Transcript: 434 James K. Galbraith and Joseph Stiglitz

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James K. Galbraith

...When you think about this problem coherently, the long-term policy problem is the same as the short-term policy problem: it is to create jobs and to place the economy back on the footing of stable prosperity. That is the desirable objective per se, and something that will require a sustained effort, a new strategic direction (as well as comprehensive reform that has not actually occurred and is not sufficiently addressed in the reform bills of the financial sector), to make it once again an effective, functioning part of the economy. That’s the correct strategy, as I said, not only for economic growth and the condition of the economy in the medium- and long-term, but also for the funding of Social Security and Medicare.

That was James K. Galbraith, an excerpt from the keynote we relayed earlier in the week. We have some Joseph Stiglitz a little later. But let’s get a little more from Galbraith before we start.

James K. Galbraith:

As has been argued very effectively in the earlier panels, the major problems with Social Security and Medicare’s funding is low wage growth and inadequate employment; there are not enough people paying the payroll taxes at present rates. Fix that problem. Then the other problem, to the extent that it is a problem, goes away.

Suppose it were true that even large public debts were associated in general with low economic growth in countries whose conditions were comparable to our own. That would be the case because those countries do not have an effective growth mechanism generated by the private financial sector, so that they do not have a credit system creating jobs and enabling people to pay taxes that cover the services that the public sector provides. These two problems are integrated; they cannot be separated.

The prescription cannot simply be cutting the public sector’s interventions in the economy. It has to be to repair the other side of the balance sheet. That has to be the first step in a strategic proposal for the economy – to recognize that the private sector is important, that it has taken a colossal hit in the last three years as a result of a colossal mismanagement in the previous fifteen or so, and that the reconstruction of a functioning private financial sector that serves our economic purposes is an indispensable priority.

Galbraith debunked the assumptions by the CBO for interest rates and debt service earlier in his speech. It is well worth listening to, twice.

We mentioned last week that the great weakness of the Neoliberal orthodoxy is that it is intellectual junk. It is held together by political forces and payments to appropriate offices.

The great strength of their position is that it is surrounded by concentric defenses. You can imagine the outer ring of FoxNews-style reactionaries and reality deniers. But even if that ring is defeated, there is interior to it, the blue dogs and their so-called responsibility, there are the defeatists and the collaborators, and of course, the tens of thousands of economics graduates educated only in its fundamentals, the chairs of their departments on the corporate payroll, and so on. All the while you need to slog through the great mass of apathy and ignorance and a population obsessed with trivia or vice.

Discouragement if not despair is a likely response.   But hey! It is not necessary to defeat these armies, just to find a way through and get enough of them to turn around and see that what they are defending is what is attacking them. And heads are starting to turn.

Joseph Stiglitz, speaking with Ariana Huffington recently at the 92nd Street Y, had these comments on the last days of the Congressional Oversight Committee.

Joseph Stiglitz

To those of you who don't know who the Congressional Oversight Panel is, about two years ago, or three years ago, when the financial sector was collapsing, Hank Paulson went to Congress with a three- or five-page bill, saying, "Give us $700 billion. Trust me." No Congressional oversight. No judicial review. Just, "Give me a blank check."

The surprising thing was that Congress said, "No."

Then there was a lot of discussion, and finally Congress, acting in perhaps a more normal way, they said, "With a $150 billion bribe to our constituents, big business tax cuts, we'll pass the bill. But we'll have one condition, there has to be a little Congressional oversight."

And that's how they created the Congressional Oversight Panel. It has done a very good job. Very impressive. It has been a real thorn in the side of both administrations. They didn't like anybody's oversight. And we can understand why when we see what they found out. So this is supposed to be the last meeting, where they're going to say, "Was it good? Was it bad? Did it work?"

If you remember, again, what both presidents said. What was the reason they were giving so much money to the banks? It wasn't because they loved the banks. You know, they're cuddly, but they're not that cuddly, for $700 billion.

So, What was it they said? They said that they needed to save the banks to get the flow of money going again. Credit, the lifeblood of the economy. That was the argument. But if you look at what they did. It hasn't worked. That is to say, credit is still lower than it was before the crisis. Profits have returned to the banks and to ... some parts of the market are doing well.

But unemployment? It is still the case that one out of six Americans who would like a full-time job can't get one. So you can't say it worked if the ultimiate objective is to get the economy back to work. It failed. What those in the Administration claim [is], "Well, things might have been worse. At least you got repaid."

But then you look at the deals that they did. They gave money to the banks at very unfair terms. And this is where the Congressional Oversight Panel played a very important role. They said, "Look, If you're going to give money to the banks, don't let them just pour the money out in dividends and bonuses. Bonuses for record losses. That doesn't make sense." Money going in and money going out.How is that going to lead to more lending? The Congressional Oversight Panel pointed out that when we gave them money, we got back stocks, preferred shares, warrants, and they valued these. They were worth sixty-six cents for every dollar that we gave them.  So we got cheated. Now in the end, the market went up. And we got paid barely what we have them. But if we had gotten an arm's length deal like Warren Buffett got when he put money into Goldman Sachs, our deficit would have been have been much smaller, our national debt would be much smaller. We would be in much stronger position.

We wouldn't have to be cutting back on education and infrastructure. And what's so interesting is that there is broad agreement about this. Except from the bankers. They liked the way things worked out. This is a statement about how our political process works.

It has been said, we have the best government money can buy. The more recent Supreme Court cases made things worse, because what we've done is we've said that corporations, or the Supreme Court said that corporations are like people. They have the right to contribute anything they want. And just think about it for a minute. The obligation of a firm is to maximize its profits. You look at how the banks invested their capital in housing, versus their political capital.

What gave them a higher return? Clearly the political capital gave them a very high return, not the investments they made that went way south. So it's they're obligation now to buy the politicians. Forget about the consequences for our country. Maximize profits. They almost have an obligation to buy the polticians in any way they can so long as they don't go to jail.

And why shouldn’t Wall Street be happy? They own the central bank, or even better, they don’t own it but got it to take a trillion and a quarter of garbage securities off their hands and to give them ever more and ever cheaper money for their casino games. Let the fundamentalists dither about inflation. The progressives will fight that battle for them. Inflation and the second coming are about as likely absent real investment. And gross private domestic spending went negative in Q4 2010. (chart of components of GDP courtesy econ intersect online)

They point out that gross private domestic investment went negative several months before the Great Recession. Let’s hope that’s not a leading indicator for the direction of overall GDP as it was in the second half of 2007.

A couple of notes on taxes. GE with the minus 3.6 billion dollar tax bill reminds us that the folks who complain about the high corporate tax rates in the U.S. are talking bull. While the nominal rates are higher than most, the effective rates are in the middle of the pack at best. It is hard to find, for example, another nation who charges negative corporate tax rates or rewards creative accounting the way the U.S. does. Solidifying our position as a banana republic.

Second, it was reported that State and Local tax revenue was up, and it was, although it fluctuates wildly from quarter to quarter. Up modestly, as governments go looking for some way to mitigate the massive cuts they are being forced to make. The rational revenue-sharing from the federal government did not arrive, for political reasons, or likely out of sheer ignorance. Government is not going to help fill the PCE gap.

From Connor Dougherty at the WSJ:

State and local tax revenue has nearly snapped back to the peak hit several years ago—a gain attributed to a reviving economy and tax increases implemented during the recession.

But the improvement masks deeper problems for state and local governments that are likely to linger for years. To weather the recession, state governments relied on now-depleted federal stimulus funds ...

Total tax receipts for state and local governments hit $1.29 trillion in 2010, just 2.3% shy of the $1.32 trillion taken in during 2008, not adjusted for inflation, according to Census Bureau data.

Local governments are mostly funded by property taxes, and it usually takes some time for falling prices to show up in property taxes. Local property tax revenue is just starting to decline in the Census data.

Even with improving revenue, there will be more state and local fiscal tightening this year - and that will remain a drag on economic growth.

The personal savings rate has dropped back down to about 5.8% from 6.1% in January. Econ Intersect says this produces widespread concern, in that the economy needs spending.

Demand Side suggests the government could tax and spend on useful projects, but this is heresy. It is also an illusion that the normal person is now saving 5.8 percent of her income. The great mass of the savings is going on in the upper income brackets, produced both by their increases in income and by their increasing reluctance to spend. In the middle and lower income brackets, savings is bouncing along the bottom, as people are burdened by debt payments, watching what they thought was their savings disappear into the housing meltdown, and many drawing down any savings they may have to mitigate unemployment or underemployment.

Personal income was 5.8 percent in February, compared with 6.1 percent in January.

The good news?

Calculated Risk tells us that the BLS reported that payroll employment increased 216,000 in March and that the unemployment rate declined to 8.8%. If we average the first three months of 2011, there were 160,000 payroll jobs added per month. Private payrolls were a little better with an average of 188,000 per month, as state and local governments continued to lay off workers.

There are 7.25 million fewer payroll jobs now than before the recession started in 2007. 13.5 million Americans are currently unemployed. Another 8.4 million are working part time for economic reasons. About 4 million have left the labor force. Of those unemployed, 6.1 million have been unemployed for six months or more. The all-in U-6 measure, aka real unemployment, was down to 15.7 percent from 15.9.