Author Archives: dm

Don’t panic, it’s only financial markets

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In case you haven’t heard, financial markets are plummeting again.  We have yet to see how this will play out, but it was to be expected because absolutely nothing has been resolved since the last time.  The most direct causes–not to be confused with the most fundamental ones–are trouble with the banking system in Europe and trouble with the banking system in the US.  In the media, the former is discussed in terms of countries for perverse reasons and both are further abstracted and described in terms of attitudes held by “the markets” towards everything from employment data to Ben Bernanke’s body language.  I call it financial anthropomorphism and this is a beautiful example.

Insofar as economies produce and consume things, the US and most other “advanced” countries have been basically stagnant since 2008.  The “recovery” was confined to financial markets that have been more or less doing their own thing with a lot more assistance from the federal government than anyone else has gotten.  If you look back, narratives switching between a “double-dip recession” and “green shoots” probably reflect whatever was going on with financial markets at the time rather than real output or employment.

Recessions are technically defined by the NBER dating committee and according to them, the last one began in December 2007 and ended in June 2009.  The dating committee bases its definition largely on changes in trends relating to (reported) aggregate income and expenditures, particularly expenditures (GDP).  Note that expenditures can be on anything, so even something like hikes in health insurance premiums count towards GDP growth (check the national accounts for yourself).  As far as most people are concerned, national income has actually been falling:

Employees have always received more than half the total national income, until now. In 2010, the percentage of national income devoted to wages and salaries fell to 49.9 percent, and it slipped a little more to 49.6 percent in the first quarter of this year. That continued decline may help explain the economic worries of many Americans who have jobs but still fear they are falling behind.

The idea of a “double-dip recession” starting now is basically just a media narrative because nothing has improved at all for most people.  The unemployment and underemployment statistics don’t mean much of anything anymore because so many people have completely fallen off the radar and become unpeople as far as decision-makers are concerned.  It’s worth noting that the system for measuring national income that we currently have came into existence during the Great Depression.

Financial markets coming down to the economic reality in which everyone else exists might finally draw the attention of officialdom.  The course we’ve been on for the past few years isn’t going to improve unless some serious changes are made to how we do things.

Through the economist’s looking glass

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I’ve had people requesting me to post more economics-type stuff for a while now and I think it’s time to get to work on it.  I’ve had trouble thinking of exactly what would fall under that category as I would define it, but I keep getting more requests, implying I have a definition.  The easiest way out of this is to start by taking a look at what we don’t want.

We’ll start with this piece where Brad DeLong contemplates whether or not he and his peers “understand what was going on.”

Here is the most interesting part of [Larry] Summers’ long answer: “There is a lot in [Walter] Bagehot that is about the crisis we just went through. There is more in [Hyman] Minsky, and perhaps more still in [Charles] Kindleberger.” That may sound obscure to a non-economist, but it was a devastating indictment….Asked to name where to turn to understand what was going on in 2008, Summers cited three dead men, a book written 33 years ago, and another written the century before last.

The first problem is asking that question of one of the people most responsible for the present mess and a number of others over the past few decades. Putting that aside for a moment, DeLong gave a strange introduction to one of the three:

Minsky (1919-1996) is best approached not through his collected essays, entitled Can “It” Happen Again?, but rather through the use Kindleberger (1910-2003) made of his work in his 1978 book Manias, Panics, and Crashes: A History of Financial Crises.

Having read some of Minsky’s work, this caught my attention.  I get the sense that he doesn’t want the “non-economist” to get the wrong impression.  He goes out of his way to avoid mentioning Minsky’s other works and steers us around the one he will name.  Here’s a clue as to why he keeps his distance from Minsky’s Stabilizing an Unstable Economy (don’t worry too much about the technical terms):

The Walrasian input to the neoclassical synthesis starts with a discussion of an abstract exchange (barter) economy: the analogue may be a village fair. Results are obtained by analyzing a model that does not allow for capital-intensive production, capital assets as we know them, and capitalist finance. Using an artificial construction of trading relations, the theory demonstrates that a decentralized market economy achieves a coherent result.

Standard economic theory then goes on to show that the property of coherence also carries through for an economy that produces, but only under heroic assumptions about the nature of capital and time….The theory is set up in such a way that any deviation from the labor supply-labor demand equality will be removed by market interactions; that is, the theory holds that full employment is achieved by means of the internal operations of the economy. The theory does not explain, however, how any initial deviation is brought about: unemployment as the result of economic processes is unexplained.

The neoclassical synthesis (mainly the work of Paul Samuelson) has been the foundation of standard economic theory for over fifty years.  It has been modified in various ways, but has retained this same theoretical core.  The degree to which it has remained unchanged is striking, as we can see by looking at what Brad DeLong is teaching his students:

We neoclassical economists really do believe that markets are extraordinarily flexible, powerful, and adaptive social institutions. We believe that they recover from shocks. We believe that if something goes wrong with the market system and it finds itself out of equilibrium with substantial excess demands or excess supplies, that it will right itself and crawl its way back to supply-demand equilibrium quickly.

It might not fix itself as quickly as we would wish. We might well want to have the helping hand of the government pushing it back to equilibrium. But the idea is that a period of high unemployment with lots of people who want jobs and could do jobs and do not have jobs not fixing itself–that a period of fifteen months after the downturn ends with no sign of any return toward equilibrium in the labor market–that is very distressing for us neoclassical economists.

No wonder he advised looking elsewhere to “understand” what is wrong with standard economic theory. But I shouldn’t single DeLong out, Paul Krugman has also vigorously (if dishonestly) defended the same thing.  Shifting from the media and classrooms to policy advisers, Christina Romer was ahead of the game in obsessing about balanced budgets for their own sake as she celebrated the “great moderation” (an equilibrium concept) right before the crisis hit. Returning to Larry Summers, he was once quoted as saying, “Spread the truth–the laws of economics are like the laws of engineering. One set of laws works everywhere.”  He has spent plenty of time in positions of power engineering his surroundings to fit this view. I could go on (and probably will in the future) but it should be clear that this will not do.

There are many alternatives, but some work is inevitably involved if we’re going to get rid of this destructive ideology.  L. Randall Wray (one of Minsky’s PhD students) is going to be giving free online classes on his university department’s blog starting soon.  You could do worse than following those and David Harvey’s lectures on Marx’s Capital (also free online).  The former will cover a number of issues that are currently coming up in the media like government deficits and the financial system and the latter will help you sit back and appreciate a much broader perspective than the term “economics” tends to imply.  That should get anyone off to a good start without even having to buy a textbook.  Where to go from there should come to you pretty naturally.

 

Investment freedoms

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I’ll start by following up on a post Tars made about the debt ceiling because the fun isn’t over!  The ceiling is going to be hit again on the 16th (according to a letter Timmy Geithner sent to congress).  If you weren’t sure that this was all completely cynical, even Chamber of Commerce is getting nervous now.  Still, the whole dysfunctional government that responds only to cash thing leaves us with a political problem.  It looks like Boehner doesn’t have control of the GOP caucus and all of the freshmen that came in on a wave of campaign contributions from the financial sector believe they’ll lose in next year’s primaries if they don’t vote against raising it.

With all of this going on in the background, the “Freedom to Invest Act of 2011” has been introduced in the House.  If you’re wondering how corporate America could possibly get more investment freedoms, it’s because they want to bring the money they have in tax havens back to the U.S.  They claim that if they’re allowed to do so, they’ll invest.  This is a blatant lie.

Doug Henwood quotes the Financial Times, saying that they’re spending it on buy-backs:

The rise in buy-backs and deals marks a turning point in the credit cycle, as companies become more willing to invest their cash and borrow more money. Since the 2008 financial crisis, many companies have been hoarding cash and building up ever greater treasure chests and rainy-day funds.

This is exactly what they did the last time they were given a tax break to “repatriate” earnings held offshore.  For the repeat, they’ve created a hilarious little website (I found it on the Adobe blog) to promote the idea, complete with a picture of blue-collar workers at the top.  The slogan, “Let’s invest the money here at home–not spend it overseas,” is beautiful because it was earned overseas in the first place, which is why it’s in a tax haven.

The State Department spokesman has gone rogue

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The Obama administration has gone nuts having everyone use twitter accounts, particularly in the State Department.  This obviously includes the State Department spokesman, who was fired last month for making a minor criticism of the administration’s treatment of Bradley Manning. It turns out that they didn’t take away his twitter account and has decided to make good use of it since then.

Here are some of my favorite posts that he’s made:

So much for Hollywood

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Last year, the CFTC decided to allow trading in movie futures, enabling people to bet on how much major films will earn at the box office (either up or down) before they’ve been finished or even started for that matter.

Businessweek, May 5, 2010:

Even as lawmakers rail against impossible-to-understand toxic securities and Wall Street vows to clean up its act, the investing public continues to be inundated with new, exotic, and complex financial products.

….

Among the proposed offerings are plans to allow traders to bet on the success of blockbuster movies, an idea that has prompted opposition from some in Hollywood and the U.S. Congress. The exchange-traded fund industry is creating new ETFs at a rate of more than 100 per year, tracking everything from financial stocks to natural gas prices, many unsuitable for all but the savviest traders.

The plan was approved the next month and the consequences are being noticed now.  The Financial Times reports that the stock of Berkshire Hathaway, Warren Buffet’s company, is shooting up whenever Anne Hathaway’s name is mentioned in the press.  How is that possible?  70 percent of stock trades are now performed by computer algorithms–a practice known as high-frequency trading–that perform trades based on, among other things, searches for online news trends.

More on the private intel stuff

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LA Times:

Hoping to win a lucrative agreement with the U.S. Chamber of Commerce, three data security contractors for federal defense and intelligence agencies developed a proposal to monitor and manipulate the chamber’s left-leaning critics, according to recently released e-mail correspondence.

Employees of the firms compiled short dossiers on a few activists that included photographs, references to their families and charts of their relationships with other liberal and labor leaders.

NYT:

Jonathan E. Turner, who runs a Tennessee-based business that gathers intelligence for corporate clients, said that companies nationwide relied on investigators to gather potentially damaging information on possible business partners or rivals. “Information is power,” said Mr. Turner, former chairman of the Association of Certified Fraud Examiners.

He estimated that the “competitive intelligence” industry had 9,700 companies offering these services, with an annual market of more than $2 billion, but said there were limits to what tactics should be used.

More from Glenn Greenwald today here.

Really, really, really creepy.

Bank of America hired private intel to target WikiLeaks

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This is really creepy.

It doesn’t look like there’s much on this story yet, but apparently Glenn Greenwald was contacted about it because he was mentioned in the leaked report (pdf).  There are also news reports being made right now downplaying the the BoA documents, which could be a PR effort on their part.

The report also shows evidence of something I’d been hoping I wouldn’t see:

It’s called social network analysis and there is very powerful software available to do it.  There are almost certainly all kinds of private databases being put together with all kinds of information about people obtained through data mining.

More deficit insanity

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“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say ‘uh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.” -Paul Samuelson in Blaug, 1995 (Quoted here)

Another report has been released that’s also terrible and completely not worth reading.  Before I go over the first page of it though, recall that the “draft version” of the first report was released after the elections, but before the date it was due (Dec. 1st).

The second report is wrapped in the flag in the very first sentence:

America is the strongest, most prosperous, and most resilient nation in history.

Followed up with invoking the Yellow Peril:

With current policies in place, even when we recover from the recession, the debt will grow far larger than the economy itself, forcing the nation to borrow enormous and unprecedented sums of money, increasing our dependence on China and other foreign lenders, diminishing our living standards, raising risks of an economic crisis, and reducing America to a second-rate power.

Despite these kinds of claims, the report doesn’t include useful charts like these:

The Caribbean Banking Centers, Belgium-Luxembourg, and probably probably a lot of “other” are tax havens (for more on tax havens, see this, this, this and this).  Rather than addressing this, the latest deficit hysteria report recommends reducing corporate taxes so they can be more “competitive” by evading smaller amounts I guess.  Even if the deficit was reduced for some reason, it seems more likely that blatant criminals like these would only be further encouraged.

The bright side to this is that despite all of the scare mongering, people just aren’t buying it.  Failure tends to be disappointing, so I guess it’s not surprising that people who put so much work into this appear to be very upset:

We have published three books, the first in 2004 before most Americans could spell “deficit,” and many essays and editorials….So widely reported has this [Bowles-Simpson] plan been that it would be difficult to live anywhere in America and fail to hear, see, or read about the plan and the disastrous budget situation it is intended to address. Perhaps Americans are just beginning to get a deeper understanding of a very deep hole.

Here’s the big question now: After a host of unelected experts and former government officials have been sounding the alarm and issuing specific proposals for many years to close the deficit gap, are politicians ready to act? So far at the federal level, elected officials have done no more than claim that they are ready to do something, mostly by shouting that the jokers in the other party are the cause of the problem….But there is nothing that even pretends to be the “Republican Plan” or the “Democratic Plan,” or the “President’s Plan.” Why is it that scores if not hundreds of scholars, budget experts, and former officials have been diagnosing the deficit problem and proposing solutions while the political system has remained all but inert?

This failure of our political system and of individual politicians can have only one explanation: they are afraid of voters. In the end, it is the American people who are the true cause of the problem. They want their government to serve them in every imaginable way. Worse, they don’t want to pay for it. Nope. They are happy to let their children and grandchildren pick up the tab. With lame politicians and a greedy public watching the deficit grow completely out of control without taking action, a devastating insight emerges: only when the nation has suffered a major crisis that will impose a decade or more of misery on millions of Americans will the public actually support serious action. By then incalculable damage will have been done to our economy, our political system, and future generations of Americans. The Titanic is approaching the iceberg and despite all the yelling, no one has even started to turn the rudder.

This is why I mentioned the report being released after the election.   The contempt for ordinary Americans (who aren’t doing so well these days) is stunning. They also seem to have forgotten that their funding is also tax deductible.

Deficit commission report 2

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Part 1 here.  I’m going to consolidate mandatory and discretionary spending into one post so I can deal with the tax stuff separately.

Discretionary

Discretionary spending is spending authorized or re-authorized every year by congress.  See the summary of the 2011 budget by the National Priorities Project here.

• 1% of the FY2011 discretionary budget was allocated to Food.

• 4% of the FY2011 discretionary budget was allocated to Education.

• Military expenditures are well over 50% of the discretionary budgets in each of fiscal years 2006-2011.

It’s pretty obvious where to cut and kind of telling that they only proposed $100 billion in cuts here despite the fact that it accounts for over a third of the federal budget. Still, they managed to come in with a few stupid proposals like “sell excess federal property” which they estimated to save $1 billion.  I wonder who might buy and re-sell property taken off the government’s balance sheet and how that might “save” anybody anything.

Mandatory

Mandatory spending is spending that occurs in compliance with existing laws to comply with particular programs or functions such as Social Security, Medicare, Medicaid, etc.  They begin by not recommending either single-payer or a public option on health care and jut go after weird stuff like “tort-reform” (i.e. limiting corporate liability in civil litigation).  The results are correspondingly modest and should be pretty embarrassing to anyone pretending to be serious about this.

Next they recommend shifting to a “chained CPI” which makes no sense.  The CPI is a really selective and terrible measure of inflation for a number of reasons that I don’t really have the space for here.  The point is that it’s supposed to be a measure of inflation, so indexing it over time like you do with the GDP, etc. makes absolutely no sense.  There argument for doing this is:

Current measures of inflation overestimate increases in cost of living by failing to account for “substitution bias”

Substitution for living?  I don’t know, the CPI has always been pretty bad and that’s kinda creepy.

P. 38: “Eliminate in-school interest subsidies for student loans”

So shift it off the government’s balance sheets and on to students’ rather than just reducing the the interest on them altogether or maybe providing more in grants, or having schools stop raising tuition so much for no reason.

P. 39: “End payments to states and tribes for abandoned mines.”

I’m pretty sure that violates some treaties, but it’s not like that hasn’t happened before.

“Extend FCC’s authority to auction radio spectrum licenses.”

Privatize.

“Require IRS to deposit fees for its services in Treasury as miscellaneous receipts.”

Making up new costs.

“Index all fixed-dollar user fees to inflation.”

But don’t measure them with the CPI.

Then they bring out the stuff about social security’s supposed solvency problems.  For that, see this and this.

Deficit commission report 1

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Link (pdf).  This thing is 50 pages long so I’m going to do it in several parts. It’s absolutely terrible and full of lies.  Its guiding principle was explained by Marx in Vol. I of Capital:

The system of public credit, i.e., of national debts, whose origin we discover in Genoa and Venice as early as the Middle Ages, took possession of Europe generally during the manufacturing period. The colonial system with its maritime trade and commercial wars served as a forcing-house for it. Thus it first took root in Holland. National debts, i.e., the alienation of the state – whether despotic, constitutional or republican – marked with its stamp the capitalistic era. The only part of the so-called national wealth that actually enters into the collective possessions of modern peoples is their national debt.  Hence, as a necessary consequence, the modern doctrine that a nation becomes the richer the more deeply it is in debt. Public credit becomes the credo of capital. And with the rise of national debt-making, want of faith in the national debt takes the place of the blasphemy against the Holy Ghost, which may not be forgiven.

The public debt becomes one of the most powerful levers of primitive accumulation. As with the stroke of an enchanter’s wand, it endows barren money with the power of breeding and thus turns it into capital, without the necessity of its exposing itself to the troubles and risks inseparable from its employment in industry or even in usury. The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would. But further, apart from the class of lazy annuitants thus created, and from the improvised wealth of the financiers, middlemen between the government and the nation – as also apart from the tax-farmers, merchants, private manufacturers, to whom a good part of every national loan renders the service of a capital fallen from heaven – the national debt has given rise to joint-stock companies, to dealings in negotiable effects of all kinds, and to agiotage, in a word to stock-exchange gambling and the modern bankocracy.

Keep that in mind the next time somebody tells you he had no idea what he was talking about.  As for the present, here is some good background on why a number of these things are lies:

1st Fiscal Sustainability Teach-In and Counter-Conference

Deficit spending 101 (part 2, part 3)

Fiscal sustainability 101 (part 2, part 3)

Ok, on to the report:

P. 4: “We must stabilize then reduce the national debt, or we  could spend $1 trillion a year in interest alone by 2020.”

To who? Who is this interest being paid to? No, it’s not China, nobody in China saves in or spends American dollars because they have their own currency.  This is “owed” to somebody who does save/spend in American dollars which is  (in theory) the American public and there’s no need to track money we owe to ourselves so we can be done with this, right?  No, we need shore up the balance sheets of insolvent banks (who were just given another $600 billion the other day by the Federal Reserve) with spending that otherwise would have been on other things.  Some of them are undoubtedly unnecessary, but many are not.

P. 5: “Invest in education, infrastructure, and high-value R&D.”

In other words: for-profit education, the FIRE sector, and the tech sector.

P. 6: “Bring spending down to 22% and eventually 21% of GDP.”

This is really bizarre.  Where did they come up with this number?  Why does it matter what percent of the GDP is federal spending?  It sounds like somebody is making it up as they go along.

P. 8: What are “illustrative” savings?

“Pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit.”

Sounds like the Ryan plan.

P. 9: “Reduces tax rates, abolishes the AMT…”

The AMT is the Alternative Minimum Tax, not a particularly pressing problem.  A good indicator of the commission’s ideological extremism.

The charts and tables are extremely silly.  I’ll probably divide this up into three more posts with discretionary spending in part 2, tax reform in part 3, and the rest in part 4.