A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Tuesday, June 28, 2011

Transcript 449: Double Denial:Failure of Economics, Collapse of Ecosystems

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Paul Gilding:

At some point you have to recognize that the trends are now clear. So yes, we are seeing extreme weather and we have before. But the extreme weather is more extreme. It is coming more often. Scientists are now saying very clearly that the average temperature is increasing, that the frequency of a variety of types of weather is increasing, and the severity of storm surges and the like is increasing.

Now of course, one can always argue that this is an unusually intense period in history, but you have to say that when virtually every scientific body in the world is saying the same thing, which is "It is changing, we are the major cause of it," then, perhaps they're all wrong. It's always a possibility. But you have to be a very brave person to say that we're going to ignore that until we are absolutely certain, knowing that absolutely certain is far too late to respond.

I think we're quite a long way along actually. I think we haven't recognized it. I think if you look around, the signals are now pretty clear, in terms of weather, but also -- really importantly -- in terms of the economy. We are now seeing what happens when you operate the economy past the limits of the system -- in our case, the eco-system. The planet can no longer support an economy this size. And I think we're well into the process. We haven't recognized it yet, but we will as the evidence mounts.

I think we'll be aware of it and talking about it within a few years. We're no longer talking decades, we're talking this decade.

If we're honest as environmentalists, we have to face up to the fact that people face up to economic pressures much more strongly that they respond to environmental impacts. And I think that, if you like, the ironically good news in the bad news, is that now seeing the impacts of hitting the limits of growth, as I would call it. Hitting the limits of the eco-system and resource capacity and its availability for our economy.

We're seeing that impact on the economy. We're seeing commodity prices across the board increase. We're seeing record food prices. We're seeing very high oil prices again. And that's what you'd expect the system to behave like as you hit the limits. So I think we are now seeing and will see a lot more dramatic economic impacts of these issues. And that's when we'll start to pay attention.

Paul Gilding is past director of Greenpeace and current author of The Great Disruption: Why the Climate Crisis Will Bring About the End of Shopping and the Birth of a New World.

Gilding is likely wrong about the short-term commodities prices, but right on the broader point. In Demand Side's view, prices are now responding to casino dynamics, being built up by cheap chips and now falling because if they can't rise any more, they fall in a bubble. Prices will not bear the burden of scarcity because incomes will. Rampant unemployment reduces demand, not by reducing desire or need, but by reducing the money incomes needed for the markets to see demand.

Simon Kuznets won the Nobel Prize for something worthwhile, not always a requirement for that prize. Kuznets took Keynesian economics into accounting. He produced the National Income and Product Accounts, NIPA, which is alive today in the monthly foofaraw around the release of the GDP number and net exports and personal consumption and savings and deficit and so on. Kuznets did the groundbreaking work in the 1930s and 1940s.

That work has not been updated or brought into the world of personal well-being or climate crisis or resource depletion. Consequently we are running a race in the wrong direction, expecting that more of the current effort will get us there faster. In fact, our speed is not on the plus side, it is on the minus side.

I should drop in here some mention of Demand Side's Net Real GDP, an idiosyncratic and rudimentary calculation. Net Real GDP is Real GDP minus Real Federal Deficits. It is what GDP would be without government spending in excess of revenue. Straight up net amount. No multiplier adjustment, although certainly there would be knock-on losses from such actions. Of course, what it shows is consistent negative numbers, negative net growth, or in layman's terms, contraction. So?

How different would the political dialog be if we had a balanced budget, but 8, 9, 10 percent less each year in incomes and output? It would be another debate. Nobody would even frame the thought that government spending is costing jobs. And this is just a simple twist to the actual numbers. The accounting for the economy, the National Income and Product Accounts, need more fundamental change.

Later in this discussion with Tom Ashbrook, Gilding makes that point that population growth will add 30% to demands on the world economy by 2050. Growth under the assumption that material standards of living will expand at current rates, people will buy more stuff, project a 300% addition to demands on the world's economy. Gilding's message: It's not going to happen, because it cannot happen. Chaos and starvation and conflict and disruption will ensue to a greater or lesser degree until we scale down our need for stuff to a sustainable level.

That interview is the podcast of the week. Link online. DemandsideEconomics dot net.

The innovation that is needed is not how to produce that much stuff in some tricky new way, but in how to adapt and innovate increased well-being from less material output. Demand Side -- and others -- call this "development" as opposed to "growth."

Accounting for resource depletion and eco-system degradation -- call it the capital consumption of the Commons -- produces a conservative statistic of 150%. We are operating our economy on one and a half times its sustainable level. Great. There's some Yankee know-how. No. That extra 50% is being taken by ignoring that we are taking it. It is being taken not even from our future, because the process of taking it is damaging our future beyond the point of being able to replace it.

The Sarkozy Report, a review of worthwhile adjustments to accounting for the economy, under co-chairs Joseph Stiglitz and Amartya Sen, was produced a couple of years ago. We did a series here on Demand side. When the crisis hits -- the ecosystem crisis -- new accounting will be reported. Why not now?

I'm sure it is, and we don't hear it.

Demandside is focused -- as are most economists -- on the current short-term economic mess. The short- and medium-term environmental and global poverty mess is largely ignored by us as it is by others.

But this is the Third World War.

Gilding makes the point that the world ignored the looming threat of Nazi Germany long past any reasonable point, as long as it could, just as we are sparing no effort to ignore the climate and natural systems crisis. Parenthetically, the violent and extreme weather is only part of the challenge to a broad range of necessary systems for human survival, but a part that is quite visible and quite difficult to ignore, and so it may change perception as no amount of scientific consensus will.

But when the invasions began, the world responded, and with muscular and determined and effective action. That is what Gilding expects from us when the climate crisis becomes too obvious to ignore. Great. Except that carbon has already dropped its bombs. They haven't hit yet. They won't strike in full force for another six, eight or ten years. But when they do, it will make Pearl Harbor look like a string of firecrackers. And the bombs will continue to fall for decades while we are trying to organize. So plan your personal adaptation now. Less, no carbon, personal food sources, whatever.

It is a great failure of economic discussion today that our meters measure the wrong thing and our future is in the opposite direction we are telling people to run.

I want to end by thinking a little bit about this larger question of leadership from economists. We have more than a few, in fact, probably a majority who are not under the thrall of denial, double denial, I guess it would be. Denial of the scale of climate change and denial of the refutation of Neoclassical models by current events. But this consensus of the progressive side has no presence on the screen of public policy. This is a great failure.

Politicians are arguing about inflation and deficits when neither is a problem, and they are doing it with the encouragement of the established interests. Why? The distraction is an effective defense to change. When we engage these discussions we enter political theater. It is like responding to the discredited memes in the comments section of a popular blog. Are you really going to make change by convincing people who think a return to the gold standard or balanced budget amendments are the solutions? Or are you even going to make change by talking to people who agree with you?

So my current fantasy is as follows. A shadow economic policy group composed of substantial voices -- more respectable than Demand Side -- who propose substantial policies broadly supported by rational economists. Fiscal side, for example, a jobs program, infrastructure spending, taxes on the wealthy or on carbon, closing special purpose tax loopholes, revenue sharing with state and local governments. Monetary policy side: Returning the banking sector to a utility role, ending casino capitalism in whatever ways are most practical.

We calculate the outcomes. The actual vs. the counter factual composed not of doing nothing, but of the projected results of this alternative policy scheme. And we present it in both traditional Kuznets terms, but also in enlightened terms which account for the environment and resource depletion and improvements in health or education or other elements of well-being.

The kicker, of course, is that it is precisely those who can see the failure of economics -- the Stiglitzes and Jamie Galbraiths of the world -- who can see the real ways out of the eco-system tragedy unfolding, who can appreciate the looming environmental crisis. Stiglitz won his second Nobel for work with the Intergovernmental Panel on Climate Change. That was a Peace Prize.

Because when the full effect of collapse comes in the consumer economy and simultaneously extreme weather and crop failures damage the internal organs of the world's confidence, there will be a need for an existing well-recognized or at least long-standing alternative schemata.

I mean governments and central banks already look stupid to the intelligent observer of any persuasion. How much less confidence will they inspire when "muddle through" turns out to be "throw gasoline on the house fire?"

All kinds of hysterical demagogues will get traction, and there ought to be some place to go.

This requires divesting this group of ties to a party. In the case of the U.S., the Democratic Party. Participating in political theater is participating in distraction. Politicians will need to attach themselves to the group.

Just fantasy. On my way out of town.

Demand Side is dark until July 25. check on the blog for transcripts of previous shows.

We expect that in the next four weeks there will be big changes in the economic landscape. Fortunately or not, we will be outside the range of broadband. The return will be fun in itself. A Rip Van Winkle moment.

Thursday, June 23, 2011

Transcript 448: Forecast, at least here, for accuracy, Main Street beats Wall Street

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A recent post from Calculated Risk begins
Just thinking out loud ...

Fed Chairman Ben Bernanke argued that the recent slowdown was mostly due to temporary factors. From the FOMC statement: "The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan."

I also think we will see some pickup in the 2nd half of 2011, although I think the recovery will remain sluggish and choppy.

There has been some progress on the supply chain issues, and oil and gasoline prices have fallen sharply since late April.

So when will we see some better economic news?"
Demand Side wonders why? Why will we see better economic news? Corporations will begin to hire again? Debt will be lifted? Yes, oil and gasoline are coming down, but because they triggered the next slump, as we said they would at the start of the year. The flock of black swans explanation for this so-called soft patch is not convincing. From the Demand Side there is no reason to expect better news. Those in power have chosen the madness of austerity. Those at home have to save as much as possible against uncertainty. Where is the demand that is the driver of the economy going to come from? Unless you can identify that, you cannot tell me why things are going to get better. It is just a languid hope.

Today on the podcast we will continue our gloating about predicting negative growth in the second half of 2011 and not last week, but at the outset of 2011. No, we won’t. True, we did predict that, and we’ll get back to the I told you so series as soon as we can muster up the interest. But there are two reasons not to be so … actually, there are three reasons … to be so full of our self.

One, nobody listens to the forecasts that are outside a conventional range, so there is the case of “If a tree falls in a forest and nobody hears it.”

Two, while Demand Side was right and the great swath of conventional economists were wrong, the usual suspects were also right – Roubini, Stiglitz, Keen, AND a good part of the educated American public. Yes, we have not done much better than the consumer confidence surveys of the broad population, which have hovered in recession territory stubbornly unconvinced by the happy talk from Wall Street and inside the Beltway.

Three, gloating about being right is not appropriate when you haven’t been right enough or effective enough in communication to affect policy. Policy has followed the blue chip consensus. Disaster has followed the policy.

Imagine what would have been done had policy-makers realized that the waning of the public works and revenue-sharing portions of the stimulus package would set the economy back into recession. They might have done what needed to be done to fix the problems.

The great John Kenneth Galbraith once said, “Politics is not the art of the possible. It consists of choosing between the disastrous and the unpalatable.”

In our case, politicians have chosen the disastrous because they did not realize it was disastrous because the forecasts they follow – from the IMF, to the Federal Reserve, to the orthodox blue chip consensus – told them things were going to get better.

The great irony of Baffled Ben Bernanke is that he championed the Monetarist line that monetary policy mistakes created the Great Depression. He has chosen to aggressively pursue another course. That course is turning out to be many times more dangerous.

Is it too late? Yes.

Politically the debate is over the non-issue of the deficit. Again, average Americans realize that the economy and jobs ought to be priority one, two, and three. But there is no jobs program in sight, there is no infrastructure or other public works program, there is no revenue sharing with our states and localities. There is only Mediscare and debt ceiling brinkmanship. Oh, and we almost forgot because it is such nonsense, hyper-inflation hysteria.

In terms of resources, while it is possible for the Federal Reserve to transfer trillions in support of banks, it is not possible for them to transfer a couple hundred billion to solve the unemployment problem.

In terms of institutions, the big banks are bigger, the regulations that might have helped have been mugged in the back rooms at the Capitol. There is no voice for the American people.

In terms of economics, the same stupid schemes that got us into the mess are the same stupid schemes that are being proposed now.

This last is the greatest failure of economics. It is not the housing bubble or even the Great Financial Crisis, it is the inability of economics to learn and change and come up with a workable plan. In spite of evidence and history, we are back in the same soup of 1932. And the debate is the same damned debate we had back then.

Why? A big part of it is that economic forecasts were taken as fait accompli, and non-solutions were thus taken as solutions. The ship ran aground, it was refloated, but the course was not changed, so it hit the same rocks. This is disgusting. It is scary. And it is about time somebody firgured out how to change the course.


The commodities bubble is again on the downward slope, as we noted on Monday.

Risk aversion trades are back on the market. Much was made of the major indexes breaking their six-week losing streak, but as David Rosenberg pointed out, two year Treasuries are still going higher. These are near cash. This is where the liquidity trap can be most clearly seen.

And here come the downgrades for Q2 2011 growth. Yes. I know. Q2 ends in ten days, but blue chippers are still forecasting it. Forecasting the past, we call it at Demand Side. Macroeconomic Advisers, the highly respected forecasting firm, lowered its Q2 forecast to 1.9 percent. It started the quarter out at 3.5. In February, it was 4.4. Goldman Sachs cut its Q2 forecast to 2 from 3.

Equally frightening, Ben Bernanke expressed optimism and Olivier Blanchard of the IMF called the downturn a bump in the road. Both raised their estimation of downside risks, however. This is so they can have it both ways. If growth rebounds, they can point to their growth numbers. If it collapses, they can point to their risk warnings. They have no clue.

Here is a cute finesse from Goldman economist Sven Jari, quote,

"At this point, we still expect a bounceback in Q3 and beyond, but will need to see significant improvement in the data over the next few weeks to maintain that view," he said.

Another cute way of finessing incompetence is to couch it in precise numbers. 2.3 percent growth. 1.9. 3.3. Then there is a flurry around the release date of the preliminary data. And a month or two later, when that data is marked up or more likely down by 30 or 40 percent, no notice. We're on to the next quarter's growth to two decimal points. The number of importance is jobs. That number needs to be in the 500,000 range. It is in the 50,000 range and dropping. Of course other numbers are carbon in the atmosphere, average temperature increase.

There’s more to be said, but we can't be heard over the babbling buffoons at the IMF, Fed, on Wall Street, inside the Beltway, at the EU and ECB. Will they be shut up by the next downturn? Who knows?

Check out our post of William K. Black’s short form of the dance of death being performed in the Eurozone right now, as the core countries demand bailouts of their banks by way of austerity from the periphery that will lead inevitably to non-payment on the debts the banks need for solvency.

Monday, June 20, 2011

The dance of death: Demand for austerity by the periphery to save the insolvent banks at the core

William K. Black has written an important summary analysis of the EU's dance of death.

Destroying the Periphery in Order to Save the Core's Banks

Demand Side has edited the piece and provides it below.

Gary O’Callaghan, a former IMF economist has written ...

“[H]ow important is it that the programs succeed? Obviously it is crucial. The success of the programs is key to the survival of the euro and should, therefore, take precedence over any other European agenda.”


It is not “obvious” that “the survival of the euro” is critical, much less a goal of such transcendent importance that it should “take precedence over any other European agenda.” The euro is simply instrumental to some substantive purpose such as economic security, employment, or at least increased efficiency. The economic welfare of the people of the EU should be the EU’s transcendent economic goal.

"The survival of the euro has been conflated with the transcendent “European agenda” and has conflated the success of the EU loan programs to Ireland, Greece and Portugal with “the survival of the euro.” The EU existed for decades without the euro. A number of EU nations have chosen not to be members of the euro. The euro is not essential to an effective EU unless the EU wishes to become a true United States of Europe. ... The crisis has revealed that most French, Germans, and Finns do not view the Irish, Greeks, and Portuguese as fellow citizens of a United Europe. European solidarity has been called by IMF apologists simply “distracting rhetoric.”


The same apologists are disturbed about the EU and ECB’s lending program for Ireland. They are horrified that the EU and the ECB are making the rookie mistakes common to novice loan sharks. The IMF does not bail out poor nations. It bails out banks in rich nations that have made imprudent loans to poor nations. The IMF realizes that it is essential not to impose so much austerity that you kill rather than cripple the victim’s economy, because you must not harm the core’s banks. The ECB is dominated by theoclassical economists who have not yet learned this lesson. Their economic dogma is a variant on the old joke: the daily floggings will continue until morale improves around here. Bleeding is virtuous. If the victims aren’t screaming the ECB is not trying hard enough.


Sentient economists do not believe that imposing austerity during a severe recession is sensible.


The ECB's plan for the periphery must succeed because non-payment of debt – including bank debt – by the nations on the periphery would lead to severe banking crises and a return to recession in the core of eurozone.

The EU is not lending money to Ireland, Greece, and Portugal to help those nations’ citizens. The EU is lending those nations money because those nations must be able to repay their debts to banks in the core. If they don't, the fact that the core banks are actually insolvent will be made public. When the Germans and French realize that their banks are insolvent the result will be “severe banking crises and a return to recession in the core of the eurozone.” The core, not simply the periphery, will be in crisis.

The ECB and the EU’s leadership would be happy to throw the periphery under the bus, but the EU core’s largest banks are chained to the periphery by their imprudent loans.

Destructive EU feedback loops: bad economics breed bad politics and worse economics

The leaders of the troika of the EU, ECB and IMF understand, but detest, the need to bail out the core’s insolvent banks by bailing out the periphery. They understand how much the EU public detests the bailouts and the resultant political cost in the core of supporting the bailouts. Their efforts to minimize that political cost has led them to demonize the periphery and support the ECB’s imposition of ever more draconian and self-defeating austerity programs.

The austerity programs are deepening the recessions in the periphery and creating far worse unemployment. The perverse economic policies create ever greater political instability in the periphery, massive resistance to austerity, and contempt for the core nation’s pretenses about European solidarity. As the periphery’s recessions deepen, the likelihood of default increases, which further outrages the core’s population and threatens to unseat the core’s political leaders. Austerity locks the core and the periphery in a dance of death. The desire to save the euro and the core’s insolvent banks has become the greatest threat to the EU project.

Creating a sounder euro system

Even if the EU did need the euro, it does not need every EU member to be in the euro. If Ireland, Greece, and Portugal were to leave the euro and reintroduce sovereign currencies the number of EU nations using the euro would be greater than during the period the euro was introduced. The remaining members would have more uniform economies that would be closer to the economic concept we call an “optimum currency area” – making the new euro far less dangerous. That would make the euro and the EU’s member states stronger – both the core and the periphery.

The euro is ulcerous. The EU and ECB leadership do not understand this point. They see the obvious; the euro is “strong” relative to the other major currencies. Look underneath and the ulcers are weeping. The euro is so strong because the U.S., Japan, and China are deliberately and generally successfully weakening their currencies in order to increase exports. They all have sovereign currencies. They borrow at exceptionally low interest rates with U.S. and Japanese debt levels roughly equivalent to or in excess of Ireland, Greece, and Portugal.

The euro has become the tail that wags the EU dog, and it is wagging so destructively that it is throwing the periphery into the ditch. The EU response is to make the periphery dig itself ever deeper into that ditch and all the while it showers the periphery with abuse. The euro is the problem – not the solution – for the periphery and the core.

It is essential that the nations of the EU periphery reclaim their sovereignty. Sovereign nations have a range of policy options to recover from recessions. They can lower interest rates, devalue their currencies, and increase public spending to offset lost demand in the private sector. Recessions cause real, severe economic and social losses. Unemployment is a pure deadweight loss. In a serious recession in a nation such as the U.S., the losses are measured in the trillions of dollars. Speeding the recovery from recession, ending unemployment, and avoiding hyper-inflation should be a sovereign nation’s transcendent economic goals at this time.

Because they lack sovereign currencies Ireland, Greece, and Portugal cannot effectively use any of these three means of fulfilling a sovereign nation’s economic functions. They cannot devalue. They cannot set monetary policy – they can’t even influence it. They can run only small deficits.

Small deficits do not come close to replacing the severe loss of private sector demand that occurs in serious recessions, so the EU “Growth and Stability Pact” is a double oxymoron. It limits growth, causes economic instability by leading to widespread unemployment, and causes political instability. It hamstrings the one thing we know reliably works to limit recessions – automatic stabilizers – by allowing them to only partially stabilize. The EU, as a matter of policy, provides far less effective automatic stabilizers than does the U.S. – in the name of producing “stability.” Neoclassical ECB economists, the designers and implementers of the euro and ECB, studiously ignore the significant insanity of this policy.

A functional sovereign nation addresses its home grown problems rather than ignoring them or blaming them on other nations. The ongoing crisis has shown that accounting control fraud in nations like the U.S., Ireland, Iceland, and Spain can cause the private sector to make trillions of dollars in destructive investments – sufficient to create massive bubbles and the Great Recession. The entities that are supposed to be best at providing “private market discipline” – the banks – rendered themselves insolvent by funding these bubbles instead of preventing them. These wasteful private sector investments should be a sovereign nation’s priority during the recovery from the Great Recession. But the private sector’s staggering destruction of wealth should not blind a sovereign nation to the problems of its public sector – crippling problems in Greece and severe in Iceland, Spain, and Ireland. The periphery needs to work in parallel on the interrelated crises of its private and public sectors.

Sunday, June 19, 2011

Transcript 447: June's Punch List

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Today on the podcast, information outside the echo chamber, but inside the sound bite. June’s punch list of things you need to know that were not reported or are older than the six-day focus of mainstream media.


The protests in Greece against new bailout conditions are closer to the Arab Spring than anything else. It’s a mass action by a very broad cross-section of the population. The austerity camp promised recovery and produced economic failure. Protesters are saying nothing more complicated than, “No,” to more lies. “Let’s find another road.”


Michael Hudson has pointed out that there is a history of financial crises. Previously they have all had the same characteristics – overleverage, fraudulent or foolish lending, unsustainable debt overhang, and cleansing by bankruptcy and restructuring. No longer. More debt is the solution to bad debt in the current crisis, at least by the lights of the banks and their facilitators in the central banks in the U.S. and Europe.


The commodities bubble has resumed its downward leg after several weeks of floating on some foam from somewhere. This is not what we promised here at Demand Side. Bubbles don’t plateau, we said. If they do, they’re not bubbles, and this is a bubble. We suspect computerized algorithms designed to protect Morgan Stanley and Goldman Sachs from the big losses they deserve. We’ll check back on that when the smoke clears.

Commodity prices are now the province of the financial players. With 70 percent of activity being financial speculation and 30 percent being legitimate hedging against price fluctuations. The Commodity Futures Trading Commission recently filed suit against market manipulators, but firms like Morgan Stanley and Goldman Sachs still play their games virtually unchallenged.


For all the happy talk about falling oil prices, we note that it was the first of July 2008 when oil prices collapsed from $147, the last bubble. Major economic collapse was not avoided.


Simon Johnson reacted to a speech by Treasury Secretary Tim Geithner to the American Bankers Association in which he said, among other things, “The U.S. banking system today is less concentrated than that of any other major country.” Johnson’s take, “[Geithner’s] history is completely wrong, his logic is deeply flawed, and his interpretation of the Dodd-Frank reforms does not mesh with the legal facts regarding how the failure of a global megabank could be handled. Together, these mistakes suggest that one of our most powerful policy makers is headed very much in the wrong direction.”


Mark Thoma turns on voodoo economics. Noting that Republicans cannot resist claiming that tax cuts pay for themselves. Had they done so, of course, the Bush tax cuts would have produced growth rather than revenue losses that dwarf any entitlement cost. Thoma observes that deficits can more than pay for themselves. A key piece of infrastructure produces incomes in construction and increases private sector growth for as long as the infrastructure remains in place. Not hard to see how a bridge to somewhere, for example, can actually save taxpayers money.


Calculated Risk observed that the string of unemployment claims over 400,000 reached ten weeks, unusual outside recessions.


The venerable Financial Times is bailing on its support of the austerity camp. Under the title, “Apologies, we need a toxic rethink on the economy,” Robin Harding writes that we must hold our noses and go back to the same bailouts, timid stimulus and monetary policy voodoo that have done so little at such great cost.
The revulsion caused by talk of stimulus is understandable. The tax cuts, spending increases and bank bail-outs used to fight the recession of 2007-09 have left behind huge budget deficits and sovereign debt crises in countries such as Ireland; in the US, UK and Japan interest rates are still at or close to zero. People want to fix these problems and get back to normal, not take more crisis measures.”

He calls it “crisis fatigue.” Well, neither austerity, nor financial sector bailouts, nor timidity have worked. I’m getting tired of it.


The Stanford Center for the Study of Poverty and Inequality (as opposed to Standord’s Hoover Institute) posted Twenty Facts About U.S. Inequality that Everyone Should Know.
One is over the last 30 years, wage inequality in the United States has increased substantially, with the overall level of inequality now approaching the extreme level that prevailed prior to the Great Depression. though the trend at the top of the income distribution (the “upper tail”) is not exactly the same as the trend at the bottom of the distribution (the “lower tail”). They found that lower-tail inequality rose sharply in the 1980s and contracted somewhat thereafter, while upper-tail inequality has increased steadily since 1980. Chart online at Demandsideeconomics.net.

Source: Economic Policy Institute. 2011. “Upper Tail” inequality growing steadily: Men's wage inequality, 1973-2009. Washington, D.C.: Economic Policy Institute. May 11, 2011. .


The University of Michigan’s Survey of Consumers asks, "By about what percent do you expect your (family) income to increase during the next 12 months?” The respondents’ answer has hit the floor, yes, zero, far below any reading since the question began to be asked in the early 1980s, and that’s been the response since the end of 2008.


Another of the twenty facts from the Stanford Center. We are a richer country overall because of a spectacular rise in labor productivity. But who has profited from this rise? Although the growth of labor productivity has expanded total national income, the real income and wages of the median worker have at the same time stagnated.

Labor productivity and income of the median worker

Source: Bureau of Economic Analysis and U.S. Census Bureau


Is that overstating the conclusions? Not really. Quoting from the executive summary of the report:

The global war on drugs has failed, with devastating consequences for individuals and societies around the world. Fifty years after the initiation of the UN Single Convention on Narcotic Drugs, and 40 years after President Nixon launched the US government’s war on drugs, fundamental reforms in national and global drug control policies are urgently needed.

Vast expenditures on criminalization and repressive measures directed at producers, traffickers and consumers of illegal drugs have clearly failed to effectively curtail supply or consumption. Apparent victories in eliminating one source or trafficking organization are negated almost instantly by the emergence of other sources and traffickers. Repressive efforts directed at consumers impede public health measures to reduce HIV/AIDS, overdose fatalities and other harmful consequences of drug use. Government expenditures on futile supply reduction strategies and incarceration displace more cost-effective and evidence-based investments in demand and harm reduction.


From Kash at the Street Light Blog http://streetlightblog.blogspot.com/2011/06/betting-on-pigs.html, some interesting data from the Bank for International Settlements regarding the exposure of various parties to debt issued by the PIGs (Portugal, Ireland, and Greece).

Observation #1. Default Insurance Matters. approximately 30% of total potential exposures to debt from the PIGs are covered by default insurance. Demand Side mea culpa: We suggested in earlier posts that this figure was much higher. Still, it is not a trivial amount

Observation #2. Direct Exposure in Europe, Indirect in the US. If Greece were to default, for example, approximately 94% of the direct losses would fall on European creditors, and only 5% would fall on US creditors. However, US banks and insurance companies would have to make about 56% of the default insurance payouts triggered by such an event, while European agents would make only 43% of those payouts.

Observation #3. Similar Overall Exposures in Europe and the US.
Once you account for the substantial payouts that US agents will have to make to European creditors in the case of a default by one of the PIGs, financial institutions in the US have roughly as much to lose from default as those in France and Germany. The apparent eagerness of US banks and insurance companies to sell default insurance to European creditors means that they will now have to substantially share in the pain inflicted by a PIG default.

That’s June’s punch list.

Thursday, June 16, 2011

Idiot of the Week, the American Economics Association

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Today’s idiot of the week is an edited version of a paper by Edward Fullbrook, published in issue 54 of the Real World Economic Review.  The paper is entitled:  “How to bring economics into the 3rd millennium by 2021”

In modern times no respected discipline has ever suffered such a radical and widespread decline in its public credibility as has economics since the Global Financial Collapse. Outside of economics itself, support for fundamental reform of economics has become nearly universal.

[Consider these headlines]

From the Financial Times : “How economics lost sight of real world” , “Academics languish behind the curve set by journalists” , “Needed a new economic paradigm” ,  “Sweep economists off their throne”

From Business Week : “Why Economics is Bankrupt” , “What Good Are Economists Anyway?”

From Atlantic Magazine: “Will Economists Escape a Whipping?” , “Why Economics Failed” , “Have economists gone mad?”

From the New York Times : “Seduced by a Model”

From the New York Times Magazine: “How Did Economists Get It So Wrong?”

From The Guardian : “Rescuing economics from its own crisis” , “The Nobel prize for economics may need its own bailout” ,

From the Foreign Policy Journal: “Bought-and-paid-for-economists”

From Newsweek: “Blame the Economists”

From the Vancouver Sun: “Economics: Dismal Science or Science at All?”

From the Korea Hearld: “Economics is a religion, not a science”

From the Huffington Post: “How the Fed Bought the Economics Profession”

From tpmcafe: “Should We Bury Macroeconomists at Ground 0?”

From Money Magazine: “How to rebuild a shamed subject”

Three years ago James Galbraith, in a piece for tpmcafe.com, wrote as follows:

The neoclassical trick is to insist that all “real economists” adhere to an arcane and limited set of techniques. The focus on conformity, on a bizarre hierarchy of journals, the dominance of the AEA [American Economics Association] at the annual meetings, all serve to define who is in the tribe, and their rank. Mainstream economics . . . is defined by who accepts the discipline of the cult.

[Fulbrook identifies]

The power structure of the economics profession:[in] six categories of institutions each with its internal hierarchy, These are as follows:

1. university departments,

2. associations,

3. journals,

4. classification systems,

5. economics introductory level textbooks, and

6. the discipline’s basic narrative, which structures its introductory textbooks and is, unless stated otherwise, presumed in most of the conversations that economists conduct among themselves and initiate with the wider world.

Contrary to everyday belief, the institutions currently filling these categories are together closed to major change and capable of resisting all attempts at serious reform. This intransigence and insuperability stems from the fact that as institutions, although independently constituted, they are interlocking and their characteristics inter-determined.

The interdependency between the hierarchies of the departments and the journals, including its determination of who teaches at and publishes in them, is much appreciated and often discussed. Similarly everyone in the profession knows that all of the economics associations in the world take at best third place to the American Economics Association, that it owns three of the five or six journals offering the most kudos and that virtually all of its officers are or have been affiliated with one or more of ten American universities. Because these three sets of institutions interlock so securely, attacking them individually, either from within or from out, will bring no results. Moreover, although the AEA has elections, the slates of candidates nominated by the existing leadership are traditionally rubberstamped by the members.

It seems likely that most economists, including heterodox ones, look upon the Journal of Economic Literature (JEL) Classification System as a neutral piece of intellectual equipment. But it exists as a powerful device for maintaining the status quo. It exerts power in three ways. It quietly conditions economists to approach economics and the economy through a hierarchy of boxes whose permanence rivals the Periodic Table of Elements. It quarantines the papers of dissident but hardy groups like Marxist, Austrians and Feminists. And it silently disappears papers that break all moulds, rather like the secret police in the middle of the night disappear dissenters in dictatorships.

The importance of economics’ introductory level textbooks tends to be under appreciated. In the United States alone more than a million young minds annually take a year long introductory course. For over 90 percent of them this experience is dominated by a textbook little changed from Paul Samuelson’s 1948 text Economics. With few exceptions, their textbook fundamentally shapes how they think about economics and economic issues for the rest of their lives. As such, these books are a powerful and long-lasting cultural and political force.

Gregory Mankiw, who’s textbook Economics is the current world gold standard in introductory level textbooks, wrote a short article for the New York Times titled “That Freshman Course Won’t Be Quite the Same”. (24 May 2009) But the title, mild as it is, overstates Mankiw’s case. The four changes he points to and which he emphasizes are the only ones needed are at best miniscule:

Robert Lucas in an article for The Economist is even more intransigent. He sneers at “people who have seized on the crisis as an opportunity to restate criticisms they had voiced long before 2008”, and he stands by what he calls the “main lesson” from the Efficient Market Hypothesis: “the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles.”

The most powerful institution of all in economics is the basic narrative that shapes the conversation called “economics”, including its textbooks, papers, departmental meetings, and perhaps most important of all, its dialogues with the rest of the world.
[For its inability to realize its own inadequacy, for its contribution to the latest enormous economic disaster, and for its intransigence in reform, we award the American Economic Association and the clueless orthodox economists, Idiot of the week.


[Fulbrook’s paper takes a look at]The vulnerability of the existing institutions
The American Economic Association has long reigned as the world’s undisputed supreme ruling body of the economics profession. In influence and membership it outranks all other economics associations. In 2009 the AEA had 16,944 members. That compares to the 3,300 members of the Royal Economics Society, perhaps the AEA’s closest rival.

However, membership in the AEA is in steady long-term decline. It reached a peak of 22,005 in 1993, since when it has been decreasing almost year by year. Its membership level is now below what it was in the late 1960s.

What does the AEA offer its rank and file members? Basically two things, journals and an annual meeting. Membership in the AEA includes a subscription to seven academic journals. Four of these are new publications beginning this year, introduced perhaps as an attempt to stop the loss of members. The traditional three journals, the American Economic Review, the Journal of Economic Literature and the Journal of Economic Perspectives, are generally regarded, along with perhaps two or three others, as the most prestigious economic journals in the world. Their prestige of course derives from many factors, but the overriding one is the size of their subscriber list, the 16,944 AEA members plus 3,383 institutional subscribers. The latter it should be noted are also year by year decreasing in number and even faster than members. Together they total to 20,327 subscribers.

I do not know what percent of those members are not based in the United States, but presume that their number is significant although not nearly as high as the 60 percent non-UK members for the Royal Economics Society. The AEA annual conference, traditionally the first week in January, attracts on average about 8,000 members. The meeting provides them with an opportunity to present papers, look for jobs and network in a pre-internet fashion.
There are two aspects of the way in which the AEA is constituted that make it highly vulnerable to having its power and influence in the wider world, including that of its journals, usurped by a new organization.

Firstly, what is most remarkable about the American Economic Association’s global hegemony in this globalist age is its nationalist character. Membership may be open to economists from all countries, but the organization is run and tightly controlled by a small and unchanging segment of American educational society.

The second aspect of the AEA that makes its pre-eminent position in the world highly vulnerable is its business model, which was invented in Victorian times when hard copy and postal services were the only options.

[Membership plus journal fees are vulnerable to a web –based internationalistic business model, says Fulbrook, whose paper then goes on to outlign a plan for launching a world association and attendant journals. That plan has been put into effect, in the form of the World Economics Association. If you are listening to this podcast and enjoying it, you are an economist. You should join and support the organization and its journals.


SUGGESTED CITATION: Edward Fullbrook, “How to bring economics into the 3rd millennium by 2020”, real-world economics review, issue no. 54, 27 September 2010, pp. 89-102, http://www.paecon.net/PAEReview/issue54/Kessler54.pdf
You may read and post comments on this paper at

http://rwer.wordpress.com/2010/09/27/ RWER-issue-54-Edward-Fullbrook/

Tuesday, June 14, 2011

Transcript: 445 Steve Keen and the Credit Accelerator

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This week, we’re looking at debt and money and the impending double dip with Australian economist Steve Keen.

On Monday, our reading of Keen described how money is not a function of the Fed in its wisdom creating some rate or level of base money that is then multiplied by a passive banking sector. Because introductory and advanced textbooks say this is the way it is doesn’t make it so. Rather, the banking sector creates loans, whose object is deposits in one or another bank account, and goes looking for the reserves later. This makes a difference because the level of debt and the change in debt makes a difference to demand.
You will have no difficulty whatsoever in convincing an intelligent non-economist that demand is comprised of income and net borrowing. But Ben Bernanke, and as we saw, even such liberals as Paul Krugman, say debt is money owed from one person to another. Unless the tendency to spend is widely different between the two, there will be no effect on demand. I know, I know, bubbles depend on debt and easy credit, but what are you going to do? If their economic theories worked, we wouldn’t have gotten in this mess in the first place.

Today, we’re going to follow Keen on into debt. I guess we’re already in debt, but we’re going to follow Keen into an understanding of debt and what he calls the credit accelerator.
Credit and money is still the major weakness in the understanding of most progressive economists, but also notably the monetary authorities at the Fed.

“Clearly the scale of government spending, and the enormous increase in Base Money by Bernanke, had some impact,” says Keen, “But the main factor that caused the brief recovery—and will also cause the dreaded “double dip”—is the Credit Accelerator.”
The Credit Accelerator is Keen’s term for the function at any point in time of the change in the change in debt over previous year, divided by the GDP figure for that point in time. So it is net borrowing as a proportion of total demand. Keen is a demand sider in the sense that he concurs that contrary to the neoclassical model, a capitalist economy is characterized by excess supply, even during booms, and – here is a quote from Keen – “The main constraint facing capitalist economies is not supply, but demand.”

All demand is monetary, and there are two sources of money – incomes and the change in debt.

This Aggregate Demand is exercised not on just goods and services, but also on net sales of existing assets. Keen shows that the behavior of asset prices is directly related to the change, the acceleration, whether plus or minus, of debt. It’s not the only factor , but particularly in the current days of casino capitalism, that’s where debt goes, to finance asset price bubbles. The strong economy during the Great Moderation?


it wasn’t “improved monetary policy” that caused the Great Moderation, as Bernanke once argued, but bad monetary policy that wrongly ignored the impact of rising private debt upon the economy.

and later, quote

The factor that makes the recent recovery … different to all previous ones—save the Great Depression itself—is that this strong boost from the Credit Accelerator has occurred while the change in private debt is still massively negative. “

That is, we are de-leveraging, but the change is positive.

I believe this is conceptually easier if you consider much of the deleveraging is default and write-down, not paydown of debt, so it does not subtract from demand for new goods, services and assets, which is funded by incomes and new borrowing. This is a useful concept to carry forward, because whatever the moral stain attached, write-downs reduce the debt load without reducing – as much – the demand and output of the economy. But that is our view, not anything we found in Keen.

Back to the master, who illustrates – or shall we say, verifies – the impact of the credit accelerator in charts – reproduced online at Demandsideeconomics dot net.

The recent recovery in unemployment was largely caused by the dramatic reversal of the Credit Accelerator—from strongly negative to strongly positive—since late 2009:

The Credit Accelerator also caused the temporary recovery in house prices:

And it was the primary factor driving the Bear Market rally in the stock market:

These confirmations of the direct link between the acceleration of debt and the change in asset prices, expose the dangerous positive feedback loop in which the economy has been trapped, similar to what George Soros calls a reflexive process: we borrow money to gamble on rising asset prices, and the acceleration of debt causes asset prices to rise.

This is the basis of a Ponzi Scheme. But because it relies not merely on growing debt, but on accelerating debt, and ultimately that acceleration must either become infinite or end, so the scheme must end. When the acceleration of debt ceases, asset prices collapse.

If you look at the quarterly data, as opposed to the annual credit accelerator, it’s apparent that the strong acceleration of debt in mid to late 2010 is petering out. This diminished stimulus from accelerating debt is turning up in the data now.

“From now on, unless we do the sensible thing of abolishing debt that should never have been created in the first place,” Keen says, “we are likely to be subject to wild gyrations in the Credit Accelerator, and a general tendency for it to be negative rather than positive.” Remember, the debt acceleerator is operating as the general level of debt is falling. People are deleveraging, but at a greater or lesser pace. And Soros’s reflexivity starts to work in reverse. With each plunge in asset prices, the public becomes more wary of taking on more debt, reinforcing the downward movement.

Current private debt level is, Keen believes, perhaps 170% of GDP above the level where it typically finances entrepreneurial investment rather than Ponzi Schemes. “The end game here will be many years in the future. The only sure road to recovery is debt abolition—but that will require defeating the political power of the finance sector, and ending the influence of neoclassical economists on economic policy. That day is still a long way off.

Steve Keen


In drawing the line to the final dot, Demand Side suggests that any return to productive investment in private goods on a large scale is illusory. In the context of reducing private debt, there is no realistic scenario in which it bounces back in the way a mathematical model can bounce back. Debt and investment must be taken on by the public sector. We’re not going to produce real value in anything other than public infrastructure, education, rational energy uses, and climate change mitigation.

Sunday, June 12, 2011

Transcript: 444 Dude, Where’s my recovery?

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Occasionally I forget that Paul Krugman doesn’t know what he’s talking about, nor does Robert Reich, nor does Rachel Maddow, nor a host of other heart-in-the-right-place progressive personalities. Not that they are completely at sea, but that they have mischaracterized the cause and so the solution of the current depression. And to be fair, they are drifting toward the proper understanding.

Today we’ll review the situation by way of a recent post from Australian economist Steve Keen. Now Keen plainly does know what he’s talking about. He is first recipient of the Revere Prize for the economist who most aptly predicted the coming of the Great Financial Crisis, author of the soon-to- be updated “Debunking Economics”, founding member of the World Economics Association (which you should look up and join too), and directly in line in terms of financial Keynesianism from the great Hyman Minsky.

While Keen does not take his analysis to its conclusion in the death of the consumer economy that we do at Demand Side, all the elements are there, and we are happy to draw the line to the final dot. More importantly, the first steps are there.

In a recent post under the title, Dude, Where’s my recovery? Keen describes the predicament facing Barack Obama. As he came into the White House, outgoing chief economist Edward Lazear promised him and the rest of the nation, quote “the deeper the downturn, the stronger the recovery”. On the basis of a regression analysis so beloved by the quasi-economists, (reproduced online) Obama was almost certainly told that real growth would probably exceed 5 per cent per annum.

“To give an idea of how wrong this guidance was,” Keen says, “the peak to trough decline in the Great Recession—the x-axis in Lazear’s Chart—was over 6 percent. His regression equation therefore predicted that GDP growth in the 2 years after the recession ended would have been over 12 percent. If this equation had born fruit, US Real GDP would be $14.37 trillion in June 2011, roughly in line with trend. Instead of recovering to the trend broken, we have recovered barely to the level of 2008 in terms of GDP, and are of course, millions of jobs below that level in terms of employment.

“So why has the conventional wisdom been so wrong?” asks Keen. “Largely because it has ignored the role of private debt.”

Neoclassical economists typically ignore the level of private debt, on the basis of the argument that “one man’s liability is another man’s asset”, so that the aggregate level of debt has no macroeconomic impact. They reason that the increase in the debtor’s spending power is offset by the fall in the lender’s spending power, and there is therefore no change to aggregate demand.

Keen quotes Ben Bernanke from the latter’s Essays on the Great Depression. Economics doesn’t need to take Irving Fisher nor his debt deflation theory of depressions, says Bernanke, quote “ because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects… (Ben S. Bernanke, 2000, p. 24)

Similarly, the estimable Paul Krugman parrots the error in his most recent draft academic paper on the crisis:

Given both the prominence of debt in popular discussion of our current economic difficulties and the long tradition of invoking debt as a key factor in major economic contractions, one might have expected debt to be at the heart of most mainstream macroeconomic models—especially the analysis of monetary and fiscal policy. Perhaps somewhat surprisingly, however, it is quite common to abstract altogether from this feature of the economy. Even economists trying to analyze the problems of monetary and fiscal policy at the zero lower bound—and yes, that includes the authors—have often adopted representative-agent models in which everyone is alike, and in which the shock that pushes the economy into a situation in which even a zero interest rate isn’t low enough takes the form of a shift in everyone’s preferences

Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth — one person’s liability is another person’s asset.

(Paul Krugman and Gauti B. Eggertsson, 2010, pp. 2-3; emphasis added)

Keen points out that they “are profoundly wrong on this point because neoclassical economists do not understand how money is created by the private banking system—despite decades of empirical research to the contrary, they continue to cling to the textbook vision of banks as mere intermediaries between savers and borrowers.

This is bizarre, since as long as 4 decades ago, the actual situation was put very simply by the then Senior Vice President, Federal Reserve Bank of New York, Alan Holmes. Holmes explained why the then faddish Monetarist policy of controlling inflation by controlling the growth of Base Money had failed, saying that it suffered from “a naive assumption” that:

the banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt. (Alan R. Holmes, 1969, p. 73; emphasis added)

The empirical fact that “loans create deposits” means that the change in the level of private debt is matched by a change in the level of money, which boosts aggregate demand. The level of private debt therefore cannot be ignored—and the fact that neoclassical economists did ignore it (and, with the likes of Greenspan running the Fed, actively promoted its growth) is why this is no “garden variety” downturn.
Look for links, citations, charts, the transcript all online at Demandsideeconomics dot net.

On Wednesday’s forecast we’ll get into more of Keen’s work, including a look at his credit accelerator, the main factor in the recent brief recovery and also implicated in the upcoming dreaded double dip. .

Wednesday, June 8, 2011

Transcript 442: Demand Side Forecast is proving out

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Today's podcast was prepared not this week, not last week, but in January. You might call it the first of the "I told you so," series. In January happy days were here again. Q4 2010 GDP had come in at over 5.5. The dawn was breaking, life was going to be good according to the consensus. What happened? Another flock of black swans! GDP was revised down to under 4 for Q4 2010. Forecasters initially ignored it, but when Q1 2011 came in low, they reestablished their practice of forecasting the past. Now, with last week's confirmation in the form of a crippling unemployment number, the stagnation camp has popped up in the middle of them. But again, that is the past. Our practice at Demand Side is to forecast the future. In January we led off with audio from David Rosenberg. Today we'll jump right in. Link to the January podcast online.

The blue chip forecasters are in the stratosphere compared to our assessment of the probable experience of the economy in 2011 and beyond.

Over the next three weeks, we will be updating our bi-annual, once every two years, view of GDP, net real GDP, employment, inflation and investment. Subsequently we hope to begin looking back at our calls and how they worked out, compared to our rivals.

Our short form for 2010 was the economy would continue to bounce along the bottom, with significant downside risks from European debt and banking problems and from domestic weakness in commercial real estate. We saw only modest manifistation of those risks in 2010.

The short form for our 2011 outlook is that those risks will be put in play in 2011, triggered by the traditional trigger, rising oil and commodity prices. 2011 will witness significant new disruption to the American and global economies, likely within the first eight months of the year. The potential for bubbles in emerging economies to burst is growing. And since the structural dilapidation of mega-banks and investment houses has not been repaired, only papered over, and the paper has all been used up, a new and severe crisis in the financial sector is a non-trivial possibility.

The key to the call is the trigger, rising oil prices.

In our view, we have returned to 2008, when political constraints and economic ignorance resulted in over-reliance on the Fed and a very poorly designed stimulus package under George W. Bush. The stimulus design had its advocates in the Democratic camp too, and might be most correctly laid at the feet of Larry Summers, who descended from Harvard with a mantra: Timely, Targeted and Temporary. Public infrastructure spending was deemed too slow a mechanism. The tax cut package cobbled together was weighted toward business, and although everyone appreciated the $400 or $800 bonus from the government, the economy did not respond.

Meanwhile a huge commodity bubble rose out of the ashes of the housing bust, as investors scrambled for returns and a hedge against the inflation that was assumed to be inevitable from aggressive Fed action. This commodity bubble has largely been ignored to this day. Yes, everyone remembers the $147 dollar oil, but do they associate it with a financial bubble? Mostly not.

Rising oil prices, combined with higher interest rates, have been the surest early warnings of impending recessions. This same trigger was operative in 2000. Oil prices and interest rates rose together in 1999, when then Maestro, now buffoon, Alan Greenspan raised short-term rates right into the explosion of oil prices. Demand Side listened to Warwick University's Andrew Oswald, and joined him in predicting the recession of 2000. This was the collapse of the New Economy.

And the same two factors triggered the 2007 recession.

Interest rates are low in the current environment, but credit terms are tight and dropping real estate values means collateral is not as handy as it is in normal times.

Oil and broader commodity prices are the match that will start a new conflagration in 2011. In our view, the American economy is fundamentally weak and burdened with debt, public policy has chosen the madness of austerity, and the corruption of the financial sector is structural. That is, the economy will not be able to bear the shock. This is not your father's economy.

Oil prices are the trigger for two reasons. One, a rise in oil and gasoline acts as a tax on consumers, constraining their purchases of other goods and services and weakening their confidence. Two, resource extraction industries, particularly oil production and distribution, are by far the worst producers of jobs. A dollar spent on gasoline or heating oil employs fewer workers than a dollar spent on any other activity. Thus, returns to oil up, returns to labor down, and labor produces demand when oil does not.


That was January. No wonder people get tired of us. Same thing this week. But with charts. These are the employment charts. Both courtesy of Calculated Risk. The employment to population ratio shows stabilization at a low level, below the era
of the early 1980s, the era of single-earner families. The second is the breathtaking comparison of jobs lost by percentage of the workforce, showing the current employment recession is an employment depression that will almost certainly end up bigger than all other such downturns in the post-war period combined.

Parenthetically, the headline unemployment number ticked up, while the all-in U-6 measure ticked down. Both are hanging out at a very high level. Both will go up.

The Big Picture relays the information that private employment today is 2% below where it stood ten years ago. Job loss over a 10-year period is unprecedented since the advent of something resembling reliable tallies began in 1890. This includes the Great Depression. The 2001 to 2011 period is the heyday of big tax cuts and deregulation, combined with huge deficit spending before the financial crash and two wars. Yet what is the prescription from the ascendent political party, more tax cuts, more deregulation, more privatization.

But we'll get to idiot of the week on Friday.

The NFIB -- National Federation of Independent Business -- reported small business hiring plans turned negative. Quelle surprise.

Elsewhere Paul Krugman continues to complain that we're making the mistake of 1937 when we cut back government spending.
The Mistake of 2010, by Paul Krugman, Commentary, NY Times: Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that ... prolonged the Great Depression. As Gauti Eggertsson ... points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?

Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data. ...

Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. ... By the beginning of 2010, it was already obvious that these concerns had been justified. Yet somehow ... it became conventional wisdom that the deficit, not unemployment , was Public Enemy No. 1...

This is all well and good. But Krugman is wrong. This is not the mistake of 1937, it is the mistake of 1932. And it is occurring three years after the crash. We have done nothing to fix the housing problem. By 1937 the Home Owners Loan Corporation had been in existence more than three years, negotiating loan agreements between borrower and lender, writing down principle and setting in place the 30-year fixed mortgage. We have done nothing of the sort. Consequently the housing market is continuing to tank. By 1937, we had installed Glass-Steagall and the SEC regulations. We have done an ole on bank regulation, and banks continue to be too big, too powerful, and too crooked. By 1937 we had installed unemployment insurance and social security. It is to our great benefit that these have yet to be rolled back by the austerity machine. By 1937 we had direct employment programs in the WPA and CCC in place. Us? We’re cutting government employment as fast as we can get the teachers to clean out their desks.

Demand Side continues to insist we are still in 1932. It is incredible to us that policy-makers in Washington cannot see over the ranks of lobbyists to what is plainly the second great depression in employment, nor marshal a message that reflects the understanding which is common on Main Street but absent in policy circles that something real has to be done.

Monday, June 6, 2011

Transcript 441: Another crisis on the way, says Wray, but shared sacrifice may also be looming, says Hochol

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L Randall Wray

That was L.Randall Wray speaking to the Real News Netrowk.  Wray is exactly right, and he is right to say that the rational restructuring of banks will not occur absent another, if inevitable, crisis.  But there is some hope.  Lost in the Medicare, Mediscare spinning of last week's victory by Democrat Kathy Hochol in New York's 26th District was her message of sharing the burden of government by taxing the wealthy and corporations.  Supposedly an anathema to Republicans, it instead seems to have touched a sense of common purpose.  Revenue increases from ending the Bush tax cuts are enormously important, not so much for their revenue impact, but for the spending they might free up when the crisis hits.

Kathy Hochol.

Thursday, June 2, 2011

Transcript: 440 The Eurozone is failing by reason of cannibalism

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Joseph Stiglitz:
There needed to be more political integration to make the Euro work, that was very clear. And many American commentators on the Euro at the time said, optimistically, this was an unfinished project. There will be a crisis sometime down the line. The hope was that when that crisis occurred, there would be an effective response.

I think the general sense is that there hasn't been. One of the reasons there hasn't is that there are two very different conceptions of what went wrong. It echoes much of what I saw when I was chief economist of the World Bank and saw the bailouts in East Asia, Argentina, Latin America, and so forth. And there were two ways of describing those bailouts. One of them was they were a bailout of Mexico, or a bailout of Argentina. The other one is they were a bailout of Citibank, they were a bailout of American -- Western -- banks.

The true description from an economic point of view is very clear, and even a political point of view, they were a bailout of the lenders. They were a bailout of the big banks who had not done their job in lending. Every loan has a lender and a borrower. The person who is supposed to be more informed about the criteria of lending should be the guy who manages the risk, which is the bank. And these are the guys that consistently did a bad job.

Now partly it's understandable. They were very politically connected. They were in the White House. They were in every government. So they knew that when things went badly, their friends in the White House would bail them out. And they were perfectly correct.

I was in the Council of Economic Advisers when the first of these began in the Mexican bailout. I said, "Why are we bailing out American lenders? Why are we using the name "Mexican bailout?" It's not a bailout of Mexico. So the way you frame this is absolutely critical.

Then you're asked the question, and you think about, What are the economic frameworks that are going to be necessary to make the European project work? The basic idea here is very simple. You have taken away two very important instruments of adjustment -- interest rate and exchange rate. And you haven't really put anything in its place. As an example, just to give you one of the ironies here. The worst manifestation of the crisis was Iceland. Iceland had a much worse crisis. But now they're doing pretty well. You know, not great, but pretty well, because they had a flexible exchange rate and they restructured their debt.

What's happened in Europe is they have not allowed it to restructure the debt. They've bailed out German banks, in effect. They've put the burden on Ireland and Greece and the other countries, which is beyond their ability to pay. It will happen. I mean, I think almost inevitably it will happen. Unless there is a real commitment of the European project. I don't see that on the way.

Let me explain what I mean by that. Japan has a 200% -- more than 200% -- debt-GDP ratio. It's not a problem. At least right now. If interest rates are 2%, 1%, a 200% debt-GDP ratio means you have to pay 2, 3, 4 percent of GDP to service your debt. Countries can do that. So, if there were a real commitment to have the European project succeed, interest rates would be low, the countries could repay, and there is no bailout. It's just making sure that they can repay.

On the other hand, if you start trying to make profits off of the members of your family, which is what the German and other governments are doing. They're quite proud about the fact. "We lent money to Greece at 5% or 6% and we borrowed at only one or two percent. Look it, we made several hundred millions of dollars of profits from our neighbors."

This is a nice family relationship here. You make it ... So if you're going to charge 6% and you have a debt-GDP ratio of 150%, that's 9% of GDP, it will go down the drain. And there will be restructuring. And they will have to pick up ... the Germans will have to pick up the cost of restructuring the German banks, because there will be that kind of restructuring. And there should be.

So it's really a political decision. Which of these alternatives Europe wants to go. Does it really believe in European solidarity, or does it want to have a restructuring.
Joseph Stiglitz giving us the framework to understand the past, present and future of the European situation.


The Great Recession lumbers on, met by the non-answers of monetary policy and austerity.

Some day Demand Side will begin the “I told you so” series. Not that we don’t remind our listeners how right we are as often as possible, but we need to remember that the low interest rates and other shoving of money into the pockets of the financial players has not worked, cannot work, and we predicted it would not work from the beginning. Likewise austerity. When there is too much unemployment and idle capacity, the answer is not to cut employment and reduce output, no matter how powerful the claimants to the income from that output are, nor how sophisticated the economic theories that suggest such a route is rational.

The starting point for prosperity is full employment of resources. The primary resource is labor.

Permit me a Nasrudin story. The Mulla Nasrudin is a famous folk character of Central Asia and Asia Minor, for whom there is no real comparable figure in the West. The mulla once decided to save money by reducing the feed of his donkey. Over time the donkey became more and more emaciated and less and less capable of carrying the loads required of him. Finally the donkey died. “Drats,” said Nasrudin, “I almost had him down to subsisting on nothing.”

What we are doing is no less insane, expecting to support our aging population, employ the millions of unemployed around the world, prepare for the impending climate crisis, and all the rest… How? By cutting back our spending on education, infrastructure, and employment. The planet is going to die and we’re going to say, “Drats. We almost had that debt paid off.”

But it’s worse than that, because the less we produce and earn, the less capacity there is to pay that debt and it actually grows in terms of burden. It is really no more complicated than that. The question becomes, “Where are we going to get the resources to employ our people doing the things that need to be done?”
The answer is, of course, from where the resources have migrated, into the pockets of the wealthy and into the coffers of the corporations. We need to – as quickly as possible – shift this – and not into the pockets of the poor, so they can spend on consumer goods and somehow generate demand for new factories, but into the investments for the future that employ the populations of the world. We can do it by providing investment opportunities for the investor class, opportunities that have a far more certain return than the McMansions they were so happy to invest in half a decade ago. Or we can do it by taxing them and directly shifting that resource to where it is needed.

The alternative is not muddle through to a more or less adequate outcome where the wealthy are secure in their wealth. That is not going to happen. THAT is the zero sum game. We need a positive sum game. The alternative is not more of the same monetary medicine. Although the Fed has proven it can write checks for useless financial instruments and put them on its balance sheet without causing inflation, that will change directly when checks are written for actual real investments that puts money into demand for real goods and services.

There is no muddle through. There is no arranging the real economy to fit the demands of the financial sector. There is only arranging our finances to meet the demands of the real economy.


Now let’s look at some observations from others

Paul Krugman

Under the title Is the ECB trying to provoke a financial crisis?:
...In Europe,... the pain caucus has been in control for more than a year, insisting that sound money and balanced budgets are the answer to all problems. Underlying this insistence have been economic fantasies, in particular belief in the confidence fairy — that is, belief that slashing spending will actually create jobs, because fiscal austerity will improve private-sector confidence.

Unfortunately, the confidence fairy keeps refusing to make an appearance. And a dispute over how to handle inconvenient reality threatens to make Europe the flashpoint of a new financial crisis.

After the creation of the euro in 1999, European nations that had previously been considered risky, and that therefore faced limits on the amount they could borrow, began experiencing huge inflows of capital. After all, investors apparently thought, Greece/Portugal/Ireland/Spain were members of a European monetary union, so what could go wrong?

The answer to that question is now, of course, painfully apparent... What to do? European leaders offered emergency loans to nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. ...

But ... Europe’s troubled debtor nations are, as we should have expected, suffering further economic decline thanks to those austerity programs, and confidence is plunging instead of rising. It’s now clear that Greece, Ireland and Portugal can’t and won’t repay their debts in full, although Spain might manage to tough it out.
And there’s more, link online

On the other side are the bond vigilantes and the insolvent European banks, who must extract their full pound of flesh or the hysterical matrons of the market will … Will what? Take their money and put it … Where?

But there’s no doubt,

Here, courtesy of Calculated Risk is a relay under the title:
ECB Official says: "Orderly" Greek restructuring is a "fairy tale"
Lorenzo Bini Smaghi, an ECB executive board member told the Financial Times in an interview that a Greek "soft" restructuring is a "fairy tale".
“There is no such thing as an “orderly” debt restructuring in the current circumstances. It would be a mess. And I haven’t mentioned contagion – which would come on top.

“If you look at financial markets, every time there is mention of a word like restructuring or “soft restructuring,” they go crazy ... “soft restructurings” “re-profilings” do not exist. They are catchwords that politicians have tried to use, but without any content.
I think that proves my point. Of course, there is orderly debt restructuring in that bondholders and the sovereigns can get together and come up with a reasonable write-down of the principle. What is not orderly is the exposure of the banks, and the ECB itself, to such an event. In particular, to the credit default swaps that nobody knows who has or who wrote or what, since they are under-the-table, oops, I mean, over-the-counter backroom bets.

The "contagion" is a catchword, not for any further deterioration of the sovereigns, but for the prospect of rational write-downs on other sovereigns that are likewise triggers for a credit default swap storm. As Stiglitz correctly describes it, this is a bailout of the bond vigilantes, the lenders, not the sovereigns.

Finally today, a few notes on taxation.

The Center on Budget and Policy Priorities observes that "simply letting the Bush tax cuts expire on schedule ... would stabilize the debt-to-GDP ratio for the next decade."

Mark Thoma comments “We are on the verge of trading tax cuts for the wealthy and spending on wars for large cuts to social programs (the budget hole the recession caused is helping to fuel the calls for austerity). Maybe that's what we want, maybe not (and likely not if the polls are correct), but we ought to at least be more aware than we seem to be that this is the trade we are making”

What’s clear is that the radical and reckless tax cuts under W, combined with the wars in Afghanistan and Iraq explain virtually the entire federal budget deficit over the next ten years.

The great mass of the debt projected for 2019 is explained likewise by the wars and reckless tax cuts of W plus direct fallout from the financial downturn.

It would be cool if some of it were explained by our readying ourselves for the climate crisis or by educating our people or even by reeingineering our infrastructure.

But no, that would be too expensive.

Chart online

Elsewhere Lane Kenworthy is out with a piece examing the question:
Is Heavy Taxation Bad for the Economy?
A puzzle

Half a century ago, in 1960, taxes totaled about a quarter of GDP in Denmark, Sweden, and the United States. The tax take then began to rise in Denmark and Sweden, reaching half of GDP by the mid-1980s, where it has remained. In America it has barely budged, hovering between 25% and 30% of GDP throughout the past five decades.

It is Demand Side’s observation that the economic well-being of Denmark and Sweden has grown and surpassed that of the United States.

And we are in the first pages of Jeff Madrick’s book “The Case for Big Government,” which describes how America benefits when the government actively nourishes economic growth and deteriorates when free market orthodoxy dominates. According to the dust jacket, Madrick looks critically at how Republicans are cooperating with Democrats to engineer an era of stagnation and deterioration. Republicans in seeking to revive 19th Century principles and Democrats are abandoning the Great Society and New Deal principles. Quote Madrick paints a devastating portrait of the nation’s declining social opportunities and how the economy has failed its workers. Unquote

Happy reading.