Monday Reads: In Search of the American Dream

the-american-dream-by-salvadore-dali

Good Morning!!

Whatever happened to the American dream? Did it ever exist in reality?

We baby boomers can look back to the post-WWII years, when the economy was humming along and the GI Bill made it easier for our dads to get college degrees, find good jobs, buy houses for their families.

In those days, one salary was enough to support a couple and several kids. My dad did it on a college professor’s salary. It was a struggle early on, but those government programs for veterans gave us a push into the professional class.

Eisenhower was President then–a Republican who wouldn’t even recognize his fellow Republican today. Later on, after John Kennedy was murdered and Lyndon Johnson was brought down by the Vietnam War, Richard Nixon presided over the end of the good times. After about 1973, it was over; and since then, wages have essentially remained stagnant.

That was when we entered a new America, in which it took two salaries to support a family. Women went to work, not just because they wanted to, but to keep their families afloat. Children went to day care. So many thing changed. What happened to the American dream? Were those post-war years just an outlier, a brief period of prosperity that meant nothing in the greater scheme of things?

Yesterday, I read a piece by Joseph Stiglitz–in Politico of all places–that addressed some of these questions: The Myth of America’s Golden Age: What growing up in Gary, Indiana taught me about inequality. Stiglitz was born in 1943. Growing up in the industrial “company town” of Gary, he was able to observe the underside of the “golden age” of capitalism–“discrimination, poverty, and bouts of high unemployment.” The big steel companies deliberate brought in desperately poor African Americans from the south in order to keep wages low–to divide and control the work force. Stiglitz writes that he never bought into the notion of the free market as the answer to all ills.

Nearly half a century later, the problem of inequality has reached crisis proportions. John F. Kennedy, in the spirit of optimism that prevailed at the time I was a college student, once declared that a rising tide lifts all boats. It turns out today that almost all of us now are in the same boat—the one that holds the bottom 99 percent. It is a far different boat, one marked by more poverty at the bottom and a hollowing out of the middle class, than the one occupied by the top 1 percent.

Most disturbing is the realization that the American dream–the notion that we are living in the land of opportunity–is a myth. The life chance of a young American today are more dependent on the income and education of his parents than in many other advanced countries, including “old Europe.”

American Dream, by Skip Hunt

American Dream, by Skip Hunt

Stiglitz points to Thomas Picketty’s research as evidence. Picketty’s work shows that capitalism leads inevitably to inequality. The post-war era of my childhood and early adulthood was an “aberration.”

Today, inequality is growing dramatically again, and the past three decades or so have proved conclusively that one of the major culprits is trickle-down economics—the idea that the government can just step back and if the rich get richer and use their talents and resources to create jobs, everyone will benefit. It just doesn’t work; the historical data now prove that. [….]

Ironically enough, the final proof debunking this very Republican idea of trickle-down economics has come from a Democratic administration. President Barack Obama’s banks-first approach to saving the nation from another Great Depression held that by giving money to the banks (rather than to homeowners who had been preyed upon by the banks), the economy would be saved. The administration poured billions into the banks that had brought the country to the brink of ruin, without setting conditions in return. When the International Monetary Fund and the World Bank engage in a rescue, they virtually always impose requirements to ensure the money is used in the way intended. But here, the government merely expressed the hope that the banks would keep credit, the lifeblood of the economy, flowing. And so the banks shrank lending, and paid their executives megabonuses, even though they had almost destroyed their businesses. Even then, we knew that much of the banks’ profits had been earned not by increasing the efficiency of the economy but by exploitation—through predatory lending, abusive credit-card practices and monopolistic pricing. The full extent of their misdeeds—for instance, the illegal manipulation of key interest rates and foreign exchange, affecting derivatives and mortgages in the amount of hundreds of trillions of dollars—was only just beginning to be fathomed.

American Dream, by Gordon Wendling

American Dream, by Gordon Wendling

I can’t quote any more, but I hope I’ve whetted your appetite enough that you’ll go read the whole thing. While you’re at that link, you might also take a look at this article by “zillionaire” Nick Hanauer, The Pitchforks are Coming for Us Plutocrats. Here’s just a small taste–it’s a long read.

The most ironic thing about rising inequality is how completely unnecessary and self-defeating it is. If we do something about it, if we adjust our policies in the way that, say, Franklin D. Roosevelt did during the Great Depression—so that we help the 99 percent and preempt the revolutionaries and crazies, the ones with the pitchforks—that will be the best thing possible for us rich folks, too. It’s not just that we’ll escape with our lives; it’s that we’ll most certainly get even richer.

The model for us rich guys here should be Henry Ford, who realized that all his autoworkers in Michigan weren’t only cheap labor to be exploited; they were consumers, too. Ford figured that if he raised their wages, to a then-exorbitant $5 a day, they’d be able to afford his Model Ts.

What a great idea. My suggestion to you is: Let’s do it all over again. We’ve got to try something. These idiotic trickle-down policies are destroying my customer base. And yours too.

It’s when I realized this that I decided I had to leave my insulated world of the super-rich and get involved in politics. Not directly, by running for office or becoming one of the big-money billionaires who back candidates in an election. Instead, I wanted to try to change the conversation with ideas—by advancing what my co-author, Eric Liu, and I call “middle-out” economics. It’s the long-overdue rebuttal to the trickle-down economics worldview that has become economic orthodoxy across party lines—and has so screwed the American middle class and our economy generally. Middle-out economics rejects the old misconception that an economy is a perfectly efficient, mechanistic system and embraces the much more accurate idea of an economy as a complex ecosystem made up of real people who are dependent on one another.

Which is why the fundamental law of capitalism must be: If workers have more money, businesses have more customers. Which makes middle-class consumers, not rich businesspeople like us, the true job creators.

Is it possible that because these articles appear in conservative Politico, even a few powerful people  in Washington might read them and stop for a moment to think about what what is really happening to America?

American Dream by Matt Sesow

American Dream by Matt Sesow

Also in the news today:

NBC NEWS: Yes, Perceptions of Washington Are Even Worse Than Last Year.

This is a six-month report card time, and it’s failing grades for all of Washington. President Obama’s approval rating stands at 41% in our recent NBC/WSJ poll, his fav/unfav is upside down (at 41%-45%), and a majority of Americans (54%) no longer think he’s able to lead the country and get the job done. Republicans and Congress are in even worse shape. The GOP’s fav/unfav in the NBC/WSJ poll is 29%-45% (versus the Democratic Party’s 38%-40% score). Just 7% of the country has confidence in Congress (compared with 29% for the presidency and 30% for the Supreme Court, per Gallup. And when it comes to congressional productivity, the 113th Congress (2013-2014) has passed just 121 bills into law — fewer than at this same point in the historically unproductive 112th Congress (140 bills into law). Maybe it doesn’t FEEL worse, because there hasn’t been an epic showdown or confrontation like the government shutdown. But the numbers tell a different story — it has gotten worse.

From James Risen at the NYT, scary revelations about the murder of 17 civilians by Blackwater thugs in Iraq in 2007: Before Shooting in Iraq, a Warning on Blackwater.

Just weeks before Blackwater guards fatally shot 17 civilians at Baghdad’s Nisour Square in 2007, the State Department began investigating the security contractor’s operations in Iraq. But the inquiry was abandoned after Blackwater’s top manager there issued a threat: “that he could kill” the government’s chief investigator and “no one could or would do anything about it as we were in Iraq,” according to department reports.

American Embassy officials in Baghdad sided with Blackwater rather than the State Department investigators as a dispute over the probe escalated in August 2007, the previously undisclosed documents show. The officials told the investigators that they had disrupted the embassy’s relationship with the security contractor and ordered them to leave the country, according to the reports.

After returning to Washington, the chief investigator wrote a scathing report to State Department officials documenting misconduct by Blackwater employees and warning that lax oversight of the company, which had a contract worth more than $1 billion to protect American diplomats, had created “an environment full of liability and negligence.”

“The management structures in place to manage and monitor our contracts in Iraq have become subservient to the contractors themselves,” the investigator, Jean C. Richter, wrote in an Aug. 31, 2007, memo to State Department officials. “Blackwater contractors saw themselves as above the law,” he said, adding that the “hands off” management resulted in a situation in which “the contractors, instead of Department officials, are in command and in control.”

I have a few more links, but I’m going to put them in comments; because I’m having terrible issues with WordPress today. I hope you’ll also post your thoughts and links in the thread below.


The Republicans Just won’t Trade in their Fairy Tales

There’s a notable absence of economists on panels in the mainstream media that discuss the fiscal “ramp”.  I’m refusing to call it a fiscal cliff because that’s a misnomer.  I’m not sure why they won’t put research economists on these panels.  Perhaps they think we’re not photogenic or–despite the fact that a lot of us teach–we can’t explain ourselves.  There’s an extremely strong consensus in the economics community on the s0-called budget crisis.  Dragging out mainstream economists like Paul Krugman and Joseph Stiglitz and labeling them lefties because of their political leanings is rather disingenuous. It stops them from getting on panels where they could actually explain to people what’s what.

The corporate press would rather haul out a few journalists with real background in the field.  There’s a difference between asking a journalist, a lawyer, or some self-anointed policy expert a question on economic theory.   First, asking an economist to answer a question as an economist means they’ll stick to the theory and the empirical findings.  Second, you can actually pull in almost any economist either trained after about 1980 or who has kept up with the dynamic business cycle models, the empirical findings, and theories and you won’t get much disagreement.  You wouldn’t know that if you listen to the press, which seems to be made up a few folks with MBAs who have very little understanding of theory, models, or findings.

Deficit hawks tend be either Wall Street types, lawyers, or partisan right wing politicians. The folks that are screaming worst about dropping the tax cuts for the uber rich tend to have the most to lose personally and the least to lose professionally.  Study-after-study-after-study shows that tax cuts to the middle, working, and lower classes and to young people tend to create completely different circumstances than they do for older people and the rich.  First, there’s more folks in the first group.  Second, they tend to spend a lot more of their current income.  Third, their savings and investment opportunities are limited, so the assets they use stay in the country.  None of this applies to the uber rich who tend to create jobs and wealth overseas these days and work hard to avoid taxes anyway.  We’d do well to just simply let go of the idea that increasing the tax rates on the rich will either lead to unemployment, won’t pay down the deficit, or will suppress growth.  These are tales of sound and fury signifying nothing but personal greed.

It is true that we are not on a sustainable spending path.  This is because of the direct actions of the Bush administration.  They lowered tax rates.  Ran two huge wars with no tax increases. They oversaw and created two recessions.  They created an asset bubble and then popped it. Growth, employment, and the value of taxable assets all decreased because of their actions.  We simply have to reverse their trajectory.   We have to do some work on Medicare and we need to walk away from the decaying, rotting corpse of Zombie Economics.  The Republicans still won’t let that rotting corpse go.

Krugman talks about some of this on his blog in a post called “Squirming Hawks”.  Paul Krugman may be a liberal but he’s certainly not going to risk his reputation in the economics community to spout crackpot hypothesis.  Look at what happened to Arthur Laffer whose basically been expunged from any serious text, publishing deal, or institution.  When you push crackpot hypotheses that do not stand up to empirical testing and you do not give them up and move on, the community of those who base their research on the scientific method will write you off.  Those that follow Hayek and Von Mises have been similarly written off.  Their ideological hypotheses do not stand up to any empirical testing.

Now, there’s a straightforward argument for why the fiscal cliff is bad but long-term deficit reduction is good — namely, that you really don’t want to cut deficits when the economy is depressed and you’re in a liquidity trap, so that monetary expansion can’t offset fiscal contraction. As Keynes said, the boom, not the slump, is the time for austerity. But the deficit hawks can’t make that argument, because they have in fact been arguing for austerity now now now.

So they’re left making a mostly incoherent case: it’s too abrupt (why?), it’s the wrong kind of deficit reduction (???), and then this:

a better approach would be to focus spending cuts on low-priority spending and on changes which can help to encourage growth and generate new revenue through comprehensive tax reform which broadens the base – ideally by enough to also lower tax rates.

Low-priority spending? I think that means spending on poor people and the middle class. And isn’t it amazing how people who claim to be horrified, horrified about deficits can’t stop talking about cutting tax rates?

Meanwhile, the CRFB features on its home page an op-ed by Jim Jones declaring that

We are perilously close to trillion-dollar yearly interest payments, 7 percent yields on 10-year U.S. Treasury bonds, 10 percent home mortgage rates and 13 percent rates on car loans. For the good of the country, the parties must come together and not let this happen.

How does he know that we are “perilously close” to this outcome? Not from the markets; not from any kind of economic model. My guess is that Peggy Noonan told him.

Scaring people with large numbers that are not grounded to other large numbers is a mean and terrible thing to do.  We have a huge tax base. We have more than enough ability to continue to borrow at low interest rates.  We have the ability to print money.  We have all kinds of options.  We have a huge economy that is showing signs of coming out of a lot of trauma. We should get a double peace dividend shortly.  These things point to a very good reason not to be crazy-go-nuts like the Europeans and fall on the austerity sword.

I think that Mark Thoma has some interesting things to add to this conversation.  He asks rhetorically and then answers: Hasn’t Paul Krugman Heard about the Magic of Tax Cuts and Supply-Side Economics? No, and for Good Reason…

I guess Paul Krugman hasn’t heard about the magic of tax cuts and supply-side economics. Well, Cato-at-Liberty has, and it’s ticked at the CBO because “it assumes higher tax rates generate more money” when making budget projections. That’s right, despite all the evidence against the claim that tax cuts actually increased revenue — it’s a myth that won’t die because people who know better, or ought to, still promote it — we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.

And that’s not all. The CBO should be further discredited because it says the stimulus package helped to ease the recession:

The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.

I’ll pass over the “record levels of unemployment’ claim (but note that unemployment peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best this is playing games with the word “levels” and ignoring population growth — and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most).

On the main claim about fiscal policy, there’s plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how much of the stimulus package was tax cuts — it’s amusing to listen to conservatives tell us how useless the tax cuts they fought for as part of the stimulus package turned out to be, especially when in the next breath they argue for more tax cuts). The CBO is dealing in actual evidence, the claims made by Cato-at-Liberty are backed by nothing more than the Republican noise machine that is so good at misleading followers.

Republicans just can’t help themselves from attacking anyone and anything that is inconvenient to their goals, and actual evidence has little to do with it. Apparently, they learned nothing from the election. This is part of a larger effort to discredit the CBO because it doesn’t agree with Republican views on the magic of tax cuts, and for other results the non-partisan agency has come up with that Republicans don’t want to hear (so they basically cover their ears and ignore them).

The Republicans aren’t the only ones doing this.  I watch about 5 minutes of an Ali Velshi panel that really horrified me.  No one there directly took on Stephen Moore of the WSJ on that same damn fairy tale about job creators and tax rates on the rich. Why doesn’t any one mention that his assertions have no basis in reality, theory, or empirical evidence and have been thoroughly trounced?  Better yet, why is some one who spouts propaganda even on a news program that supposedly informs people about economics, finance, and policy?  There was one truly knowledgeable person on the panel.  The rest of them should have asked questions then  listened to Mohamed A. El-Erian.   Again, Stephen Moore should only be placed on panels where fairy tales are involved.  His degrees in economics are obviously stale.  Plus, he works with Laffer whose been laughed out of any organization that contains serious economists.  He’s basically a tool of the plutocracy.

Fortunately, it looks like the Senate Democrats are having none of this.

Sen. Patty Murray (D-Wash.) on Sunday said Democrats were prepared to allow the expiration of all George W. Bush-era tax rates if Republican lawmakers objected to raising taxes on the wealthiest.

“We can’t accept an unfair deal that piles on the middle class and tell them they have to support it. We have to make sure that the wealthiest Americans pay their fair share,” said Murray on ABC”s “This Week.”

Murray said one option would be to let the lower rates expire across-the-board and then return to the table next year with new talks on a tax-cut package.

“So if the Republicans will not agree with that, we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year. And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this,” said Murray.

The Washington senator is likely to become chairwoman of the Senate Budget Committee and previously served on the congressional “supercommitee,” which failed to finalize a deficit-reduction plan, which may trigger sequestration cuts in January 2013.

The evidence points to the recessionary impact of tax cuts on the middle class.  There is nothing that shows allowing the Bush Tax cuts to expire will do the same. Republicans keep suppressing the evidence.

In particular, the CBO gave its most detailed look at how the expiration of the Bush-era tax cuts would affect the economy. Apparently, it would do little harm, the numbers show.

Just like the damn things did little good for the economy and most of us, letting them die would do little harm.  I hope the Dems just hold to the facts and that the election has given them some resolve to do the people’s business.


Bring on the Real Economists

I really loved the line in Obama’s acceptance speech on the Republican’s apple vinegar cure-all for everything that ails you.  Take two tax cuts, throw out a few regulations, and call us in the morning!  Here’s a great read.  The NYT book review looks at the new books of Nobel prize winning economists Paul Krugman and Joseph Stiglitz.  These out spoken economists speak truth to power.  I just wish the current powers-that-be would listen.

…Washington is stuck in neutral. Worse than neutral; it is in reverse. As the last elements of the 2009 stimulus phase out, the initial flood of federal aid has slowed to a trickle. If no agreement is reached before early next year, the trickle will become a huge backward flow, as President Obama’s payroll tax cut and all the Bush tax cuts expire while automatic spending cuts agreed to in previous legislative sessions kick in. Already, Republican leaders are threatening to replay last year’s standoff over the debt ceiling. Meanwhile, state and local governments—prohibited from running sustained deficits, increasingly dominated by anti-spending forces—continue to cut aid to those out of work and slash programs that invest in the nation’s future while laying off teachers and other public workers. Without those layoffs, the current unemployment rate would probably be around 7 percent.

Against this backdrop, no book could be more timely than Paul Krugman’s End This Depression Now! Since the crisis began, Krugman has argued with consistency and increasing frustration that the United States has become caught not in a normal recession, but in a “liquidity trap.” Since interest rates are already at rock bottom, normal measures, such as easy credit, won’t work, and expanded government expenditures must play a central part in boosting anemic demand. Otherwise, the efforts of private citizens to pay down debts laid bare by the financial crisis will continue to hold the economy back.

We continue to see Republicans blame the current Democratic administration for an economy they wrecked and a lackluster recovery that they actively work to prevent from becoming betterToday’s job report is not what it should or could be.  But, it’s not what the Republicans make it out to be either.  History shows us that the Democrats have been the job creators.

In the eighteen months from the beginning of 2008 through the middle of 2009, a period fully shaped by the Bush economic program to which Republicans now want to return, (but before the Obama stimulus had a chance to take effect), approximately 7.5 million jobs were lost.

Over the most recent 18 months of the Obama administration, approximately 2.8 million jobs have been added.

That means that the average monthly job loss during the “difficult situation” before Obama’s policies took effect was 417,000. Over the last year-and-a-half, the average monthly job gain has been 155,000.

If Rep. Ryan and Gov. Romney see that as making a bad situation worse, it should tell us something about their “vision.”

Joseph Stiglitz has been focused on the huge income gap created by policies that funnel money to the highest income earners.  His concern is of the US as a Banana Republic.

We may be the richest nation in the world, but poverty is higher and social mobility between generations lower than in other rich nations. In other respects, our model is bloated: we release far more carbon dioxide and use far more water on a per capita basis; and we spend far more on health care, while leaving tens of millions uninsured and achieving health outcomes that are mediocre at best.

The reason, according to Stiglitz, is that the vaunted American market is broken. And the reason for that, he argues, is that our economy is being overwhelmed by politically engineered market advantages—special deals that Stiglitz labels with a term familiar to economists: “rent-seeking.” By this, he means economic returns above normal market levels that are derived from favorable political treatment. In the most powerful parts of The Price of Inequality, Stiglitz chronicles the blatant tax and spending giveaways to big agriculture, big energy, and countless other sectors. Yet he also pointedly argues that much of the rent-seeking that plagues our economy takes a more subtle form, also familiar to economists: “negative externalities,” or costs that economic producers impose on society for which they don’t pay.

The spectacular profits of the energy industry, for example, rely heavily on the failure of regulation to incorporate fully the social and economic costs associated with environmental degradation, including climate change. Similarly, the increasingly aggressive activities of Wall Street—whether in the marketing of unsound mortgages, the use of excessive leverage, or the irresponsible use of derivatives—create huge risks for the economy as a whole. Yet these risks are largely not taken into account in the prices paid in financial markets. Without effective regulation, the costs are borne by all of us—most acutely by the struggling millions who have been pushed out of jobs.

Weeding out these and other forms of rent-seeking would thus promote both efficiency and equity, and Stiglitz provides a broad list of reform ideas, ranging from strict regulation of financial markets to more effective anti-trust laws. Yet he is most passionate about the need for political reform. Either those at the top will realize that things must change, or, he suggests, the kinds of popular revolts sweeping Middle Eastern nations will come to the United States.

Bill Clinton indicated that we have a choice of visions in this election.   He’s also right that the economy does better under Democrats.

Clinton has some intriguing facts on his side. Aside from a rounding error, his historical numbers are accurate (figures from the Bureau of Labor Statistics show that the tally under Democrats since 1961 rounds to 41 million, not 42 million). I crunched the numbers a few different ways to see if Clinton was cherry-picking the best numbers. His figures measure job gains from the month a president took office until the month he left. Since it takes a year or so for any president’s policies to go into effect, I also measured job gains from one year after each president took office till one year after he left. Here’s the score by that measure: Democrats: 38 million new jobs, Republicans, 27 million.

Clinton only mentioned private-sector jobs, so I pulled the data for all jobs, including government. Again, the Dems have a big edge, accounting for 48 million new jobs, compared with 31 million for Republicans. If you push the boundaries out one year for each president, the gap narrows to 44 million new jobs under Democrats, and 34 million under Republicans.

Other measures also show that the economy performs better under Democratic presidents. Sam Stovall, chief equity strategist for S&P Capital IQ, conducted an analysis recently showing that GDP, stock prices, and corporate earnings have all increased more under Democratic presidents than under Republicans.

The S&P 500 stock index, for example, has risen 12.1 percent per year under Democratic presidents since 1900, and just 5.1 percent under Republicans. Since 1949, GDP has grown 4.2 percent per year under Democrats and 2.6 percent per year under Republicans. The same trend extends to corporate profits, which have grown 10.5 percent under Dems and 8.9 percent under Republicans.

The irony is obvious, since Republicans are considered the business-friendly party, while “tax and spend” Democrats are regarded as redistributionists eager to transfer wealth from those who have it to those who don’t.

We need to hold the Republicans responsible for all the evil they have done recently.  I’m rejecting them all up and down the ticket this fall because I want a healthy economy and they never really deliver that.


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.


Income Inequality, Redux

US Income Inequality – Too Big To Ignore

I had to frontpage this because I just can never make this point enough.  Vast income inequality is not the sign of a healthy society or economy.   H/t to Corrente for my first look at this Joseph Stiglitz article at Vanity Fare called ‘Of the 1%, by the 1%, for the 1%’. We’re back to the Versailles days and the Bush tax policies–extended by Obama–are a good part of the source of the problem.  I hate to just lift just one paragraph out of Stiglitz’ rant because the entire thing is worth reading. However, here’s two for starters.  Go read the entire thing, please.

But one big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

When you look at the sheer volume of wealth controlled by the top 1 percent in this country, it’s tempting to see our growing inequality as a quintessentially American achievement—we started way behind the pack, but now we’re doing inequality on a world-class level. And it looks as if we’ll be building on this achievement for years to come, because what made it possible is self-reinforcing.

The other reason that I decided to front page this is the here-here response from Michael Tomasky at the UK Guardian.  It’s aptly called ‘Sad, just sad’.  He mentions something we’ve said for some time.  The villagers are also the beneficiaries of this kind of windfall.  Why would those DC beltway types want to downsize when they can blame teachers, nurses, firefighters, and police officers for all those budget woes? It’s the overgenerous tax cuts.  A nation can’t sustain itself without roads, airports, electrical grids, education, and public health and safety programs unless your idea of an ideal nation is that found in the Grapes of Wrath.

Stiglitz might have added the very important point that the majority of the country’s most prominent pundits who go on television and interpret all this for the American people, who soothe their audiences with assurances that all this is completely reasonable, are in the top 1%, which means households above around $380,000 per year. Many of course are far above that (Bill O’Reilly, Rush Limbaugh, etc.). High-end print journalists who aren’t quite at that level are still likely in the top 2%.

Anyway, the piece makes many important points, all of which boil down to the idea that while income inequality has several initial causes, there is only one thing that sustains it: a political process that is owned lock, stock and barrel by the top 1%.

Stepping back and looking at this context, and staying aware of it, makes watching these budget cuts particularly noxious. That’s not to say there isn’t waste, fine. But it is to say that the US political system of today is pretty inevitably designed to help the rich and punish the poor. So it’s no surprise when GOP Congressman Paul Ryan proposes, as he just has, cutting $1 trillion from Medicaid, which provides health care for poor people and the disabled (and to some extent, a greater extent than many people are aware, middle-class families, too, in the form of nursing-home cost support or in-home services like those from NY CDPAP agency).

Yes, Medicaid costs are high, killing the states. The feds could actually pick them up. Ronald Reagan proposed doing this. But that would be radical today. If Americans, especially wealthy ones, were paying taxes (income and capital gains) even at the rate we were in the Reagan era, we’d have no budget problems.

This brings me to the latest “Dopiest Constitutional Amendment of All Time”  discussed by former economist Bruce Bartlett. The very same people that gutted tax revenues and funding sources for ten years and went on a spending spree on Treasury Bills now want to demand a federal balanced budget amendment.  It’s not like watching the states get into deep trouble with their own versions of the stupid thing has taught any lessons.  Balanced budget amendments simply lead to bad economics.  When the revenues come in, the politicians spend like crazy on unnecessary things because the money’s there and the economy doesn’t require the expenditures.  When the recession hits, the revenues go down, and the balance the budget part hurts, they start doing things that basically put their states in worse situations.  This should be immoral, unethical and illegal.  Instead, they stick in constitutions.  Evidently none of these guys ever got away to reading the Grasshopper and the Ant. They’re all Grasshoppers until the real need for fiscal management comes into play.

Today, all 47 Senate Republicans introduced a constitutional amendment to balance the federal budget. Full text available here. Presumably, this is the amendment that Republicans plan to demand as their price for increasing the federal debt limit. Of course, simply refusing the raise the debt limit would balance the budget overnight — the nation would default on its debt and we would be plunged into the worst fiscal crisis in history, but the budget would be balanced. I have previously explained the idiocy of right wing advocates of debt default (here and here) and the idiocy of a balanced budget amendment (here and here). However, the new Republican balanced budget proposal is especially dimwitted.

At what point do the Republicans just change their name to the party of Batshit Crazy Liars?  At what point do the Democrats start fighting some of this?  It’s unbelievably hard to watch a group of people with so little at stake except their own re-election just run through a country’s future and assets like a Mardi Gras krewe tossing trinkets to bystanders.  How much more looting of national resources to benefit their cronies can we honestly take before people really take to the streets and say enough!


US Economic Malaise

I happened across the latest outlook for the global economy by Dr. Doom–Nouriel Roubini–over at Project Syndicate. We must share the same depressed muse.  His outlook is very similar to mine although he’s crunching numbers in computer models that I can only dream about.  It’s also a similar outlook to what Joseph Stiglitz indicated while in Davos.  You will not need sunglasses while facing the future if you’re in Europe or North America.  This will most likely be the decade of developing nations.  I don’t have the sophisticated programs available to Roubini but his forecasts seem reasonable.

The outlook for the global economy in 2011 is, partly, for a persistence of the trends established in 2010. These are: an anemic, below-trend, U-shaped recovery in advanced economies, as firms and households continue to repair their balance sheets; a stronger, V-shaped recovery in emerging-market countries, owing to stronger macroeconomic, financial, and policy fundamentals. That adds up to close to 4% annual growth for the global economy, with advanced economies growing at around 2% and emerging-market countries growing at about 6%.

The word anemic is never one you want to see when talking economic forecasts.  Roubini does identify a few possible black swan events related to things like the deterioration of the Spanish economy that could make anemic sound like a good thing.   His comments on the US economy indicate more of the same.  None of the same is pleasant.

The United States represents another downside risk for global growth. In 2011, the US faces a likely double dip in the housing market, high unemployment and weak job creation, a persistent credit crunch, gaping budgetary holes at the state and local level, and steeper borrowing costs as a result of the federal government’s lack of fiscal consolidation. Moreover, credit growth on both sides of the Atlantic will be restrained, as many financial institutions in the US and Europe maintain a risk-averse stance toward lending.

There’s some indication of our potential black swans in that paragraph.  Every economist is attuned to the solvency problems in states like Illinois, New Jersey, and California.  There is also no faith in the federal government’s ability to bail out any one but political donors.  The only hope I have for the situation is that it’s an election year and those do tend to be important states electorally for presidential wannabes.

The other trends that worry me are the trends in oil and food prices which could mean that huge countries like China may have to readjust their plans with their sovereign wealth funds.  Countries that import a lot of these items are going to be in for hefty bills. China is already experience inflation and has upped its interest rates.  Roubini is watching for further signs that they recognize the potential problem.  He also believes these tensions will further fuel currency tensions.

Roubini actually sees some upside risks and believes that we will slowly pull out of things.  He believes that all sectors are still engaging in balance sheet repair with the exception of the US government.  This is especially significant for the potential for jobs creation. If  corporations are lean and mean and things do improve, this could create some much needed labor demand.

Joseph Stiglitz wrote a column for the UK Guardian after his Davos trip for the World Economic Forum.  He may actually need to take the Dr Doom title from Robini.  He focused on some systemic things that you might find interesting.   Once again, we see an evaluation of the Efficient Market Hypothesis (EMH).  This is something that should’ve happened years ago.  He also mentions some skepticism of the monetarist (aka Milton Friedman) positions of central banks on inflation.

But this time, as business leaders shared their experiences, one could almost feel the clouds darkening. The spirit was captured by one speaker who suggested that we had gone from “boom and bust” to “boom and Armageddon”. The emerging consensus was that the International Monetary Fund (IMF) forecast for 2009, issued as the meeting convened, of global stagnation – the lowest growth in the post-war period – was optimistic. The only upbeat note was struck by someone who remarked that Davos consensus forecasts are almost always wrong, so perhaps this time it would prove excessively pessimistic.

Equally striking was the loss of faith in markets. In a widely attended brainstorming session at which participants were asked what single failure accounted for the crisis, there was a resounding answer: the belief that markets were self-correcting.

The so-called “efficient markets” model, which holds that prices fully and efficiently reflect all available information, also came in for a trashing. So did inflation targeting: the excessive focus on inflation had diverted attention from the more fundamental question of financial stability. Central bankers’ belief that controlling inflation was necessary and almost sufficient for growth and prosperity had never been based on sound economic theory; now, the crisis provided further scepticism.

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An Authentic New Year’s Resolution for our Economy

Joseph Stiglitz is one economist whose research influences mine and whose grasp of the big questions and answers that the discipline of economics can provide causes me constant amazement.   He’s won just about all the prizes you can possibly win from your peers and the powers that be in recognition of his contributions to the field.  Stiglitz has also consulted for almost all the institutions that create economic policy.

Most importantly, his contributions aren’t just theoretical abstracts alone.  His contributions have brought theory down from the philosophical level to the ‘make it work’ level of policy.  He was the visionary behind the Clinton economic policy that defined a new economic philosophy called the “third way”.    The third way was really a pragmatic view of government’s role  in a market economy based on naturally and unnaturally occurring flaws in markets that cause them to collapse or fail or not produce the most efficient out come.   His theories teach us that some times you have to step in to correct the limitations of the market in the real world.

He has a new article up at Project Syndicate called ‘New Year’s Hope against Hope’. The man is very brilliant and has produced theorems that are both complex and significant. (My Risk Theory Seminar which included his theory of screening is responsible for a large number of  my gray hairs.)  However, the resulting narrative of his theory and work is always practical, pragmatic, understandable and spot on; once you get pass the math.

Here’s why I wish he had the ear of our tin ear president.

In fact, 2010 was a nightmare. The crises in Ireland and Greece called into question the euro’s viability and raised the prospect of a debt default. On both sides of the Atlantic, unemployment remained stubbornly high, at around 10%. Even though 10% of US households with mortgages had already lost their homes, the pace of foreclosures appeared to be increasing – or would have, were not it not for legal snafus that raised doubts about America’s vaunted “rule of law.”

Unfortunately, the New Year’s resolutions made in Europe and America were the wrong ones. The response to the private-sector failures and profligacy that had caused the crisis was to demand public-sector austerity! The consequence will almost surely be a slower recovery and an even longer delay before unemployment falls to acceptable levels.

There will also be a decline in competitiveness. While has China kept its economy going by making investments in education, technology, and infrastructure, Europe and America have been cutting back.

It has become fashionable among politicians to preach the virtues of pain and suffering, no doubt because those bearing the brunt of it are those with little voice – the poor and future generations. To get the economy going, some people will, in fact, have to bear some pain, but the increasingly skewed income distribution gives clear guidance to whom this should be: Approximately a quarter of all income in the US now goes to the top 1%, while most Americans’ income is lower today than it was a dozen years ago. Simply put, most Americans didn’t share in what many called the Great Moderation, but was really the Mother of All Bubbles. So, should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?

Yup, that’s the BIG question that Obama should be asking himself: “Should innocent victims and those who gained nothing from fake prosperity really be made to pay even more?”  How can they bail out the perpetrators and punish the innocent?  There are no big thinkers in the District at the moment when we really need one.

Mister President, please put Dr. Joseph Stiglitz on speed dial.