Relay: Who's afraid of the military sequester

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EPS Bernard Schwartz Symposium:
Who's Afraid of the Fiscal Cliff?
November 13, 2012
Hyatt Regency Capitol Hill

Session Two – On the Military Sequester
Chaired by Richard Kaufman, Bethesda Research Institute

• Carl Conetta, Project on Defense Alternatives
• William Hartung, Center for International Policy, Arms and Security Project
• Winslow Wheeler, Project On Government Oversight, Straus Military Reform Project
• Heather Hurlburt, National Security Network

Transcript: Lucas v. Correa, Japan's negative inflation, Nouriel Roubini

Today: Who is the better economist? The man who turns depression ito vitality or the one who does the reverse. Plus Japan's big reflation plans start with a hole in the ground. Then, We haven't heard from Nouriel Roubini in awhile, even though he has a chapter in the book, Demand Side Economics, find it at demandsidebooks.com Roubini was number two to Steve Keen in the Revere Award balloting.

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Let's start with Ecuador’s president Rafael Correa. Correa has been elected to a third term as leader of Ecuador. Here he is, quote

We are improving real wages—we have been able to close the gap between family incomes and a basic basket of consumption goods. Around 60–65 per cent of families could afford the basic basket at the start of our mandate, now we’ve reached 93 per cent, the highest in the country’s history. We’ve disproved orthodox economic theory, the idea that to generate employment one needs to lower real wages: here the real wage has risen substantially, and we have one of the lowest unemployment rates in the region—just under 5 per cent. We’ve also paid attention to the quality of employment, making sure businesses comply with labor laws. While raising wages for labor, we’ve reduced the remuneration for capital. In this country, if one proposed raising the minimum wage by a few dollars one was called a demagogue, a populist, but no one was surprised by interest rates of 24–45 per cent. We drastically lowered interest rates, to 8–9 per cent, for the corporate sector."

The US-educated Correa defied international financiers by defaulting on $3.9bn in foreign debt obligations and rewriting contracts with oil multinationals to secure a higher share of oil revenues for Ecuador.

Not that he's all that popular with free press advocates, or with the Washington Post.

But in this corner.

via Lars Syll and Real World Economic Review, we get Robert Lucas on the slump.

In a recent lecture on the US recession – Robert Lucas gave an outline of what the New Classical school of macroeconomics today thinks on the latest downturn in the US economy and its future prospects.

Lucas starts by showing that real US GDP has grown at an average yearly rate of 3 per cent since 1870, with one big dip during the Depression of the 1930s and a big – but smaller – dip in the recent recession.

After stating his view that the US recession that started in 2008 was basically caused by a run for liquidity, Lucas then goes on to discuss the prospect of recovery, maintaining that past experience would suggest an “automatic” recovery, if the free market system is left to repair itself to equilibrium unimpeded by social welfare activities of the government.

As could be expected there is no room for any Keynesian type considerations on eventual shortages of aggregate demand discouraging the recovery of the economy. No, as usual in the New Classical macroeconomic school’s explanations and prescriptions, the blame game points to the government and its lack of supply side policies.

Lucas is convinced that what might arrest the recovery are higher taxes on the rich, greater government involvement in the medical sector and tougher regulations of the financial sector. But – if left to run its course unimpeded by European type welfare state activities -the free market will fix it all.

In a rather cavalier manner – without a hint of argument or presentation of empirical facts – Lucas dismisses even the possibility of a shortfall of demand. For someone who already 30 years ago proclaimed Keynesianism dead – “people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another” – this is of course only what could be expected. Demand considerations are simply ruled out on whimsical theoretical-ideological grounds, much like we have seen other neo-liberal economists do over and over again in their attempts to explain away the fact that the latest economic crises shows how the markets have failed to deliver. If there is a problem with the economy, the true cause has to be government.

Lucas won the Nobel Prize in Economics, but you choose. Which is the better economist.

Reflation in Japan? The new government in Japan announced a 2% inflation target. The latest reading is minus 4%. Japan is deflating at 4%. Peter Radford at RWER opines:

"We should not read too much in one data-point. But we also should take it serious: there might well be some kind of deflation shock in Japan. Which adds some background to the aggressive reflation policies proposed by Shinzo Abe. A 4% deflation rate is a massive failure of central bank policies and preliminary data must have been buzzing around for quite some time."

Chart online



We haven't heard from Nouriel Roubini in awhile. His latest Project Syndicate piece runs

"The global economy this year will exhibit some similarities with the conditions that prevailed in 2012. No surprise there: We face another year in which global growth will average about 3 percent, but with a multi-speed recovery—a subpar, below-trend annual rate of 1 percent in the advanced economies, and close-to-trend rates of 5 percent in emerging markets. But there will be some important differences as well.

Painful deleveraging—less spending and more saving to reduce debt and leverage— continues in most advanced economies, which implies slow economic growth. But fiscal austerity will envelop MOST advanced economies this year, rather than just the Eurozone periphery and the United Kingdom. Indeed, austerity is spreading to the core of the Eurozone, the United States, and other advanced economies (with the exception of Japan). Given synchronized fiscal retrenchment,another year of mediocre growth could give way to outright contraction in some countries.

With growth anemic, the rally in risky assets that began in the second half of 2012 has not been driven by improved fundamentals, but rather by fresh rounds of unconventional monetary policy. Central banks—the European Central Bank, the US Federal Reserve, the Bank of England, and the Swiss National Bank — have all engaged in some form of quantitative easing, and they are now likely to be joined by the Bank of Japan.

Moreover, several risks lie ahead. First, America’s mini-deal on taxes has not steered it fully away from the fiscal cliff. Sooner or later, another ugly fight will take place on the debt ceiling, the delayed sequester of spending, and a congressional “continuing spending resolution” (an agreement to allow the government to continue functioning in the absence of an appropriations law). Markets may become spooked by another fiscal cliffhanger. And even the current mini-deal implies a significant amount of drag—about 1.4 percent of GDP—on an economy that has grown at barely 2 percent over the last few quarters.

Second, while the ECB’s actions have reduced tail risks in the Eurozone—a Greek exit and/or loss of market access for Italy and Spain—the monetary union’s fundamental problems have not been resolved. Together with political uncertainty, they will re-emerge with full force in the second half of the year.

After all, stagnation and outright recession—exacerbated by fiscal austerity, a strong euro, and an ongoing credit crunch—remain Europe’s norm. Large stocks of private and public debt remain. Given aging populations and low productivity growth, potential output is likely to be eroded in the absence of more aggressive structural reforms to boost competitiveness, leaving the private sector no reason to finance chronic current-account deficits.

Third, China has had to rely on another round of monetary, fiscal, and credit stimulus to prop up an unbalanced and unsustainable growth model based on excessive exports and fixed investment, high saving, and low consumption. By the second half of the year, the investment bust in real estate, infrastructure, and industrial capacity will accelerate. And, because the country’s new leadership—which is conservative, gradualist, and consensus-driven—is unlikely to speed up implementation of reforms needed to increase household income and reduce precautionary saving, consumption as a share of GDP will not rise fast enough to compensate. So the risk of a hard landing will rise by the end of this year.

Fourth, many emerging markets—including the BRICs (Brazil, Russia, India, and China), but also many others—are now experiencing decelerating growth. Their “state capitalism” is the heart of the problem. A large role for state-owned companies; an even larger role for state-owned banks; resource nationalism; import-substitution industrialization; and financial protectionism and controls on foreign direct investment. Whether they will embrace reforms aimed at boosting the private sector’s role in economic growth remains to be seen.

Finally, serious geopolitical risks loom large. The entire greater Middle East—from the Maghreb to Afghanistan and Pakistan—is socially, economically, and politically unstable. Indeed, the Arab Spring is turning into an Arab Winter. An outright military conflict between Israel and the U.S. on one side and Iran on the other side remains unlikely, but it is clear that negotiations and sanctions will not induce Iran’s leaders to abandon efforts to develop nuclear weapons. With Israel refusing to accept a nuclear-armed Iran, the drums of actual war will beat harder. The fear premium in oil markets may significantly rise and increase oil prices by 20 percent, leading to negative growth effects in the U.S., Europe, Japan, China, India and all other advanced economies and emerging markets that are net oil importers.

While the chance of a perfect storm is low, any one of them alone would be enough to stall the global economy and tip it into recession. And while they may not all emerge in the most extreme way, each is or will be appearing in some form. As 2013 begins, the downside risks to the global economy are gathering force.

says Nouriel Roubini, NOT a winner of the Nobel Prize in Market Fundamentalism


This week's folder at reMacroBaseline.com is labeled Human and Social Capital. We're going to get into some forecasting problems, and then to a specific scheme to solve a looming problem for many people, the boomers, in retirement financing, but first some notes.

It's funny how people get more respect when you consider them alongside machines or land or natural resources, and that is what happens when we put capital alongside "human" or "social." We begin to see that the society does better when people are better educated and in better health, irrespective of the increase in well-being to those people themselves.

There is an educational level -- skill level, if you must -- and a level of health that creates an intrinsic value that can be tapped. When we allow our educational systems to deteriorate -- often as a result of misguided schemes to hold teachers "accountable" -- or our health systems to run to high cost and low benefit -- often for the benefit of mega-corporations wearing free market costumes -- we are letting our infrastructure and capital decay just as surely as when we let the roadways turn to potholes or the sewer systems break.

Notice the difference between human capital and social capital. The educational and health care systems are parallel to physical capital, as well, and when we allow these, or police, or courts, or parks and libraries, or any of the rest of the utilities-type social services ... transportation ... to deteriorate, it is no different than a company allowing its production facilities to fall apart. Yet, corporations who would never let their machines rust or their roofs leak demand that the public sector do just that in the name of fiscal responsibility.

So when we consider the forecast for the medium and long-term futures, we need to take account of the crumbling human and social capital. But there are other issues.

One of them is the tendency to place more emphasis on the read-outs on the economic indicator dials -- GDP, investment, inflation, the rest -- than on the obvious condition of the infrastructure and what that portends for the future. Or for that matter, on the obvious condition of the population, its finances, health, security, and so on. One of the issues in this metrics vs. real condition that has gotten good attention recently is income disparity.

Which society is healthier, the one where the average income is $40,000 or the one where it is $50,000? Not enough information. In a society of 25 people, if 24 are getting $10,000 per year and one is getting a million, it is not clear that this is better than when all 25 are getting $40,000.

So, combine the two problems, the ignorance of social and human capital in the assessment of national well-being and the problem that the metrics often miss the mark, and you have a recipe for bad policy. Here we come again to health care, but also to retirement. One side says, cut the funding for social insurance, increase the contributions, raise the retirement age. But this doesn't fix the problems of growing older or being sick, it just shuffles the accounts and pushes people into private insurance. This is a more costly alternative, not as efficient, but it is good for GDP, or at least that part of GDP associated with the providers. In fact, as a public good, we need to universalize health care to drive the costs down. Doesn't do a thing for GDP. But we also need to make retirement efficient.

That brings us to today's special post, delivered partly for a want of time, since this is in the can from another project, but partly to offer a way out of the current and prospective dead-end for many baby boomers entering retirement. The investments many have made, the 401(k)s and individual retirement plans, have shrunk sadly under the Fed's easy money for the banks and corporations policy. A million dollars which returned $70,000 per year now returns half that. The house we were going to sell for a fat profit is now not worth enough for the down payment on the next one.

So, we've put up the Retirement Co-op Scheme. You can find the whole post below. But if you want to comment, please go to Retirement Co-op (http://retirementco-op.blogspot.com/) It is the first cut at this. Hopefully the concept comes through. There are a lot of details and aspects not directly addressed.

It offers retirees a way of securing their future in a very insurance-like way, entering a community before they need to join one physically, converting their energy, talent and property into the services they need while retaining equity and maximum estate value.

Ick and I

Hey! Fellow Demand-Sider here... I really love your podcast and have learned quite a lot. I also appreciate your casting of various guests (not the least of which was Galbraith)

Anyway, I was listening to “Rolling out the New Forecast Blog” episode wherein you talk about the “Boomers”.

You say things such as:

“Older people will have the time, if not energy, to get involved. And they have at least the opportunity of perspective to the degree they support a broader interest with their time and talent and do not become strictly an interest group for social insurance and healthcare, the Power Base for reform is set.”

There are a LOT of Assumptions there! And, frankly, I think they are fanciful.

Once upon a time my former boss (who was a jazz player of note) apologized to me for the things Ronald Raygun was doing... He said, “It’s MY generation that has screwed everything up for your generation and it’s not fair to you.”

Well, that was then... this is now. Today, the Boomers are the Movers and Shakers of Government and Business... George Carlin opined about the Boomers once upon a time... He noted that NEVER was there a more spoiled group of kids... NEVER has a generation been GIVEN so much... and it’s easy to sum up their entire philosophy in one simple phrase: “Give me it! It’s Mine!!!!!”

Buncha spoiled brats!

And this from a child of a Hippie Boomer. The biggest difference: My Hippie Boomer dad never lost the faith. However, the same can NOT be said for damn near any of his friends... (save one).

I am in my 40’s and haven’t thought about losing the faith... so, I think I’m safe.

But I digress...

The “Boomers” are the ones who created the Derivatives... The Credit Default Swaps... The GREED!!!!

They are the ones who REALLY capitalized on Raygun’s laxing of Anti-trust laws...

They are the ones who ran AMUCK over everything that came before them. Think about it! It’s the MO!!!!

So, for you to say that ‘The Power Base for Reform Is Set” is WAY beyond naïve, IMHO.

These greedy bastards will ONLY seek to get what they want (i.e. Social Insurance and Health Care). Believe me, they don’t care about anybody else but themselves.

There is NO “Power Base for Reform”. Don’t count on it.

Quite Sincerely,

Eric Brewer


Eric:

Very sorry to have missed this e-mail. My account was apparently hijacked, perhaps inadvertently, for a period of time, and I just got to see this today. I'm going to put it up in the comments section of that podcast, as time allows.

As to the comments.

My assumptions:

Old people will have the time to get involved. Should be able to take advantage of retirement and should be limited only by energy. That does not seem too far out.

They have the opportunity of perspective. Well, the opportunity IS there, with a lifetime of experience. Too often, as you say, the old ways are just inculcated no matter how off-base and useless they may be.

To the degree they... The point being, the innate selfishness you ascribe to Boomers will naturally lead them to be vigorous defenders of the social insurance programs. This may lead them to the Left. To the degree they also see the need to rescue the whole mess in order to rescue themselves, they will be motivated to social change. Right now, as I've said, the corporate oligarchy is ensconced on the top deck; we are keeping afloat by kicking people off the lower decks. Mentally ill, low skilled, college students and recent graduates. Pretty soon it will be the old people. Insofar as the Boomers are a big group and everybody gets old, this seems like it might lead to social activism. But I did begin with "To the degree... "

Your main point is that the Boomers caused the mess. I think it is the 1% who caused the mess, and it is their disinformation and subsidized BS that keeps people confused. These could be Boomers or not. I don't think it's an age thing. We had Tom Brokaw, for example, telling us that the Boomers parents were "the greatest generation," but it was really the leadership of the New Dealers that made World War II and the postwar prosperity happen successfully; that is, their parents.

But you are basically right, it is the MY and MINE that prevent real change. This also is taught. There is the famous "prisoners' dilemma" game in game theory that demonstrates people acting strictly for their own account create an outcome that is far below optimal. Yet it is this self-interest that is the backbone of market fundamentalism and the Neoliberal construct.

But to the degree that this fails, as it must, there will have to either be scapegoating or re-thinking. How long is FoxNews going to have critical thinking locked down?

I still think there is a power base there. I may be wrong. We'll see. You may be wrong.

Thanks again,

Alan



The Brewers

Feb 11 (3 days ago)

to me

To the degree that the 1% caused the crisis, and it is their disinformation and subsidized BS that keeps people confused, I must say that they could NEVER have succeeded without the complicity of the Boomer’s “Give me it! It’s mine!” very solid philosophical foundation.

The fact that SO MANY of the Boomers (a very bright, creative, well educated, group) bought the 1% line of BS in the first place is proof positive of their underlying selfish disposition. It is dreadfully simple to take a large group of people who feel entitled to all the very best (because their parents GAVE them the best and spoiled them rotten... Those parents were by far NOT the Greatest Generation... But they aren’t the worst either, IMHO) and, by seemingly agreeing with them and encouraging them, get them to do your bidding.

Some of the most creative, intelligent, and best educated people every were spoiled rotten at their core... and their talents and energies were easily exploited by the 1%.

I have seen NOTHING to make me think the Boomer’s are in any way capable of cleansing their collective soul.

I am from Generation X. The first generation who is not expected to do better than their parents... ...many of my contemporaries are mindless, intellectually incurious children who were GIVEN everything by their yuppie/boomer greedy parents. They are good little entitled greed-bots toeing the line for the parents they so aim to please. It’s endemic.

But, there are also a LOT of Gen X'rs who reject the BS of their parents and have lived their lives responsibly... both to their own bank accounts and to the community around them.

It is my opinion that these are the unsung heroes that are going to be the ones who are going to be diligent and level headed and boring... these are going to be the Responsible Adults in the room that keep things from going straight to hell as fast as possible.

BUT, there’s a big black cloud on the horizon. The Generation Why group. Talk about self absorbed and entitled little brats. Do a little quick research on this group and you’ll find they are not interested in having long term relationships of any kind... Spouse, Significant Other, Jobs, etc... a large percent don’t even want kids because they want to have it all for themselves.

These are the 21st Century Club Kid version of the same selfish boomer philosophy. When these people are responsible for taking care of things, you can BET they will be just as exploited by the 1%’s as any Boomer ever was... And their puppet masters will EASILY pull their strings and create a whole world of crisis several magnitudes greater than the one we see right now.
Like I said, I think it’s endemic.

I really hate to sound like an angry old curmudgeon (I’m only 42), but my family and I just took a tour of 35 states in 7 months and I must say in all honesty that this country is full of the most intellectually uncurious group of people I could have ever imagined. It’s worse than I could have imagined. I could count on 1 hand the number of “interesting” conversations I had during this whole trip... and gawd knows I tried! I went out with a lot of optimism, thinking my own little bubble of a city was the exception to this rule, but I found that my own little bubble of a city is well above average in this category. Anecdotal, I know, but personally depressing. In many ways I feel worse about the future than I did before I left... and I was really hoping to feel the opposite.

On another comment to be made on another day I would like to discuss the effect personal DEBT has on perpetuating the Incuriosity and Complacency... and the dream of being rich!... all to our collective detriment.

Thanks again,

Ick

Transcript: Forecast, Columbia River Infrastructure, Idiots of the Week

Today on the podcast, idiots of the week, with returning all-star, Allan Meltzer of Carnegie Mellon University, Jeffrey Sachs of Columbia, and Patrick Sims of Hamilton Place Strategies.

First, we're sorry we didn't get our post up on ReMacroBaseline.com this week. It was investment/infrastructure/transportation/housing week. Our ambition is to devise a metric that takes account of the value of public infrastructure in the same manner as private capital, and hence registers the loss in real terms when that infrastructure is allowed to go to rot. We got a little bit down the road conceptually this week, but nothing to write up.

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So today a little history. Here in the Pacific Northwest -- Washington/Oregon/Idaho -- we have the legacy of big federal infrastructure -- the hydroelectric dams on the Columbia and Snake Rivers.

Where did they come from? In 1933 Franklin D. Roosevelt ordered the construction of the Bonneville and Grand Coulee dams. In 1944 and early 1945 FDR signed authorizations for the Hungry Horse and McNary dams and four dams on the lower Snake River. The 80th Congress reacted, slashed appropriations, reduced staffs and actually halted projects already under construction.

Then in May and June of 1948, the Columbia River's third greatest flood caused an enormous amount in damages. Truman visited the area. Six months later, the flow of the Columbia dropped sharply; the region was short of power and had to curtail Christmas lighting.

This was election year, Truman running against the Do-Nothing Congress and Thomas Dewey.

It was clear from speeches made by prominent Republicans that a Dewey victory would mean decimation of the federal power program and the elimination of the sales preference to public bodies and rural electric cooperatives. The election of Truman allowed the continuation of the program. In 1950 a record number of dams was authorized.

Eisenhower was of two minds. On a visit to the Hoover Dam shortly before becoming a candidate for president, Ike was complimentary. Two months later he made a campaign speech in Boise, Idaho, charging that construction of federal dams reflected "left-wing government." After he was elected, Eisenhower did complete those dams in process, but only because the Democratic Congress initiated and passed the authorizations.

Fast forward. Cheap hydropower still drives the industrial advantage of the Columbia Basin, that area between the Cascades and Rockies through which the Columbia flows is now full of farms and cities that are deep in the red state column, seriously conservative, The floods have passed; immense irrigation is present.

Washington is composed, like many states, of regional economies quite divergent from each other. Eastern Washington is away from shipping and big cities and Boeing and Microsoft. it is more like Idaho than Western Washington. Politically as well. Deeply anti-government folks sit there and feel entitled to their hydropower and immense irrigation. Entitlements. Who's got them?

reference C. Girard Davidson, Assistant Secretary of the Interior under Truman, in Economics and the Truman Administration, Francis Heller.


We should say a few words about the forecast. Maybe we did already. Not that we follow the emerging numbers all that closely. Advance, preliminary, final. They change. It has been remarkable to us that nobody else picked up on the political business cycle, the practice of sitting presidents to rev up federal spending prior to elections. It happened again this time.

The dip into negative territory in Q4 came with these words in the BEA's press release.


http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

Real federal government consumption expenditures and gross investment decreased 15.0 percent in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.4 percent, compared with an increase of 3.0 percent. Real state and local government consumption expenditures and gross investment decreased 0.7 percent, in contrast to an increase of 0.3 percent.

That defense number, from an increase of 12.9 percent in Q3 to a decrease of 22.2 in Q4 was historically unmatched. Not noticed by the pundit class, however.

but we noticed it, even before it happened. It was a good part of the reason we looked for a post-election slump back in September, and then called another recession beginning in December. Not that we're out of the last one, but in conventional terms, we wanted to get back into the fray. We'll see.

And productivity collapsed into a negative number. BLS preliminary numbers equal minus 2 percent. Our rule? Eight minus the unemployment rate equals productivity growth. Eight minus eight is zero, adjust for previous quarters of positive numbers. Not surprising.

But why would GDP not go down. From the demand side, there is no good reason.

Steve Keen has a good chart out showing the growth in credit now back to its previous slope. We love Steve Keen, check out hte SteveKeenInSeattle.com website. But he's got no public goods, no government investments, no multipliers. His is a financial economy. We have a real economy, as in an actual goods and services economy. Overbuilt on the private side. Starving on the public side. government has the biggest multipliers. Investment there yields enormous returns. We are blind and stupid not to be doing them.

We cannot just give people money. We need to pay them for doing useful work. Give the banks money? They're holding on to it or playing in the casinos.

Individuals? Tax breaks. Pay down debt or buying necessities.

Businesses? Hold on to it. Why invest? We've already got too much capacity.

Government? A few roads, some rail, a DC transmission grid, some retrofitting programs, universal health care, good education. Those are high return activities. Maybe replace fossil fuels with clean energy, including human energy.

IDIOTS OF THE WEEK

Allan Meltzer Carnegie Mellon

Let's see, 1923-28, 1985-2003, what would those be? Ah, the Great Moderations leading up to the worst financial catastrophes of the past 100 years. Yeah, let's do that.


Jeffrey Sachs Columbia University

Now I'm with Sachs on the need for big long-term public investments and strategy. He earns the idiot award, however, for using "Keynesian" to describe short-term and shovel-ready. That is Paul Krugman Keynesian, true, but that should be clearly labeled New Keynesian or Neo-classical. Keynesian is not confined to the short term. In my view.



Patrick Sims director of research at Hamilton Place Strategies, a policy and communications firm

Great. Too big to fail. Too big to jail. Big backdoor subsidies. Now in Europe we have a slow-motion version of our train wreck with banks three and four times the size in comparison to the economies. There are no economies of scale in banking. Capture of the government is not an economy.


Enough of that.

Today's podcast also brought to you by two of the faithful thirty-nine listeners to the podcast. These two notables:

Jonas Feit, whose blog Conscience Warrior is very well worth your visit. Likewise the Conscience Warrior News Feed. That's consciencewarrior.com and news.consciencewarrior.com.

And by Eric Brewer -- Ick, by name -- whose exchange of letters I am putting up in a special post on Sunday, if I get my act together. As somebody who reads a bit of academese, I am completely delighted to hear vigorous prose. I am wading now through a tome which has every verb turned into a noun. Ick is not like that. I will respond to him in good order, but I found our exchange -- on the subject of whether or not the aging population could be a power base for change -- Ick says no, everybody is completely self-absorbed -- anyway I found it extremely cool.

Transcript: Back to the Depression, Commodities and Steve Keen in Seattle

Today on the podcast, some history and history repeating itself, then commodities, and finally Steve Keen in Seattle.

From 1921 through 1929, the conservatives in power made fully manifest the content of their national policies.  These policies revealed, among other things, an almost complete abnegation of the necessary role of the Government in the modern world, perhaps best exemplified by the famous statement of President Calvin Coolidge that "the business of government is business."  They revealed practically  no awareness of the public responsibility to help those who needed help and could not help themselves, and were blind to the emergence of imbalances in the private economy which ended up in the Great Crash.

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In the private economy, the advance of technology and productivity in both industry and agriculture led to immense increases in our capabilities to turn out more and more goods and services.  This was accompanied by a remarkably stable price level (except for falling farm prices); this in itself was proof positive that price trends alone do not determine economic results, and that stable prices may be experienced at too high costs.  For the remarkably stable price level accompanied by vast increases in technology and productivity accrued predominantly to the benefit of the investor and profit functions, because farm income was in deep trouble at a time when farmers constituted a very large proportion of the total population, and because wage rate increases lagged far behind productivity gains.  To illustrate, from 1923 to 1929, productivity in manufacturing rose 31 percent while average weekly earnings rose only 5 percent.  Union membership was small, and the Government hardly took steps to interfere with industrial refusal to recognize unions or with bloody assaults upon workers by company "guards" and imported thugs.  Thus, the gap between the ability to produce and the ability to consume -- a condition of severe economic imbalances -- grew fairly constantly, and the chronic under-consumption problem in the U.S. economy appeared in virulent form.

... 

During the latter years of this glittering decade, the stupendous increases in stock prices were regarded by many as a sign that all was well.  It was not recognized that this speculative binge was a sign of disease rather than health.  It reflected the fact that far too large a share of the national income was in the hands of those who bid up stock prices in a frenzied desire to get rich quick  During more recent years ... [1983] excessive ebullience in the stock market has been similarly misread.  When the stock market upsurge collapsed in late 1929, those in public and private power did not realize that this was not the fundamental cause of the general economic collapse which followed.  It was but the spark which could not have brought about the general conflagration if the ignitable materials were not in place in every sector of the economy.  And even the first stages of the stock market crash were accompanied by assurances from the most respected that all would turn out for the best.

Tax cuts in the wrong directions

While the government largely stood by in its rapt admiration of things as they were, there were some examples of positive action.  Taxes were cut, primarily for those who were already contributing to the economic imbalances in the form of relatively excessive saving, investment and profits.  This, too, added to the growing economic imbalances.

A striking feature during the 1920s was the inability of the recognized leadership of the economic profession to bring economics into contact with reality.  If one were now to make a listing of the fifty most honored leadership people in America who substituted complacency for a call to action, a goodly proportion of them were among the greatest names in the academic profession.  All joined in the chorus that we were in for endless years of unabated prosperity.  They dubbed this the "New Era."

That was from Leon Keyserling, Liberal and Conservative National Economic Policies and Their Consequences, 1919-1979.  See the chapter on Keyserling in Demand Side the Book.  demandsidebooks.com.

Our first observation is that this is us all over again.  Absent the New Deal programs of unemployment insurance, social security, deposit insurance, low rent housing, protection of collective bargaining, minimum wage laws, farm price supports and so on, this would be the Great Depression.

But the decade of the 1920s as described here, with its low inflation, booming stock market, capture of productivity not in wages, but in the investor class, is very familiar, too.  Even the over-investment and under-consumption is the same, mitigated only by the base of demand that is a legacy from the New Deal, and by the larger size of government acting somewhat as ballast.  And it is public goods that are now under-consumed.  Roads, education, health care, mitigation and avoidance of catastrophic climate change.

Likewise mistaking  stock market  highs as a sign that all is well.  In fact, it is the program to make things well. The Fed wants to see the wealth effect lead us out, and that is one of the overt purposes of QE.  Make safe investments pay nothing, so as to force people into risky investments.  The real wealth effect has happened with the collapse of housing wealth.  The economy is thus struggling with an inflated stock market making some people happy.

We have to note the new, shorter piece by Claudio Borio of the Bank for International Settlements.  Macroeconomics without the Financial Cycle, Hamlet without the Prince.  He reprises his basically mainstreaming of Hyman Minsky, with nice graphs.  We note that the financial cycle began in earnest this time with the rise of Reaganomics and exactly the favoritism to the wealthy class that Keyserling indicated here.  


And lastly, today, this week was Commodities, Commons and Resources week at reMacroBaseline.com.  We outlined our old position that commodity prices are casino prices, not physical supply and demand prices.  In this week's post we concentrated on the ETFs, the vehicle by which the average investor can join in speculation.  Not that the mass of ETFs is bought by the average investor.  Jim Rogers calls them physical assets.  We call them products.

Several charts demonstrate the prices relative to the growth of ETF's.  Here is some audio from Michael Greenberger, courtesy CTV, which responds to the Security and Exchange Commission approving a new ETF for copper, indicating the range of the problem in this commodity.  Greenberger is now a law professor at the University of Maryland, and was formerly director of Trading and Markets at the Commodity Futures Trading Commission.

GREENBERGER


Finally today, we are very pleased to let you know that Demand Side has partnered with the Seattle Economics council to bring Steve Keen to Seattle May 23rd at Town Hall.  Six o'clock PM public event.  With two special sessions prior, also at Town Hall.  One will be a demonstration of "Minsky," Keen's ambitious and progressing modeling project.  The second session will be a panel discussion, working title "Money, Monetary Policy and Financial Repression."  All events at Seattle's Town Hall.

Keen, of course, is notable for winning the Revere Prize for the economist who best predicted the Great Financial Crisis and Recession and whose policy framework is most likely to produce results going forward.  Right now he is on the front page in his native Australia for accuracy in predicting that country's economy over the past year.  And he has a chapter in Demand Side the Book, available at demandsidebooks.com.  A long chapter on money, debt and the credit accelerator.  He is in the direct line from Hyman Minsky.

The public event -- in keeping with Town Hall practice -- will be $5 only.  The two special sessions will be in the $20 - $35 range, with a catered light lunch for the panel.

As long as we have him in the neighborhood, those of you who may be listening in Vancouver, British Columbia, or Portland, Oregon, we could possibly schedule something for Friday the 24th of May or Saturday the 25th.  That is Memorial Day weekend here in the states.  Friday and Saturday, not the best for lectures, but do-able.

Let us know directly at demandside@live.com or 206.459.5067.  Look for the SteveKeenInSeattle.com website coming soon to a screen near you.