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

Thursday, January 31, 2013

Transcript: The federal government failing the states, climate change, entitlements


 [Richard Kravitz, former Lt. Governor of New York State, commenting on the findings of the State Budget Crisis Task Force, which he chaired with former Fed Chairman Paul Volcker, which reviewed the fiscal situation of six large states.]

The economic discussion at the highest policy levels in the Capital and on Wall Street is a Mad Hatter's tea party, full of idle chatter with little connection to the real economy in which people live. it is a place where everybody agrees on the need to reduce federal spending, cut entitlements, where climate change is a non-factor, where the lessons of the Great Financial Crisis and subsequent might as well be printed in the Cyrillic alphabet. And where the sky is blue because we say it is. Never mind the torrential rain.
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The disconnect between DC and economic reality is no more evident than in the willingness to let the states fail. This, of course, lets the municipalities dependent on the states fail. The federal government, somebody said, is an insurance program with a military. The states and local -- county, city and special purpose districts -- deliver the services we call government. Schools, roads, courts, police, utilities, fire protection, parks, libraries, jails, health and human services, airports, seaports, and on and on.

This is the government that is set to fail. And it is the object of the Tea Party Right to let it, or actually make it fail. The teacher and the policeman is just another corrupt bureaucrat.

Here in Washington State we are just starting up a new session of the legislature. It meets in the vise of on one hand the McCleary decision and on the other the promise of our new governor Jay Inslee not to raise taxes. The McCleary decision came down from the state supreme court and mandates full funding of K through 12 education per the state constitution. This is a billion dollars or more than the state has access to at present.

The response has been, from the no new taxes folks:

(A) We will fund education and write off the rest, or

(B) We will not fund education and let the court do whatever it has done in the past when its decisions have been ignored.

These are the let government fail responses.

Meanwhile, of course, transportation funding is absent, the roads are deteriorating, as are the linkages between the ports and rail. Washington State, with Boeing and big agriculture and a couple of deep water ports just right for container ships is highly trade dependent. THE most trade dependent state in the nation. That industry -- trade -- is threatened by the widening and deepening of the Panama Canal, set to be finished in 2014. Ships that are now too big and must offload on the West Coast or go around South America will soon be able to steam right into the Caribbean and on up the East Coast.

The Canadians have responded by linking their ports of Prince Rupert and Vancouver, British Columbia, to the U.S. Midwest with nonstop rail. Seattle, Tacoma and Washington have failed to rise to the challenge. Penny wise and pound foolish. This means the deterioration of a big private industry.

That is a bit of a digression. Still on the order of "Let government fail," but this is key infrastructure and planning for the private economy, not education. When it fails, hypocrites will assail the government that they just refused to fund. The Constitutional protection for education is only a technicality, they say, and really the human cost continues to rise.

On that happy note, we turn to climate change.

This week we posted on reMacroBaseline.com our observations on climate change and how it illustrates another grand disconnect between economics and reality.

The fact of near term, catastrophic climate change is both illustration and proof of the dysfunction of orthodox Neoclassical economics, but also any other economics which does not have an institutional component.

Environmental Protection Agency

For forecasting, nothing is easier to read than the chart of the rise in CO2 emissions over the past quarter century. The loss of Arctic Sea ice, the growth of the average temperature, the increasing frequency of violent weather, all are charts as easy to read as they are alarming.

The science behind climate change predictions is long established and solid. All major scientific organizations have asserted its validity. Its predictions have proven out over time.

Yet climate change has earned nary a whisper in the economic discussion. It is the health of the banking system, the recovery of housing, the size of the federal deficit that are presumed to be the drivers of economic well-being. This is not withstanding the enormous toll of violent weather, drought, flood we have seen so for and the potential for the effects to become hundreds of times worse. The loss of resources and natural systems are invisible to the economics as practiced in 2013. Repairing and rebuilding from damage is a positive thing in GDP, the measure used for health.

This is partly because the orthodoxy is entirely distracted with readings on the dials and how they relate to their hypothetical or replica of the economy. Federal deficits are a monetary phenomenon that has history. They can be seen in this replica. The certain collapse of the ecosystem cannot. There is no monetary trend line for it.

The other major part is not the invisibility of climate change in measurement or model, but the active denial of the science by major sectors of the existing corporate economy, and the active promotion of climate-damaging technologies by these and others. This is the institutional side: The failure to put a price on carbon, the manipulation of the political system to avoid addressing needed changes, and the simple distortion of the science for public consumption.

The challenge for the forecaster is not so much to anticipate the gradually worsening effects of climate change, but to capture these effects in numerical terms that can be tracked over time and used for policy purposes. An additional challenge is to make these numbers comparable to those of other forecasters so as to provide a base for evaluation.

We go into that in more depth in the post, or at least more breadth.

The Demand Side Podcast is brought to you today by the word "Entitlements." No, not the program of social insurance, just the word "Entitlements." Much like the term "Fiscal Cliff," which turned out to be more a pile of bull than a cliff -- not to say it doesn't have a certain downward slope, the word "Entitlements" has been selected carefully.

For those of you listening in Europe or Australia or elsewhere, social insurance -- mainly the public retirement program and public health insurance are referred to as "Entitlements" by virtually all media and most of the political class. Entitlement has a pejorative connotation, as something not earned..

We were unable to come up with the first use of the word entitlement, just as we do not know the derivation of "fiscal cliff."

The United Federation of Teachers had a similar problem,

How these programs came to be called entitlements we do not know, but it was the wrong word when first used and continues to be the wrong word today.

They are not entitlements. They are hard earned benefits. Working people contribute toward their benefits over a life time of work.

We have heard it said that retirees are getting more in benefits than they have paid for. The answer to this charge is that Social Security and Medicare are like insurance policies. Some people will benefit more due to a long life span while some will benefit less or not at all because of a death at an early age.

As we fight to protect and preserve Social Security and Medicare as we know them, we must always remember that we have earned and sacrificed for the benefits we receive. Nothing has even been given to us on a silver platter. Our benefits must never be taken away, diminished or changed into private plans.

RESOLVED, it is time to do away with the use of the word entitlements. Earned benefits we have worked a life time for and have made sacrifices for are not entitlements.

Dr. Paul M. Johnson defines the term:

The kind of government program that provides individuals with personal financial benefits (or sometimes special government-provided goods or services) to which an indefinite (but usually rather large) number of potential beneficiaries have a legal right (enforceable in court, if necessary) whenever they meet eligibility conditions that are specified by the standing law that authorizes the program.

The beneficiaries of entitlement programs are normally individual citizens or residents, but sometimes organizations such as business corporations, local governments, or even political parties may have similar special "entitlements" under certain programs. The most important examples of entitlement programs at the federal level in the United States would include Social Security, Medicare, and Medicaid, most Veterans' Administration programs, federal employee and military retirement plans, unemployment compensation, food stamps, and agricultural price support programs.

So. the word and its meaning.

Friday, January 25, 2013

Relay: Richard Fisher interviewed by Arthur Levitt

January's relay is the complete interview of Dallas Fed President Richard Fisher by former SEC chair Arthur Levitt on Levitt's Bloomberg show "A Closer Look."  We present this at Demand Side because it is thoughtful and complete, but more because it confirms our characterization of monetary policy. Because it is also mistaken on some elemental points. To be clear, this is different from other relays here at Demand Side because we do not agree with the speakers.
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Fisher IS on point in his comments here with regard to the coddling of the big banks and the penalty smaller banks pay.  His idea to dump Dodd-Frank and all its lobbyist-inspired complexity and replace it with a simple guarantee on deposits only, no more, is an excellent one.  Market discipline would be a lot more strict than the regulation of captured regulators.

The mistakes which we have alleged at the Fed, Fisher confirms.

The quantity theory of money.  The Fed to a man does not understand that the quantity of base money has little to do with the rise or fall of the broad money supply.  This in spite of the clear evidence.  Base money has exploded, broad money has fallen.

Mistake two: The fear of inflation from Fed easy money.  And mistake two A, the belief that some sort of exit strategy will defuse the inflation once it rears its head.  Both again derive from the misunderstanding of how broad money is created, which is through the lending system, and from the idea that base money can control the broad money.

Inflation may occur -- demand pull inflation -- only when there is renewed investment.  At that point the Fed might crush the green shoots, but if the demand is there the investors will find a way.  That inflation derives not only from the creation of new money, but from the employment of people in investment goods production, people who bid for the product of the consumer goods sector.

Not to go too long in our introduction, but Fisher is right to question the ability to sell off the trillions of dodgy paper on the Fed's balance sheet in any sort of organized manner.  Now, in its entirety:  Richard Fisher of the Dallas Fed with Arthur Levitt.

Tuesday, January 22, 2013



Barack Obama, 2006, in an interview with Tom Ashbrook and On Point.

I play this for you this morning because he told us right there what he was going to do and who he was.  The passing of universal health care was itself progressive, no matter how it was designed.
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Barack Obama is a bright man.  Brighter and more articulate than most of us, certainly than me.  herbert Hoover was a bright man, the whiz kid of the Republican party, commerce secretary.  If any body could do it, Herbert could do it. He comes down to us today as a stubborn, baffled bureaucrat who could not see the obvious.  Obama will become O'Hoover.  He cannot see the difference between single payer and corporate give-away, the need to attack climate change now when we have idle resource is not one he admits, the essential madness of austerity is treated as something in need of political compromise.  Is that old-time religeon, or is it a clear look at the world.

The point here is that Obama did not experiment to see what worked, as did FDR after Hoover.  Obama instead adopted the corporate preference plan, in health care, for Wall Street, the banks, the Energy Complex.


Now that part I agree with.  The country values a fair political process.  It is broken, I hear the polls telling me.  Not sure I hear Obama.  People are wanting to protect the environment for their children.  Doesn't seem to play.  Jobs are more important than deficits.  Not in the White House.  Social Security and Medicare -- they need to work for me says the common man and woman. ...  Just saying.

The inauguration was beautiful, though.

This week's post at REMacroBaseline.com is a short form of our paper entitled "Productivity, Unemployment and the Rule of 8" to be published in the upcoming issue of Real World Economics Review.  The premise is, and the evidence supports it, that in the medium and longer terms productivity varies inversely to the unemployment rate.  Unemployment goes down, productivity goes up.  Unemployment goes up, productivity goes down.  The chart has absolutely sinuous, I mean perfect, symmetry.  The R-squareds are okay.

Why?  Because, following from the first law of economics, when a resource becomes more scarce and expensive, its use is husbanded.  When labor is scarce, managers manage, workers are shifted to more productive tasks, productivity goes up.  And vice versa, when labor is plentiful and cheap, no new machinery or system is installed, run with the old.

Sounds sensible, but it is exactly the oppose of conventional wisdom, which says that in periods of high unemployment workers fear for their jobs, managers speed up the line, productivity goes up.  And in periods of low unemployment additional workers don't add as much to output as previous workers.  The law of diminishing labor productivity or diminishing marginal returns.  A law that is valid in only a limited number of cases, and certainly not in the mainstream industrial or service sectors.  Maybe in 19th Century agriculture.

Our paper touches on the Phillips Curve and NAIRU -- the non-accelerating inflation rate of unemployment -- and on the centrality of inflation to the orthodox economic mind.  The Phillips Curve is basically the notion that there is a trade-off between output and inflation. NAIRU defines a "natural rate" of unemployment by its effect on inflation.  And you get the Fed governors wrestling over the interest rate button.  Half of them think that as soon as inflation kicks in it will be too late, the fire of higher prices will burn out of control.  The other half think, No, at the first sign of inflation we can boost interest rates, sell our massive stock of bad mortgage securities, eat up the loose money and forestall that hellfire.

Even if the quantity theory of money upon which the strategy depends were not bogus to start with, there are other problems.  Neither half has thought this through.

The kind of inflation that higher interest rates could affect is demand-pull inflation, which is nowhere on the horizon, and if it were, we should welcome it.  It would mean full employment and renewed investment.  Instead what upward pressure there is on prices comes from cost-push inflation.  Particularly the inflation of commodity prices via the Fed's cheap chips for commodity speculators.  It is possible higher interest would reduce speculation, but higher interest is a cost that might also be added to prices.

The concept of potential GDP, potential output, is also dependent on inflation.  The idea being you know you're at potential GDP when inflation kicks in.  Phooey.  That inflation could very easily be temporary.


The most profoundly disappointing experience of the financial crisis for me has been the manifest failure to learn and adapt.  We have wasted a perfectly good crisis.

Demand Side has been laboring in the dark for many years, out of the mainstream by our choice to not accept absurd assumptions like perfect competition, the quantity theory of money, and house prices ballooning far beyond the incomes needed to afford them.

We saw in the Great Financial Crisis and the Great Recession not so much a validation of our sophisticated understanding, because it was not so sophisticated.  What we saw was the certain destruction of Rational Expectations, Monetarism, Market Fundamentalism, Neoclassical or so-called New Keynesianism. And the opportunity to grow in sophistication by learning from those who were right, from Dean Baker to Nouriel Roubini, George Soros, Steve Keen, James K. Galbraith.

Plug -- all those except Dean Baker have chapters in the Demand Side Book -- demandsidebooks.com.  And there was a lot to learn. Very gratifying.

But the destruction of the concepts and ideology in power that created the crisis and creates its subsequent stagnation littered with further crisis has not occurred.  Instead the politicians are arguing over how many limbs we should amputate to cure this case of malnutrition.  And the Wall Street types are blaming the politicians, while their lobbying continues unabated.  Obviously the funding ...   Banks continue not to function, pretending to be functional while collecting their back-door bailouts and continuing their nights in the casinos.  Employment continues to falter.

Why is that?

This question:  How can we have failed so miserably to learn from this great opportunity to learn?  It is not enough to wring our hands here at Demand Side and blame the obtuseness of men.  We've come up with some answers.

One, policy and practice that does not learn is well-funded by entrenched interests/ , the same interests that endowed the chairs at Harvard and Stanford in the pre-crisis to promote the error are still there, and they are still funding.  We think also of the Fix the Debt folks funded by Pete Peterson's billions.  Same message before the crisis and after.  Just change the wallpaper.  The banks and Wall Street, primary employers of economists or at least people who speak Economese; no interest in admitting banks are not functioning and need to be broken up. And we mentioned the academics who built fine careers and occupy endowed chairs, who have no reason to change their minds -- other than intellectual integrity -- and actually a lot of reason not to change them.

Two, the same funding is active in politics.  Money is power, money flows to power, power flows to money. However you want to phrase it. Campaigns are more for donors than for votes.  And the chosen policy simply finds its sympathetic economics.

The parallel to climate change is instructive.  Here, I would argue, the science was convincing for a decade before serious scientists started waving their hands.  There were academic positions to be protected and to intrude upon the TV watching public with apocalyptic warnings is just not in the DNA of many intellectuals.  But eventually -- I would say too late -- the scientific bodies came out forcefully.  They were frustrated by the political dynamics, and now we are off the climate change cliff.  Soon to 400 parts per million. That is the tragedy there.

The tragedy in economics is that it is bound up in world views that make the warnings of the serious seem like just another interest group  trying to get the goods.  So the talk has gone from how great the free market is to create all this housing wealth and aren't these financing innovations great TO "It's all just a minor blip," TO "Oops, Nobody saw this coming," TO "It must be the government's fault, but by the way the government needs to bail out my bank," to "We're going to rebound quickly," TO "It really was the government's fault and if they would just get out of the way the business confidence fairy would visit again," TO "It has to be this way, -- this stagnation is an inevitable and necessary phase to recovery because those bad mortgages have to paid off and we need to cut government at the same time."  The whole sequence without re-thinking the economics that created the mess.

And here is where Demand Side has to look in the mirror again.  We have our model, getting better all the time, but a model -- an explanation -- of how the economy works.  We love our model.  Those folks over there have their model -- the Market Fundamentalist model.  They love it.  It was good to them.  When it is threatened they cling to it as a part of themselves, because it is their explanation of the world.  Without it, the world does not make sense.  It is like walking on the ceiling.  It is as fundamental as a religious explanation.  It IS a religious explanation.  We can expect the roads to crumble and the land to melt into the sea before we experience any substantial conversion by these fundamentalists.

Maybe that is not so profound an epiphany on our part.  But we do think it points to where the debate should be directed.  Not at the academics, nor necessarily at the halls of Congress, but at the informed, interested, educated and alarmed population which has not been trained in hyper-conservative economic fundamentalism and to whom it is not a pillar upon which the world sits.  To some extent this group -- this very large group -- is the Occupy movement, but it should also be social insurance advocates, climate change activists, people who need jobs or better jobs, students, people who need government to work.  And these folks ARE coming up with the same sometimes obvious answers that economists who learned from the crisis advocate -- put people to work in green jobs or stop coddling the banks who caused the mess or don't cut education and transportation funding, it's good for the future and for the present in terms of jobs.

We do believe, however, that Demand Side can help. And we should crawl out of our own laboratories and start waving more vigorously in the public square.  You can help us with that, if you haven't already, by posting a rating or leaving a comment on the demandside podcast page.  This would be the demandside one word page.  Either is good, but new listeners would be better served by is we kept them off the demand side economics legacy page.

These are once weekly low volume sources of perspective.  And our model IS informed by the real world.

Tuesday, January 15, 2013

Transcript: Robert Pollin, Employment and Unemployment, and the events of 2012


That was Robert Pollin of the Political Economy Research Institute. We'll hear him later in the podcast with the short form of his take on 2013.

First, a little tardy, but our annual report on events widely reported that did not actually occur.

The Recovery,
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Sorry. We're still at it. We'll go into detail in coming months, but today let's break it down.

The Housing Recovery. Did it happen for you? Or are you still in a mortgage bigger than the house?

In many markets house prices ARE up, or at least sideways. There is a lot of activity with hedge funds and vulture funds coming to buy distressed properties to convert to rentals. But millions of families are locked into houses they are over-paying for and unable to even trade down because they don't have the 20 percent down payment.

Employment Recovery. Did it happen for you?

If you're young, Are you sure you went to school to work at Starbucks? Do you worry that these lost years will never be made up? Or do you take out another loan and go to graduate school? Or maybe just get another game app for the phone?

If you've lost your job, Aren't you sorry the new ones don't pay as well as they used to? Did you ever think you'd be working night security?

If you still have your job, Are you locked in there by that mortgage? The retirement plan has gone from sell the house for a nice profit to supplement the savings to no retirement, hold on to the job, hope you can squeeze into social security and Medicare at some future date.

Small Business Recovery? Just look at the NFIB sentiment survey. No reason to invest, expand, hire. Business conditions six months from now? That question was answered with gloom not seen since 2008. No. No recovery.

What else was widely reported and did not happen?

The Obama victory triggered the apocalypse? That was predicted. Did not happen. Seems to be business as usual, actually.

Deleveraging has progressed substantially and soon we will have a turnaround? Asserted by many. Has it happened?

Mortgage debt blew up in the 2000 to 2008 period, carrying total consumer debt (Home Equity, Auto Loans, Credit Cards, Student Loans) to a peak in the last day in office for George W. Bush. From six plus trillion to twelve plus trillion dollars.

It HAS come off a bit now, to around eleven trillion, on the fall in mortgage debt, as some households stick in there and pay down their loans, while others realize their losses through foreclosures and short sales.

But we've added in the student loan category, which has not quite doubled in the same period, now to $1 trillion. This is an alternative to unemployment. Borrow money to go to school. It is a sleeping crisis. With the rules the way they are, it could cripple the future for many of these people, even as it provides another profit center in the private economy, the no-value technical school.

So, Widely reported, not occurring, 2012 version

This week at the forecast blog, ReMacroBaseline.com, we take up employment and unemployment.

As we wrote in our last forecast in September 2011:
"Employment growth and the real rate of unemployment are not only key economic indicators. They are the measure of the economy. All the other numbers, including GDP growth and the other indices, are secondary. Labor is the primary capacity that must be used to its maximum. A full employment economy is the only healthy economy."

Unfortunately that blog is lost to the cyber-vortex which consumes those too lazy to keep up their domain registrations.

But the point remains.

Employment is in Depression. We are not yet back to the peak of nearly five years ago. Not back? We're barely halfway back. We dropped over 6% of the labor force, and we've added back slightly more than 3%. Meanwhile the labor force is growing. The Economic Policy Institute has a chart from 2012 which shows the jobs shortfall as being 8.9 million jobs, of which 5.2 million are jobs not added. That is, adjusted for population, we needed 5.2 million, or 3.8 percent of the labor force in additional jobs to keep to trend. That means -- adjusted for population -- there has been no recovery at all. We hit the bottom and have flat-lined since.

The closest thing in the post-war to this depth of job loss was in 1949, a short, sharp recession that went north into the wonderful unemployment rates, sub-4% and a decade of prosperity. That job loss was similar in percentage of the workforce terms, very much less in terms of population. 1949 came in the context of huge government debt, by the way, coming out of the war, greater as a percentage of GDP than today, and in the context of tremendous economic challenges in the transition from war to peace. We rebuilt Europe, built the American dream, and had time to practice containment of the Soviet Union. That was in the heyday of demand side economics.

Any argument that employment is recovering is specious. Wall Street likes to feature job growth, which is often a positive number, but as we said, barely tracking the growth in the labor force. And it likes the unemployment rate -- not because it is so good, but because it seems to be lower than it was at the depths.

In fact, job growth rarely peeks above 200,000 in a month, and we need 600,000 to get to recovery. The slow drop in the unemployment rate is not a sign of health, it is a symptom of stagnation, a function of the decline in job-seekers. The employment to population rate ought to be around 63%. It is stuck below 59% and is not moving.

Again, the unemployment rate IS coming down, not from any conspiracy hatched in the pocket-protected hearts of statisticians at the Bureau of Labor Statistics, but as a result of people having to make other plans. Getting onto Social Security early, going to school on credit, taking disability, or doing whatever they can.

We get into more of that, with charts, in the post at reMacroBaseline.com on Friday. But just a couple more quick notes:

Jobs are important on two counts. One, idleness is bad. Idle capacity means unmade goods and services, products we could use to build on. Two, the incomes that come with jobs are the demand that is the primary driver of market capitalism. The stagnation in the employment numbers is further exposed as a disease by the fact of falling real incomes for most workers. People who lose jobs and find another typically lose up to one-third of their take-home in the exchange. This is a recipe for further decline.

The higher-paying jobs are in investment-related industries, and there is a lot of public investment that is going unbuilt that needs to be built.

And a last note, we listened to Paul Krugman this week, and we have his book here, End This Depression Now. Some of our listeners know we are not great Krugman fans because of ... well, in this case, because a temporary pump-priming even on the scale Krugman suggests may be better than what we have now, but it is not sufficient to rescue the economy, nor restore long-term stability. Nor is it designed to. Krugman may be on the edge of what is politically possible, but economically we need substantial reform in banking, debt, health care, and public investment. This is a necessary regime for recovery. Krugman is offering two aspirins and call me in the morning for a serious systemic disease.

So, Before we get to Robert Pollin and his look into 2013... This episode of the Demand Side Forecast is brought to you by, yes, Demand Side the book, DemandSideBooks.com and reMacroBaseline.com, our new and in need of comment forecast blog, and by your democracy. Taking to the streets is all very nice, but wouldn't it be better if the representative government we have in place would represent people in a democratic manner? It would certainly make the chat about economics more relevant.

Now, on to Robert Pollin, courtesy of the Real News Network.


Tuesday, January 8, 2013

Transcript: Claudio Borio and the ghost of Hyman Minsky

Today on the podcast, Credit and the Financial Cycle, a look at a recent paper by Claudio Borio,

Then an excruciating experience listening in on economists
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The most talked about paper in recent months came from Claudio Borio of the Bank for International Settlements, BIS, working paper number 395, "The Financial Cycle and Macroeconomics: What Have We Learnt?"
"It is high time," Borio begins, "that we rediscovered the role of the financial cycle in macroeconomics. In the environment that has prevailed for at least three decades now, it is not possible to understand business fluctuations and the corresponding analytical and policy challenges without understanding the financial cycle."

We get deeper in the weeds with Borio in our post Thursday at ReMacroBaseline.com, and Mr. Borio displays an intellectual objectivity and critical thinking often and sadly lacking in the orthodoxy. But where has he been? What has he learnt? The most remarkable thing about this paper is that it is delivered entirely without referencing Hyman Minsky or Steve Keen. The financial cycle he explores here is the credit cycle, the boom and bust, and it is really more primitive in some ways than that developed by Minsky 35 years ago. In particular, the theta – time – component is still fundamentally T+1, T+2, etc, and not Minsky's historic time. And the sophistication of Minsky's financing structures of hedge, speculation and Ponzi is miles above what Borio approaches here.

And is he not aware that Steve Keen used the credit cycle, if you want to call it that, to predict the Great Financial Crisis? If this is the most enlightened of its support, which the BIS generally is, then it is no wonder official policy is so weak.

There is much to pique interest in the paper, and it is not exactly redundant to Minsky and Keen. So it provides a kind of stereoscopic effect which brings detail and depth. The empirical work is also extensive. Good to have all that stuff.

The link to the paper is in the transcript at demandsideeconomics.net, and we reproduce some of the charts Thursday at REMacro.

Borio tracks his financial cycle alongside the business cycle, producing impressive waves on graphs that some might take to be evidence of forces beyond the control of men, when in fact they are two-dimensional representations of human behavior. Not that Borio himself makes that mistake. For his part, he seems quite aware of the frailties of men and policy.

Some findings and observations from the paper:

"Recessions that coincide with the contraction phase of the financial cycle are especially severe."

Well, yes. They are "depressions," "debt deflations."

Soros, Keen, Minsky and others might say that the expansion phase of the financial cycle can simply wash out recessions. This is what happened in the period after 2000, when the Fed under Greenspan and the unfettered Wall Street innovations blew a credit bubble up over an employment recession. The eight years of George W. Bush produced fewer jobs than any other presidency in the post-war era. he came within a million or so of producing negative job numbers, with the great part of this time with the economy in recovery or expansion.

But I digress.

Other observations from Borio

Deregulation creates problems, or as he says,
"Financial liberalization weakens financing constraints, supporting the full self-reinforcing interplay between perceptions of value and risk, risk attitudes and funding conditions. A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation."

Demand Side might say, when you have the artillery trained on the inflation mouse, you can lose sight of the debt boom coyotes in the barnyard.

Again, reading through this, it's hard not to feel Minsky and Keen by their absence. I had an exchange with Professor Keen on another matter, but mentioned that the most remarkable accomplishment was producing all these observations without ever citing you or Hyman Minsky.

He replied dryly, "Yes, it was rather, though there were implicit references galore to Hyman. Maybe it was a tactical decision by Borio."

We'll take up a few more from Borio's piece, plus the charts, in Friday's post at reMacroBaseline.com, but here is one, under the subhead "Essential Features that require modeling"

"The financial boom should not just precede the bust, but cause it."

Quite reminiscent of Minsky's injunction that a model which cannot explain depressions is not a very good model of a capitalist economy. The real business cycle genre and general equilibrium models cannot.

We cannot, we could not, afford to screw up the economy like Wall Street did with the fools gold rush, unless Wall Street was going to pay for it. In Borio's terms, the financial cycle got out of control, fomented in the regulatory hands-off environment. Wall Street told the world what the market was, promised big returns, generated immense private debt. When the crash came, they demonstrated their control of government by getting bailed out completely without having to restructure in any meaningful form or really change the practices that brought about the crisis. The Fed has become, in former SEC chair Arthur Levitt's term, "the banker's protective association." The Treasury failed to sponsor effective mortgage relief, and has essentially run interference for the big banks under Tim Geithner. Now we have stagnation as far as the eye can see.

Recovery is waiting. That debt still needs to be written down. There are debt to equity strategies, there are – what we called for at the beginning and still ask for – Home Owners Loan Corporation individual writedowns. But four years into the mess and it is no better, for some it is worse. Borio's graphs display that we are not near an inflection point.

Okay, there is more here with Borio, look for the link, and we'll expand in our post at REMacro.

Now on to the excruciating part. A sequence of interviews assaulted our ears the first week of 2013.

The first was Nobel Prize winner Edmund "Ned" Phelps, who gave a phlebotic talk as the first Herbert Stein memorial lecture at the National economists Club. (I wonder what the opposite of phlebotic is? Agile?) Herb Stein was an economist in the room in 1971 at Camp David with Richard Nixon when the U.S. simultaneously abandoned the gold standard and instituted wage and price controls. That worked better than Ned Phelps nonsense in this lecture, but it didn't work very well. Phelps is a Nobel Prize winner. Sometimes, and this is one of them, I note that the Nobel Prize in Economics does not exist. It is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. A much longer title, a much shorter list of accomplishments. Milton Friedman is there, John Kenneth Galbraith is not. Enough said.


Keynesianism is, of course, slandered by such a characterization as "the belief government can dial up... " Keynesianism is demand side economics, dosed with a trenchant distrust of casino markets and developed in the financial sphere by the work of Hyman Minsky. It is equally Keynesian to promote private investment as it is public spending. We've done that for decades.

Now we have an overabundance of private goods production facilities, excess capacity, and nobody wants to invest into slack demand. There is a dearth – dearth is the opposite of plethora in over elaborate language – a dearth of public goods, infrastructure, climate change mitigation, education, and yes, health and human services. Public investment here means value created and jobs and incomes and demand for private goods, which is the real way out. Not to mention returns for investors backed by real value increases and tax revenues.

I didn't play and I won't play Phelps rant on corporatism, which is his term for an ideology that is followed by this or that president or public leader. In fact, corporate power selects leaders who believe what it wants leaders to believe. Selects and trains. These are not the best ideas, they are the ideas with the strongest backing. The successful politician is the one who sees which side of the bread the butter is on, and makes his or her choice accordingly. Or a likely ideologue is chosen for advancement.

The same is true in economics. To think of economics as flow charts and trend lines and cute theories and not to appreciate that the framework itself is determined by how well it fits institutional needs is to miss half of economics. Economics, economists, politicians, credibility, access, influence, operate in an ecosystem determined by the power arrangements.

The point I am laboring to make is maybe simpler than I am making it. And it is a point I think we are all beginning to get, with degrees of disturbance varying from annoyance to alarm. It is not the thought that determines the politics, it is the politics that determines the thought. The whole theory of Neoliberalism has worked for the powerful, but has not worked at all for the society writ large. Trickle down continues to dominate not for any empirical support or ratification by history. Thus the greatest support to sound economics is a vibrant institution of democracy. Democracy itself as the equal representation of each individual. Hardly what we have today.

And on

So. Brought to you by REmacrobaseline.com and by Demand Side the book. Links online.

Wednesday, January 2, 2013

Transcript: Rollout of ReMacroBaseline.com, fiscal cliff and some notes on Europe

Today, some passing comments on the fiscal cliff, a rollout of our new forecast blog, reMacroBaseline.com, and some notes from Richard Koo and Nouriel Roubini on the prospect for deterioration in Europe.

Our response to the fiscal cliff,

Well, it was nice to see the hysterical matrons of the market in a tizzy and the rest of the country not responding, and once again the Wall Street crowd forced to come up with excuses. But as to the fiscal cliff and the compromise itself?

In this football season, it's like seeing two teams clashing at the 50-yard line, one cheering that they've scored and the other cheering that they've stopped them. Or maybe its more like having a huge argument over how many holes in the hull are best for sea travel. At least there were no announced cuts in social insurance.
Listen to this episode
We are a long way away from stability and recovery, and we have yet to address the crises in jobs, education, infrastructure and climate change. Perhaps most problematic was the expiration of the 2% payroll tax holiday. It will be a hardship, and it needs to be offset by some high multiplier spending, say on infrastructure or aid to states.

But a game-changer? No

We rolled out the Forecast blog yesterday. reMacroBaseline.com. Over the first three months of the year, we hope to establish a comprehensive forecast, one which deals with the popular metrics of GDP, employment and unemployment, inflation, and so on, but is not so obsessed by them that it fails to see reality. The financialization of the economy has skewed economic thinking. The Fed and others think that if only market prices are happy and key metrics are in the green zone, then the economy is doing well. Not the case.

But for the first month we'll deal with those metrics, establish the projections and maybe have a little fun keeping score. In the second month we'll look at the actual condition of the economic world, from climate change to resource depletion and the destruction of the Commons, to investment and infrastructure, energy, transportation, and on into human capital, education, health care, and poverty.
In the third month we have to look at the command structure, the steering mechanism, the predator state, the potential for Democracy to reassert itself, and on into finance, banking and markets.

It's a broad scope, but we think forecasters set themselves too small a task when they focus on the track of certain aggregate numbers, as if these were readouts on dials from a hidden machine, the capitalist economy. There is no hidden machine. There is rampant unemployment, pathetic investment, much too small and not nearly in the right things. In fracking, for God's sake, rather than infrastructure for the future, high capacity transportation, clean energy production and transmission, retrofitting of buildings and massive R&D in non-carbon fuels, in education and health care .

Unemployment, underemployment and mis-employment are the overt evidence of an economy off the rails. the fact that corporate finance and markets have led – or driven – us here means they are blind. The fact that we let them continue to call the shots means we are blind.

And we're going to do the whole thing in 25 words or less. That is, we don't suffer from too little information, but too much, so reMacro will publish only once a week. BUT the scope is broad, so we're going to go through the sequence in subsequent quarters, create a record and hopefully a window big enough to see what is really going on.

Now, we would be remiss not to at least outline the 2013 Forecast, find it at reMacroBaseline.com.

The United States is bouncing along the bottom with downside risks, a bottom that is sloped downward. This has been the forecast for the past three-plus years at Demand Side Economics. Levels of employment and investment dropped dramatically during the Great Financial Crisis and have stagnated since that time. The Obama stimulus of 2009 provided only $250 billion of high multiplier public investment, an impulse that has long since died out. State and local government has become a permanent drag. Monetary policy has actually squeezed real disposable incomes both by depressing interest income and by inflating commodity prices. The fiscal policy debate is now mired in whether to have more or less austerity.

We see no change to public policy that would lead to a substantive recovery. No direct employment programs are on the horizon. The federal government has abandoned states and municipalities to fend for themselves. There will be no meaningful infrastructure spending. (A recent trial balloon for $50 billion in infrastructure would cover about one-fifth of what is needed for simple maintenance.) The climate cliff has happened without arousing any particular interest, and we await the moments of impact -- violent weather, lost resource capacity and permanently damaged natural systems. There will be no meaningful reparations to the middle class, nor a restoration of the egalitarian society which worked so well in decades before the 1980s.

Absent positive contribution from government and caught in its own negative feedback loops, the private sector is destined to drift lower. Investment will be lower. Asset prices will be lower, except as markets are juiced by bubble financing from the Fed. Consumer prices will be lower, again to the extent they escape the Fed's liquidity injections. Personal incomes will be lower. This is the bottom sloped downward.

The combination of easy money for financial players, the tremendous debt overhang in the private sector, and declining real incomes will expose fragile financing structures and lead to further threats of financial crises. Those threats will be met by straightforward debt adjustments or by prolonging the debt squeeze and shifting the pain from the financial sector to taxpayers. Debt adjustments would clear the economy for growth, but are the definition of systemic crisis. Shifting the pain in a way that preserves the current financial architecture exacerbates the inequality, injustice and potential for social disruption. These are the downside risks.

blah, blah, blah,

get that middle section and the charts at reMacroBaseline.com

We put in this rather cute point, however, here:

One last positive, however. The old people. In times prior to the Modern Era and even up through the late part of the last century, elders were leaders who were respected. For good reason. They had seen enough to know and survived enough to have demonstrated intelligence or values. In this early part of the 21st Century, with the retirement of baby boomers, we have an immense number of people with experience, and people with a stake in a working government. It once was said that you were liberal in your twenties and conservative in your fifties, but that was more a description of being co-opted than of aging. Now the boomers find the promises of seven percent gains in stocks year after year as ephemeral as their 401(k)s. 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 the broader interest with their time and talent, and do not become strictly an interest group for social insurance and health care, the power base for reform is set.

What is the forecast?

In terms of common metrics:
• GDP to sub-zero
• Employment in its current stagnant, deteriorating pattern
• Investment lower, both private and public
• Prices lower in real terms
• Easy money creating instability in financial markets
The GDP forecast is condensed to a single chart, which also displays our Net Real GDP, a number which displays the weakness of the private economy by the amount it relies on government deficits.

We have the real GDP number in negative territory beginning in Q1 2013, or really December 2012.

GDP and Net GDP

To engage with traditional forecasts, we need to translate our outlook into common economic parlance, which begin with the measurement of GDP.

Our view is that we scored an eight in the 2008 forecast, as opposed to the orthodox consensus scoring below one. We get credit for not missing the devastating drop, nor overestimating the subsequent rebound. [We, in fact, do not see the recovery at all in terms of the business cycle. The improvement in numbers is not a real economy event, but a statistical event conjured by big federal deficits, easy monetary policy and failure to make the structural adjustments necessary.]

The 2013 Forecasts predicts things on a shorter term, which is the reason for its variability. A flat line extension of both GDP and Net GDP from the 2008 Forecast would be an acceptable alternative. Net Real GDP is lower in our prediction than actual numbers because we anticipated greater interest in infrastructure spending.

But again, remember, even the flat line overstates the health of the economy going forward. GDP is not a good representation of the vitality or direction of a society. Much of the nominal growth is coming in health care, where bad accounting confuses inputs with outputs. And a great deal of economic deterioration is masked by resource depletion, environmental degradation and workforce decay.

Now we end the podcast with a couple of notes.

One from Richard Koo, he of the balance sheet recession, somewhat dated, but still relevant.
The question is how long democracy can survive with governments and EU institutions forcing the patient to undergo treatment for the wrong disease. Eurozone social security programs have made great strides since the prewar era, and as a result a recession will not lead to an immediate collapse of democratic government.

However, the term “democratic deficit” is appearing more frequently in Western newspapers, as more governments are implementing policies without going through proper democratic channels. The complete inability of leaders in the countries already experiencing double dips to present a plan for addressing the situation also casts a shadow over the outlook for democracy.

In Germany’s Weimar Republic, the unemployment rate was at 28% when the government pushed through austerity measures in the midst of a balance sheet recession, causing democratic structures to collapse.

In that sense I am deeply concerned about eurozone unemployment, which now stands at 24.8% in Spain [When Koo wrote this, now over 25% for the first time], and 23.1% in Greece [Now likewise over 25%]. Even more worrying, policymakers have been unable to present the public with a single persuasive scenario showing a way out of the current predicament.

The Weimar Republic collapsed in 1933 after Chancellor Heinrich BrĂ¼ning’s insistence on fiscal consolidation triggered an economic implosion. It is extremely unfortunate that the countries of Europe are repeating his mistake some eighty years later.

The one difference is that this time it is the lack of understanding of balance sheet recessions at the ECB, the EU, and the German government that is pushing the eurozone (ex Germany) in the wrong direction.

The Eurozone’s Delayed Reckoning

Nouriel Roubini
NEW YORK – The risks facing the eurozone have been reduced since the summer, when a Greek exit looked imminent and borrowing costs for Spain and Italy reached new and unsustainable heights. But, while financial strains have since eased, economic conditions on the eurozone’s periphery remain shaky.

Several factors account for the reduction in risks. For starters, the European Central Bank’s “outright monetary transactions” program has been incredibly effective: interest-rate spreads for Spain and Italy have fallen by about 250 basis points, even before a single euro has been spent to purchase government bonds. The introduction of the European Stability Mechanism (ESM), which provides another €500 billion ($650 billion) to be used to backstop banks and sovereigns, has also helped, as has European leaders’ recognition that a monetary union alone is unstable and incomplete, requiring deeper banking, fiscal, economic, and political integration.

But, perhaps most important, Germany’s attitude toward the eurozone in general, and Greece in particular, has changed. German officials now understand that, given extensive trade and financial links, a disorderly eurozone hurts not just the periphery but the core. They have stopped making public statements about a possible Greek exit, and just supported a third bailout package for the country. As long as Spain and Italy remain vulnerable, a Greek blowup could spark severe contagion before Germany’s election next year, jeopardizing Chancellor Angela Merkel’s chances of winning another term. So Germany will continue to finance Greece for the time being.

Nonetheless, the eurozone periphery shows little sign of recovery: GDP continues to shrink, owing to ongoing fiscal austerity, the euro’s excessive strength, a severe credit crunch underpinned by banks’ shortage of capital, and depressed business and consumer confidence. Moreover, recession on the periphery is now spreading to the eurozone core, with French output contracting and even Germany stalling as growth in its two main export markets is either falling (the rest of the eurozone) or slowing (China and elsewhere in Asia).

Moreover, balkanization of economic activity, banking systems, and public-debt markets continues, as foreign investors flee the eurozone periphery and seek safety in the core. Private and public debt levels are high and possibly unsustainable. After all, the loss of competitiveness that led to large external deficits remains largely unaddressed, while adverse demographic trends, weak productivity gains, and slow implementation of structural reforms depress potential growth.

To be sure, there has been some progress in the eurozone periphery in the last few years: fiscal deficits have been reduced, and some countries are now running primary budget surpluses (the fiscal balance excluding interest payments). Likewise, competitiveness losses have been partly reversed as wages have lagged productivity growth, thus reducing unit labor costs, and some structural reforms are ongoing.

But, in the short run, austerity, lower wages, and reforms are recessionary, while the adjustment process in the eurozone has been asymmetric and recessionary/deflationary. The countries that were spending more than their incomes have been forced to spend less and save more, thereby reducing their trade deficits; but countries like Germany, which were over-saving and running external surpluses, have not been forced to adjust by increasing domestic demand, so their trade surpluses have remained large.

Meanwhile, the monetary union remains an unstable disequilibrium: either the eurozone moves toward fuller integration (capped by political union to provide democratic legitimacy to the loss of national sovereignty on banking, fiscal, and economic affairs), or it will undergo disunion, dis-integration, fragmentation, and eventual breakup. And, while European Union leaders have issued proposals for a banking and fiscal union, now Germany is pushing back.

German leaders fear that the risk-sharing elements of deeper integration (the ESM’s recapitalization of banks, a common resolution fund for insolvent banks, eurozone-wide deposit insurance, greater EU fiscal authority, and debt mutualization) imply a politically unacceptable transfer union whereby Germany and the core unilaterally and permanently subsidize the periphery. Germany thus believes that the periphery’s problems are not the result of the absence of a banking or fiscal union; rather, on the German view, large fiscal deficits and debt reflect low potential growth and loss of competitiveness due to the lack of structural reforms.

Of course, Germany fails to recognize that successful monetary unions like the United States have a full banking union with significant risk-sharing elements, and a fiscal union whereby idiosyncratic shocks to specific states’ output are absorbed by the federal budget. The US is also a large transfer union, in which richer states permanently subsidize the poorer ones.

At the same time, while proposals for a banking, fiscal, and political union are being mooted, there is little discussion of how to restore growth in the short run. Europeans are willing to tighten their belts, but they need to see a light at the end of the tunnel in the form of income and job growth. If recessions deepen, the social and political backlash against austerity will become overwhelming: strikes, riots, violence, demonstrations, the rise of extremist political parties, and the collapse of weak governments. And, to stabilize debt/GDP ratios, the denominator must start rising; otherwise, debt levels will become unsustainable, despite all efforts to reduce deficits.

The tail risks of a Greek exit from the eurozone or a massive loss of market access in Italy and Spain have been reduced for 2013. But the fundamental crisis of the eurozone has not been resolved, and another year of muddling through could revive these risks in a more virulent form in 2014 and beyond. Unfortunately, the eurozone crisis is likely to remain with us for years to come, sustaining the likelihood of coercive debt restructurings and eurozone exits.

Read more at http://www.project-syndicate.org/commentary/the-inevitable-return-of-europe-s-crisis-by-nouriel-roubini#yA9lkjlzYLapIvFl.99

Today's podcast brought to you by Demand Side the book, demandsidebooks.com. Find Nouriel Roubini's chapter there. AND by reMacroBaseline.com, developing a forecasting framework for the future of reality.

Suzy Khimm’s summary of the fiscal cliff deal:

— Tax rates will permanently rise to Clinton-era levels for families with income above $450,000 and individuals above $400,000. All income below the threshold will permanently be taxed at Bush-era rates.

— The tax on capital gains and dividends will be permanently set at 20 percent for those with income above the $450,000/$400,000 threshold. It will remain at 15 percent for everyone else. (Clinton-era rates were 20 percent for capital gains and taxed dividends as ordinary income, with a top rate of 39.6 percent.)

— The estate tax will be set at 40 percent for those at the $450,000/$400,000 threshold, with a $5 million exemption. That threshold will be indexed to inflation, as a concession to Republicans and some Democrats in rural areas like Sen. Max Baucus (D-Mt.).

— The sequester will be delayed for two months. Half of the delay will be offset by discretionary cuts, split between defense and non-defense. The other half will be offset by revenue raised by the voluntary transfer of traditional IRAs to Roth IRAs, which would tax retirement savings when they’re moved over.

— The pay freeze on members of Congress, which Obama had lifted this week, will be re-imposed.

— The 2009 expansion of tax breaks for low-income Americans: the Earned Income Tax Credit, the Child Tax Credit, and the American Opportunity Tax Credit will be extended for five years.

— The Alternative Minimum Tax will be permanently patched to avoid raising taxes on the middle-class.

— The deal will not address the debt-ceiling, and the payroll tax holiday will be allowed to expire.

— Two limits on tax exemptions and deductions for higher-income Americans will be reimposed: Personal Exemption Phaseout (PEP) will be set at $250,000 and the itemized deduction limitation (Pease) kicks in at $300,000.

—The full package of temporary business tax breaks — benefiting everything from R&D and wind energy to race-car track owners — will be extended for another year.

— Scheduled cuts to doctors under Medicare would be avoided for a year through spending cuts that haven’t been specified.

— Federal unemployment insurance will be extended for another year, benefiting those unemployed for longer than 26 weeks. This $30 billion provision won’t be offset.

— A nine-month farm bill fix will be attached to the deal, Sen. Debbie Stabenow told reporters, averting the newly dubbed milk cliff.