We come now to bury Supply Side Economics

I’ve been having a major hissy fit about the extraordinary bad policy measures proposed and undertaken by Republicans for sustaining tax cuts and deficits for as long as I can remember. The deal is, however, nobody likes it when you tell them they can’t have a free lunch when Ronnie Raygun repeated it ad infinitum. That is very much how the Republicans have achieved political victory since the Reagan years. Basically, they promise to cut taxes no matter what the circumstances and spend money on every military adventure and toy that comes down the pike and chock it up to preserving American exceptionalism. Ronald Reagan and Dubya Bush are responsible for the deficit today and the people that benefited from their tax cuts–and voted for them–should be asked to clean up the mess.

I was ever so pleased to read this article by FT’s Martin Wolf that recognizes ‘supply-side economics’ for what it is. It has nothing to do with a good economy and has everything to do with good politics. It’s a policy of promising and delivering everything and then screaming about the huge bill when a Democrat is in office. Every 8 years or so they do one huge Dine and Dash on the country. Wolf realizes this and basically calls Dubya’s tax cuts “massive, irresponsible, and unsustainable”. He also rightly calls the Reagan years for what they were. Reagan was a premier example of Keynesian policy. Ronald Reagan spent us out of the recession of the early 1980s. The only thing that was supply side about it was the high supply of bull shit rhetoric that went along with it. Some one needs to correct the message.

Ronald Reagan was the country’s premier Keynesian. Then Bill Clinton got into office and led us to a very long,very good business boom by doing what Keynes said to do during that time. You only deficit spend when the economy sucks. It had improved by the beginning of the 1990s. Bill Clinton was frugal. I can never forget the day that Dubya/Cheney looked at those surpluses they inherited and Cheney said, deficits don’t matter, Reagan showed us that. Then they immediately started two wars and gave away the Treasury to every corporation and rich person in the country. It’s damn ironic now that every Republican and Blue running Dawg thinks deficits matter. This is the time when we need them. We should’ve paid more attention to them like five years ago. But Cheney of no heart has brass balls and a spine. If only we had a Democrat in elected office with spine and balls.

Anyway, here’s Wolf’s nutshell description of supply side economics. It’s a good one.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives – for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In short, Republicans chose one side of Keynesian economics–the side that uses government spending or tax cuts to spur an economy that should be used only during recessions–and applied it like the apple cider vinegar of economic policy. One spoonful of tax cuts fits all! Decades of data have shown economists that that is the farthest thing from truth, however, the political windbags of the right have managed to continue the charade that every one can have everything and not pay for it as long as we just cut taxes. (That is until a democratic president takes office). It’s like saying 1 + 1 = 4. Problem is that many people still buy that. It’s like thinking there were Dinosaurs in a literal Garden of Eden.

The truth is that tax cuts NEVER pay for themselves. Even one of Dubya’s advisors has said as much.

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

The Democratic leadership must get out ahead of this misleading set of facts and stories. It doesn’t help that they are also adding to the confusion by dissing the Clinton/Gore economic record. Indeed, if any of them would ever get around to reminding the public how good they had it in the 90s, the message would go far. I also remember the Reagan Years. My first house loan came with an interest rate of %16.7. Both my exhusband and I lost our first jobs out of college because of a bad economy. I lost my job at a huge S&L that went bankrupt. He lost his at the Federal Land Bank because of the bad ag economy. The Reagan period was not morning again in America and the Democrats need to step up the game to remind people of that.

Why is it that the Republicans so clearly and convincingly get people to buy the snake oil and the Democrats can event manage to agree on a coherent message? Of course, it would help if they’d stuff that dead racoon of a hairmet in Senator Ben Nelson’s mouth every time he goes rogue, but it would also help if they mentioned how everything was just fine during the Clinton years.

Here let me remind you. The unemployment rate hit a 30 year low in 1999. It was 4.2% and it was low for all groups including

Find the good trend.

blacks, women and hispanics. (It was 7.3% when he took office). From 1993 to 1999, the economy added 20.4 million jobs. There were also increases in blue collar jobs like construction.

20.4 Million New Jobs Created Under the Clinton-Gore Administration. Since 1993, the economy has added 20.4 million new jobs. That’s the most jobs ever created under a single Administration – and more new jobs than Presidents Reagan and Bush created during their three terms. Under President Clinton, the economy has added an average of 245,000 jobs per month, the highest of any President on record. This compares to 52,000 per month under President Bush and 167,000 per month under President Reagan.

92 Percent — 18.8 Million — of the New Jobs Have Been Created in the Private Sector. Since President Clinton and Vice President Gore took office, the private sector of the economy has added 18.5 million new jobs. That is 92 percent of the 20.4 million new jobs – the highest percentage since Harry S. Truman was President and presiding over the post-World War II demobilization.

We had the fastest and the longest Real Wage growth in two decades. Inflation was the lowest it had been since the 1960s.

Under President Clinton, real wages are up 6.5 percent, after declining 4.3 percent during the Reagan and Bush years. Real wage growth in 1998 reached 2.6 percent — the largest increase since 1972.

Okay, so now, tell me. What policies were highly successful? Which policies lead us to peace and prosperity? Why aren’t we seeing the Democrats today try to reinvigorate the policies of Clinton/Gore instead of putting through legislation that comes from the Heritage Foundation? Why are they even dicking around the Republicans at this juncture?

The Obama apologists wonder why Obama–the greatest things since FDR?–is not getting due credit for all these massively huge bills that his congressional chorus line has passed. Well, it’s the economy stupid! First things should’ve been put first. We got a half assed stimulus bill the same way we now have assed financial reform and half assed health insurance reform. If he’d have put all of his political capital into solving the country’s economic problems (JOBS) first, he’d have had enough to run the gambit on the rest. And I would be willing to bet you we wouldn’t have to wonder why a bunch of half-baked Heritage Foundation plans got implemented under a Democratic presidency and majority.

What is so wrong with so many people that they can’t just point to the Clinton years and say, let’s just do that again? Of all things, why can’t the Democrats take and sell that message seriously?


Cholesky Decomposition: Solving a System of Linear Egos

Consider a dinner table--a matrix if you will--of elements consisting of the world's prominent Economic Minds

I swore I wasn’t going to read The Promise by Jonathan Alter. Even the title oozes that smarmy assurance of a member of the Oborg fluffing brigade and the faith it takes to join a cult of personality. Then I got caught up in an excerpt with a title that could not be ignored by any practitioner of the dismal science. It’s over at the Slate’s The Big Money and under the siren title of “Why Paul Volcker Was Frozen Out of the Obama Administration”. I have to admit to having been awed by Volcker during my young career when the extremely volatile fed funds rate gave me heartburn and euthanized the very sick Savings & Loan where I was working.

While the title implies it’s mostly about Volcker, it’s actually mostly about the extremely volatile La La Summers and his “abrupt manner” and the dynamics of Obama and his economic advisers. What’s pretty amazing is the article says that Summers had mellowed since his tenure at Harvard. You wouldn’t know it as you read–and if you believe–this narrative. Doesn’t this just sound like the boss that every one prays they never get?

Summers’ friends claimed he had mellowed by the time he entered the Obama White House, and it was true that he had learned to take ribbing. Obama teased Summers for repeatedly falling asleep in meetings, for sweating in winter, and for attaching probabilities to everything. Summers’ habit of finding a cloud around every silver lining led the president to privately dub him “Dr. Kevorkian.”

Inside the White House, David Axelrod was among the few representing the so‑called populist side of the argument, and a joshing debate broke out. Axelrod asked Summers, “So, what does your plutocrat constituency make of this, Larry?”

“It’s good to be hearing what Che thinks,” Summers replied.

There was evidently even some stunning moments between La La and Dr. Christie Romer who is the chair of the Council of Economic Advisers. La La is of course well known for thinking women don’t have what it takes to deal with the really big questions and equations. Take a gander at this exchange.

When Christie Romer was brought in to be the chair of the Council of Economic Advisers, Summers tried to exclude her from important meetings. Romer fought back, even suggesting to Summers that sexism might have played a role in her exclusion, a serious charge given that he was fired as president of Harvard for perceived sexism.

“Don’t you threaten me!” Summers yelled.

“Don’t you bully me!” Romer shouted.

Evidently Rahm Emmanual had to work this one out.

So, remember that dinner at the White House of all those economists where we wondering if some one put something in Paul Krugman’s coffee? It’s outlined there too. It also shows how Obama couldn’t possibly be considered a socialist because both Noble Prize winners Krugman and Joseph Stiglitz were arguing for nationalizing of Citigroup and Bank of America. Oh, and here’s the decription of Valerie Jarret’s boss who is supposedly too intelligent and bored all the time to be bothered with ordinary people. This is a guy sitting with a group of clearly brilliant people. Rather than fully discussing the topic at hand, Obama wants the easy solution and turns off the conversation so that it’s all about where he is in this ordeal.

The dinner had been so hastily arranged that Stiglitz didn’t even get invited until the morning of the event. Over a lettuce salad from the White House garden and roast beef, the group held a spirited two-hour discussion. Obama grew slightly impatient when the conversation grew too technical or backward looking. He wanted to know what the economists would do if they were in his shoes. The answers from Krugman and Stiglitz—which amounted to taking over Citigroup (C) and Bank of America (BAC) for a brief time before breaking them up—hardly made Obama wish that he had hired these economists rather than Summers, who had considered the same idea but seemed more appropriately dispassionate in his analysis of it. If Obama had done what Krugman, Stiglitz (who had earlier said nationalizing the banks was the “only answer”), and plenty of other progressives wanted, it would have cost the government perhaps another trillion dollars and quite possibly caused a disastrous run on those banks.

And speaking of Valerie Jarret, guess who was the gatekeeper for Volker?

Volcker could always go through Valerie Jarrett if he needed to see Obama, but he didn’t want to abuse the privilege. After hearing from Obama often during the campaign, Volcker’s phone stopped ringing. He wryly told friends he was nothing more than a “wax figure” for the White House.

So, this is an even more telling excerpt that let’s you know what we’re dealing with in this White House with this set of advisers and this President.

Of the major players, only Volcker (who didn’t consider himself a player because he didn’t hold a government job) thought the whole financial system was conflict-ridden and dangerous. Contrary to much reporting, he did not advocate reinstating the Glass-Steagall Act. But he did favor segregating commercial and investment banking from proprietary trading. Advising clients while trading in one’s own accounts, he felt, was an obvious conflict of interest (the laughable claims of bankers that they had internal “Chinese Walls” notwithstanding) and an inherent source of instability. Why should core banking operations be subjected to such risk? Paul Volcker, principal author of what was once thought of as heartless Reaganomics, was now the most populist of the bunch!

Like I said, I wasn’t going to read Alter’s book, but he has my attention now.


Have we reached the Cross-Roads?

Is the press starting to hold the President accountable for his action or inaction for the Gulf Oil spill and his many unanswered campaign promises? Are we finally getting real coverage on a do-nothing, speechifying, megacorporate-enabling White House?

I’m going to make this brief, but I’m going to point you to a few headlines that show that reality may be sinking in for That One and his fluffer brigade. Hopefully, you can share some insight of your own too.

From Politico; Headline: White House takes heat over spill response

Punchline:

“We have been frustrated with the disjointed effort to date that has too often meant too little, too late to stop the oil from hitting our coast,” Louisiana Gov. Bobby Jindal said during a Monday news conference at Port Fourchon with Homeland Security Secretary Janet Napolitano and Interior Secretary Ken Salazar.

“BP is the responsible party, but we need the federal government to make sure they are held accountable and that they are indeed responsible. Our way of life depends on it,” Jindal said.

Gen. Russel L. Honore, who helped oversee the government’s response to Hurricane Katrina, didn’t criticize the administration’s actions — but suggested the federal government could assert more control by declaring a national disaster in the Gulf.

Punchline:

The president’s visit this week comes amid stepped up criticism on the administration’s role in handling the oil spill.

White House press secretary Robert Gibbs said Tuesday that everyone within the administration is “frustrated that there’s still a hole in the bottom of the ocean leaking oil” – and that the president is not going to be satisfied until it’s plugged.

Washington Examiner; Headline: Fawning press now gets Cold shoulder from Obama

Punchline:

Will Barack Obama go an entire year without holding a formal news conference? He’s getting close: The president’s last full-scale session with the press was on July 22, 2009, which was 307 days ago.

WaPo, Headline: The big offshore lie
Punchline:

The Obama administration, in the wake of the Gulf of Mexico disaster, has apparently decided that digging in on its misguided decision in March to expand offshore drilling is the way to go.

Even the blogosphere is beginning to realize the emperor never had any clothes. There’s more heat over at FireDogLake then any outraged PUMA blog during the primaries; including here. HuffPo (whose banner today says “IMPOTENT RAGE”), DU, and others are all voicing concerns over what kind of leadership enables the very corporations that create international disasters to continue forward with their cost-minimizing, profit-maximizing, programs of mass destruction. From derivatives to drugs to drilling, we’re seeing the same monsters that crashed the process lead the response to them with follow-up record profits and tax payer funding. It’s a pattern now. There’s no escaping it.


Of Marx and Smith and Mice and Maddoffs

If we lived in a perfect world of either perfect market capitalism or perfect government planning, there’s a lot of things that wouldn’t exist. There would be no corruption, no hidden information, no excesses or shortages, and absolutely no need for banks, insurance companies, and stock, real estate, or insurance brokers. That’s right. The entire FIRE lobby wouldn’t exist. Not only would we not need lobbyists, but we wouldn’t need the industries they represent. The Financial Markets exist because we don’t have any perfectly beneficent centrally planned governments or any form of real capitalism with perfect markets. They can’t exist. They are theoretical models period.

We have blended economies. They’re mishmashes of government intervention and mess-ups and failing markets and limping-along-as-best-they-can-markets. Nearly every economic transaction in the real world is fraught with some kind of chance for a misfire. You hire a real estate broker who you hope you can trust to guide you through the treacherous process of buying and selling the biggest asset most folks will ever have. You don’t know what’s a fair price, you don’t know where the buyers or sellers are and if either are honest or hiding The Money Pit from you, and you certainly don’t know who is a good or bad mortgage loan lender and lawyer to help ensure that you get a loan and a title free of bad encumbrances. That process is the same when you have a baby and you need a doctor and a hospital and you trust your insurance company to get a good deal for you. It’s the same when you look to save up for your pension or your kid’s college. The entire FIRE industry is there to help you navigate a bunch of imperfect markets with a lot of imperfect information. They’re supposed to be the experts who will help you navigate moral hazard and hidden information for you.

Except when they don’t.

Then, their government regulators are there to protect you and them from the bad eggs in the business. No one should be protected from their own stupidity, but these markets are so fraught with hazards and problems, that anything can happen. Bernie Maddoffs happen despite everything. So, do Goldman Sachs’ untoward influence in the NY Fed and the Treasury and financial panics. The key to these markets is middle-path economics. Yes, I’m a Buddhist and a Financial economist so I have to use the don’t tune the string too tight or it breaks, or tune the string to loose or it won’t play metaphor. It’s a balancing act. The financial markets play a unique role in a mixed market economy. The way we treat them must be unique also.

I got drug back from the bliss of the first few days of spring break where the last thing I should be thinking about is the financial markets (not teaching) but the only thing I should be thinking about is the financial markets (researching) by an email by the petulant clown. Did I want to handle or look at the discussion here? It’s a thread at FDL started out with a nod to the WAPO editorial here by Simon Johnson and James Kwak then a retort at the NYT by Paul Krugman here. The central question is financial reform. The specific question is should we break up big banks? Johnson and Kwak join ex-Fed Chair Volcker and say yes. Krugman says no, just toughen their regulation. My bottom line is all of the above. Break them up AND toughen the regulation.

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Not that kind of Protection

The European Union appears to be serious about stopping the hedge fund casino where you get to bet on the failure of countries to meet their sovereign debt obligations with other folks’ money. It also wants to increase regulation that provides more transparency which should–theoretically–lead to increased protection from moral hazard and insiders with inside information acting against the best interests of other investors. Would you consider this action to be protectionist? (i.e. against free trade agreements?) Once again, I’m turning to the UK’s Financial Times for more information.

Evidently, Timothy Geithner our Secretary of Treasury Goldman’s Sachs Financial Interests is arguing just that.

Tim Geithner, US Treasury secretary, has delivered a blunt warning to the European Commission that its plans to regulate the hedge fund and private equity industries could cause a transatlantic rift by discriminating against US groups.

A letter sent by Mr Geithner this month to Michel Barnier, Europe’s internal market commissioner, makes it clear that the European Union is heading for a clash with Washington if it pushes ahead with what the US – and Britain – fear could be a protectionist law.

As we see the continual watering-down of financial regulation met to rein in the worst of credit abuses in the country, we now see our government arguing against reining-in the casino-style side bets of the hedge funds. The UK is raging against the reform machine too.

The draft EU directive would impose tighter restrictions on hedge funds, private equity and other alternative investment funds. It has caused alarm in the City of London, where some in the industry say it is a thinly veiled attempt by France and Germany to undermine the UK’s dominance of financial services.

Okay, so this is my question. How is this going to undermine the dominance of the UK and US investment houses? How does this stop them from competing for business? The answer is in one clause that may or may not be the real issue here.

Mr Geithner warns that US hedge funds, private equity groups and banks could be discriminated against if proposals to restrict the access of EU investors to funds based outside the 27-country bloc are included in the final law.

So-called “third country” elements of the directive would force non-EU funds to comply with the new rules if they wish to market themselves at all within the EU. The directive could also force EU-based private equity and hedge funds to use only locally based banks as custodians and depositaries.

Contentious areas also include rules on remuneration, limits on borrowing, the disclosure of sensitive information and the regime for depositaries.

Paul Myners, UK financial services minister, told a meeting of private equity executives on Wednesday that he would fight “line by line and minute by minute” to defend the free movement of capital. But he also warned that “nobody in this room is going to get the directive they want”.

One senior private equity executive said the UK needed to take a stand before others would rally behind it.

I can see how portions could restrict the movement of capital from one country to another if investors are forced to use local banks. However, asking the UK and US hedge funds to comply with the EU rules doesn’t seem any different than asking FORD or GM to comply with the tougher MPG or emissions standards by the EU or for that matter asking US food companies to restrict certain ingredients either. Most other U.S. industries comply with EU rules daily. One major example is the use of the metric system. So, why can’t Goldman Sachs and JP Morgan just shut up and comply?

Here’s what is more likely at the heart of the argument.

One regulation they do not want is one that bans speculative trading on naked CDS.

The momentum for a ban on naked CDS is getting stronger. Germany and France on Wednesday called on the European Union to consider banning speculative trading in credit default swaps and set up a compulsory register of derivatives trading, the FT reports. Angela Merkel and Francois Fillon sent a letter to Jose Barroso yesterday, asking for an immediate investigation of the role and effect of speculative trading in CDSs in the sovereign bonds of European Union member states. Fillon assured after talks in Berlin, that both governments are “very much in agreement in tackling extreme speculation”.

Earlier this week, Mario Draghi indicated that tighter regulation of CDS could become a G20 issue when he confirmed that the subject will be on the agenda of the Financial Stability Board (FSB), Reuters reports.

Four EU member states have called for an investigation into the role of these things in Greece’s problems.

An inquiry must be opened into the role and impact of speculation linked to credit default swaps trading in EU government bonds as soon as possible to determine any market abuse, the heads of four countries said.

The move stops short of repeating recent calls for an immediate ban on selling CDS contracts to ‘naked’ buyers who have no interest in the underlying asset — thereby making it easier to find broad backing from the bloc’s finance ministers who will discuss CDS markets next Tuesday.

In a joint letter to European Commission President Jose Manuel Barroso and Spanish Prime Minister Jose Luis Rodriguez Zapatero, dated March 10, Germany, Luxembourg, France and Greece also called for more transparency on derivative markets.

The moves would be aimed at preventing undue speculation, enhancing transparency and improving the safety of derivative transactions, according to the letter, which was released by the office of French President Nicolas Sarkozy on Thursday.

So is Geithner complaining about the provision to restrict business in certain countries to local banks or the restrictions on some of the more exotic and toxic financial innovations? That would include the ones that have troubled both Greece and Iceland.

Meanwhile, Bloomberg reports that Senator Future Lobbyist of America member Chris Dodd is about ready to unveil his version of Financial Reform. This reflects his compromise with Republican committee member Bob Corker. Have I mentioned recently that nothing particularly good ever comes from compromising with a right wing nut? Oh, yes, that would be yesterday’s post where we talked about Corker’s goal of exempting payday lenders from regulation meant to stop lending abuse. Still, let’s go to Bloomberg for the latest controversy in OUR financial industry reform.

The new Dodd bill will include some elements negotiated with Corker. For example, it won’t propose the stand-alone agency, which Corker opposed, and will probably put the consumer unit in the Federal Reserve with an independent budget, a director appointed by the president and some enforcement powers, according to a person with direct knowledge of the plan.

“It has always been my goal to produce a consensus package,” Dodd said in the statement. “And we have reached a point where bringing the bill to the full committee is the best course of action to achieve that end.”

Notice the difference in the content between the EU talks and the US version. The EU is talking about serious regulation and the US is creating another level of bureaucracy within the FED with “some enforcement powers”. This is like trying to protect some one from AIDS by handing them a virginity pledge to sign when they ain’t no virgin.

It has to be the power of the FIRE lobby. All you have to do is read any of the academic literature on the financial industry to know that standardization of process and translucency, along with making investors have skin in their game creates stronger and deeper financial markets. While we are shuffling decks on the Titanic, the Europeans are looking at the engines. I just wish I had more control over my pension plan (which unfortunately has to be a selection of professionally ‘managed’ screwed up funds rather than letting me have my own money to invest as I see fit.

Who is going to stop Wall Street before they kill again?