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Tuesday, March 15, 2011

Transcript:: 430 Economic common sense vs. Neoliberal fantasy theology

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We are stuck in what a friend of mine, Stephan Schulmeister, calls “the neoliberal two-step.”

The two-step works as follows. Step one is you adopt neoliberal economic policy and create a problem. Step two is then you claim we need more neoliberal policy to solve the problem. It really is that simple. That is exactly what’s going on with the budget deficit debate in this talk about taxes – irresponsible tax policy creates huge budget deficits, and then we need more irresponsible tax policy to get out of it. Same way we talk about regulation. Irresponsible regulation and lack of regulation created a problem, so guess what? A lot of the Congress says we need less regulation, more of that irresponsible stuff. The same on labor market policy. The same on trade policy. The same across the board with federal reserve policy. You look everywhere you go, and you see the imprint of the neoliberal two-step.


We have to discredit neoliberal policy because we cannot fix these problems until we abandon neoliberal policy and restore a pro-people shared prosperity policy, but that’s really very tough. It’s tough because a lot of Democrats, a lot of the media, a lot of voters, and almost the entire economics profession believe in neoliberal economics in one form or another.

Today on the podcast, economic theology, GDP as a measure of what?, and the Fed’s policy, effective in producing what we don’t want.

In terms of punditry, Demand Side is far behind the curve. We have not yet mastered the skills of avoiding issues and going after the cheap shots, of dealing only in stereotypes, or of treating politics as a spectator sport. Least of all have we listened only to the flavor of the week commentary. We have in fact, tried to bring attention to last month's fashion, the promises and pledges of policy makers, remembering for example, that profitable companies will hire people and that solvent banks are the first step in a return to healthy investment. Reminding you that both of these were explicit justification for huge transfers of public money to the private sector.

Half a century ago, in his book American Capitalism, (p. 15-16) John Kenneth Galbraith made the point that "Man cannot live without an economic theology -- without some rationalization of the abstract and seemingly inchoate arrangements which provide him with his livelihood."

It is the construction of this economic theology which is our concern here.

Ah, but as you heard at the top, Thomas Palley objects. The Neoliberal two-step is indeed alive and well. Parentheses. Neoliberalism is economic speak for conservative free market free trade small government doctrine. End parentheses.

Galbraith also noted, writing in the middle of the 1950s, that the ideas which comprise the economic orthodoxy are derived from an eighteenth and nineteenth century system developed in England and Scotland that is internally consistent as a system, but bear precious little resemblance to reality. As Galbraith said,

"It is described as an economic system of high social efficiency -- that is to say, one in which all incentives encouraged the employment of men, capital and natural resources in producing most efficiently what people most wanted. There could be no misuse of private power because [competition ensured] no one had power to misuse. An innocuous role was assigned to government because there was little that was useful that a government could do. There was no place in the theory for severe depression or inflation."
Still, as he said then and as is true today.
"In the contemporary United States few of the preconditions for the system can seriously be supposed to exist. Nor do we pretend to live by its rules. Accordingly, we are forced to assume that we stand constantly in danger …. The dangers and even the disasters we risk are no less fearsome because we do not know their precise shape or why they do not come."
Hence the anxiety of the times is over inflation when no inflation exists. Hysteria over inflation is not only premature, it is misplaced. We see the absence of inflation as evidence of stagnation, and having been schooled in endogenous money by Minsky and Keen, we do not fear inflation in the future. If it happens – that is, a general price rise – it will mean investment is happening. Ersatz inflation as a speculation-induced rise in commodity prices is already happening.

Likewise, the fever over unions and pension plans which are issues only because of a financial collapse and the government's solution, low interest rates, and over government deficits which are assumed to be a problem in recession when they were not in the expansion. That is, the public discourse has returned to the dominant economic theology in direct view of a reality which is quite different.

It is as if we have accepted that all calamity is the result of fires, so we employ fire hoses on the occasion of a flood.

I was doing a short presentation to the Economists Club last week and found myself pointing to the bottom of the curve describing the employment recession and wondering silently, “What the hell is GDP doing in recovery, when employment is stuck at the bottom?” GDP reached its previous level in Q4 of 2010. Employment is not even back to its level in 2001. Clearly stimulus measures and Fed monetary policy have done wonders for activity, but little for jobs.

Econ Intersect had some other problems with the GDP metric last week. Writing after the reduction in Q4 estimates by the Bureau of Economic Analysis, Econ Intersect wrote,

“… this report is still showing modest GDP growth during 4Q-2010, although that growth is now not statistically distinguishable from the BEA’s last estimate for the third quarter of 2010. The estimate-to-estimate changes lowered the contributions of both consumers and governments to the growth rate, with the contraction of state and local governmental expenditures now removing … nearly three times the impact estimated only 30 days ago.

It should be noted that the BEA still used “price deflaters” that reflected an aggregate 0.4% national annualized inflation rate (up slightly from the 0.3% used in the “Advance Estimate”). At a number of levels this “deflater” is curious.

The numbers are so volatile on a quarter-to-quarter basis that a rational observer might lack confidence in their values.

In some cases the numbers defy common sense or real-world experiences (e.g., the last two quarters of computer prices inflating at annualized rates exceeding 60%).

The aggregate inflation rate was shown to be 0.4% even though the “GDP Excluding Food and Energy” (i.e., excluding the two key items which have recently seen the most sharply rising prices) was inflating three times faster at a 1.2% rate and total “Gross Domestic Purchases” was showing a 2.1% inflation rate.

None of these numbers translate in any obvious way into the official U.S. inflation rates published by the Bureau of Labor Statistics.

[A] rational observer might conclude that the values in this table have been hijacked by volatile seasonal adjustment factors or a blind conformance to historical methodologies that have lost touch with reality. As a consequence it is possible that quirky “deflaters” might have caused the published 2.79% growth rate to include between 1% and 2% of uncorrected inflation.”
And Econ Intersect concludes with a comment on how inventory adjustments are skewing economic measurement

"… a rapidly rising “deflater” will cause “real” inventories to deflate even as physical quantities remain relatively constant.

This is where a bizarre “deflater” can do its damage, because at the highest level the BEA’s logic attributes any variations in the quarter-to-quarter rates of change in inventory valuations to changes in factory production levels.

This whole process tends to highlight one of our major concerns: that the quality of traditional economic data drops sharply during times of dynamic or unprecedented changes in the economy. We would trust these reports more if the BEA had previously experienced periods of economic dislocations or governmental interventions on the same scale as those being seen today."

We are in recovery, though, and the economy is perking right along according to Wall Street. Never mind the immense federal deficits, the housing recession, the labor recession, nor the fact that unprecedented Federal Reserve action continues unabated, with zero percent interest rates and financial market manipulation.

Most people who object to the Fed’s action say it is setting us up for hyperinflation. If you don’t think that, you are not a realist. I know, weird.

Demand Side objects to the Fed’s action because it is destabilizing and ineffective.

To say that the Fed’s policy is ineffective would not be precise. It is effectively keeping commodity prices up and stock prices in bubble territory and promoting commodity price rises around the world. It is effectively delaying the reckoning with the banks. It effectively shifted trillions of dollars into the accounts of people who formerly held dodgy derivatives and securities. It has effectively continued the party on Wall Street for several years.

But it is not effective in creating jobs.

To say that deficit spending has not been effective is likewise not completely accurate. True, tax cuts for the wealthy have no economic benefit, and only a political purpose. But even after campaign donors have been made whole, the tax benefits for business were virtually useless, as investment is not produced by tax cuts, but by prospects for profit. The marginal rate reductions even for the middle class, including the payroll tax reduction may be welcome, but they are not job-producing. Only the one-third of the original Redevelopment and Recovery Act funds that went to spending on real projects have any jobs benefit to speak of. At the time, it was said that infrastructure spending was useless because it was too slow. Timely, Targeted and Temporary. Well. Here we are three years on and the only stimulus left with any pop are roads, rails, and power grid construction.

The “wealth effect” is the object of both the Fed’s monetary and the Administration’s main fiscal policy. Now that IS working, very effective in producing profitable corporations, cash-flush banks, and an ever wealthier ruling class. Jobs, not so much.

Stocks, bonds, liquid derivatives, doing quite well with the Fed’s cheap chips. But it is all Ponzi. Stable financing, as Minsky taught, is hedge financing (“Hedge” here has nothing to do with “hedge funds,” but refers to what we normally think of as productive investment; build a plant or facility, produce a good or service; pay back the loan from a portion of sales.

Ponzi finance is wealth effect finance. Inflate the value of financial assets with leverage so people will buy.

The more effective policy would be to provide jobs. It is not the owners of financial assets, nor even the currently employed who are hurting, or even who will produce demand if given the money. It is the jobless, who if given a job will demand housing, manufactures, and essential services.

I know this is at odds with my progressive fellow-travelers, for whom all deficit spending is okay. But as we will hear from Heather Boushey in next week’s relay, that argument has already been lost with regard to deficits. Liberals say all deficit spending is Keynesian. Keynes said … advocated … in times of unemployment burying ten pound notes in bottles and hiring people to dig them up. This is as useless an activity as he could imagine. But it involved hiring people hiring people hiring people. It was not helicopter Ben.

Even Helicopter Ben, as we’ve said, is not Helicopter Ben. He is providing cheap leverage to financial players, keeping the party going on Wall Street, creating a bigger problem every day in commodity markets, and wasting time and people’s lives.

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