Monday Reads

Good Morning!

Nobel Prize winning economists continue to warn against “Destructive Austerity”. Here’s Paul Krugman on a Jared Bernstein post.

That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

From Davos, we have this from Joseph Stiglitz on the austerity forced on Irleand.

NOBEL PRIZE-winning economist Joseph Stiglitz has described the continued payments by the Government to unsecured bondholders as “unconscionable”.

Ireland’s chances of cutting its way back to health were negligible he said, and its prospects were being compounded by German chancellor Angela Merkel’s austerity rhetoric.

“Why should Irish taxpayers have to give up health and education to make good on a loan from a private bank when the previous government failed to do an adequate job of regulation?” asked Prof Stiglitz in an interview with The Irish Times .

There were cases where austerity programmes led to quick recovery, he said, but there were so few and in circumstances so different to Ireland’s that they weren’t applicable.

“The only instances in which they worked tended to be when there was a weak country with a strong trading partner and typically with a flexible exchange rate. You have a fixed exchange rate and a Europe in recession.”

In the complexity of the discussion over bondholders, Prof Stiglitz said simple facts were being overlooked: the unsecured bondholders were paid a normal interest rate for bearing a risk by investing in Irish banks, which was and is the nature of the market economy.

In addition the process of internal devaluation – a drop in salaries and other costs– would, he said, only fan the flames of recession.

“Your ability to make mortgage and other debt payments is diminished and you already have a problem in your real estate market,” he said. “In that sense the suffering, the bankruptcies and the foreclosures are going to only increase.”

David Cay Johnston says austerity  has a “siren call”.

This message of austerity is like the call of the ancient Sirens, whose music lured sailors to shipwreck.
We should take a lesson from Odysseus, who poured wax into the ears of his crew and had himself lashed to the mast of his ship to resist the Siren call.

Austerity supporters are selling the idea that governments, like families, must cut back when income shrinks. But economically, governments are not like families.

Firing teachers, cops and government clerks will, for sure, reduce public spending. But budgets, like the song of the Sirens, are only part of the story. Listen only to the alluring lyrics and, like the many voyagers before Odysseus, we will suffer disastrous consequences – in our case falling incomes and worsening economies.

The full economic story begins with this principle taught to every economics student: spending equals income and income equals spending. Cut spending and incomes must fall; cut incomes and spending must fall.

Those who disagree with this say that only private spending can create wealth and that government spending is inefficient. I think the first argument is wrong, but the second is often true, which is why citizens need to pay close attention to their government.

When private spending shrinks, then either government spending must grow to make up for it or the other side of the equation, income, must shrink.

If we increase spending today by borrowing, we create a claim on future income. Families with debt must divert part of their future income to interest and principal to service that debt or go bankrupt. Governments are different, provided they have monopoly control of their currency. By definition, no sovereign government can ever go broke in its own currency.

Krugman’s NYT editorial today calls the entire austerity agenda a “debacle”.

True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.

And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

The Florida Primary is tomorrow and Romney is regaining the lead in polls.

Mitt Romney may be on his way to a decisive victory in the Florida GOP primary Tuesday, according to a new NBC/Marist poll.

Romney leads Newt Gingrich by 15 points, 42 percent to 27 percent in the crucial state. Rick Santorum is third with 16 percent, followed by Ron Paul with 11 percent. Just 4 percent said they were undecided.

“The bottom line in all this is Romney’s sitting in the driver’s seat going into Tuesday,” said Lee Miringoff, director of the Marist Institute for Public Opinion at Marist College, who conducted the poll.

If Romney pulls off a victory of that magnitude, he could be on a glide path to the nomination. But there are warning signs for the Republican Party that the primary has taken a toll on Romney and the rest of the GOP field. Each of the candidates struggles in a general-election matchup with President Barack Obama in this swing state, especially with independents.

Goerge Monbiot suggests that the UK and other countries consider a “maximum wage”.

The successful bank robber no longer covers his face and leaps over the counter with a sawn-off shotgun. He arrives in a chauffeur-driven car, glides into the lift then saunters into an office at the top of the building. No one stops him. No one, even when the scale of the heist is revealed, issues a warrant for his arrest. The modern robber obtains prior approval from the institution he is fleecing.

The income of corporate executives, which the business secretary Vince Cable has just failed to address(1), is a form of institutionalised theft, arranged by a kleptocratic class for the benefit of its members. The wealth which was once spread more evenly among the staff of a company, or distributed as lower prices or higher taxes, is now siphoned off by people who have neither earned nor generated it.

Over the past ten years, chief executives’ pay has risen nine times faster than that of the median earner(2). Some bosses (British Gas, Xstrata and Barclays for example) are now being paid over 1000 times the national median wage(3). The share of national income captured by the top 0.1% rose from 1.3% in 1979 to 6.5% by 2007(4).

These rewards bear no relationship to risk. The bosses of big companies, though they call themselves risk-takers, are 13 times less likely to be sacked than the lowest paid workers(5). Even if they lose their jobs and never work again, they will have invested so much and secured such generous pensions and severance packages that they’ll live in luxury for the rest of their lives(6). The risks are carried by other people.

The problem of executive pay is characterised by Cable and many others as a gap between reward and performance. But it runs deeper than that, for three reasons.

As the writer Dan Pink has shown, high pay actually reduces performance(7). Material rewards incentivise simple mechanistic jobs, such as working on an assembly line. But they lead to the poorer execution of tasks which require problem solving and cognitive skills. As studies for the US Federal Reserve and other such bolsheviks show(8), cash incentives narrow people’s focus and restrict the range of their thinking. By contrast, intrinsic motivators — such as a sense of autonomy, of enhancing your skills and pursuing a higher purpose — tend to improve performance.

Even the 0.1% concede that money is not what drives them. Bernie Ecclestone says “I doubt if any successful business person works for money … money is a by-product of success. It’s not the main aim.”(9) Jeroen van der Veer, formerly the chief executive of Shell, recalls, “if I had been paid 50 per cent more, I would not have done it better. If I had been paid 50 per cent less, then I would not have done it worse”(10). High pay is both counterproductive and unnecessary.

The second reason is that, as the psychologist Daniel Kahneman has shown, performance in the financial sector is random, and the belief of traders and fund managers that they are using skill to beat the market is a cognitive illusion(11). A link between pay and results is a reward for blind luck.

Most importantly, the wider consequences of grotesque inequality bear no relationship to entitlement. Obscene rewards for success are as socially corrosive as obscene rewards for failure. They reduce social mobility, enhance plutocratic power and allow the elite to inflict astonishing levels of damage on the environment(12). They create resentment and reduce the motivation of other workers, who see the greedy bosses as the personification of the company(13).

Interesting idea isn’t it?  What’s on your reading and blogging list today?