Hattip to Mark Thoma, for this one.

Peter Dorman

This is a critical moment for economic policy in the industrialized countries. After a year and a half of emergency rescue, with large fiscal deficits and rock-bottom interest rates, governments are beginning to pull back. Especially in countries with large current account deficits, stimulus spending is being withdrawn, and central banks are under pressure to begin raising rates and tightening money. The threat of deflation and cascading insolvencies in the financial system are so yesterday; today’s threat is said to be inflation and sovereign default.

If you survey the center-to-left economics blogs, including this one—economists who see the world at least in part through Keynesian eyes—you will find howls of protest. It is simply irrational, we say, to allow this slump to run its course. There is no threat of inflation at all, which is actually a problem, since a bit of inflation would be medicine against effectively high nominal interest rates at the zero lower bound. And every indication is that the recovery under way owes its feeble pulse to the lingering effects of last year’s stimulus.

But is this just a problem of economic analysis? Is it only that New, Post and other Keynesians haven’t been persuasive enough? Does economic argument and evidence drive policy?

In a sense yes: those who make the decisions summon economic arguments to justify their actions. But who gets to make the decisions and what arguments they find appealing is not the outcome of academic seminars. What got us into this mess in the first place, and what now threatens to throw us back into the maelstrom, is the political hegemony of the “finance perspective”, the interests and outlook of those whose main concern is maximizing (and now simply protecting) the value of their financial assets. . . .

. . . economic orthodoxy is regaining control over policy because it reflects the outlook of those who occupy the upper reaches of government and business.

Up to this point, the Great Economic Event we are passing through has not caused even a hint of political realignment, and that is why policy is returning to the old normal.

Dorman identifies the "finance perspective" with the traditional concept of the rentier class. I think this wrong in an important way: the actual rentiers are being taken for a ride by a "finance class" of financial intermediary managers and the new class of corporate CEOs. But, still, Dorman's point, which is worth highlighting on this blog, is the absence of a political realignment, and its role in pressing the country and the world back toward the status quo ante.

This blog has been searching the horizon for the beginning of a political realignment from its beginning, and hasn't spotted it, yet, though some pretty fierce political storms have come and gone.

I fault the Keynesians for habitually denying what Dorman tepidly acknowledges here.

Still, he doesn't go far enough, doesn't acknowledge whole dimensions of the conflict, let alone measure the depth in context.

One dimension that he doesn't acknowledge is Time; ordinarily, progress through time creates a conflict between those, who lend money to make money, and those, who borrow money to make money, not to mention the conflict between those who labor to make money, and those, who dominate those who labor, to make money.

We are at the end of an Era, an economic Epoch -- an aspect of economics the Keynesians buried with Schumpeter, and the New Keynesians ostracized in Minsky. In the words of "my hero" Sterling Newberry,

"Our present is defined not by what we hope for, but by how we justify a position of wealth and privilege which we are no longer earning, but are determined to keep."

You fault the conservatives among the financial class for failing to see that we are all in the same leaky boat. Whether from hopeful idealism or from the naivete of Pangloss, that attitude leads to the same eyes-wide-shut blindness.

We are not in the same boat. The finance class (which includes the social class of actual and aspiring CEOs, who run our major corporations) have been throwing more and more of us overboard for some time.

The dominant core of American Finance has been evolving [metaphor switch] from farmer/shepherd to predator to parasite, and may well transition into scavenger, without hesitation. (The rentier class does not drive the politics; they go along, because they think they are in on the con. Just like Madoff investors, who thought Madoff was a crook, their crook, they will try to protect the ability of the Financial Class to steal on their behalf.)

And, we are not part of a generic, past-less, future-less economy. The Economy does not tend toward some general, generic, structure-less equilibrium, guided by Walrasian tatonnement. The Economy finds its stability in disequilibrium, like a bicycle in motion. It can go on for a long-time, growing pleasantly, in a particular pattern or paradigm of disequilibrium, but not forever. Eventually, the bases for stable disequilibrium are exhausted, and structural change is required.

We are at a point in time, when structural change, deep and broad and massive, is clearly and urgently required. Climate change, peak oil, pointless and unbelievably costly wars without end, the descent of the American economy into negative savings/disinvestment -- the signals are clear, frequent and at ear-splitting volume.

Again, the Keynesians, new and old, stand by, mutely, dumbly. This is an aspect of the situation, they mostly refuse to acknowledge. Krugman will call for fiscal stimulus, but not complete the argument, by saying clearly how public spending should be focused on re-structuring the economy. The argument becomes diffuse, as conservatives opposed to re-structuring or wanting to accelerate the strip-mining of the middle-class, propose massive tax-cutting. And, why not, if stimulus is just generic spending, if the Federal deficit is something to be considered only later, . . .

In one sense, Dorman is right: the ideas of the econ-Left have no traction, because interests drive policy. Here's the thing: to have traction, you have to have friction, you have to come in contact with an opposed surface.

But, the econ-Left, in its argument and ideation, habitually abstracts away from Interests. The Keynesian insistence that it is a "technical problem" -- which in 1936 was actually very helpful in dispelling the paralysis of analysis of "its complicated" coming from the institutionalists as well as the nonsense of the classical know-nothings -- has become the doctrine of an establishment Technocracy, a priesthood, who find esoteric obscurity more useful than clarity.

Economic ideas can have traction. They can have traction, when they connect with Interests. Economic ideas that abstract away from the particular reality of the immediate crisis and historic moment, that fail to acknowledge opposed interests, because it requires acknowledging that some Members in Good Standing of the Club are working for the devil-incarnate -- well, no one should be surprised that an unwillingness to describe current policy and its intended and likely consequences accurately leads to irrelevance.

Doctor Why says this more succinctly than I:

The orthodoxy believes that economic adjustment should happen in the labor market (lower wages), rather than in the credit markets (lower real interest rates) or through fiscal policy (high budget deficit and more progressive taxation) - which is of course a very convenient view for the powers that be.

So if Keynesians really want to influence policy - rather than just blog about it - they have to show that the economic and political cost of the labor-market adjustment is going to be unacceptable. Unfortunately, right now such an argument cannot be convincingly made from a purely cyclical perspective (it requires a more sophisticated structural view), and therefore some sort of anti-Keynesian backlash seems to be inevitable.

Taking a more global perspective, the status quo ante entails some chronic imbalances of trade, investment and funds flow, which are simply unsustainable. They were always unsustainable "in the long run", but highly beneficial in "the short run", especially to the financial sector and to those in charge of multinational corporations; now, the long run has run out. The American powers-that-be are choosing stagnation, as the least bad policy, because the financialization of the American economy rests on those chronic imbalances of trade and funds flow, and, maybe, that chronic imbalance can be managed, and the wealth it created, preserved, for a bit longer, provided the losses are crammed-down on labor and the middle classes.

Plunge

"US money supply plunges at 1930s pace as Obama eyes fresh stimulus"

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

Deflation cometh.

The Moral Courage of the Obama Administration in Action

NY Times:

President Obama, the Pentagon and leading lawmakers reached agreement Monday on legislative language and a time frame for repealing the military’s “don’t ask, don’t tell” policy, clearing the way for Congress to take up the measure as soon as this week.
It was not clear whether the deal had secured the votes necessary to pass the House and Senate, but the agreement removed the Pentagon’s objections to having Congress vote quickly on repealing the contentious 17-year-old policy, which bars gay men and lesbians from serving openly in the armed services.

House Democratic leaders were meeting Monday night and considering taking up the measure as soon as Thursday. But even if the measure passes, the policy cannot not change until after Dec. 1, when the Pentagon completes a review of its readiness to deal with the changes. Mr. Obama, his defense secretary and the chairman of the joint chiefs of staff would also be required to certify that repeal would not harm readiness.

The measure could enable gay men and lesbians to serve openly in the military for the first time, ending a policy that Mr. Obama, Defense Secretary Robert M. Gates and Adm. Mike Mullen, the chairman of the joint chiefs of staff, all say they oppose.

Representative Patrick J. Murphy, Democrat of Pennsylvania and a leading advocate in the House for repeal, is hoping to attach the proposal to a defense authorization bill that will come up for a vote on Thursday.

In the Senate, Senator Joseph I. Lieberman, independent of Connecticut, intends to introduce the language on Thursday in the Armed Services Committee. In a letter to Mr. Obama on Monday, Mr. Murphy, Mr. Lieberman and Senator Carl M. Levin, the Armed Services Committee chairman, announced support for the proposal and asked the White House for its “official views.”

Mark Kleiman: Obama has been willing to accept the hostility of the advocacy groups in order to get the thing done right. More likely than not in an unjust world, that hostility will continue even after the deed is done. Obama has done some unheroic stuff, but in my book this makes him a hero. Real moral courage isn’t standing up to your enemies; it’s standing up to your friends.

Here's a report on Obama standing up to teh gay:

At a fundraiser for Sen. Barbara Boxer (D-CA) yesterday in San Francisco, President Obama was heckled by an audience member who called on him to "move faster on 'Don't Ask, Don't Tell.'"

Amid boos and chants of "yes we can," Obama addressed the man who heckled him: "We are working with Congress as we speak to roll back 'Don't Ask, Don't Tell.'"

Obama added: "Come on, man, I'm dealing with Congress here. It takes a little bit of time."

Josh Marshall

With the news that congressional Dems, the White House and the DOD have reached an agreement that should bring DADT to an end this year, it's worth remembering how deeply uncontroversial a decision this has become. According to the latest CNN poll, almost 80% of Americans now support allowing gays and lesbians to serve openly in the US Armed Forces.

And it's not even a new number. Public support has been at similar levels for the last few years. I confess that as someone who remembers the early 90s battle over this question, those numbers are about as gratifying as they are surprising to me. But there it is.

So, there we have it. The Obama Administration "gets it done" with 80% popular support.

A clue?

digby at hullabaloo:

I could be wrong, but I'm sensing a shift in the narrative that could finally begin to break down the conservatives' decades-in-the-making consensus against taxation and regulation. With the bipartisan loathing for bailouts, continued economic stress, the arrogance of Wall Street and now the clear professional malpractice of the oil industry, it's just possible that the people of the United States are getting a clue.

I have no proof that this is happening. It's purely my instinct. And I don't know that the malefactors of great wealth will not be able to successfully misdirect once again and declare it all a measure of government failure. But I think the convergence of all these things at the same time may actually be enough to finally make people question their assumptions a little bit.

Well, it is certainly pretty to think it, but, really, does the opinion of the American People even matter?

Storm Cloud on the Horizon

The Great Financial Crisis of 2008, coming in an election year, after the twin debacles of the Wars in Iraq and Afganistan, and the humiliation of Katrina, should have been the Perfect Storm -- that coming together of political and economic consequences of bad policy with a devastating narrative critique and the ambition of political rivals, to create shift, a change, an alteration in the political and economic structures and paradigms that brought us to this extreme.

Polls show a majority of Americans began to feel the country was off on the wrong track, soon after the War in Iraq started, and except for a brief moment of hope soon after Obama's election, Americans have continued in that pessimistic conviction. Personally, I thought the country was off on the wrong track, when a Pittsburgh billionaire bought a 7-year "scandal" culminating in the Impeachment of the President of the United States. I thought the country was off on the wrong track, when the Supreme Court cancelled an election recount, and appointed Alfred E. Newman as President. I thought the country was off on the wrong track, when the appointed President, a self-described fiscal conservative, launched a massive program of tax cuts for the wealthiest Americans. I thought the country was off on the wrong track, when an Administration lied its way into an aggressive war against Iraq, as a "response" to a terror attack perpetrated by a bunch of Saudi Arabians. But, what do I know?

I'm admittedly fascinated by the "cycles" of history, the apparent patterns of rise and fall, of paradigmatic organization, growth and collapse. Political economy -- the somewhat chaotic, somewhat organized mass behavior of polities, societies and economies -- does seem to find stable patterns in which to channel development and growth, and then, having exhausted the possibilities, to dis-organize in moments of crisis.

The Financial Crisis of 2008 looks remarkably like the culmination of a long political and economic program, traceable, at least, to Reagan, and the ultimate exhaustion of an economic paradigm that goes back to FDR, the New Deal and WWII. Reagan began the process of dismantling the New Deal at home, and the international regime abroad. The Reagan economic program of de-regulation, restricted public investments and tax-cuts for the rich would feed off the entropy of the post-WWII prosperity.

Internationally, the U.S. has led the capitalist order, with the U.S. dollar as reserve currency, facilitating trade and investment. This order, too, seems to have reached a culminating moment.

Key to the U.S. role in the international order has been its role as a consumer of last resort, profiting from its role as issuer of the reserve currency, and leading round-after-round of tariff reductions and market-opening measures. For a long time, those policies both benefitted the world and benefitted the U.S., as the dominant economic position of the U.S. gradually eroded. Much of that erosion was inevitable and even desirable, as other countries caught up to the U.S. technologically and in terms of living standards, and increasing competition benefitted U.S. consumers, as European, Japanese, Korean and Chinese products filled American shelves.

In the Clinton years, the advent of the Internet and the Tech Boom, gave American international economic leadership an Indian Summer revival, but in the Bush years, the costs of hegemony mounted, as the U.S. sold off much of the Middle Class' home equity to buy more electronic junk from China, while American manufacturing was devastated.

When the Financial Crisis arrived, nothing should have been more clear than the need to radically change everything in the structure of the American economy and its relation to the world. Al Gore was quoted in Rolling Stone:

"Right now we are borrowing huge amounts of money from China to buy huge amounts of oil from the most unstable region of the world, and to bring it here and burn it in ways that destroy the habitability of the planet. That is nuts! We have to change every aspect of that."

The Financial Crisis, however, invoked a bi-partisan reactionary response, and an effort, not to adapt through structural change, but, rather, to restore the status quo ante. This reactionary effort has brought about the bear market rally of all-time in the Stock Market, and a calm in banking and international finance. But, the determination to push all the losses on to Middle Class home owners and taxpayers, while holding unharmed, the banks and the financial sector, leaves the country weaker and unprepared.

The Crisis happened because the economic structure could not be sustained. Restoring that structure does not change the fact that it is unsustainable.

Because of the short-sighted insistence of U.S. policymakers on restoring the status quo ante, there will be enormous pressure on the U.S. to resume its customary role as consumer market of first and last resort, so that other countries can use export-growth to lead their economies out of difficulty. To the extent that the U.S. goes along, it will be dis-investing and borrowing massively, once again.

There's not enough seed corn left in the bin, for this to go on for long. And, yet, there also doesn't seem to be the kind of vision, which would allow the U.S. to lead the kind of massive re-structuring of the global economy -- to meet the challenges of climate change and peak oil and ecological collapse, among others -- which ought to be obvious and urgent.

Our Present

Stirling Newberry: "Our present is defined not by what we hope for, but by how we justify a position of wealth and privilege which we are no longer earning, but are determined to keep."

A Rationalization Engine

Matthew Yglesias -- normally my hero for his clarity of thought -- falls for the Libertarian gambit.

He reports that Rand Paul, the libertarian nominee of the Republican Party for Senate in Kentucky "admitted that under his brand of libertarian conservatism he can’t support the 1964 Civil Rights Act or other non-discrimination legislation as applied to private businesses."

Yglesias, to his shame, endorses the libertarian excuse:

The point to make about Paul, however, is that what he suffers from here is an excess of honesty and ideological rigor not an unusual degree of racism. Basic free market principles really do lead one to the absurd conclusion that government regulation of private business is a greater evil than institutionalized segregation. That’s why Barry Goldwater, William F Buckley, the Young Americans for Freedom, and the other progenitors of the postwar conservative movement all opposed the Civil Rights Act and the civil rights movement. And, indeed, under the kind of hyper-restrictive construction of the constitution that today’s rightwingers use to say the Affordable Care Act is unconstitutional, the Civil Rights Act would probably also be invalidated.

"Basic free market principles" lead to no such conclusion at all. On the contrary, non-discrimination laws are in an ancient, common law tradition, which requires those businesses that offer public accomodation, like restaurants and hotels, to serve all, who present themselves in good order. The efficiency of competitive markets, enshrined in economic theory, presumes that the participants are not undermining the social fabric, with organized efforts to make a subgroup of the society, second-class citizens.

Libertarianism, in fact, is just a rationalization engine, a philosophical apparatus for generating arguments in support of a policy position, while obscuring the true (reprehensible) motives for it.

As Matthew observes, Rand Paul "goes out of his way to explain that he doesn’t actually favor segregated lunch counters, he just thinks it would be wrong to do anything about them. Similarly, I suppose the Cato Institute’s Dan Mitchell would tell you he doesn’t actually want poor children to suffer from starvation or malnourishment he just thinks it’s folly to try to do anything about it . . ."

Denial is a tell.

Since the argument of the libertarian is false, there's really little use in arguing with it.

Of course, many actual libertarians are "sincere" -- they are just fools, who have discovered that libertarian ideology allows them to generate dozens of seemingly sophisticated, philosophically impressive opinions and arguments. And, they like winning the battle of the water cooler.

But, mostly arguing with libertarians is a confusing waste of time. And, it is undermines democratic deliberation, because there's no compromising with such false rationalizations. Compromises between opposing interests, with opposing desiderata are possible, but a compromise with a false principle? What is that?