Tough love

Yes, we do have a problem. A very big one, and I have in mind Wall Street and its corrosive influence on politics and government. Because it has amassed so much collective wealth, aided and abetted by a compliant Congress, Wall Street calls the shots.

So, when Wall Street guessed wrong on house prices and the longs and the shorts of trading, the federal government came to its rescue, pouring hundreds of billions of dollars into reserve-starved financial institutions to restore their liquidity. The response to the collapse of Lehman Brothers was as massive as it was quick.

However, instead of gratefulness or newfound humility, the captains of Wall Street have doubled down on attempts to regulate them, seeking to denude Dodd-Frank, itself a toothless product of much compromise, and squelch the Volcker rule, a pale shadow of Glass-Steagall. Meanwhile, these casino magnates are lavishing both the Romney and Obama camps with millions of dollars in contributions.

For his part, Romney promises to gut Dodd-Frank in its entirety, reduce the marginal tax rate, kill the estate tax, and otherwise leave Wall Street to gamble with trillions of dollars while ensuring that any future losses would be covered by the Rest of Us, just as we did under TARP. In Romney’s worldview, these captains of the finance industry are the lifeblood of the U.S. economy. They should be praised rather than pilloried.

Obama chooses to treat the malefactors of great wealth with “tough love.” Writing for the New York Times, Thomas Edsall quotes Obama’s February 2009 remarks to a question about temporarily nationalizing one or more of the then-troubled financial firms.

You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country. Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country. And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.

Edsall provides us with some truly depressing numbers about Wall Street’s campaign contributions. Wall Street has been the largest source of Romney’s campaign cash, now at $13 million. The pro-Romeny Super PAC, Restore Our Future, has so far received $24 million from financial institutions, almost half of the PAC’s total contributions.

Hedging its bets, Wall Street has also been the Democratic Party’s biggest source of dollars, contributing almost $20 million. Hollywood, famously derided by conservatives as the principal contributor to Democratic candidates, comes in at less than $8 million. Edsall:

Romney has made it very clear how he will help Wall Street if he wins. It’s President Obama who is in a conflicted position. Obama could conceivably take a more aggressive regulatory posture. The more likely scenario, given recent history, is that he would be apprehensive about the consequences of regulating hedge-fund operators and investment bankers. In the aftermath of Citizens United, Obama and the rest of the political community are aware of how dangerous the financial sector can be in the freewheeling world of campaign finance.

The Supreme Court’s awful ruling, equating money with speech, effectively silences the speech of the Rest of Us, since we ain’t got no money. Nor can we look to Obama to take up our cause. We simply don’t count.

The birthers

I haven’t paid all that much attention to the “birther movement,” folks among us who proclaim that Obama was not born where he said he was born. Indeed, the birthers claim, he was born in Kenya, probably raised a Muslim, and now sits in the White House plotting an inside coup based on socialist ideology. State officials have even attempted to bar Obama’s name from the ballot this November, because they continue to believe against all evidence to the contrary, that Obama is illegitimate—only natural born citizens are eligible for president.

So, I happened upon this morning, a blog site featuring the content of a semi-anonymous college professor. The professor takes on the birther movement, eventually tossing out the conspiracies in favor of Occam’s Razor, or the principle of parsimony , if you prefer. That is, the simplest, least complicated explanation is more likely to be true than one involving numerous hypotheses, speculation, and random dot-connecting. He concludes:

If a theory this convoluted is necessary to make sense of your predetermined conclusions, there is a good chance that you’re making shit up. That obvious fact is remarkably easy to overlook if you’re 100% convinced that Barack Obama is a fraud. The phrase Unnecessarily Complex does not enter into your thinking. You will develop some theory, find evidence somewhere, and substitute “likely” for “plausible” to make sense of it all. And no matter what Obama says, does, or makes public, this parade of inane conspiracies will never stop.

Hey, this is “Americia” [sic].

Right or left?

Add another item to the category “things I didn’t know.” This one on how countries came to drive on the left or right of highways.

As a consumer of many British video offerings, including stuff on the Tudors, I found this bit interesting:

In feudal Europe, people would travel on the left side of the road because most people were right-handed and wanted the arm that they used for their sword (or other weapon) between them and anyone who approached. As a result, traveling on the left became customary.

Napoleon Bonaparte happened to be left-handed. So he ordered his troops and the countries he conquered to travel on the right.

I don’t know about Japan, though. I think they drive on the left, just as the British do. But the Japanese were not colonized by England. Their samurais must have been right-handed, too.

In praise of idleness

That was the title of one of philosopher Bertrand Russell’s essays. He didn’t have in mind just sitting on one’s butt. Rather, the hustle and bustle of modern living was depriving us of leisure, the opportunity to contemplate, to engage in the arts, to recreate.

We’re obsessed with growth and productivity. As it turns out, these two strategies will be our and the planet’s undoing. Besides, being less productive would allow more of us to work, and there are far too many without jobs.

Such ideas emerge from the keyboard of Tim Jackson, a professor at the University of Surrey. Writing for the New York Times, he tell us:

But the relentless drive for productivity may also have some natural limits. Ever-increasing productivity means that if our economies don’t continue to expand, we risk putting people out of work. If more is possible each passing year with each working hour, then either output has to increase or else there is less work to go around. Like it or not, we find ourselves hooked on growth.

He has an interesting suggestion. One that involves altering incentives.

[The transition to a more sustainable economy and lifestyle] demands careful attention to incentive structures — lower taxes on labor and higher taxes on resource consumption and pollution, for example. It calls for more than just lip service to concepts of patient-centered care and student-centered learning. It requires the dismantling of perverse productivity targets and a serious investment in skills and training. In short, avoiding the scourge of unemployment may have less to do with chasing after growth and more to do with building an economy of care, craft and culture. And in doing so, restoring the value of decent work to its rightful place at the heart of society.

I’m a product of Berkeley in the 60s. So I like what this man is saying. How about you?

Working, or not

Somewhat random thoughts on employment.

The sputtering economy reveals itself starkly in this chart.

Men have not fared well. But what about women?

The Great Recession hit employed women harder than men.

Putting both together we get:

We’ll note that recessions (the gray columns in the charts) have a greater impact on working women than working men. Apparently more jobs held by women are vulnerable to layoffs in a weakened economy.

Despite the above, real per capita income rose steadily until the Great Recession.

But this statistic misleads. Some Americans have dramatically increased their incomes; the Rest of Us not so much. (I don’t have data newer than 2005.)

The unemployment rate remains high, still at 8.5 percent in April of this year.

In May of 2007 the unemployment rate stood at 4.3 percent. It jumped to 10.9 percent in October of 2009, the largest jump for the period covered by the above chart.

And people are staying unemployed much longer than before—around 40 weeks, or twice the previous high

This is all bad, folks. Also, the long-term effects of so many being out of work for so long will surely be devastating for those who directly suffer and for the economy as a whole.

Meanwhile, the dysfunctional government fiddles.

Brooks channels Hamilton

In his column today the New York Times‘ David Brooks, sticking to his recurring theme, argues that America has become soft, relying too heavily on government while at the same time allowing the government to frustrate innovation and productivity. He believes that over the 19th and 20th centuries America has lost the Hamiltonian spirit, which, he says, was all about limited government and an entrepreneurial private sector. Brooks:

But the federal role has historically been sharply limited. The man who initiated that role, Alexander Hamilton, was a nationalist. His primary goal was to enhance national power and eminence, not to make individuals rich or equal.

Brooks goes on to finger three phases that undermined prosperity. These are: the original progressive era (circa late 19th and early 20th centuries); the New Deal; and LBJ’s Great Society.

Of the progressives, Brooks suggests:

But the late progressives had excessive faith in the power of government planners to rationalize national life. This was antithetical to the Hamiltonian tradition, which was much more skeptical about how much we can know and much more respectful toward the complexity of the world.

Unfortunately for his readers, Brooks doesn’t explain how such planners rationalized “national life.” A quick skim of this Wikipedia entry on the progressive era provides little evidence to bolster Brooks’s criticism. The progressives sought to eliminate, or at least reduce, corruption in government and impose restraints on the “malefactors of great wealth,” to use Theodore Roosevelt’s expression. There were several major panics in the economy, with at least one threatening financial collapse, that led to the establishment of the Federal Reserve.

As for the New Deal, Brooks writes:

But the New Deal’s dictum — that people don’t eat in the long run; they eat every day — was eventually corrosive. Politicians since have paid less attention to long-term structures and more to how many jobs they “create” in a specific month. Americans have been corrupted by the allure of debt, sacrificing future development for the sake of present spending and tax cuts.

I don’t see how New Deal measures hobbled commerce. Indeed, and as I’ve mentioned many times on this blog, the economy experienced its greatest period of growth in the post-war decades, ending in the late 70s. It’s been downhill ever since.

Nor did Americans take on debt, other than mortgages on their homes. As we see, debt began its upward trajectory in the 80s and accelerated in the 90s and 00s, reaching a peak in 2008-09.

And we need to keep in mind that marginal tax rates at the time were at their highest, exceeding 90 percent at one point.

Americans took on increasing amounts of debt as their wages stagnated. How else to maintain consumer spending, so vital to the economy—about 70 percent of GDP?

LBJ meant well, Brooks allows.

But he made a series of open-ended promises, especially on health care. He tried to bind voters to the Democratic Party with a web of middle-class subsidies.

Brooks evidently doesn’t like Medicare, which is far more efficient than the private health care system that currently rains terror on us all, gobbling up more and more of our paychecks as providers play god in determining who gets covered and for what ailments. As for the “web of middle-class subsides,” what might these be? He doesn’t say. Social Security started in the 1930s. The ability to deduct mortgage interest from federal income taxes dates back to the second decade of the 20th century.

Brooks believes that the federal government has “overreached” with increasing frequency. In so doing it has stifled commerce and risked stagnation, a familiar term to readers of this blog. He concludes:

Does government encourage long-term innovation or leave behind long-term debt for short-term expenditure? Does government nurture an enterprising citizenry, or a secure but less energetic one?

If the U.S. doesn’t modernize its governing institutions, the nation will stagnate. The ghost of Hamilton will be displeased.

I began this post with a table, based on OECD data. It shows government spending (perhaps a proxy for “overreach”) as a percentage of GDP. You will have noticed that the U.S. is below average, far less than the Nordic countries, France, and Germany. The point, of course, is that citizens of the U.S. are hardly “secure,” certainly not as secure as our counterparts across the pond. Nor do the Rest of Us enjoy lavish “subsidies.” Remember, our government coddles the rich as it gives the middle finger to the Rest of Us.

The income taxes we pay are less burdensome than those paid by most Europeans. Yet, Republicans, as a rule, want them even lower (OECD data for 2009).*

However much I disagree with Brooks on the above matters, I do wholeheartedly concur on the need for governmental reform. The federal structure established by Hamilton et al. clearly doesn’t work, if it ever did. Checking and balancing the three branches have proven disastrous on two major fronts: the ability to get things done; and the opportunity for institutional bribery. Despite our country’s enormous wealth, school buildings and transportation systems and public services in general urgently require attention. But government, the only entity that can provide these has no money, especially at the state level.

The rising federal debt has more to do with diminished tax revenues, as tax rates have plummeted over the last forty years. Add a couple of expensive wars and a bloated military, and we get closer to understanding the reasons for soaring debt. No, it’s not runaway federal spending on discretionary items.


* France, whose government spends much more on public services than does America’s, must derive significant revenues from sources other than income. Value-added taxes on consumer purchases would surely be one of them.

Why the sputtering economy?

In a recent post on money and inflation I promised to speculate on why the economy is so anemic. I posed this questions: “With all this cheap money out there, why aren’t investors investing, firms producing, and workers working?”

As is my habit, I will use a few charts, drawn mostly from data published by the St. Louis Fed (or FRED). But before I begin this hopefully brief journey, I need to wrestle with a proposition offered by the late economist Paul Sweezy.

In March of 1992 Sweezy addressed the Harvard Economics Club. His topic: Why stagnation? Sweezy believed that mature capitalist economies tend toward economic stagnation rather than growth. He acknowledges the post-war economic boom, then proffers five factors that made that period exceptional:

  1. the need to make good wartime damage;
  2. the existence of a vast potential demand for goods and services the production of which had been eliminated or greatly reduced during the war (houses, automobiles, appliances, etc.): a huge pool of purchasing power accumulated during the war by firms and individuals which could be used to transform potential demand into effective demand;
  3. the establishment of U.S. global hegemony as a result of the war: the U.S. dollar became the basis of the international monetary system [Bretton-Woods agreement], prewar trade and currency blocs were dismantled, and the conditions for relatively free capital movements were created—all of which served to fuel an enormous expansion of international trade;
  4. civilian spin-offs from military technology, especially electronics and jet planes; and
  5. the building up by the United States of a huge peacetime armaments industry, spurred on by major regional wars in Korea and Indochina.

Only the last two conditions obtain today. Instead, avers Sweezy, we have increasing financialization of the economy, growing inequality, and weak aggregate demand. He also cites “a strong propensity to save and a weak propensity to invest”—inherent in capitalism. Sweezy:

In tracing the causes of the re-emergence of stagnation in the 1970s, the crucial point to keep in mind is that every one of the forces which powered the long postwar expansion was, and was bound to be, self-limiting. This indeed is part of the very nature of investment: it not only responds to a demand, it also satisfies the demand. Wartime damage was repaired. Demand deferred during the war was satisfied. The process of building up new industries (including a peacetime arms industry) requires a lot more investment than maintaining them. Expanding industrial capacity always ends up by creating overcapacity.

Sounds plausible.

Now on to a few charts. What about the “strong propensity to save and the weak propensity to invest”?

Do we have too much capacity?

We know that whatever we produce here in the U.S. has not been all that attractive to foreign consumers, since our current account balance has been sharply negative since the start of the Great Divergence.

Are we Americans buying things?

How did we do this, if real wages have either stagnated or declined for the Rest of Us? (Source: Saez and Piketty)

An obvious answer is that we Americans took on increasing amounts of debt.

We’re also losing jobs.

However, at the same time corporate profits have soared.

So, somebody’s making money, just not the Rest of Us.

Which brings us back to the problem of where to put all that money. The Rest of Us would like to see better schools, better roads, better trains, and livable-wage jobs for everyone who wants to work. We’d like a better health care system. Okay. There are lots of things we’d like to see happening that require investments of those dollars that are in the bank accounts of the filthy rich.

The challenge, of course, is how to extract those dollars for the benefit of the Rest of Us. The rich aren’t about to simply start writing checks to build the schools, roads, etc.

Sweezy concluded that the existing economic system (mature capitalism) cannot work for the Rest of Us:

But no one can say for sure that there will never be other new powerful stimuli to investment, such, for example, as were provided by the industrial revolution, the railroad, and the automobile in earlier times. What one can say, I think, is that nothing like that is visible on the horizon now. For those who understand this, the lesson is clear enough: rather than wait around for a miracle (or an irretrievable disaster), it is high time to dedicate our thoughts and energies to replacing the present economic system with one which operates to satisfy human needs and not as a mere byproduct of the presence or absence of investment opportunities attractive to a relative handful of socially irresponsible capitalists.