The Truth Is . . .

Michael Hiltzik at the L.A. Times explains the push to reform Social Security:

The truth is that there are two separate tax programs at work here — the payroll tax and the income tax... The first pays for Social Security and the second for the rest of the federal budget. Most Americans pay more payroll tax than income tax. Not until you pull in $200,000 or more ... are you likely to pay more in income tax than payroll tax. ...
Since 1983, the money from all payroll taxpayers has been building up the Social Security surplus, swelling the trust fund. What's happened to the money? It's been borrowed by the federal government and spent on federal programs — housing, stimulus, war and a big income tax cut for the richest Americans, enacted under President George W. Bush in 2001. In other words, money from the taxpayers at the lower end of the income scale has been spent to help out those at the higher end. That transfer — that loan, to characterize it accurately — is represented by the Treasury bonds held by the trust fund.
The interest on those bonds, and the eventual redemption of the principal, should have to be paid for by income taxpayers, who reaped the direct benefits from borrowing the money. So all the whining you hear about how redeeming the trust fund will require a tax hike we can't afford is simply the sound of wealthy taxpayers trying to skip out on a bill about to come due. The next time someone tells you the trust fund is full of worthless IOUs, try to guess what tax bracket he's in. ...

Who to Blame, II?

Dean Baker:

". . . the economic crisis was entirely predictable and predicted by people who understand economics. The more obvious problem is the incentive structure within the economics profession. It provides economists with no incentive to break with conventional wisdom even when it is obviously wrong and provides no sanction against those whose failure to break with conventional wisdom led to disastrous consequences for the economy and the country.

Unless this incentive structure is changed, no improvements in methodology will make any difference at all."

Who to Blame? Who to Blame?

There really isn't adequate space to address the extraordinary drop in American prestige that accompanied a war of aggression fought for bogus reasons, the use of torture as official U.S. policy, massive increases in poverty and inequality, and the world-wide economic collapse largely brought about by irresponsible American financial institutions.

And the current Republican response to this record of shame is to say give us another shot to make it all happen again.

Again, I want to deal with the broader failings of a more bipartisan elite, but feel like this is the necessary pre-condition to understanding that Republicans generally and conservatives specifically, on a virtually across-the-board basis, have laid our country low in ways that are almost too numerous to quantify. Sadly, as I will demonstrate later, the people who should have provided some check on this gang that couldn't shoot straight failed almost as miserably, continue to fail us to this day, and in most instances, seem to have learned nothing by their failures.

Indeed, it continues to be remarkably difficult to figure out who is more responsible for America's failure: Neocons or Neoliberals, the Right or the Center, the Republicans or the Feckless Democrats or the Media, the complacent Elite or the ignorant and resentful People.

No one appears to have changed their minds about anything.

A Plan, a Project, an Ideology

bob mcmanus, commenting at Economist's View:

. . . this recession is not a mistake, not an error, nor a failure, not incompetence, not even complicated in motives or intent.

It is a plan, a project, an ideology.

I am getting very tired of "liberal" economists and pundits acting befuddled over why the PTB don't do X or do y;why the Fed won't loosen;why Congress won't enact fiscal stimulus; why Obama won't push mortgage cramdowns or why there was no public option or why Pete Peterson has such influence.

They know what they are doing and they are doing it very well indeed. I really don't see how they can be stopped, short of social unrest.

The gradually spreading recognition that the people, who run the country under the Democratic Party are pretty much the same people, who run the country under the Republican Party -- that we traded an Administration dominated by Big Oil and sympathetic to Big Finance for an Administration dominated by Big Finance and sympathetic to Big Oil -- will have an unexpected effects.

The Republican Position

Dean Baker pulls back the curtain:

. . . in spite of what [NY Times Columnist] David Brooks tells us, [Republican Congressman] Ryan’s concern is not reducing the size of government, but rather redistributing income upward.

Of course, upward redistribution of income is not a very good political platform since there are many more people who end up losers in this story than winners. And, in a democracy, politicians are unlikely to win elections if they promise to take money out of most voters’ pockets.

So, Mr. Ryan and David Brooks come up with stories about how conservatives want to limit government and unleash individual entrepreneurs. The story might have little basis in reality, but that doesn’t mean that you can’t get it in the New York Times and persuade lots of people to take it seriously.

Close to Zero

Tyler Cowen on "The speed of labor market adjustment"

I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero.

“Radical leaders prey on the fearful & naive.”

Iowa tea party billboard likening Obama to Hitler and Lenin draws criticism - Los Angeles Times

The North Iowa Tea Party began displaying the billboard in downtown Mason City last week. The sign shows large photographs of Obama, Nazi leader Hitler and communist leader Lenin beneath the labels “Democrat Socialism,” “National Socialism,” and “Marxist Socialism.”

Beneath the photos is the phrase, “Radical leaders prey on the fearful & naive.”


The co-founder of the roughly 200-person group said the billboard was intended to send an anti-socialist message.

I like the use of the phrase, “Radical leaders prey on the fearful & naive.”

Is that "irony"?

A Modern American Entrepreneur

The U.S. Naval Institute reports the story of a modern American entrepreneur:

The Olympia was a successful museum vessel, at least according to the numbers. More than 100,000 visitors annually paced the same decks where Dewey uttered the immortal fighting words, "You may fire when you are ready, Gridley."

In 1996, the museum, flush from a six-year $15 million capital campaign, took control of the Olympia. The future looked bright. But now, 14 years later, the nearly broke museum is giving up the distressed vessel, claiming her maintenance poses an insurmountable fiscal challenge.

What has been steadily sinking the ship? Not disinterest. Instead, more modern American vices-greed, corruption, and civic disengagement-may have overpowered this monument to the strong, optimistic America of old.

As the Olympia sat deprived of basic maintenance, the Independence Seaport Museum's chief, John S. Carter, enjoyed perks far above compensation provided at peer institutions. In 2004, his salary exceeded $350,000, and he lived rent-free in a $1.7 million executive mansion bought, maintained, remodeled, and even furnished with museum funds, according to news reports.

The criminal complaint against Carter claimed that by 2006, the museum had been billed more than $335,000 for work on the director's Massachusetts home. While Carter charged the museum over $280,000 for personal purchases of jewelry, home electronics, designer clothing, and rare artwork, almost $200,000 dollars in maritime artifacts-including a rare print of Dewey-went missing.

Rather than support the Olympia, Carter defrauded the museum of more than $900,000 dollars in a scheme to restore and resell-for personal gain-several antique pleasure boats.

The museum faltered. Between 1999 and 2005, its endowment went from $48 million to a mere $7.7 million. Admission receipts tumbled by half. And all this time, the final arbiters of fiscal management, the museum board, did nothing.

Outside the museum, interested stakeholders did little more. In 2002, after the U.S. Naval Institute's own Naval History magazine published a devastating article detailing the Olympia's dire condition, Carter flatly rejected the story in a letter, claiming the account was "somewhat dated and generally uninformed." This strange rebuttal evoked little response, even though the Olympia's decay, well documented by photographs in the magazine, was undeniable.

Carter's looting of America's historic treasure continued unabated. Apparently gambling on a federal bailout, the museum director carried on until his house of cards began crumbling in 2005.

In 2007, Carter was sentenced to a 15-year prison term for defrauding the museum of more than $1.5 million over his 17-year tenure.

Learning lessons

Rich people have solution to economic crisis: Make lazy poor get jobs - U.S. Economy - Salon.com". . . these wealthy elites think the biggest problem facing America today is that the wealthy elite have to pay taxes, while the poor and unemployed sit around collecting "Social Security" and "food stamps" and "unemployment benefits."

Aspen Ideas Festival: Obama Loses Support of Nation’s Elite - The Daily Beast

Nothing succeeds like success

Nothing succeeds like success — Crooked Timber

The Fire Next Time

"God gave Noah the rainbow sign, no more water -- the fire next time."

A Spiritual

The great political storm came, sweeping the Democrats into power, first in the Congress in 2006 and to the Presidency in 2008. And, what did they with that power? What lessons were taught and learned? What change was promised, and what change delivered?

I'm afraid that the main lesson delivered to date is that American democracy doesn't work. It doesn't matter, who you vote for, the corporations still run things, and the powers that be, deliver Republican policy, no matter what.

Mike Lux at Huffington Post and Open Left takes note of an opinion poll by Stan Greenberg.

What [the poll] basically showed was that Democratic arguments, even relatively well framed one, have little credibility with the majority of the likely voters in the 2010 elections. Greenberg tried four different sets of competing Democratic and Republican arguments, and the Republican arguments won each time- by 10, 12, 12, and 13 points. Not a single one of the four was even competitive. In past years, similar lines of debate have tended to favor Democrats, but not this time.

Here's Greenberg:

62 percent of Republicans in Democratic districts describe themselves as very enthusiastic about the upcoming election. That compares with 37 percent of Democrats in those same districts.

By 57 to 37 percent, voters in these 60 Democratic seats believe that President Obama’s economic policies have produced record deficits while failing to slow job losses — and not averted a crisis or laid a foundation for future growth.

Republicans are encouraged; Democrats are discouraged, and independents are, what?

Mark Kleiman reports on a survey of two, his dinner guests.

I just had dinner with two people – one an old and trusted friend with a sophisticated knowledge of public policy, one a relative stranger with limited information – both of whom plan to vote for Carly Fiorina over Barbara Boxer this fall.

Why, you might ask?

For each of them, the Access to Care Act is an important reason. Their concerns were opposite; the stranger loves Medicare and fears that ACA will cut into Medicare spending, the friend has caught Peterson-itis and is convinced that Medicare is going to eat the GDP, and hates ACA for not cutting Medicare enough.

Similarly, the stranger thinks that extending the Social Security retirement age would be a crime, while the friend regards it as an obvious response to increased longevity.

The fact that they were voting for Fiorina for opposite reasons didn’t bother either of them; the stranger has decided that all incumbents ought to replaced, and indeed offered John Boehner’s proposal to raise the retirement age as a reason to vote against Boxer. (All this while railing against “socialism.”)

Mark Kleiman explains this existential political confusion, as the success of Republican propaganda:

Anecdote isn’t data, but the hint here is that the Repubilican strategy of obstruction plus obfuscation is, so far, working pretty well.

On the other hand, one might consider it a failure of the Democrats' messaging and policy. The success of Republican obstruction is the failure of Democratic administration and strategy.

Kleiman is inclined to see the Left of the Democratic Party as the problem. He complains, "the problem with trying to make change is that you have strong enemies and lukewarm allies", but he doesn't see Obama as the lukewarm ally of change. His co-blogger, Jonathan Zasloff, has complained about progressives, dissenting from Obama-love, demanding a pejorative term be coined,

for a progressive who holds out against a good bill, under circumstances where it is virtually impossible to get something better, and thus undermines his/her own party’s ability to govern, while pretending to uphold the “true” values of the party, movement, coalition etc.

It's one view of the political situation, I guess. I find it hard to reconcile this view with what I know of reality. Kleiman wants to praise Obama for his "courage" in supporting, for example, the military's anti-gay Don't Ask, Don't Tell policy -- a policy repeal that has the support of 3/4s of the population!

It seems to me that the ability of the Party to govern has been impeded by the President, not by the Left of the Democratic Party, which has dutifully supported every move, albeit with ever diminishing enthusiasm. If a Democratic President is going to govern as a Republican, what is the point?

Brad DeLong, not exactly Jane Hamsher's soul mate, had an excellent post on how the political problem and the policy problem have married at the putrid center, in Obama's style of governance:

In fighting the recession, Obama decided early on that he would push for a fiscal stimulus program about half the size of what his Democratic economic advisers recommended, and he decided to count that as a total victory rather than press for expanding half a loaf into the full amount.

Obama has been so committed to that cautious policy that even now, with the unemployment rate kissing 10%, he will not grab for the low-hanging fruit and call for an additional $200 billion of federal aid to the states over the next three years in order to prevent further layoffs of teachers. Rather than stemming further erosion of the national commitment to educate the next generation, Obama has shifted his focus to the long-term goal of balancing the budget – even while the macroeconomic storm is still raging.

And, in order to move forward on long-term budget balance, Obama has appointed a fiscal arsonist, Republican ex-Senator Alan Simpson, as one of his fire chiefs – one of the two co-chairs of his deficit reduction commission. Simpson never met an unfunded tax cut proposed by a Republican president that he would vote against, and he never met a balanced deficit-reduction program proposed by a Democratic president that he would support. Partisans whose commitment to deficit reduction vanishes whenever political expedience dictates simply do not belong running bipartisan deficit-reduction commissions.

Likewise, in dealing with the financial sector’s distress, Obama has acquiesced in the Bush-era policy of bailouts for banks without demanding anything of them in return – no nationalizations and no imposition of the second half of Walter Bagehot’s rule that aid be given to banks in a crisis only on the harsh terms of a “penalty rate.” Obama has thus positioned himself to the right not only of Joseph Stiglitz, Simon Johnson, and Paul Krugman, but also of his advisers Paul Volcker and Larry Summers.

On environmental policy, Obama has pressed not for a carbon tax, but for a cap-and-trade system that, for the first generation, pays the polluter. If you were a major emitter in the past, then for the next generation you are given a property right to very valuable emissions permits whose worth will only rise over time.

On anti-discrimination efforts, the repeal of the US military’s “don’t ask, don't tell” policy toward gay soldiers is on an extremely slow track – if, that is, it is hooked up to an engine at all.

On policy towards the rule of law, the closure of the mistake that is Guantánamo Bay is on a similarly slow track. Moreover, Obama has joined George W. Bush in claiming executive powers that rival those claimed by Charles II of Britain in the seventeenth century.

On healthcare reform, Obama’s proudest moment, his achievement is...drum roll...a scheme that almost precisely mimics the reform that Mitt Romney, a Republican who sought the presidency in 2008, brought to the state of Massachusetts. The reform’s centerpiece is a requirement imposed by the government that people choose responsibly and provide themselves with insurance – albeit with the government willing to subsidize the poor and strengthen the bargaining power of the weak.

In all of these cases, Obama is ruling, or trying to rule, by taking positions that are at the technocratic good-government center, and then taking two steps to the right – sacrificing some important policy goals – in the hope of attracting Republican votes and thereby demonstrating his commitment to bipartisanship. On all of these policies – anti-recession, banking, fiscal, environmental, anti-discrimination, rule of law, healthcare – you could close your eyes and convince yourself that, at least as far as the substance is concerned, Obama is in fact a moderate Republican named George H.W. Bush, Mitt Romney, John McCain, or Colin Powell.

Now, don’t get me wrong. My complaints about Obama are not that he is too bipartisan or too centrist. I am at bottom a weak-tea Dewey-Eisenhower-Rockefeller social democrat – that is, with a small “s” and a small “d.” My complaints are that he is not technocratic enough, that he is pursuing the chimera of “bipartisanship” too far, and that, as a result, many of his policies will not work well, or at all.

And, that brings us back to Mike Lux and Stan Greenberg's poll, which has Democrats, even in Democratic districts, deeply depressed, and Republicans, while foaming at the mouth like mad dogs, enthusiastic.

Obama achieved power in 2008 by shifting a small, but critical slice of secular, conservative Republicans into the Democratic coalition. It represented a big chunk of money, because financial sector bigwigs were a big part of the slice, and it resulted in several Republicans in key posts in Obama's cabinet -- Defense Secretary and Transporation Secretary, most prominently.

It wasn't a campaign strategy or a coalition strategy, which required anyone to change his mind about anything. It wasn't based on George W. Bush and the Republican Party being wrong; it was based on George W. Bush being incompetent.

Obama's governance has followed, on the same, faulty premise -- that Bush policy, well-executed, would be some kind of ideal. The Democratic Party has not been able to offer the electorate an alternative, or to articulate an alternative philosophy or to enact substantive change.

Coulda, Shoulda, Did-a

atrios of Eschaton speaking truth (not to Power, but only because Power is not listening):

Bernanke could have sent money from the Fed's magic money machine in all kinds of ways. They could have paid down mortgages. They could have put money in my bank account. They could have given it to state governments. What they did was prop up a failed banking system, and the worst failures of the failed banking system, under the premise that capital misallocating financial intermediaries were necessary for a stable economy.

It's one way to do things.

Policy debates confuse people into thinking that policy doesn't matter. They don't know what the policy is, or was. They think there wasn't any choice, that circumstances force those in charge into certain channels.

On the whole, the struggle over what policy is to be, just isn't very edifying. Policy is a joint product of the actions of many people, and so no single person's intentions are controlling; plus, people deny what their intentions are. And, the policy may concern broad and confusing areas of collective life: social institutions, the functions and evolution no one fully comprehends, let alone can explain. And, even the parts of the debate, which are not outright deceptions, may be -- probably are -- oversimplifications. Bumperstickers, slogans, cliches.

All of that said, journalism -- contemporary, narrative observation of what is -- can be really useful. And, succinct.

The U.S. had a definite policy, in responding to the Financial Crisis of 2008. It really didn't involve very many people at the top. So, it was, unusually coherent. By contrast, the fiscal policy enacted at the beginning of 2009 had many participants, and little coherence.

And, looking back, the shape is sharp and distinct and unmistakable.

I suspect that many folks, who spent years contemplating in prospect how to respond to the emergence of such a crisis, and wrote opinions about what to do -- as Bernanke himself was wont to do -- thought they knew the best course. But, they never really came to grips with what the basic policy forks would be. They faced imminent disaster, and like a driver, whose car has started to slide on ice, their impulse was to steer away.

The most basic decision fork -- whether to let a failed system, collapse -- received minimal consideration in the moment.

If someone did glimpse the choice, I suspect their impulse might have been to think they could parse the decision: patch things together in the moment, and reform later.

I cannot read minds. I don't know what primitive decision heuristics the key players were using at the time: Bernanke, Geithner, Secretary Paulson.

Now, in retrospect, as their panicked decision-making is revealed in detail, it is convenient to charge corruption or worse. I don't care to go there.

But, I consider that the policy was what it was, and it has consequences.

nothing that really fixes anything fundamental will be allowed

Ian Welsh:

The bottom line in America today is that while everyone who isn’t paid not to know, knows how to fix what’s wrong with America (for example, instead of the mess called Health Care Reform, pass single payer), nothing that really fixes anything fundamental will be allowed to occur.

[Emphasis added.]

Kind of summarizes the state of American politics.

Morality

BBC News - Morality is modified in the lab

Scientists have shown they can change people's moral judgements by disrupting a specific area of the brain with magnetic pulses.

They identified a region of the brain just above and behind the right ear which appears to control morality.

And by using magnetic pulses to block cell activity they impaired volunteers' notion of right and wrong.

The small Massachusetts Institute of Technology study appears in Proceedings of the National Academy of Sciences.

Lead researcher Dr Liane Young said: "You think of morality as being a really high-level behaviour.

"To be able to apply a magnetic field to a specific brain region and change people's moral judgments is really astonishing."

The key area of the brain is a knot of nerve cells known as the right temporo-parietal junction (RTPJ).

The researchers subjected 20 volunteers to a number of tests designed to assess their notions of right and wrong.

In one scenario participants were asked how acceptable it was for a man to let his girlfriend walk across a bridge he knew to be unsafe.

After receiving a 500 millisecond magnetic pulse to the scalp, the volunteers delivered verdicts based on outcome rather than moral principle.

If the girlfriend made it across the bridge safely, her boyfriend was not seen as having done anything wrong.

In effect, they were unable to make moral judgments that require an understanding of other people's intentions.

"a region of the brain just above and behind the right ear which appears to control morality"?!?

So, what is my cellphone doing to it?

General McChrystal: FAIL

Peter Beinart analyzes the significance of the McCrystal Rolling Stone piece:

Of course, McChrystal deserves to be reprimanded for letting a reporter make him and his staff look like arrogant jerks. But by focusing on McChrystal’s supposed challenge to Obama’s manhood—is the president afraid of his generals? Will Obama show that he can’t be pushed around?—the press is turning a story about policy into a story about penises. What matters isn’t what McChrystal said about Obama; it’s what he believes about Afghanistan. That’s why he should lose his job.

For close to a year now, it’s been painfully clear that McChrystal, with the backing of David Petraeus and the rest of the top military brass, wants America to make an unlimited commitment to the Afghan war. Counterinsurgency, they believe, works; all it requires is an unlimited amount of money and time. As Jonathan Alter details in his book, The Promise, McChrystal and company spent last summer waging a media and bureaucratic campaign aimed at forcing Obama to make that unlimited commitment. Obama resisted, insisting on a timeline for beginning America’s withdrawal. But the fight goes on. In his book, Alter quotes Biden as pledging that “In July of 2011, you’re going to see a whole lot of people moving out. Bet on it.” Confronted with that quote last weekend, Robert Gates shot Biden down, declaring that “that absolutely has not been decided.”

Obama’s problem isn’t that McChrystal is talking smack about him. His problem is that McChrystal isn’t pursuing his foreign policy. McChrystal wants to “win” the war in Afghanistan (whatever that means) no matter what it takes. Obama believes that doing whatever it takes will cost the U.S. so much money, and so distract the administration from other concerns, that it will cripple his efforts to stabilize America’s finances and rebuild American economic power. That’s the struggle that Hastings exposes: between a single-minded general who will stop at nothing to fulfill his mission and a president who believes that even if that mission saves Afghanistan, it could bankrupt the United States. It’s a struggle about whether America is going to adjust to the new limits on its power or pretend that they don’t exist.

That’s the real relevance of the Harry Truman-Douglas MacArthur analogy. Truman didn’t just fire MacArthur because the general treated him with disrespect. He fired him because MacArthur wanted to do whatever it took to liberate the Korean peninsula, including bombing mainland China, whereas Truman came to realize that Korea must be a limited war, fought merely to preserve South Korean independence. In insisting that America’s Cold War strategy be the containment of communism, not the rollback of communism, Truman kept the pursuit of military victory from destroying American power.

Now Obama must do the same. Last summer, he tried to split the difference—surging in Afghanistan while simultaneously pledging to retreat on the theory that within eighteen months the U.S. could so weaken the Taliban that they would sue for peace. Six months in, that strategy looks increasingly absurd. As its most honest proponents concede, counterinsurgency is a long, messy business, especially when the president whose country you’re trying to save is indifferent, if not hostile, to the effort. In all likelihood, when the deadline for troop withdrawal arrives a year from now, Obama will be forced to choose between something that looks like an unlimited commitment and something that looks like defeat. He’ll be forced to make the choice that he avoided last year.

My only quibbles with this superb analysis is that I think I might be a little less generous in my assumptions about what Obama thinks, and about what his foreign policy is. Obama chose Afganistan, chose, in some ways, to affirm and extend the Bush policy. Obama certainly changed the attitude of the U.S. toward Pakistan, and dramatically, but, in the main, Obama chose to continue and escalate the War in Afganistan, without, to my mind, clearly articulating achievable goals and objectives, or identifying the means to do so.

My general view is that Obama is a Master Politician, who focuses his calculation on the political consequences, meaning by "political", the consequences on attitudes and conventional wisdom among the elite, particularly the Media elite, and among the bullies of the Right. How it will look, in other words, in the public relations contest.

Sadly, I don't think he has much of an appreciation, at the end of the day, for the consequences of policy. He's a strategic thinker in political terms, but not a strategic thinker in policy terms. At least not most of the time.

He did what he thought was politically wise, with regard to Afganistan. But, the lack of policy substance in his choice was betrayed by the failure to outline genuine and achievable goals and objectives for the continued war in Afganistan. He left a policy vacuum.

And, McChrystal and Petraeus and Gates drove their trucks into that policy vacuum. Obama did not discipline McChrystal when the general deviated from Obama's foreign policy strategy, because Obama did not really have a foreign policy strategy in Afganistan. Obama had only the appearance of a strategy, thrown up long enough to do what he thought needed to be done, politically. After that he trusted his subordinates to fill in the blanks, with a real policy and strategy, the one Beinart disparages.

I acknowledge that Obama has a formal process in place, which, I suppose, is something. Very large organizations need formal processes, not because leaders need them to make deliberate decisions, which is how Obama's process is portrayed in the Media, but because a formal process is needed in order that the operational meaning of the policy in action, at the lowest levels, is in accord with intention at the top. This isn't just a top-down process, there's a role for feedback, and educating the guys at the top.

This process is not working. The Rolling Stone article was quite clear that McChrystal is failing, and knows he's failing, to get his ideas on counterinsurgency strategy and tactics, to percolate down through the ranks, without serious and debilitating distortions. McChrystal was not succeeding, and didn't know who to blame, and did not know how to digest what soldiers on the front lines were telling him about how it is, out there.

That's a serious, serious problem. McChrystal, after being fired, did not participate in the top-level reviews, today, at the White House. That's understandable on one level, but curious on another, because one would hope that top-level policy-makers, looking abject failure in the face, would be a bit more curious about what is going on, in the field.

Interesting

Interesting chart

U.S. Corporate profits, as a percentage of output, are at historically very high levels.

I guess not everyone is in recession.

Further confirmation: World's rich got richer amid '09 recession: report - Yahoo! News

Note on the source of the chart: "Interesting chart" above links to the Bloomberg article, where I got the chart. Bloomberg references the U.S. Department of Commerce, as the source of the data. I'm sorry embedded links are not more visible, with this color scheme.

Great Depression 2.0

Marshall Auerback and Robert Parenteau take note of the G20's decision to embrace the Banks and reject the populace:

The more the bankers’ interest is served, the worse and more debt-burdened the economy will become. Their gains have been bought at the price of domestic austerity. The G20 Communique irresponsibly and immorally ratifies this disgraceful state of affairs and we will all pay a severe price going forward.

The G20 policy makers, and their allies in finanzkapital, are like vultures picking over a dying carcass. And the rest of us are helpless because the institutions designed to serve broader public purpose have become subverted. We are making bond holders and big bankers whole at the expense of impoverishing the entire society.

It is hard to avoid drawing very dark conclusions. Our policy making elites have discovered that the underclass doesn’t matter politically anymore, so why respond to it? That indifference is extending to the middle class. Ordinary, struggling folks are all becoming so demoralized that they present:

1. No voting threat, because none of the major political parties in Europe or the US genuinely represent their interests (and haven’t for years). There have been, as a result, no political price to pay for such shameless predatory capitalism.
2. They present no power threat, because they have been systematically destroyed over the last 30 years and what is happening now in Europe represents the final assault on the residue of the 20th century welfare state (the US social safety net eviscerated well before this).

The message from the G20 seems to be this: We’re through with domestic spending to employ the underclass.

There are decent jobs for about 20% of the working-age population in the west. And for the rest? Poverty a la South America. It is extraordinary that voters around the globe continue to tolerate this corrupt state of affairs, but it’s getting increasingly hard to see a way out.

Disaster Capitalism washes away the Welfare State

digby at Hullabaloo

My correspondent wondered why there was an international move to neo-Hooverism considering the differences in cultures between the various European countries and the US. . . . and he pressed for a reason why the rest of the world is on the same bandwagon, especially considering their more generous history with the welfare state. (He also mentioned that Tim Geithner was surprisingly Keynesian at the G20.)

After thinking about it for a bit, I’m not sure the same phenomenon we see here isn’t happening internationally. It’s an article of faith among financial elites across the planet that the welfare state is an abomination and this is a global opportunity to end it. Each culture will deal with it slightly differently --- riots in Greece, marches in France, blog posts in America. But in the end, the result, short of revolution, will be similar everywhere --- the post-war welfare state will be weakened or destroyed. The left is barely relevant anywhere anymore and [the elites] simply do not fear any kind of serious populist uprising. . . .

I think it's easy to over think this. The world economy is unstable for myriad reasons. But the reasons for insisting on austerity are fairly obvious. The question is whether or not people will see through this or not. Disaster capitalism depends upon the people being confused and stressed for its success. (In that sense, rioting in the streets may actually help them.) And all over the world right now, with the rapid change from globalization and resistance to modernity in general, there is a tremendous amount of social stress and cultural upheaval on top of this economic downturn. It's the perfect time to strike.

Apparently, the Coming Perfect Storm is here to wash away the Welfare State, not the Corporate and Financial Oligarchy. Most sorry for not foreseeing that. My bad.

Policy Paralysis or Class Indifference

Brad DeLong is wondering why Washington is so uninterested in responding to high rates of unemployment.

. . . whenever I wander the halls of Washington these days, I can’t help but think that something else is going on—that a deep and wide gulf has grown between the economic hardships of Americans and the seeming incomprehension, or indifference, of courtiers in the imperial city.

Have decades of widening wealth inequality created a chattering class of reporters, pundits and lobbyists who’ve lost their connection to mainstream America? Has the collapse of the union movement removed not only labor’s political muscle but its beating heart from the consciousness of the powerful? Has this recession, which has reduced hiring more than it has increased layoffs, left the kind of people who converse with the powerful in Washington secure in their jobs and thus communicating calm while the unemployed are engulfed in panic? Are we passively watching an unrepresented underclass of the long-term unemployed created before our eyes?

Yves Smith

"most of America appears to have deeply internalized the belief that labor lacks, and perhaps more important, ought not to have any bargaining power. This is a wonderful state of affairs for the managerial elite and investors. Having labor share in productivity gains was no impediment to growth; indeed, the record from the end of World War II through the mid-1970s versus the last two decades would suggest the reverse.

"And the argument that US labor cannot compete with China et al is overblown. In most cases of outsourcing and offshoring, the results are disappointing (a dirty secret you will find if you burrow into the literature; for instance, IT, a popular candidate, has a particularly poor record). But it also serves to reduce lower-level labor costs and INCREASE managerial costs (greater coordination required). . . . The gap between the raw labor costs [savings] and the net savings is an increase in compensation to managers (which could be either via larger bonuses or an increase in headcount). . .

"A second reason for complacency about unemployment is just as deeply rooted. There is little confidence in conventional policy remedies. . . . the real problem may be that all these approaches are past their sell-by dates, helpful around the margin but insufficient to provide lasting relief to our current malaise. We may be at the end of a paradigm. The US and its trade partners have engaged in a 30 year experiment of deregulation, financial liberalization, more open trade, and deep integration of markets. But most other countries had clear objectives: they wanted to protect their labor markets, which usually entailed running a trade surplus (or at least not a deficit). Many of them also had clear industrial policies. By contrast, the US pretended it was adhering to a “free markets” dogma so that whatever resulted from this experiment was virtuous. But in fact, we have had stagnant real worker wages, with a rising standard of living coming from rising household borrowings and to a much lesser degree, falling technology prices. We have also had industrial policy by default. Certain favored groups, such as Big Pharma and the sugar lobby, get special breaks.

"And who has been the biggest beneficiary of our stealth industrial policy? The financial services industry. How many Treasury Secretaries have lobbied for more open financial markets with major trade partners? Has any other industry seen as extensive a reduction in regulations? And we’ve had first the Greenspan, now the Bernanke put, with the financial services well aware that the Fed will run to the rescue of the markets (ie the banksters) should any serious trouble arise, but the resulting low rates work to the detriment of savers, and push all investors to take undue risks to compensate for artificially low yields.

"So the inaction over unemployment is yet another symptom of deep seated rot in the body politic."

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?

A Complacent Capital

Matthew Yglesias » A Complacent Capital:

If you had asked me in 2006 about the political reaction to 10 percent unemployment I would have said “total freak out!” Heck, as late as 2009 I would have said “total freak out.” After all, the Obama administration was projecting 10 percent unemployment as a nightmare scenario in which there was no policy response to rising unemployment. The specter of 10 was supposed to prompt a freak-out. Well now here we are at 10 percent unemployment and there’s an eerie calm.

Pollster.com: The Rapidly-Changing Issue Environment and What It Means

We are in one of the longest sustained periods of voter dissatisfaction in modern history. Except for a few weeks in the spring of 2009, perceptions of the direction of the country have been strongly "wrong track" since the invasion of Iraq in 2003. That is seven years. The only comparable period is 1973-1983. This helps explain why we are in the middle of a third successive "change" election. Moreover, trust in government to do what is right is at an all-time low. In a Pew Research Center poll last month, less than one fourth (22%) of respondents said they could trust government most of the time. This is one of the lowest percentages in more than 50 years.

Pollster.com goes on to note a number of indications that Republicans -- and extremely, irrationally conservative Republicans, at that -- will sweep into office.

Democrats have had two change elections, to change something, anything that dissatisfied the country, and they've done nothing, but confirm the policies of the worst, most unpopular President since Herbert Hoover.

Here Is Why the Fed Cannot Simply Continue to Inflate Its Way Out of Every Financial Crisis That It Creates

Jesse's Café Américain: Here Is Why the Fed Cannot Simply Continue to Inflate Its Way Out of Every Financial Crisis That It Creates:

The return on each new dollar of US debt is plummeting to new lows according to figures from the Federal Reserve. . . .

The ability to expand debt is contingent on the ability to service debt. If the cost of the debt rises over the net income of the country's capital investment, or even gets close to it, the currency issuing entity is trapped in a debt spiral to default without a radical reform.

In other words, if each new dollar of debt costs ten percent in interest, largely paid to external entities, and it generates less than ten cents in domestic product, it is a difficult task to grow your way out of that debt without a default or dramatic restructuring.

So we are not quite there yet. But we are getting rather close on an historic basis. Without the implicit subsidy of the dollar as the world's reserve currency it would be much closer.

As it is now, this chart indicates that stagflation at least, rather than a hyperinflation, is in the cards for the US. But the trend is not promising, and the lack of meaningful reform is devastating. . . .

The economy is out of balance, heavily weighted to a service sector, especially the financial sector which creates no new wealth, but merely transforms and transfers it. With stagnation in the median wage, and an historic imbalance in income distribution skewed to the top few percent, with the banks levying de facto taxation and inefficiency on the economy as a function of that income transfer, there should be little wonder that the growth of real GDP is sluggish in relation to new debt.

Or as Joe Klein so colorfully phrased it, the elite have been strip-mining the middle class in America for the past thirty years.

Along with the 'efficient market hypothesis,' trickle-down economics is also a fallacy. This is why the stimulus program being conducted by the Federal Reserve, in an egregious expansion of its authority to conduct monetary policy, in subsidies and transfer payments to Wall Street is not working to stimulate the real economy. It merely inflates the bonuses of the few, and extends the unsustainable.

So obviously one might say, "The Banks must be restrained, and the financial system reform, and the economy brought back into balance, before there can be any sustained recovery."

Plus they just enjoy ruining things for other people.

digby at Hullabaloo contemplates the psychology of the right, and recalls a family experience: "I'll never forget sitting in a crowd of wingnuts at a family gathering watching some footage of the Exxon Valdez spill and watching them all laugh uproariously at dying, oil covered birds flopping around on the beach."

Consider the previous post and this one together.

Politics -- at least the part of politics, which is ideas and rhetoric, as opposed to interest and personal ambition -- is a product of human ambivalence combined with the need to reach collective decisions.

Assemble any small group, and you will see the process in operation. To get along in a group, each person has to choose what they will say, and when, while choosing also when to allow others to speak. Automatically, almost, we choose our identities, we choose what ideas to specialize in expressing.

I would allow that laughing at a dying bird is one of several responses any human has available, not unique to someone with a peculiar pathology. The pathology lies in not caring to self-govern in a way that suppresses that impulse, in favor of a higher rank order for empathy.

In other words, it is a social choice.

As American politics has simplified and become a single continuum of worldviews, what divides our politics is more and more this kind of choice. And, one side of our politics is choosing greed and destruction and torture and corruption and cheating and waste.

And, he's good with that . . .

Jesse's Café Américain: Trading in Hubris: Pride, Overreach, and the Inevitable Blowback and Consequences

I had a conversation this morning with a trader that I have known from the 1990's, which is a lifetime in this business. I have to admit that he is successful, more so than any of the popular retail advisory services you might follow such as Elliott Wave, for example, which he views with contempt, a useful distraction for the little guy, the same way that casino operators view most gambling systems except counting cards. He is a bit of an insider, and knows the markets internals and what makes them tick. I remember a time when some of the more obvious market shenanigans used to bother his conscience a little. But he is well beyond that point now. . . .

He thinks the euro is done, and the dollar will remain the sole currency. His attitude is, "What will replace it?" He cannot even imagine anything different than what we have today. But interestingly enough he does not believe that the US government is running things. "Things are being run by a new world order, and have been for some time." He said that so matter of factly that it made me catch my breath.

And he's good with that. Does not bother him in the least little bit, as long as he is making money. And that is where our conversation started to go downhill, quickly. I was in no mood to hear his usual perspective on the future and the triumph of the willful.

If there is a new Mussolini in the US to maintain order, he's good with that. If they start putting people on trains to resettlement camps in the southwest, he's ok. If there are starving people in the streets, it doesn't bother him because he lives in a gated community. If the middle class gets crushed by a new market crash that is ok. He made a killing shorting the Crash of 1987, and was able to enjoy the resort where he spent the winter even more than ever because they were so few people there.

I would like to say he is an outlier, a one of a kind. But he is not. He is typical. He is driven purely and almost solely by personal greed, and he makes no bones about it. Life is a war, and he wants to conquer you.

But he is not a monster. If you met him you might like him. He's affable, conservative, a decent conversationalist, and personally well kept and engaging. But he is missing something, like the derivative of a human being. If you talk about the 'bad guys' he doesn't identify with them. He thinks he is 'us.' It's never occurred to him that he is the problem. Because his value system is utterly one dimensional and egocentric. In some ways he is the most intelligent twelve year old I have ever met. But I am sure he considers me a fool and an idealist. And I might agree. But it is not so much who you are, but why. Who or what do you serve?

He is a microcosm of Wall Street, and the prevailing attitudes in the Big Banks in particular. If you wish to form public policy, if you want to create a stable system, one based on human values, never ask a trader or a trading company for advice. They are incapable of framing the question in a way that will provide you a workable answer. What is good is whatever works for them in the most narrow definition of the terms. They think they are being altruistic when they take a little bit of a haircut on terms that are already well into the realm of usury.

The problem is the ability of Wall Street to buy power and influence among the regulators and politicians, and bring their unbalanced world view to bear so heavily on the formation of public policy and governance.

That is not to say that they are necessarily bad people. They are what they are. It's just that they need to be restrained by regulation, and certainly should not be in the driver's seat of anything outside of their own accounts, and those with external supervision and transparency. But certainly not in control of things in general, of running the system by proxy, which is where they are today. Or at least where they think they are.

Explaining Inequality Trends: Pretty Simple? | Progressive Fix

Explaining Inequality Trends: Pretty Simple? | Progressive Fix says its all about financial regulation, and has a chart to illustrate it.

Existential Threat

Economist's View: Galbraith: The Role of Fraud in the Financial Crisis
From the Statement by James K. Galbraith, Lloyd M. Bentsen, jr. Chair in Government/Business Relations, Lyndon B. Johnson School of Public Affairs, The University of Texas at Austin, before the Subcommittee on Crime, Senate Judiciary Committee, May 4, 2010:

the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

What they did

Atrios of Eschaton:

"Basically the Fed printed a huge amount of money. Some of that money they used to do what TARP was originally supposed to do, buy up Big Shitpile at inflated prices. Some of that money they lent to banks at basically 0 interest. Of course there were plenty of other things they could have done with 2 trillion bucks, if preserving the executive compensation at megabanks wasn't thought to be crucial for the survival of the economy. They could have dropped it from helicopters. They could have paid off mortgages directly. They could have given it to state governments. They could have bought me a SUPERTRAIN. But, no, they decided that propping up an obviously failed system of financial intermediaries was the important thing, so that's what they did."

Much has been made, for propaganda purposes, of the Big Banks (most of them, anyway) repaying loans with interest, and redeeming equity investments. As Dean Baker explains, this doesn't signify.

Bank Bailouts: Goldman's Debt to Society - CEPR:

"At the time the government made money available to the banks through TARP and even more so through the Fed, liquidity carried an enormous premium. The major banks charged each other 5 percent interest on 90 day loans because they did not have confidence in their ability to survive.

In this environment, the government stepped in and providing banks with huge amounts of money (we don't know exactly who got how much because the Fed refuses to tell us what it did with our money), at a cost far below what they would have been forced to pay in private markets. The banks could lend this money at enormous premiums or use it to just buy government bonds and pocket the difference in interest rates. As a result, most banks have been able to get back on their feet.

As a bookkeeping matter we can say that the government 'profitted' from these deals in the sense that it got interest on its loans. (It also received warrants from banks that it sold at a profit.) However, as a practical matter, these profits no more benefit the government's accounts than if the Federal Reserve Board just printed the same amount of money and handed it to the Treasury by purchasing government bonds. Unfortunately, few reporters covering the economy and the bailout understand this point, so they end up writing pieces that imply the country was somehow benefitted by the fact that the banks repaid their loans with interest."

Net Savings

The U.S., in 2009, entered negative savings territory, not even able to finance maintenance of its existing capital stock.

Macro and Other Market Musings: More Dependent Than Ever

Principles of the Opposition

Health Reform And Personal Responsibility | The New Republic:

"the heart of what animates the staunchest opposition to health care reform [is] a principled opposition to the idea the fortunate should be forced to subsidize the unfortunate.

A person who has [a serious disease], unless he is very affluent, is not going to be able to afford the cost of his own medical care. He is going to need to be subsidized by healthier or wealthier people -- either by being lumped in with them in an employer-based insurance pool, or getting government-provided insurance like Medicaid, or government subsidies, or the enactment of regulations that force insurers to offer him insurance at a regular price (meaning healthy people would pay higher rates.) Any way you slice it, somebody else is going to have to pay for his health care. But that's the kind of redistribution the right increasingly cannot stomach."

I've written for quite a while that American politics has become increasingly uni-linear: a continuous variation along one dimension -- "worldview" -- from Right to Left.

A number of people on the Left insist that racism lies beneath the hostility of many of the tea party activists, and there's some evidence in favor of that thesis, but I think it is actually the breakdown of racism, and a breakdown of a felt sense of solidarity, that drives the anger. Now, in the past, that felt sense of social and political solidarity was based, for many people, implicitly on race or, more generally, on membership in the dominant culture. What defines the "dominant culture" has expanded over time, with the last big intake taking place in the 1960s, when Catholics and immigrants were embraced. From the 1840s through the 1920s, nativist hostility to immigrants was a big factor in American politics; in the 1960s, it was all forgotten.

Something bigger has emerged in American politics -- Class. And, we don't know what to do with it. The elite -- across politics, business, finance, academia -- has proven itself hostile to the interests of the mass of Americans, and incompetent in managing the nation's economy and foreign affairs. But, the elite remains firmly united in resisting demands for relief and reform.

The sense of frustration is palpable across the political spectrum, but people don't know what to make of their frustration. The elite is feeding them -- everyone -- propaganda. Much of that propaganda is completely unbelievable, but there exists little alternative -- no narrative or leadership. Just a steady drumbeat insisting that "entitlement reform" is seriously needed. Iraq is oh so worrisome. What is politically practical is so limited, we cannot consider good proposals, only what is being proposed and compromised to death . . . And, so on.

The American body politic is in a state of extreme disorganization. People don't derive much of a sense of identity from their membership in various groups and organizations, because, frankly, they are not likely to be all that active, as a member of a social group or organization. Ethnic neighborhoods have become, mostly, historical curiosities. Ghettos are mostly just slums, as the prosperous and ambitious elites have moved away. Black people don't have to live in Harlem; gay people don't have to live in West Hollywood. Clubs, like the Elks or the Shriners have aged and declined in importance. Groups like the Daughters of the American Revolution have faded into idle hobbies, their ability to confer status long gone. Unions have faded in power, membership and economic importance.

So, we are left with the rare clarity of a politics that divides on worldview -- nothing with even enough philosophical substance to qualify as ideology -- but just the most superficial collection of attitudes translated directly into policy.

It is not "redistribution" that is being objected to here, it is, at bottom, that most basic, implicit assumption of government organized around nationality: that "we" are in this, in life, in government, in society, together.

I don't think people actually "oppose" solidarity, per se. That would require opposing human nature. But, they feel its absence and its absence makes them angry, and it makes them mad.

Now, it may be that the last shreds of that sense of solidarity, for some people, was in race, or in religion, or in traditions like hunting, or even feeling that they were "the real" Americans. Where those last, fading shreds were can affect the focus of their rhetoric, or carry telling demographic markers, but I think we miss important details, if we only relate these phenomena to a racist past, when it is economic oppression by a predatory elite in the present, and the economic decline that entails, which drives the frustration.

The Twilight of the Elites

The Twilight of the Elites - 10 Ideas for the Next 10 Years - TIME:

"In the past decade, nearly every pillar institution in American society — whether it's General Motors, Congress, Wall Street, Major League Baseball, the Catholic Church or the mainstream media — has revealed itself to be corrupt, incompetent or both. And at the root of these failures are the people who run these institutions, the bright and industrious minds who occupy the commanding heights of our meritocratic order. In exchange for their power, status and remuneration, they are supposed to make sure everything operates smoothly. But after a cascade of scandals and catastrophes, that implicit social contract lies in ruins, replaced by mass skepticism, contempt and disillusionment.

In the wake of the implosion of nearly all sources of American authority, this new decade will have to be about reforming our institutions to reconstitute a more reliable and democratic form of authority. Scholarly research shows a firm correlation between strong institutions, accountable élites and highly functional economies; mistrust and corruption, meanwhile, feed each other in a vicious circle. If our current crisis continues, we risk a long, ugly process of de-development: higher levels of corruption and tax evasion and an increasingly fractured public sphere, in which both public consensus and reform become all but impossible."

Desperately needed?

Brad DeLong: "more macroeconomists who think like Ben Bernanke are desperately needed on the FOMC" [Federal Open Market Committee -- the Federal Reserve's principal body responsible for monetary policy through the setting of short-term interest rates]

Team Sports in the Winter of Our Discontent

I sometimes use a pretty simple analytical model to sort out the dynamics of American politics, beginning with the observation that politics is a team sport. In the U.S. two-party system, it is a team sport played by three teams, one of which doesn't know that it is a team or that it is playing.

There's the Republicans on the Right, the Democrats on the Left, and then there are various folks, including most professional journalists, who identify as political "independents" or non-partisans. None of these groups is homogenous, of course; that's what it means to be "a team". They are coalitions, which act in a semi-coordinated way in the competition to acquire and exercise political power.

Politics, particularly Party politics, in the U.S., through most of American history, has tended to be much more complicated that it currently is, even though the two-party paradigm has usually been sustained successfully, even in times of great stress, like the Civil War. Even scholars of the second two-party system, 1824-1856, when the Whigs contended against the Jacksonian Democrats, struggle to explain the social identity differences between the Parties, or why a particular person was a Democrat or a Whig. Strong political movements or causes, like anti-slavery, or temperance, or women's suffrage, tended to develop obliquely to the Parties. In the 1850s, anti-immigrant sentiment played a part in destroying the Whigs and building the Republican Party; in the 1880s and 1890s, populism divided the Democrats; in the early 20th century, Progressivism affected both Parties. Religion and regional identities and ethnicity also played a large part. Virginia and Massachusetts dominated the country's politics, beginning with the independence movement; in the late 19th and early 20th century, Ohio seemed to dominate the affairs of the Republican Party, while the Solid South of agrarian white supremacist Southerners came to anchor the politics of a Democratic Party that was turning to urban constituencies in the North.

Since the Democrats became the unlikely instrument for finally ending segregation and legalized racial discrimination in the 1960s, the presumptive loyalty of white Southerners to the Democratic Party has been eroding. And, with the decline in labor unions, the Democratic Party's base among the working classes has also declined. The relatively poor are still more likely to vote Democratic, than Republican, and white males are more likely to vote Republican, but these differences reflect primarily differences in worldview and economic circumstances. In contrast to the past, Party identification has lost its complicated, orthogonal character, and become almost entirely a matter of political attitudes and worldview -- "ideology" in a fairly weak sense. All Republicans are conservative; all Democrats are progressives or liberals. Almost every Republican in the Senate or House is more conservative than almost every Democrat.

If you like quantitative data, there are some folks, who've done some number crunching on Congressional voting, and it is quite revealing
http://polarizedamerica.com/#POLITICALPOLARIZATION

This political polarization is related in a variety of complex ways to both a relative decline in the salience of issues of race and ethnicity, and a rise in economic inequality.

Not to belabor the point, American politics is increasingly dominated by the agenda of the very wealthy and of the social and economic class, which runs large American business corporations. Other organizations, which might represent broader constituencies, like labor unions and professional organizations, as well as fraternal, ethnic and religious organizations, have declined in sometimes absolute, but always relative power, in comparison to large business corporations.

The Corporate Executive Class has become the sole and dominating political center of gravity in the Land, around which all three political Parties -- the two Political Parties, plus the "independents" -- revolve. I am not saying that either the Republicans or the Democrats are some kind of false front for Corporate interests, or that the relationship of either Party's politicians or voters to Corporate money and power is simple or uniform, nor that the Non-Party's relationship to Corporate money and power is simple, either. I propose to use the simple, three-Party scheme of analysis to identify some of the complexity and dynamics.

It is a discouraging analysis, because to look honestly at the dynamics of American politics is to realize that the Republicans, the Democrats, the Independent Voters and the Mainstream (non-partisan) Media are all manipulated instruments, if not actual creatures, of Corporate Business Power. I intend to avoid too much passionate ranting, but I'm deeply dissatisfied with this state of affairs, and the self-destructive policy course it seems to condemn the country to follow.

The uni-dimensional continuum of American politics has put the vast majority of those inclined toward an authoritarian cluster of political attitudes -- those to whom so-called populist appeals are traditionally made in American politics -- into the Republican Party. That, by itself, is an unusual state of affairs. In most eras, the cross-cutting of regional interests and ethnic identifications has tended to divide the authoritarians between the Parties. It has changed the character and style of the Republican Party in ways that make the Republican Party less attractive, even to many well-educated, secular conservatives. The increasingly authoritarian character of the Republican Party, as a Party of the Right, has always undermined its competence in governance, which has further alienated some of its Corporate Executive supporters. The Obama coalition and strategy in 2008, revolved around welcoming into the Democratic coalition, a small slice of conservative voters and elite leadership, increasingly alienated by the Republican Party, and a big slice of Corporate financial support. The demonstrated incompetence of the Bush Administration was an object lesson, as well as a means to various ends.

"The demonstrated incompetence of the Bush Administration was an object lesson, as well as a means to various ends." I quote myself, knowing that this is a curious proposition. Remember though, that I am writing about complex, mass behavior. Politics is a team sport. There's a division of labor, a division of intentions and interests and roles, leadership and followership, glory and spoils. Division is what it is all about, and just enough unity to get to 50.1%.

When I started this blog, it was because in the wake of Bush's election in 2004, I felt fairly certain that the country was headed toward a crack-up, a confluence of unfortunate events following in train from Bush's unwise policy-making, which would create some kind of political "perfect storm" that would precipitate a political realignment and restructuring.

The "storm" came in the rise of the Democrats in 2006 and 2008, but the reforms of the political economy I looked for, have been stifled. Few of the useful lessons, I hoped the American body politic might draw from its experience with George W. Bush, appear to have been learned. Far from overthrowing the regime constructed by George W. Bush, the Obama Administration has been intent on confirming and reinforcing it, with just a thin veneer of enhanced competence and a more progressive manipulation of symbols.

Adding a small slice of conservatives to the Democratic coalition, put the Democrats into power, but, it made the Democratic Party slightly more conservative, and in the coalition of moderate conservatives with progressives, which makes up the core of the Democratic Party, the conservatives have demanded all the power to govern. The result has been a continuation of conservative government, under the aegis of the progressive Party, effectively removing all means for progressive or liberal opposition to governance on conservative and neo-liberal principles.

The liberals and progressives are not able to introduce liberal or progressive policy, but they are being blamed for the failures and shortcomings of continuing neo-liberal, conservative policy.

In the meantime, the increasingly authoritarian Conservative Party -- the Republicans -- have adopted an obstructionist attitude, and await the swinging of the proverbial political pendulum from the failed Party -- now the Democrats -- back to the Republicans. That Republicans are obstructing policy ideas that they actually favor is an irony noted by a few observers, while progressive Democrats are demoralized by their own impotence -- co-opted into desperately supporting an agenda of economic policies that they would ordinarily oppose, adamantly.

In this strange dynamic of the powerlessness of the supporters of the Party in Power, the Non-Party third Party -- the "independents" and their "leadership" (journalists and journalist-pundits) -- have played a powerful and necessary role, in pushing narrative analysis and description that tends to narrow the agenda and to confirm the powerlessness of the leading politicians in the Democratic Party. More about this in a subsequent post (I hope).

Centrism

DougJ at Balloon Juice:

"Apparently, Bill Frist and Mark Halperin are on Charlie Rose discussing today’s summit right now. (The good news is that Ezra Klein is on too.) I’d watch but I have no desire to take my own life this evening.

There are a lot of people out there who believe that our sorry state of affairs is caused by Glenn Beck and Rush Limbaugh and, if they’re really deluded, they’ll add “and on the left, Rachel Maddow and Keith Olbermann”. I know plenty of people who say things like this.

The truth is, it’s more the fault of Charlie Rose and Tom Friedman and David Brooks. Glenn Beck didn’t get us into Iraq."

I watched a bit of it. I saw Charlie Rose and Mark Halperin stage a masterful dialogue, supposedly analyzing the politics, which confirmed Republican talking points. Rose managed the back-and-forth among the panel, so there was no contradiction of what they said. Ezra Klein was brought in next on a completely different point, not that the career-minded Washington Post Online columnist seemed inclined to oppose Rose and Halperin on whether Obama's proposal was too far left, or too ambitious, etc.

It just left me despairing for my country. And, DougJ is right: this, not the clowning of Beck, is what got us into Iraq. Rose is absolutely relentless in defining "sensible" centrism in ways that make not just the Left, but rationality and facts and intelligence disappear. Critical reason is simply excluded. And, the result is quiet, and boring and rambling, and, ultimately, monstrous.