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

Saturday, May 26, 2012

Relay: Peter Schiff dancing with the media wolves, plus MMT

We're going to start subtitling the podcast, "Legitimate economics."

You would think all these years after "Inside Job" and the patent absence of accuracy and effect from the orthodoxy, there would be some soul searching or at least fact checking. Not to be.

Now, years after Stiglitz, Roubini and others, including Demand Side identified the austerity prescription as madness, we hear analysts coming around. There is the fiscal cliff and the realization that pushing Greece out of the euro would not be such a fine thing for the European banking system.
Listen to this episode
Today we're going to relay another podcast—Bloomberg on the Economy—and an interview with Peter Schiff, one of the few who got the Great Financial Crisis right. We're doing it to show how legitimate economics is marginalized.

We have our issues with Schiff, particularly on the opportunity for productive investment in in public goods. But he did see the debt bubble, he does see the error of further debt explosion, and the patent mistakes of monetary policy. Quoting here:
" When looking back from a point in the future, I believe that the years immediately after the credit collapse of 2008 will stand out as a period of dangerous economic negligence. We have bought ourselves some time by sweeping enormous problems under the rug. Through a combination of political cowardice, economic ignorance, and false confidence, we are digging ourselves into a hole so deep that it may take generations to crawl out."
The unlikely place Schiff has taken us, however, is into Modern Monetary Theory. Schiff and his "We're going to bankrupt the Treasury and debase the currency" and so on does not look like a likely impetus, but when I ran into this audio, the whole issue demanded to be settled.

Modern Monetary Theory, as I understand it, sees no constraints other than inflation to government's ability to create money and spending. Simply make entries into bank accounts with a keystroke and proceed to economic activity. This is true. It is almost self-evident.

But it is true in the sense that the mechanics are true.

As I understand it, MMTers admit inflation is a constraint. We have as a given the history of endogenous money creation, given to us by Minsky and those who went before. Money is created and destroyed through the banking system's lending. The counter in illegitimate economics is that the Fed is creating money and sooner or later there will be a passive money multiplier effect, and explosion of inflation.

So with these as givens, the nut of the matter is this. The economy is a full contact sport. While MMT may be absolutely correct, it cannot be executed in a vacuum. The institutions currently in place, the banks, bond markets, stock markets, political parties, and unfortunately above all the entrenched economic orthodoxy, however illegitimate, on Wall Street and in Academia will not go away. These institutions operate for the benefit of their constituencies, not by any fealty to objectivity or even intellectual honesty. That is why they are as a science or discipline illegitimate.

Were an experiment of MMT allowed, it would fail, not because the results would be other than its advocates predict, but because the cacophony of criticism and spin from those with real power to affect policy would drown out the truth. We forget that the Fed was defeated at one point. During the Depression it was reorganized and until 1951 operated as a function of the Treasury, keeping interest rates low and stable, even through the great commodity inflation following World War II. It was only with the Treasury Accord of 1951 that the Fed gained its independence as the fourth branch of government, giving full control of monetary policy over to the bankers. With the Humphrey Hawkins bill in the late 1970s, they were required to add the mandate of full employment and make a few appearances before Congress, but the policy has been theirs and their constituency in the banks ever since.

Which point is mainly to demonstrate the practical reality of trying to impose a modern monetary theory policy in the real world.

But let's let it happen. Investment or spending produced by an MMT experiment would first set off hysteria among the actors at the Fed, the bond vigilantes and the banking system. Any recovery or growth occasioned by an MMT experiment would quickly spur inflation fears. No. Inflation panic.

In the hyperinflation of Germany, with people rushing to the store with their wheel barrels full of currency, it was not just the volume of currency. It was the fevered rush to the store. Money times velocity. On the other side, it is not the great volume of cash supposedly being created by the Fed, but the fact that it is stuck in the banks and by hoarding that creates the current non-inflation. But adding to panic would be the creation of credit money by the banks, as a recovery will spur investment. If demand picks up, lending will pick up.

We should not fear inflation, but we do.

That is a very easy target for my MMT advocate listeners to hit, and I welcome your response on that issue. It needs to be settled.

Whenever we get around to employing our people first again, then inflation will pick up, and it will be the dusty errors of illegitimate economics that will be accepted as the reasons for it. No matter what has actually happened.

Demand Side is not innocent of naiveté. We love economics and would love to see it practiced right. Our virtue is only that the schemes we espouse work when they are tried. Our fault is that we don't like the hurly burly. We don't like the full contact. We want the rational to be acted upon because it is rational. We share this with the advocates of Modern Monetary Theory. When the story comes in different that the prediction, we want some honesty. We bailed out the banks, we made the corporations profitable. The operation worked. So where is the recovery? If there is no recovery, then bailing out the banks and making the corporations profitable is not the road to recovery. When Ayn Rand takes welfare for her lung cancer, we want that to be part of the story.

If we've learned anything over the past four or five years, it is that a crash with a serious bust will not sort out the truth.

Hitler employed Germany in a depression. It could happen again.

The financial casino will shrink as soon as we stop feeding its players the chips, but the shrinking could be devastating because of the institutional dynamics. And the official historical explanation may well not be, "It was a casino." It may be, "We should never have stopped feeding them the chips." We let Lehman fail. Never mind we bailed out the rest and it solved nothing. To many it is the Lehman failure that is remembered.

So it will be the institutions that determine economic policy. Academic and Wall Street economics is among those institutions. Academics invested in their own careers and in the failed Neoclassical paradigm continue to dominate this institution. On Wall Street, Milton Friedman still has currency, pardon the pun. But really.... Economists there do a dance of data. When the inevitable arrives, it arrives as a shock. The response is not, "Why was this inevitable?" but "How can we blame or dance around it?"

Our federal government has kept things afloat with deficits that would not be allowed in the Eurozone. At the same time, the federal government is led by men who really don't get it, starting at the top. More on that in the next podcast. That president's rival in the next election is—believe it or not—an outspoken advocate of the very practices that created the bust.

So when you see no institutional backing for hiring people to do things that need to be done, you know there is no Demand Side Faction on the field. When the madness of austerity is executed to keep profligate lenders whole and the financial casino first in line rather than last, you know there is no early end of trouble.

So, at the end of the day, Modern Monetary Theory demonstrates convincingly that there is no budget constraint, but I believe that this is something to be kept on the back pocket of progressive reconstruction.

We cannot let finance get in the way of fully employing people. Government can do that with infrastructure, climate change mitigation, public services and so on. We don't have to be afraid to tax, though. The sense of sacrifice is needed to reassure the population, a population which is intuitively conservative and educated into fear of government spending. That broad population might also be educated into coherence and become the institution to carry the day.

Plug book. Demand Side Books Dot com. Coming on June 1.

But as I said, this is about Peter Schiff.

Hardly a Modern Monetary Theorist.

Peter Schiff got the housing bubble right, wrote a book, made money. But as John Maynard Keynes said, "It is better to be wrong conventionally than right." In this expanded exchange, you hear Schiff getting no—zero—respect. And that is what made it so troubling to us.


We should note that Schiff is right on again with regard to the Fed's continued attempts to blow up a bubble. Their mandate is full employment. To them, this means full profitability for corporations and banks.

We note also that we do not agree with Schiff that the only investment is on the private side. Demand Side—as you see in DSE the book—final version June 1—makes the point that the productive investment is on the public side. Private capacity for the consumer economy is at record idleness.

But that is not what is scary about this Bloomberg on the Economy. It is the myopia and self assuredness of the lemmings.


Peter Schiff, author of "America's Coming Bankruptcy: The Real Crash: How to Save Yourself and Your Company" discusses the book. Schiff speaks with Bloomberg's Carol Massar and Michael McKee on "Bloomberg On the Economy."

Sunday, May 20, 2012

Transcript: 503 Lest We Forget editon of Idiot of the Week

there's lots of free sample there.
Now the lest we forget edition of idiot of the week
There is a reason the U.S. is stagnating, bouncing along the bottom, as we have said, a bottom sloped downward, a bottom littered with crises. it is an incompetent bureaucracy in charge of an out of control financial system educated into incompetence by a dysfunctional economic orthodoxy that refuses to die in the conflagration it created. Along with its sponsors in the financial sector and corporate oligarchy, this unnatural economic organism clambers over its victims for the best of the spoils, not realizing its victims are also its hosts, and as they die and are left behind, it has no independent strength or integrity. It only knows it must dominate, and threats to that domination only inflame its desperation.

Listen to this episode

A lot was done wrong in the George W. Bush regime. His eight-year rule corresponded with stagnating incomes, a housing and debt bubble.

Brian Wesbury was an advisor to George W in his second term. This is the advice, this is the economic thinking of the Bush White House. It's like the Great Financial Crisis, the socialization of bank losses, the subsequent Great Recession did not happen, is not happening.

Increasing productivity and growth. Not. As we've seen, after a spike in productivity as plants were emptied, that productivity has returned to its normal path, which is – contrary to the conventional thought – inversely related to the unemployment rate. The higher unemployment, the lower productivity. We went over that. Now productivity is negative.
The phrase "increasing productivity and growth" is slipped into conversation with the ignorant, say the Tea Party klatches, but we hope you don't buy it. Along with, "There's no such thing as global warming." FoxNews facts, fantasy the ideology needs to validate itself. Pretend it is real. It is la-la land.


Offsetting headwinds of regulation and government spending.

I wonder if those headwinds are coming over the fiscal cliff that seems to have caught everyone else's attention?
We have the image of Wesbury having pie and coffee with Edward Laffer wearing tinfoil hats and writing on their napkins like little trekkies. Apologies to trekkies. More discouraging. I see them actually in an office in DC with a button. I wonder what this does. Ooops. We'll pretend that didn't happen.

Facts to Wesbury. Total government spending, counting the negatives from states and locals is negative, going down. He's like reading from an old comic book hoping somebody will take him seriously again. Not in this life. Apologies to comic books.

But you haven't heard anything yet.

Here it is.

Edward Lazear, Brian Wesbury, Ben Bernanke, Glen Hubbard, Greg Mankiw.

Lest we forget.


Saturday, May 19, 2012

Transcript: 502 Greece and Reality, with Ritholz, Roubini, Goodman v. Demand Side

How does Europe play out?


Debts that cannot be repaid will not be repaid, no matter how high you hike the interest rate.
Listen to this episode

The country of Greece owes, say 360 billion euros, that's about 450 billion dollars, and there are eleven million people. What is that 32,000 euro per. Say $44,000. Shame on the Greeks, you say. Well, shame on the lenders.

Oh yeah, the federal deficit is maybe $15.7 trillion, a country of 311.5 million, mmmm, that's $50,315 per. We count things in percentages of GDP, though. And the US pays 1.2 percent, the Greeks north of 25 percent.


Gone are the mentions of how small the Greek economy is and how trivial a contribution to the European economy. Drifting in around the edges are mentions of the banks and their exposure. Austerity for banks? Perish the thought.


The Greek exit, other than at the fringe, such as with the bush-era ideologues like Brian Wesbury, who made it to idiot of the week this time, the Greek exit is now accepted. But what does it look like?


As we said many weeks ago, it looks like a bank run. It is testament to the Greeks' hopes for a rational outcome that there has not yet been a run. A jog now, I guess. But when the banks run out of money, they go to the ECB. When the ECB says no, we're not giving you liquidity, the Greeks are out. Banks collapse, all the bad stuff happens.

Does the Greek government plan a middle of the night conversion of euros to drachma? No. Does the EU eject them? No. Does the ECB cut them off? Yes. At least that's how we see it.


Could it be different? Will there be contagion to others? We'll take the second up in a moment after Ritholz and Goodman. For the Greeks, 360 billion euro, 11 million people, rollovers costing north of 25%. Austerity eating at the foundation of the economy. Citizens saving and hoarding against frightening uncertainty. The drumbeat from the market-first economies saying, "You need to starve your way to health."

Here are Ritholz and Goodman, edited as always, but not distorted.

I'm not buying it. Ritholz is rosy about exit, Goodman is rosy about the sturdiness of the euro. Sure, somebody could come in and micromanage an economy according to his or her own view of what is right or wrong. The micromanaging, however, would be done by the lenders on the debtors. There would be no reorganization of the Finnish economy or the German economy. It would be cut wages and benefits in Portugal, Ireland, Greece, Belgium. Therefore it is only austerity.

The problem is the debt. Maybe the audio is too thick, but it Goodman is essentially saying that competitiveness is near par and that with some so-called structural reforms, it could be made right. The problem is the debt. The divergences between the currencies, the so-called trade weight, is a measure of the capital flows. The deficits. Over time that has created the debt. When interest rates balloon, the carrying cost of that debt balloons.

If you look at Goodman's chart of his synthetic currencies, you'll see the Finns and the Germans have been exporting debt. The Italians have been financing their own debt. And the rest are borrowing. The Finns are absurdly undervalued. No wonder they're hardline.

A better look was presented by Nouriel Roubini, who has been so far out in front he has lapped the field. On project syndicate, he outlined the ways an orderly arrangement might proceed.


NEW YORK – The Greek euro tragedy is reaching its final act: it is clear that either this year or next, Greece is highly likely to default on its debt and exit the Eurozone.

Postponing the exit after the June election with a new government committed to a variant of the same failed policies (recessionary austerity and structural reforms) will not restore growth and competitiveness. Greece is stuck in a vicious cycle of insolvency, lost competitiveness, external deficits, and ever-deepening depression.

says Roubini. We should have made this clear. The program of restoring Greece to solvency involves first making them net income earners. Not happening. So we never get to the second step where they spend decades making the bankers whole.

Back to Roubini

The only way to stop it is to begin an orderly default and exit, coordinated and financed by the European Central Bank, the European Commission, and the International Monetary Fund (the “Troika”), that minimizes collateral damage to Greece and the rest of the Eurozone.

... all of the options that might restore competitiveness require real currency depreciation.
The first option, a sharp weakening of the euro, is unlikely, since Germany sees this as inflation and imprudence. The ECB, European Central Bank, as a child of the Bundesbank will never aggressively ease monetary policy.

Second, Greece could rapidly reduce unit labor costs. Not happening. They've already cut standards of living. The pension funds are fully invested in the government's debt. Would you – after seeing the disaster of the first three years of austerity – say, "Yes, give me more. I believe?"

It took Germany ten years to restore its competitiveness this way; Greece cannot remain in a depression for a decade.

Third, a rapid deflation in prices and wages, known as an “internal devaluation,” would lead to five years of ever-deepening depression.

None of those three options is feasible, says Roubini.

the only path left is to leave the Eurozone. A return to a national currency and a sharp depreciation would quickly restore competitiveness and growth.

Of course, the process would be traumatic – and not just for Greece. The most significant problem would be capital losses for core Eurozone financial institutions. Overnight, the foreign euro liabilities of Greece’s government, banks, and companies would surge. Yet these problems can be overcome. Argentina did so in 2001, when it “pesofied” its dollar debts. The United States did something similar in 1933, when it depreciated the dollar by 69% and abandoned the gold standard. A similar “drachmatization” of euro debts is necessary and unavoidable.

Losses that Eurozone banks would suffer would be manageable if the banks were properly and aggressively recapitalized. Avoiding a post-exit implosion of the Greek banking system, however, might require temporary measures, such as bank holidays and capital controls, to prevent a disorderly run on deposits. The European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) should carry out the necessary recapitalization of the Greek banks via direct capital injections. European taxpayers would effectively take over the Greek banking system, but this would be partial compensation for the losses imposed on creditors by drachmatization.

Greece would also have to restructure and reduce its public debt again. The Troika’s claims on Greece need not be reduced in face value, but their maturity would have to be lengthened by another decade, and the interest on it reduced. Further haircuts on private claims would also be needed, starting with a moratorium on interest payments.
Some argue that Greece’s real GDP would be much lower in an exit scenario than it would be during the hard slog of deflation. But that is logically flawed,

says Roubini.

We agree. And we see those who argue such a thing as often working for the banks.

More importantly, the exit path would restore growth right away, via nominal and real depreciation, avoiding a decade-long depression. And trade losses imposed on the Eurozone by the drachma depreciation would be modest, given that Greece accounts for only 2% of Eurozone GDP.

Reintroducing the drachma risks exchange-rate depreciation in excess of what is necessary to restore competitiveness, which would be inflationary and impose greater losses on drachmatized external debts. To minimize that risk, the Troika reserves currently devoted to the Greek bailout should be used to limit exchange-rate overshooting; capital controls would help, too.

Those who claim that contagion from a Greek exit would drag others into the crisis are also in denial. Other peripheral countries already have Greek-style problems ... Portugal, for example, may eventually have to restructure its debt and exit the euro. Illiquid but potentially solvent economies, such as Italy and Spain, will need support from Europe regardless of whether Greece exits; indeed, without such liquidity support, a self-fulfilling run on Italian and Spanish public debt is likely.

Substantial new official resources of the IMF and ESM – and ECB liquidity – could then be used to ring-fence these countries, and banks elsewhere in the Eurozone's troubled periphery. Regardless of what Greece does, Eurozone banks now need to be rapidly recapitalized, which requires a new EU-wide program of direct capital injections.

The experience of Iceland and many emerging markets over the past 20 years shows that nominal depreciation and orderly restructuring and reduction of foreign debts can restore debt sustainability, competitiveness, and growth. As in these cases, the collateral damage to Greece of a euro exit will be significant, but it can be contained.


Make no mistake: an orderly euro exit by Greece implies significant economic pain. But watching the slow, disorderly implosion of the Greek economy and society would be much worse.

Even Roubini is too rosy. Not that it wouldn't work. It just won't be tried. The politics are not there.

We remember the various calls for more political integration. But I'm not sure you would find political integration in the U.S., even, if New York, or Texas, or California were making rules for the rest of the country.

We recall Mundell's trilemma, the unholy trilemma, which posits that a country can have any two of these three: stable exchange rates, free capital flow, and domestic economic sovereignty. The Europeans chose stable exchange rates and free capital flows. It was a mistake. Now they need a period of capital restrictions as they change back to floating exchange rates and domestic sovereignty.

So, not too disjointed, we hope.

Oh, got to plug the book. We got word back from a publisher. Liked it. Pretty dense. And we need a bigger platform than the podcast. Good stuff, though. We enjoyed our conversation and were, I think, rightly encouraged. We're still shooting for June 1. Check it out at DemandSideBooks dot com. Still in review and comment, but there's lots of free sample there.

Wednesday, May 16, 2012


Okay. Today. Apology. May 15 has come and gone and the final first edition of Demand Side Economics is still not out. No excuses. Should have been done.

Now we're looking at June 1. Did I mention Steve Keen liked it? I sent him the Review and Comment edition and he had it up on his Debtwatch blog in twelve hours. Provided a fine spate of buyers. He SHOULD like it.
Listen to this episode
Today I'm going to throw audio at you. From Wall Street. From AEI, the American Enterprise Institute. And it's not idiot of the week. Imagine that. It's the great JP Morgan hedge debacle.

Let me set it up briefly. This is a casino. Hedge is a betting word. Minsky uses it to describe rollover financing, but that's not what the big boys are doing. They are trading paper in hopes of getting the stuff with the biggest numbers at the end of the game. There is absolutely no roads, bridges, houses, plant, equipment, involved. It is speculation.

Second, the exposure is tremendous. You'll hear Charles Peabody talking with Tom Keene in a minute about $5 trillion of notional value on JP Morgan's book, with Morgan Stanley close behind. Not net, they say, but notional. What is the net exposure? They say they have bought credit protection on their positions, but what is the point of that? If everything is symmetrical, Why bother? And when we hear it is going to take months, quarters, years to unwind the trade, we get to the point. It depends on liquidity. Can you buy, sell, trade today? If you can't, here comes the rollover. And it's not rolling over.

Third, second, first, this is a casino. We're seeing why we need real investment in real stuff. Rail, electrical grids, schools, climate change mitigation, infrastructure. That will produce real value, savings, improvement in capacity, a livable planet. What about bonds to retrofit buildings with efficient heating a cooling? Pays off in seven years in energy savings. Use an eighth year to pay the interest. You'd have retirees lining up around the block. I can't keep the disgust down when I hear we need the Keystone pipeline for jobs. We need to build environmentally questionable infrastructure for a doomed technology for jobs? But we don't need half a million construction workers, materials suppliers, engineers and technicians to fit us out for the real future?

Sorry. That's not today. Today is JP Morgan. Too much money. Looking for risk, not value. Thank you, Ben Bernanke. Finding it in the demise of the Eurozone.

It's not even a bet. Or at least it's not even a question. The madness of austerity in order to pay off the banks for their previous bad bets is not going to work. It has never worked. The IMF has imposed the Washington Consensus across the globe. Where is the example of success? You can't shrink your way to growth. You can't kill the host or the parasite will die too.

I listen to a lot of Bloomberg. That's where I lifted today's audio. Every other economist is talking about how Europe needs to take the pain. These guys are from the banks, and they're getting desperate. Europe needs to take the pain because the banks are so shaky, they can't take even a token write-down.

But how can you tell the Greeks, whose standard of living is cut in half and its debt problems actually growing that austerity works? They've watched it on the ground for three years. Or the Spanish. Or the Irish.

I'd better get the book out soon or the last chapter on Euro breakup won't be a forecast.

But lastly, the Fed's zero interest under Ben Bernanke is working just about as well as its one percent interest under Alan Greenspan.

Now, here, from AEI. Maybe I should have kept that attribution for the punch line. Here, from the well-endowed Right Wing think tank, the American Enterprise Institute, John Makin.


Wow. AEI. Who would have thunk.

Now, a couple of pieces on JP Morgan and its blunder, beginning with investor Vince Farrell and continuing with analyst Charles Peabody, one of the best banking analysts. We featured him back in 2007 excerpts from a National Economists Club lunch. He is still calling it as he sees it.

Finally, we have some Chris Whalen from before the blunder to get the general outlook for banks absent the potential from this blunder. Whalen actually has a lot more to say than this, but its in Street jargon.


Wow. These guys are not Occupy Wall Street. They ARE the Street.

If I hear any more about exogenous shocks, I'm going to plant a black swan in Ben Bernanke's bed.

With the size of the too big to fails, the incentives to risk, the absense of control of markets, the fevered feeding of cheap chips into the casino, and the insistence on austerity rather than investment, How could anything ELSE happen? These aren't shocks coming from outside the system. They are the impact of the rocks we've been steering toward. This is the inevitable consequence of bad economics for the benefit of the powerful. This is no accident. It is incompetence.

Friday, May 11, 2012

Transcript: 501 Paul Krugman, Dangerous Man


Paul Krugman is out with a new book, "End This Depression Now." You may expect us to be a big Krugman fan. You will be disappointed. We certainly agree with the sentiment of the title, but ... and we'll get to some audio from Krugman. We won't make him an idiot. More dangerous than an idiot. Paul Krugman is one of the most dangerous economists on the planet.
Listen to this episode

First a couple of items of fact to characterize a real world. The United States is a low wage nation. These are data for 2009, but they are likely even more true now. The proportion of the workforce earning below two-thirds of a median hourly wage—that's median, not average—is higher in the US than in any other OECD country. 24.8 percent. This confirms the US as an unequal society. The next lowest is the UK at 20.6.

David Ruccio who brought this forward on the Real World Economics blog, presenting research done by John Schmitt at CEPR, Center for Economic and Policy Research, Dean Baker's shop, link online. Also chart online. And we did get up the chart on productivity finally. But

United States of low wages

April 24, 2012

from David Ruccio

John Schmitt [pdf] defines low-wage jobs as paying less than two-thirds of the national median hourly wage.

Schmitt explains that low wages are not the only problem for low-wage workers, particularly in the United States:

The intense policy focus on low pay can obscure the reality that low pay is often among the least of the labor-market problems facing low-wage workers, especially in the United States. U.S. labor law offers workers remarkably few protections. U.S. workers, for example, have the lowest level of employment security in the OECD and no legal right to paid vacations, paid sick days, or paid parental leave. The low level of union coverage in the United States means that contractual obligations generally don’t make up for the lack of legal guarantees.

In the absence of legal or contractual rights, low-wage workers are the least likely to have access to core benefits. Almost half of private-sector workers in the bottom fourth of the wage distribution in 2010, ... had no paid vacations. In the same year, about 68 percent of private-sector workers in the bottom fourth of the wage distribution had no paid sick days, .... In the U.S. context, however, probably the most critical problem facing low-wage workers is the lack of access to health care. ..., more than half (54 percent) of workers in the bottom [fifth] did not have employer-provided health insurance and more than one-third (37 percent) had no health insurance of any kind, private or public. The 37 percent non-coverage rate for the bottom [fifth] of wage earners in 2008 was up from 15 percent in 1979.

Next, the chart online shows the crash in public sector employment since 2009, this borrowed from the Calculated Risk blog. Definitely not a feature of prior recoveries. The steepness of the decline has flattened out, but it is no way to handle an economy. We are below 2007 in non-federal public employment.

Krugman makes this feature—public sector employment—a key part of his recovery policy. That's in just a minute.

First, one more note. Europe is back. It is still the banks. Protecting them from any sort of restructuring of foreign debt while demanding austerity and feeding them liquidity is the same recipe that has led to the US non-recovery. Socialist Francois Hollande has turned Sarkozy out of office in France. The Dutch government collapsed. Elections in Greece rejected the austerity coalition, under the leadership of the so-called technocrat Lucas Papademos, the man credited with taking Greece into the Eurozone. Previously he was the Governor of the Bank of Greece from 1994 to 2002, and then and Vice President of the European Central Bank. from 2002 to 2010. Naturally he is the one who negotiated the terms of recent bailouts.

It would be nice when the terms are decided upon if the confidence fairy would guarantee a certain level of growth. All this austerity is being sold under the premise that it will lead somewhere else but down. It doesn't. The economy collapses, standards of living are cut in half, and yet the Greeks are blamed for not bringing down official debt to GDP. Well, GDP is falling faster than debt. That means the proportion of GDP going to debt is higher.

Elsewhere, the Cameron government in the UK is under well-deserved pressure. There are mass demonstrations in Czechoslovakia. Spain is deep in depression, with enormous unemployment. But the Neoliberal Two-Step goes on. Austerity did not work, then reform your labor markets. Reforming your labor markets did not work, then more austerity. Here comes recession. We haven't done enough deregulation.

Now, Paul Krugman, here appearing with Tom Ashbrook. As always the audio is heavily edited, but the context is retained.


What makes Paul Krugman so dangerous?  Certainly we are in a depression as he describes.   Certainly the mainline and still in power got it wrong, badly wrong.  Certainly hiring is the way to go.  You may recall Demand Side was outraged in the first case,  way back in 2008, about allowing states and localities to lose services and lose jobs.

What makes him so dangerous is "It is simple, it is easy, just raise inflation and kick start the economy with these jobs."

We also remember Larry Summers in 2008 with his "Timely, Targeted and Temporary."  That used to
promote the Bush stimulus, which turned out to be ineffective tax cuts.  We remember Larry Summers as Obama's point man on the economy.  Came in with the $700 billion ARRA, again canted to tax cuts, some of them completely useless, those to the corporate sector.  And there is the point.  Paul Krugman made it best.  This was too small, to timid, too insubstantial.  It did create economic activity.  Look at the chart of GDP.  But it was not enough to cover the gaffe of predicting an immediate return to lower unemployment.  Consequently it has been characterized as not working at all.

That is what Krugman is doing.  If his plan were enacted, it would stem the bleeding, but would not lead to recovery.  There is the enormous private debt, the balance sheet recession, as Richard Koo calls it, that is not touched, except with the feather of a few jobs for firemen and policemen and teachers.  We called for principle write-down in 2008, along with others.  But those mortgages were buried under the securitization debacle.  Absent some program to reduce the enormous private debt, now around 250% of GDP, we are in for a long slog.  So we can give the banks their pound of flesh.  If not write-down, maybe just refinancing at the banks' rate, zero percent.  Certainly Corporate American has benefited from refinancing.  Inasmuch as they need to, with all that cash.

And there is no impetus for real investment. 

We have work that needs to be done, infrastructure, education, climate change avoidance and mitigation.  There are millions of jobs doing things that need to be done.  We have the people to do them.  This is a long-term investment in public goods.  It is not a short-term fix so we can buy more iPods built in China.  We have made the financial sector primary, when it is secondary.  Why?  Of course, because they control the policy levers.

But the point is, What would happen if Krugman's program were enacted.  No real investment is forthcoming from the private sector, no matter how low the interest rate goes.  Our contention is that capital goods -- the actual machinery and facilities -- are deflating in value even as we speak.  Otherwise corporations would be investing.  The zero bound would have to be violated by ten percent, and who thinks a ten percent subsidy would lead Corporate America to do useful things.  Would it lead to a rebound in the housing market?  Hard to believe any sub-zero money would ever find its way to that sector, given the miserable history so far.

Krugman cites Joe Stiglitz as a fellow in the band of brothers who got it right.  Stiglitz does not imagine a one-time pop of any amount will lead us out.  Stiglitz is on-board with climate change investment.  Paul Krugman is no Joe Stiglitz.

Stiglitz is one of the economists featured in our book, Demand Side Economics, out very soon in final form and available now in rush version at DemandSideBooks.com in any one of a number of print and electronic formats.  Another is James K. Galbraith, who kindly reviewed his part with approval.  Quote, I just spent an hour or so reading with great pleasure"

Tickles my happy bone.

He also gave us some precious anecdotes on Leon Keyserling, in his later years,

 "I remember Bruce Bartlett telling me years ago how much the Republicans hated him and it was easy to see why. He would trawl through the Rayburn building with his typewritten articles and hand-done charts, relentless and determined."

We may have to do a biography of Keyserling one day.

Friday, May 4, 2012

Transcript: 500 Productivity,(updated with chart) Innovation, Flat Supply Curve

Today on the podcast – wait, wait, wait – this is the 500th podcast of Demand Side Economics. Number 500. We've been broadcasting since October 2007. You may remember the story. We rushed to air so as to not get left behind in calling the onset of the recession that began in December. More effort than necessary. Most economists hadn't called it by May 2008. In any event, we've learned a lot over the past nearly five years. We hope it stimulates a little in you.
Listen to this episode
We should celebrate. Maybe issue a book. Yes. That's it, we'll do a book. Out May 15 the final first edition of Demand Side the Book, available now in rush version at Demand Side Books dot com. Pristine final version May 15. Our favorite response so far, "This is really clear. Are you sure it's economics?" Yes, it's economics absent neoclassical lighting and cobwebs. Oh, and thanks, Mom.

But on to economics. Last week we slipped into the muck of commodity market manipulation. That with the relay of a Congressional hearing on the casino featuring Michael Greenberger. Today we'll talk about innovation, productivity and take a look over the fiscal cliff if we have enough time.

I'm getting excited. Must be the champagne.

Anyone who's involved in economics, and my training is indeed in economics, knows that the long-term growth and success of any economy is really related to the innovation that we see, related to not just those people who study the so-called STEM subjects, science, technology, engineering and math, but all the rest of us who benefit from what they have developed, number one. Number two -- we also track what corporations are doing. Are they investing in capital? Are they investing in their people?

Abbey Joseph Cohen, Idiot of the Week

Innovation will lead us out, neoclassical growth theory, not going to happen. The US leads in innovation, lags in employment, as manufacturing is shipped overseas in spite of our yawning trade deficit. I wonder what the world would look like if goods were traded for goods.

Innovation, we've argued arises from the soil of good basic education and subsidized R&D, through research universities and the public sector – often the Defense Department, most often with strong demand from the public sector, often the Defense Department.

In reading Steve Keen's indispensible Debunking Economics – maybe not as clear as our Demand Side Economics, but likely more satisfying to the serious student – we find from page 114,
the Hungarian economist Janos Kornai.

Kornai's analysis was developed to try to explain why the socialist economies of eastern Europe pre-1990 had tended to stagnate (though with superficially full employment), while those of the capitalist West had generally been vibrant (though they were subject to periodic recessions). he noted that the defining feature of socialist economies was shortage:

In understanding the problems of a socialist economy, the problem of shortage plays a role similar to the problem of unemployment in the description of capitalism." (Kornai 1979: 801).

Seeing this as an inherent problem of socialism—and one that did not appear to afflict capitalism—Kornai built an analysis of both social systems, starting from the perspective of the constraints that affect the operations of firms:

The question is the following: what are the constraints limiting efforts at increasing production? [...] Constraints are divided into three large groups:

  1. Resource constraints: The use of real inputs by production activities cannot exceed the volume of available resources. These are constraints of a physical or technical nature [...]
  2. Demand constraints: Sale of the product cannot exceed the buyers' demand at given prices.
  3. Budget constraints: Financial expenses of the firm cannot exceed the amount of its initial money stock and of its proceeds from sales. ...
Which of the three constraints is effective is a defining characteristic of the social system [...]

Kornai concluded that

With the classical capitalist firm it is usually the demand constraint that is binding, while with the traditional socialist firm it is the resource constraint."

That meant there were unemployed resources in a capitalist economy—of both capital and labor—but this also was a major reason for the relative dynamism of capitalist economies compared to socialist ones. Facing competition from rivals, insufficient demand to absorb the industry's potential output, and an uncertain future, the capitalist firm was under pressure to innovate to secure as much as possible of the industry's demand for itself. This innovation drove growth, and growth added yet another reason for excess capacity: a new factory had to be built with more capacity than needed for existing demand, otherwise it would already be obsolete.

Therefore most factories have plenty of 'fixed resources' lying idle—for very good reasons—and output can easily be expanded by hiring more workers and putting them to work with these idle 'fixed resources.' An increase in demand is thus met by an expansion of both employment of labor and the level of capital utilization—and this phenomenon is also clearly evident in the data.

Kornai's empirically grounded analysis thus supports Sraffa's reasoning: diminishing marginal productivity is, in general, a figment of the imaginations of neoclassical economists. For most firms, an increase in production simply means an increased use of both labor and currently available machinery: productivity remains much the same, and may even increase as full capacity is approached—and surveys of industrialists ... confirm this.

So the capitalist is under pressure to innovate to secure as much of the available demand as possible.

We would add the capitalist seeks to control demand with advertising and promotion, as well, scientific mind manipulation.

But Keen leads us into the next issue of today. Productivity.

He does it by noting that the supply curve taught to you and me in 101 is not visible in the real world. The upward sloping supply curve is a vestige of the 19th Century, when agriculture under heavy demand would move to less hospitable acreage and yields would go down. Less productive soil mean higher costs per bushel.

Hasn't happened that way in the real world for a century. As Keen points out, capitalists plan their facilities so it doesn't. High fixed costs are averaged down the more units that are produced. Plus the marginal cost of a new worker actually results in just as much product as the last worker, right up to capacity. In fact, the average cost per unit is going down. Right up to the last station on the third shift. Not to mention we haven't gotten close to capacity in decades, and are trending down.

Not new to listeners of the podcast – about capacity anyway—though to read Keen and recognize the supply curve is not rising, but is flat or downward sloping until near the end makes me want to paint the iconic X supply-demand curve on the office door of Professor Brown. You'd think he'd check with the capitalists before he taught that to the hundreds of naive young business students.

One academic did ask the capitalists and found less than 10 percent reported the classic rising supply curve. Those ten percent were concentrated in industries with key supply constraints. More than 90 percent reported downward sloping, then nearly flat or slightly rising supply curves. Oops. Not 90 percent. Well, zero reported rising supply curves from the get-go. But 17 reported that at least near capacity there was a sharp rise. Fully 316 firms, that's 316 versus 17, more like 95 percent reported downward sloping then nearly flat or slightly rising supply curves.

That's disgusting. But what it means is output is determined by demand, where demand crosses this downward sloping then flat supply curve.

Now Productivity leads us back to the Rule of Eight, a Demand Side invention that—or observation—that describes the relationship between unemployment and productivity. Eight minus the rate of unemployment in the medium and long term determines the rate of productivity—output per hour nonfarm businesses. The higher the unemployment rate, the lower productivity. The lower the unemployment rate, the more managers manage for efficiency and the more productive workers are.

You may remember our sinuous chart, which we've updated through the end of 2011 on the transcript.

Wait! Wait! Wait! Didn't we hear unending bleats that people were working harder to keep their jobs and managers were speeding up the line with the Great Recession's job losses?

Ah. The short term. The short term is often in the opposite direction. We would describe it as the systems developed by workers whose desks are now empty are being used by the remaining workforce. But whatever its cause, the general conventional wisdom was so insistent we lay low for awhile. Now we see productivity collapsed in 2011. The rule of 8 would say it should be around zero or even below, since unemployment is above eight. But these are unusual times. 2011 did have some negative numbers in it, including minus 1 percent annualized in the first quarter, but it eventually came in above the zero line at 0.4 percent. A far cry from the 4 percent of the year before or the 2.3 percent from 2009 or the three and a half of earlier in the decade or the 1990s.

So, productivity having collapsed, we can peek out again, and put up our chart, and even point to a new source, the survey by Eiteman and Guthrie. When was that? Ah, new information. 1952. This empirical data contradicting the upward sloping supply curve has been on the books for sixty years of X marks the spot in the supply-demand pages of price theory instruction.

Where's my spray can?