Podcast transcript 07.07.09

07.07.09

Increasingly more distressing to me is the evidence that we are not going to meet the challenges of the current economic crisis, nor of the looming climatic change because of self-interest. This ruling motive of capitalism has become the ruling motive of our whole society. We are no longer a democratic society. We are no longer a just society. We are not a moral society, nor are we an open society. We are a capitalistic society.

Those who hold power are moved by those who control the wealth. The gains we have made over the past century are all ascribed to the fever of making money. None to the organization of laws which created rules by which all could play to win. None to the immense public investments in education and infrastructure. None to the moral values of honesty and integrity.

Consequently a battle ensues every time a small step is taken and even to hold the current ground is an exercise both exhausting and demoralizing.

We need to take the money out of government, of course, so that the just, the moral and the socially responsible may be represented along with the wealthy. And there are some who want to do this. I recommend Common Cause as the way to connect. Be sure, this is a matter of economic survival, since equality and fairness are necessary for a successful future. We have seen where the capitalist drives the economy when he is in charge.

Unfortunately we have not seen the capitalist take credit for the collapse the way he took credit for the expansion. Instead we have seen a melange of excuses, blame, inappropriate and ineffective remedies, and assurances that either things will soon be back to normal or there is no other way to do it.

Straying into psychoanalysis for a moment here, with On Point's Jack Beatty and British author Adam Phillips.

ADAM PHILLIPS

The book is ON KINDNESS, author Adam Phillips.

Once the generosity and kindness of one's family and neighbors was a principal form of social insurance. In institutionalizing social insurance, we have purportedly institutionalized away the need for this support.

We'll leave that for another day.

THE BEST MINDS COME UP WITH THIS?

In the 1930s the best minds of the generation turned to economics because the economic disaster of the Great Depression was the challenge of the day. With them, we got the New Deal, plus the economic organization of World War II which arguably was the deciding factor for the Western Front, plus the full employment of the first two decades after the War.

Since then, the best minds have abandoned economics. Here is the opening of a recent paper from the Federal Reserve Bank of San Francisco

FRBSF Economic Letter

2009-20; June 19, 2009

Fighting Downturns with Fiscal Policy

Should fiscal policy be used to fight recessions? Most economists would answer that, for normal economic ups and downs, business cycle stabilization should be left to monetary policy and that fiscal policy should focus on long-term goals. The main argument is that monetary policy can act quickly when output falls below an economy's potential or when inflation varies from its optimal rate, and that these actions can be reversed quickly as conditions change. By contrast, modifications to the fiscal code take a long time to enact and implement and can be very difficult to undo.

The phrase "most economists would answer..." should be stricken from the vocabulary of all, since most economists do not agree with other economists, and secondarily the opinion of most economists such as exists has led us into the mess.

To say that we should rely on monetary policy is to say that we should replicate the past twenty years of blowing up bubbles. To ascribe speed to monetary policy is to suggest a much shorter functional connection than actually exists.

Fiscal policy has not shown those lags. The expansion of the deficit under Reagan produced growth. The expansion of the deficit under Bush showed the same. While those deficits were the result of ineptitude and disingenuousness, they were enacted, but the slowness to enact fiscal measures for economic purposes is not evident. What are these people pointing to except their own preconceptions?

Continuing from the paper:

However, the current recession is clearly not a typical downturn. In particular, unlike other post-World War II U.S. recessions, monetary policy has run out of its usual ammunition to boost economic activity. The federal funds rate, the principal tool that the Federal Reserve uses to stabilize the economy, is now hovering near zero. Because interest rates cannot be negative in nominal terms, monetary policymakers are unable to lower the federal funds rate further. In this situation, the Federal Reserve has turned to unconventional tools to get around this barrier, commonly called the zero lower bound.

I agree that the Fed's ammunition has run out and without making a mark on the recession. I agree that the Fed has turned to other monetary schemes. I do not agree that anything they have done has been effective.

Where you hear a dissonance in our response here is when we ascribe success to any monetary policy intervention, because that has produced growth and aggregate wealth, but at a great cost. In fact, since the 1970s, monetary policy has been used to dump liquidity on the markets in the event of crisis and otherwise to dampen things for fear of inflation.

Because of the severity of the recession and the uncertain effects of unconventional monetary policy tools, Congress and the Obama Administration have also enacted a fiscal stimulus package. The $787 billion program approved by Congress in February includes a mix of tax and spending measures aimed at creating jobs and boosting output. Yet, economists and political leaders heatedly debate whether tax cuts or increased spending are more effective, a dispute that's hard to resolve because of the difficulty of determining the precise magnitude of fiscal policy's impact on real GDP.

If the effectiveness of tax cuts was not answered by the Bush stimulus package of early 2008, then it will never be answered. They are not effective. At all. We need to create jobs and stability. Tax cuts as modeled by Reagan and Bush II have only ballooned the deficit and led to declining median incomes and crumbling social infrastructure.

Yet this is the discussion that is going on at the Fed and in Academia.

Compare it to an analysis targeted on the real world and not the phony alchemy of monetary policy and interest rates.

3 Reasons We Need an Economic Wake Up Call
by Robert Kuttner
Huffington Post

Several events of the past week should be a wake-up call to the Obama administration. Bottom line: the medicine isn't working. Stronger stuff is needed.

...

Until strong economic growth returns, companies will not resume hiring. And as long as layoffs continue, that means fewer customers and the downward spiral continues.

As EPI observes, President Obama's economic stimulus simply wasn't designed for a recession this deep. And I would add that stimulus funds are getting out too slowly. Compounding the problem is inadequate government policy on three crucial fronts:

STATE FISCAL COLLAPSE. The states, unlike the Federal government, are not permitted to run current budget deficits. So in a deep recession, when tax receipts fall, their only choice is to cut program spending or raise taxes. Both are of course perverse in a recession, since they only further undercut consumer purchasing power.

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THE FORECLOSURE CATASTROPHE. When the Obama administration took office, they basically continued the Bush administration's program of voluntary loan modifications. They sweetened the deal by paying banks to reduce the principal or interest, spending $75 billion for banks (money that might have gone directly to homeowners.)

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The consequence of this policy failure is a continuing downward spiral of more vacant homes, continuing declines in property values and home equity, depressed home construction, and stresses on homeowners who spend every penny of disposable income to keep their houses. The government needs a Roosevelt-scale mortgage refinancing program with one goal--to keep people from losing their homes.

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BUSTED BANKS. The Administration's policy of pumping up busted banks, such as Citigroup and Bank of America has been a success only in the sense that these zombies are still in business.

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I still have to pinch myself when I realize that the President of the United States is Barack Hussein Obama. Like the rest of the progressive community, my heart swells when Obama, in Egypt, makes a brilliant speech on Middle East, or accelerates the progress of redeeming full civil rights for gays and lesbians. (I could find some quibbles on these fronts as well.) But these are not the issues that will cost him his presidency if he fails to grasp that the economic recovery and the moment of reform are slipping away.

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ONE LAST POINT

The Baltic Dry Index is a measure of the cost of renting shipping capacity. It collapsed along with commodities in July of 2008, and has since recovered a bit, but is showing signs of weakness.

Our place in Seattle has a beautiful view over Eliot Bay into the city scape of downtown. One of hte very eerie and scary parts of the collapse in shipping was seeing the Bay empty of ships week after week after week. Even the grain terminal went very long periods without a freighter under it taking on the grain shipped in from the Midwest or whereever. The container ships were absent and the containers were stacking up like cordwood in the yards beyond the container loaders. They still are.

But a green shoot! The freighters are back. I saw a couple of container ships, too, during the past week. It's time to breathe again. I hope.

This is Alan Harvey, from the Demand Side