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Tuesday, December 31, 2013

Transcript: Pope Francis v. Capitalism

... today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? 
As sometimes happens when we have too much time, we get distracted. Or should I say involved in interesting reading. The same happened this holiday, and it left us short of material for today's podcast. So we sought inspiration. Didn't find enough of it to be original, so we kept looking, and we found someone with the requisite inspiration and the material. This is the relevant economics from the letter, or book, message, from Jorge Mario Bergoglio, known these past eight months as Francesco, Pope Francis.

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2. The great danger in today’s world, pervaded as it is by consumerism, is the desolation and anguish born of a complacent yet covetous heart, the feverish pursuit of frivolous pleasures, and a blunted conscience. Whenever our interior life becomes caught up in its own interests and concerns, there is no longer room for others, no place for the poor. God’s voice is no longer heard, the quiet joy of his love is no longer felt, and the desire to do good fades. This is a very real danger for believers too. Many fall prey to it, and end up resentful, angry and listless. That is no way to live a dignified and fulfilled life; it is not God’s will for us, nor is it the life in the Spirit which has its source in the heart of the risen Christ.



50. ...Today, we frequently hear of a “diagnostic overload” which is not always accompanied by improved and actually applicable methods of treatment. ...

51. It is not the task of the Pope to offer a detailed and complete analysis of contemporary reality, but I do exhort all the communities to an “ever watchful scrutiny of the signs of the times”.[54] This is in fact a grave responsibility, since certain present realities, unless effectively dealt with, are capable of setting off processes of dehumanization which would then be hard to reverse. ...

I. Some challenges of today’s world

52. In our time humanity is experiencing a turning-point in its history, as we can see from the advances being made in so many fields. We can only praise the steps being taken to improve people’s welfare in areas such as health care, education and communications. At the same time we have to remember that the majority of our contemporaries are barely living from day to day, with dire consequences. A number of diseases are spreading. The hearts of many people are gripped by fear and desperation, even in the so-called rich countries. The joy of living frequently fades, lack of respect for others and violence are on the rise, and inequality is increasingly evident. It is a struggle to live and, often, to live with precious little dignity. This epochal change has been set in motion by the enormous qualitative, quantitative, rapid and cumulative advances occurring in the sciences and in technology, and by their instant application in different areas of nature and of life. We are in an age of knowledge and information, which has led to new and often anonymous kinds of power.

No to an economy of exclusion

53. Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality. Such an economy kills. How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. Can we continue to stand by when food is thrown away while people are starving? This is a case of inequality. Today everything comes under the laws of competition and the survival of the fittest, where the powerful feed upon the powerless. As a consequence, masses of people find themselves excluded and marginalized: without work, without possibilities, without any means of escape.

Human beings are themselves considered consumer goods to be used and then discarded. We have created a “throw away” culture which is now spreading. It is no longer simply about exploitation and oppression, but something new. Exclusion ultimately has to do with what it means to be a part of the society in which we live; those excluded are no longer society’s underside or its fringes or its disenfranchised – they are no longer even a part of it. The excluded are not the “exploited” but the outcast, the “leftovers”.

54. In this context, some people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and na├»ve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system. Meanwhile, the excluded are still waiting. To sustain a lifestyle which excludes others, or to sustain enthusiasm for that selfish ideal, a globalization of indifference has developed. Almost without being aware of it, we end up being incapable of feeling compassion at the outcry of the poor, weeping for other people’s pain, and feeling a need to help them, as though all this were someone else’s responsibility and not our own. The culture of prosperity deadens us; we are thrilled if the market offers us something new to purchase. In the meantime all those lives stunted for lack of opportunity seem a mere spectacle; they fail to move us.

No to the new idolatry of money

55. One cause of this situation is found in our relationship with money, since we calmly accept its dominion over ourselves and our societies. The current financial crisis can make us overlook the fact that it originated in a profound human crisis: the denial of the primacy of the human person! We have created new idols. The worship of the ancient golden calf (cf. Ex 32:1-35) has returned in a new and ruthless guise in the idolatry of money and the dictatorship of an impersonal economy lacking a truly human purpose. The worldwide crisis affecting finance and the economy lays bare their imbalances and, above all, their lack of real concern for human beings; man is reduced to one of his needs alone: consumption.

56. While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules. Debt and the accumulation of interest also make it difficult for countries to realize the potential of their own economies and keep citizens from enjoying their real purchasing power. To all this we can add widespread corruption and self-serving tax evasion, which have taken on worldwide dimensions. The thirst for power and possessions knows no limits. In this system, which tends to devour everything which stands in the way of increased profits, whatever is fragile, like the environment, is defenseless before the interests of a deified market, which become the only rule.

No to a financial system which rules rather than serves

57. Behind this attitude lurks a rejection of ethics and a rejection of God. Ethics has come to be viewed with a certain scornful derision. It is seen as counterproductive, too human, because it makes money and power relative. It is felt to be a threat, since it condemns the manipulation and debasement of the person. In effect, ethics leads to a God who calls for a committed response which is outside the categories of the marketplace. When these latter are absolutized, God can only be seen as uncontrollable, unmanageable, even dangerous, since he calls human beings to their full realization and to freedom from all forms of enslavement. Ethics – a non-ideological ethics – would make it possible to bring about balance and a more humane social order. With this in mind, I encourage financial experts and political leaders to ponder the words of one of the sages of antiquity: “Not to share one’s wealth with the poor is to steal from them and to take away their livelihood. It is not our own goods which we hold, but theirs”.[55]

58. A financial reform open to such ethical considerations would require a vigorous change of approach on the part of political leaders. I urge them to face this challenge with determination and an eye to the future, while not ignoring, of course, the specifics of each case. Money must serve, not rule! The Pope loves everyone, rich and poor alike, but he is obliged in the name of Christ to remind all that the rich must help, respect and promote the poor. I exhort you to generous solidarity and to the return of economics and finance to an ethical approach which favours human beings.

No to the inequality which spawns violence

59. Today in many places we hear a call for greater security. But until exclusion and inequality in society and between peoples are reversed, it will be impossible to eliminate violence. The poor and the poorer peoples are accused of violence, yet without equal opportunities the different forms of aggression and conflict will find a fertile terrain for growth and eventually explode. When a society – whether local, national or global – is willing to leave a part of itself on the fringes, no political programmes or resources spent on law enforcement or surveillance systems can indefinitely guarantee tranquility. This is not the case simply because inequality provokes a violent reaction from those excluded from the system, but because the socioeconomic system is unjust at its root. Just as goodness tends to spread, the toleration of evil, which is injustice, tends to expand its baneful influence and quietly to undermine any political and social system, no matter how solid it may appear. If every action has its consequences, an evil embedded in the structures of a society has a constant potential for disintegration and death. It is evil crystallized in unjust social structures, which cannot be the basis of hope for a better future. We are far from the so-called “end of history”, since the conditions for a sustainable and peaceful development have not yet been adequately articulated and realized.

60. Today’s economic mechanisms promote inordinate consumption, yet it is evident that unbridled consumerism combined with inequality proves doubly damaging to the social fabric. Inequality eventually engenders a violence which recourse to arms cannot and never will be able to resolve. It serves only to offer false hopes to those clamouring for heightened security, even though nowadays we know that weapons and violence, rather than providing solutions, create new and more serious conflicts. Some simply content themselves with blaming the poor and the poorer countries themselves for their troubles; indulging in unwarranted generalizations, they claim that the solution is an “education” that would tranquilize them, making them tame and harmless. All this becomes even more exasperating for the marginalized in the light of the widespread and deeply rooted corruption found in many countries – in their governments, businesses and institutions – whatever the political ideology of their leaders.

Some cultural challenges

61. ... We should recognize how in a culture where each person wants to be bearer of his or her own subjective truth, it becomes difficult for citizens to devise a common plan which transcends individual gain and personal ambitions.

62. In the prevailing culture, priority is given to the outward, the immediate, the visible, the quick, the superficial and the provisional. What is real gives way to appearances. In many countries globalization has meant a hastened deterioration of their own cultural roots and the invasion of ways of thinking and acting proper to other cultures which are economically advanced but ethically debilitated. This fact has been brought up by bishops from various continents in different Synods. The African bishops, for example, taking up the Encyclical Sollicitudo Rei Socialis, pointed out years ago that there have been frequent attempts to make the African countries “parts of a machine, cogs on a gigantic wheel. This is often true also in the field of social communications which, being run by centres mostly in the northern hemisphere, do not always give due consideration to the priorities and problems of such countries or respect their cultural make-up”....


We are living in an information-driven society which bombards us indiscriminately with data – all treated as being of equal importance – and which leads to remarkable superficiality in the area of moral discernment. In response, we need to provide an education which teaches critical thinking and encourages the development of mature moral values.

That from the


A little background and some audio from observers and commentators, including Rush Limbaugh, David Brooks and John Stewart follows.

Before that, I offer my caution, in the words of John Kenneth Galbraith, a remarkable and moral economist.
"People of privilege almost always prefer to risk total destruction rather than surrender any part of their privileges. Intellectual myopia, often called stupidity, is a reason. There is also the inevitable feeling that privilege, however egregious, is a basic right. The sensitivity of the poor to injustice is a small thing as compared with that of the rich."


Evangelii Gaudium is Latin for Joy of the Gospel. Its purpose is not to teach new doctrine, but to suggest how Church teachings and practices can be profitably applied today.

It is one of the more important papal documents—more important, for example, than a Wednesday audience or a homily. As it is of a pastoral nature rather than a doctrinal or legal nature, though, it is ranked lower than an encyclical or an apostolic constitution.

Usually, the pope does not draft the document himself, but it is drafted based on his decisions, and he has final approval over what it says. Pope Francis’s decision in this case is similar to his decision to release the encyclical Lumen Fidei, which was primarily drafted by Pope Benedict, but which he completed.

Unlike that case, though, Pope Francis contributed much, much more to this document.
With Lumen Fidei, he did not add very much to what Pope Benedict had written. Evangelii Gaudium, by contrast, is much more a “Francis document.” It regularly emphasizes the distinctive thought and themes of the new pope.

Newsy ran this description:


Rush Limbaugh had this to say

LIMBAUGH: I mentioned, last night -- I was doing show prep last night -- usual routine. And I ran across this -- I don't actually know what it's called -- the latest papal offering, statement from Pope Francis. Now, up until this -- I'm not Catholic. Up until this, I have to tell you, I was admiring the man. I thought he was going a little overboard on the "common man" touch, and I thought there might have been a little bit of PR involved there. But nevertheless, I was willing to cut him some slack. I mean, if he wants to portray himself as still from the streets of where he came from and is not anything special, not aristocratic, if he wants to eschew the physical trappings of the Vatican -- OK, cool, fine.

But this that I came across last night -- I mean, it totally befuddled me. If it weren't for capitalism, I don't know where the Catholic Church would be. Now, as I mentioned before, I'm not Catholic. I admire it profoundly, and I've been tempted a number of times to delve deeper into it. But the pope here has now gone beyond Catholicism here, and this is pure political. Now, I want to share with you some of this stuff.

"Pope Francis attacked unfettered capitalism as 'a new tyranny.' He beseeched global leaders to fight poverty and growing inequality, in a document on Tuesday setting out a platform for his papacy and calling for a renewal of the Catholic Church. In it, Pope Francis went further than previous comments criticizing the global economic system, attacking the 'idolatry of money.' "

I've gotta be very caref-- I have been numerous times to the Vatican. It wouldn't exist without tons of money. But, regardless, what this is -- somebody has either written this for him or gotten to him. This is just pure Marxism coming out of the mouth of the pope. There's no such -- "unfettered capitalism"? That doesn't exist anywhere.

Rush was willing to cut him some slack, but no more. Note: the term unfettered capitalism does not appear in the material. Neither "unfettered" nor "capitalism." Apparently Rush recognized it from the description.

David Brooks had a somewhat softer tone.


We hope Francis is taking notes on the business of how to be a proper pope.

And John Stewart of the Daily Show had some fun with the right wing reaction.


Tuesday, December 24, 2013

Transcript: Richard Parker on Greece, Europe, Americanization of the Globe, and Left of Center Politics

Remarks from Richard Parker, fellow Kennedy School of Government, Harvard
advisor to George Papandreou 2009-2011

Remarks Delivered November 4, 2013, LBJ School of Public Affairs
Conference: Can the Eurozone Be Saved
Panel: "Alternatives for Greece"

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Transcript: The Eurozone is Fragmenting

Europe is fragmenting. It is breaking apart along social and national lines, that is, by class and by country. It is not in the news because the bad markets are stabilized for the time being, and as with our own country, the illusion of peace is produced by happy financial markets. But also as in the US, the price of this peace is the impoverishment of millions. Decades of work have evaporated for some. For others only a decade. And an anxiety that is new has infected all, stemming from the subservience of the common good to the temporary well-being of the few but powerful.
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In fact, Europe is doomed to survive. I start with that as my opening context. Europe from 1789 and the fall of the Bastille to 1989 and the fall of the Berlin Wall has represented two hundred years of a bloody and very circuitous attempt to sustain the idea of democracy across the continent. By and large, that has largely now proved to be a success. Democracy can now be said to exist across Europe. But it is an imperfect democracy, and the ways in which it is imperfect are the foundations for what ought to be the political discussion going forward, and it is the political discussion that ought to frame the policy recommendations, rather than the other way around.

My great fear is that, after the experience of serving as an adviser to Prime Minister Papandreou, and actually serving on the Greek team that negotiated with the Troika and the Greek team that negotiated with the private banks ... and in fact was in a number of meetings with the bankers, and so have a very jaundiced view of the global financial system as a consequence ... that there is a deep dilemma at the heart of not only the Greek situation, but the European and in fact the global political situation, and let me describe it this way. I use the idea of matryoshka dolls, those wonderful Russian dolls of dolls within dolls.

Greece and Greece's fiscal crisis is the smallest of the dolls in this set of nested dolls. It is two percent of the European economy. Its deficit was one-tenth of that two percent. It should never have been the precipitant of the scale of crisis that we have today in Europe.

One step above that tiny doll is the euro doll and whether or not there was a misconfiguration in the design of the euro which created a central bank that lacked the power to act as a lender of last resort and also lacked a coordinate fiscal policy regime that covered Europe. But that's not the large doll for me, either.

One step above that is the deregulation of Anglo-American finance which has taken place over the last thirty years, which I think in some ways has been far more determinant of the problems of Europe than, in fact, the design or misdesign of the euro as such, although the misdesign of the euro as such, and in particular, not the coordination of fiscal policies, but the lack of immediate lender of last resort capacity for the ECB made the crisis in Europe worse.

But I want to step up two more levels to two larger dolls.

Beyond the Anglo-American financial architecture that has been put in place over the last thirty years is the realization that with the fall of Communism, the United States is pivoting toward Asia, and the world is being globalized at an extraordinarily rapid rate. Although I prefer to use the term Americanized rather than globalized. Because the degree to which American business practices and American financial practices and focus on American attributes of power are at the center of this globalization process cannot be underestimated. I think it is important to note that, because finally the largest of the dolls that I think should be at the heart of the discussion at a place like this is the decline in the values of democratic ideals, of the role of democratic parties, and in particular, left of center parties across the West, and indeed across the world today.

There is a deep intellectual crisis that is tied to that lack of focus, that lack of purpose, that would identify a left of center set of parties, whether in Europe or North America or the rest of the world. I believe deeply that the crisis that future generations would face is in no small part growing out of that inability to create a narrative that is on one hand national and on the other hand global that would broadly encompass what have traditionally been the values of the Left in that two hundred year struggle to create democracy in Europe.

Now the issue for me then is of trying to get get Greece back on its feet, but in the process to provoke a larger and deeper and longer discussion of the world that we want Greece to be able to return to, as a full partner. It is important to understand that in those two hundred years of Europe's struggle to create stable democracy across the continent, in the last sixty-five, since the end of the Second World War, the United States has had its hands all over Europe in one way or another, in the process of leading toward democratization. Europe seems not to be fully conscious of both the benefits and costs of that US role. The benefits are framed in terms of the Marshall plan. And one hears today of the need for a new Marshall Plan. One hears of the generosity of the Americans of the need for Europe, and in particular Germany, to show the kind of generosity that the US showed toward Europe in the immediate aftermath of the Second World War. The story was always a much more complicated one.

Along with the Marshall Plan came NATO. And along with NATO came anti-Communism. And if you don't know, you might be interested to know, that the very first order of the National Security Council -- the arm of the White House charged with overseeing US foreign policy -- the very first order of the National Security Council was to intervene covertly in Italian elections in 1946 to block the emergence of Left parties in Italy of achieving governance powers. The United States has in other words had multiple levels of intervention in European politics and economics throughout this sixty-five-year period. And if Europe thinks it can chart a direction for its member states, Greece or Germany, without full attentiveness to what the Americans think is important, in which this new world that is emerging and puts the G2 of Beijing an Washington replaces the old bilateral world of Moscow and Washington in terms of the Cold War, Europe had best think again. Because the fact of the matter is that the downward pressure operating on European wages and European welfare systems is the same pressure operating on the American side of the Atlantic as well.

We have to accept that until we can somehow negotiate global deals that somehow reverse that process, Europe is not going to be able to construct a picket fence around the continent that will protect its most vulnerable members from the enormous pressures that that global downward pressure of an Americanizing economic system across the planet is going to create, and has already begun to create. That, in turn, then places the Europeans a responsibility for energizing left of center parties in a way that once again moves away from the role in which they seem to have found themselves in the last quarter century which is as the happier social cost accounts than the dour austerity-minded social cost accountants of the right of center parties. It is not enough to be better managers as political parties in a democratic system. There is a need to provide a democratic explanation of why we are democracies to Democratic voters across the continent. In this I would call upon all of you at a conference like this to be attentive not only to what your professional roles are in providing policy recommendations, but to the absolute necessity of providing a language of democracy to the whole polis, and that convincing Democratic citizens that left of center parties are in fact differentiable from right of center parties, to trust that there is a vision to the left of the center in Europe and North America that can be built out across the world.

Because without that, you will find going on what we find in the United States and you find here, which is that voters don't trust left of center parties to make a difference. In the 1930's the kinds of crises engendered by the Great Depression led to the growth of unions, led to the growth of left of center parties. Roosevelt was able to accomplish so much because he won reelection time and again with more than 60% of the vote, and the Democratic Party controlled 75 percent of the seats in the Congress in the 1930's. There is no state in Europe and certainly it does not exist in Washington that can claim that kind of unilateral left of center support. I think it is not just a failure of policy, it is a failure of imagination.

So I credit Syriza and Mr. Tsipras with struggling in the context of Greece to find the words that would articulate democratic left of center policies that make sense going forward. A debt write-down of extraordinary proportions is absolutely at the center of this. Major investment funds, absolutely central. And solidarity around issues of human suffering -- absolutely essential. But Greek political leaders of the Left, like European leaders of the Left, owe their citizens and one another a larger vision than the reconstruction of a peaceable, small Europe at the periphery of history.
Richard Parker is a fellow at the Kennedy School of Government at Harvard. These remarks were recorded at a recent conference at the LBJ School at the University of Texas - Austin. We podcast the full, maybe ten twelve minutes as a separate podcast and provided a text of these remarks -- something we don't always do -- in their place in today's podcast transcript at DemandSideEconomics.net.

The problems of Europe are a mirror of the problems of the United States. Inadequate investment, to understate the matter, investment controlled by corporations producing salable goods rather than needed public goods, an abuse of democracy by corporate interests -- led by the financial sector, and the unnecessary misery of millions.

It is not true that the federal structure of the Eurozone and EU prevents delivering direct and immediate solutions. In the US we are prohibited only by political will from enacting tax and regulatory reform that would reduce the power of the financial sector and corporate oligarchy over government. The political frame has moved so far to the right that it can see only a silly morality play about federal debt and deficits and ... well, you've seen it. Investment in infrastructure and the beginnings of the redesign of the economy mandated by climate change are stalled for no good reason. The economics of austerity, the madness of austerity, is preferred because we think if we save the money, we will save the people. It is, of course, the reverse that is true. If we save the people, we will save the money. No country has ever recovered economic growth by austerity. The Tea Party is the Mad Hatter's Tea Party. Still, the camera has effectively been moved from the financial crisis and its children to the dog and pony show of deficit and debt. No matter that the intellectual rationale has proven to be a sham, see the Rogoff and Reinhart debacle.

What is the situation in Europe? A series of charts online shows that only Germany is a bump above pre-crisis GDP, that employment has tanked across the board, and that the debt-to-GDP ratios that were the objective of austerity have -- surprise -- gone in the opposite direction as predicted by the Troika -- ECB, IMF and EU -- when they demanded the austerity. And the first of the charts shows the extremely poor track record of those predictions. The confidence fairy never showed up, apparently. Official predictions every six months predicted an imminent recovery and saw instead continued decline. The only positive chart is that for interest rate spreads, which did moderate enormously following the ECB's commitment to buy sovereign debt, never used, on conditions, but so far effective in calming the markets.

Real investment and growth lie in the opposite direction of the madness of austerity, and only in that direction will we find social stability, as well. The dark sister of the confidence fairy blocks the way. TINA. There is no alternative. The official line is now that the necessary actions cannot be taken because the ECB and EU lack the institutional powers, because the level of solidarity between the nations, between the core and the periphery is not strong enough to allow Eurobonds, the mutualization of debt or significant streams of support to those in need. A recent paper by Varifoukis, Holland and Galbraith exposes the fact that TINA has no more substantial existence than the confidence fairy, and that there are indeed things that can be done in the immediate term through the ECB and other federal functions to address the crisis. And be sure, the crisis continues and continues to increase. Imagine 30 percent unemployment in the US and whether or not we would be wondering if the crisis was over. Europe is fragmenting, and the European experiment is considered a failure by more and more of its citizens.

Borrowing extensively in the following from the Varifoukis-Holland-Galbraith paper, what is the situation? (That paper is linked to in the transcript, or just Google "A Modest Proposal for Resolving the Eurozone Crisis.")

In the US and in Europe, there are really four crises: banking, debt, investment and social crises.

A banking crisis. And in this case it is worse in Europe than the US. Although the bailouts followed by no restructuring of the profligate banking institutions is the same in different clothes, there IS a move toward re-regulation in the US, although the political willingness to run the gauntlet of lobbyists is not all it needs to be. In Europe, there is "a central bank with no government, and national governments with no supportive central bank, arrayed against a global network of megabanks they cannot possibly supervise. Europe's response has been to propose a full Banking Union -- a bold measure in principle but one that threatens both delay and diversion from actions that are needed immediately."

The debt crisis continues in the US in the household sector and in public pensions. There is no federal debt crisis. Corporate debt issues have been settled by cheap refinancing sponsored by the Fed, but the household sector saw its bet on the housing market turn tragically sour. Its debts remain. Its equity has dwindled.

In Europe, "the credit crunch of 2008 revealed the Eurozone’s principle of perfectly separable public debts to be unworkable. Forced to create a bailout fund that did not violate the no-bailout clauses of the ECB charter and Lisbon Treaty, Europe created the temporary European Financial Stability Facility (EFSF) and then the permanent European Stability Mechanism (ESM). ...

The ECB came up with another approach in the summer of 2012 to stem a market attack on the credit of several Eurozone members, including Spain and Italy. The Outright Monetary Transactions’ Programme (OMT) succeeded in calming the bond markets, but it fails as a solution to the crisis, because its threat against bond markets cannot remain credible over time. And while it puts the public debt crisis on hold, it fails to reverse it; ECB bond purchases cannot restore the lending power of failed markets or the borrowing power of failing governments.

The third is the investment crisis. Which is also the jobs crisis that we have been on about here at Demand Side. In principle there is no obstacle to public investment in infrastructure, education or addressing that looming climate catastrophe, and such investment would resolve the depression in employment. Useful, cost-effective productive investment is everywhere to be seen. Just not in salable goods.

Only Germany ran trade surpluses after 2000, the resulting trade deficits of others ensured that when crisis hit in 2008, the deficit zones would collapse. Then the burden of adjustment fell exactly on the deficit zones, which could not bear it. Nor could it be offset by devaluation, since everybody used the euro, so the scene was set for disinvestment in the regions that needed investment the most. Europe ended up with both low total investment and an even more uneven distribution of that investment between its surplus and deficit regions.

The fourth is the social crisis. The price of happy markets is apparently the loss of a generation in the US. In Europe, three years of harsh austerity have taken their toll on the people from Athens to Dublin and from Lisbon to Eastern Germany. Millions of Europeans have lost access to basic goods and dignity. Unemployment is rampant. Homelessness and hunger are rising. Pensions have been cut; taxes on necessities meanwhile continue to rise. For the first time in two generations, Europeans are questioning the European project, while nationalism, and even Nazi parties, are gaining strength.

The solutions? Immediate and practicable solutions?

Europe cannot wait until a banking union is formed. Prior to a banking union banks in need of recapitalisation from the ESM  can be turned over to the ESM directly – instead of having the national government locked in a death embrace with the nation's banks, the ESM, and not the national government, would control, then restructure, recapitalize and resolve the failing banks.

The Eurozone must eventually become a single banking area with a single banking authority. But this final goal has become the enemy of good current policy. At the June 2012 European Summit direct bank recapitalisation was agreed upon in principle, but was made conditional on the formation of a Banking Union. Since then, the difficulties of legislating, designing and implementing a Banking Union have meant delay and dithering. A year after that sensible decision, the deadly embrace between insolvent national banking systems and insolvent member-states continues.

A national government could have the option of waiving its right to supervise and resolve a failing bank. The ESM and the ECB can supervise the workout. Once the bank has been restructured and recapitalised, the ESM could sell its shares and recoup its costs. The process of making sovereigns pay for the misdeeds of banks is unfair and unwarranted.

To deal with sovereign debt, a new facility could be offered through the ECB to convert debt up to 60 percent of GDP, which is the Maastricht Treaty limit, convert it to low-interest debt. The ECB can sell bonds probably at less than 2% that are completely safe, and pass the low interest on to sovereigns, make them super-senior to other debt, and even insure the loans. thus go one long step to making nations' economies viable.

The current illusion of peace in the bond markets comes because of the OMT, but no country has taken advantage, because to do so would also commit that country to accepting the financial management of the Troika -- the ECB, EU, and IMF -- and any government which did such a thing would be out on its ear the next day. For god reason, because the policies of austerity propounded by the Troika continue to fail at every turn. Thus the OMT is a non-credible threat to bond dealers who will sooner or later test the ECB.

As to public investment. Public investment can be financed -- without Eurobonds which require more solidarity between EU members than exists even in the shadows. The paper identifies an Investment-Led Recovery and Convergence Programme. In principle the EU already has a recovery and convergence strategy in the European Economic Recovery Program 2020. In practice, this has been shredded by austerity. But a program could be co-financed by bonds issued jointly by the European Investment Bank (EIB) and the European Investment Fund (EIF). The EIB has a remit to invest in health, education, urban renewal, urban environment, green technology and green power generation. The EIF can both co-finance EIB investments and finance a European venture capital fund, which was part of its original design.

Borrowing for such investments should not count on national debt any more than US Treasury borrowing counts on the debt of California or Delaware. The under-recognised precedents for this are (1) that no major European member state counts EIB borrowing against national debt, and (2) that the EIB has successfully issued bonds since 1958 without national guarantees.

A European Venture Capital Fund financed by EIF bonds was backed unanimously by employers and trades unions on the Economic and Social Committee in their 2012 report Restarting Growth. Central European economies (Germany and Austria) already have excellent finance for small and medium firms through their Mittelstandpolitik. It is the peripheral economies that need this, to build new sectors, to foster convergence and cohesion and to address the growing imbalances of competitiveness within the Eurozone.

Notice that interest sponsored by the ECB is not generating private investment in Europe any more than the cheap interest sponsored by the Fed is generating private investment in the US. Large public investment is needed for its own sake and on a scale that would be large enough to work as a recovery lever. The paper goes into detail on that program and the alternatives.

The fourth crisis is the social crisis -- poverty, hunger, homelessness and the lack of basic energy. Basic needs are not being met. There is funding available via the so-called TARGET2 interest that could provide a European Food Stamp Program and a European Minimum Energy Program. While not in the paper, a European-wide social security program is also feasible. These three, particular the latter, could give citizens the sense of something working FOR them in the European experiment. These are simple, effective, decentralized and not susceptible to corruption. Young Europeans see themselves as Europeans first and nationalists second, more than we suspect. Just as we consider ourselves Americans first and Washingtonians or Floridians or Texans ... well, maybe not Texans ... second. This citizen buy-in is crucial to our stability and would likely help Europe as well.

The paper concludes:

Three years of crisis have culminated in a Europe that has lost legitimacy with its own citizens and credibility with the rest of the world. Europe is unnecessarily back in recession. While the bond markets were placated by the ECB's actions in the summer of 2012, the Eurozone remains on the road toward disintegration. While this process eats away at Europe's potential for shared prosperity, European governments are imprisoned by false choices:

  • between stability and growth 
  • between austerity and stimulus
  • between the deadly embrace of insolvent banks by insolvent governments, and an admirable but undefined and indefinitely delayed Banking Union
  • between the principle of perfectly separable country debts and the supposed need to persuade the surplus countries to bankroll the rest 
  • between national sovereignty and federalism. 

The bank program bypasses the impasse of Banking Union, decoupling stressed sovereign debt from banking recapitalisation, and allowing for a proper Banking Union to be designed at leisure. With the debt conversion program, nations' mountains of debt shrink. The Investment-led Recovery and Convergence Programme re-cycles global surpluses into European investments , and the so-called "Emergency Social Solidarity Programme" deploys funds created from the asymmetries that helped cause the crisis to meet basic human needs caused by the crisis itself.

The proposals maintain greater sovereignty for member-states than that implied by a federal structure, and reduces excess national debt without the need for national guarantees or fiscal transfers. The Modest Proposal suggests no new institutions and does not aim at redesigning the Eurozone. It needs no new rules, fiscal compacts, or troikas. It requires no prior agreement to move in a federal direction while allowing for consent through enhanced cooperation rather than imposition of austerity.

It is in this sense that this proposal is, indeed, modest.

It needs to be emphasized that only one of the steps is not enough. In particular, the banking program and conversion of debt by itself will not lead to the jobs and social improvement absolutely required. But again, as Richard Parker pointed out, all the beautiful policy inspiration in the world will not substitute for a political will. The policies are indeed at hand and practical, but the solutions will not come through logic and persuasion of current figures in power. The Troika marches to a drum that ignores the evidence. We trust that political will is not so far away, in Europe or in North America.

Thursday, December 19, 2013

Transcript: Here, Janet, You Take It: Bernanke bails out with QE blunder still running

Today, QE, tapering, how the Fed spent trillions betting a blind alley was the road to recovery... with audio from hizzoner Ben Bernanke, from David Rosenberg, and from Steve Keen.
Listen to this episode

David Rosenberg.

These comments are obviously from before the Fed's announcement that it would be cutting back its purchases all the way from $1 trillion to $900 billion annualized. But what does Rosenberg mean when he says "priced in" to the market? And how could the Fed be so foolish as to do something that wasn't priced in?

"Priced in," of course, means the current prices of stocks and bonds assume whatever action is contemplated actually takes place. That is, the Fed does what the markets wants. While we're at it, What does "unwind" mean? The Fed's purchases under the QE's of trillions of dollars of mortgage backed securities and Treasuries have to be sold, right? That is what the conventional wisdom has told us, maybe with a wink, but that is the story. We'll connect with Steve Keen later to discover what the effects of winding and unwinding actually are, but before that I want to introduce another definition of "unwind." Which is actually to slow down the purchases, not sell the stuff it bought back. This announcement of so-called "taper" would be the first step. At present, we are still driving up the blind alley, only we've cut the speed by ten miles per hour, from 100 to 90. Actually, that's not quite the case. We've reached the end of the alley, and are revving the engine against a brick wall. Revving the engine makes it sound like we're going somewhere, but not the case. The front bumper is hard against it and we're just burning the tires. No real investment is taking place, but a great deal of asset purchases are fouling the air like a bubble.

There was a time when the Fed did what it thought was right -- even though more often than not it was wrong. Then there was a time when you couldn't understand what it was saying, so you had to watch what it did and impute some motive or rationale for the actions. Call that the Greenspan era. Now it does pretty much what the market wants, because if it doesn't, the market will throw a fit and the hysterical matrons will call their Congressman, secretaries of the Treasury, or Fed governors, not to mention punish the offending office with the withdrawal of their endowment funds.

Ben Bernanke, looking quite relieved for getting out of town before his ideas reached their full potential, his last press conference at the Fed, gave us these comments. I don't think it should have been a surprise that Bernanke's last meeting was the venue for tapering. Continuity is a proxy for coherence at the Fed.


QE is, of course, Baffled Ben's baby. The entire Fed response to the crisis, abetted by the Geithner Treasury, was premised on Ben's hypothesis that bailing out the banks, providing liquidity to the frozen and sometimes bogus markets, would avoid the Depression that followed the crash of '29. This was the theme of his academic work, for which he has been so often praised. Bernanke pushed trillions of dollars in on the red in the belief that his unproven hypothesis would indeed prove out. Too bad for us.

Pushing interest rates down by buying hundreds and now thousands of billions of dollars of mortgage backed securities and Treasuries was also in line with Ben's focus on restarting the housing market, or more precisely, making the CDOs good again.

We can only suspect surprise at the Fed with the discovery that it was not the housing market, nor the labor market, that boomed, but the stock and bond markets. Real investment was not affected, and even declined. But financial investment, or trading, boomed.

Parenthetically, we suspect at Demand Side, that once the payment system was saved, the rest of the recovery had more to do with the floor of demand from government stabilizers and social security slash medicare than the focused intervention on behalf the 1%.

So now Janet Yellen, as the incoming Fed chair, has the QE lever. That lever has already been pulled enough times to produce a massive, historically unprecedented, transfer of wealth to the already wealthy, even as the share of national income going to labor declines year after year, and once again, real investment has not been tickled. What the QE's have done and continue to do is create a financial market hooked on government infusions of money. Tapering is a form of avoiding cold turkey. Unfortunately, as when applied to other addictions, it rarely works.

The markets actually bumped up after the announcement, perhaps from the notion that tapering means confidence in the future direction of the economy, perhaps from an appreciation that the Fed is at least looking at the reality of the situation. Perhaps from the rosier projections for things like unemployment that emerged. This last should be cause for panic, actually, since the Fed's projections are always wrong. They come from the same economics that produces things like QE.

A good example of the current state of that economics comes from Olivier Blanchard, IMF chief economist. At the risk of losing some of the audience, I quote.

Monetary Policy Will Never Be the Same
Olivier Blanchard
On the liquidity trap: We have discovered, unfortunately at great cost, that the zero lower bound can indeed be binding, and be binding for a long time — five years at this point. We have also discovered that, even then, there is still some room for monetary policy. The bulk of the evidence is that unconventional policy can systematically affect the term premia, and thus bend the yield curve through portfolio effects. But it remains a fact that compared to conventional policy, the effects of unconventional monetary policy are very limited and uncertain.
Which is to say, in spite of the cost, the benefit is hard to see. To demonstrate that Mr. Blanchard has no clue, I continue...
There is therefore much to be said for avoiding the trap in the first place in the future, and this raises again the question of the inflation rate. There is wide agreement that in most advanced countries, it would be good if inflation was higher today. 
Presumably, if it had been higher pre-crisis, it would be higher today. To be more concrete, if inflation had been 2 percentage points higher before the crisis, the best guess is that it would be 2 percentage points higher today, the real rate would be 2 percentage points lower, and we would probably be close in the US to an exit from zero nominal rates today. 
We should not dismiss the possibility, raised by Larry Summers that we may need negative real rates for a long time. Countries could in principle achieve negative real rates through low nominal rates and moderate inflation. Instead, we are still facing today the danger of an adverse feedback loop, in which depressed demand leads to lower inflation, lower inflation leads to higher real rates, and higher real rates lead in turn to even more depressed demand.

Phooey. These folks have not learned the liquidity trap. The liquidity trap is not drained by finding a way to get interest rates to new lows, defeating the so-called zero lower bound. It is defeated by investment and demand. When the private sector does not invest, the public sector must. Here I am talking about real investment in real stuff that is productive, in the near or long term. Yes, inflation -- were it to appear -- would reduce the problem of debt, which is THE problem for the real economy. It has not appeared because the stimulus is stuck in the financial sector. Were needed investment the target, rather than the savings instruments of the wealthy, we would have all the inflation we could handle. Plus a few million more jobs, a healthier revenue stream for government at all levels, AND returns to private investment that would spur real growth. Remember, overcapacity is also under-demand. As to Mr. Blanchard's idea that if inflation were higher before it would be higher after. This gives inflation a kind of independence from actual events that it does not have.
Later, Blanchard continues as the dutiful deacon of Neoliberal nonsense:
Finally, turning to capital flows. In emerging markets (and, more generally, in small advanced economies, although these were not explicitly covered at the conference), the evidence suggests the best way to deal with volatile capital flows is by letting the exchange rate absorb most — but not necessarily all — of the adjustment.
This is, of course, the problem Brazil and China are experiencing. Where the QE cheap money actually went to invest, causing unwanted exchange rate problems and bubbles.

So the Fed is meekly trying to reverse course, not yet backing out of the alley, but revving the engine at ten percent less RPM's. They have reasserted the zero interest rate policy, and have followed our recent analysis regarding the unemployment rate, realizing that a 7 percent unemployment with a radically reduced workforce in 2013 does not equate to a 7 percent workforce in 2007. We showed last week, I think, that controlled for participation, today's headline unemployment rate would be about 11.7 percent in 2007 terms. So I would say they are listening to the critics who say QE is not workable, or at least they are looking at the data that demonstrates the same fact.

They are probably not listening to the more politically visible group, some members on the Fed's board, who have said and repeated that QE was dangerous because it was inflationary. Let's quote from Lee Adler of the Wall Street Examiner, with a pungent view.

ZIRP and QE are Deflationary 
The Fed has been doing QE and ZIRP (Zero Interest Rate Policy) for nearly 5 years and for the past year and a half, there’s been no “inflation.” Zero. Zilch. Nada. And Japan has been doing some form of QE and ZIRP for over 20 years, and they’ve been stuck with deflation the whole time.
The headline Producer Price Index for November was down 0.1%, in line with the consensus guess of economists. 
Get the picture? QE and ZIRP are deflationary. Apparently, central bankers don’t get it because it’s against their religion-the mystical belief that their policy of printing money and holding interest rates at zero will stimulate inflation if they just do it for long enough. There’s no basis for it in fact, but they go on believing. Faith is a critical element of central banking. Central banking represents all of the world’s great religions-Christianity, Islam, Buddhism, Shintoism, Judaism, Zoroastrianism, Witchcraft, Devil Worship, and Economics, the last three especially so. 
Fed Policy and Producer Price Index -

The Fed started ZIRP in late 2008 and began printing money hand over fist with QE1 in early 2009. Producer prices had collapsed in 2008 after the commodity bubble blow-off earlier in 2008 that was an echo of the housing and credit bubble that grew out of years of easy central bank policy and lax regulation. We know how that ended. After the Fed cut rates to zero on the heels of the 2008 crash and started printing money, prices rebounded through QE 1 and 2, but only to their previous level. But look what happened with QE3 and 4 which began late in 2012. No inflation. 
Here’s the problem. Money printing and ZIRP are great for asset inflation-bubbles, if you will. But economists do not count asset inflation as inflation. That’s right. Asset prices don’t count. Even though the link between money printing and asset inflation is clear, direct, and incontrovertible, economists and central bankers, being the mystical jackass charlatan frauds that they are, simply DO NOT count it. They even manage to ignore house price inflation by using something called “owner’s equivalent rent” in the CPI, as opposed to actual house prices, which have been rising at about 15% a year for the past year. 
ZIRP and QE, as opposed to stimulating inflation as the economists define it, actually suppresses it. QE and ZIRP cause overpricing of assets, malinvestment, and as a result, excess capacity in many sectors of the economy. That contributes directly to the suppression of labor rates. Capital becomes overvalued because there’s too much cash for speculators to play with, while labor income is under constant downward pressure because the plutocrats make more money from speculation than from production. The incentive is to invest in processes and structure that eliminate troublesome labor. The purchasing power of labor declines. Workers’ standard of living and ability to purchase goods and services declines. Because of overcapacity, excess production, and falling real personal income for the majority, the prices of many goods and services remain under downward pressure. They are typically mostly the goods counted in the PPI and CPI. 
This creates a vicious cycle. The price indexes that economists watch remain under downward pressure. In their religious delusions, the central bankers and their economic disciples spread the doctrine that we only must print more money for longer and keep interest rates lower for longer, maybe even turn them negative, to get those inflation numbers up. But it does not work. 5 years of US policy and over 20 years in Japan have provided overwhelming evidence that it does not work. In spite of that the central bankers and economists go right on ignoring it. They continue their policies of robbing from the middle class, stealing their savings and devaluing their work, to give the spoils to the plutocrats and speculators. They get richer and the rest of the population sinks ever further into an economic abyss.
That is Lee Adler. Pungent. Not precisely our take, but close enough.

They key on inflation is that money doesn't get into the real economy unless lending is for real stuff. So not only is the real economy getting no inflation, it is getting no lift. I've embedded the Steve Keen video that goes through the details. The key point is that the Fed cannot create broad money, and QE does not create broad money. Only lending for legitimate purposes creates broad money. The very term "trading" should tell you it is not investment.

I have appended to the transcript some examples of the Wall Street spin from before the taper announcement as well as the entirety of the FOMC statement.

Let's go out with a little Steve Keen.


Link to Keen's YouTube Talk on QE

FOMC Statement:

Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. 
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term. 
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate 
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. 
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.

Here is some analysis, first from Merrill Lynch:

Once again, market anticipation is rising ahead of a Fed meeting. In our view, this meeting will be defined by what the Fed doesn’t do: we see a low chance of the start to tapering or meaningful changes to forward guidance. Rather, we look to Chairman Bernanke’s final press conference for a broad discussion of Fed policy options into next year. He is likely to signal both that tapering could start early next year — conditional on the data — and that the Fed will be patient and gradual as it winds down its purchase program. We also expect him to indicate that the Fed will strengthen its forward guidance if needed, but keep his options open. The overall tone should be modestly dovish, especially relative to market expectations of potential start to tapering. We expect him to reiterate that the Fed intends to keep policy accommodative well into the future in order to support a broader and more sustained recovery.

And from economist David Mericle at Goldman Sachs:

Fed officials face a more difficult decision at their meeting next week, as the employment and growth data have picked up since the October meeting. But our central forecast for the first tapering move remains March, with January possible as well. We see a decision to taper next week as unlikely for three reasons.

First, the case for tapering on the basis of the data since October is mixed at best. The strongest argument in favor is the improvement in the trend rate of payroll growth to the 200k level. However, we expect that Fed officials will also put considerable weight on inflation, which has fallen further in recent months. At current spot and projected inflation rates, a tightening move would be quite unusual by historical standards.

Second, we continue to expect that tapering will be offset by a strengthening of the forward guidance, but we doubt the FOMC is ready to take this step. While some eventual strengthening or clarifying of the forward guidance is now a consensus expectation, the October minutes and recent Fed commentary suggest little agreement on what form this should take.

Third, while consensus expectations now place greater probability on a December taper, it remains a minority view. We suspect that this makes a move less likely, as Fed officials will be reluctant to deliver a hawkish surprise that could tighten financial conditions and raise doubts about their commitment to the inflation target.

Friday, December 13, 2013

Transcript: Unemployment and the Reserve Army of the Unemployed

Last week was Investment.

Investment is the key to employment. This is mainline Keynes.

Government deficits for employment purposes have been promoted by some on the Left, including Keynes, but in a society with failing infrastructure, failing schools, decrepit health care, and a climate crisis looming, employment is the way to the end, not the end in itself. Healthy employment would return prosperity to the middle class, stabilize the society and get things rolling for small business, as well. But we don't need employment for employment's sake.
Listen to this episode
Is my thought.

But the more normal take is that government deficits applied in a kind of blanket manner: any combination of tax cuts, defense spending, or whatever else the government might get through will increase GDP and by extension employment. This group is usually the jump-start group, with the idea that a certain momentum will generate demand which will cause investment and we'll be off to the races. Probably not. Another angle is out of the Levy Institute, which advocates direct employment in lieu of welfare. There is a certain logic to that. Getting rid of the "ragbag" as Leon Keyserling called it, of government programs in favor of direct work is logical and more respectful. But there is a class of dependent people, whether by disability or age, which cannot be abandoned.

Others claim that the problem is not going to be solved by employing people by government action. The problem is that the interest rate is not low enough, or the right interest rate is not low enough. This is the zero lower bound school. So what we need to do is buy ever more financial securities to force the interest rates down. This group includes Ben Bernanke and Paul Krugman.

While it WAS Keynes who pointed out the efficacy of interest rates in certain situations to stimulate investment, and identified the mechanism to influence them as the purchase of securities by the central bank, and Bernanke and Krugman call themselves NeoKeynesians, I think John Maynard would not approve. Keynes was explicit in the contention that the interest rate would not work in some situations -- like the one we have today. And he was right. The interest rate has not produced investment in this era of uncertainty. All that buying of financial securities has ended up in financial securities. The liquidity trap. There is no level of interest rates low enough to drain it off into real investment.

And we ought not leave out the last group which says "Cut the deficit, cut the spending, balance the budget, NOT investing will sooner or later create jobs. The Hayek school of virtual reality. Like the interest rate group, no matter what the evidence, just forge onward. Not a single example of austerity succeeding as a recovery tactic. No matter if the cause was a financial bubble ... actually some of them -- the most recent Nobel laureate from the Chicago School included -- don't believe in bubbles, even now ... but no matter what the cause, the solution is to cut the real spending in the social safety net and not invest in anything useful until we wring out the excesses in this imaginary capitalist marvel.


The components of the unemployed. In normal times there are people who are looking for work who cannot find it, and there is another group who are not able to work, prefer not to work, are going to school, or are working outside the monetized economy, housewives and unpaid home health care workers and so on. In bad times, this group grows. Someone -- maybe it was Karl Marx -- called this the reserve army of the unemployed. That army is swollen, homeless, disabled, living on social security before they wanted to, hiding out in school growing their debt, and doing whatever else they can do to get by. This army was ignored by the headline rate of unemployment released last Friday -- 7.0 percent.

We are growing this group every day. Creating chronically dependent people who are willing to live subsistence lives because they are not willing to work at the jobs and pay levels they can get, or are mentally unable to work, or socially unable. The Right calls the government the cause of this kind of dependency, when in fact, it is the manifest failure of the corporate capitalism to create the work. So-called "discouraged workers" are in a relative's or friend's basement because they aren't being thrown out, and are learning just how worthless they are every day without a job. Drugs, television, video games, conversation with others who have it just as hard, sullenness.

Nobody is worthless.

But I digress. Our point today is employment.

What are the employment facts?

Public sector payroll jobs under Obama have fallen by more than 700,000. Absolutely unprecedented. Of course, these are not just the federal jobs, but include the teachers and police and fire and so on of local and state governments. Down 700,000. At the same elapsed point in Ronald Reagan's administration, that number was up by 400,000. Under Clinton up by 800,000. Under W by a million. Under Papa HW ... well, he didn't get a second term, but he still wins. Between his first day in office and his last, 48 months later, plus 1.1 million public sector jobs. Under Obama minus, 700,000.

Private sector payroll jobs? Obama's presidency to date, plus 4 million. At the same point in W's, less than 2 million. Papa HW's ended up with plus just over 1 million. Reagan, plus 7 million. Clinton plus 13 million.

The charts are online. Note. Without public employment gains, both W and Papa would have been negative total jobs at the end of their tenures.

The Bush-Obama recession/depression in jobs continues today. Employment now almost six years on is still 1 percent below that at the onset. We have lost more person-years of employment in this recession than in all other postwar recessions combined.

Long-term unemployment is coming down. Good news? First the data. Those unemployed over 27 weeks now comprise 2.5 percent of the population. This is actually a higher number than the peak in any other post-war recession. But why has it come down? Because the non-participating reserve army of the unemployed has absorbed them. Not because they found work.

Our contribution here at Demand Side is to provide you with the chart that reconciles the unemployment rate with the swelling of the army of unemployed. We do this by simply taking the official Bureau of Labor Statistics Current Employment Survey headline unemployment rate and adding the draftees into the Army of the Unemployed. Simple. Methodologically robust. And see that it correlates with your experience and the doldrums most of us feel in the real business and household sectors. Bouncing along the bottom. But here on our chart, the bottom seems to be sloped up slightly. The All-In number has broken below 18 percent, down from a high of 22 percent in late 2010. The Headline number, adjusted, is now peeking below 12 percent, down from its high of 14.3, also late in 2010. Wonderful. We've shaved 3.2 percent off the 14.8, and in only three years. At this rate we'll be back to the number of 2007 by ... what? ... 2022. Come on.

Demand Side says the bottom is sloped down, that the stagnation as it continues will deteriorate fundamental social structures, physical structures and economic structures. Continuing crises will occur, including a growing number of natural disasters. Do we change that assessment based on the real headline rate dropping a little over a point a year? No. There is no guarantee it will continue. The jobs that are being added pay less and do less valuable work. The unemployment and underemployment is concentrated in the young, gouging at the competence of the workforce going forward.

There are those who say, "Whooee! 203,000 jobs added. Unemployment rate at 7.0 percent by the old math! We're on our way! 2014 will be the turning point. These are the people who have been saying the same thing since 2010. The same people. Many of them were assuring us the crash would be a dip at best. And a lot of them want to sell you a share or two of an ETF.

Because it is less bad than the peak of the crisis does not make it good or even a harbinger of better times ahead.

An aside about employment v. productivity. If one thing should have died over the past 30 years it is the notion that labor gets paid its marginal product. This is a Neoclassical scheme in which the factors of production get paid relative to their contribution. Note that it is impossible to split out which is which from labor and capital, and productivity has gone up substantially while wages have not. Still, in the long run or in the fantasy world, the route to higher wages is through productivity improvements.


Productivity goes up in tight labor markets because managers manage, innovators innovate, and so on. It goes up because wages go up in tight labor markets and managers are incentivized to save labor. Wages also go up in situations where labor organizes, because the market becomes balanced. The buyer of labor no longer dominates the seller.

Productivity does rise with technology, to a degree, and to some extent the absence of job gains currently is from business investment in technology, self-serve, robotics. Some of that is labor being more productive. Some of it is self-serve. I am now searching through a phone menu rather than asking the nice lady for the answer. Profits may go up, but you see every day some folks who are left out for want of technological capability. I think that may be my personal axe.

Tangentially, the move to high tech, robotics and so on has also produced some -- anecdotally, at least -- unfilled job openings, as the technical chops to run the robots are not in broad supply. Companies complain about the dearth of qualified applicants. How about they train them? No, it would be better for profits if the local college trained them at the student's expense.

And that brings us to the unemployment rate for different levels of education. Not surprisingly, those with the most education are the best employed at the highest wages. But all levels have gone down, and we suspect that the most well qualified and best connected are simply bumping the lesser endowed down the ladder.

Calculated Risk says we'll be back to the pre-recession peak in terms of absolute numbers of employed by the middle of next year. We'll return to that level with hundreds of thousands of new entrants into the job market, millions drafted into the reserve army of the unemployed, college graduates and MacDonalds and on the night watchman beat, and very, very few more doing what needs to be done -- infrastructure, education, climate change mitigation. We have the talent, we have the numbers, we just don't have the will to do the right thing.

Friday, December 6, 2013

Transcript: There is plenty of investment ready in infrastructure

Howard Davidowitz, retailing analyst.

But today's podcast is on investment.
Listen to this episode

Here is the conventional thought.


No, Kathleen, Investment does drive jobs. Just like Tom's textbook says. Yes, corporations have taken their tax breaks and turned them into robots, but investment is missing in the corporate sector, moribund in the residential sector, and negative in the public sector. Industrial capacity is shrinking as companies "right size." Households hunker down. Infrastructure and education crumble. These public goods are shared by everybody. This is where the investment ought to be made. And we equate education with infrastructure. The workforce degrades just as the transportation system degrades.

The estimated need for infrastructure by 2020. $3.6 trillion. About the Fed's balance sheet.

Once every four years, America’s civil engineers provide a comprehensive assessment of the nation’s major infrastructure categories in ASCE’s Report Card for America’s Infrastructure have been near failing, averaging only Ds, due to delayed maintenance and underinvestment across most categories.

The grades in 2013 ranged from a high of B- for solid waste [the only grade above a C] to a low of D- for inland waterways and levees. [put that in your climate change flooding pipe and smoke it, or get smoked] Rail did get a C+. Cumulative GPA? D+.

Infrastructure is critical for long-term economic growth, increasing GDP, employment, household income, and exports. Deteriorating conditions can become a drag on the economy.

Water and Environment

Dams: D. The average age of the 84,000 dams in the country is 52 years old. The nation’s dams are aging and the number of high-hazard dams is on the rise. Many of these dams were built as low-hazard dams protecting undeveloped agricultural land. However, with an increasing population and greater development below dams, the overall number of high-hazard dams continues to increase, to nearly 14,000 in 2012. The number of deficient dams is currently more than 4,000. The Association of State Dam Safety Officials estimates that it will require an investment of $21 billion to repair these aging, yet critical, high-hazard dams.

Drinking Water: D. At the dawn of the 21st century, much of our drinking water infrastructure is nearing the end of its useful life. There are an estimated 240,000 water main breaks per year in the United States. Assuming every pipe would need to be replaced, the cost over the coming decades could reach more than $1 trillion. The quality of drinking water in the United States remains universally high, however. Even though pipes and mains are frequently more than 100 years old and in need of replacement, outbreaks of disease attributable to drinking water are rare.

Hazardous Waste: d. There has been undeniable success in the cleanup of the nation’s hazardous waste and brownfields sites. However, annual funding for Superfund site cleanup is $500 million short of what is needed, and 1,280 sites remain on the National Priorities List with an unknown number of potential sites yet to be identified. More than 400,000 brownfields sites await cleanup and redevelopment. The EPA estimates that one in four Americans lives within three miles of a hazardous waste site.

Levees: D-. The nation’s has 100,000 miles of levees. Many of these levees were originally used to protect farmland, and now are increasingly protecting developed communities. The reliability of these levees is unknown in many cases, and the country has yet to establish a National Levee Safety Program. Public safety remains at risk from these aging structures, and the cost to repair or rehabilitate these levees is roughly estimated to be $100 billion.

Solid Waste: B-. Americans generate more than 250 million tons of trash. Of that, 85 million tons were recycled or composted. This represents a 34% recycling rate, more than double the 14.5% in 1980. Per capita generation rates of waste have even begun to show signs of decline in the past several years.

Wastewater: D. Capital investment needs for the nation’s wastewater and stormwater systems are estimated to total $298 billion over the next 20 years. Pipes represent the largest capital need, comprising three quarters of total needs. Fixing and expanding the pipes will address sanitary sewer overflows, combined sewer overflows, and other pipe-related issues. Treatment plants now comprise about 15%-20% of total needs, but increase due to new regulatory requirements. Stormwater needs are growing, but are still small compared with sanitary pipes and treatment plants. Since 2007, the federal government has required cities to invest more than $15 billion in new pipes, plants, and equipment to eliminate combined sewer overflows.

Aviation: D. Despite the effects of the recent recession, commercial flights were about 33 million higher in number in 2011 than in 2000, stretching the system’s abilities. FAA estimates put the cost of airport congestion and delays at $22 billion in 2012. At current funding levels, that cost will rise from $34 billion in 2020 to $63 billion by 2040.

Bridges: C+. Over two hundred million trips are taken daily across deficient bridges. In total, one in nine of the nation’s bridges are rated as structurally deficient. The average age of the nation’s 607,380 bridges is currently 42 years. The Federal Highway Administration estimates that to eliminate the nation’s bridge backlog by 2028, we would need to invest $20.5 billion annually, as opposed to the $12.8 billion being spent currently.

Inland Waterways: D-. Our nation’s inland waterways and rivers are the hidden backbone of our freight network – they carry the equivalent of about 51 million truck trips each year. It's the same system as in the 1950's. More than half of the locks are over 50 years old. Barges are stopped for hours each day with unscheduled delays, preventing goods from getting to market and driving up costs. There is an average of 52 service interruptions a day throughout the system. Projects to repair and replace aging locks and dredge channels take decades to approve and complete. Inland waterways received a D- grade once again as conditions remain poor and investment is absent.

Ports: C. The U.S. Army Corps of Engineers estimates that more than 95% (by volume) of overseas trade produced or consumed by the United States moves through our ports. Port authorities and their private sector partners have planned over $46 billion in capital improvements from now until 2016, but federal funding has declined for navigable waterways and landside freight connections needed to move goods to and from the ports.

Rail: C+. Railroads are experiencing a competitive resurgence as both an energy-efficient freight transportation option and a viable city-to-city passenger service. In 2012, Amtrak recorded its highest year of ridership with 31.2 million passengers, almost doubling ridership since 2000. Both freight and passenger rail have been investing heavily in their tracks, bridges, and tunnels as well as adding new capacity for freight and passengers. Since 2009, capital investment from both freight and passenger railroads has exceeded $75 billion, actually increasing investment during the recession when materials prices were lower and trains ran less frequently.

Roads: D. Actually up from D- four years ago, but 42% of America’s major urban highways remain congested, costing the economy an estimated $101 billion in wasted time and fuel annually. The Federal Highway Administration estimates that $170 billion in capital investment would be needed on an annual basis to significantly improve conditions and performance.

Transit: D. Transit agencies continue to struggle to balance increasing ridership with declining funding. America’s public transit infrastructure is critical to the one-third of Americans who do not drive cars. Unlike many U.S. infrastructure systems, the transit system is not comprehensive, as 45% of American households lack any access to transit, and millions more have inadequate service levels. Americans who do have access have increased their ridership and that trend is expected to continue. Although investment in transit has also increased, deficient and deteriorating transit systems cost the U.S. economy $90 billion in 2010, as many transit agencies are struggling to maintain aging and obsolete fleets and facilities amid an economic downturn that has reduced their funding, forcing service cuts and fare increases.

Public Facilities

Public Parks and Recreation: C-. The popularity of parks and outdoor recreation areas in the United States continues to grow, with over 140 million Americans making use of these facilities a part of their daily lives. These activities contribute $646 billion to the nation’s economy, supporting 6.1 million jobs. Yet states and localities struggle to provide these benefits  amid flat and declining budgets, reporting an estimated $18.5 billion deficit in 2011. The National Park Service estimates its maintenance backlog at approximately $11 billion.

Schools: D. Almost half of America’s public school buildings were built to educate the baby boomers – a generation that is now retiring from the workforce. Public school enrollment is projected to gradually increase through 2019, yet state and local school construction funding continues to decline. National spending on school construction has diminished to approximately $10 billion in 2012, about half the level spent prior to the recession. The minimum investment needed to modernize and maintain our nation’s school facilities is $270 billion by 2020. However, due to the absence of national data on school facilities for more than a decade, a complete picture of the condition of our nation’s schools is unknown.


Energy: America relies on an aging electrical grid and pipeline distribution systems, some of which originated in the 1880s. Investment in power transmission has increased since 2005, but ongoing permitting issues, weather events, and limited maintenance have contributed to an increasing number of failures and power interruptions. Although about 17,000 miles of additional high-voltage transmission lines and significant oil and gas pipelines are planned over the next five years, permitting and siting issues threaten their completion. Thus, the grade for energy remained a D+.


Infrastructure is the foundation that connects the nation’s businesses, communities, and people, driving our economy and improving our quality of life. For the U.S. economy to be the most competitive in the world, we need a first class infrastructure system – transport systems that move people and goods efficiently and at reasonable cost by land, water, and air; transmission systems that deliver reliable, low-cost power from a wide range of energy sources; and water systems that drive industrial processes as well as the daily functions in our homes. Yet today, our infrastructure systems are one grade from failing, and investment in infrastructure is faltering.

A website that could only have been designed by an engineer yielded a good chart, but I could not find it again to make it more readable.

Public investment is missing. What else is missing? Oh. Jobs. A strong economy capable of returning the budget to balance. Prospects for the future. An appreciation of the economics of climate change

Infrastructure is the bones and sinews and circulatory system of the economy. The workforce from top to bottom is the musculature and tissues, including the heart. The nervous system is the media, perhaps, in all its forms. The digestive system is the market. The brain, intelligence, gray matter, is the collective will channeled by the governing regime. A kind of cancer has spread from the gut through the nervous system and blocked the healthy, hard work that needs to be done, by throwing up an image on a screen of a healthy body and bright future, even as the fat old fart totters to the edge of the cliff.

That virtual health is thrown up on a screen and we’re all encouraged by its being everywhere to watch it. The belly knows best. You have bright teeth if you drink our vodka, plus look at the girls, or guys.

Many of us, listeners here probably  included, don’t believe what’s on the screen… can look past it, and see we’re a tottering, obese, arthritic old fart tottering to the edge of the cliff.  The economy operates in a real world. The cliff is in the real world. The screen says there is not a cliff, and if there is when we get to the edge we fly away with magical innovation

What then, is profit? It is the satisfaction of the gut. Yes, it’s a good feeling to be fed, and eating probably helps you live longer, but is it the satisfaction that motivates people to do what needs to be done. Even the titans of industry don’t know what to do with all that profit. It’s a good feeling to be fed, I wish everybody could have that feeling, and eating probably helps you live longer, but there is also a certain satisfaction in doing a job well. It seems  to set right in the body. Or creating a piece of music or art. Or helping somebody, or seeing justice done, or just breathing the air on a cool, crisp morning.

And of course, there is exhaustion and revulsion and frustration, just as there is nausea from eating and drinking too much, not to mention the hangover and the big gut. To say that profit is the motive force of the economy is to reduce humankind to the level of a cow, or a piranha. I wonder what a cow crossed with a piranha would be?

The Buddhists have a level of hell, or a realm of being, actually, called the Hungry Ghost realm. The beings here have huge mouths and tiny throats, so they can never get enough. Maybe that’s what a cow-piranha looks like.

The brain?

You might have your own view, but I would say it is the collected intelligence embodied in education of all sorts. We have a collected experience and observation over tens of thousands of years, like memories. We have the critical analysis of more brilliant minds than ours. When it is unblocked by self-interest, that is, when it can represent the collected interest, we've got intelligence. When it serves only one system, we've got cancer.

Profitability of corporations boomed after the bust as they laid off workers, took advantage of cheap financing, and cut back on capital investment. But corporate profitability is coming down, as we said it would, with the decline in government deficits. Michal Kalecki's algebra demonstrated that in the absence of investment, profits are a mirror of deficits.

Stock prices remain high, as multiples increase, but this holiday season will demonstrate how squeezed profits are going to be. Only the 20% who own stocks will be rich. Those 20% are being supported by the Fed and the easy money for stocks and bonds.

Investment in the private sector is overbuilt as a result of forty years of tax advantages and declining demand for product.

With proper forward-looking investment, doing things that need to be done, that demand comes back and they start looking to expand. That demand comes back with public investment. Today we talked about physical infrastructure, but education is the same, the workforce infrastructure, if you will. And there is a care infrastructure, for kids and old people and the disabled. These three are employment for easily 6, 7, 8 percent of the population, the number needed to get going again.

I wonder if any of those projects are shovel-ready yet?

Cumulative Infrastructure Needs by System Based on Current Trends Extended to 2020 (Dollars in $2010 billions)

With each Report Card, ASCE estimates the investment needed in each infrastructure category to maintain a state of good repair. That is, approximately what amount of investment is needed to get to a grade of B?
The table below provides the estimated cumulative investment needs by infrastructure category based on current trends extended to the year 2020 (dollars in $2010 billions). Categories that are not shaded rely on data from ASCE’s Failure to Act series.

Cumulative Infrastructure Needs by System Based on Current Trends Extended to 2020 (Dollars in $2010 billions)
With each Report Card, ASCE estimates the investment needed in each infrastructure category to maintain a state of good repair. That is, approximately what amount of investment is needed to get to a grade of B?

The table below provides the estimated cumulative investment needs by infrastructure category based on current trends extended to the year 2020 (dollars in $2010 billions). Categories that are not shaded rely on data from ASCE’s Failure to Act series.

Infrastructure Systems Total Needs Estimated Funding Funding Gap
Surface Transportation1 $1,723 $877 $846
Water/Wastewater Infrastructure1 $126 $42 $84
Electricity1 $736 $629 $107
Airports1,2 $134 $95 $39
Inland Waterways & Marine Ports1 $30 $14 $16
Dams3 $21 $6 $15
Hazardous & Solid Waste4 $56 $10 $46
Levees5 $80 $8 $72
Public Parks & Recreation6 $238 $134 $104
Rail7 $100 $89 $11
Schools8 $391 $120 $271
TOTALS $3,635 $2,024 $1,611
Yearly Investment Needed $454 $253 $201