake such purchases provided a robust safety net that ensured Treasury could meet its obligations even in the event of an unforeseen depletion of its cash balances. Congress prohibited direct purchases in 1935, but subsequently provided a limited wartime exemption in 1942. The exemption was renewed from time to time following the conclusion of the war but ultimately was allowed to expire in 1981. This paper addresses three questions: 1) Why did Congress prohibit direct purchases in 1935 after they had been utilized without incident for eighteen years, 2) why did Congress provide a limited exemption in 1942 instead of simply removing the prohibition, and 3) why did Congress allow the exemption to expire in 1981?

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr684.pdf

RGC -> RGC... , January 01, 2017 at 09:24 AM
Paul Krugman
Be Ready To Mint That Coin
January 7, 2013 9:05 am
.....................
For those new to this, here's the story. First of all, we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit - tax and spending bills the president is legally required to implement - and then lets Congress refuse to grant the president authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default.

And Republicans are openly threatening to use that potential for catastrophe to blackmail the president into implementing policies they can't pass through normal constitutional processes.

Enter the platinum coin. There's a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector's items - but that's not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling - while doing no economic harm at all.

So why not?

http://krugman.blogs.nytimes.com/2013/01/07/be-ready-to-mint-that-coin/?_r=1

DeDude -> RGC... , January 01, 2017 at 12:17 PM
If the Fed were to buy treasuries directly, then Wall Street would be losing a big fat paycheck for the horrendous work of two keystrokes. That is why Wall Streets little sock puppets in Congress has not done anything.
anne -> RGC... , January 01, 2017 at 05:05 PM
By the way, I have been wondering about "demonetization" in India and what that might mean but I have read no convincing analysis so far:

https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation

DeDude : , January 01, 2017 at 09:38 AM
Rule number one for a populist (popular) communicator of complicated issues is that you lose any and all doubt or granularity. The peeps will immediately lose interest in you and think you know nothing, if you fail to say things with great certainty and great simplicity.

This is the exact opposite of how you communicate in an academic environment. If a scientist give a talk and fail to acknowledge the weaknesses in the narrative they present; the scientists listening will dismiss him/her as ignorant or a BS artist (and confront them with those weaknesses).

RC AKA Darryl, Ron -> DeDude... , January 01, 2017 at 10:28 AM
Academics at least theoretically seek to discourage group think while politicians seek to cultivate group think. Nonetheless, peer review processes instill group think in academics regardless of intentions. Elite groups only think that they are better when in fact they are hardly any different in essential and existential ways, just in customs, habits, and aesthetics. Individual results may vary though in the general population and among elites.
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 01, 2017 at 10:34 AM
In a democratically electoral republic if the mainstream or status quo is the result of majority opinion then how can the opposition be characterized as populist?
DeDude -> RC AKA Darryl, Ron... , January 01, 2017 at 12:06 PM
"Elite groups only think that they are better when in fact they are hardly any different"

A case of false equivalency. There is a huge difference between a process that is constructed to reach a correct conclusion (but fails when inappropriately applied) and a process that has less of a chance of reaching the correct conclusion than a random number pick. Yes there are many examples where the scientific process has failed to reach the correct conclusion (and we know that because eventually it cleansed itself of those conclusions). However there are many more times when the scientific process got things right. That is in contrast to the FoxBot blowhards who seems almost incapable of getting anything right.

RC AKA Darryl, Ron -> DeDude... , January 01, 2017 at 01:08 PM
Intellectual conclusions only matter when they influence real world policy decisions. Real world policy decisions are not governed by science regardless of political control and economics is not deterministic science and often is not even probabilistic science. Of course that is why real world policy decisions are not governed by science. The political influence of wealth, custom and habit, heuristic guidelines obtained from the random walk of history, and popular memes all have more influence over public policy decisions than science.

Quasi-science makes for fun social clubs though.

RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 01, 2017 at 02:50 PM
When we pursue technocrats, elitists, and oligarchs to advance the cause of socialism we do not get social democracy, but we may get liberal policy aimed at quelling discontent when necessary to prevent a popular uprising. That was the catch-22 omitted from Schumpeter's "Capitalism, Socialism and Democracy". Corporatism does not naturally lead to socialism in republican governments as Joseph Schumpeter said that it would. If we want social democracy then we must start by pursuing the electorate to advance the cause of democracy first.
DeDude -> RC AKA Darryl, Ron... , -1
"Real world policy decisions are not governed by science regardless of political control"

Another false equivalency...

The real world is not yes/no, black/white. Just because science sometimes get corrupted doesn't mean it always is corrupted. Just because one of our main parties have become addicted to refusing facts and evidence against their narratives doesn't mean that everybody all the time refuse to listen to facts and evidence. I know that the corruption narrative is what keeps you alive and thinking you got it all figured out, but it also is what leads you astray on a regular basis.

pgl -> DeDude... , January 01, 2017 at 12:24 PM
Milton Friedman once tried to explain to doctors why their precious cartel known as the AMA was a bad idea. One would have thought the doctors would have shot him on the spot. But no - Friedman pitched this as a way to keep away "socialism" aka things like Medicare. The doctors loved it. Of course I thought this was one of his lower moments. BTW - never tell a doctor we should have Medicare for all unless you want to endure a tirade of why they don't make all that much.
DeDude -> pgl... , January 01, 2017 at 06:51 PM
Yes, you got to give Friedman that he was a good salesman. Scientist and economists: mediocre - just to easily addicted to his own narratives. But he was a brilliant salesman.
jonny bakho : , January 01, 2017 at 11:15 AM
MF proposal to manage economies with monetary policy only and to sideline fiscal and regulatory policy found favors with free market conservatives.

Free market rules mean that the greedy are free to market their get rich quick scams to the harm of the rest of us and their own personal enrichment.

Monetary policies such as Volcker's job killing interest rates in 1980 are praised. Fiscal and regulatory policies such as the CAFE standards and subsidies to move away from oil created the Great Moderation, yet are dismissed or worse vilified.

Monetary policy is not saving us from climate change. Fiscal incentives for clean energy and regulation of carbon emissions are the tools that can be applied effectively.

The reformation we need is Post-Monetary with a strong emphasis on the fiscal and regulatory...

pgl -> jonny bakho... , January 01, 2017 at 12:26 PM
The free markets do hate fiscal policy or almost anything else that is sensible policy. But if they ever really understood what Friedman was saying about monetary policy - they would turn on him as being some of sort of communist.
RC AKA Darryl, Ron -> pgl... , January 01, 2017 at 01:12 PM
Then the free markets (sic) do not really understand some of sort of communist either.
RC AKA Darryl, Ron -> RC AKA Darryl, Ron... , January 01, 2017 at 01:16 PM
[If pgl would learn to type then I could copy from his comments without getting sic.]

CORRECTION: "...they would turn on him as being some of [sic] sort of communist."

Larry : , January 01, 2017 at 04:27 PM
"But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications."

Marvelous irony how well this applies to its author.

Chris Herbert : , January 01, 2017 at 06:12 PM
Still, nothing regarding the monopoly over the money supply. Not addressed. Ignored. That the Treasury can inject debt free money into the money supply, is ignored! That we could have a job guaranteed program is ignored. That we never needed to produce debt for deficit financing is ignored. What the hell!
anne -> Chris Herbert... , -1
Monopolization of the money supply: I have been wondering about "demonetization" in India and what that might mean but I have read no convincing analysis so far:

https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation

[Dec 31, 2016] Milton Friedman was intellectual prostitute of financial oligarchy most of his long life, starting from his days in Mont Pelerin Society

Dec 31, 2016 | economistsview.typepad.com
JohnH :

Ironic isn't it? "Why didn't ... exhibit the same restraint in his role as a public intellectual?

The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy."

Krugman should have stuck to economics...

Reply Saturday, December 31, 2016 at 04:38 PM likbez -> JohnH... , -1
Yes, this is pretty nasty verdict for Krugman too.

But, in reality, Milton Friedman was an intellectual prostitute of financial oligarchy most of his long life, starting from his days in Mont Pelerin Society ( https://en.wikipedia.org/wiki/Mont_Pelerin_Society) , where he was one of the founders.

So, if the period when he was a good econometrician exists it is limited to pre-war and war years. As he was born in 1912, he was just 33 in 1945. His "A Theory of the Consumption Function" was published in 1957. And "A Monetary History of the United States, 1867–1960" in 1963, when he was already completely crooked.

Mont Pelerin Society was founded in 1947 with the explicit political goal of being hatching place for neoliberal ideology as alternative to communist ideology. He served as a President of this Society from 1970 to 1972.

Capitalism and Freedom that many consider to be neoliberal manifesto similar to Marx and Engels "Manifesto of the Communist Party" was published in 1962.

So what Krugnam is saying is a myth. And he is not an impartial observer. He is a neoliberal himself. I still remember Krugman despicable attacks on John Kenneth Galbraith and his unhealthy fascination with the usage of differential equations in economic modeling, the epitome of mathiness.

[Dec 31, 2016] Problems with Krugman as an economist is that he, as a neoliberal, believes that profit motive is superior to the mutual benefit motive all the time.

Notable quotes:
"... My criticism of Krugman is far more fundamental. I do not believe the profit motive is superior to the mutual benefit motive when it comes to organizing economies. ..."
Dec 31, 2016 | economistsview.typepad.com
Paul Mathis -> anne... , December 31, 2016 at 06:48 PM
I have two problems with Prof. K:

1. His refusal to acknowledge the central role of consumption in our economy. As Keynes said, ""Consumption - to repeat the obvious - is the sole end and object of all economic activity." The General Theory, p. 104.

And Adam Smith agreed: "Consumption is the sole end and purpose of all production." The Wealth of Nations, Book IV Chapter VIII, v. ii, p. 660, para. 49.

2. Krugman's refusal to endorse fiscal stimulus unless the economy is at ZLB. That is not only anti-Keynesian, it plays directly into the hands of the debt fear mongers. (Krugman is also worried about the debt.)

yuan -> Paul Mathis... , December 31, 2016 at 06:56 PM
"Krugman's refusal to endorse fiscal stimulus unless the economy is at ZLB."

That is a strawman, and a bad one.

PS: My criticism of Krugman is far more fundamental. I do not believe the profit motive is superior to the mutual benefit motive when it comes to organizing economies.

anne -> Paul Mathis... , December 31, 2016 at 06:57 PM
Important criticisms.
anne -> Paul Mathis... , December 31, 2016 at 07:00 PM
https://www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book04/ch08.htm

1776

An Inquiry into the Nature and Causes of The Wealth of Nations
By Adam Smith

On Systems of Political Economy

Conclusion of the Mercantile System

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.

anne -> Paul Mathis... , December 31, 2016 at 07:07 PM
https://www.marxists.org/reference/subject/economics/keynes/general-theory/ch08.htm

1935

The General Theory of Employment, Interest and Money
By John Maynard Keynes

The Propensity to Consume: The Objective Factors

Consumption - to repeat the obvious - is the sole end and object of all economic activity. Opportunities for employment are necessarily limited by the extent of aggregate demand. Aggregate demand can be derived only from present consumption or from present provision for future consumption. The consumption for which we can profitably provide in advance cannot be pushed indefinitely into the future. We cannot, as a community, provide for future consumption by financial expedients but only by current physical output. In so far as our social and business organisation separates financial provision for the future from physical provision for the future so that efforts to secure the former do not necessarily carry the latter with them, financial prudence will be liable to diminish aggregate demand and thus impair well-being, as there are many examples to testify. The greater, moreover, the consumption for which we have provided in advance, the more difficult it is to find something further to provide for in advance, and the greater our dependence on present consumption as a source of demand. Yet the larger our incomes, the greater, unfortunately, is the margin between our incomes and our consumption. So, failing some novel expedient, there is, as we shall see, no answer to the riddle, except that there must be sufficient unemployment to keep us so poor that our consumption falls short of our income by no more than the equivalent of the physical provision for future consumption which it pays to produce to-day.

anne -> Paul Mathis... , -1
Krugman's refusal to endorse fiscal stimulus unless the economy is at zero lower bound. That is not only anti-Keynesian, it plays directly into the hands of the debt fear mongers. (Krugman is also worried about the debt.)

[ Only correct to a degree, economic weakness is recognized. ]

[Dec 31, 2016] Economists View 2007 Krugman on Milton Friedman

Dec 31, 2016 | economistsview.typepad.com
Mathew Kahn:
2007 Krugman on Milton Friedman : As you read this direct Paul Krugman quote, do y ou hear this song in the background.

"What's odd about Friedman's absolutism on the virtues of markets and the vices of government is that in his work as an economist's economist he was actually a model of restraint. As I pointed out earlier, he made great contributions to economic theory by emphasizing the role of individual rationality-but unlike some of his colleagues, he knew where to stop. Why didn't he exhibit the same restraint in his role as a public intellectual?

The answer, I suspect, is that he got caught up in an essentially political role. Milton Friedman the great economist could and did acknowledge ambiguity. But Milton Friedman the great champion of free markets was expected to preach the true faith, not give voice to doubts. And he ended up playing the role his followers expected. As a result, over time the refreshing iconoclasm of his early career hardened into a rigid defense of what had become the new orthodoxy.

In the long run, great men are remembered for their strengths, not their weaknesses, and Milton Friedman was a very great man indeed-a man of intellectual courage who was one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the general public that ever lived. But there's a good case for arguing that Friedmanism, in the end, went too far, both as a doctrine and in its practical applications. When Friedman was beginning his career as a public intellectual, the times were ripe for a counterreformation against Keynesianism and all that went with it. But what the world needs now, I'd argue, is a counter-counterreformation."

Paul Mathis : , December 31, 2016 at 02:26 PM

Counter-reformation? Not exactly.

In an interview with Public Broadcasting System on Oct. 1, 2000, Dr. Milton Friedman said, "Let me emphasize [that] I think Keynes was a great economist. I think his particular theory in The General Theory of Employment, Interest, and Money is a fascinating theory. It's a right kind of a theory. It's one which says a lot by using only a little. So it's a theory that has great potentiality."

Brilliant economist? Not exactly.

For monetarists who believe as Dr. Friedman did that "inflation is always and everywhere a monetary phenomenon," the nearly $4 trillion added to the money supply by the Fed since 2008 should have produced raging hyper-inflation. For Friedman, the answer was not debatable: "A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth." The Counter-Revolution in Monetary Theory (1970).

Dan Berg -> Paul Mathis... , December 31, 2016 at 02:38 PM
$4 T was not "added to the money supply"

https://fred.stlouisfed.org/graph/?g=2VX3

For Krugman, this is called being hoisted by one's own petard.

anne -> Dan Berg ... , December 31, 2016 at 03:35 PM
https://fred.stlouisfed.org/graph/?g=2VX3 :

this graph, which should have been labelled but was not, depicts the monetary base from October 2012 to December 2015 for reasons that are a mystery to me.

anne -> Paul Mathis... , December 31, 2016 at 02:44 PM
https://fred.stlouisfed.org/graph/?g=cfmn

January 15, 2016

Adjusted Monetary Base, 2000-2016


https://fred.stlouisfed.org/graph/?g=cfmq

January 15, 2016

Adjusted Monetary Base, 2008-2016

anne -> anne... , December 31, 2016 at 02:47 PM
About $3 trillion was added to the monetary base between 2008 and the beginning of 2015.
Dan Berg -> anne... , December 31, 2016 at 05:05 PM
so why are you depicting the monetary base if they are such a mystery; and without labels?
anne -> anne... , December 31, 2016 at 05:18 PM
Perfectly described and drawn graphs depicting more than a $3 trillion increase in the monetary base between 2008 and 2015. Nice and simple as that:

https://fred.stlouisfed.org/graph/?g=cfmn

January 15, 2016

Adjusted Monetary Base, 2000-2016


https://fred.stlouisfed.org/graph/?g=cfmq

January 15, 2016

Adjusted Monetary Base, 2008-2016

Tra la, tra la.

anne -> Paul Mathis... , December 31, 2016 at 03:44 PM
http://krugman.blogs.nytimes.com/2013/08/08/milton-friedman-unperson/

August 8, 2013

Milton Friedman, Unperson
By Paul Krugman

So Friedman has vanished from the policy scene - so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote.

anne -> Paul Mathis... , December 31, 2016 at 05:26 PM
Do write further on this matter when possible.
anne : , December 31, 2016 at 02:39 PM
http://www.nybooks.com/articles/19857

February 15, 2007

Who Was Milton Friedman?
By Paul Krugman - New York Review of Books

1.

The history of economic thought in the twentieth century is a bit like the history of Christianity in the sixteenth century. Until John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936, economics-at least in the English-speaking world-was completely dominated by free-market orthodoxy. Heresies would occasionally pop up, but they were always suppressed. Classical economics, wrote Keynes in 1936, "conquered England as completely as the Holy Inquisition conquered Spain." And classical economics said that the answer to almost all problems was to let the forces of supply and demand do their job.

But classical economics offered neither explanations nor solutions for the Great Depression. By the middle of the 1930s, the challenges to orthodoxy could no longer be contained. Keynes played the role of Martin Luther, providing the intellectual rigor needed to make heresy respectable. Although Keynes was by no means a leftist-he came to save capitalism, not to bury it-his theory said that free markets could not be counted on to provide full employment, creating a new rationale for large-scale government intervention in the economy.

Keynesianism was a great reformation of economic thought. It was followed, inevitably, by a counter-reformation. A number of economists played important roles in the great revival of classical economics between 1950 and 2000, but none was as influential as Milton Friedman. If Keynes was Luther, Friedman was Ignatius of Loyola, founder of the Jesuits. And like the Jesuits, Friedman's followers have acted as a sort of disciplined army of the faithful, spearheading a broad, but incomplete, rollback of Keynesian heresy. By the century's end, classical economics had regained much though by no means all of its former dominion, and Friedman deserves much of the credit.

I don't want to push the religious analogy too far. Economic theory at least aspires to be science, not theology; it is concerned with earth, not heaven. Keynesian theory initially prevailed because it did a far better job than classical orthodoxy of making sense of the world around us, and Friedman's critique of Keynes became so influential largely because he correctly identified Keynesianism's weak points. And just to be clear: although this essay argues that Friedman was wrong on some issues, and sometimes seemed less than honest with his readers, I regard him as a great economist and a great man....

anne -> anne... , December 31, 2016 at 03:00 PM
http://krugman.blogs.nytimes.com/2009/03/02/friedman-and-schwartz-were-wrong/

March 2, 2009

Friedman and Schwartz Were Wrong
By Paul Krugman

It's one of Ben Bernanke's most memorable quotes: at a conference honoring Milton Friedman on his 90th birthday, he said: *

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

He was referring to the Friedman-Schwartz argument that the Fed could have prevented the Great Depression if only it has been more aggressive in countering the fall in the money supply. This argument later mutated into the claim that the Fed caused the Depression, but its original version still packed a strong punch. Basically, it implied that no fundamental reforms of the economy were necessary; all it takes to avoid depressions is for central banks to do their job.

But can we say that recent events appear to disprove that claim? (So did Japan's experience in the 1990s, but that lesson failed to sink in.) What we have now is a Fed that is determined not to "do it again." It has been very aggressive about monetary expansion. Here's one measure of that aggressiveness, banks' excess reserves:

[Bank excess reserves, 1990-2009]

And yet the world economy is still falling off a cliff.

Preventing depressions, it turns out, is a lot harder than we were taught.

* http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm

anne -> anne... , December 31, 2016 at 03:17 PM
https://fred.stlouisfed.org/graph/?g=cfmx

January 30, 2016

Excess Reserves of Depository Institutions, 1990-2009

[Dec 31, 2016] Greed Springs Eternal

Notable quotes:
"... You can't go all Ayn Rand/Gordon Gekko on the importance of greed as a motivator while claiming that wealth insulates ... from temptation. ... ..."
"... And this is telling us something significant: namely, that supply-side economic theory is and always was a sham. It was never about the incentives; it was just another excuse to make the rich richer. ..."
"... "The modern conservative is engaged in one of man's oldest exercises in moral philosophy: that is, the search for a superior moral justification for selfishness." ..."
"... choosing a cabinet of billionaires, because rich men are incorruptible"...kind of like showering ZIRP on the Wall Street b