Lazy Saturday Reads: Economics Food Fight, Drive-By Mass Murder, and Other News

Thomas Picketty

Thomas Picketty

Have a Stupendous Saturday!

It’s too bad Dakinikat is so busy today, because there’s an economics food fight brewing. Perhaps she’ll still find time to comment on the controversy later the evening after she returns home with her newly adopted canine family member, Temple. Meanwhile, I’ll do my best to describe the dispute over Thomas Picketty’s conclusions about wealth inequality, published in his book Capital in the Twenty-first Century.

The Accusations:

At the Financial Times, Economics Editor Chris Giles has claims to have found problems with Picketty’s work: Piketty findings undercut by errors.

Thomas Piketty’s book, ‘Capital in the Twenty-First Century’, has been the publishing sensation of the year. Its thesis of rising inequality tapped into the zeitgeist and electrified the post-financial crisis public policy debate.

But, according to a Financial Times investigation, the rock-star French economist appears to have got his sums wrong.

The data underpinning Professor Piketty’s 577-page tome, which has dominated best-seller lists in recent weeks, contain a series of errors that skew his findings. The FT found mistakes and unexplained entries in his spreadsheets, similar to those which last year undermined the work on public debt and growth of Carmen Reinhart and Kenneth Rogoff.

The central theme of Prof Piketty’s work is that wealth inequalities are heading back up to levels last seen before the first world war. The investigation undercuts this claim, indicating there is little evidence in Prof Piketty’s original sources to bear out the thesis that an increasing share of total wealth is held by the richest few.

Prof Piketty, 43, provides detailed sourcing for his estimates of wealth inequality in Europe and the US over the past 200 years. In his spreadsheets, however, there are transcription errors from the original sources and incorrect formulas. It also appears that some of the data are cherry-picked or constructed without an original source.

John Maynard Keynes

John Maynard Keynes

In one specific example, Giles says the corrected data do not show significant growth in Europe since 1970. In a second article, Giles goes into more detail. In addition, he argues that the U.S. data doesn’t support the conclusion that a greater proportion of the wealth is controlled by top 1% than in recent decades. He does admit to the top 10% controlling a greater share of wealth than previously.

An investigation by the Financial Times, however, has revealed many unexplained data entries and errors in the figures underlying some of the book’s key charts.

These are sufficiently serious to undermine Prof Piketty’s claim that the share of wealth owned by the richest in society has been rising and “the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945”.

After referring back to the original data sources, the investigation found numerous mistakes in Prof Piketty’s work: simple fat-finger errors of transcription; suboptimal averaging techniques; multiple unexplained adjustments to the numbers; data entries with no sourcing, unexplained use of different time periods and inconsistent uses of source data….

A second class of problems relates to unexplained alterations of the original source data. Prof Piketty adjusts his own French data on wealth inequality at death to obtain inequality among the living. However, he used a larger adjustment scale for 1910 than for all the other years, without explaining why.

In the UK data, instead of using his source for the wealth of the top 10 per cent population during the 19th century, Prof Piketty inexplicably adds 26 percentage points to the wealth share of the top 1 per cent for 1870 and 28 percentage points for 1810.

A third problem is that when averaging different countries to estimate wealth in Europe, Prof Piketty gives the same weight to Sweden as to France and the UK – even though it only has one-seventh of the population.

Get even more detail and charts here: Data problems with Capital in the 21st Century.

Karl Marx

Karl Marx

The Pushback So Far:

Paul Krugman: Is Piketty All Wrong?

Great buzz in the blogosphere over Chris Giles’s attack on Thomas Piketty’s Capital in the 21st Century. Giles finds a few clear errors, although they don’t seem to matter much; more important, he questions some of the assumptions and imputations Piketty uses to deal with gaps in the data and the way he switches sources. Neil Irwin and Justin Wolfers have good discussions of the complaints; Piketty will have to answer these questions in detail, and we’ll see how well he does it.

Krugman suggests that Giles may be doing something wrong.

I don’t know the European evidence too well, but the notion of stable wealth concentration in the United States is at odds with many sources of evidence. Take, for example, the landmark CBO study on the distribution of income; it shows the distribution of income by type, and capital income has become much more concentrated over time:

It’s just not plausible that this increase in the concentration of income from capital doesn’t reflect a more or less comparable increase in the concentration of capital itself….

And there’s also the economic story. In the United States, income inequality has soared since 1980 by any measure you use. Unless the affluent starting saving less than the working class, this rise in income disparity must have led to a rise in wealth disparity over time.

At Mother Jones, Kevin Drum notes that

Giles’ objections are mostly to the data regarding increases in wealth inequality over the past few decades, and the funny thing is that even Piketty never claims that this has changed dramatically. The end result of Giles’ re-analysis of Piketty’s data is [below] with Piketty in blue and Giles in red. As you can see, Piketty estimates a very small increase since 1970.



R.A. at The Economist: A Piketty problem?

Milton Friedman

Milton Friedman

Mr Giles’s analysis is impressive, and one certainly hopes that further work by Mr Giles, Mr Piketty or others will clarify whether mistakes have been made, how they came to be introduced and what their effects are. Based on the information Mr Giles has provided so far, however, the analysis does not seem to support many of the allegations made by the FT, or the conclusion that the book’s argument is wrong.

There are four important questions raised by the FT‘s work. First, which data are wrong? Second, how did errors in the work, if they are errors, come to be introduced? Third, how do the errors affect the specific points made in the relevant chapters? And fourth, how do the errors affect the fundamental conclusions of the book?

Mr Giles focuses on wealth inequality, to which Mr Piketty turns in Chapter 10 of his book. Mr Piketty has not published nearly as much research on the question of wealth inequality, and it seems that much of the analysis in Chapter 10 was done specifically for the book, based on others’ research. Mr Piketty’s wealth-inequality analysis certainly matters as a component of the book’s argument, but it is not accurate to say, as Mr Giles does, that the results in Chapter 10 constitute the “central theme” of the book.

Are the data wrong? Mr Giles identifies discrepancies between source material cited by Mr Piketty and the figures that appear in the book. He identifies cases in which Mr Piketty appears to have chosen to use data from one source when another would have made more sense. Further, the calculations in Mr Piketty’s spreadsheets (which have been available online since the book’s publication) seem to include adjustments in the data that are not adequately explained, and some figures for which Mr Giles cannot find a documented source. Finally, Mr Piketty has made choices concerning weighting of data used in averages, and assigning of data from one year (1935, for example) to another (1930) when such assignments seem unnecessary or inadvisable.

Alan Greenspan

Alan Greenspan

The author concludes that, unfortunately, ideology will determine how many people respond to the Giles critique. Much more extensive analysis at the link.

Here is Picketty’s–presumably preliminary–response to Giles in a letter to the Financial Times:

Let me also say that I certainly agree that available data sources on wealth are much less systematic than for income. In fact, one of the main reasons why I am in favor of wealth taxation and automatic exchange of bank information is that this would be a way to develop more financial transparency and more reliable sources of information on wealth dynamics (even if the tax was charged at very low rates, which you might agree with).

For the time being, we have to do with what we have, that is, a very diverse and heterogeneous set of data sources on wealth: historical inheritance declarations and estate tax statistics, scarce property and wealth tax data, and household surveys with self-reported data on wealth (with typically a lot of under-reporting at the top). As I make clear in the book, in the on-line appendix, and in the many technical papers I have published on this topic, one needs to make a number of adjustments to the raw data sources so as to make them more homogenous over time and across countries. I have tried in the context of this book to make the most justified choices and arbitrages about data sources and adjustments. I have no doubt that my historical data series can be improved and will be improved in the future (this is why I put everything on line). In fact, the “World Top Incomes Database” (WTID) is set to become a “World Wealth and Income Database” in the coming years, and we will put on-line updated estimates covering more countries. But I would be very surprised if any of the substantive conclusion about the long run evolution of wealth distributions was much affected by these improvements.

I thought this was important:

my estimates on wealth concentration do not fully take into account offshore wealth, and are likely to err on the low side. I am certainly not trying to make the picture look darker than it it. As I make clear in chapter 12 of my book (see in particular table 12.1-12.2), top wealth holders have apparently been rising a lot faster average wealth in recent decades, at least according to the wealth rankings published in magazines such as Forbes. This is true not only in the US, but also in Britain and at the global level (see attached table). This is not well taken into account by wealth surveys and official statistics, including the recent statistics that were published for Britain. Of course, as I make clear in my book, wealth rankings published by magazines are far from being a perfectly reliable data source. But for the time being, this is what we have, and what we have suggests that the concentration of wealth at the top is rising pretty much everywhere.

Luckovich shooting

In Other News:

There has been a mass shooting in Southern California–this time perpetrated from behind the wheel of a car. From the LA Times, 7 dead in drive-by shooting near UC Santa Barbara.

The shootings began about 9:30 p.m., a sheriff’s spokeswoman told KEYT-TV. It wasn’t clear what the attacker’s motivation might have been.

An 18-year-old Newport Beach man who was visiting Santa Barbara described a confusing scene as the shots rang out.

Nikolaus Becker was eating outside The Habit, 888 Embarcadero Del Norte,  near the scene when the first set of shots was fired about 9:30 p.m. At first he thought it was firecrackers. A group of three to five police officers who were nearby started to casually walk toward the sounds, said Becker, but ran when a second round of shots broke out.

“That’s when they yelled at us to get inside and take cover,” Becker said.

The BMW took a sharp turn in front of The Habit, Becker said, and moments later a third round of shots was heard. Becker and his friends moved toward the restaurant’s kitchen but were told to wait in the seating area by employees.

He estimates there were at least 13 to 15 shots total at three locations. The locations were about 100 yards from one another.

The shooter, whose motivation is unknown, was found dead in his BMW. It’s not yet clear if he shot himself or was killed by sheriff’s deputies.

In another gun-related story, TPM reports that some gun nuts are reconsidering their campaign of carrying long guns into public places: Scaring The Crap Out of People Oddly Not Winning Fans.

Open Carry Texas and a group of other aggressive gun rights groups have issued a joint statement telling their members, Dudes, let’s stop taking our guns to restaurants. It’s freaking people out and making them hate us.

Read the full statement at TPM.


Soon-to-be former LA Clippers owner Donald Sterling has signed over the team to his wife and wants her to negotiate the sale.

Shelly Sterling, who previously shared ownership of the beleaguered NBA franchise with her estranged husband, is now in talks with the NBA over selling the team, the source said.

The NBA banned Donald Sterling for life from all league events after an audio tape became public that caught him on tape uttering racist comments to his assistant V. Stiviano. He told her not to post photos of herself with black people on Instagram — such as Magic Johnson — or bring them to his basketball games.

But the NBA isn’t buying it. From ESPN: Why the NBA won’t allow Shelly Sterling to control the Clippers.

At first glance, Donald Sterling’s gesture may seem like serendipitous news for the NBA. Taking him at his word, Donald Sterling has agreed to leave the league without a fight and has signed off on the sale of his team. Digging deeper, however, reveals possible ulterior motives on Sterling’s part to delay and potentially block the sale of the team. Do not forget a crucial point: capital gain taxes. As first reported by, the Sterlings have significant incentives under capital gain tax law to avoid the sale of the team and keep it in the Sterling family. Doing so, would save them hundreds of millions of dollars. Also, contrary to some reports, the Sterlings are unlikely to benefit from the “involuntary conversion” tax avoidance provision of the Internal Revenue Code. The bottom line is if the Sterlings have to sell the Clippers, they will probably pay hundreds of millions in state and federal taxes.

Along those lines, Donald Sterling’s proposed maneuver does not accomplish the NBA’s goal of ousting the entire Sterling family on June 3. As explained in a previous article, the NBA interprets its constitution to mean that ousting Donald Sterling on June 3 would also automatically oust Shelly Sterling as co-owner, with the Clippers then falling under the control of commissioner Adam Silver. Donald Sterling’s proposed maneuver risks the prospect of Shelly Sterling undertaking a slow-moving effort to sell the team. A sale process that takes months or years would clearly aggravate the NBA, which wants to erase the Sterling family name from the league as quickly as possible. A protracted sale of the Clippers by Shelly Sterling might also constitute a potential rationale for players to boycott NBA games.

Even of greater risk to the NBA, what is to stop Shelly Sterling from deciding to keep the Clippers? She could plausibly reason, on various grounds, that now is not the right time to sell the team. Also, her instruction from her husband to sell the team would not be legally binding; it would be a mere suggestion the moment she takes over the team.

Read much more at the link.

Ta-Nehisi Coates

Ta-Nehisi Coates

I’ll end with a long article that I haven’t gotten to yet, but I’m hearing it’s a must read: The Case for Reparations, by Ta-Nehisi Coates at The Atlantic. Here’s the tagline:

Two hundred fifty years of slavery. Ninety years of Jim Crow. Sixty years of separate but equal. Thirty-five years of racist housing policy. Until we reckon with our compounding moral debts, America will never be whole.”

Some reactions:

The Guardian: The ‘Case for Reparations’ is solid, and it’s long past time to make them.

Slate: An Ingenious and Powerful Case for Reparations.

The Wire: You Should Read “The Case for Reparations.”

NPR: How To Tell Who Hasn’t Read The New ‘Atlantic’ Cover Story.

WaPo: Culture change and Ta-Nehisi Coates’s ‘The Case For Reparations’.

What else is happening? As always, please post your links in the comment thread.

To be or not to be … a second term for Obama

I’m watching the Economist Debate on US elections with the proverbial jaundiced eye. It’s not exactly a good sampling of folks that will most likely be voting in the election.  However, the comments are extremely interesting and as of this moment, Obama’s being judged by the readership as worthy of a second term.  Why I bring this up is that there are two think tank guys arguing the opposing sides and their fascinating arguments reveal a lot about why we can’t get a decent conversation about issues going on in this country at most levels of policy making.

Michael Barone  is arguing the Republican side of things.  He’s a Senior political analyst for the Washington Examiner and a resident fellow at the American Enterprise Institute.  This is supposedly the ‘brains’ of the conservative movement and one of its mouthpieces wrapped up in “research” and “journalism”.  Let’s just say he’s a propaganda tool and leave it at that.  As such, this is the level of his argument.  Death Panels!!! Liberal Elites!!!  Socialism!!!!  If this is the brains behind the conservative moment, be very afraid.  Let me offer up a sample.

America needs to reform its industrial-age entitlement programmes, especially Medicare, to better suit our information-age society. Entitlements are on a trajectory to gobble up all federal revenues and more, and their centralised command and control design leaves no options but death panels and default. Unfortunately, Mr Obama has shown no serious interest in entitlement reform. He ignored the recommendations of his own Bowles–Simpson commission and sabotaged the “grand bargain” negotiations by suddenly demanding $400 billion more in tax increases. He has responded to Republican proposals such as Paul Ryan’s budget plan with campaign demagoguery of the crudest sort.

I’m no Obama fan but this characterization is about as real as the pictures of Obama riding the Unicorn while wielding the rainbow sword. Paul Ryan’s budget plan was full of unsubstantiated number fudging. The grand bargain always included tax increases on the uppermost bracket and Romney/Dole/Chaffey Care–a brain child of the conservative Heritage Foundation–is anything but command and control.  Well, unless you want to consider Insurance and Drug companies having command and control over everything the basis for “command and control”.  I found Obama way too eager to sell off social security and medicare so that criticism is just delusional.  So, basically, the argument against Obama is just more lunatic fringe propaganda here.  It’s not an argument.  It’s a mythic diatribe.  The only thing it needed was a reference to “who is John Galt”. Frankly, the liberal arguments against Obama are much more compelling including the ones that find his extensions of the Patriot Act and use of drones positively Cheneyesque. But, Glaston is not going to argue against the Bushy Cheney imperialistic presidency so that’s no where to be found.

So, is the argument for Obama any more compelling?  Again, I’m looking at the folks here.  I’m not making any case either way on my own terms.William A. Galston  provides the counter argument.  He’s the Ezra Zilkha Chair for the Governance Studies Program at the Brookings Institution.  This is the supposed liberal counterpart to AEI.  Here’s what Galston believes are Obama’s accomplishments-to-date.

But Mr Obama’s most notable achievements have come in the three wars he inherited. He engineered a military withdrawal from Iraq phased so as not to surrender hard-won gains, and he has devised a reasonable timetable for ending the decade-long war in Afghanistan in a manner that safeguards our core long-term interests As for the war on terrorism, Mr Obama has proceeded with focus and verve, and the results have been more than satisfactory. The bold mission that killed Osama bin Laden was the frosting on a very large cake. American drone attacks in Pakistan and Yemen have decimated al Qaeda’s leadership. While the international terrorist network continues to pose a substantial threat, its leaders are on the defensive and in hiding as a result of Mr Obama’s policies.

Back at home, Mr Obama’s social policies have produced similarly good results. In the area of education, he chose a reform-minded secretary and backed him to the hilt. The result: a number of useful initiatives, including the “Race to the Top” programme that catalysed substantial change at the state and local level at modest cost. Mr Obama has also done more for gay rights than any president in history. But when looking at the president’s non-economic domestic record, the focus inevitably falls on health-care reform.

Mr Obama’s reform has long been unpopular and remains so today. But this does not mean it is bad policy, or that it will remain unpopular. If the legislation is fully implemented, it will succeed in expanding insurance coverage and in ridding the system of some of its worst defects, such as denial of coverage based on pre-existing conditions. It also includes attempts to restrain health-care costs, now growing at a rate that portends fiscal disaster if allowed to proceed unchecked. Even its most controversial aspect, the mandate, is a policy conservative Republicans once supported (and Mr Romney included in his reform of Massachusetts’s health-care system). It is for good reason that health-care reform represents a signature accomplishment for Mr Obama, one that had eluded previous Democratic presidents for three-quarters of a century.

I come, finally, to the economy, the issue on which—barring a military confrontation with Iran—the election will turn. To assess the president’s record accurately, some context is essential. As economists Kenneth Rogoff and Carmen Reinhart have shown, financial collapses differ from even deep cyclical downturns. Growth and household incomes are slower to recover, while unemployment, deficits and public debt are higher. And these effects persist for many years. So putting Mr Obama’s record up against Ronald Reagan’s is to make an apples-to-oranges comparison.

The real question is how Mr Obama has done in relation to previous financially induced crises. And the answer is: not badly. He averted an all-out meltdown of the American and global financial system and the onset of a second Great Depression. His stimulus programme, though imperfect in design, helped to stem job losses at a crucial moment in the downturn. (A majority of American economists concurs in this view, as does the non-partisan Congressional Budget Office.) His intervention saved two American car firms and as many as 2m auto-dependent jobs. His programme to recapitalise the banking sector, which was necessary but unpopular on the left, has left America’s financial system better off than its European counterparts. And his new architecture for financial regulation, which was necessary but unpopular on the right, addresses many of the excesses and imbalances that had crept into the system.

So, you can go read all the comments and the longer arguments by both these guys.  Frankly, the more I know about Romney, the more I am resigned to vote for Obama.  I’m not sure that’s a particularly compelling argument for any one to make but as far as things I really care about, Romney is anathema to them all. What’s worse?  Obama’s pathetic retreat from conflict over important issues or Romney’s do and say anything just make me King manner?  Frankly, I’m sticking with the known quantity at this point.  Huzzah!

Surrender Sanity

I cannot believe the toxic environment in which our public policy plays out these days.  There appears to be a well-funded campaign fomenting the politics of resentment.  There also is a campaign of disinformation that continually puts out lies about our economy and our history.  Much of it seems to be rooted in the same kind of anti-intellectualism that plays to fundamentalists of all sorts.  These are people that believe in myths, ideologies and religion without question and seek to demonize any one that brings facts, education, and knowledge to the table.  It is a well-funded campaign and it will bring down our country if we do not stop it.

I see the obfuscation most clearly in economics because that’s my field. Evidently you do not need any particular background in economics in order to write articles on the economy for major newspapers.  Last night, BostonBoomer brought up Ezra Klein and a subsidiary column by Matt Yglesias.  Both of these guys are young and their degrees are in the esoteric subjects of philosophy and literature.  I guess a few years of writing articles makes you an economics pundit in the eyes of the Village.  Klein and Yglesias have written things in defense of the Obama administration’s handling of policy based on a tic tock narrative written by Suskind that shows clear misunderstanding of both fiscal and monetary policy.  It makes me wonder if either of them have ever seen an IS-LM curve and worked through basic policy implications of macro supply or demand shocks.   Ygelsias appears to confuse the Board of Governors with the Open Market committee which shows a lack of knowledge on basic institutions too. A few graduate courses in financial institutions or monetary policy would clear that up pretty quickly, but sadly it will never happen.

Last week, I was beyond horrified by Lori Montgomery’s laundry list of lies on social security. Many of these falsehoods were subsequently repeated by the WAPO ombudsmen yesterday in her defense.  Lori basically called social security “cash negative” by completely ignoring the interest payments received by the social security trust fund from investments in US Treasuries.  Her defender used pretzel logic to attach the social security program to the general budget. That’s a pretty astounding level of bad information for an article that got printed as special on the front page of a major newspaper.  Anyway, it’s disheartening that so much bad information is getting out there about basic economic stuff but it doesn’t stop there.  Just think climate change science, genetics, fetal development, and simple evolution.  That doesn’t even count the malinformation planted by Fox News and the right wing blogs like Red State, Hot Air, or anything connected to Brietbart.  I’m a committed independent, and seeing this nonsense coming from “journalists” on both sides of the US coin just about has me in a total state of despair.  There’s obfuscation on all kinds of things these days and I point to these examples because I know they’re wrong and they come from opposite sides of the political spectrum.

I read two op eds this weekend that are playing into my thoughts about this.  The first is one in the NYT called “The Politics of Austerity” by Thomas B. Edsall.  Edsall is a long time journalist. The other comes from The Economist which never actually gives a byline to a writer.  Its op ed is called “America’s missing middle” with the subtitle “The coming presidential election badly needs a shot of centrist pragmatism”.  Frankly, American discourse and policy not only needs a shot of pragmatism, they need a dose of reality-based economics and politics.  I should mention that I’m not going to use reality in the sense that corporate media uses reality these days.  After all, corporate media has brought us ‘reality’ TV which is the most fictional form of ‘entertainment’ around as far as I can see.  It appears that the same set of villagers that got played by Kim Kardasian and her dream wedding are being played daily by political ideologues like Brietbart, the Koch Brothers, and the Chicago school of Economics and the Chicago School of Politics.  This is what happens when information, money, and power concentrate in a few hands. Average Americans are fed a steady diet of shit that’s meant to get them to act against their own best interests and each other.

So, let me first quote a few things from Edsall who writes that austerity is more of a political ploy than anything based in economics.  He writes on how extremists have basically pitted one taxpayer against another in this current toxic political environment.  Blowhards with agendas get to say whatever they want, unchecked, as long as it suits the plutocracy.  We’re in the process of throwing our children, our elderly, our veterans, our public servants like teachers, public health providers, and public safety officials straight under the bus in order to maintain unrealistic tax structures that benefit the few but have been sold as helping the many who aren’t lazy, shiftless, and criminal.

The new embattled partisan environment allows conservatives to pit taxpayers against tax consumers, those dependent on safety-net programs against those who see such programs as eating away at their personal income and assets.

In a nuanced study, “The Tea Party and the Remaking of Republican Conservatism,” the sociologist and political scientist Theda Skocpol and her colleagues at Harvard found that opposition to government spending was concentrated on resentment of federal government “handouts.” Tea Party activists, they wrote, “define themselves as workers, in opposition to categories of nonworkers they perceive as undeserving of government assistance.”

In a March 15 declaration calling for defunding of most social programs, the New Boston Tea Party was blunt: “The locusts are eating, or should we say devouring, the productive output of the hard working taxpayer.”

The conservative agenda, in a climate of scarcity, racializes policy making, calling for deep cuts in programs for the poor. The beneficiaries of these programs are disproportionately black and Hispanic. In 2009, according to census data, 50.9 percent of black households, 53.3 percent of Hispanic households and 20.5 percent of white households received some form of means-tested government assistance, including food stamps, Medicaid and public housing.

Less obviously, but just as racially charged, is the assault on public employees. “We can no longer live in a society where the public employees are the haves and taxpayers who foot the bills are the have-nots,” declared Scott Walker, the governor of Wisconsin.

For black Americans, government employment is a crucial means of upward mobility. The federal work force is 18.6 percent African-American, compared with 10.9 percent in the private sector. The percentages of African-Americans are highest in just those agencies that are most actively targeted for cuts by Republicans: the Department of Housing and Urban Development, 38.3 percent; the Equal Employment Opportunity Commission, 42.4 percent; and the Education Department, 36.6 percent.

The politics of austerity are inherently favorable to conservatives and inhospitable to liberals. Congressional trench warfare rewards those most willing to risk all. Republicans demonstrated this in last summer’s debt ceiling fight, deploying the threat of a default on Treasury obligations to force spending cuts.

Conservatives are more willing to inflict harm on adversaries and more readily see conflicts in zero-sum terms — the basic framework of the contemporary debate. Once austerity dominates the agenda, the only question is where the ax falls.

The Economist similarly wonders what happened to the US society that achieved so much after World II and before Reagan–who couldn’t even get past a Republican primary these days–when every one was focused on pulling the entire country up.  Now, the focus is on maintaining the extreme wealth and power of the few while inciting American against American anger.

On the face of it, neither side has gained from this stand-off. Only 45% of Americans approve of Mr Obama’s performance. The approval rating for Congress dropped to 9% in one recent poll. A plurality of Americans call themselves independents, and on the most divisive economic argument—how to solve the budget mess—two in three of them back a combination of spending cuts and tax rises. But politics is being driven by extremists who reject any such compromise (see article).

The right is mostly to blame. Ronald Reagan, a divorcee who did little for the pro-life lobby and raised taxes when he had to, would never be nominated today. Mr Romney, like all the Republican presidential candidates, recently pledged to reject tax rises, even as part of a deal where spending cuts would be ten times bigger. Mr Cain surged briefly to the front of the pack because of a plan that would cut personal taxes to 9% (see Lexington); Mr Perry lost support for wanting to educate the children of illegal immigrants. Meanwhile, in Congress, the few remaining pragmatic Republican centrists, like Senator Richard Lugar, are being hunted down by tea-party activists.

It’s easy to make fun of the EURO standoff, but really, what is the deal with the group of congress critters on the super committee right now?  These are the subset of power brokers who are ignoring poll after poll of US citizens on all sides of the political spectrum to support ridiculous tax policies, continue ten plus years of war spending with no war bonds, and ignore the results of a  huge cyclical downturn and lifeless recovery.  These guys experienced a 25% increase in wealth recently, what kind of stake do they have in solving the resultant problems of an austerity agenda?

I think all of this comes from spending too much time in Beltway, Washington DC and on Manhattan Island.  These are basically two places untouched by falling incomes, falling house prices, and any educational experience outside of law schools and esoteric Ivy League degrees.  Then there’s a bunch of know nothing imports that come in with backgrounds in religious extremism, rural isolation, and decades in dysfunctional state governments.  Our political and journalist class are basically spoonfed by plutocrats or isolated backwaters.  The carving up of the national voting map ever so often doesn’t help.  This nearly ensures that we get representatives that specialize in one voter segment and probably one industry. They totally don’t have to pay attention to anything remotely ‘average’ in America.

This is also a clue as to why none of these folks get the “occupy” movements.  I don’t know if you’ve ever headed over to Memeorandum, but it looks like the press is trotting out every possible outlier behavior possible in a society and smearing it to every one carrying a placard.   They all are so threatened that the average American might realize that other average Americans are focused on them instead of segments of each other they are in total panic mode!  I’ve been completely dismayed by a set of villagers that can justify police brutality against veterans and young women. The right wing is trying to scare ordinary Americans away from the picket lines with stories of old women beaten by protestors, small business people unable to do business due to exuberant drumming by lazy people and of stories of encroachment by mentally ill homeless and sexually predatory men.

Again, this is typical of the divide-and-conquer political strategies we see today.  Any one with any kind of nuance is drummed out of their perspective clubs.   I am by no means a supporter or slightly sympathetic of Rick Perry but I have to wonder if his statements about immigration that didn’t include alligator-filled moats and electrical fences didn’t lead to his eclipse by Herman “Racism isn’t a problem until I can use it” Cain.

Back to The Economist for a moment.

In other countries such a huge gap in the middle would see the creation of a third party to represent the alienated majority. Imagine a presidential candidate next year who spelled out the need for deep future cuts in spending on entitlements and defence, as well as the need to raise some revenue (largely by getting rid of deductions); who explained that the pain would be applied only after the recovery was solidly in place; who avoided class or culture wars; who discussed school reform without fear of the Democrats’ paymasters in the teachers’ unions. Better still, imagine a new centrist block in Congress, which might give that candidate (or for that matter a President Obama or Romney) something to work with in 2013.

And so the fantasy continues, for that is sadly what it is. Even if the money were forthcoming, there are all sorts of institutional barriers, especially to starting new parties, and the record of even very well-heeled third-party presidential candidates is bleak. Instead, the middle will have to be recreated from what is already there.

The immediate, rather slim, chance is of a grand bargain on the budget emerging out of a congressional “supercommittee” set up after the debt-ceiling fiasco. If it were to embrace a centrist option, politics over the next year would be considerably more civilised. But it too appears deadlocked, with the Republicans once again ruling out tax increases of any kind.

The way to deal with populist stirrings in the Republican party was to immediately co-opt any spontaneity in the tea party and surrender it to the Club for Growth, Freedomworks, and Americans for Prosperity.

In a forthcoming book (“The Tea Party and the Remaking of Republican Conservatism”), two Harvard University academics, Theda Skocpol and Vanessa Williamson, say that the emergence of the tea-partiers was “just what the doctor ordered” for a group of billionaire ideologues, such as brothers Charles and David Koch of Koch Industries, who lost no time exploiting the movement’s anger and energy. Dick Armey, the founder of FreedomWorks, and Matt Kibbe, its president, have been candid about their efforts to turn the tea-party movement into “a permanent grassroots army” and mount a “hostile takeover” of the Republican Party.

We have another strategy for the popular Occupy Movement.  Since the plutocracy can’t get it shaped into their agenda, it must be demonized.  I was rather young during the civil rights movement and the anti-Vietnam movement. I did come in at the end of both and the uptick of the Gay and Women’s rights movements.  All of these social justice campaigns were subjected to police brutality, name calling, and attempted co-opts.  They stuck so long because of the basic rightness of the causes, the stubbornness of the activists, and the growing support among average Americans.  The only thing that gives me hope is that while I have no faith in journalists, politicians, and the power brokers of K and C street, I do have faith in average Americans.  If we can remember our shared vision and goals, we can steer us back on course to a shared prosperity.  Meanwhile, we need to fight the hate and the ignorance with everything we’ve got.  Right now, I think the Occupy movement is the closest thing we’ve got to the right way to do it.  Frankly, the fact that it confuses journalists and politicians and causes the right wing to go on propaganda witch hunts is a pretty good sign of how right it is to me.

The Economist Pans POTUS

obamabearsThe Economist endorsed Obama for POTUS in last year’s presidential campaign.  I’m going to say that up front because  reading my print edition (slightly soggy from today’s rain) would have lead me to another conclusion. Each article in this week’s (March 14, 2009)  United States section took a jab at something POTUS either said or did.  Either the Brits are really mad at the Gordan snub last month, the koolaid has worn off overseas, or they’ve finally seen into the empty suit.  All I can say is here are the links, read for yourself.

Article one was  “Pursued by Obamabears“.  This was an analysis  subtitled “Investors fret that Obama’s crisis  response is not up to task.”  It also had this nifty graphic.  You can read the entire thing and we’ve discussed the bear market that just recently experienced a brief relief rally.  This point was the money maker for me.

Whatever the cause, the strain on the Treasury is encouraging the view that Mr Obama’s agenda is being driven by political advisers and Congressmen, both more attuned to voters’ rage than to market confidence. Chris Dodd, who faces a battle to retain his Connecticut Senate seat in 2010, inserted tough new restrictions on bankers’ pay into the fiscal stimulus package despite the administration’s objections. Since then, a series of mostly small banks have said they will return bail-out money, frustrating the plan to increase the banking system’s capital and lending capacity.

There was also an interesting quote from a former aide to Bill Clinton who was quoted as having ‘two equally depressing” hypotheses on why team Obama appears to be not ready for prime time.  I also liked it.  The comparisons to Carter have started already.

“Either they do not know what to do, or they do not believe they can muster the political support to do what they know needs to be done.” He advised Mr Obama to focus his attention on the crisis, or risk the loss of confidence Jimmy Carter suffered three decades ago. That would bring Obamabears out in droves.

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The Invisible Hand vs. The Big Stick

 “The reason that the invisible hand often seems invisible is that it is often not there.” (Making Globalization Work, 2006)

Nobel Prize winning economist (2001) Joseph E. Stiglitz

After finding out about it on, I’m participating in an on line debate at concerning regulating the financial system after this crisis.  It is interesting to read the comments because they come from all over the world and they come from folks that participate one way or another in the financial markets.  Right now 63% of the participants (led by American Economist Joseph Stiglitz) want more regulation of financial markets.

Here is his opening argument:

The current crisis is caused, in part, by inadequate regulation. Unless we have an adequate regulatory system—regulations and a regulatory structure that ensures their implementation—we are bound to have another crisis. This is not the first such crisis in the financial system that we have had in recent decades. Indeed, around the world, it is more unusual for a country not to have had a financial crisis than to have had one. They have occurred in societies with “good institutions”—like those in Scandinavia—and in societies without such institutions. They have occurred in developed and in developing countries. The only countries to have been spared so far are those with strong regulatory frameworks.

The side against regulation is taken up by Myron Scholes who is an equally impressive American Finance Professor.  Here is his opening argument:

There is now a rising chorus among regulators, politicians, and academics claiming the freedom to innovate in the financial domain should be curtailed.  This stemmed from the apparent recent failures in mortgage finance and credit default swaps and the apparent need for governments and central banks to “bail out” failing and failed financial institutions around the world directly through capital infusions and indirectly by providing a wide array of liquidity facilities and guarantees. They claim that freedom in global financial markets has proceeded at too rapid a pace without controls—in particular with an incentive system that rewards risk-taking at the expense of government entities—and as a result “throwing sand in the gears” of innovation will reduce “deadweight costs” and “moral hazard” issues.

Here are my thoughts.

Financial markets are not like other markets. To function properly, there needs to be transparency and trust. If transparency and trust are not there, they do not work, and if financial markets don’t work, nothing works in an economy.

Regulations should be put into place that increase transparency and increase trust. This does not mean they should be used to push social agendas like ‘affordable housing’. This means that rules of dealing in a market should be clearly established and a regulator should ensure they are followed. Rules concerning leverage, capitalization, prudent underwriting standards, and standardization of contracts all lead to transparency and trust. Countries with the standards attract capital and grow. Countries without do not attract capital and stall. Adequate regulation would have stopped this financial panic. We still have not unwound the rogue credit default swap market. We have yet to determine the full impact this will have on the current situation and it remains an unquantified risk hanging out there in the ethos like a cancer ready to spread. Unless we ensure these markets cannot be gamed, we will lurch from one financial panic to another.

As the financial crisis winds its way through history the discussion concerning the role of regulation, deregulation, and future policy will be an important one.  I suggest you get involved with that discussion because it is just that, an important one.