Deprogramming Progressives Indoctrinated into Supporting Austerity

Reprinted from New Economic Perspectives

By William K. Black

A little bit of economics can be a truly terrible thing, for the introductory classes in micro and macro-economics are the most dogmatic and myth-filled part of the neo-liberal curriculum.  Dogmas that have been falsified for 75 years (such as austerity) are taught as revealed truth.  The poor indoctrinated student is then launched into the world “knowing” that austerity is the answer and that mass unemployment and prolonged recessions are small prices to be paid (by others) to achieve the holy grail of a balanced budget.  Students are taught that national budgets are really just like household budgets.  These dogmas are not simply false, they are self-destructive and cruel.  Neo-liberal economics is so bad and has gone downhill at such a rapid rate that it now worships the economic analog to bleeding patients – austerity – as a response to a Great Recession.  Millions of people are indoctrinated annually into believing this long-falsified nonsense, and that includes people who consider themselves progressives.

The remarkable aspect of neo-liberal economics is that the power of its myth has survived for many progressives even after its failed dogmas caused massive economic destruction, massive elite fraud with impunity, and crony capitalism so corrupt that it cripples democracy.  Indeed, the brainwashing they received is so effective that even after the eurozone ran a massive experiment with austerity that proved (again) to be a catastrophic failure they remain neo-liberal acolytes.  This column discusses three examples that exemplify the problem.

The Guardian (U.K.)

The Guardian is the U.K.’s most famous paper of the left, but its finance editor’s embrace of the neo-liberal austerity myth is passionate and inane.  Consider this remarkably incoherent discussion of the “fiscal cliff” by the paper’s finance editor.

“The fiscal cliff explained: what to know about the biggest story in Washington. Is America really heading off a cliff? Why can’t Congress and the president strike a deal? Get the lowdown with our handy primer.”

I chose the Guardian’s coverage as the first example because it begins with the most basic and common neo-liberal myth supporting austerity – a nation with a sovereign currency is really just like a household.

“So let’s start at the beginning: what is the fiscal cliff?

It’s not one cliff, but two things: a group of spending cuts and tax hikes that will come into effect on January 2.

Why now?

The US has about $2.3tn of money coming in, and it spends about $3.6tn. So imagine you were making $23,000 a year and spending $36,000. What would happen? You’d be in debt, and you’d have to cut your spending. The US is in the same pickle. Except, instead of a few thousand, it has to cut $1.3tn.”

The U.K. did not adopt the euro, so it retains a sovereign currency.  The U.K. allows the value of the Pound to float freely and it borrows overwhelmingly in its own currency.  The Guardian, therefore, has no excuse for failing to understand a national economy like the U.S. that also has a sovereign currency.  A nation that borrows in its own freely-floating sovereign currency is not a target for bond vigilantes.  It can and should spend considerably more than it brings in through tax revenues in response to a recession.  That is what “automatic stabilizers” do.  Automatic stabilizers greatly reduce the severity and length of recessions.  Austerity does the opposite.  Nations with sovereign currencies can create money directly through key strokes on the central bank’s computer or by borrowing at exceptionally low interest rates during a recession.  The U.S., the U.K., and Japan all borrow long-term (10 years) at interest rates below two percent because they have sovereign currencies.  Nations with sovereign currencies typically run budget deficits in most years.  The U.S. has run a budget deficit over the great bulk of its history.

If a household reduces its spending because its income falls during a recession there is a negligible effect on the Nation’s economy.  If a national government cuts spending because a recession reduces its income it directly reduces public sector demand and indirectly reduces private sector demand.  A recession occurs when demand is seriously inadequate.  Governmental austerity inflicts a far more severe recession on the nation by further reducing demand.  A household and a Nation should follow the opposite strategy when their incomes fall sharply.  The Guardian’s claim that they should follow the same strategy shows their indoctrination into one of neo-liberalism’s most destructive myths.  The fact that the Guardian is making this claim in December 2012, after seeing the recession that austerity inflicted on the eurozone, proves that the problem is dogma, for only dogma is impervious to facts that repeatedly falsify its predictions.

The Guardian, of course, knows that the eurozone has been forced back into recession by the “troika’s” policies, but it reverses the causality.  Here is a related piece by the same finance editor about the world’s reaction to the failure to reach a deal on the “fiscal cliff.”

“Q: What does the rest of the world think of this?

They think we’re ridiculous, and that we’re playing fast and loose with not just our own economy, but that of the world. IMF chief Christine Lagarde said the US is becoming its own worst enemy by delaying a decision. Still, this is a case of pots and kettles. It’s not like Europe can really look down on us: they’ve been delaying the same hard decisions on spending cuts for over three years and have been on the brink of a meltdown many times since. Should we be smart enough to look at their example and avoid the same troubles? Yes, technically. But this is the nature of negotiations: they go down to the wire.”

The Guardian’s remarkable explanation of why the Eurozone has been forced back into recession is:  insufficient and delayed austerity!  If only the Eurozone had promptly made deeper “spending cuts” things would have been much better.  That “logic” comes from assuming that nations are just like households.  The Guardian’s answer to the fact that bleeding the patient makes the patient weaker is to bleed them more, and faster.

Note that the Guardian’s finance editor also seems to believe that sovereign monetary systems like the U.S. and the U.K. suffer the same risk of “meltdown” that nations that abandoned their sovereign currencies because they adopted the euro experienced “many times.”  The “meltdowns” that the eurozone nations have suffered “many times” because of the deadly vulnerability of nations that lack a sovereign currency to the toxic mix of recession, austerity, and the debt vigilantes.  The Guardian’s finance expert’s failure to understand such fundamental and critically important features of the financial system is a testament to the danger of dogma.

The U.S. has “avoid[ed] the same troubles” as the eurozone following the Great Recession.  It has not suffered financial “meltdowns” “many times.”  It has not been thrown back into recession and it does not suffer Great Depression levels of unemployment.  The U.S. budgetary deficit has been reduced at a record rate over the last three years.  The U.S. has been able to “avoid the same troubles” as the eurozone because it has not embraced the austerity dogma and it has not given up its sovereign currency.  The U.S. did not provide remotely adequate stimulus of the kind recommended by competent economists, but the modest stimulus has been sufficient to produce a modest, sustained recovery.  The Guardian, however, implies that we have failed to avoid the eurozone’s troubles after the onset of the Great Recession.

Governor Howard Dean

Governor Dean served as Chairman of the Democratic National Committee from 2005-2009.  He was an early opponent of the invasion of Iraq.  His self-description is “progressive Democrat.”  He is a physician.  Dean is a frequent guest on MSNBC’s evening programs.  Dean takes the position that the U.S. should go off the “fiscal cliff” because austerity is desirable.  He claims that a “balanced budget” is essential and that “everybody” should pay higher taxes to balance the budget.  He thinks, contrary to the history of the U.S., that no nation can continue to run deficits.    

On CNBC, Dean cheered for the austerity that the “fiscal cliff” would inflict on the nation.  He did so even though he believed it would cause a recession for at least six months.  He predicted that the recession would be short and mild and a small cost to reduce the deficit.  He assumed that austerity would reduce the deficit even though he conceded it would cause a recession.

Dean, a self-described progressive, and one of the nation’s most prominent Democrats, is more dogmatic than Speaker Boehner on austerity.

Andrew Stern (former head of SEIU)

Andrew Stern headed one of the largest unions in America.  He made it a growing union and a political force devoted to progressive causes.  He was a member of the Bowles-Simpson (BS) deficit reduction commission appointed by President Obama.  Obama appointed co-chairs he knew were zealous supporters of austerity and unraveling and privatizing the safety net.  Erskine Bowles is a leader of the Wall Street wing of the Democratic Party and Alan Simpson is a very conservative Republican.  Stern declined to vote in favor of the BS austerity recommendations, but his vote was not based on any rejection of austerity.

Why I Voted No On Simpson-Bowles

On December 3, 2010, I voted “no” on the Simpson-Bowles report presented to the National Commission on Fiscal Responsibility and Reform. Here is what I had to say about it at the time:

This Commission report also challenges our President to offer his plan for economic growth, and fiscal responsibility no later than his State of the Union, and challenges Congress to adopt a plan no later than Election Day 2012.

I voted no, despite my admiration for the effort, because any plan, I feel strongly, must tackle both our fiscal and investment deficit needed to create jobs and a dynamic economy. No family would willfully balance its budget by not sending their child to college. No business can successfully compete with outdated equipment. And no nation can simply cut its way into prosperity. I felt the plan should better balance revenues and spending cuts, could balance Social Security while preserving more benefits, made too many short term cuts in health care before full reform was implemented in 2018, and did not have shared corporate responsibility.”

Stern now says that he regrets voting against the BS recommendations.

He pushed for the “Super Committee” to “go big” and adopt massive austerity before it statutory deadline in November 2011.

Stern’s co-panelists at the conference, organized by one of Pete Peterson’s groups, whose participants unanimously urged the “go big” super-austerity plan included the former CEO of the AARP, Bill Novelli.  Novelli’s support for austerity is particularly noteworthy given the BS plan’s proposals to cut and begin to privatize Social Security – Wall Street’s unholy Grail.

Conclusion

Neo-liberal economics has devastated the global economy and produced all of the predictive failures and evil consequences that progressives have long attributed to its micro-economic myths.  Far too many progressives, however, continue to believe the similarly mythical and self-destructive macro-economic myths about deficits, debt, and austerity.  It is hard enough countering Pete Peterson’s billion dollar campaign to inflict austerity and unravel and privatize the safety net.  Peterson funds myriad front groups.  We also have to counter the Wall Street wing of the Democratic Party, which dominates Treasury, OMB, the Justice Department, and the office of the Chief of Staff and favors austerity and unraveling the safety net.  We should not have to deprogram progressives indoctrinated into repeating neo-liberal economic dogmas.

Progressives should be able to observe that the neo-liberal macro-economic predictions have been consistently falsified by reality.  They should have seen documentaries like Inside Job and Capitalism: A Love Story about the catastrophic failure of neo-liberal economics and economists.  They should read sites like New Economic Perspectives and Paul Krugman’s columns that explain why austerity is self-destructive and why the safety net need not, and should not, be attacked.  Progressives need to say “no” to anyone who wants to “bleed” the economy through austerity or cutting the safety net. 


William K.Black, J.D., Ph.D. is Associate Professor of Law and Economics at the University of Missouri-Kansas City. Bill Black has testified before the Senate Agricultural Committee on the regulation of financial derivatives and House Governance Committee on the regulation of executive compensation. He was interviewed by Bill Moyers on PBS, which went viral. He gave an invited lecture at UCLA’s Hammer Institute which, when the video was posted on the web, drew so many “hits” that it crashed the UCLA server. He appeared extensively in Michael Moore’s most recent documentary: “Capitalism: A Love Story.” He was featured in the Obama campaign release discussing Senator McCain’s role in the “Keating Five.” (Bill took the notes of that meeting that led to the Senate Ethics investigation of the Keating Five. His testimony was highly critical of all five Senators’ actions.) He is a frequent guest on local, national, and international television and radio and is quoted as an expert by the national and international print media nearly every week. He was the subject of featured interviews in Newsweek, Barron’s, and Village Voice.

America’s Deceptive 2012 Fiscal Cliff – Part 1

Reprinted from New Economic Perspectives

By Michael Hudson

How today’s fiscal austerity is reminiscent of World War I’s economic misunderstandings

When World War I broke out in August 1914, economists on both sides forecast that hostilities could not last more than about six months. Wars had grown so expensive that governments quickly would run out of money. It seemed that if Germany could not defeat France by springtime, the Allied and Central Powers would run out of savings and reach what today is called a fiscal cliff and be forced to negotiate a peace agreement.

But the Great War dragged on for four destructive years. European governments did what the United States had done after the Civil War broke out in 1861 when the Treasury printed greenbacks. They paid for more fighting simply by printing their own money. Their economies did not buckle and there was no major inflation. That would happen only after the war ended, as a result of Germany trying to pay reparations in foreign currency. This is what caused its exchange rate to plunge, raising import prices and hence domestic prices. The culprit was notgovernment spending on the war itself (much less on social programs).

But history is written by the victors, and the past generation has seen the banks and financial sector emerge victorious. Holding the bottom 99% in debt, the top 1% are now in the process of subsidizing a deceptive economic theory to persuade voters to pursue policies that benefit the financial sector at the expense of labor, industry, and democratic government as we know it.

Wall Street lobbyists blame unemployment and the loss of industrial competitiveness on government spending and budget deficits – especially on social programs – and labor’s demand to share in the economy’s rising productivity. The myth (perhaps we should call it junk economics) is that (1) governments should not run deficits (at least, not by printing their own money), because (2) public money creation and high taxes (at lest on the wealthy) cause prices to rise. The cure for economic malaise (which they themselves have caused), is said to beless public spending, along with more tax cuts for the wealthy, who euphemize themselves as “job creators.” Demanding budget surpluses, bank lobbyists insist that austerity can enable private-sector debts to be paid.

The reality is that when banks load the economy down with debt, this leaves less to spend on domestic goods and services while driving up housing prices (and hence the cost of living) with reckless credit creation on looser lending terms. Yet on top of this debt deflation, bank lobbyists urge fiscal deflation: budget surpluses rather than pump-priming deficits. The effect is to further reduce private-sector market demand, shrinking markets and employment. Governments fall deeper into distress, and are told to sell off land and natural resources, public enterprises, and other assets. This creates a lucrative market for bank loans to finance privatization on credit. This explains why financial lobbyists back the new buyers’ right to raise the prices they charge for basic needs, creating a united front to endorse rent extraction. The effect is to enrich the financial sector owned by the 1% in ways that indebt and privatize the economy at large – individuals, business and the government itself.

This policy was exposed as destructive in the late 1920s and early 1930s when John Maynard Keynes, Harold Moulton and a few others countered the claims of Jacques Rueff and Bertil Ohlin that debts of any magnitude could be paid if governments would impose deep enough austerity and suffering. This is the doctrine adopted by the International Monetary Fund to impose on Third World debtors since the 1960s, and by European neoliberals defending creditors imposing austerity on Ireland, Greece, Spain and Portugal.

This pro-austerity mythology aims to distract the public from asking why peacetime governments can’t simply print the money they need. Given the option of printing money instead of levying taxes, why do politicians only create new spending power for the purpose of waging war and destroying property, not to build or repair bridges, roads and other public infrastructure? Why should the government tax employees for future retirement payouts, but not Wall Street for similar user fees and financial insurance to build up a fund to pay for future bank over-lending crises? For that matter, why doesn’t the U.S. Government print the money to pay for Social Security and medical care, just as it created new debt for the $13 trillion post-2008 bank bailout? (I will return to this question below.)

The answer to these questions has little to do with markets, or with monetary and tax theory. Bankers claim that if they have to pay more user fees to pre-fund future bad-loan claims and deposit insurance to save the Treasury or taxpayers from being stuck with the bill, they will have to charge customers more – despite their current record profits, which seem to grab everything they can get. But they support a double standard when it comes to taxing labor.

Shifting the tax burden onto labor and industry is achieved most easily by cutting back public spending on the 99%. That is the root of the December 2012 showdown over whether to impose the anti-deficit policies proposed by the Bowles-Simpson commission of budget cutters whom President Obama appointed in 2010. Shedding crocodile tears over the government’s failure to balance the budget, banks insist that today’s 15.3% FICA wage withholding be raised – as if this will not raise the break-even cost of living and drain the consumer economy of purchasing power. Employers and their work force are told to save in advance for Social Security or other public programs. This is a disguised income tax on the bottom 99%, whose proceeds are used to reduce the budget deficit so that taxes can be cut on finance and the 1%. To paraphrase Leona Helmsley’s quip that “Only the little people pay taxes,” the post-2008 motto is that only the 99% have to suffer losses, not the 1% as debt deflation plunges real estate and stock market prices to inaugurate a Negative Equity economy while unemployment rates soar.

There is no more need to save in advance for Social Security than there is to save in advance to pay for war. Selling Treasury bonds to pay for retirees has the identical monetary and fiscal effect of selling newly printed securities. It is a charade – to shift the tax burden onto labor and industry. Governments need to provide the economy with money and credit to expand markets and employment. They do this by running budget deficits, and this can be done by creating their own money. That is what banks oppose, accusing it of leading to hyperinflation rather than help economies grow.

Their motivation for this wrong accusation is self-serving and their logic is deceptive. Bankers always have fought to block government from creating its own money – at least under normal peacetime conditions. For many centuries, government bonds were the largest and most secure investment for the financial elites that hold most savings. Investment bankers and brokers monopolized public finance, at substantial underwriting commissions. The market for stocks and corporate bonds was rife with fraud, dominated by insiders for the railroads and great trusts being organized by Wall Street, and the canal ventures organized by French and British stockbrokers.

However, there was little alternative to governments creating their own money when the costs of waging an international war far exceeded the volume of national savings or tax revenue available. This obvious need quieted the usual opposition mounted by bankers to limit the public monetary option. It shows that governments can do more under force majeur emergencies than under normal conditions. And the September 2008 financial crisis provided an opportunity for the U.S. and European governments to create new debt for bank bailouts. This turned out to be as expensive as waging a war. It was indeed a financial war. Banks already had captured the regulatory agencies to engage in reckless lending and a wave of fraud and corruption not seen since the 1920s. And now they were holding economies hostage to a break in the chain of payments if they were not bailed out for their speculative gambles, junk mortgages and fraudulent loan packaging.

Their first victory was to disable the ability – or at least the willingness – of the Treasury, Federal Reserve and Comptroller of the Currency to regulate the financial sector. Goldman Sachs, Citicorp and their fellow Wall Street giants hold veto power the appointment of key administrators at these agencies. They used this beachhead to weed out nominees who might not favor their interests, preferring ideological deregulators in the stripe of Alan Greenspan and Tim Geithner. As John Kenneth Galbraith quipped, a precondition for obtaining a central bank post is tunnel vision when it comes to understanding that governments can create their credit as readily as banks can. What is necessary is for one’s political loyalties to lie with the banks.

In the post-2008 financial wreckage it took only a series of computer keystrokes for the U.S. Government to create $13 trillion in debt to save banks from suffering losses on their reckless real estate loans (which computer models pretended would make banks so rich that they could pay their managers enormous salaries, bonuses and stock options), insurance bets gone bad (underpricing risk to win business to pay their managers enormous salaries and bonuses), arbitrage gambles and outright fraud (to give the illusion of earnings justifying enormous salaries, bonuses and stock options). The $800 billion Troubled Asset Relief Program (TARP) and $2 trillion of Federal Reserve “cash for trash” swaps enabled the banks to continue their remuneration of executives and bondholders with hardly a hiccup – while incomes and wealth plunged for the remaining 99% of Americans.

A new term, Casino Capitalism, was coined to describe the transformation that finance capitalism was undergoing in the post-1980 era of deregulation that opened the gates for banks to do what governments hitherto did in time of war: create money and new public debt simply by “printing it” – in this case, electronically on their computer keyboards.

Taking the insolvent Fannie Mae and Freddie Mac mortgage financing agencies onto the public balance sheet for $5.2 trillion accounted for over a third of the $13 trillion bailout. This saved their bondholders from having to suffer losses from the fraudulent appraisals on the junk mortgages with which Countrywide, Bank of America, Citibank and other “too big to fail” banks had stuck them. This enormous debt increase was done without raising taxes. In fact, the Bush administration cut taxes, giving the largest cuts to the highest income and wealth brackets who were its major campaign contributors. Special tax privileges were given to banks so that they could “earn their way out of debt” (and indeed, out of negative equity). ((No such benefits were given to homeowners whose real estate fell into negative equity. For the few who received debt write-downs to current market value, the credit was treated as normal income and taxed!))  The Federal Reserve gave a free line of credit (Quantitative Easing) to the banking system at only 0.25% annual interest by 2011 – that is, one quarter of a percentage point, with no questions asked about the quality of the junk mortgages and other securities pledged as collateral at their full face value, which was far above market price.

This $13 trillion debt creation to save banks from having to suffer a loss was not accused of threatening economic stability. It enabled them to resume paying exorbitant salaries and bonuses, dividends to bondholders and also to pay counterparties on casino-capitalist arbitrage bets. These payments have helped the 1% receive a reported 93% of the gains in income since 2008. The bailout thus polarized the economy, giving the financial sector more power over labor and consumers, industry and the government than has been the case since the late 19th-century Gilded Age.

All this makes today’s financial war much like the aftermath of World War I and countless earlier wars. The effect is to impoverish the losers, appropriate hitherto public assets for the victors, and impose debt service and taxes much like levying tribute. “The financial crisis has been as economically devastating as a world war and may still be a burden on ‘our grandchildren,’” Bank of England official Andrew Haldane recently observed. “‘In terms of the loss of incomes and outputs, this is as bad as a world war.’ he said. The rise in government debt has prompted calls for austerity – on the part of those who did not receive the giveaway. ‘It would be astonishing if people weren’t asking big questions about where finance has gone wrong.’” ((Philip Aldrick, “Loss of income caused by banks as bad as a ‘world war’, says BoE’s Andrew Haldane,” The Telegraph, December 3, 2012. Mr. Haldane is the Bank’s executive director for financial stability.))

But as long as the financial sector is winning its war against the economy at large, it prefers that people believe that There Is No Alternative. Having captured mainstream economics as well as government policy, finance seeks to deter students, voters and the media from questioning whether the financial system really needs to be organized in the way it is. Once such a line of questioning is pursued, people may realize that banking, pension and Social Security systems and public deficit financing do not have to be organized in the way they are. There are much better alternatives to today’s road to austerity and debt peonage.


Michael Hudson is research professor of economics at University of Missouri, Kansas City (UMKC) and a research associate at the Levy Economics Institute of Bard College. He is a former Wall Street analyst and consultant as well as president of the Institute for the Study of Long-term Economic Trends (ISLET) and a founding member of International Scholars Conference on Ancient Near Eastern Economies (ISCANEE).


Michael’s latest book, Finance Capitalism and its Discontents is now available.

Fueled by Deficit Hysteria, Obama and the Republicans Are Choosing the Path of “Economicide”

Reprinted from New Economic Perspectives

By Michael Hoexter

In the “fiscal cliff” negotiations and the subsequent debt limit talks between Obama and the Republican leadership of the House of Representatives, it appears that there will be no “good guys” because the talks and policy framework within which they are operating are at odds with the welfare of the American people.  Set up by a series of interactions over the last four years between Obama and his nominal opponents in the Republican Party, the framework of the negotiations ignores the way that the US government finances itself as well as the only known economic policy orientation which will allow our economy to thrive; the proposed policies and negotiations have been to date economically illiterate.  The biggest losers in these talks if they “succeed” according to the self-evaluations of the Republican and Democratic leaderships will be the American people and politically the Democrats who go along with a framework that demands cuts in federal budget deficits at all costs.

The 2011 Budget Control Act, initiated by the Republican controlled House, is one of the most foolish pieces of legislation ever passed into law by Congress, as it forces the government to attempt to “balance” its budget and reduce the budget deficit.  National government budget deficits, which are the net contribution of government spending to economic growth, are actually integral to economic growth, contrary to the anti-scientific conventional budget lore upon which deficit hysteria has been built.  Without government budget deficits, the economies of nations with trade deficits CANNOT grow in monetary terms due a matter of simple arithmetic; those few nations (China, Germany, not the US) with large trade surpluses MIGHT be able to grow without a budget deficit but always with the cooperation of other nations financing those surpluses through trade and, in most cases, government budget deficits on the side of the net-importing nation.

A fiat currency-issuing national government, unlike a local government, business or a household, does not depend upon tax or other income and therefore is not and should not pretend to be bound by conventional balance sheet accounting, which was perhaps a more applicable, though not particularly successful, means of national government accounting during the gold standard era. The reasons for transitioning away from the gold-standard, the rigidities which it imposed on aggregate demand and the money supply, have been suppressed from public discourse in an era in which deficit hysterics like those at “Fix the Debt” hold honored seats at the policymaking and policy advocacy tables.  These deficit hysterics, funded by Wall Street tycoons freelancing as economic pundits, would like Washington insiders and the media to believe that the gold-standard never went away, specifically for the purpose of cutting social programs that stand in the way of Wall Street’s expansion into new markets.

I have recently proposed that we rename the so-called budget deficits specifically of currency-issuing governments, the government’s “net contribution to monetary/economic growth” so that the confusion no longer persists that these so-called deficits are by their nature “bad” and to be avoided.  The fiat currency issuer can never run out of its own money, can never be in “deficit” in it; “net contribution” is a better formal description of the excess of spending over taxes for specifically a fiat currency-issuing government.  The government spending over taxes collected becomes the incremental increase in the money supply for the real economy as it grows in real terms, underneath the pro-cyclical expansion and contraction of money available from bank credit (i.e. expands in a boom and collapses in a bust).  Too much price inflation is a possibility with too much government spending over-and-above taxes collected but demand-led inflation in our current situation would be a “high quality problem” indicating that we have reached full capacity in our economy, which is not nearly the case.  Right now we have a very large output gap as well as high demand for government-led expenditures on things like infrastructure, public services and education, making increased government expenditures very unlikely to cause inflation.

The foolishness of the 2011 Budget Control Act has been compounded by its timing:  attempts to balance budgets during an economic boom can sometimes have lesser yet often negative effects but during a period of economic weakness, during a debt-deflation, budget balancing and deficit reduction efforts (reducing the government’s contribution to economic growth) can have dire effects.

Despite the fact that cutting government spending and vital government programs will in the medium term not serve either Party well politically, elements of the Democratic and most of the Republican Party are trying to commit this “economicide” together now.  Why are they so foolish?  While getting elected is important to politicians, in between elections, the electorate tends to be ignored and politicians have as a primary constituency and funder the now extremely wealthy and politically cosseted financial services industry.  The FIRE sector with its political emissaries in organizations like Third Way and “Fix the Debt”, is desperately trying to throw up enough dust to escape re-regulation and downsizing, as happened during the last debt-deflation, the Great Depression of the 1930’s.  So far, no leader in one of the major finance centers has stood up as did Franklin Roosevelt almost 80 years ago to diminish their power.  Even worse, in the historical place and time where a 21stCentury FDR should have stood, President Obama has been, despite the appearance of a rift with Wall Street, a true believer in rescuing the financial services industry as it is now constituted.  Good opportunists that they are, the financial services industry’s proxies are attempting via whipping up public debt hysteria to use this crisis to expand their markets:  downsizing or eliminating the risk-free government provision of retirement and health insurance would open the market for the FIRE sector’s riskier and less secure products that will cost us all more while delivering less.

This is also fundamentally a fight about the nature of our economic system, the nature of money and the source of money, in which government leaders play a critical role.

The Myth of Market Self-Regulation

Not too long ago, it was considered to be a middle-of-the-road political position to suggest that capitalism needed to be saved from itself.   Government’s economic role was seen in the post-Depression era largely as the stabilizer of an economy that would otherwise run off the rails as it had in the 1920’s.   Many businesspeople and the citizenry at large accepted this compromise between government and market dynamics, an acceptance of the fact of a mixed economy that had existed in various forms since the inception of complex economies in the ancient world.

During the 1950’ and 1960’s, when Keynesianism was viewed as the economic policy norm, there emerged groupings of dissenting economic philosophers led by Friedrich von Hayek and Milton Friedman, that came to be called neoliberals, who suggested to leaders that in the name of “liberty” they should rid economies of regulation and let “the free market” do its work.  In part inspired by neoliberals, in the 1970’s and 80’s,a series of “innovations” in neoclassical economic theory posited that in fact capitalism is a self-regulating system (efficient markets hypothesisreal business cycle theory, etc.) and that markets are the fundamental institution in society.  An accompanying counter-theory of government based on neoclassical economics’ Homo Oeconomicus (public choice theory) portrayed government officials as simply self-interested market participants and not potential representatives of some common interest.  These political and economic theories in turn boosted the self-regard of many businesspeople to delusional levels who were told by academics, politicians and the media that they in fact were the paragon of economic virtue and could do without government’s role in the economy.

Our current set of political leaders almost to a man or woman now operate within the narrowed assumptions of the market fundamentalist/neoliberal picture of the functioning of the economy.  They are also under continual pressure to support the reality distortions demanded by wealthy political patrons, who, as they have breathed in the new self-flattering theory, become increasingly short-sighted in their perception of their self-interest.  The current fiscal cliff and debt limit fiascos are a direct outgrowth of the delusional view of capitalism as a self-regulating, self-sufficient system promoted successively by neoclassical economics, neoliberalism and now austerity economics.

Capitalism’s Habitual Destruction of Effective Demand

One of the critical and obvious ways that capitalism and markets cannot regulate themselves is in maintaining sufficient demand for products and services to allow continuing growth of the economy, an existential need for the existence of capitalism.   There are two primary reasons for capitalism’s chronic and increasing demand gap: on the one hand, a tendency towards inequality and concentration of resources and, on the other, the drive to increase labor productivity and reduce unit labor costs.

Effective demand is weakened by the tendency within capitalism towards increasing inequality in income and wealth, intensified by financialization of the economy.  The increasing inequality leads to shortfalls in demand as money becomes concentrated more and more in savings, which are differentially concentrated among the wealthy.  To preserve these savings, ways are found by financial intermediaries and con men, with the help of lax or enabling government regulations, to grow these savings without putting them fundamentally at risk in real investments in businesses that need to hire people and thereby distribute income more equitably.  Without targeted intervention by government, the formation of a Ponzi economy becomes a matter of course, and eventually the inevitable collapse of that economy in a debt-deflation, similar to that of the 1930’s or of the current period.  Private debt is offered as a means to boost buying power but this only provides a short-lived stopgap as debts become bad debts because average incomes cannot support both current consumption and the debt burden, leading to the collapse of the Ponzi house of cards.

Another area, that has recently received some media attention, is that capitalism and “economic development” as widely understood means the replacement of human labor with machines (powered by a non-food energy source like fossil fuels, nuclear or renewable energy) and the accompanying increase in labor productivity, i.e. the amount of goods and services produced per unit labor.  Even though productivity is celebrated as a universal good, it leads systemically to the reduction in demand for labor as well as reduction in effective aggregate demand for goods and services.  Payment for labor has been one of the primary ways that money gets into the hands of people who want goods and services.  With every rise in productivity and investment in labor-saving technologies, effective demand is endangered locally unless other means are found to distribute income or the primary market, usually abroad, still has a favorable enough income distribution to enable the purchase of these goods.  Eventually this process of capitalizing on others’ still-favorable income distribution reaches its endpoint.

Effective demand has two major components:  intent to buy and means to buy.  With increasing inequality and increasing labor productivity, the means to buy, money, is concentrating increasingly in fewer and fewer hands.  Intent to buy is more evenly distributed throughout the population, dependent as it is on the biological needs and wishes of people; many middle income and poor people of equal total income to one rich person have together “more” intent to buy than that one wealthy person, who by definition is saving a good portion of his or her very large income.  So with increasing inequality and increasing labor productivity effective demand is on a systemic basis destroyed.

It should now also be obvious that by reducing effective demand, which is a primary driver of the economy, capitalism also stifles economic growth and reduces the profits to be gained from selling real goods and services.  Without the stoking of effective demand via injection of the means to buy from outside the market, capitalism would be dead in the water as an economic system; to repeat, our economic system is not a self-regulating system, contradicting the assumptions that have become embedded in contemporary political discourse and that underlie the self-induced debacle that is the Budget Control Act of 2011.

The Only Known Solution: Government Sponsorship of Demand

As money gets more concentrated in the hands of people who are less inclined to spend it, the only way to stabilize capitalism and enable economic growth of some kind, is for the government to put money into the hands of people who are inclined to spend it.  The means available to government are various forms of government spending, including old age and disability pensions, low cost public health insurance that frees up private money for discretionary purchases, as well as payment for labor, goods and services from the private sector in the process of operating the government and creating government projects.  The governments of most advanced economies have for the last 80 years used these solutions to stabilize their economies, building a social welfare state that also manages the economy as a matter of course.  In the context of these efforts, we have seen wealth shared between social classes and, in historical terms, relative social peace.

Of course, government payments are not simply issued to boost demand in the economy but to fulfill the public purpose and increase overall social welfare, which might be considered the primary intention of engaging in these activities in the first place.  The demand-related effects of these activities are an important byproduct of building public infrastructure, taking care of the sick, funding for basic research, caring for the elderly, etc.   The dual benefit of this work makes it all the more foolish to try to cut it in the name of a phantom deficit problem.

In the current budget negotiations, both sides of the negotiation are in agreement that they should permanently eliminate this only solution available to stabilize and rescue capitalism from itself, the ability of government to put money in the hands of people who will spend it.  This is notwithstanding the absolutely vital and ever more valuable services of government which are endangered and also in increasing demand (see for instance the aftereffects of various climate disasters like Hurricane Sandy).  No plausible substitute is being offered by austerity advocates for the vital role of government in providing critically needed services as well as sponsorship of demand.  No private enterprise or bank can offer these services to the people and to the economy.

Obama’s and the Democrats’ focus on increasing taxes on the rich could be only seen, in the context of our current fiat currency system, as an effort to reduce the purchasing and the informal power of the wealthy but not a means to support social spending and the government’s role in sponsoring demand.  Without the Democratic side standing up for maintaining or increasing government spending in combination with the increased taxation on the wealthy, the reductions in income inequality from that taxation will be washed out as lowered growth will reduce proportionally the incomes of the middle classes and the poor more than the incomes of the wealthy.  Furthermore overall economic growth will diminish with both increases in taxation and decreases in government spending.  Targeted taxation of specific activities, for instance a financial transactions tax and a carbon tax, will drive economic activity towards more socially productive ends and perhaps lower unemployment as more labor intensive activities become more attractive investments.  Yet these taxes without increases in government spending overall and/or the serendipitous reduction in the trade deficit will not lead to aggregate economic growth in monetary terms.

Politically Instigated “Economicide”

As Bill Black has just pointed out, the austerity drive that has become popular among political elites in capitals of the world over the last 4 years is a surefire way to “kill the economy”.   Fueled by deficit hysteria, the Cameron government has done its best to kill the UK economy and the Euro-Zone’s “structural” austerity is in the process of killing the Greek, Spanish, Irish and Italian economies.  If you the reader are incredulous that well-attired, well-informed politicians could do such a thing, I have hoped above to show you that 30 years of ideological training has so obscured politicians’ perception of how the economy works, that they are now capable of inflicting damage on their own economies, still convinced of their own rectitude.

The two pillars of the delusional system that enables politicians to commit economicide already discussed above are

  1. the neoliberal view that capitalism is self-regulating and government intervention in it optional and
  2. the Wall Street-led austerity drive’s reinforcement of myths about modern money that are holdovers from the gold-standard.

It also helps sustain this delusional thinking about the economy, for politicians to recognize that they will, in all probability be “saved” in their post-public service lives by the patronage of the elite community that now demands sacrifice from the least while realizing the social vision of the most privileged and corrupt.  Thus there are two sets of “books” kept, one for the elites and one for the rest of society.  The idea that the fates of all are yoked together is not yet fashionable enough.


Michael Hoexter is a policy analyst and marketing consultant on green issues, climate change, clean and renewable energy, and energy efficiency.

Kill the “fiscal cliff” Instead of the Economy

Reprinted from New Economic Perspectives

Editor’s Note: Here Professor Black likens austerity to the medieval treatment of bloodletting.

By William K. Black

Everyone now agrees that the so-called “fiscal cliff” is a stupid policy that threatens our economy and our people.  Everyone agrees why the “fiscal cliff” is stupid – it inflicts austerity at a time when it is likely to throw the nation into a gratuitous recession.  Causing a recession leads to increased unemployment and a larger budget deficit.  We have all seen austerity force the Eurozone into a gratuitous recession in which Italy, Spain, and Greece have Great Depression levels of unemployment.

Here’s the short version of why austerity is a self-destructive response to the Great Recession.  A recession occurs when demand to purchase goods and services falls and the economy contracts, causing increased unemployment.  This simultaneously causes tax revenues to fall and government expenditures for programs like unemployment compensation to increase.  The fall in revenues and increase in expenses causes the federal budget deficit to grow rapidly.

Austerity is a policy of raising taxes and/or cutting governmental spending for the purported purpose of cutting the deficit.  If one raises overall taxes in response to the Great Recession the result is a reduction in private sector demand.  If one cuts governmental spending the result is a reduction in public sector demand.  The result of reducing private and public sector demand in the recovery phase from the Great Recession, where overall demand is already grossly inadequate, is to throw the nation back into recession or even a depression.  That causes the budget deficit to grow.  A policy of austerity undertaken under the claim that it will reduce the deficit causes a gratuitous recession that leads to a massive loss of wealth, far higher unemployment, and in increased deficit.  That is why austerity is a policy that is the self-destructive economic analogy to the medical insanity of bleeding patients.

We have known that austerity is an idiotic response to a severe crisis for 75 years.  The U.S. was in the midst of a strong recovery from the Great Depression until FDR’s neo-liberal economists convinced him in 1937 that is was essential that the U.S. adopt an austerity program to reduce the federal deficit.  Austerity forced our economy back into a Great Depression.

It was only the stimulus of federal spending in World War II that brought the U.S. out of the depression.  During World War II and for the remainder of that decade the ratio of debt-to-GDP was at or near historically record levels.  The result was the greatest industrial expansion in history, full employment (including a massive influx of women), strong economic growth, and sharply declining deficits and debt-to-GDP ratio because the growth led to large increases in revenue and the low unemployment greatly reduced spending on the unemployed.  We also defeated the Axis powers, created Social Security and the GI Bill, and began an extraordinary expansion of our housing stock to house the baby boom.

We learned many lessons from the catastrophic failure of austerity and the extraordinary success of stimulus in this era.  The U.S. adopted a fiscal system of “automatic stabilizers.”  These are counter-cyclical (they push in the opposite direction of the business cycle) fiscal effects that are designed into the system and do not require new legislation once the recession or inflation begins.  The result of these automatic stabilizers has been to reduce the severity and duration of recessions.  Indeed, studies show that the larger the national governmental role in the economy, the less volatile the economy.  This makes sense because the stabilization function should be more effective if the stabilizers are larger relative to the economy.

Unfortunately, these sensible counter-cyclical policies that make theoretical and common sense and have repeatedly worked in the real world were forgotten by many due to a campaign of deficit hysteria funded by Pete Peterson, a Republican billionaire financier who has made it his mission in life to destroy the safety net.  His ultimate goal is to privatize social security so that Wall Street can receive hundreds of billions of dollars in fees investing our retirement funds.

I’ve explained in a prior column how the fiscal cliff was created through an insane bipartisan deal in August 2011.  The fiscal cliff was always a terrible job-destroying idea that also began to unravel the safety net by cutting Medicare.  Everyone involved in creating the fiscal cliff acted irresponsibly and inhumanely in seeking to inflict austerity, cause a recession, and unravel the safety net.

What is forgotten, however, in discussions of the idiocy of creating the fiscal cliff is that it was part of a broader bipartisan deal intended to inflict even more self-destructive austerity and even greater damage to the safety net.  The fiscal cliff was an act of idiocy in pursuit of a policy of depravity called “the Grand Bargain” that was actually the Grand Betrayal.

The bipartisan madness has increased since the August 2011 budget deal.  Today, the parties are simultaneously screaming (1) that the fiscal cliff is a disaster because it imposes austerity and will cause a recession and (2) that it is essential that we agree to a Grand Betrayal that will inflict even greater austerity and cause an even more severe recession.  Indeed, the Grand Betrayal mandates austerity over a decade so it is likely to cause and/or deepen multiple recessions.  The Republican and Democratic variants of the Grand Betrayal are doubly destructive and inhumane because they cut the safety net.  President Obama wants to begin to unravel the safety net and cut social programs even though an overwhelming majority of Democrats oppose it and even though doing so will inflict even greater austerity.  That will cause a deeper recession and likely make the deficit larger, so it is as nonsensical as it is cruel.

During this this entire financial farce I have been unable to get the dominant media to make the most obvious point.  Since we all agree that austerity (the fiscal cliff) is a terrible idea that will cause a recession and likely increase the deficit we must logically conclude that all variants of the Grand Betrayal are austerity programs that must be defeated in order to prevent a recession that is likely to increase the deficit.  We should all be opposing any cuts in the safety net because they would inflict austerity.  An overwhelming majority of Democrats and a majority of Republicans also oppose cuts in the safety net as inhumane.

So why don’t the Democrats and Republicans stop trying to do a deal that will inflict austerity?  Why not simply repeal the Budget Act of August 2011?  That would kill the fiscal cliff.  Repeal would kill austerity, prevent the recession, save the safety net, increase growth, and shrink the deficit.  All versions of the Grand Betrayal (Republican and Democratic) inflict austerity, are likely to cause a recession, begin to unravel the safety net, destroy growth, and increase the deficit.

Under the same logic we should be able to agree on two related actions – renew the extension of long-term unemployment compensation and renew the moratorium on collecting the payroll tax.  These policies are superb counter-cyclical programs and have the added advantage of reducing human misery and inequality.  Republicans and Democrats have agreed in the past on the desirability of both actions.


Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.


Obama Unchanged By Election, Still A Timid Fiscal Conservative

Beil H. Buchanan, writing in Verdict, says:

Obama has already revealed himself to be unchanged by the election, and by the last two years of stonewalling by the Republicans. He still appears to believe, at best, in a milder version of orthodox Republican fiscal conservatism—an approach that would be a fitting starting position for a right-wing politician in negotiations with an actual Democrat. Moreover, he still seems to believe that the Republicans are willing to negotiate in good faith.

[…]

After months of hearing the Obama team say—quite correctly—that Social Security is not a part of any long-term deficit problems that might one day need to be addressed, their latest proposal adopted a method of measuring inflation to adjust Social Security benefits (and many other federal benefits and taxes) that would reduce benefits in the future.

This concession to Republicans’ insistence that spending on “entitlements” be cut right away was especially surprising, because there is evidence that senior citizens actually face higher price increases than are reflected in the current inflation measure, not lower price increases.

[…]

The White House’s broader spending proposals are so constrained that, as Eduardo Porter pointed out in an economic commentary in yesterday’s New York Times Business Section, it would reduce the federal government’s spending on items other than defense and those related to aging and health care to levels not seen since the Eisenhower Administration in the 1950’s. Support for sending worthy middle-class students to college, for spending on the Centers for Disease Control, for national parks, and so on, will all be cut disastrously (or even eliminated entirely).

At most, therefore, the Obama plan represents a complete capitulation to the Republicans’ long-term goals regarding government spending. Once one adds in the concessions that the White House shockingly offered this week, the newly-reelected Democratic President looks like a caretaker who is merely trying to tap the brakes as the Republicans continue to take and take from the rest of the country, in order to allow the wealthiest Americans to continue to solidify and expand their gains over the last thirty years.

Read full article: “How Many Times Will Speaker Boehner Save President Obama From Himself?


Obama is the Biggest Threat to Social Security

Brian Beutler, writing in Talking Points Memo, suggests that Obama will offer a Social Security benefit cut as part of the “fiscal cliff” negotiation. It’s utterly pointless and economically illiterate (but politically expedient) to respond to the looming threat ((The markets perceive austerity as a threat even if economically illiterate politicians of both parties don’t.)) of the automatic January 1st austerity cuts by (1) imposing even more austerity cuts, and by (2) applying them to a program that has nothing to do with the nation’s debt and deficit. ((The Social Security trust fund is quite real, and not fictional, by virtue of being a social contract. Think of this analogy: Your bank account balance is real by virtue of your “social” contract with the fractional reserve banking system, under which your deposits are insured against bank runs. In reality, your bank does not have sufficient reserves on hand to satisfy all (the aggregate of all) deposits it nominally holds. Strictly speaking, therefore, the Social Security trust fund should be safer than your bank balance. It’s only really threatened by the willingness of politicians to abrogate that social contract through new legislation. But with new legislation, of course, nothing is safe and anything is always possible.))

It’s shameful to throw seniors (like us) “under the bus” in order to make an unnecessary deal. Is Obama an economic illiterate like those he is negotiating with, or does he just not care about seniors? And does it matter which?

The truth is that Obama walks like a conservative and quacks like a conservative, so … he’s a conservative. (The chained CPI was originally a conservative proposal).

In the same way that Nixon (secure in his Republican bona fides) was in a better position to pursue a more liberal policy toward China, Obama (as a Democract) is in a better position to erode entitlement programs like Social Security and Medicare. Of course, by doing that, he is tarnishing what little sheen is left on the Democratic “brand,” no real favor to Democrats in Congress who may hope to get re-elected someday based partly on the strength of their commitment to traditional Democratic values.

This is not the change we voted for.

Beutler says:

If President Obama and House Speaker John Boehner do reach a broad deal to avert the fiscal cliff, Obama’s up front concession to Boehner will very likely be to make the Social Security cost of living adjustment formula less generous.

The quasi-technical term for the new index is called chained CPI. It’s been kicking around in policy circles for years, and loomed large in budget negotiations between Obama and Boehner in 2011.

Supporters like to describe it as a technical fix to the way the government calculates inflation. But in practical terms, it will effectuate a genuine Social Security benefit cut. If it’s applied across the board, it will also reduce food stamp benefits and veterans benefits, and function as a modest but regressive tax increase, as brackets grow more slowly and taxpayers find themselves pushed across income thresholds more quickly than in the past.

[…]

“Is this rumored deal better than no deal?” asked Paul Krugman, articulating the internal conflict liberal Democrats will grapple with if the deal takes shape. “I’m on the edge. It’s not clear that going over the cliff would yield something better; on the other hand, those benefit cuts are really bad, and you hate to see a Democratic president lending his name to something like that. There is a case for refusing to make this deal, and hoping for a popular backlash against the GOP that transforms the whole debate; but there’s also an argument that this might not work.

I wouldn’t mind making this small sacrifice “for the good of the nation.” But this is good for nothing except political expediency in the service of stupidity.

By the way, Obama does not have the authority and the power to make such cuts unilaterally administratively. It won’t be a done deal until Congress does it. We need to create a firestorm of opposition.

Read Brian Beutler’s complete article here: “The Social Security Benefit Cut Obama May Agree To


Further Resources

These comments (brief, < 2 min) from last year by Congressman Deutsch are an excellent description of the chained CPI proposal and what’s wrong with it (including that “it affects CURRENT recipients”). His remarks are glaringly out-of-date in one respect, though: he blames the proposal on Republicans. Now that Obama is embracing the idea, he really owns it.


Let’s Extend Our Grief to the Deaths of ALL Innocent Children

Professor Juan Cole made these remarks yesterday in his blog, Informed Comment: Thoughts on the Middle East, History and Religion:

Of the some 3000 persons killed by US drones, something like 600 have been innocent noncombatant bystanders, and of these 176 were children. In some instances the US drone operators have struck at a target, then waited for rescuers to come and struck again, which would be a war crime. Obviously, children may run in panic to the side of an injured parent, so they could get hit by the indiscriminate second strike.

[…]

Someone actually wrote me chiding me that the Newtown children were “not in a war zone!” Americans seem not to understand that neither is Waziristan a “war zone.” No war has been declared there, no fronts exist, no calls for evacuation of civilians from their villages have been made. They’re just living their lives, working farms and going to school. They are not Arabs, and most are not Taliban. True, some sketchy Egyptians or Libyans occasionally show up and rent out a spare room. So occasionally an American drone appears out of nowhere and blows them away.

Robert Greenwald of the Brave New Foundation explains further: (warning: graphic and not for the squeamish):

Read Juan Cole’s complete post here: “Let’s also Remember the 176 children Killed by US Drones


The Broken Social Contract Between Wages (Workers) and Profits (Business)

Peter Radford has a good post over at the Real World Economic Review.

Excerpts (bold emphasis mine):

For a long time after World War II, up through the late 1970′s at least, there was an unwritten but clear ‘social contract’ operating in the US. Originally this was driven by the benevolence felt towards those returning GI’s from WWII, but then it became generally accepted. The deal was that big business was free to innovate and make profits as long as workers shared fully in the productivity surge that innovation would create. So even as technology threatened some jobs the overall workforce benefitted from rising wages and those who became unemployed were protected by things like unemployment assistance and the other aspects of the New Deal, and could find their way back into the workforce quickly because the economy was relatively dynamic.

This dynamism was not a function of the devastation of America’s competitors – they were also our markets – but was more a function of a positive feedback loop within the economy. Rising wages fed demand, which fed profits, which created opportunities for business, new jobs and boosted demand. The economy rumbled forward on a self-sustaining path as long as neither wages nor profits crowded out the other.

This was neither a worker’s paradise nor a capitalist’s dream. It was a compromise.

But this mutually-beneficial contract broke down, in large part due to Reaganism, as Radford explains:

Just as the Republicans have waged war on big government by attempting to ‘starve the beast’, thus robbing government of the funds to address social issues. So too has business starved another beast: the middle class. By hammering wages and by squeezing employment in order to boost profit the business community has eroded the very machine upon which it thrives. It has robbed the workforce of the funds needed to propel business forward. It has dampened demand. It has starved itself.

To get back on track we need to return to that post-war social contract. We need to abandon Reaganism. We need to put business back into a box.

Read the full article here: “Robots don’t buy stuff”


Further Resources

The following graph vividly illustrates the way in which worker real wages no longer tracked productivity starting in the late 1970s. Thereafter, the economic benefit of increased productivity accrued disproportionately to the 1%.


We’re Probably Screwed

Bob (RL) Crabb made a clever comment following Dean Baker’s article on the economically illiterate “thugs” who propose to gut Social Security and Medicare:

So we got into this mess by borrowing money at historically low interest rates in the hope that a speculative yet unsustainable economy would pull us out of the hole, and now we are told that must borrow money at historically low interest rates in the hope that a speculative yet unsustainable economy will pull us out the hole. Okay.

Following Bob’s comment I offered my own scrupulously nonpartisan observation, which — and this rarely happens — I like well enough to reprint here.

RL, that’s a clever and funny way to put it.

But the humor glosses over some important facts.

For instance, what caused the “hole” in the first place (the hole you rightly say we need to be pulled out of)?

The hole was the insufficiency of the demand side of our economy starting in the mid to late 1970s, when for the first time in our history (and because of policy decisions by politicians of both parties) rising productivity no longer created a corresponding rise in worker real wages. Real wages went flat in about 1979 (when inequality also began increasing more rapidly) and have stayed flat since.

The benefits of rising productivity thereafter accrued almost exclusively to the rich, who — because of this tremendous process of wealth redistribution upward — grew richer at an accelerating rate.

Worker wages, the usual demand engine of our economy, were no longer growing. The problem then became how to fill that demand gap (the “hole”) … where to find (or how to create) demand to keep the economy afloat?

First a stock bubble sustained demand for awhile in the mid to late 1990s, followed by a (dot-com) bust in the year 2000.

Then there was the housing bubble, pumped up by the Fed’s “historically low interest rates,” as you point out. Artificially inflated home mortgage equity, while it lasted, was the favorite working class/middle class ATM supporting demand until 2008, when that bubble burst.

So what should we do now?

We could try to reflate the bubble through private borrowing at historically low interest rates and investing again in non-productive financial instruments (to keep the cycle of boom and bust sputtering along continuously). Hair of the dog that bit us.

Or, we could do it by means of public borrowing at historically low interest rates and investing in infrastructure and job growth as a way to restore the historical lockstep connection between rising productivity and rising real wages. WWII provided the impetus for this solution after the depression of the 1930s.

It’s worth noting that in the usual cycle of boom and bust … inequality (with its destruction of demand through the impoverishment of the working class) reaches its peak just before the bust phase. This was true in 1928 and true again in 2008 (and, if you look carefully, you’ll probably find that to be the case in most earlier depressions).

In other words, there appears to be a cause and effect relationship between excessive inequality and the bust phase of the perennial boom and bust cycle.

This moves the issue of inequality from a “mere” moral issue into the realm of economic practicality and economic well-being.

Recent economic literature is full of the sharpening realization that extreme inequality in a society is toxic to its economic health.

See, for instance …

Inequality and Instability: A Study of the World Economy Just Before the Great Crisis,” by James Galbraith.

The Price of Inequality: How Today’s Divided Society Endangers Our Future,” by Joseph Stiglitz.

Beyond Outrage: Expanded Edition: What has gone wrong with our economy and our democracy, and how to fix it,” by Robert Reich.

The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer,” by Dean Baker.

Inequality Matters: The Growing Economic Divide in America and Its Poisonous Consequences,” by James Lardner and David Smith.

It’s also worth repeating that the original hole was the result of deliberate policy decisions (favoring the 1% over the 99%, if you want to put it that way) made by members of both political parties.

Whether we overcome the current doldrums by more engineered boom and bust cycles or — on the contrary — by intelligent long-range investment in our nation’s productive capacities … continues to be a policy issue entirely dependent on statesmen of good will of both parties making the right decisions in the public interest.

A modicum of economic literacy — largely now absent — wouldn’t hurt either.

In other words, we’re probably screwed.

If we don’t get our energy here, where will we get it?

Reprinted from High Country News

By Sarah Gilman

A few weeks ago, a Texas oilman cornered me at a brewery in the high-mountain town of Ouray, in western Colorado. Some young women from Moab had just taken the table next to my friend and myself, when the fellow wandered over to buy us a round.

Eventually, he revealed that he worked for ConocoPhillips. This didn’t go over well with the Utah ladies, and Mr. ConocoPhillips grew defensive: Did they think the vehicle they had driven here ran on rainbows? When he found out I covered the industry as a reporter, he leaned in tipsily and asked, “Can we have a conversation? A real conversation?”

The answer was apparently no, since what ensued felt like an energy-focused version of writer Rebecca Solnit’s essay, “Men explain things to me.

But if he had gotten past his assumption that I was an airy naïf, he would have realized that I mostly agreed with him: As drilling impinges on more communities, those communities need to have “real,” critical conversations about energy development, conversations in which the locals recognize their role as consumers.

Paonia, Colo., where I live and work, recently became such a town. Last December, nearly 30,000 acres in the surrounding North Fork Valley were nominated for oil and gas leasing. Though the proposal was deferred this summer for further study, in November, the Bureau of Land Management announced its intent to auction about 20,000 of those acres Feb. 14.

Given the habitat fragmentation and pollution that energy development can bring, many here have fought the proposal. Some of the earlier leases sprawled across mountain biking areas or sat next to schools. Others encompassed springs that feed the town water system or surrounded irrigation ditches for ranches, organic farms and vineyards. As Peter Heller reported in an essay for Bloomberg BusinessWeek this July, the North Fork Valley “is home to the largest concentration of organic farms in the Rocky Mountains. … The valley produces 77 percent of the state’s apples, 71 percent of its peaches.” The BLM received nearly 3,000 comments on the proposal, mostly in opposition.

“None of (those) issues … are incompatible with oil and gas development,” Steven Hall, BLM’s Colorado communications director, told Heller. Even so, in its latest proposal, the agency removed a couple of the more controversial parcels,   including the one closest to Paonia’s water supply and another containing a popular trail network.

Most of the parcels remain, though. Worse, the sale would occur under the terms of the outdated Resource Management Plan, a 23-year-old document which governs development on hundred of thousands of acres. If the agency waited, it could re-examine the proposal under the updated version — due in draft this spring — which, in theory, would allow it to account for advances in drilling technology and changes to the area’s economy, demographics and environment. That might help the agency strike a clearer balance between energy development and other interests.

At an environmental film festival in Paonia soon after the BLM’s decision, the audience booed throughout a Google Earth tour of the parcels still up for lease. When a staffer from the conservation group who hosted the event noted that the mountain biking parcel had been withdrawn, discontent only grew. Many refused to accept any leasing whatsoever.

Opponents believe, as do their counterparts in many communities facing oil and gas development, that some places are too special to drill. It’s a valid view; I often share it. But that raises an uncomfortable question: Are there any places so unspecial that they should be drilled? Mr. ConocoPhillips knows well that few of us in Paonia or elsewhere can say we don’t rely on these fuels — for heat, for transport, for electricity, for the fertilization of food. Every place matters to somebody. And what patch of Earth isn’t habitat for at least a few wonderful somethings?

As Bobby Reedy, who runs a local auto shop in Paonia, told Heller: “I wanna flick the light switch and know the lights are gonna come on. If it’s not in my backyard, whose is it gonna be in?”

If we continue to insist on living as we do now, maybe we need to see drill rigs from our kitchen windows and hiking trails, even our school playgrounds.

How else can we truly understand the costs of something we use unless we’re confronted with them daily? This isn’t just the machinery of corporate greed; it’s the machinery of our vast collective energy appetite. And if we can’t look directly at it, and can’t accept what it does to our water and air, then it’s time to do more than just fight drilling. It’s time to go on an energy diet.


Sarah Gilman is a contributor to Writers on the Range, a service of High Country News in Paonia, Colorado, where she is the magazine’s associate editor


 

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