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

Sunday, August 21, 2011

Transcript 454: Forecast: Productivity

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Today on the podcast we change our focus from the previous 453 episodes. No longer will we be taking up the issue or policy of the week, nor will we be promoting the demand side explanation. Instead we will be forecasting and looking at issues and examples of forecasting. Of course, – in the words of George Soros’ mentor Karl Popper –since “Predictions and explanations are symmetrical and reversible,” there will be plenty of opportunity for issues, policies and the demand side explanation.

Today it is Productivity. Output per hour.

New productivity numbers came out from the Bureau of Labor Statistics earlier this month and befuddlement set in among economists. Productivity has swung around, as in gone negative.

Peter Radford, a wonderful economist who blogs at Radford Free Press and Real World Economics Review, put it succinctly on August 9.
This morning’s data are far from rosy: productivity declined 0.3% in second quarter, while it was revised to a decline of 0.6% in the first quarter from what had originally been reported as a 1.8% gain. This is not good. This makes two successive quarters of decline which we hadn’t seen since 2008. Moreover, productivity has crawled up a mere 0.8% over the past twelve months, which is another bad performance and a sign of things being out of kilter deep within the economy.
When productivity spiked during the economic collapse and the wholesale loss of jobs, economists and everybody else knew exactly what was going on. Employers were cutting and existing workers were in a fever to keep their jobs. The conveyor belt was moving faster. Well, unemployment is still high and productivity is now declining.

Radford continues with an effort at unravelling the Gordian knot. Tyler Cowen, a not as good economist,from George Mason completely whiffed on the subject in his interview with Jeff Sommer on the Weekend Business podcast. BLS includes with its statistics a breakout of the mysterious “multi-factor productivity,” which is code for “We assume capital improves productivity, so anything else is everything else. And we can’t say it quite so baldly, so we’ll give it a technical sounding name. Multi-factor productivity.”

Instead, as did Alexander, it is necessary only to slice through the knot. Which we did in early 2010 when we published under the title: “Multi-Factor Productivity Solved

For some reason, we used a rule of 7 back then, but now we use the Rule of 8.” Eight minus the unemployment rate equals the rate of productivity increase. A nearly perfect correlation.

Why this relationship was not discovered prior to us is likely the simple fact that nobody went looking for it. Oh, AND it is masked by the fact that contemporaneous numbers do not show this simple relationship, and often diverge from it wildly. But as you can see on the blog, the trendline for the unemployment rate has a sinuous mirror image in the trendline for the rate of productivity increase. So in the medium and long terms, described by these trendlines, if you can estimate the unemployment rate, you can estimate the rate of productivity growth or decline.

And we did go looking for it. We suspected that low unemployment would make managers manage and workers find efficiencies. We also follow Adam Smith to the extent we see efficiencies in the specialization of labor, which obviously has a better chance with more workers, as the more skilled may be shifted to the more essential tasks.

Adding tools, as is encouraged by the concessionary tax breaks for investment these days, can help, or it can simply be a bad idea. Better to add tools when unemployment is low and let your workers incorporate them as appropriate.

Again, we have shown in a simple graph that productivity is a mirror image of the unemployment rate. The higher the unemployment rate, the lower productivity. The lower the unemployment rate, the higher productivity. Keep it down out there. I can hear you yelling. No. It is not in the contemporaneous statistics, when very often the numbers go in exactly the opposite direction.

BUT, if you simply graph the trendlines, as we did, you will see what we saw, a perfect mirror. We provided the mathematical equation: 8 – U = P. No second derivatives. Not even a coefficient.

You will notice that the graph published in 2010 is of a slightly different shape. That earlier chart depended on statistics for all businesses. In order to get to the most current data, we had to use non-farm businesses.

A footnote. The productivity of government workers is not considered by the BLS or anybody else, because their output is assumed to be their input. Here, Cowen has a good idea when he notes that purported productivity increases in the health care field are inappropriate because they do not consider health outcomes. It is not rational to say that a health care system which produces poorer outcomes than the rest of the industrialized world,at twice the price and with half again as many people, or more, has any real connection with high productivity, no matter how much it makes for the corporate owners.

So, the forecast for productivity growth? Bouncing along below the bottom, averaging negative one to negative two for the next year. That follows from our projection of the unemployment rate at nine or ten or higher. But we’re not forecasting unemployment today. That’s next week.

Does it mean bad things for industry? No more than the collapse in demand for products. Nor the threatened slashing of government deficits. Workers, insofar as their wages and salaries are connected to productivity, will continue to see their incomes erode.


Now reminding you of the general shape of our forecast for the year, bouncing along the bottom with downside risks from the European debt crisis and from domestic commercial real estate slash local and regional banks. Negative growth in the second half of the year. This forecast issued back in January. Another financial crisis was a nontrivial possibility.

We’re seeing those risks play out in Europe, with the necessary restructuring of sovereign debt being delayed and the big banks sweating out that inevitable outcome for the damage it will do. Solvency in these banks depends on avoiding the inevitable. The European Union, the political umbrella for Europe is not constituted in a way that can solve the problem. The European Central Bank, the principal institution of the eurozone, is constitutionally the same as Bundesbank, with its only mandate to hammer inflation or the shadows of inflation or the hints of shadows of inflation. The current crisis is unexpected only because it was so easy to see coming and we wonder why nothing was done.

Domestically, with the petering out of the stimulus has come the petering out of the growth. Government stimulus will turn negative in a big way with cutbacks in state and local employment about to surge. Huge federal deficits and historically unprecedented zero percent interest rates for now on three years have created a puppet theater recovery which everybody bought into until recently. Our view is that there has been no recovery and another leg down is now in progress.

Wednesday, August 17, 2011

Response to Nathan Tankus on Payroll Tax Holiday

We got a response from long-time listener to the podcast or reader of the blog challenging our dismissal of the payroll tax holiday as an effective tool for getting out of the mess we're in. We thought we'd bring it up to the top half of the page, and we'll probably do that for other commenters in the future, since we have excellent comments (as far as you know, anyway, since the non-excellent ones don't get through).  We like policy and theory, but beginning next week the podcast is going exclusively to forecasting issues and forecasts.

Here, from Nathan Tankus. (I'll cut it up for readability)

Nathan: In "The Echo Chamber Denies Recovery -- Wow!" you criticize unnamed (I'm assuming Chartalist) progressives for supporting a payroll tax holiday as part of a recovery plan on the basis that the increases in household income will simply be used to pay down debt, won't be very stimulative and the money would be better used for a jobs program. I have a few responses.

Alan: Not Chartalists alone, by any means, support a payroll tax holiday. Even so tedious a conservative as Bill Dunkelberg of the National Federation of Independent Business supports such a thing, because his members -- small businesses -- are hurting for lack of customers. Others include the mainline progressives like Robert Reich and Robert Kuttner. Also folks like James K. Galbraith, though I suspect him of Chartalist leanings. Everybody likes it. [I've asked Nathan to come up with a capsule description of Chartalism for the next round, if there is one.]

Nathan: First, paying down private debt should be government policy (more specifically, reducing the ratio between debt and after-tax income).

Alan: Agreed. But that should be done by writing down the debt, destroying the bad loans, as a nod to historical practice and to generate a little bit of market discipline. Steve Keen estimated that excess private debt in the U.S. (including financial debt) amounts to about 125% of GDP. That's $17 trillion, more or less, in today's numbers. The chances of paying that down in any reasonable amount of time is negligible.

Nathan: Government policy should be aimed at medium term stability (because long term stability is nearly unattainable ala Minsky), not just reducing unemployment (although it should be aimed at that too). reducing aggregate private debt to private income is a crucial part of achieving that medium term stability (tranquility).

Alan: Okay. We'll leave that point for later. Except poor Minsky never expected us to reach this pass. He always thought the government could cover the problem before it got to debt-deflation, largely, as I recall, by policies that protected the middle class and produced inflation.

Nathan: Second, I think you are stuck in the economics of 'macrostatics' (Roy Harrod's term). Multipliers are based on the marginal propensity to spend. That essentially refers to how much of 1 dollar I would spend if you gave me a dollar. the problem with that concept is that it's static. If you give me 1000 dollars and then gave me 1 dollar my marginal propensity to spend that dollar would probably be very different (see higher). Similarly a large reduction in the private debt to after-tax income through a payroll tax holiday may largely go to paying down debt but after the first few thousand dollars, household's marginal propensity to spend would rise precipitately. In addition, since it is a sustained monthly stimulus, it would generate more demand as time went on. On top of that, new hires resulting from a jobs program will not have to pay payroll taxes preventing the usual fiscal drag that has historically occurred after large rises in employment.

Alan: The first part of this is exactly my argument for jobs rather than payroll tax reductions. A job, say $25,000 plus benefits, creates a full spectrum of spending, from rents to groceries to durables to gasoline. A payroll tax holiday goes to somebody who already has a job and will likely not make changes to his spending on a large part of that spectrum. The marginal propensity to spend, you say, would be higher. I say it would be saved or used for debt reduction. In the main, of course. Taxes, of course, and particularly payroll taxes are direct transfers to another's income.  The larger the payroll tax cut, the more would go to consumer spending?  Maybe.  This is a flat tax reduction. The more you make the more reduction you get, and we know that the propensity to save goes up with income.

A secondary effect of jobs is inflation. Job programs would by necessity go to public goods and services. The private sector would likely choke any Congressman who allowed jobs to be used to produce consumer goods. These public goods and services ought to be considered investment goods. As Minsky and Kalecki have shown, it is the proportion of the workforce employed in the investment goods sector that determines true inflation, a general price rise. Now I would say that if all that money the Fed is protecting in the financial sector got a whiff of inflation or the prospect of profit, then there could be the much-feared uncontrolled situation. But if that money is properly destroyed, then we have the Minsky starting point, where capitalists are chary about lending, and it is lending that creates money (in the current framework).

Nathan: Third, Chartalists usually propose payroll tax holidays and job guarantees simultaneously, making your either-or argument moot.

Alan (interrupting): I do believe it is an either-or argument, not because it is not possible, but because the political will to do both will not be there. I could be wrong. I heard Wray talking about a jobs guarantee plan. Minsky proposed one. It is a very good idea.

Nathan: This leads me to question the supreme importance of multipliers in determining what policies we should pursue (ignoring negative spending multipliers). Let's say there are two stimulus programs. One costs $500 billion and has a 2.0 spending multiplier while the other costs $2 trillion and has a 0.5 spending multiplier. They both stimulate private spending by 1 trillion dollars. Should we choose the one with a higher multiplier over the other? Just because it increases spending more doesn't mean it's better. The first one increases private sector propensities to spend while the the second one decreases it. Why should increased savings be considered a bad thing? Both programs stimulate demand equally. I see no reason to pick one over the other purely on the amount of deficit spending it entails when it increases effective demand exactly the same. You may say it involves more bond issuance which sends more income to rentiers. I say that is not a necessity of deficit spending. The Treasury has the authority right this minute to buy back all Treasury debt by getting income moved to their reserve account through the deposit of platinum coins (in whatever denomination, independent of market price) into federal reserve vaults. Ultimately I agree with the Minskyans and Chartalists, stimulus programs are hastily designed and too slow to respond to events. We need institutions that preserve full employment (like the job guarantee) so that policy can be free to be designed around how to reallocate and reorganize the use of real resources, without being concerned about preserving employment and output.

Alan:  Increased savings is a good thing, so long as it is ratified by somebody else making good use of that savings.  Talking past the point a bit, I would say that jobs programs, education and infrastructure spending are targeted at investments for the future. I am going to accept your point about the Treasury because it is true. But who will believe it?  What about the political problem that a majority of the people think the whole disaster now comes because the government just prints money? I sense more support for employment and targeted investment and support for states and municipalities ... Well, step back, I guess we are on the same page there.

The multiplier is important, I think, because it is higher for a reason, that the initial stimulus is passed through several hands. This creates or recreates the web of economic activity that is the core of stability. Notice that the reason the multiplier has deteriorated over the past 40 years is because of the proportion going to debt payments. (I say "note," but that is my theory, untested but logical.)

Nathan: Feel free to use the contents in this email on your blog or in your podcast.

Alan: Done, thank you.  Shoot back if you like, and as I warned you, I am including the collection of excellent quotes which follows your signature:
"When the regulation, therefore, is in support of the workman, it is always just and equitable; but it is sometimes otherwise when in favour of the masters" - Adam Smith

“If our Nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. It is absurd to say that our country can issue $30 million in bonds, and not $30 million in currency. Both are promises to pay: but one promise fattens the usurer, and the other helps the people.” -
Thomas Edison

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" -
Upton Sinclair

"We call our demonstration a campaign for jobs and income because we feel that the economic question is the most crucial that black people, and poor people generally, are confronting." -
Martin Luther King, Jr.

"The voices which, in such a conjuncture, tell us that the path of escape is to be found in strict economy and in refraining, wherever possible, from utilising the world’s potential production, are the voices of fools and madmen."
- John Maynard Keynes

"When I learn new things, I change my mind. What do you do sir?"
- John Maynard Keynes

“Talk about centralisation! The credit system ... constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner-and this gang knows nothing about production and has nothing to do with it."
- Karl Marx

A humane society should not be sacrificed on the altar of narrow economic efficiency." -
Henry Simons

"There are some ideas so wrong that only a very intelligent person could believe in them." -
George Orwell

Sunday, August 14, 2011

Transcript 453: Simon Johnson and the Hysterical Matrons of the Market

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Downside risks in our baseline forecast, which we repeated in January, included a new and messier financial sector meltdown. Hard to imagine even today, you say, with the huge cash balances at the banks, now $1.4 trillion. That is ten percent of GDP. You forget that many of the assets on their balance sheets are valued at mark-to-make-believe. Combine this with the new leg down now unfolding. It’s not pretty. And add to this the fact that the trading houses are exposed to the stock market more than anybody else, having abandoned investment in favor of speculation, including in commodities. I can hear Ben Bernanke saying it now, “Nobody saw this coming.”

Where is Baffled Ben? That comes next week.

Beginning next week, Demand Side will concentrate exclusively on forecasting and forecasts. We believe we have the record and awareness of who has been right and who has been wrong. In spite of its being free, it will be the best look forward, short-, medium- and long-term.

Today we bring in Simon Johnson and Nouriel Roubini to take a look at monetary policy and leadership in the current financial mess.

We begin with Simon Johnson, former chief economist at the IMF, and the voice that is most clear and most accurate about what needs to be done and what doesn’t

Johnson writes in a recent post.
In the wake of recent equity market declines, the clamor for bailouts of various kinds grows ever louder around the world. Influential voices call for “leadership” from the US and Western Europe, and for policymakers in those countries to “get ahead of the curve”. This is all code for a simple and familiar plea: Do something that will protect investors, particularly creditors who have lent a lot of money to banks and countries that now appear to be in serious difficulty.

But providing another round of unconditional creditor bailouts in this situation would be a mistake. What we need is a combination of transparent losses where bad loans were made, combined with a ring fencing approach that protects sound governments and firms. There is no sign yet that policymakers are willing to make that distinction clear.

The situation around the world is undeniably bad. … Europe is most definitely “On the Brink” of a serious economic crisis that could involve widespread defaults or significant inflation or both. At the same time, Bank of America shares this week fell to their lowest in 2 years; with other large banks under pressure, there is a legitimate fear of rerunning the parts of the financial crisis of 2008-09.

The Financial Stability Oversight Council’s recently released first annual report does not provide particularly up-to-date numbers, but most of the global warning lights that they discuss in Chapter 7 must now be flashing red. As recently as 2008-09, there were three kinds of government support available to the US and European economies when such systemic financial trouble hit. But all three traditional forms of bailout are now much harder to pull off.

First, over the past 30 years interest rate cuts and other forms of expansionary monetary policy became standard practice in the face of potential financial market disruption – this is the original meaning of the “Greenspan put”. But short-term interest rates are already very low in the United States. The European Central Bank (ECB) has room to cut rates – but both the ECB and the Federal Reserve fear that inflation may soon return. Unlike fall 2008, they are reluctant to respond to the latest round of stock market declines with a dramatic easing of monetary policy.

Second, after the initial monetary policy response in fall 2008, it was fiscal policy that took the lead in preventing global economic freefall – with significant attempts to provide countercyclical stimulus in the US, much of Western Europe, and China.

Now the eurozone faces a series of fiscal crises … Further stimulus is out of the question – the issue in Europe is who will do what kind of austerity and how fast.

The fiscal crisis in the US is more imagined than real. The S&P downgrade of long-term US government debt sparked a massive sell-off – but not in government debt. Investors around the world vote with their feet; they see US government assets as one of the safest available assets. Still, further fiscal stimulus is most definitely not on the political table in Washington.

And even Chinese fiscal policy shows signs of tightening – as the authorities try to prevent any overheating that could accelerate inflation.

Third, in 2008-09, monetary and fiscal policies were complemented by government capital injections directly into US and European banks. But these became harder to do under the Dodd-Frank financial reform legislation – unless there is a large-scale systemic approach, which would be very hard to get through this Congress.

The worst financial sector problems are in Europe. But the recent banking stress tests there were completely unrealistic as they did not include default events that now appear inevitable. To run one set of misleading stress tests (in 2010) might be considered excusable, to do this twice during the same crisis is unconscionable. There is no coherent financial sector policy within the eurozone.

What are the policy options now? The people in charge of European and US policy would clearly prefer to do nothing or postpone dealing with the underlying issues. This is a bad idea as it puts markets in charge – and these markets are panicked.

The core to any feasible strategy must be bank capital. … without sufficient capital large banks and other financial institutions are prone to failure – this is what spreads failure and panic far and wide . The Basel III framework, negotiated just last year, is crumbling before our eyes; the failure to ensure sufficient capital is at the heart of the European meltdown – and why the pressure on US banks is mounting.

The Europeans have to decide, once and for all, which sovereigns will restructure their debts and which will be protected – to an unlimited degree – by the European Central Bank. A full-scale bank recapitalization program is required, along with management changes at almost all major European financial institutions.

If the Europeans fail to get a grip on their economic situation, the FDIC will be pressed to use its Dodd-Frank resolution powers to take over and manage the unwinding of a major financial institution. In that scenario, creditors are supposed to face losses that are transparent and clearly understood; the theory is that this will stabilize market expectations.


The Dodd-Frank reform process decided not to break up global megabanks, but rather to handle them under the FDIC’s resolution framework. We’re about to find out if this was a good idea – or if we are just on the brink of more unconditional bailouts.”

That from Simon Johnson

Next week we’ll begin focusing on the forecast. With help from Nouriel Roubini and a post entitled, Mission Impossible: Stop Another Recession. Our baseline is and has been, bouncing along the bottom with significant downside risks from European debt and fallout in the U.S. banking sector from commercial real estate. We predicted and still predict negative growth in the second half of this year. In the absence of policy options, we’re looking at 1932.

The hysterical matrons of the market are about to start shrieking. Hold onto your hats.

Thursday, August 11, 2011

James K. Galbraith says "Show me the deficit"

Stop Panicking About Our Long-Term Deficit Problem. We Don’t Have One.

James K. Galbraith
New Republic
August 9, 2011

Standard & Poor’s did not downgrade the U.S. political system. It did not downgrade the stock market. It downgraded United States Treasury bonds and bills—and did so after Congress had removed whatever tiny chance existed of even a small delay in payments. So it’s instructive that, on the next market day, investors moved massively out of stocks, and into the safety of U.S. Treasury bonds and bills. Rarely has stupidity been so quickly and massively shown up.

Some commentators read the downgrade as a rebuke to the Tea Party, but, in fact, S&P was making good on its threat to act if the deficit deal resolving that drama did not reach the arbitrary threshold of $4 trillion over ten years. It wasn’t the Tea Party’s Kool-Aid they were drinking, but that of the deficit hysterics.

And yet, S&P’s statement (math error and all) was of a piece with mainstream budget projections from CBO and other official sources. These projections all assume steady growth, low inflation, and falling unemployment (in which case, one may ask, what’s the problem exactly?). Yet they also predict much higher interest rates. In these projections, it is mainly the vicious magic of compound interest—debt compounded on top of debt in computer models—that generates the explosive debt dynamic which rationalized the downgrade.

These projections are so bizarre and so inconsistent that they survive only through the willful refusal of those who use them to actually look at them. With low inflation, why on earth would the Federal Reserve jack up interest rates? If it did, mortgages would go even more massively into default, stocks and bonds and real estate would again crash, so the growth rate could never be achieved. Not to mention the fact that actual economic growth rates have been below-track for two years, so that the short-term assumption that a sustainable recovery is underway is obviously and plainly wrong.

None of this matters to the president, nor to majorities in Congress, nor to the pundit brigades. All have embraced the “long-term deficits” which appear in the projections as though they were foreordained history, sufficient to compel action now that will effectively cut Medicare, Medicaid, and Social Security, and curtail federal government investment, regulation, administration, and services to levels not seen since the 1950s.

Exactly what that threat is remains elusive. Foggy rhetoric about “burdens” that will “fall on our children and grandchildren” sets the tone of discussion. The concept of “sustainability” is often invoked, rarely defined, never criticized; things are deemed unsustainable by political consensus, backed by a chorus of repetition from the IMF, headline-seeking academics, think-tankers, and, of course, the ratings agencies.

But there isn’t, in fact, a “long-term deficit problem.” So long as interest rates stay below the growth rate, as they are, debt-to-GDP levels eventually stabilize and even decline. The notion that there is a big problem is pure propaganda based on a pseudo-debate, pitting two viewpoints that nevertheless converge on the practical issue.

On one side are those who profess to abhor all deficits, arguing that the productive private sector will rise up to offset all government cuts. This is an appealing 18th century viewpoint found in Adam Smith, a throwback to the days of peasants and petty craftsmen preyed upon by lords, kings, and tax collectors. The only problem is that things have changed since The Wealth of Nations was published in 1776.

The other force is the political liberals who were desperate to get a short-term stimulus package through Congress two years ago and who were therefore prepared to concede the case for “long-term deficit reduction.” What that case is—crowding out? Inflation? High long-term interest rates?—they rarely, if ever, say, because none of those things is remotely plausible given the 9 percent unemployment, debt-deflation, and rock-bottom long-term interest rates we see now. But having made the concession, mainly for political and rhetorical balance, they are trapped. Paul Krugman is a key example; as recently as August 6, he wrote on his blog:
America does have a long-run fiscal problem, driven by the combination of rising health costs, an aging population, and the unwillingness to raise taxes to pay for the programs we already have. If we don’t come to grips with that problem, bad things will happen.
Notice two things here: First, Krugman doesn’t say what the “bad things” are. Second, he does not mention the interest rate and never discusses what happens to the debt/GDP ratio if rates stay put. (Answer: It stabilizes eventually and nothing else happens, as I have shown in a paper linked here.) And thus he lends his great weight to the pressure that will build, later this year, for the cuts in Social Security, Medicare, and Medicaid that were deferred in August—and which Krugman surely opposes.

The perverse character of the debt deal will now force the Pentagon into the fray on behalf of cutbacks in Social Security, Medicare, and Medicaid. This is true even though the Pentagon sequesters that would occur if Congress does not pass the recommendations of the new “supercommittee” are arguably phony. It seems obvious that both the Republicans and the White House understood this dynamic very well, which is why the defense-spending-cut rabbit came out of the debt-deal hat at the last minute. As usual, the progressives who momentarily thought this was a win for Democrats were duped.

So what is to be done? This is not a moment to describe policies that would, for example, create jobs, build infrastructure, or deal with energy or climate change. Nothing like that can happen now until ideas change. And the first change must be to challenge and reject all the nonsense about long-term budget deficits, national bankruptcy or insolvency, and even “fiscal responsibility” that we are hearing. The entire object of this propaganda campaign is to cripple government—including regulation and the courts—and to roll back Social Security, Medicare, and Medicaid. The defense of those successful, effective—and yes, sustainable—programs just became far more difficult, and perhaps impossible. But it needs to be carried on to the last ditch.

James K. Galbraith is author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too.

Tuesday, August 9, 2011

Transcript 452: Echo Chamber Abandons Recovery

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With head-snapping speed, the echo chamber abandoned recovery last week. Yes, the much-ballyhooed recovery engineered by the three amigos Baffled Ben Bernanke, Gofer Tim Geithner, and Tiny, Timid and Temporary Larry Summers, with their trillions in support to the banking sector and not one dime to households. That recovery. What? Didn’t happen. In the area roped off for recovery deniers, Demand Side has been lonely. Now there are plenty of people around. The echo chamber is ringing with recovery deniers, and frankly it’s uncomfortable. We used to have a nice little table here, Keen, Stiglitz, Roubini, Shiller. Now you have to stand in line for the bathroom. Of course, they’re not looking at us. No. But they’re sitting on the couch and checking out the fridge.

After Q2, the forecasters began moonwalking back their predictions of 4%. Now it’s a scramble, no grace to it. An incredible pile of bull has been simply abandoned, ignored, forgotten. Actually, there’s a little bit clinging to their shoes and messing up our carpet.

You will remember, Demand Side was the outlier, a minority of not one, but not more than a dozen, for our baseline forecast of bouncing along the bottom, with downside risks and negative growth in the second half. Aggregate demand is the driver of the economy and aggregate demand is fading – from cuts to states and municipalities, growing real debt burdens on households, and the paralysis of government to invest. This scheme is still not the mainline, by any stretch. The current mainstream is kind of a cross between the Fed’s favorite, “It was worse than we thought,” and the ever-popular “flock of black swans.” There is no absence of interest in flogging the whipping boy of government, either.

Rather than debate, today, we’re going to take some prerogative from being right and restate the position. Then we’re going to look at other canards from the echo chamber. Simple facts of conventional wisdom that will sooner or later be rescinded without a backward glance.

The consumer economy is dead. It is buried under a mountain of private debt. The only way out is to socialize investment, as Keynes said, putting people back to work doing things that need to be done. Essential, not optional, are writing down this private debt (either directly or by inflation) and reconstituting public goods and services that are currently the object of a thousand cuts. That is government – teachers, police, firefighters, and a new millennium of infrastructure. We have an incredible challenge to meet in climate change and we have the spare capacity available to put to work.

This is not going to happen, we are afraid, because the current economic institutional framework is basically that the corporate control regime runs the governments, central banks, and dominates business economics with its market fundamentalism. Three years ago, when a complete collapse of the economy was prevented only by massive government intervention, it was difficult to imagine how the financial sector and corporate elite could survive. Now the institutions which created the last bust are back in charge: ratings agencies, central banks, IMF, and the fundamentally insolvent financial sector. It is difficult to imagine how they are going to be dislodged before a new and deeper collapse occurs.

So, our listeners are likely members of the choir on this and we won’t go into detail here. The principle lesson from this new validation by the echo chamber is that your analysis should ignore them. That view has absolutely no correlation with eventual outcomes. Most of their effort goes into explaining why what they said would happen did not happen because of a new extraneous factor and anyway if you look at it more closely, actually they didn’t really say what we thought they said. Besides which nobody else saw it coming either.

So. What else is reverberating in the echo chamber that is worth rejecting?

Ah. The S&P downgrade of U.S. debt is a big deal. Not so. As you will see tomorrow with the rush into U.S. debt. The ratings agencies are like Inspector Clouseau who was repeatedly baffled and caught off guard and could only get the drop on Cato by sucker punching him. The real red flag here is that the same ignorant voices that were in charge during the last financial debacle – S&P here – still get a hearing.

Another favorite which gets reverberation on the Left side of the echo chamber is that an expansion of the payroll tax reduction will create jobs. This has history. Tax cuts in the Bush stimulus of 2008 and the Obama stimulus of 2009 and the 2% reduction currently in place all ended up in paying down debt, not increasing employment. Increase employment by hiring people. The multiplier out of new jobs will be three times that out of another $50 in the average monthly paycheck. What is two percent of annual payroll taxes? A minimum, I would guess, of $100 billion. You could hire three million Americans at decent wages for that. And they would immediately start paying payroll taxes. That’s two percent off the unemployment rate. You are not going to get two percent off the unemployment rate by beating around the bush.

What else? Here’s one. Tax increases will kill jobs. Here again the confusion derives from the sound bouncing off both political walls. Not all tax increases are jobs-killers. Just as not all tax cuts increase jobs. A carbon tax, for example, would do much less damage to the pump price than has oil price speculation. The price quoted on one web site said gasoline went from $2.10 to $3.40 in just the past year. Tax revenues could produce funding for jobs, not rents to resource extractors. Tax increases on the rich don’t cut spending because the rich spend out of accumulated wealth, not income. A Tobin tax on financial transactions only captures some of the losses inherent in speculation. Eliminating the cap on payroll taxes creates a flat tax instead of a patently regressive tax and at the same time gives people confidence in their social security, so they will not hoard against uncertainty. Capping the mortgage interest deduction at $500,000 and one home will push money into productive uses, not in indulgences for the already opulent.

What else?

Our favorite call and response was that the crash in the markets had nothing really to do with the debt ceiling circus and the outcome extorted by the Tea Party. That was just a distraction. To be fair, we said something similar, that the public was fascinated by a schoolyard shouting match and was ignoring the oncoming bus. But to say that the austerity extracted in the debt ceiling debate had no effect is not very convincing. After all, the markets crashed the very next day.

In fact, some of those losses may have come from investors who share our view, that millions of jobs will be lost as a result of no balanced approach. Cutting off government investment as a means of cutting the deficit works only hypothetically, only on a spreadsheet constrained by bad assumptions. Investment by government is the road out. Cutting it is blowing the road up. Since we are kicking the can down this very road, that really doesn’t make any sense in anybody’s metaphor.

We are going to have deficits. They will happen either because we restart the economy with much-needed public investment or because we crash the economy by the madness of austerity.

Next year, we’re going to look like Greece. Remember, the Greek people swallowed Austerity One. When it didn’t produce stability, but rather a major downturn in their economy, they protested that probably more of the same would produce more of the same.

So, echo chamber says, Austerity is good, but the markets are looking elsewhere. Survey of reality says, Austerity is throwing gasoline on the fire. There is no possible way that austerity will lead to debt reduction. We need to earn our way out, not starve our way out.

The only way out is, reducing private debt, creating jobs with a full spectrum demand profile, and bringing some market discipline back to the banking sector. We can try all the austerity, all the market fundamentalism, all the shoving money at the banks we want. It is not going to work, because it cannot work. The economy operates from the demand side.