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, December 25, 2012

Transcript: Recession Call, Idiots of the Week

Today on the podcast, the recession call, idiot of the week forecast edition with John Silvia and Mickey Levy, that's chief economists at Wells Fargo Securities and Bank of America, and the problems with establishing our new forecasting blog: apples to oranges, apples to metronomes, and apples to sheep. Also known as how to make a model fly in the real world.

First the recession call

Yes. I know we are recovery deniers here at Demand Side, so how do we get to call the onset of another recession without having closed the last one? Well, we DID predcict a slump aftger the election, following the political business cycle. We DID follow the federal spending, particularly defense spending, as it ran up prior to the election. And we HAVE called downside risks in all of our commentary.
Listen to this episode
So for that, and for reasons of comparison with the supply siders, we decided to rejoin the fray.

The U.S. economy slipped back into recession (in the conventional frame) in December 2012.

Of course, in the Demand Side frame we are still bouncing along the bottom, stagnating, the real economy's physical and human capital deteriorating, its resources and natural systems depleting at dangerous rates, and its control systems seriously corrupted by entrenched corporate power.

We'll get more of the conventional view in a moment with John Silvia, but as we get ready to launch the Forecast blog again, now under the URL remacro.com – look for that January 1—we've had to level some critical thinking at some basics. that exercise, somewhat to our surprise and certainly to our disgust – allowed us to see through the facile garments worn by many modern forecasters. We'll get to that after Silvia.

First. The recession call.

As long-time listeners to the podcast will know, Demand Side does not see the recovery purported to have begun in July 2009. We see an economy bouncing along the bottom, a depression ameliorated by the New Deal institutions of social security and unemployment insurance, a continuing employment and income crisis. We see financial markets, including commodities now, where higher prices are founded on cheap chips from the Fed. We see an investment phase of the business cycle by its absence. The business cycle is broken. High profits, cheap financing, large cash balances on corporate balance sheets have failed to connect with the business cycle because the economy is driven from the demand side and the demand side is staggering under high unemployment, huge debt burdens and stagnating incomes.

The uncertainty excuse purveyed by the supply siders is very lame, when it is followed by "government policy" or "government regulation." The real uncertainty is about demand. Corporations which did well individually by increasing margins through downsizing and cost cutting are in the aggregate responsible for cutting the legs out from under any sort of real recovery. Demand is stagnant and risks another fall.

We get some concurrence from ECRI, the Economic Cycle Research Institute, although that shop headed by Laksman Achuthan is relying on the basic leading indicators and did not see the political business cycle. Gary Shilling, as you've heard here, is also on board. Most importantly, small business in the NFIB – National Federation of Independent Businesses – survey has been in step not only on this call, but on the whole non-recovery call. And this week, the Michigan Consumer Sentiment Index came in low, getting a vote for recession from the average citizen. Charts online at demandsideeconomics.net

The University of Michigan Consumer Sentiment final number for December came in at 72.9, a decline from the December preliminary of 74.5 and a dramatic decline from the November final of 82.7.

To put today’s report into the larger historical context since its beginning in 1978, consumer sentiment is 15% below the average reading (arithmetic mean) and 13% below the geometric mean. The current index level is at the 21st percentile of the 420 monthly data points in this series.
The Michigan average since its inception in 1975 during the five recessions is 69.3.

Now to

Idiot of the Week


Quickly turning from stimulus – which DID work in the ARRA back in 2009 – and Levy can see it in his own growth charts, he takes some shots at Ben Bernanke. We like that sport, and we've been doing it a lot longer than he has. You heard us say in 2008 that monetary policy won't work, can't work. Now it's mainstream.

But government stimulus, which is code for spending on real stuff, hiring real people, has worked, can work, will work. In terms Levy might understand, it is putting money into the economy, directly into the economy, not into the casino on the hill in hopes the rich will feel richer and let some slip out.

And housing as a non-monetary factor. The Fed is obsessed with housing. It is the bulls eye in their easy money obsession.

The non-monetary factor is the spending factor, THAT is common sense.


Didn't learn very much. As if Social Security had something to do with the downturn or low growth or the debt and deficit. Social security is supporting growth and not one nickel of the deficit or debt comes from social security. Tens of billions come from defense spending. Let's call war a corporate entitlement, maybe that will loosen some minds.

So co-idiots of the week, John Silvia and Mickey Levy. Notice we didn't pick easy targets, we didn't lampoon the weak-minded. Let's be clear, these are accomplished economists, but they have a difficult path to walk. Locked up in Neoclassical jail, and employed by the banks. They cannot talk about writing down the tremendous private debt, the first step in recovery, because their employers are marki ng that debt to make-believe in order to remain solvent. Not dissimilar to the Eurozone, where bank economists must insist on austerity, because if sovereign debt were restructured, at least if it is done before it is transferred to the ECB or individual nations' central banks, that takes down the economists' paycheck.

Now to the forecast.

January 1, we are rolling out the new Forecast Blog. remacro.com. Don't go there now. It is not ready. We have issues.

First, we want to continue to be better as in more accurate than the other forecasters. In one of the first posts on that site, we'll show you the chart of how many forecasters got the scale and timing of the Great Financial Crisis right. Then we'll trot out the Federal Reserve Governors' forecasts and show that skill in prognostication is apparently not attracted to money.

There are some issues.

First is the fact that the mathematical models used by many forecasters are DSGE, Dynamic Stochastic General Equilibrium models, that ignore money and banking, treat time as if it had no historical dynamic, and of course, constrain the outcomes into an equilibrium that plainly does not exist in the real world. That is one problem.

The second is that even those models that escape from the absurd assumptions of the Neoclassicals are still mathematical models that cannot see climate change, corporate dominance of decision-making, or other institutional structures that really form an economy.

The third is that the economy that is measured is not the real economy, but one of aggregated metrics. Growth can boom in prosperity or war. Inflation can be high in recovery or stagnation. Employment can be in healthy, high-paying or sick dead-end jobs. Depletion of resources and natural systems, goods versus bads, and public goods are all either ignored or wildly inaccurate in the GDP Growth economy of economists. That GDP Growth fetish is going to kill us all. Particularly when it favors policy which kills the economy. It is not so far from the short-term fixation of corporate executives which corrupts the long-term health of their corporation.

So, we have set for ourselves an improbable task: One, Describe an economy in real terms, actual terms, so that people can relate, and so it has relevance to the real ... actual ... world. Two, recalibrate so we can compare to other forecasters and see who comes out as most accurate. This means translating demand-side and medium term into supply-side short-term numbers, as well as stripping away much of the real ... actual ... economy to find the comparable numbers. All this without overwhelming you with data and verbiage.

Should be fun. We will hope to get your help on that, via feedback.

So, today's podcast, as always, brought to you by Demand Side the book. DemandSideBooks.com, AND by remacro.com, because as Karl Popper said, "Predictions and explanations are symmetrical and reversible." That is, as we say, if your predictions are no good, then your explanations are no good, your models are no good.

Monday, December 17, 2012

Today on the podcast, John Casidy on austerity in Britain, Robert Kuttner on the winning hand being played by president Obama, and some thoughts on the housing air quote recovery.
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It’s Official: Austerity Economics Doesn’t Work, by John Cassidy:
With all the theatrics going on in Washington, you might well have missed the most important political and economic news ...: an official confirmation from the United Kingdom that austerity policies don’t work.

In making his annual Autumn Statement to the House of Commons on Wednesday, George Osborne, the Chancellor of the Exchequer, was forced to admit that his government has failed to meet a series of targets it set for itself back in June of 2010, when it slashed the budgets of various government departments by up to thirty per cent. Back then, Osborne said that his austerity policies would cut his country’s budget deficit to zero within four years, enable Britain to begin relieving itself of its public debt, and generate healthy economic growth. None of these things have happened. Britain’s deficit remains stubbornly high, its people have been suffering through a double-dip recession, and many observers now expect the country to lose its “AAA” credit rating.

One of the frustrations of economics is that it is hard to carry out scientific experiments .... But not in this case. Thanks to Osborne’s stubborn refusal to change course—“Turning back would be a disaster,” he told Parliament—what has been happening in Britain amounts to a “natural experiment” to test the efficacy of austerity economics. For the sixty-odd million inhabitants of the U.K., living through it hasn’t been a pleasant experience—


That austerity has led to recession is undeniable. Despite the Bank of England slashing interest rates and adopting a policy of quantitative easing, consumer and investment spending have remained depressed. Osborne places much of the blame on continental Europe, Britain’s biggest trading partner, but that’s a lame excuse. ... The proper reaction to a negative external shock is to loosen fiscal policy, not tighten it, much less tighten it violently. But Osborne was determined to go ahead with his grisly exercise in pre-Keynesian economics.

... The debt-to-G.D.P. ratio, which Osborne originally said would peak at about seventy per cent, has now hit seventy-five per cent, and it is forecast to come close to eighty per cent in 2015-2016. It was supposed to start falling next year. Now, it is set to keep climbing until at least 2017-2018.

A comparison with what has happened on this side of the Atlantic is illuminating. For the purposes of the natural experiment, the U.S. can be thought of as the control.
and here Cassidy mischaracterizes the American effort as Keynesian stimulus. I guess that depends on what your definition of Keynesian is. If you mean policies that would have been advocated by Keynes or his followers, No. If you mean deficits, Yes. But they are the deficits of the Right. Tax cuts and letting government borrow so as to transfer the money to boost consumer sales. Not jobs nor efforts to reduce consumer debt. Better than intentional austerity, I suppose, but no recipe for recovery. Cassidy fairly notes that the deficit as a percentage of GDP is falling faster in the U.S. than in Britain.

He concludes the article.
Let’s go over that one more time. Having adopted the policies of Keynes in response to a calamitous recession, the United States has grown more than twice as fast during the past three years as Britain, which adopted the economics of Hoover (and Paul Ryan). Meanwhile, the gaping hole in the two countries’ budgets has declined at roughly the same rate, and next year the U.S. will be in better fiscal shape than its old ally.

Read more:

Better Late Than Never

by Robert Kuttner
He lays out the optics:
In his budget proposal, the president offered no cuts in Social Security, and only $400 billion over 10 years in Medicare and other savings, money that can be gotten by allowing Medicare to negotiate bulk discounts with drug companies and other administrative savings, without raising the eligibility age or otherwise cutting into benefits.

The Republicans, meanwhile are revealed as the people who would push the economy off a cliff in order to fight for tax breaks for the richest 2 percent; the party that would rather cut benefits in Medicare and Social Security than have the wealthy pay even the relatively low tax rates of the Clinton years.

Then Kuttner turns to the policy history
Obama, belatedly, is doing the right thing.

He tried taking big savings out of Medicare in order to finance his Affordable Care Act. The Republicans pilloried him for it.

He tried pivoting to fashionable austerity, appointing the Bowles-Simpson Commission to propose far deeper budget cuts than the economy required. The commission majority report offered a deflationary program of cuts in Medicare, Social Security, and no rate increases on the taxes paid by the rich. Mercifully, the commission failed to get the necessary super-majority for its proposals.

And he tried offering cuts in Social Security and Medicare in order to get a budget deal in 2011 ... But the refusal of the Republicans to consider even a penny of tax increases saved the President from himself.

Now, as a last resort, President Obama has come around to sensible economics and smart politics -- no cuts in social insurance benefits, no backing down on tax hikes for the rich, no deeper deficit cuts until the economy is stronger. His plan even proposes $50 billion in new public investments -- not enough but a big step in the right direction.

What's so heartening is not just that Obama is helping voters appreciate what Republicans really stand for but that he is turning his back on the echo chamber of deficit hysteria ginned up by Wall Street as a way of cutting social insurance and protecting low tax rates on the richest. Seeing Pete Peterson and his corporate deficit-hawk cronies lose this fight is as satisfying as seeing the Republicans lose.
So what happens next? Kuttner offers some scenarios:

The Republicans will continue to huff and puff that it's Obama's fault if taxes go up for everyone. But the fact is that the Senate has already approved a continuation of the Bush tax cuts for the bottom 98 percent -- all the Republican House has to do is concur and Obama will sign the bill into law.

The business elite, through the corporate-funded campaign "Fix the Debt" campaign, will continue to warn about the perils of the automatic tax hikes and spending cuts -- the dreaded fiscal cliff -- and press the two parties to meet each other halfway.


If Obama hangs tough and the budget briefly goes "over the cliff" in the form of automatic tax increases for everyone and mandated indiscriminate spending cuts that risk sending the economy back into recession, the Republicans are at last set up to take the blame that they richly deserve.


The risk is that when the negotiations finally get to the end game, and Republicans are forced accept the tax deal, Obama may succumb to pressure to cut Social Security and Medicare, so that he can say that he, too, gave ground on issues that were difficult for his party. The risk is that he will listen to his inner bipartisan.

Now some thoughts on housing.

The real economy perspective is that housing will not recover until the enormous mortgage debt that still lurks there is written down to the value of the house. The value of the house is a function of jobs and incomes. The financial economy perspective is that by a combination of low interest rates and starving investors of yield in less risky assets, the Fed can inflate the value of housing as a financial investment back to some bubble level.

Bill McBride, formerly known as Calculated Risk, came out of the housing market of California. He had a recent post, let's see, here,

Some Bullish 2013 House Price Forecasts

J.P. Morgan Chase & Co. expects U.S. home prices to rise 3.4% in its base-case estimate and up to 9.7% in its most bullish scenario of economic growth. Standard & Poor’s, which rates private-issue mortgage bonds, on Friday said it expects a 5% rise in 2013.

The J.P. Morgan analysts boosted their base-case estimate from 1.5% ...

McBride counters, "I think house prices will increase further in 2013 based on supply and demand (there is little supply, however I think it is possible that inventory will bottom in 2013), but I doubt we will see a 9.7% price increase next year on the repeat sales indexes.

The WSJ's Nick Timiraos makes an amusing comment on Twitter: "All these analysts forecasting monster home price gains were forecasting moderate declines a few months ago."

And McBride, as apparently all economists are wont to do, reminds you that he is never wrong
At the beginning of the year, the consensus was that house prices would decline for at least another year. When I posted The Housing Bottom is Here in early February, many people were surprised. How views change!
True to the role of being a recovery denier, Demand Side denies the housing recovery, as well. Our view is in the Pacific Northwest, but it is not just the weaker sales prices here that are different than McBride's world.

"Recovery" is a term we are told does not refer to the level, but to the direction of change. That is, in the business cycle there is peak, recession, trough, recovery, and you can throw in expansion. If your economy is improving, you are in recovery, no matter that the level of GDP or jobs or in this case house prices is below – far below – previous levels.

But the business cycle is broken. The housing market is not responding to supply and demand, except as it is jinned up by public policy. Increased demand in the last half of 2012 will fade, we fear, because the fundamentals are absent.

Why is there demand in housing? Because the Fed under Ben Bernanke is obsessed with housing. Zero percent interest rates for the past four plus years. Trillions of dollars in direct purchases of mortgage securities. Jawboning at every opportunity. I say they are obsessed with housing, but that is not quite true. They are obsessed with housing as a financial security, not housing as a place to live. Their object is not to make houses affordable to people. Their object is to keep the price as high as possible by keeping the financing as low as possible and by pushing investors into this arena. This, they hope, will give some value to the mortgages on banks' books and in their own portfolio.

McBride's tight supply is something we heard repeated here in Seattle last week. Inventories at low levels. On the other hand, we heard that banks are not foreclosing, nor listing properties they own, and homeowner can stay in their houses for a year without getting a letter from the bank. Meanwhile those at or near negative equity are holding on. After all, if they sell, they most likely want to buy somewhere else. And without at least 20% equity, they don't have the down payment. This is shadow inventory that is going to depress any significant rise in prices.

And a word about prices. While the sticker price is low but rising, two other prices are more salient. Both are related to affordability. One, Is the price really low if you cannot afford the downpayment or qualify for the loan? It used to be all you needed to do was fog a mirror and you could get a loan. Now you need a Warren Buffet credit score. Secondly, Is the sticker price the appropriate price to watch? In the real world, we look at the monthly payment. That monthly payment, if you qualify for a loan, is still dropping because of dropping interest costs. Still going down. Still deflating.

So, housing recovery? Prices bottomed? We've heard it before. Three years running it led Demand Side's year-end account of events widely reported that never really happened. Will it appear again this year? Along side, perhaps, the recovery of the economy?

We'll see

Today's podcast brought to you by pragmatism.

It is considerably frustrating to watch bad economics destroy human lives and lead us further and further from real recovery. The economics of austerity rules in official D.C. and on Wall Street. That is, economics in favor of austerity, in favor of cooking the planet, in favor of frivolous privte goods at the expense of essential public goods. Why is the ECB's Mario Draghi a person of the year?

We just don't have time for things that don't work. And what greater irony or bigger joke on the future to have hysteria force people out of Medicare and no concern at all about the destruction of the livable planet. The climate deficit is growing exponentially. The social insurance deficit is an ant on an elephant. Yet

Saturday, December 15, 2012

Transcript: Is the Arab Spring coming to Europe and the US

Is the Arab Spring coming to Europe and to the US.

Revisiting Europe, we see Nouriel Roubini has apparently withdrawn his prediction of a Greek exit from the eurozone.

speaking from Berlin last week, Roubini said
“To keep Greece in the euro zone, effectively you need a transfer union, you have to realize that the problems of Greece are long-term, it’s going to take 10 to 20 years to do the austerity and the reform to stabilize Greece and therefore you have to give money and you have to be patient,”
Listen to this episode
“If you’re willing to do that for the sake of keeping the euro zone together, whether it’s economic reasons or political or geo political or foreign policy then Greece has a chance.”
The New York Times characterizes it thusly:
"The words are an about-face for the bearish economist, who in July forecast that Greece would exit the euro by 2013.

The probability of a Grexit is still “meaningful,” but less than 50% these days, according to Mr. Roubini, who is known as “Dr. Doom” for predicting in 2006 the global economic crisis.

I'm not sure they are a complete about face. I seem to recall Roubini opining that Greece could be bribed to stay in the Eurozone, the domestic cost being a decade of depression. That seems to be what is happening.

Last spring's restructuring, where the private bondholders got bailed out by the public banks with the understanding there would be no more restructuring seems to be by the board. Oops, as soon as those conditions were set, they were abandoned.
It is very unlikely Greece will hold together politically or socially under a decade of depression. Some of the scenarios are scary.

Will the Arab spring become the European Spring become the American Spring? Last year we were met with the remarkable revolutions across North Africa: Tunisia, Lybia, Egypt, elsewhere. Millions of often well-educated young people without prospects taking to the streets adn taking it out on the repressive, corrupt, authoritarian governments, freeing themselves to an uncertain, but more democratic future.

Highly educated, unemployed young people. Now a mark of the European economy.

Another recent New York Times article highlighted France:
a growing problem in France and other low-growth countries of Europe — the young and educated unemployed, ... go from one internship to another, one short-term contract to another, but ... cannot find a permanent job that gets them on the path to the taxpaying, property-owning French ideal that seemed the norm for decades.

This is a “floating generation,” made worse by the euro crisis, and its plight is widely seen as a failure of the system: an elitist educational tradition that does not integrate graduates into the work force, a rigid labor market that is hard to enter, and a tax system that makes it expensive for companies to hire full-time employees and both difficult and expensive to lay them off.

The result, analysts and officials agree, is a new and growing sector of educated unemployed, whose lives are delayed and whose inability to find good jobs damages tax receipts, pension programs and the property market. There are no separate figures kept for them, but when added to the large number of unemployed young people who have little education or training, there is a growing sense that France and other countries in Western Europe risk losing a generation, further damaging prospects for sustainable economic growth.
“It’s a disaster for everyone,” said Jean Pisani-Ferry, who runs the economic research center Bruegel in Brussels. “They can’t get credit, and they’re treated awfully by employers. And then there are all those young people in jobs that don’t match their skills.” The labor market, he said, is “deeply dysfunctional.”

Throughout the European Union, unemployment among those aged 15 to 24 is soaring — 22 percent in France, 51 percent in Spain, 36 percent in Italy. But those are only percentages among those looking for work. There is another category: those who are “not in employment, education or training,” or NEETs, as the Organization for Economic Cooperation and Development calls them. And according to a study by the European Union’s research agency, Eurofound, there are as many as 14 million out-of-work and disengaged young Europeans, costing member states an estimated 153 billion euros, or about $200 billion, a year in welfare benefits and lost production — 1.2 percent of the bloc’s gross domestic product.

In Spain, in addition to the 51 percent of young people who are looking for work, 23.7 percent of those 15 to 29 have simply given up looking, said Anne Sonnet, a senior economist studying joblessness at the O.E.C.D. here. In France, it’s 16.7 percent — nearly two million young people who have given up; in Italy, 20.5 percent.

As dispiriting, especially for the floating generation, is that 42 percent of those young people who are working are in temporary employment, up from just over one-third a decade ago, the Eurofound study said. Some 30 percent, or 5.8 million young adults, were employed part time — an increase of nearly 9 percentage points since 2001.

That trend is especially evident in France, where 82 percent of people hired today are on temporary contracts, said Michel Sapin, the labor minister.
Ms. Forriez said: “Yes, it’s true, you can find internships or apprenticeships, no problem. The companies take you with open arms. But when you speak of employment, of a permanent contract, it seems they no longer need anyone.”

Ms. Sonnet, the O.E.C.D. economist, said that high youth unemployment is a regular problem in France. Companies are afraid to commit to permanent hiring when economic growth is stagnant and charges for social benefits are so high, and the educational system tends to value liberal arts over technical or industrial expertise.

They “often don’t learn the skills that employers need,” she said. “They’re simply not ready to work.” Ms. Sonnet promotes more use of apprenticeships, as in Germany, where students work part time while they go to school.

François Béharel, the president of Randstad France, a branch of the multinational employment agency, said that the problem of youth unemployment among the educated is worsening at a time when employers are crying out for engineers, computer technicians, electricians and welders.

“We have to begin with parents — ‘Stop dreaming of white collars!’ ” Mr. Béharel said. “Blue collars, there really is a true path for them,” he said. But small and medium-size companies, which are France’s primary employers, do not have the resources or the profit margins to train the untrained.

“We’ve piled up battalions of students in general education, and everyone knows that there aren’t 10,000 among them who are going to find the job that they imagined when they entered university,” he said. Only 40 percent of students entering university get their degree; the rest drop out, trained for nothing.

Still, he said, a college degree is the best path to a job — only 10 percent of those with diplomas are unemployed after four years, while 40 percent of those without diplomas are jobless. But the passage to finding that job is now longer, costly for the person and for the state. It also delays marriage, house ownership and retirement.

At the Real World Economic Review, John Schmitt observes about the commentary:
... the NYT argues, is “a failure of the system,” which has as its key features: “an elitist educational tradition that does not integrate graduates into the work force, a rigid labor market that is hard to enter, and a tax system that makes it expensive for companies to hire full-time employees and both difficult and expensive to lay them off.”

But, wouldn’t it be useful for NYT readers to know how the United States compares? The NEET numbers cited in the story are OECD calculations for 2010. For the same year, the same source puts the figure for the United States at 16.1 percent — not far from France (16.7 percent), which the piece paints as suffering through a “growing problem” common to “other low-growth countries of Europe.”

If NYT readers knew the U.S. NEET rate, they would be able to ask why the rates here are so close to those in France even though we don’t have a euro crisis, or apparently, “an elitist educational tradition,” or rigid European-style labor markets, or high European-style taxes, or strong European-style job protection laws.
And, wouldn’t it be useful to know if other European countries are faring any better? The same OECD data also show some EU countries are outperforming the United States. The NEET rate in Germany, for example, is only 12.0 percent; in Denmark, 10.5 percent; in the Netherlands, 7.2 percent. Compared with the United States, all three have highly regulated labor markets, high unionization rates, and high taxes. How have they managed to provide better opportunities for their young people than France and the United States?

Demand Side observes that the concept of NEET ignores also the realities of the Arab Spring. the problem is not education, the problem is jobs, incomes and demand. to say, as the article does that ample jobs await the appropriately trained ignores a couple of items: the traiing is a cost and a risk to the potential employee that could easily be borne by the employer if the economics were right. In other words, companies needing welders, electricians, engineers and crying for the absence of them could certainly train likely candidates for those positions on their own dime. They want the skills, after all, but they want the employee or the state to pay for them.

Those skills are often in technical and engineering fields of automation, we note, and jobs are being automated or outsourced as a matter of corporate competition, reducing incomes to all, reducing demand in the private sector, and so reducing the margins needed to pay for the education and training they demand, and increasing the corprate whining for others to pay for the education and training they want. It is an internal dynamic of the capitalist markets, nto a failure of workers or government, that creates the labor economics the capitalist markets are complaining about.

Here in the U.S., the graduates of Wharton and other expensive high profile business schools are likley looking with a jaundiced eye on similar claims by American companies, that they have jobs, but no qualified applicants. It wasn't a decade ago that Wall Street was demanding with six-figure starting salaries that physics and engineering students turn to finance. We see how well that worked out. For the economy and for the students themselves, now out of work in that field, but carrying enormous debt.

Two decades ago it was the computer science degree. Big influx of people into that arena, now manning the help desk somewhere, trying to carry their student debt forward. What happened to the six figure starting salaries? Now they're going to new graduates with more timely traiing.

And we see that well-meaning and motivated young people, and some who just cannot find work, are being fleeced by for-profit technical colleges. Ruin ed lives because we as a nation could not provide a fair start. And this a legacy of the nation which produced the GI bill and grew on cheap higher education as an opportunity for all. We ought to be ashamed.

Meanwhile the intelligent and forward-looking have gotten educations in environmental sciences, seeing that we are cooking the planet and the rational answer will lead to demand for these sorts of educations, not to mention they are the challenges that inspire the young.

Ooops. What we need, says the capitalist market economy, are engineers and welders to extract cheap energy and increase the heat on the collapsing environment. We're not cooking the planet fast enough.

Brought to you by Climate Change

Action on climate change is World War II. It can bring us out of depression and at the same time make a survivable planet.

Thursday, December 13, 2012

L. Randal Wray observes "As Global Growth Slows, Auserians Demand More Blood-Letting"

Great Leap Forward

You don’t often encounter controlled experiments in the social sciences. Nations usually balk at using their economies as Guinea pigs. But right now they’re lining up to see if it really is possible to cut your way back to prosperity. So here’s the question: is starvation a cure for hunger? Over coming months we’ll find out.

I’ve just returned from interesting conferences in Berlin and Helsinki. The first was a Levy Institute-Ford Foundation Minsky conference held at Deutsche Bank in Berlin on Debt, Deficits and Unstable Markets. (http://www.levyinstitute.org/conferences/berlin2012/) It more-or-less followed the format of the long-running Levy-Minsky conferences held each April in New York. Unlike most academic conferences, these Minsky conferences actually include interesting presentations that touch on real world policy issues. One of the better presentations was by Vítor Constâncio, Vice President, European Central Bank, titled “Completing and Repairing the Economic and Monetary Union”. Yes, you read that right—a VP of the ECB. Apparently at least some at the ECB have finally recognized what is wrong with the set-up of the EMU. His assessment of the problems comes mighty close to what MMTers have been saying for the past decade. His solutions are timid, but I suppose there are constraints on what he can say. Still, I recommend that you take a look at his talk (at the Levy site). I’ll draw on some of his points below.

The second was The Return of Full Employment Policy Conference in Finland that I’ve mentioned previously. (http://sorsafoundation.fi/2012/10/04/seminar-on-full-employment-policy/) This one focused narrowly on the “deficit owl”, functional finance, MMT approach to using public policy to achieve full employment. It provided a frontal attack on EU austerity. One of the more interesting (albeit brief) presentations was by Lena Sommestad, an MP in Sweden (you can watch the video of the panel discussion here: http://www.youtube.com/watch?v=ZKTuHM6qkgA&feature=plcp). While Sweden is not in the EMU, she was concerned that this drumbeat for austerity has also gripped her government.

Both conferences raised some hope that there are outposts of sanity in Europe. However, that hope was dashed as I returned to the US and was inundated with media reports of the latest policy moves—from the UK to Ireland and to Germany, every government is calling for more blood-letting. Britain is planning to cut a million jobs from the public sector, and Chancellor of the Exchequer Osborne says austerity will continue through 2018! Remember that the global downturn began in 2008, so he’s planning to prolong the Great Recession to a 1930s style Great Depression length of at least a decade.

Here’s the logic: so far the cut-your-way to prosperity has generated only more suffering, so greater and more prolonged cuts will be needed to achieve the elusive prosperity. (http://nyti.ms/11EOF9w) Yep, the patient is weakening, so we’ve got to drain more blood to restore health.

Over in Ireland, things are even more desperate. Since five rounds of blood-letting have failed so far to revive the patient, the government is imposing yet a sixth austerity plan. (http://nyti.ms/11EDYUi) We know that those Irish are tough, but this is getting a bit ridiculous. The remedy to famine is now thought to be more famine.

And, finally, Chancellor Merkel has held out the hope of some consideration of debt relief for troubled member nations—but not before 2014 and only if they agree to impose more suffering on their starving people first. You see, the patient is not dead enough to stop the bleeding just yet.

(And not to be outdone, our own resident comedy relief team—University of Chicago economists—is demanding more suffering in the US. Not merely content with general statements about the need for austerity programs, Casey Mulligan is arguing that we need more poverty (“Poverty Rates Should Have Risen”, http://economix.blogs.nytimes.com/2012/12/05/poverty-should-have-risen/) . He insists that it is terrible, just terrible!, that poverty rates have not risen higher in the downturn. I, for one, wish we could find a way to let all the “Chicago Boys” experience some homelessness for a few weeks this January.)

Let’s think back to the formation of the EMU. Back then, Europe had a standard of living that was the envy of the world, or at least of most of the world. There were, to be sure, big differences across Europe in terms of material living standards, but in many cases that difference was tolerably well compensated by a pleasant social environment. Even a visit to the relatively poorer Mediterranean periphery nations could produce envy—at least in me.

There were three laudable goals of unification: convergence of living standards (poorer nations enjoying improvements); social/cultural/political/economic unification; and creation of a huge internal market. I want to focus in this blog on the last goal.

Let’s recall the economic theory that reigned during the final push to unification because it had a lot to do with the way the monetary union was formulated. And note that it was largely our Chicago Boys who dominated the creation of this pathologically false doctrine.

First, individuals and markets were presumed to be rational in a very specific sense: they know how the economy works and form expectations in such a way that only random errors are made. There is no uncertainty, although mistakes are made (you know a fair coin will come up heads fifty percent of the time in repeated tosses, but there’s a risk you could lose five times in a row). Financial markets are “efficient”, with prices reflecting fundamental values. Importantly, these models do not allow for default. So speculative bubbles and crashes that generate defaults are ruled out by assumption. Essentially, neither money nor finance really matters—with no default risk and no uncertainty, underwriting is unnecessary. Money’s role in the economy comes down to determining inflation.

Second, the reigning orthodoxy abstracts away from institutions; to the extent that institutions are considered at all, they are seen as obstructions to the efficient operation of free markets. Governmental institutions, in particular, are mostly bad, interfering with equilibrating forces. Likewise labor unions and consumer protection—these necessarily lead to suboptimal results.

Third, market forces are strongly equilibrating. While exogenous shocks might momentarily move markets away from equilibrium, unregulated markets will quickly restore equilibrium.

Fourth, monetary policy is potent but should be limited to fighting inflation. As markets are naturally stable, there is no need to use policy to nudge the economy back to equilibrium. In the short run, inflation is dangerous because it fools people into acting against their own self-interest as they mistake nominal price changes for “real” (relative) changes. (In the long run, money doesn’t matter at all.) Hence it is important for the central bank to target inflation.

Fifth, fiscal policy is completely impotent; for every dollar spent by government, the private sector reduces its spending by a dollar—or even more. This is true even if the government deficit spends—the extra dollars do not call forth extra production because everyone knows that deficits today mean higher taxes in the future. So people today set aside more savings in order to meet the bigger tax bill tomorrow.

Sorry for all the esoteric theory, but it helps to frame our understanding of the set-up of the EMU. The idea was that adoption of the single currency would result in lower transactions costs of trade across borders. Opening those borders to financial institutions would similarly lower the costs of financial transactions by increasing competition. With free markets and open borders, the euro would lubricate trade in goods and services so that it would flow as freely as grass through a goose.

Monetary policy was moved to the ECB which pursued a single inflation-fighting mandate. By contrast, fiscal policy would be retained at the individual member level—reflecting its subordinated function. Maastricht’s “growth and stability pact” would constrain national fiscal policy by imposing deficit and debt limits. By constraining those governments, the vaunted market forces would be free to pursue growth. Importantly, financial regulation and responsibility for crisis resolution were left in the hands of the severely fiscally constrained individual member states.

In truth, there was almost no regulation—reflecting the belief that financial markets are efficient—and there was no real planning for crisis resolution. After all, unregulated and unsupervised banks would never do anything stupid!

Various other barriers—especially labor market regulation by unions and governments—were reduced or removed. The social safety net was under constant attack—who needs a net if nothing can ever go wrong up on the trapeze?

As VP Constâncio argued in Berlin, for this set-up to work, three (at least) conditions would need to be met.

A) Business cycles in the member nations would need to be synchronized. This is because with the centralization of monetary policy, all members would face the same interest rate set by the ECB. If, say, Germany was growing very vast, that would dictate on conventional thinking a high interest rate; but if Portugal was growing slowly it would need a low rate.

B) Flexible and competitive internal markets would be needed to ensure a quick rebalancing after a shock. This is based on the belief that “free” markets would move economies back to equilibrium.

C) There would be in place shock absorbers of sufficient size in each member state to deal with any idiosyncratic problems. It was believed that “fiscal capacity” to deal with a shock would be ensured by running tight fiscal policy in normal times, so that deficits and debt could expand when a shock hit. That was part of the thinking behind setting maximum ratios in the Maastricht agreement (to maintain policy space to manage a crisis).

In my view all three of these conditions are problematic because they rely on the conventional macroeconomic model described above. First, they presume that central banks can and should fight inflationary pressures through interest rate setting. I cannot get into it here, but there is neither evidence nor sound theory to justify this; a more accurate characterization of central bank omnipotence is the Wizard of Oz spinning dials and pulling levers that are not attached to anything.

Second, they presume that markets are equilibrium-seeking, and that disequilibrium is caused by external shocks. In reality, markets are highly unstable and it is the existence of constraining institutions that keep markets from flying off toward Pluto. After the Global Financial Crisis, if anyone still believes in the equilibrating forces of markets, I suppose they are already living on some virtual Pluto.

Or at the University of Chicago. (Same thing.)

Finally, it should always have been clear that if you deregulate financial institutions, allow them to cross borders, and permit them to layer on debt upon debt upon debt, they would blow up any of the member states in the first serious financial crisis. There was no way that any member would have the fiscal capacity to deal with such a crisis no matter whether it had always run budget surpluses.

Indeed, the countries that had the “best” fiscal policy (budget surpluses)—Ireland and Spain—were the ones with the worst problems in the financial sector. Anyone who understands the three sector balances approach of Wynne Godley knows why: if the government runs a surplus then the private sector will run a deficit (unless there is a large enough current account surplus—see below; that was made impossible by Germany’s economic strategy).

And so the banks blew up Ireland, and in its attempt to fall on the sword to protect French and German banks, the Irish government blew up its budget. With no central authority concerned with financial crisis, and with the banks highly interconnected (debts on debts!), the crisis spread like a deadly viral contagion across Euroland.

Again, the problem was that neither macroeconomic theorists nor Euroland policy makers understood that financial flows are mostly related to ownership of financial assets rather than to trade flows. That’s what “financialization” or what Minsky called “money manager capitalism” is all about. Even now most analysts point their fingers to current account deficits of some of the members and claim that the financial crisis was caused by profligate consumption of imports by overindulging Mediterraneans.


Recall that one of the arguments for the creation of the EMU was to develop a large internal market, something on the order of the size of the USA. With a large internal market, Euroland’s producers would not have to rely on export sales. That was a good idea; and if they could rely on internal markets, they would not have to slash wages to reduce labor costs to Asian levels in order to compete for global trade outside the EU.

Following the USA, they could ignore internal current account deficits, since, after all, they all use the same currency. They have a single payments system, run through the ECB—which clears accounts of the national central banks. Internal current account deficits don’t matter, at least with respect to the financing.

Unfortunately, the EU made one big mistake that we did not make in America. When the Fed was created in 1913, we made sure that the borders of the regional central banks did not coincide with state lines (indeed, Missouri is home to two regional central banks—it’s nice to have an influential representative in Washington to send the pork home!). That means that the payment-clearing does not coincide with states.

In the USA we do not know or care which states run current account deficits. Payments clear whether or not Mississippi runs a current account deficit forever. It is sustainable. The Fed makes it so. And it does not matter if the Federal Reserve of Kansas City always runs a clearing deficit with the Federal Reserve of St. Louis. It is sustainable. The Fed makes it so.

In Euroland, the Target 2 system accomplishes the same thing for national central banks: accounts clear. But here’s the problem. The little accounting elves keep track by national borders. They report that the naughty Greeks import more from the other member states than they export to them. Profligate consumers! Shame, shame. Tighten your belts!

Rather than creating one great big economy, the EMU was set up to foster competition among the member states to see who could export the most to neighbors. Germany won. How? Through painful deflationary policies to keep wages in check, assisted by the fortune of the fall of the Berlin Wall that brought in waves of low wage and high skilled East Germans to the labor force.

And so now Germany chastises the hapless Greeks, Italians, Spanish and Portuguese for losing the Hobbesian dog-eat-dog Mercantilist battle for internal export markets. The proposed solution is austerity everywhere. The inevitable outcome will be race-to-the-bottom dynamics to slash wages and living standards.

We’ve been there before. Remember the 1930’s? Made worse by trade policies such as the Smoot-Hawley Tariff Act of 1930. The EU has the Maastricht No-Growth and InStability Pact.

European leaders are seeking déjà vu all over again.

What should they have done differently? First they should have prohibited a member state from purposely deflating to gain competitive advantage. Germany’s strategy sucked jobs out of the periphery and should have been penalized as anti-EMU behavior. Second, they should have ignored current account deficits arising from internal trade. And third, they should have created jobs in those nations losing them to internal trade.

What happened, instead, is that as nations lost jobs to German imports, their unemployment rates rose. In some cases, their households tried to maintain living standards through borrowing, and their economies relied on asset speculation (especially real estate) to create income and jobs. In other cases they tried to compete by adopting austerity—which of course could never work for the EU as a whole precisely because it destroyed the big internal market the EU was trying to create.

Here’s the most important conclusion. If you want to create a monetary union, you need to forget the internal current account outcomes and focus instead on employment. The trade flows all take place in the same currency and can always be financed. Internal deficits are sustainable. But unemployment is not.

Euroland needs jobs, not austerity.

Wednesday, December 12, 2012

Steve Keen's presentation in Berlin, "The Debt Issue in Neoclassical Economics" (video)


My presentation at the Rosa Luxembourg Foundation in Berlin today on how Neoclassical economics misunderstands the role of private debt in a capitalist economy. I show how to use my Minsky program to model both the Neoclassical “Loanable Funds” vision of lending and the empirically-informed Post Keynesian “Endogenous Money” model.

Keen is also about to start a Kickstarter campaign to raise additional funds to develop Minsky. Please “watch this space” and be ready to help promote this campaign and help fund it. Minsky as it stands has been written by one programmer in about 800 hours. I want to be able to hire 3 programmers for a minimum of 2 years to fully develop the program.

Tuesday, December 11, 2012

James K. Galbraith on"A question of Institutions: Why in spite of Reactionary Economic Ideas the US Still Survived the Great Financial Crisis and Europe Did Not"

James K. Galbraith in an extremely useful historical and institutional view of the American and European situations. The speech, entitled "A question of Institutions: Why in spite of Reactionary Economic Ideas the US Still Survived the Great Financial Crisis and Europe Did Not," delivered to a seminar on full employment policy in Helsinki Finland, December 2012.

The event was organised by the Foundation for European Progressive Studies with the support of the Kalevi Sorsa Foundation and the Finnish Confederation on Trade Unions (SAK).
Listen to this episode

Material from the Conference website:
It is often argued that the era of full employment and Keynesian economic policy is over. Most orthodox economists claim that, in the long run, real full employment cannot be achieved with demand management policies. Active demand management is, thus, deemed to be too costly and inflationary.

Top Post-Keynesian economists James K. Galbraith and L. Randall Wray, however, argue that achieving full employment through demand management is still perfectly possible. They suggest that, in order to achieve full employment and carry out democratic economic policies, governments have to break out from the pressures of the private bond markets.


14.00–14.15 Opening
Ernst Stetter, Secretary General, FEPS
Mikko Majander, Director, Kalevi Sorsa Foundation

14.15–15.00 A Question of Institutions: Why In Spite of Reactionary Economic Ideas the US Still Survived the Great Financial Crisis, and Europe Did Not
James K. Galbraith, Professor, University of Austin Texas

15.00–15.45 Wray: Money, the State, and Employment as Anti-Poverty Policy: A Minskian Approach (ppt)
L. Randall Wray, Professor, University of Missouri – Kansas City

15.45–16.15 Break

16.15–18.00 Comments and Panel Discussion
Comments will be delivered by Olli Koski (Chief Economist, SAK), Jukka Pekkarinen (General Director, Economics Department at the Ministry of Finance) and Lena Sommestad (Professor of Economic History, MP in Sweden). They will join professors Galbraith and Wray in a panel discussion, which will be moderated by Dr. Ville-Pekka Sorsa (University of Helsinki).

Monday, December 10, 2012

James K. Galbraith and "Muddling Toward the Next Crisis"

James Kenneth Galbraith in conversation
with The Straddler

“Since the 1980s, the American business cycle has been based on financial and credit bubbles, and therefore on the enrichment, through the capital markets, of a very small number of people in a very few places. Truly we have become a 'trickle-down economy'—as we were not before. A rising tide may lift all boats, but recent business cycles have been more like waves, whereby certain sectors and areas ride the peaks before crashing to the shore. This is a sign, surely, not of the social evil of inequality per se but of the instability of bubble economies, closely associated with inequality of income, wealth, and power, for which we now pay a fearsome price.”

—James Kenneth Galbraith, Inequality and Instability

I think there is a tendency on the left to underestimate the success of the programs that created and sustained the middle class and the middle class mentality. There’s a tendency to focus on some statistical aspects of what’s happened to wages—median wages in particular—and to focus less on the role played by Medicaid, Medicare, Social Security, the housing programs, public education, and support for higher education, all of which gave us a population that had the attributes of a middle class society.

The story that is often told about what’s happened to factory jobs, and what’s happened to wage rates, is not a good way of getting at the threat to that existence. The typical story is that median wages peaked in 1972 and have been stagnant and falling since then. As a result, it must be the case that people who are working now are much worse off than they were ten, fifteen, twenty years ago. That’s not an accurate story—at least not up until the crisis in 2008—because over that period the labor force became younger, more female, more minority, and more immigrant. All of these groups start at relatively low wages, and they all then tend to have upward trajectories. So there’s no reason to believe that life was getting worse for members of the workforce in general. On the contrary, for most members of the workforce it was still getting better. Plus they had the benefit of technical change and improvement in the other conditions of life.

The real threat to the middle class is not there, it’s in the erosion of the programs I just mentioned. That is to say, it’s in the attack on the public schools, it’s in the squeeze on higher education, it’s in the threat to Social Security. When you look at housing, you have a very large unambiguous loss. Millions of people have been displaced, but many, many more have lost the capital value of their homes. They won’t be able to sell and retire on the proceeds.

So I think there is a threat to the middle class, but if I were talking about it in political terms, I wouldn’t be giving an abstract statistical picture of wages. This doesn’t connect to people’s experiences. If I were designing the boilerplate rhetoric of a popular movement, I would take a blue pencil to these statistical formulations. I don’t like the stagnant median wage argument—I think it obscures what actually happened. And I don’t particularly care for the “one percent” argument. I understand it has a certain power, but one can be much more precise about what it is you want to attack, and what it is you want to preserve and to build. I would cut to the chase: we need to tear down the financial sector and rebuild it from scratch in a very different way.

In our current situation, the financial sector makes its money by destroying, not by building. When one frames the issue that way, and when you try to explain to people why that’s so, I think they have a much clearer picture of what they’re facing and what should be done. Occupy Wall Street wasn’t wrong to focus on Wall Street. That was exactly right. But talking in terms of the “one percent”—which, after all, would be about 3.1 million people—doesn’t clarify what is truly at issue. What do people care about? People care about their public services, they care about their schools, they care about the environment in which they live, they care about safety, they care about the terms of student loans, they care about health care and retirement. When one talks about those issues, I think you connect much more effectively than by addressing this in terms of “the middle class,” which is itself a very abstract term.

We are going to come to a point of decision fairly soon as to whether the core institutions of the New Deal and the Great Society survive. It is a straightforward question: do we insure the whole population against old age, disability, or the loss of their income, or not? Do we provide a decent standard of health care and long-term care for the elderly and people in the final phases of life, or not? Is this a community that provides this as a matter of common insurance, or isn’t it?

The Predator State described a world in which the institutions of collective security survived courtesy of side payments. So Medicare survives—and, in fact, is strengthened under Bush—because the pharmaceutical industry gets a side payment. The Affordable Care Act is another example of that. It expands coverage in a way that protects the interests of the insurance industry. But what we should be doing is moving in the direction of increasing the coverage and reducing the cost of providing basic collective security. We also need to remove the incubus of the financial sector; we need to reduce the fixed costs that society pays for its basic services in order to ensure that there are resources for a spectrum of economic activities that we are not presently undertaking.

But I don’t think we’re going to go in that direction. I think the basic choice will be between muddling through on the present model, which is a modified predator state model, or going in the direction of the Ayn Rand model, which is a radical attack on those core institutions—an attack, incidentally, never undertaken by Reagan. We’re seeing the political debate moving in that direction and legitimating that possibility. And the danger of muddling along on the present model is that the more people become dissatisfied with it, the more willing they may be to take a risk on a total attack.

There is enormous political appeal in the promise to “bring America back,” after all—to get America moving again, to restore the alleged optimism of the last generation. It’s also baked into the cake of every economic model and every economist’s thought process. It’s very hard to raise the question of whether it’s really possible. There are a few people who do it. It is, of course, a habit in the Marxist tradition to view stagnation as normal and growth as extraordinary. I have never been a Marxist, but I think there are a number of reasons to believe that what we have just come through is a basic turning point and that the period from 1950 to 2000 was historically exceptional, and will not be repeated in the next fifty years.

So we need to think about how we cope with a truly fundamental change in circumstances—and that’s what we’re not doing. What troubles me is that it’s practically impossible to nudge the conversation in that direction and still remain within the pale of credibility of your listeners, because they so strongly want to believe that what you’re suggesting to them can’t be so.

Look at manufacturing. Now, there are some parts of the manufacturing sector that aren’t going anywhere because they’re very closely allied to advanced technology design, and efforts to outsource them tend to work poorly. Certain parts of aircraft manufacture, for example. And there are some parts that aren’t going anywhere because it’s just not ever going to be economic to import every single assembled car that the United States consumes. We produce millions of them—there may be a lot of the components that are imported, but ultimately you do the assembly closer to the customer. So I don’t think we’re in danger of completely losing the manufacturing sector. But that said, the number of people employed in manufacturing is going to go down. There’s just no way around that. It’s going to go down because there are still components of the manufacturing sector that we will eventually lose to overseas producers. And it will go down because in the course of productivity gains you can do the same amount of work with fewer people. That’s a reality. Another reality is that at this stage the manufacturing sector is a tiny fraction of the total workforce. The last number I saw was 11 million; it might be lower than that now. Everyone can complain about the Chinese and anybody else, but you can’t make them go away. The Chinese have a form of industrial organization that turns out to be a very powerful model, one that produces a lot of very low-cost, high-quality goods that are going to be out there. And it’s not within the power of the United States to wall off the country, even if it were in our interest—which it isn’t—to do so.

So then the question is, what do people do? I think the answer is that almost all of the jobs of the future—certainly the new jobs—will be service jobs. The important thing will be to construct institutions that give people decently remunerative stable employment doing things that are useful, worthwhile, and that contribute something to the needs of the larger community. It’s not too hard to figure out what it is that people need other people to do. We’re obviously not going to do very much residential construction for the near future, but we’re going to do a lot of home care and a great many personal services. We could support a great deal more artistic and cultural endeavors than we in fact do, if we could figure out how to run those things.

Returning to this idea of “normal growth”—I have a hard time making myself sympathetic to President Bush, but he came in after the peak of the Internet boom, right after the crash of the NASDAQ. There had been a big turning point there, and his problem was how to make it as minimal an experience for Americans as possible. The tax cuts compensated a lot of rich people for their capital losses. Then, after September 11th, interest rates were cut to practically zero in order to encourage people to get back into the market for cars and to discourage them from hoarding cash. The war in Iraq was not fought principally for economic reasons, but it raised the growth rate by a point or so in 2003. And then in 2004, they actually quite deliberately increased public spending as much as possible—they understood that they didn’t have enough public spending to keep the economy going. And basically the President said to the Congress, “I’ll sign any appropriations bill you send me. Spend away.” And they did. And they squeaked through that election. Behind all of this was the deregulation of the real estate sector, de-supervision, which was designed to put money through the economy on whatever terms possible. That is a real wrecking of the future. It gives you growth in the short term, but everything is set to melt down in a few years. They tried, of course, to push the meltdown past the passage of power to the next administration, and they almost succeeded.

With the Obama administration there was a vast failure to look at the crisis in a realistic way—to assess what it actually was. When you look at the period of, and immediately following, the crisis, the new administration bought into the view that this was a temporary event, and that there would be—at some point—a return to the normal growth path. They didn’t assess the possibility that this wasn’t true—that we’d reached a turning point and we were not going back to that path. And therefore, they created expectations that they could not meet. What they did was vastly too small, and they treated the financial sector as though it were going to behave in the future the way it had behaved in the past—namely, making loans that support economic expansion. But in the environment that we were in—which was basically a debt-deflationary environment—the financial sector makes money not by promoting growth, but by promoting contraction: by shorting things, driving down prices, selling off assets, liquidating, and foreclosing.

So by keeping the financial sector alive, the administration basically kept alive a panoply of institutions which had at one point been constructive but were now purely destructive. And as a result, the notion that the government was going to be the saving force lost steam. It lost credibility because they didn’t take the full spectrum of measures that were required. And because they hadn’t made clear to people from the beginning what they were actually facing, they opened up the window to every quack in the business who had a magical solution—and that includes the Grover Norquists and it includes the Paul Ryans. Plus, you’re faced with large budget deficits—which people attribute more importance to than they actually have—that can easily be turned into an argument supporting cutting government.

The reality is that most operating businesses, if they could rely more on Social Security and less on their own contributions to retirement, more on public health insurance and less on employer contributions, they’d be much better off. For most of basic American business, the more you have insurance schemes handled by the public sector, the better off you are. But there are parts of the plutocracy that have always regarded this as a threat in principle to private insurance companies. It’s the threat of a good example. The government runs an insurance company—it’s basically an office building full of bureaucrats and computers. They don’t have fancy salaries or fancy perks. They’re doing this pretty well on a civil servant’s income, and without lots and lots of people to try and separate the healthy from the sick. They just enroll everybody. And guess what? It’s a very functional system. But there are some parts of the plutocracy that just don’t care what happens to the broader population, and for whom, as I say, the fact that the government runs very efficient, comprehensive insurance programs is politically offensive.

There is also an element of money-grubbing associated with opposition to government insurance programs—people who imagine they could make money running funds, or biting into the insurance market. So again we come back to the crucial issue: it’s the power and the instability associated with having the economy run by bankers and hedge fund managers that is the problem.

James K. Galbraith holds the Lloyd M. Bentsen, Jr., Chair in Government/Business Relations at the LBJ School of Public Affairs at the University of Texas, Austin. A Senior Scholar of the Levy Economics Institute, he also directs the University of Texas Inequality Project and is chair of Economists for Peace and Security, a professional association. He previously served on the staff of the U.S. Congress as executive director of the Joint Economic Committee.

On Sunday, August 26th, The Straddler met with James Kenneth Galbraith at his Townshend, Vermont home.

We had previously spoken with Galbraith for the springsummer2010 issue, using his 2008 volume, The Predator State, as our point of departure. In that book, Galbraith argued that over the past thirty years there had been a transition from the sort of economy described by his father, John Kenneth Galbraith, in The New Industrial State (1965)—where conglomerates run by technocratic, mid-century organization men (the “technostructure”) were the primary driving force—to one in which large corporations had primarily come to serve the individuals who ran them (i.e., the “CEO class”).

Galbraith’s most recent book, Inequality and Instability, seeks both to provide a method by which to reliably measure inequality in the U.S. and across the world, and to point up very concrete reasons for concern about increasing inequality. Rather than focusing on questions of “comparative welfare analysis” using provocative statistical measures whose utility is limited (for example, CEO-to-janitor pay ratios or median income stagnation over time), Galbraith and his team bring a new method to the question by applying a consistent statistical measure to a more comprehensive set of world economic data.

Galbraith’s inquiry results in several interesting claims, foremost among them that the fundamental deleterious effect of income inequality is economic instability. But this instability is not a result of inequality; rather, inequality is a symptom of the shaky and, in the end, unsustainable foundations of an economy lurching from crash to crash as it maintains its reliance on credit-fueled stock or asset bubbles that provide massive rewards to select few and always changing sectors (finance being the one constant) in which select few highly remunerative jobs exist. Speaking of the nineties, for example, Galbraith writes:

The problem was not that rising economic inequality was unpleasant; on the contrary, it led to better economic outcomes for most workers. The problem was that the mechanism could never be sustained.

A corollary of this claim is that the U.S. faces a choice as to whether or not it continues to pursue an economy built on such foundations; closely tied to this question is the future fate of the social safety net’s constitutive institutions. It was an exploration of these issues that formed the basis of our conversation.

Sunday, December 9, 2012

Joe Stiglitz offers "America's Hope Against Hope"

December 8, 2012
Project Syndicate

NEW YORK – After a hard-fought election campaign, costing well in excess of $2 billion, it seems to many observers that not much has changed in American politics: Barack Obama is still President, the Republicans still control the House of Representatives, and the Democrats still have a majority in the Senate. With America facing a “fiscal cliff” – automatic tax increases and spending cuts at the start of 2013 that will most likely drive the economy into recession unless bipartisan agreement on an alternative fiscal path is reached – could there be anything worse than continued political gridlock?

In fact, the election had several salutary effects – beyond showing that unbridled corporate spending could not buy an election, and that demographic changes in the United States may doom Republican extremism. The Republicans’ explicit campaign of disenfranchisement in some states – like Pennsylvania, where they tried to make it more difficult for African-Americans and Latinos to register to vote – backfired: those whose rights were threatened were motivated to turn out and exercise them. In Massachusetts, Elizabeth Warren, a Harvard law professor and tireless warrior for reforms to protect ordinary citizens from banks’ abusive practices, won a seat in the Senate.

Some of Mitt Romney’s advisers seemed taken aback by Obama’s victory: Wasn’t the election supposed to be about economics? They were confident that Americans would forget how the Republicans’ deregulatory zeal had brought the economy to the brink of ruin, and that voters had not noticed how their intransigence in Congress had prevented more effective policies from being pursued in the wake of the 2008 crisis. Voters, they assumed, would focus only on the current economic malaise.

The Republicans should not have been caught off-guard by Americans’ interest in issues like disenfranchisement and gender equality. While these issues strike at the core of a country’s values – of what we mean by democracy and limits on government intrusion into individuals’ lives – they are also economic issues. As I explain in my book The Price of Inequality, much of the rise in US economic inequality is attributable to a government in which the rich have disproportionate influence –& and use that influence to entrench themselves. Obviously, issues like reproductive rights and gay marriage have large economic consequences as well.

In terms of economic policy for the next four years, the main cause for post-election celebration is that the US has avoided measures that would have pushed it closer to recession, increased inequality, imposed further hardship on the elderly, and impeded access to health care for millions of Americans.

Beyond that, here is what Americans should hope for: a strong “jobs” bill – based on investments in education, health care, technology, and infrastructure – that would stimulate the economy, restore growth, reduce unemployment, and generate tax revenues far in excess of its costs, thus improving the country’s fiscal position. They might also hope for a housing program that finally addresses America’s foreclosure crisis.

A comprehensive program to increase economic opportunity and reduce inequality is also needed – its goal being to remove, within the next decade, America’s distinction as the advanced country with the highest inequality and the least social mobility. This implies, among other things, a fair tax system that is more progressive and eliminates the distortions and loopholes that allow speculators to pay taxes at a lower effective rate than those who work for a living, and that enable the rich to use the Cayman Islands to avoid paying their fair share.

America – and the world – would also benefit from a US energy policy that reduces reliance on imports not just by increasing domestic production, but also by cutting consumption, and that recognizes the risks posed by global warming. Moreover, America’s science and technology policy must reflect an understanding that long-term increases in living standards depend upon productivity growth, which reflects technological progress that assumes a solid foundation of basic research.

Finally, the US needs a financial system that serves all of society, rather than operating as if it were an end in itself. That means that the system’s focus must shift from speculative and proprietary trading to lending and job creation, which implies reforms of financial-sector regulation, and of anti-trust and corporate-governance laws, together with adequate enforcement to ensure that markets do not become rigged casinos.

Globalization has made all countries more interdependent, in turn requiring greater global cooperation. We might hopethat America will show more leadership in reforming the global financial system by advocating for stronger international regulation, a global reserve system, and better ways to restructure sovereign debt; in addressing global warming; in democratizing the international economic institutions; and in providing assistance to poorer countries.

Americans should hope for all of this, though I am not sanguine that they will get much of it.& More likely, America will muddle through – here another little program for struggling students and homeowners, there the end of the Bush tax cuts for millionaires, but no wholesale tax reform, serious cutbacks in defense spending, or significant progress on global warming.

With the euro crisis likely to continue unabated, America’s continuing malaise does not bode well for global growth. Even worse, in the absence of strong American leadership, longstanding global problems – from climate change to urgently needed reforms of the international monetary system – will continue to fester. Nonetheless, we should be grateful: it is better to be standing still than it is to be heading in the wrong direction.

Read more at http://www.project-syndicate.org/commentary/a-reform-agenda-for-the-second-obama-administration-by-joseph-e--stiglitz#jUqHlQXKQHrWbuXx.99

Saturday, December 8, 2012

Robert Kuttner says "Better Late than Never"

President Obama has belatedly grasped that holding firm on tax increases for the top 2 percent, and defending Social Security, Medicare and Medicaid against needless cuts, is good politics and good policy. As his Treasury Secretary, Tim Geithner put it on Fox News Sunday, "Why does it make sense for the country to force tax increases on all Americans, because a small group of Republicans want to extend tax rates for 2 percent of Americans, why does that make any sense? There's no reason why it should happen."
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Geithner was even more explicit on CNN, when interviewer Candy Crowley pressed him on whether the Administration was really prepared to go "off the cliff" if Republicans refused to raise tax rates on the top 2 percent.

"If Republicans are not willing to let rates go back up [on the top 2 percent" Geithner said, "and we think they should go back to the Clinton levels when the American economy did exceptionally well, then there will not be an agreement."

In his budget proposal, the president offered no cuts in Social Security, and only $400 billion over 10 years in Medicare and other savings, money that can be gotten by allowing Medicare to negotiate bulk discounts with drug companies and other administrative savings, without raising the eligibility age or otherwise cutting into benefits.

The Republicans, meanwhile are revealed as the people who would push the economy off a cliff in order to fight for tax breaks for the richest 2 percent; the party that would rather cut benefits in Medicare and Social Security than have the wealthy pay even the relatively low tax rates of the Clinton years.

It was Winston Churchill who said that you can always count on Americans to do the right thing, after they've tried everything else. Obama, belatedly, is doing the right thing.

He tried taking big savings out of Medicare in order to finance his Affordable Care Act. The Republicans pilloried him for it.

He tried pivoting to fashionable austerity, appointing the Bowles-Simpson Commission to propose far deeper budget cuts than the economy required. The commission majority report offered a deflationary program of cuts in Medicare, Social Security, and no rate increases on the taxes paid by the rich. Mercifully, the commission failed to get the necessary super-majority for its proposals.

And he tried offering cuts in Social Security and Medicare in order to get a budget deal in 2011 with House Speaker John Boehner. But the refusal of the Republicans to consider even a penny of tax increases saved the President from himself.

Now, as a last resort, President Obama has come around to sensible economics and smart politics -- no cuts in social insurance benefits, no backing down on tax hikes for the rich, no deeper deficit cuts until the economy is stronger. His plan even proposes $50 billion in new public investments -- not enough but a big step in the right direction.

What's so heartening is not just that Obama is helping voters appreciate what Republicans really stand for but that he is turning his back on the echo chamber of deficit hysteria ginned up by Wall Street as a way of cutting social insurance and protecting low tax rates on the richest. Seeing Pete Peterson and his corporate deficit-hawk cronies lose this fight is as satisfying as seeing the Republicans lose.

So what happens next?

The Republicans will continue to huff and puff that it's Obama's fault if taxes go up for everyone. But the fact is that the Senate has already approved a continuation of the Bush tax cuts for the bottom 98 percent -- all the Republican House has to do is concur and Obama will sign the bill into law.

The business elite, through the corporate-funded campaign "Fix the Debt" campaign, will continue to warn about the perils of the automatic tax hikes and spending cuts -- the dreaded fiscal cliff -- and press the two parties to meet each other halfway.

But domestic spending has already been cut by $1.7 trillion over 10 years under the terms of the 2011 budget deal. Domestic spending has been cut enough. Tax rates on the rich are already at a postwar low, and it hasn't levitated a depressed economy. The Democratic Party have already met the GOP more than halfway. And each time, the Republicans use the concession as the new starting point.

If Obama hangs tough and the budget briefly goes "over the cliff" in the form of automatic tax increases for everyone and mandated indiscriminate spending cuts that risk sending the economy back into recession, the Republicans are at last set up to take the blame that they richly deserve.

Obama seems willing let that happen, in order to keep the pressure on Republicans to allow taxes to rise on the rich.

The risk is that when the negotiations finally get to the end game, and Republicans are forced accept the tax deal, Obama may succumb to pressure to cut Social Security and Medicare, so that he can say that he, too, gave ground on issues that were difficult for his party. The risk is that he will listen to his inner bipartisan.

That would be a huge mistake. The Republicans have been unmasked for who they are. The best thing Obama can do is to continue to hold the high ground of this debate. The Republican position is entirely at odds with the vast majority of voters. If Obama doesn't fold a winning hand, eventually the Republicans will have to come to him.

Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos

Thursday, December 6, 2012

Transcript: Dueling Forecasts plus some Steve Keen

Forecast December continues today with Paul Ballew of Dun & Bradstreet, leading the force making bold predictions for 1% growth in Q4 2012.

How helpful is it to forecast Q4 2012 in the middle of December? Yet the numbers are bouncing around even today. And the most often heard comment about next year is, "It all depends on Congress adn the fiscal cliff." A government who could do nothing right because of overspending is in danger of being so stupid as not to continue. Or spend now and borrow it from Social Security in the future.
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The Demand Side Forecast is bouncing along the bottom. We're going to get it out right now and dust it off. Oh yeah, negative numbers in Q4 2012. We issued that in ... well, a long time ago ... the date is a little smudgy here. Mimeo paper, you know.

What is the Demand Side premise? That the economy is driven from the demand side, a capitalist market economy is constrained by demand, what is demanded is what is produced. Private demand – effective demand – arises from incomes and from borrowing, or credit. Public sector demand arises from incomes, that is, tax revenues, from borrowing, or just purchasing goods and services.

So when incomes are falling, credit is contracting, debt service absorbing incomes, and government purchases of goods and services weakening, we re going down. Current huge deficits are supporting private demand. Absent investment, there is no growth, nor possibility of growth. And we're talking public investment, because aside from some parts of the technology industry, we have over-capacity in the private sector, and no good reason to invest.

And where would we be without the incomes associated with Social Security and Medicare providing a base of demand? These are not contributing to the current deficit, but are supporting private demand, just like the tax cuts.

Notably absent from the Demand Side analysis is an appreciation for the health of the big capitalist firms. By all accounts they are flush with cash and simply waiting on the sidelines. We'll get a sense of that from Mr. Ballew in just a moment. But what are they waiting for? Balance sheets have never been healthier. Lean and mean.

to our mind this is proof positive that profit does not mean optimal economic outcomes. These companies achieved and maintained their pristine balance sheets by cutting workforces, downsizing operations and squeezing suppliers. All of which constricted demand. It was their feverish pursuit of profit to the exclusion of their stakeholders' interests that created such a sharp decline. It has been the role of government and social insurance to keep that decline from being more miserable than it already is. And it's plenty miserable. A lost generation if the current policies are followed mindlessly to their conclusions.

So ... we'll roll out the next biennial Demand Side forecast on January 1, but look for it to keep leverage to the downside vis-a-vis other forecasts. The current policy debate is between the Reagan Republicans led by Tim Geithner and the Old Guard Republicans led by John Boenher, and it promises very little in the way of positive outcomes.

Now, here, from Paul Ballew


Not last year's view from D&B, and it doesn't sound like growth, this crawl-stagger-crawl. Sounds like bouncing along a bottom.


We take our point, crawl stagger crawl economy equals cost-cutting, efficiencies, and productivity


And small businesses are getting squeezed by lowering demand from consumers and cutbacks from big firms and government to whom they may be suppliers, and possibly because they cannot lay off the workforce, because they are the owners.


Ah, Mike McKee jumps in with the conventional wisdom, or conventional ignorance, that somehow it is Social Security and Medicare that are causing the current economic woes, kind of a time vortex thing, coming back from the future. But it's not really slack demand, no investment and big unemployment that are making people miserable, it is the failure to insist that people in 2025 work two more years before qualifying for Medicare.


It's just sad that this passes for analysis.


Demand Side wakes up. Deleveraging! Could it be that the enormous private debt bubble and bust is instead at the root. Makes sense from the demand side. Any time you go through this, as in any time Wall Street collapses, the ramifications tend to be long term. Granted. It is Demand Side's view, however, that any time you have such a situation, you need to fix or things never get better, no matter how long you wait. And you don't fix it by sacrificing the middle class.

But let's look at somebody who knows better about deleveraging..

Here is Steve Keen briefing Congress. We have bad audio, so we didn't put up more, but you can get it on the transcript. The whole 45 minutes is there on YouTube, plus the link to Steve's site and the rest.


Today's podcast brought to you by Demand Side, the book, find it at DemandSideBooks dot com.

Wednesday, December 5, 2012

Transcript: 442 Relay Shilling

Because of time constraints and to keep our place in your queue of podcasts, today's episode is primarily a relay of a conversation between Tom Keene, Gary Shilling and Michael McKee. We featured Shilling recently as one of the few independent economists on Wall Street and consequently one of the few without a bull's bias, nor the need to wear hip waders. As the year turns, and we ourselves turn back to the forecast, we will be looking at some of the other forecasts. But we thought we'd start you off with Shilling, so you know it's not all bull....
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Yes, honey.

The talk about inflation is a bit confusing. Shilling identifies six or seven different kinds of inflation. But inflation is by definition a general phenomenon. We've made this point before, and then backed off it by defining two types of inflation, inflation in consumer goods and inflation in investment goods. This is relevant because there is deflation in real investment goods, which means investment is lagging and the employment and value in investment is being extracted from our present and our economic futures. We could rectify this problem by big new investment in public goods, infrastructure, climate change mitigation, education, electrical transmission. The perceived inflation in consumer goods is caused, of course, by the bidding up of commodities in the casino markets. That inflation is greatly weakening, and ought to be a sign of weakness, as speculation cannot keep commodity prices high.

Key to any general price rise, that is inflation, is the wage rate. Wages are stagnant and falling, hence there is a general deflation, as well, masked by this folderol in the financial markets. Deleveraging is the context for debt deflation. There is deleveraging going on in the household sector, in the business sector, at least the small business sector.

And Shilling correctly points out that all the money, the liquidity, the M in the PQ equals MV equation, is not creating price rises except in financial securities, the casino, and that casino activity is not getting out onto Main Street.

This has been the theme of Demand Side for years. Monetary policy is not working. We need fiscal policy, as in public spending on job-creating enterprises. Otherwise, we will continue in what, as Keene and Shilling say, for two thirds and more of the country is not recovery, but recession.

To say then, that this new slump was not precipitated by the Fed, is a bit off the mark. The Fed is still steering in the same direction as precipitated the Great Financial Crisis, nothing has been fixed, and their cheap chips are not constructive in addressing the employment crisis.

Today's podcast brought to you by honey. Yes the natural sweetener with nutrients and value. That white sugar is poison, my friends. The energy you get is just the front side of the crash. Watch out for your chocolates, a Trojan Horse for sugar. One of these days, sooner or later, your body will ask you to switch.