Economics in a Nutshell

Joseph Stiglitz is one of my favorite economists.  He has that rare ability to put the results of theory, models, and empirical research into pithy common sense statements.  He has shown–with tons of peer-reviewed research–how frictions that exist in all markets distort results.  There is no real world example of a perfect market. In fact, he has a Nobel Prize for it.  Markets are not these efficient, well-oiled, rational deal makers that many Republicans, Libertarians, and Rich People would like you to believe simply because they really really want to believe in it.  They can click their red ruby Hayek slippers as much as they want but decades of study over the results of market have left us with lots of succinct lessons that a lot of  21st century policy makers appear to have unlearned.  In a recent speech and interview, Stiglitz manages to hit all the main ones in short order.  Here’s what the evidence has taught us.  First, it’s really not good for any economy to have income inequality.

Inequality is bad for growth, stability and efficiency. … Inequality peaked both before the Great Depression and before the Great Recession, and it’s not an accident. So basically, when we have a lot of inequality, demand goes down. … All this inequality was offset by creating a bubble. The bubble allowed people to consume more. Now we have the inequality but we don’t have a bubble, and that means that we will have persistent, weak demand, and therefore unless we create another bubble it’s going to be very difficult for us to get back to full employment.

A lot of the inequality that we have in the United States is created by distortions – excessive financial sector, monopolies like Microsoft … giving the oil companies, mining companies resources at a discount. … These things distort the economy, while they create wealth at the top. So it’s not wealth creation – it’s wealth redistribution, which makes the size of the pie smaller.

Second, a lot of government policy and just things inherent to some markets can create distortions that make markets very inefficient. Government actually creates a lot of distortions by trying to put businesses on steroids. Our recent tax policies that give special treatment to capital gains over income earned from labor are an example.  They have created horrible distortions that have drained resources away from useful things and into parasite markets and gambling activities.

And the loopholes, the distortions, the giveaways. … When you tax capital gains at half the rate of others, you encourage speculation. And so you divert resources to speculative activity, including the best brains at Columbia, into speculation rather than into creative activities.

Stiglitz also has his three top Economic Memes and Tropes that are absolutely killing this country’s economy because they have absolutely no basis in any evidence or reality.  He’s actually been tweeting them all morning as the top three Myths.  The first myth is the one about the confidence fairy.  The second and third are part and parcel of trickle down economics.  This is the horrible Republican kneejerk response that we have to appease “job creators” at all costs even when we have evidence they are more job destroyers than creators. Economists have been hypothesizing these things for decades and every bit of evidence from policies meant to achieve these results from Reagan to Bush have shown them to be seriously untrue.  However, they persist in the minds of many policy makers and they are killing our future.

The first is that reducing the budget deficit would stimulate the economy by restoring confidence, which you hear over and over again. No evidence that has ever worked. You might call it the austerity myth – that’s the most serious one.

The second one is that raising taxes on upper-income individuals will lead them to save less, invest less, will have adverse supply-side effects. Again, no evidence of that.

The third is that lowering [the] corporate income tax rate across the board will stimulate investment in the United States. No evidence of that. … If you want to encourage investment, what you do is lower taxes on firms that invest and you raise taxes on firms that don’t invest. You can restructure the taxes to provide incentives to invest.

I’m not certain what it will take to end the impact of these harmful myths.  However, given that harmful myths–notably the ones that come from any religion not based on evidence and reality–have kept us in Dark Ages before and are likely to continue to do so.  For many people, science fiction still holds a broader appeal than science fact.

Why Austerity is Necessary: short version

US White House state dining room during Bush PresidencyDoes anyone honestly think austerity is important to the restoration of fiscal balance because discipline and frugality lead to wealth? The people promoting austerity are invited to dinner in places like the room to the right. They’re doing well and not practicing austerity, so the answer must lie elsewhere.

And, really, it’s not that hard to figure out if you remember not to listen to a word they say.

  • 1) For whatever reason (the crash in this case) there’s not enough money to go around.
    • 1a) It is necessary to get the money from somewhere.

  • 2) You could get it from rich people.
    • 2a) If you do this by making them take the loss (= no taxpayer-funded bailout), they will threaten to take their ball and go home. (For instance, “I won’t buy your treasury bonds. I’ll buy somebody else’s.” Government goes into cold sweat worrying about finding money and has a crisis of confidence. This is the real “confidence fairy.”)
    • 2b) Assuming you must bail out the rich, the government could cover the cost by taxing the rich. But the wealthy own the media, plus they can defund re-election campaigns, so the actual people in government would be out of a job. This, too, leads to cold sweat, but it does not yet have a catchy name. (The “keep-my-job fairy”?)

  • 3) You could get it from everybody else.
    • 3a) Everybody else objects because they didn’t cause the problem, so why should they pay for it?

Because austerity! It sounds so much better than,

“You pay for it. I don’t want to.” And way better than,

“I don’t need you for anything, Bub. Pay up.”

Full disclosure: I am (obviously) not an economist.

Crossposted from Acid Test

All Talk, No Action on Jobs

Disappoint Mints*

A couple of days ago Newt Gingrich made the bizarre claim that

President Barack Obama’s tenure in the White House “is a Paul Krugman presidency.”

Of course we know that Obama cannot stand Paul Krugman, because Krugman has been criticizing Obama since the back in 2008. No, Obama’s is not “a Krugman presidency.” It’s “a ‘the dog ate my homework'” presidency. It’s a “smoke and mirrors” presidency. Or maybe a “confidence fairy” presidency.

In the morning post today, I quoted both White House Press Secretary Jay Carney and Treasury Secretary Tim Geither holding forth on what Digby calls “the confidence fairy.”

Here’s Carney yesterday:

Spokesman Jay Carney says there is no question that economic growth and job creation have slowed over the past half year.

But, Carney told a White House briefing, “We do not believe that there is a threat of a double-dip recession.”

Really? And how do you know this, Jay?

He blamed the earthquake and tsunami in Japan, higher energy prices, default worries in Europe and recently resolved uncertainty over raising America’s borrowing limit. Carney said, “We believe the economy will continue to grow.”

Uh huh. But what’s that based on? Where is your evidence? Carney never produced any.

Now here’s Tim Geithner on the dramatic spending cuts included in the debt ceiling bill:

GEORGE STEPHANOPOULOS: So this won’t cost us jobs?

TIM GEITHNER: No, it will not. Now … if we put this behind us then we can turn back to the important challenge of trying to find ways to make sure that we do everything we can to get more people back to work, strengthen our growth. And we’ll have more ability to do that now with people more confident and we can start to get our arms around the long-term problems.

Leaving aside the fact that no one I know is “more confident,” and Wall Street sure doesn’t seem “confident,” how will “confidence” translate into jobs? Especially now that there are caps on domestic spending that will prevent the government from helping create jobs?

Read the rest of this entry »

Thursday Reads: A Poverty Tour, Confidence Fairies, A-Rod, D.B. Cooper, and Wingnut Censors

Good Morning!! Let me get a sip of my breakfast tea, and then I’ll share what I found in the news today.

After doing his level best to wreck the U.S. economy, President Obama headed to Chicago to celebrate his birthday and rake in some campaign donations.

Taking a brief hometown respite Wednesday night, President Barack Obama used a 50th birthday bash in Uptown to raise re-election money from a friendly crowd as he sought to recharge a presidency showing signs of scars from Washington’s partisan battles.

The president told supporters at the Aragon Entertainment Center that the nation doesn’t have time to “play these partisan games.”

“I hope we can avoid another self-inflicted wound like we saw over the last couple weeks,” Obama said of the recent debt-ceiling gridlock.

Although Obama doesn’t turn 50 until Thursday, his visit symbolized presidentially and politically a need to turn the corner following weeks of bruising debate over raising the nation’s debt ceiling and cutting the country’s deficit.

Awww, poor guy. Screwing the poor, the elderly, baby boomers, and the working- and middle-classes must be really exhausting.

Meanwhile, Tavis Smiley and Cornel West are heading up a “poverty tour”

to highlight what they see as deficiencies in the Obama’s administration and to force the president and Congress to pay more attention to poor people who have been hit hardest by the recession.

Smiley called the legislation, signed by the president, “a declaration of war on the poor.”

“I don’t understand how the president could agree to a deal that does not extend unemployment benefits, does not close a single corporate loophole and doesn’t raise the taxes on the rich,” said Smiley. “The poor are being rendered more and more invisible in this country. Nobody, not the president, not the Republicans in Congress, is speaking to the truth of the suffering of everyday people.”

Paul Krugman was on Keith Olbermann’s show last night. I keep forgetting to watch that! Krugman discussed a number of things related to the debt ceiling bill, including Newt Gingrich’s remark that the Obama’s is “the Krugman Presidency.” It is to laugh!

Vodpod videos no longer available.

Today, Obama’s press secretary Jay Carney said there won’t be a double-dip recession and the economy is going to grow.

He blamed the earthquake and tsunami in Japan, higher energy prices, default worries in Europe and recently resolved uncertainty over raising America’s borrowing limit. Carney said, “We believe the economy will continue to grow.”

Al-righty then! I guess we have nothing to worry about.

At his blog, Krugman responded that “hope is not a plan.”

Of course there’s a threat. Larry Summers puts the odds at one in three; I might be slightly more optimistic, but the risk is very real. Who, exactly, is at the White House who knows better?

And think about the politics here. For two years the White House has been determinedly cheerful, always declaring that the recovery was on track, that its policies were working fine. And all it did was squander its credibility. Maybe admitting the truth, saying that in fact we hadn’t done nearly enough, would not have helped get useful legislation through Congress. But at least it would have conveyed the message that the WH was living in the same reality as ordinary workers.

Now they’re doing it again. To what purpose? Do they think the markets will be reassured? Do they think consumers will be reassured? At this point, after the “summer of recovery” came and went a whole year ago?

Apparently, that is what they think. Via Digby, Tim Geithner, who seems to be the person Obama listens to most on economic issues, strongly believes in the “confidence fairy.” He must also be the source of Jay Carney’s belief that we won’t have another recession, because that’s what Geithner told George Stepanopoulos a couple of days ago.

GEORGE STEPHANOPOULOS: But don’t you think that any deficit reduction now will — will hurt the attempts of the economy to recover?

TIM GEITHNER: You know, I think the — basic reality we live with and, you know, part of governing is recognize we live with — we don’t have unlimited resources, and we inherited and are left with unsustainable deficits long term. And the president understands that for the sake of the economy long-term it’s very important we demonstrate to the American people, to people around the world that we can get our arms around this and start go back to living’ within our means.

Now, we want to do that very carefully so we create room for the economy to grow and we have the resources necessary to invest in things that are going to be very important to the future like education, like infrastructure, like incentives for private investment. And to do that, it is absolutely essential to lock in these long term savings. Now — the president was very strong on this and made sure that we were not going to accept spending cuts that would damage the prospects for near term recovery. Now, with this behind us, and we get this —

GEORGE STEPHANOPOULOS: So this won’t cost us jobs?

TIM GEITHNER: No, it will not. Now … if we put this behind us then we can turn back to the important challenge of trying to find ways to make sure that we do everything we can to get more people back to work, strengthen our growth. And we’ll have more ability to do that now with people more confident and we can start to get our arms around the long-term problems.

WTF?! Is this guy for real? As Krugman said, “hope is not a plan,” but they don’t seem to have anything else.

At The Nation, George Zornick asks a very good question: Is it time to downgrade the ratings agencies?

…by almost all accounts inside the beltway, a downgrade in the federal government’s credit rating would be catastrophic. But a closer look at who issues these ratings, how they do it, and the real-world impact of these ratings tells a different story.

The first clue that these ratings might not be highly calibrated, serious indicators of creditworthiness can be found in the 2008 economic collapse. The financial products created by Wall Street that were full of toxic mortgage securities were all blessed with gold-star ratings as safe investments from the country’s three main credit ratings agencies, Moody’s, Fitch and Standard and Poor’s.

These products were so awful as to destroy Lehman Brothers, threaten many other trading firms, and plunge the economy into recession, but the ratings agencies consistently told investors they were safe. As William Greider has noted here, this essentially made the rating agencies “unindicted co-conspirators” in the collapse.

Were these agencies just bad at their jobs? Maybe, but Greider offers another more sinister theory: since the banks pay the rating agencies to examine their financial products, a harmful rating would persuade the banks to just shop elsewhere for a more favorable outcome. “This is an outrageous conflict of interest at the very heart of the financial system,” Greider writes.

Overpaid New York Yankee Alex Rodriguez is in trouble again, this time for illegal gambling. Baseball officials opened an investigation after

Star Magazine reported that Rodriguez “played in an underground, illegal poker game where cocaine was openly used, and even organized his own high-stakes game, which ended with thugs threatening players.”

Under the rules that govern baseball players, Rodriguez will have to truthfully answer baseball’s questions. If he acknowledges that he played in underground games or if officials uncover evidence that he did so, he could face a suspension.

The report Wednesday came a month after Major League Baseball opened its own investigation into Rodriguez’s ties to gambling. The investigation was prompted by a Star Magazine report in June that said Rodriguez had participated in a high-stakes illegal poker game with the actors Tobey Maguire, Leonardo DiCaprio, Ben Affleck and Matt Damon.

Hmmm…he was playing with Red Sox fans Affleck and Damon. I wonder who talked to Star Mag? I also learned on Google that A-Rod is dating actress Cameron Diaz. Boy is she making a big mistake.

Here’s an update on the D.B Cooper story I wrote about in the Tuesday Reads: My uncle was D.B. Cooper, Oklahoma woman claims It sounds crazy, but apparently the FBI believe this woman’s story.

To Marla Cooper of Oklahoma, her uncle was D.B. Cooper — except she knew him as Uncle L.D. She believes he died in 1999.

“I saw my uncle plotting a scheme,” Cooper told CNN’s Brooke Baldwin of what she said she remembers witnessing as an eight-year-old girl four decades ago.

Cooper said she was with two uncles at her grandma’s house around Thanksgiving time.

“I was with them while they were plotting it. I didn’t really know what was going on,” Cooper said. “Afterwards on Thanksgiving Day, I saw them return and I heard them discussing what they had done with my father. I have very vivid memories of it.”

Her claim might be cause for healthy speculation, especially 40 years after the fact, but two sources close to the investigation have told CNN that Marla Cooper’s tip led to the FBI reviving the case and for the past year the agency has been actively working the lead.

She says her uncle returned home badly injured and was treated at a VA hospital. Then he disappeared and she never saw him again. Her family made her swear she would never talk about what had happened.

Finally, from Think Progress, here’s an update from the annals of wingnut craziness: MO High School Bans ‘SlaughterHouse Five’ From Curriculum, Library Because Its Principles Are Contrary To The Bible

On Monday at the Republic, MO school board meeting, four Republic School Board members reviewed a year-old complaint that three books are inappropriate reading material for high school children. In a 4-0 vote, the members decided to ax two of the three books from the high school curriculum and the library shelves: Twenty Boy Summer by Sarah Ockler and Slaughterhouse-Five by Kurt Vonnegut. Speak by Laurie Halse Anderson was spared. The resident who filed the original complaint targeted these three books because “they teach principles contrary to the Bible”

Wesley Scroggins, a Republic resident, challenged the use of the books and lesson plans in Republic schools, arguing they teach principles contrary to the Bible.

“I congratulate them for doing what’s right and removing the two books,” said Scroggins, who didn’t attend the board meeting. “It’s unfortunate they chose to keep the other book.”

Horrors! Contrary to the Bible? We can’t have that! You know, sometimes I’m very grateful to live in a relatively civilized place like Boston. This is one of those times.

On that note, I’m going to get another cup of tea and then check out what you all are reading and blogging about. Please post your links in the comments.