Robert Reich is not very optimistic about the "recovery":
The Sham Recovery, by Robert Reich:
Are we finally in a recovery? Who’s “we,” kemosabe? Big global companies, Wall
Street, and high-income Americans who hold their savings in financial
instruments are clearly doing better. As to the rest of us – small businesses
along Main Streets, and middle and lower-income Americans – forget it. ...
Look more closely and the only ones doing better are the people and
private-sector institutions at the top. Many of America’s biggest companies are
sitting on huge amounts of cash right now, but that says nothing about the
health of the U.S. economy. ... America’s biggest companies are also showing fat
profits and productivity gains because they continue to slash payrolls and cut
expenditures. ...
(None of this, by the way, is stopping supply-side fanatics from arguing
government needs to cut taxes on big corporations in order to spur the recovery.
Their argument is absurd on its face. Big companies don’t know what to do with
all their cash they have as it is. They aren’t investing it in new plant and
equipment and new jobs. So why should the government cut their taxes and enlarge
their cash hoards even more?)
The picture on Main Street is quite the opposite. Small businesses aren’t
selling much... Americans still aren’t buying much. Small businesses are also
finding it difficult to get credit. ... Small businesses ... are responsible for
almost all job growth in a typical recovery. So if small businesses are hurting,
we’re not going to see much job growth any time soon. ...
Some cheerleaders say rising stock prices make consumers feel wealthier and
therefore readier to spend. But to the extent most Americans have any assets at
all their net worth is mostly in their homes, and those homes are still worth
less than they were in 2007. The “wealth effect” is relevant mainly to the
richest 10 percent of Americans...
Add to all this the joblessness or fear of it that continues to haunt a large
portion of the American population. Add in the trauma of what most of us have
been through over the past year and a half. Consider also the extra need to save
as tens of millions of boomers see retirement on the horizon. Bottom line:
Thrifty consumers are doing the right and sensible thing by holding back from
the malls. They saved a little over 4 percent of their disposable income in
fourth quarter of 2009. In the months or years ahead they may save more.
Right and sensible for each household but a disaster for the economy as a whole.
American consumers accounted for 70 percent of the total demand for goods and
services in the American economy before the Great Recession, and a sizable chunk
of world demand.
So what happens when the stimulus is over and the Fed begins to tighten again?
Where will demand come from to get Main Street back, create jobs, raise middle
class wages? Not from big businesses. Certainly not from Wall Street. Not from
exports. Not from government.
So, where? That question is the big unknown hanging over the U.S. economy. Until
there’s an answer, an economic “recovery” for anyone other than big
corporations, Wall Street, and the wealthy is a mirage.
There's another consequence of the lagging recovery for labor markets. Here's
Paul Vigna:
Meet The New Welfare Queens, by Paul Vigna: There’s a new profligate in town, one that isn’t working, isn’t looking for a
job, but is just sucking off the government teat while productive citizens slave
away. This new welfare queen can be found in living rooms across the country,
her (or his) feet up on the coffee table, sucking down a Fuze and turning down
job offers while they waste time watching The View. They’re almost, go ahead and
say it, European.
“Continuing to pay people unemployment compensation is a disincentive for
them to seek new work,” Sen. Jon Kyl
said... That’s right, you 11 million or so unemployed Americans collecting benefits:
you’re being “disincentivized” to work by a government handout. And in the
process, you’re robbing decent productive, working Americans. It’s only a matter of time before Mark Levin or somebody starts screaming
about unemployment queens.
This is so wrong on so many levels, I’m not sure where to start with
it. The worst economic meltdown in our lifetimes has thrown more than 8 million
Americans out of work. The jobs have simply vanished. ... When employers are losing money because they
can’t hire enough people to keep up with demand for their products, and people
are on the dole for two years, then come to talk to me about lazy Americans. Not
before then.
Right now, there are precious few jobs, and for each of those precious few,
there are more than five unemployed people. Employers aren’t adding jobs because
people still aren’t sure how this whole thing’s gonna turn out. And until real,
concrete demand starts showing up, that’s going to remain the case. ...
Then, of course, unemployment benefits are only a slim percentage of
your previous wages, so I find it very hard to believe there’s anybody out there
living it up on the dole. ... At the best, you may have some two-income families that are making due on one
income and the unemployment checks for the time being. ... So let’s hold off on all the joyriding
jobless talk, shall we?
If Congress had instituted the job creation programs that were needed, and done so in a timely manner instead of dragging their feet on the false hope that recovery was just around the corner, there wouldn't be so much resentment of those receiving government help since many of them would have jobs. There would, of course, still be irritation from the deficit hawks over the deficit spending that would have been required to create the needed jobs, much more deficit spending than Congress was willing to put in place was needed, but at least their ire would have been directed at the government and Congress rather than the unemployed.
Conservatives whine about everything, and the noise they make is often quite disconnected from the importance of the problem, so the mere fact that they are making noise doesn't say much. The real problem is those who refused to give the help that was needed, people like Jon Kyl. The people sitting at home jobless as a consequence of this failure, people just trying to get by until there are jobs again, are not the ones to blame.
Don't believe the "three big myths" about health care reform:
Health Reform
Myths, by Paul Krugman, Commentary, NY Times: Health reform is back from the
dead. Many Democrats have realized that their electoral prospects will be better
if they can point to a real accomplishment. Polling on reform — which was never
as negative as portrayed — shows signs of improving. And I’ve been really
impressed by the passion and energy of this guy Barack Obama. Where was he last
year?
But reform still has to run a gantlet of misinformation and outright lies. So
let me address three big myths about the proposed reform...
The first of these myths, which has been all over the airwaves lately, is the
claim that President Obama is proposing a government takeover of one-sixth of
the economy, the share of G.D.P. currently spent on health.
Well,.... Medicare, Medicaid, and other government programs already pay for
almost half of American health care, while private insurance pays for barely
more than a third (the rest is mostly out-of-pocket expenses). And the great
bulk of that private insurance is provided via employee plans, which are both
subsidized with tax exemptions and tightly regulated.
The only part of health care in which there isn’t already a lot of federal
intervention is the market in which individuals who can’t get employment-based
coverage buy their own insurance. And that market ... is a disaster — no
coverage for people with pre-existing medical conditions, coverage dropped when
you get sick, and huge premium increases in the middle of an economic crisis.
It’s this sector, plus the plight of Americans with no insurance at all, that
reform aims to fix. What’s wrong with that?
The second myth is that the proposed reform does nothing to control costs. To
support this claim, critics point to reports by the Medicare actuary... The
actuary’s assessment of the Senate bill ... finds that it would raise total
health care spending by less than 1 percent, while extending coverage to 34
million Americans... That’s a large expansion in coverage at an essentially
trivial cost.
And it gets better ... further into the future: the Congressional Budget Office
has just concluded, in a new report, that the arithmetic of reform will look
better in its second decade than it did in its first.
Furthermore, there’s good reason to believe that all such estimates are too
pessimistic. ... Realistically, health reform is likely to do much better at
controlling costs than any of the official projections suggest.
Which brings me to the third myth: that health reform is fiscally irresponsible.
How can people say this given Congressional Budget Office predictions — which,
as I’ve already argued, are probably too pessimistic — that reform would
actually reduce the deficit? Critics argue that ... when cost control actually
starts to bite on Medicare,... Congress will back down.
But this isn’t an argument against Obamacare, it’s a declaration that we can’t
control Medicare costs no matter what. And it also flies in the face of history:
contrary to legend, past efforts to limit Medicare spending have in fact
“stuck”...
So what’s the reality of the proposed reform? Compared with the Platonic ideal
of reform, Obamacare comes up short. If the votes were there, I would much
prefer to see Medicare for all.
For a real piece of passable legislation, however, it looks very good. It
wouldn’t transform our health care system; in fact, Americans whose jobs come
with health coverage would see little effect. But it would make a huge
difference to the less fortunate among us, even as it would do more to control
costs than anything we’ve done before.
This is a reasonable, responsible plan. Don’t let anyone tell you otherwise.
Fed Vacancies and the Monetary Challenge, by Alan S. Blinder, Commentary, WSJ:
...Federal Reserve Vice Chairman Donald Kohn's recent announcement that he will
retire in June will bring the Federal Reserve Board down to four members—unless
the Obama administration gets some new members in place by then. Recent history
is not propitious. While the law states that the board has seven governors, vacancies have become
the norm in recent decades. ... Let's hope Mr. Obama breaks that pattern—soon.
Why? Because ... Chairman Ben Bernanke and his four (soon to be three)
colleagues, along with the presidents of the 12 district Reserve Banks, face two
enormously complex and consequential sets of decisions. One has to do with the
Fed's exit from its hyper-expansionary monetary policies—a process that is just
beginning. The other pertains to the post-crisis regulatory system—provided
Congress keeps the Fed in that business.
Each of these two areas is replete with hazards and numerous questions... And in each, mistakes can be quite
consequential. As the Fed grapples with its many difficult decisions..., it
would be nice if the estimable Mr. Bernanke were supported by a full, talented
team. ...
That said, the Fed is formulating exit plans... Doing so adroitly will require
both consummate technical skills and good seat-of-the-pants judgments. Yet,
remarkably, once Vice Chairman Kohn retires, the Federal Reserve Board will be
down to just one ... trained economist. That member, of course, is a
very talented guy named Bernanke. But not even Derek Jeter carries the Yankees
alone.
So it is imperative that President Obama appoint two distinguished and
knowledgeable economists to the board as soon as possible. Such talent is often
found in academia..., but that is not the only source. In selecting nominees,
the president should be mindful ... that ... the Federal Open Market Committee ...
is, on average, pretty hawkish. Mr. Obama will, I believe, want to create more
balance.
The Fed's second big task will be creating and adapting to the new financial
regulatory system. The ... Fed must be prepared for either of two challenging
contingencies. If a major financial-reform bill passes, the Fed will likely have
to reorganize itself and, in concert with other agencies, write scores of rules
and regulations to implement the new regulatory framework. The other possibility
is that no legislation passes. Since maintaining the regulatory status quo ante
is unthinkable, the Fed and other agencies would then have to think through and
promulgate dozens of regulatory changes that fall within their existing
authority...
In either case, the Fed has a major regulatory job ahead of it. Economics will
be useful here, too. But ... economists who would be most helpful on monetary
policy will probably have little expertise on financial regulation. So President
Obama would be wise to use one of his three nominations for someone deeply
experienced in banking or financial regulation. Having three vacancies ... gives
the president the luxury of being able to hire a diversified portfolio of
talented people.
One last but important point: Confirmations of Federal Reserve governors have
not traditionally been political events. ... Fed nominees are rarely highly
political people. That's a tradition that both parties should cherish and
nurture. ... Senate Republicans should refrain from turning his nominations into
a political circus. Well, a man can hope, can't he?
It looks like there may finally be some action on this issue:
Report: Yellen to Fed vice-chair, by Tracy Alloway, FT Alphaville: Janet
Yellen, president of the Federal Reserve Bank San Francisco, has been chosen by
US president Barack Obama to replace Donald Kohn as vice chairman of the central
bank, Bloomberg reports, citing two people with knowledge of nomination process.
The selection is “pending completion of vetting by the Obama administration,”
Bloomberg said.
Brad DeLong says "A very good person for the job. Not, however, a good move as far as
strengthening the FOMC is concerned..." I also think Yellen is a very good choice, and if the new president at the SF Fed is chosen wisely, the FOMC will be improved over its present composition.
Rajiv Sethi draws a connection between reflexivity theory, risk/reward asymmetry, and the question of whether naked credit default swaps should be restricted:
MR pointed out that the idea of multiple self-fulfilling default
probabilities plays a key role in George Soros' theory of reflexivity, and
linked to an
article in which Soros interpreted the Lehman bankruptcy in precisely these
terms. In fact, it is a combination of reflexivity and a particular kind of
risk/reward asymmetry that gives rise to what Soros calls
self-validating bear raids:...[long Soros quote]...
Soros' point about risk/reward asymmetry directly answers one
objection to curtailing purchases of naked credit default swaps, namely that
such contracts "provide identical leverage both to the optimistic and the
pessimistic side of the transaction." Leverage may be considerable on both sides
of the contract but this does not mean that market clearing prices reflect
optimistic and pessimistic beliefs in equal measure, because the spreads at
which sellers are willing to enter the contract must offer them adequate
compensation for the significant downside risk that they face.
MR does not consider reflexivity to be a routine problem in credit markets,
arguing that "only when the entity is in a state of low resilience that markets
are sufficiently reflexive to push it over the edge." This is also David
Merkel's view of
the matter:
... if a company or government has a strong balance sheet, and has a lot of cash
or borrowing power, there is nothing that speculators can do to harm you. You
have the upper hand. But, if you have a weak balance sheet, I am sorry, you are
subject to the whims of the market, including those that like to prey on weak
entities. Even without derivatives, that is a tough place to be.
But what causes a balance sheet to become weak? In the case of sovereign
states, it could be widespread tax avoidance and excessive spending relative to
revenues, as has been alleged in the case of Greece. But it could also be a
significant decline in economic activity that reduces the tax base and triggers
automatic stabilizers. This is how Paul Krugman
interprets the experience of Spain, which had a budget surplus three years
ago, but "is running huge deficits now [as] a consequence, not a cause, of the
crisis: revenue has plunged, and the government has spent some money trying to
alleviate unemployment."
Any attempt to raise taxes or cut spending in this environment could make it
even harder for the country to meet its near term debt obligations. ... As a
result, raising tax rates or trimming expenditures (such as unemployment
benefits) in the face of severe deficiencies in aggregate demand can worsen
rather than improve its balance sheet position.
Under such circumstances, it is terribly important to determine whether the
looming threat of default is simply one of several possible equilibrium paths.
As Felix
acknowledged in his response to my post, it is true in principle that "a
company or country can find it easy to repay debt when spreads are low, thereby
justifying the low spreads, while finding it hard to repay debt when spreads are
high, justifying the high spreads." Default under these conditions would be
terribly wasteful, and I can see no reason why attempts to avoid it should not
be pursued vigorously.
Why are they calling this a jobs bill? There are hardly any job creation
measures in it:
Jobless claims bill OK'd by Senate, by Tami Luhby, CNNMoney.com: The Senate
on Wednesday approved ... by a 62-36 vote ... the latest job creation effort to
go before lawmakers, though it contains virtually no new initiatives to boost
employment. Its price tag has wavered between $140 billion and $150 billion,
which is partially offset. Its next stop is the House, where a quick passage is
anything but assured. ...
Lawmakers have come under pressure from both the White House and unemployed
Americans to do more to spur hiring. But after many speeches, officials have
enacted little to help the nearly 15 million looking for work. ...
The bill passed Wednesday would push back the deadline to file for extended
jobless benefits and the federal subsidy for COBRA health insurance until Dec.
31. ...
The measure would also extend dozens of tax provisions -- including allowing
teachers to deduct education expenses and providing businesses a research and
development credit -- that expired at the end of last year. ...
It would also temporarily halt a 21% reduction in Medicare physician
reimbursement rates. And it would send another $25 billion to the states to help
them fund their Medicaid programs for another six months.
The bill also extends two Recovery Act provisions for small businesses. It
provides $354 million to continue funding the increased Small Business
Administration guarantee and fee waiver through year's end.
Next up is a $15 billion bill that would:
--Exempt employers from Social Security payroll taxes on new hires who were
unemployed.
--Fund highway and transit programs through 2010.
--Extend a tax break for business that spend money on capital investments, such
as equipment purchases.
--Expand the use of the Build America Bonds program, which helps states and
municipalities fund capital construction projects. ...
Even if every measure that has been proposed passes, it won't have much of an
impact on jobs. Congress ought to be embarrassed by this effort, it's not even
close to what is needed, but come election time, I have no doubt that they'll
brag about how they stepped up to the plate in a time of need. What they won't
tell you is that they struck out -- looking -- and lost the game.
What "Government Takeover"?, by
Daniel Gross: There have been lots of absurdities in the debate—such as it
is—about health care reform. There's the hypocrisy of people dependent on
government-run health care complaining about government-run health care. And now
comes the Republican canard that the current health care reform proposal
constitutes a government takeover of one-sixth of the economy. Here are Rep.
Steve Buyer of Indiana, Rep. John Fleming of Louisiana, and Sen. Jim DeMint of
South Carolina making precisely that argument.
First, the proposed health care reform does not take over the system in any
sense. Much to the chagrin of progressives, the bills under consideration don't
contain a public option and don't provide for a single payer. In fact, they
provide subsidies for millions of people to purchase private insurance.
Second... We're already halfway toward socialized medicine, but not because of
Obamacare. ... Over the last couple of decades, as the private sector has done a
miserable job controlling costs, as employers have felt less and less compelled
to offer health care benefits as a condition of employment, as the population
has aged, and as the government created new health care entitlements, the
government has been slowly assuming a higher portion of health care spending in
the United States—or "taking it over."
Check out Table 123 in the CDC's big annual report. In ... the 1990s, a period
in which Republicans controlled the House for six years, the share of health
spending controlled by the government rose by 10 percent. The trend continued in
the period from 2000 to 2008, when Republicans controlled the White House and
largely controlled Congress. ... In pretty much every year of the Bush
administration, the government "took over" a greater chunk of the health care
sector. And many of the Republicans who are complaining about reform proposals
today didn't utter a peep. In fact, they helped the process along by voting for
the Medicare prescription drug benefit in 2003. ...
CMS ... notes that thanks to these trends, public spending will soon outpace
private spending... "As a result of more rapid growth in public spending, the
public share of total health care spending is expected to rise from 47 percent
in 2008, exceed 50 percent by 2012, and then reach nearly 52 percent by 2019."
So, to reiterate, we're already half way toward fully socialized medicine. The
government has already taken over one-twelfth of the economy—and more every day.
That's the status quo the opponents of reform are defending.
As noted above, "the proposed health care reform does not take over the
system in any sense." But why would government run health care along the lines
of successful models in other countries be a bad thing? Don't we want lower
costs and better health outcomes?
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And shouldn't health care be available to everyone?:
Health Reform: If Not Now, When?, by Maxine Udall: Two recent encounters
have gotten me thinking about health reform. The first was with my hair
stylist—hardworking, talented, bright—who had a bad respiratory infection. She
had just finished a 7-day course of antibiotics, but still had symptoms of a
secondary bacterial sinus infection. Because she has no health insurance, she
was thrilled that the antibiotics had only set her back $70. She was dismayed
that she was still sick after a 7-day course of antibiotics. She was terrified
that it might still land her in hospital. Another stylist at the same salon with
the same symptoms had ended up in hospital with pneumonia. The other stylist
also did not have health insurance.
The second encounter occurred a few days later when I gave a seminar at a
university in another city. During the cab ride to the train station after the
seminar, my 38 year old cab driver revealed that he had recently obtained health
insurance for the first time in his life. He was thrilled, but also concerned
that his new insurance was not comprehensive and most likely would not cover a
serious illness or injury. ...
Many if not most hair stylists and cab drivers are essentially self-employed
independent contractors who “rent” the place where they stand in a salon or the
cab that they drive. They receive no health insurance benefits, no sick days, no
retirement benefits. If they don’t work, they lose income. If they get really
sick or injured, they lose everything.
...The inequalities in income distribution that have become greater in the US
over the last 30 years are nothing compared to the growing inequalities that
will result from an increasingly larger pool of Americans who lack adequate
health insurance coverage. Each unforeseen, primary care-preventable illness, every
serious injury will cause them and their families to fall further behind
economically and in the quality of their lives. ...The Gini coefficient captures our growing income inequality. How do we capture
the inequality induced by 30 million people and growing who have no health
insurance?
More importantly, why, in a nation whose national narrative extols the virtues
of entrepreneurship and individual effort, are young entreprenurs who choose
jobs like hair styling or cab driving penalized for that choice? I personally
know two hair stylists who started as independent contractors and worked their
way to salon owner and employers of 10 to 20 stylists, manicurists, and
estheticians. A major uninsured illness could have stopped them and the
contributions they made to our economy dead. Literally. ...
Those who do not work for large companies, including small business
owners, independent contractors, and the individuals they employ, are often
unable to obtain health insurance either as employer-sponsored groups or as
individuals in private markets. Yet these entrepreneurs are an important source
of job creation and economic growth. Moreover, they represent the kinds of
businesses we as a society should want to foster: embedded in their communities
and therefore responsive to community demand and community welfare; small enough
to fail and big enough to foster growth, employment, and innovation from the
bottom up.
We in the US have been marginalizing the people who are the heart and soul of
commercial enterprise, the small businesses and workers around which most of our
communities used to be built. We are in effect segregating them based on
employment status and health insurance cover. These are people who embody the
values we say lie at the heart of our nation and our economic system:
entrepreneurial, hard working, self-starters. By continuing to exclude them and
their employees from affordable and adequate health insurance, we are in real
danger of relegating them instead to a permanent underclass, a “servant” class
that styles our hair, drives our cabs, cooks our food, cares for our children,
and manicures our lawns. Until they get sick or have a car accident.
The divide is unsustainable. We cannot maintain economic growth and greatness
with a growing proportion of US citizens excluded from one of the most basic
requirements for the successful pursuit of life, liberty, and happiness. ...
Comprehensive, affordable health insurance must be made available to everyone.
Every other developed country has done it. It does not get cheaper or easier to
fix as time passes. We must do it now, in a form as close to optimal as can be
achieved politically, and worry about the details later. It’s the right thing to
do both economically and morally.
Just one note -- even those who work for large companies shouldn't rule out the possibility that their health care will end just when they need it the most.
The state side of the story is told most clearly in another report this week,
this one from the private Center on Budget and Policy Priorities. ... The Great
Recession knocked state tax revenue down by $87 billion in the fiscal year that
ended last September -- an 11 percent decline that was the steepest on record.
In response, the first thing the states did was cut spending... -- even as
Medicaid rolls swelled and other recession-related expenses climbed.
But the governors and legislators did not stop there. Two-thirds of the states,
33 of 50, also raised taxes last year, adding more than $30 billion in revenue.
...
While the federal government was handing out tax rebates and is preparing to
extend many of the Bush-era tax cuts, 13 states were raising personal income
taxes; 17 were passing sales tax and various business tax increases; and 22 were
increasing excise taxes on tobacco, alcohol or gasoline. ...
Once again this year, Congress has passed a "pay-as-you-go" bill, requiring
lawmakers to make compensatory cuts whenever they increase appropriations...
Then Congress turned right around and began waiving the requirement when
circumstances pinched.
Discipline is visible in the states. It is still a stranger to Washington.
It's a debate also characterized by a politically convenient amnesia. Just a
decade ago, we were running surpluses so big that Alan Greenspan, then chairman
of the Federal Reserve, worried about what would happen once our national debt
was liquidated. We had this problem well in hand until we started waging wars
and cutting taxes at the same time.
What would a rational approach to the budget look like? It would begin by
accepting that running deficits at a time of high unemployment is a good thing.
We would celebrate the fact that the world's governments were far wiser in this
downturn than their counterparts were during the Great Depression.
It is a hugely underrated achievement of international cooperation that the
world's 20 leading economic powers pumped trillions of dollars into the global
economy to prevent collapse. Catastrophe was averted, and growth, although
sluggish, has resumed.
True, unemployment in our country is still too high. But the lesson here is not
that President Obama's economic stimulus failed but that it was too small to do
all that was needed. Those who would repeal stimulus spending -- the bright idea
of the House Republican Study Committee -- would take us backward.
Yet no one should doubt that we must put our long-term fiscal house in order.
...
There's smart debt and there's stupid debt. We need to recognize the difference.
Rawls on Marx; December 1973, by Daniel Little: John Rawls taught a course on the
history of political philosophy throughout much of his career at Harvard
University. The course contained his description and analysis of the most
important figures in modern political philosophy, including Mill, Locke,
Rousseau, Kant, and Marx. The course evolved over time; the final version from
1994 is edited in Samuel Freeman's Lectures
on the History of Political Philosophy. I served as graduate assistant in
Rawls's lectures on this subject in fall 1973, and recently reread my notes of
the course. Here are my notes of a particularly important lecture towards the
end of the course: Rawls's treatment of Marx's ideas about economic justice.
This lecture demonstrates Rawls's understanding of the fundamentals of Marx's
economic theories and the labor theory of value. (I am inclined to think that
Joseph Schumpeter's History
of Economic Analysis (1954) was an important source for Rawls
on the history of economic thought, including Marx's economics, though I can't
at this moment confirm this.) This lecture is particularly significant in that
it is roughly simultaneous with the emergence of "analytical Marxism" announced
by the publication of an important article by Allen Wood, "The Marxian Critique
of Justice" in Philosophy and Public Affairs in 1972 (link).
MARX'S ATTITUDE TOWARDS THE THEORY OF JUSTICE
John Rawls, History of Political Philosophy, Phil 171, fall 1973 Notes from lecture, December 11, 1973
[notes taken by Daniel Little; intended to capture Rawls's formulations of the
main points presented in the lecture]
[Quoting Rawls:]
Capital seems to be a description of an unjust society. The owners of the
means of production live in relative abundance and idleness at the expense of
the ever-growing class of wretched laborers. But Marx doesn't make any attempt
to present an argument that capitalism is unjust, nor any concept of justice
which would back up such an argument. Moreover, we have vitriolic criticisms of
utopian socialists who did condemn capitalism on the grounds of justice. Marx
asserts on the contrary, that capitalism is perfectly fair, perfectly just. Why
so?
(a) It is not enough to say Marx is averse to preaching or moralizing. He is so
averse; but judgments of justice can be reasoned and hence not properly
described as "preaching".
(b) It is not enough to say that he didn't want the critique of capitalism to
rest on some social ideal. He does reject the utopian socialists' program; but
that would not prevent him from stating his own opinion. And he doesn't do that
either. He reproaches the utopians for not realizing that some major social
change must precede an adjustment along moral lines.
Here is my conjecture as to why Marx didn't judge capitalism unjust. He thinks
of justice as a political and juridical conception which is associated with a
particular conception of the state and society; so it belongs to the prehistory
of mankind. Given his picture of human society, these political and juridical
institutions belong to the superstructure, and reflect the workings of the mode
of production. For each mode of production there is a conception of justice
appropriate to it, at least in prehistory. A further qualification: It is
worthwhile to distinguish between the high time of a form and its low period --
where the form is a progressive force and where it stands in contradiction to
the mode of production.
Here is a brief discussion of justice in Capital III:
To speak here of natural justice, as Gilbart does, is nonsense. The justice of
the transactions between agents of production rests on the fact that these arise
as natural consequences out of the production relationships. The juristic forms
in which these economic transactions appear as wilful acts of the parties
concerned, as expressions of their common will and as contracts that may be
enforced by law against some individual party, cannot, being mere forms,
determine this content. They merely express it. This content is just whenever it
corresponds, is appropriate to the mode of production. It is unjust whenever it
contradics that mode. Slavery on the basis of capitalist production is unjust;
likewise fraud in the quality of commodities. (Capital III, 339-40)
Here Marx conceives of justice in terms of adequacy to the mode of production.
(1) The justice
of legal forms cannot be discovered on the basis of those forms alone. Rather it
depends upon their adequacy to the mode of production. The juridical institution
is formal; to give it content we must look to the way of life and its
requirements. A consequence: There is no universal theory of justice which
allows us to evaluate generally the social institutions of any society. There is
no general principle like "slavery is always unjust." There are thus no general
rules of natural rights, no universal justice. (2) This adjustment of justice to
the mode of production doesn't mean there are no injustices. Slavery is unjust
under capitalism; wage labor is just under capitalism, provided that the worker
is paid the value of his labor power.
This view seems to suggest a sort of relativism; but this would be a faulty
conclusion. We have a theory matching theories of justice with modes of
production, and we might at some time find a function systematically linking
them.
Let's now try out this suggestion on the conception of surplus value. The
utopians argued that workers ought to be paid the value of their contribution to
the firm. Since they are not, capitalism is unjust. Marx rejects this view. It
makes the appropriation of surplus value appear accidental -- as if the
capitalists could act differently. Marx required a theory of value which made
the appropriation of surplus value a necessary part of the capitalist system. On
the theory of value every commodity is exchanged for a strict equivalent.
Marx distinguishes between the product of labor and labor power. The worker is
given the value of his labor power, not his product. It is on this ground that
he is fairly treated. Thus he is undercutting the Ricardian socialist position
by rejecting and replacing the principle of contribution. It is the system
itself which brings about surplus value, not the behavior of individuals who
violate moral principles. Surplus value is an intrinsic part of the working of
the social institutions of capitalism.
Consider the description of the production of surplus value in Capital.
Every condition of the problem is satisfied, while the laws that regulate the
exchange of commodities, have been in no way violated. Equivalent has been
exchanged for equivalent. For the capitalist as buyer paid for each commodity,
for the cotton, the spindle and the labour-power, its full value. He then did
what is done by every purchaser of commodities; he consumed their use-value. ...
This metamorphosis, this conversion of money into capital, takes place both
within the sphere of circulation and also outside it; within the circulation
because it is conditioned by the purchase of the labour-power in the market;
outside the circulation, because what is done within it is only a stepping-stone
to the production of surplus value. (Capital I, p. 194)
The fact that
surplus value arises is a piece of good fortune for the buyer, but no injustice
to the seller.
Marx thus rejects the Ricardian principle of contribution. He finds it a
bourgeois notion, basing property rights on one's labor.
Summing up. (1) Marx views the notion of justice as a virtue of legal forms and
institutions, and thus perhaps it is a notion which belongs to prehistory. The
state depends upon the mode of production. (2) Marx doesn't deny that the
various conceptions of justice have formal features in common -- exchange of
equivalents for equivalents -- but the notion of what is equivalent is
determined in different ways. Marx would be prepared to admit that capitalism in
its high period is just. One reason he rejects the utopian's argument is that it
is misleading. It rests on a misapprehension of where the essential problem
lies: not in the superstructure, but in the mode of production. He felt that the
key enterprise is to give a scientific theory of the mode of production.
A second point: justice is a distributive notion. The appeal to justice suggests
that we can separate the mode of distribution from the mode of production. This
is for Marx incorrect. Appeals to justice are thus supposed to be superficial.
Moreover, appeal to justice suggests that important social change can be
achieved by legislation.
[Other relevant materials from the course:]
From the syllabus:
(a) Marx's criticism of the liberal state; (b) His attitude towards theories of
justice; (c) The theory of alienation and exploitation; (d) The conception of
rational human society
Final exam questions on Marx:
4. Present and discuss Marx's theory of alienation (as developed in the
Economic and Philosophic Manuscripts)
5. Present and discuss Marx's theory of historical materialism (as developed in
the German Ideology)
6. Present and discuss Marx's analysis of historical change in the Communist
Manifesto.
7. Outline Marx's analysis of the basic characteristics of capitalism: the
social relations which define it and the nature of the form of economic
production.
Consider the following. The Millennium Development Goals were debated in many
conferences, but nobody spoke about the macroeconomic policy framework needed to
achieve them. As if reducing hunger and extreme poverty, generating employment
and providing health services and education had nothing to do with fiscal
policy, monetary policy and financial deregulation. Aside from some pious words
about financing and overseas development assistance, the implicit message was to
carry on with the same macroeconomic policies. That could only have been based
on faith in the trickle-down potential of neo-liberal globalization.
At UNFCCC-COP events, everyone recognized there are serious issues in terms
of financial resources for mitigation and adaptation. Vulnerability and poverty
go hand in hand, it is said. But, again, nobody wanted to discuss the
relationship between neo-liberal macroeconomic policies and poverty, as if they
had no connection. Even the Stern report kept safely away from the thorny issues
of macroeconomic policies in developing countries. ...
The 2008 crisis led the UN Environment Program
(UNEP) to launch its Green Economy Initiative and the
Global Green New Deal (GGND). Their objective is to revive the global
economy, “boost employment and accelerate the fight against climate change,
environmental degradation and poverty.” According to the GGND, the triple crises
demand the same kind of initiative as shown by Roosevelt’s New Deal of the
1930s, but “at the global scale and embracing a wider vision.” The punch line is
that “re-booting the world economic system” is simply not enough to get us on
the road to sustainability.
One would think that macroeconomic policy would be a relevant issue in this
context, especially after the reference to FDR’s “New Deal.” Well, the authors
appear to think differently: the Global Green New Deal is unconcerned with
macroeconomic policies.
What? Monetary and fiscal policies, financial regulation, exchange and
interest rates, capital flows, and incomes’ policies, they have nothing to do
with environmental and social sustainability?
Let’s assume we keep a monetary policy obsessed with price stabilization, a
fiscal policy focused on generating a primary surplus for “responsible debt
management”, an open capital account and financial deregulation. On top of this,
let’s say we also maintain downward trends for real wages. Clearly, more
efficient automobiles and intelligent buildings will not, by themselves, give us
at the end of the day a “green global economy.”
Why is macroeconomic policy ignored in so many important conferences? Is it
because macroeconomics focuses on the short term and is unconcerned with long
term developmental and sustainability issues? This is a real problem, but I
think there might be a deeper reason.
Perhaps another explanation is the state in which macroeconomic theory finds
itself today. For one thing, many people find it difficult to get around in this
messy land where everything is, as Blanchard and Fischer once remarked, in a
state of flux. What with getting to know who are the New Keynesians and how they
differ from the Keynesians, the Neo-Keynesians and the Post-Keynesians, it can
get a bit confusing. ...
Maybe there is an additional explanation for why the elephant in the room is
met with silence. Discussing macroeconomic policies raises awareness about the
inner workings of the neo-liberal model and its political economy. Suddenly, the
relation between cuts in social expenditures and a primary surplus becomes
crystal clear. The rapport between controlling inflation and holding back
aggregate demand (all too frequently through repressing real wages) turns out to
be self-evident. Pretty soon people are talking about how macroeconomic policy
is subordinated to the priorities of financial capital. This morphs the
discussion into a political debate, something the establishment dislikes.
Progressive movements need to seize the initiative in defining new avenues
for macroeconomic policy. They have done this in debates on agricultural
policies, as well as with social and environmental policies. But we still have a
long way to go to replace that elephant with a friendly creature.
So I learned that TSA now requires all bags on trains to have an identification
tag. Otherwise, security will confiscate them if left unattended.
This makes perfect sense. Terrorists could never figure out that if they
wanted to leave a “suitcase bomb” on a train, they should include a tag so that
security will ignore it.
Last summer I was traveling and had to drive over Hoover damn. But
before you can drive over it, you have to clear a checkpoint where a couple of guys get up out of their lawn chairs and shine a flashlight in your car
and ask you a few questions (this happened to be late at night):
Crossing Hoover
Dam: A Guide for Motorists: Since Sept. 11, 2001, vehicle traffic across
Hoover Dam has been restricted. Motorists must now pass through inspection
checkpoints...
The checkpoints are staffed by Bureau of Reclamation Police Officers and
contractor security personnel, who are authorized to inspect any vehicle at any
time, before it is allowed to pass through the checkpoint and cross the dam.
The vehicle passenger area, trunk/cargo area, engine compartment, undercarriage,
and the cargo holds of buses may be searched, as well as any closed or locked
containers. If contraband and/or prohibited items are found, additional police
officers will be summoned. Motorists who refuse a search will not be allowed
through the checkpoint or across the dam.
The determination about the types of vehicles to allow across the dam was based
on specific criteria, including an assessment of the threat posed by specific
vehicles, as well as the ease and the thoroughness with which certain types of
vehicles can be inspected
It doesn't do much as far as preventing attacks, at least not so far as I
could tell, since defeating a flashlight search is trivial. So why do it? It
seems like a lot of these checkpoints, searches, etc. do little to actually
prevent things from happening, and instead are intended to give people the sense
that the government is looking out for them. Personally, it doesn't make me
feel and safer, but it does irritate me greatly. I hate having authority figures
decide whether I pass whatever test they are applying -- I have no doubt they
could make my life hard if they chose to do so even though "I have nothing to
hide." I felt like my liberty was quite compromised by this search. And
for what? Very little as far as I could tell.
(I hate to agricultural checkpoint driving into
California for the same reason. I go through it quite a bit and one time I
didn't answer the question the way the inspector wanted. He said the usual "do
you have any fruits or vegetables," and I said no, not unless you count the
package of ketchup I have left over from lunch (I was thinking of Reagan wanting
to count ketchup
as a vegetable when assessing school lunches, but I doubt the inspector
picked up on that). That prompted him to threaten me. I did
say it with a bit of a smart-ass tone, I'll admit that, but it wasn't much and I
couldn't believe that it lead to his threatening me with what he could do. Apparently
you have to answer correctly -- use the words they are looking for -- and
respectfully. He got the answer to his question, no I didn't have any fruit or
vegetables, and he should have simply waved me through. Why do we have internal
check points for travel in the U.S.?)
Should the Fed have done more to combat the unemployment problem? In examining the costs and benefits of further easing, I have made
almost all of the arguments against further easing by the Fed made below, i.e.
that further easing by the Fed may not have much additional effect on long-term
real interest rates, that even if rates could be brought down, consumers and
businesses would be unlikely to respond by increasing investment and the
consumption of durables -- firms already have considerable idle capacity, so why
build more, and consumers are pessimistic about their futures, so why buy on
credit -- and that there is an inflation risk from further easing.
One additional argument against more aggressive action by the
Fed is that there is considerable uncertainty
about the effects of further easing because they do not yet have "a robust suite
of formal models to reliably calibrate interventions of this sort." But as with
climate change, uncertainty does not necessarily translate into inaction. If the
uncertainty includes much worse outcomes for employment than expected, and if
the costs we attach to that outcome are very large, then uncertainty may prompt
more aggressive rather than less aggressive intervention.
Yet another argument concerns the degree to which current productivity
changes are permanent of temporary and how that translates into the degree of
slack in labor markets. However, on this point I agree that "the sheer magnitude
of unemployment today is so large that there is little doubt in my mind that
there is considerable slack in the economy." Thus, however this debate comes
out, it does not much change the degree and urgency of the unemployment problem.
In the end it comes down to the relative weights placed on the cost of
inflation and the cost of unemployment, and I don't think policymakers are
placing enough weight on the unemployment term (particularly given the
uncertainty about the speed of recovery).
I have been somewhat hesitant to push this point strongly because I think the
bigger blame ought to go to fiscal policy authorities, i.e. Congress. Blaming the Fed for the unemployment problem gives Congress a scapegoat that
allows them to avoid their own failings. But something needs to be done, and
both monetary and fiscal policymakers could do more.
This is the last part of a speech given today from Charlie Evans, President of
the Chicago Fed, along with a graph from the speech showing the severity of the
long-term unemployment problem:
Labor Markets and Monetary Policy, by Charles Evans, President, Chicago Fed:
...Productivity and resource slack The other side of an economy
experiencing growing output but low labor utilization is high productivity
growth. Indeed, productivity has been quite strong of late, particularly over
the past three quarters. This is often the case in the early stages of a
recovery, as firms first meet higher demand for their products and services
without expanding their work force.
A key question today is the degree to which the recent productivity surge
reflects a temporary cyclical development or a more enduring increase in the
level or trend rate of productivity. If the gains are predominantly driven by
intense cost cutting, then they may be unsustainable once demand revives more
persistently. In this case, we would expect hiring to pick up quickly as the
economic expansion takes hold. However, if the level or trend in productivity
has risen due to technological or other improvements, then higher average
productivity gains will continue. In this case, the implications for
hiring are not clear. Higher levels of productivity will show through in both
higher potential and actual output for the economy, and so need not necessarily
come at the cost of lower labor input.
The relative importance of these factors also has consequences for our
assessment of the degree to which resource slack exists in the economy. Since a
higher level or trend of productivity implies a higher path for potential
output, a given level of actual GDP would also be associated with a greater
degree of economic slack. That is, the good news on productivity, if sustained,
suggests that as of today we have a larger output gap to fill In contrast, some
are skeptical that the economy really is operating far below sustainable levels.
They argue that much of the drop in output during the recession was the result
of a permanent reduction in the economy’s productive capacity, perhaps because
certain financial market practices that had for a time enabled additional
investments have now been discredited. According to this view, the strong
productivity growth of recent quarters only goes a fraction of the way toward
offsetting this decline in the level of potential output.
Of course, the unemployment rate gives us another way to infer the degree of
slack in the economy. My earlier discussion of the sharp rise in unemployment
duration and decline in labor force attachment may lead one to think that slack
is even greater than what is implied by the unemployment rate itself.
However, it is possible that longer durations and lower labor force attachment
could reflect broader structural changes in the economy, such as a mismatch
between the skills of the unemployed and those demanded by employers. There may
also be other impediments that currently prevent workers from shifting to the
industries or locations where jobs are available. Under these scenarios, labor
market slack might actually be lower than what one might infer from the
unemployment rate alone.
I have just given you 2 minutes of classic two-handed economist speak. In the
final analysis, however, the sheer magnitude of unemployment today is so large
that there is little doubt in my mind that there is considerable slack in the
economy. Incorporating alternative views about productivity and labor market
behavior do not alter this general conclusion. The debate really boils down to
whether the amount of slack in the economy is large or is extremely large.
Should the Fed have done more?
Given this large degree of slack, there is a legitimate question of whether
monetary policy could, and more fundamentally should, have done more to combat
the deterioration in labor markets. As we all know, a lot was done. As the
crisis arose, we first used our traditional tools, substantially cutting the
federal funds rate and lending to banks through our discount window. As we
neared a zero funds rate, we turned to nontraditional tools to clear up the
choke points, providing liquidity directly to nonbank financial institutions and
supporting a number of short-term credit markets. Finally, we reduced long-term
interest rates further by purchasing additional medium- and long-term Treasury
bonds, mortgage-backed securities, and the debt of government-sponsored
enterprises.
These nontraditional actions helped us avoid what easily could have been an even
more severe economic contraction. But the unemployment rate still hit 10 percent
this fall.
Had we done more, the most plausible action would have been to expand our Large
Scale Asset Purchases (LSAP) program. Precisely quantifying the effect this
would have had is difficult. A good place to start, though, is to look at the
recent empirical evidence.[3] When significant new asset purchases were
announced, our big, fluid financial markets built that information immediately
into asset prices. For example, right after the March 2009 Treasury purchase
announcement, ten-year Treasury yields fell about 50 basis points. Comparable
declines occurred in Option Adjusted Spreads (OAS) on the announcement of agency
mortgage-backed securities (MBS) purchases in November 2008. It might be
reasonable to infer that say, doubling the size of the LSAPs might have doubled
this impact on rates.
However, I would attach more than the usual amount of uncertainty to such an
inference. Part of my hesitation reflects our lack of understanding about the
interactions between nontraditional monetary policy, interest rates, and
economic activity. While research efforts at the Federal Reserve and elsewhere
to assess the effects of nonstandard monetary policy have been ramped up
considerably, to date we do not have a robust suite of formal models to reliably
calibrate interventions of this sort.
Moreover, there are reasons to expect that the impact of recent nontraditional
policy actions might not have scaled up so simply. We initially responded to the
financial crisis with our highest-value tool—a reduction in the funds rate—and
then moved to our best alternative policies as interest rates approached zero.
Finally, we turned to the LSAPs, which were designed to further lower long-term
interest rates and thus stimulate demand for interest-sensitive spending, such
as business fixed investment, housing, and durables goods expenditures. But the
influence of lower rates on private sector decision-making may have reached the
point of second-order importance relative to the countervailing forces of the
housing overhang, business and household caution, and considerably tighter
lending standards.
Moreover, although it is impossible to quantify, a portion of the impact of our
nontraditional actions may have come simply from boosting confidence. In those
very dark times, I believe households, businesses, and financial markets were
reassured that policymakers were acting in a decisive manner. Further asset
purchases would not have had an additional effect of this kind.
In addition, on a practical level, the portfolio of future purchases likely
would have looked different and therefore their overall effectiveness might have
deviated from our recent experience. The Fed’s typical monthly purchases of new
issuance MBS were so large that it left very little floating supply for private
investors. This could have forced a larger LSAP program to concentrate more
heavily in Treasuries or existing MBS. Though the empirical evidence is limited,
these assets likely are less close substitutes than new MBS for many of the
instruments used to finance spending on new capital goods, housing, and consumer
durables. Consequently, the effect of their purchase on economic activity may be
less.
Finally, we must also keep in mind that more monetary stimulus also has costs.
These could be considerable at higher LSAP levels. Many are already worried
about the inflation implications of the Fed’s expanded balance sheet and the
associated large increase in the monetary base. Currently, most of the increase
in the monetary base is sitting idly in bank reserves—and because banks are not
lending those reserves, they are not generating spending pressure. But leaving
the current highly accommodative monetary policy in place for too long would
eventually fuel inflationary pressures. Likewise, if the monetary base was
expanded much beyond where we are today, the risk that such pressures would
build as the economy recovers would be significantly increased. Furthermore,
policymakers already face the task of unwinding a sizable balance sheet at the
appropriate time and pace. Substantially increasing the size of asset purchases
could have further complicated the exit process down the road.
That said, changes in economic conditions could alter the cost–benefit calculus
with regard to the LSAP. Hopefully the recovery will progress without any
serious bumps in the road and the inflation outlook will remain benign. But, as
we have repeatedly indicated in the FOMC statements, the Committee will continue
to evaluate its purchases of securities in light of the evolving economic
outlook and conditions in financial markets. ...
US GDP growth would have been only 2.0% without the contribution of the
inventory terms (which was itself a deceleration in the rate at which stocks
were being drawn down.) In Canada, the 2009Q4 GDP number would have been 5.8%.
And look at the contribution of government spending. In the US, the
contribution was negative: the increase in federal spending was more than
compensated by cutbacks at the state level.
It's easy to see why the Canadian numbers were greeted with more enthusiasm
than were those in the US, even though the headline number was smaller. Growth
was evenly distributed across all types of expenditures, and we can expect
inventories to bounce back as well fairly soon.
The negative net contribution of government to output growth is disappointing. That's not how it's supposed to work in a recession.
This uncertainty has fueled a prolonged debate between two old friends, renowned
economists Robert Shiller and Jeremy Siegel. ... Mr. Shiller, a Yale University
professor whose book "Irrational Exuberance" warned of the tech bubble just
before it burst in 2000, still worries about the market's future. Prof. Siegel
of the University of Pennsylvania's Wharton School, whose book "Stocks for the
Long Run" was the bible for many investors in the 1990s, is bullish.
Each of them can marshall a slew of data to bolster his viewpoint. Their
reputations as forecasters may be affected by which of them winds up being
correct. ...
One concern of pessimistic analysts such as Mr. Shiller is that despite the two
bear markets, stocks have spent almost all their time since 1991 priced above
historic averages. History suggests that when stock prices are high, performance
in ensuing years is disappointing. ...
Mr. Shiller worries that the housing market could be turning down after a brief
recovery, which could contribute to a decline in U.S. stocks, which already look
expensive to him. ... Mr. Siegel scoffs at his friend's concerns—and at his
numbers. "This is an extremely cheap market," he says, and its future is bright.
...
Here's the full set of videos from the conference:
Introduction: Make Markets Be Markets
Roosevelt Institute President & CEO Andrew Rich kicks off the Make Markets
Be Markets conference at the Time Warner Center on March 3, 2010.
Joseph Stiglitz: Make Markets Be Markets
Nobel Laureate and Chief Economist at the Roosevelt Institute,
Joseph Stiglitz sets the frame for why we need to make markets be markets.
Simon Johnson on the Doom Cycle
Simon Johnson on the Doom Cycle that produces (and
predicts) increasingly greater financial crises.
Roundtable w/ Soros et al: Make Markets Be
Markets George Soros, Joseph Stiglitz, Jim Chanos, Peter Solomon, Bowman
Cutter, Judge Stanley Sporkin, and Lynn Turner discuss the need for and
ramifications of financial reform.
Q&A from Make Markets Be Markets
George Soros, Joseph Stiglitz, Elizabeth Warren, Robert Johnson, and more
discuss the ramifications of financial reform.
I agree. Bailing out the financial system, but not bailing out schools in financial trouble because of the crisis, is unconscionable:
Bail Out Our Schools, by Robert Reich: Any day now, the Obama administration
will announce $4.35 billion in extra federal funds for under-performing public
schools. That’s fine, but relative to the financial squeeze all the nation’s
public schools now face it’s a cruel joke.
The recession has ravaged state and local budgets, most of which aren’t allowed
to run deficits. That’s meant major cuts in public schools and universities, and
a giant future deficit in the education of our people.
Across America, schools are laying off thousands of teachers. Classrooms that
had contained 20 to 25 students are now crammed with 30 or more. School years
have been shortened. Some school districts are moving to four-day school weeks.
After-school programs have been canceled; music and art classes, terminated.
Even history is being chucked.
Pre-K programs have been shut down. Community colleges are reducing their course
offerings and admitting fewer students. Public universities ... have raised
tuitions and fees. That means many qualified students won’t be attending.
Last year the nation committed $700 billion to bail out Wall Street banks, the
engines of America’s financial capital, because we were told we’d face economic
Armegeddon if we didn’t.
We’ve got our priorities backwards. Our schools are the engines of our human
capital, and if we don’t bail out public education we face a bigger economic
Armegeddon years from now. ...
Starting immediately, the federal government should give states and local
governments interest-free loans to make up for all school and university budget
shortfalls. The loans can be repaid when the recession is over and local and
state tax revenues revive.
Over the longer term we must shift incentives away from financial capital toward
human capital. A tiny one half of one percent tax on all financial transactions
would generate about $200 billion a year, according to the Economic Policy
Institute. That might put a crimp on Wall Street bonuses but it’s enough to fund
early childhood education, smaller K-12 classes, and lower tuitions and fees for
public higher education.
The Street’s financial capital is important to the American economy, but over
the long term the classroom’s human capital is absolutely crucial.
Once help in some form is available to the states, I'd consider going even
further and penalizing states in some way if they reduce educational services to balance their budgets during the recession (a voice in my head is urging me to think this through more before saying it, but I'm ignoring it).
Better education today equals better jobs in the future, and we should do all we
can to avoid penny-wise policies that undermine our future potential.
The Bill of Rights is pretty well shredded. Freedom of speech is fast becoming
the special privilege of corporations. Economic pressures, fueled by greedy
shareholders, have eviscerated the press, leaving freedom the press virtually
meaningless.
The most important part of the Fifth Amendment is probably the takings clause,
which is interpreted to restrict the right of the government to regulate
property.
Perhaps, the Second Amendment is the most important amendment, giving people the
right to arm themselves with anything short of a nuclear weapon.
All this right-wing nonsense might be somewhat understandable if it were
necessary to provide for a good life; however, the economy is becoming as
dysfunctional as the ridiculous political system.
Watching people rebel politically or in the streets in Iceland and Greece, while
people in the United States express their frustrations with the tea party, makes
me noxious. My problem with the tea party movement is one of political
jealousy. Many of the participants share my frustration at the class bias
of the system, but they seem confused, mistaking late capitalism for socialism.
Sure, the tax system is rigged against ordinary people, but it works in favor of
the same people who are running the tea party movement.
Unfortunately, the left (if there is such a thing) seems unable to articulate a
strong call to action. Instead, our anger bubbles up periodically — today,
over the evisceration of education; tomorrow, over an escalation or extension of
the war; or maybe even the promotion of a protest candidate, but a systematic
program is nowhere to be found in the public dialogue.
[Is there nothing that can] be done (but vent)? I hope not.
What caused the financial crisis, and how can we reduce the
chances it will happen again?:
An Irish
Mirror, by Paul Krugman, Commentary, NY Times: Everyone has a theory about
the financial crisis. These theories range from the absurd to the plausible —
from claims that liberal Democrats somehow forced banks to lend to the
undeserving poor (even though Republicans controlled Congress) to the belief
that exotic financial instruments fostered confusion and fraud. But what do we
really know?
Well,... the crisis ... affected much ... of the world... We can look at
countries that avoided the worst, like Canada, and ask what they did right... We
can also look at countries whose financial institutions and policies seemed very
different from those in the United States, yet which cracked up just as badly,
and try to discern common causes. So let’s talk about Ireland.
As a new research paper by the Irish economists Gregory Connor, Thomas Flavin
and Brian O’Kelly points out, “Almost all the apparent causal factors of the
U.S. crisis are missing in the Irish case,” and vice versa. Yet ... Ireland’s
crisis was very similar...
Ireland had none of the American right’s favorite villains: there was no
Community Reinvestment Act, no Fannie Mae or Freddie Mac. More surprising,
perhaps, was the unimportance of exotic finance: Ireland’s bust ... was an
old-fashioned, plain-vanilla case of excess, in which banks made big loans to
questionable borrowers, and taxpayers ended up holding the bag.
So what did we have in common? The authors ... suggest four “ ‘deep’ causal
factors.”
First, there was irrational exuberance: in both countries buyers and lenders
convinced themselves that real estate prices, although sky-high by historical
standards, would continue to rise.
Second, there was a huge inflow of cheap money. In America’s case, much of the
cheap money came from China; in Ireland’s case, it came mainly from the rest of
the euro zone, where Germany became a gigantic capital exporter.
Third, key players had an incentive to take big risks, because it was heads they
win, tails someone else loses. ...
But the most striking similarity between Ireland and America was “regulatory
imprudence”: the people charged with keeping banks safe didn’t do their jobs. In
Ireland, regulators looked the other way in part because the country was trying
to attract foreign business, in part because of cronyism: bankers and property
developers had close ties to the ruling party.
There was a lot of that here too, but the bigger issue was ... free-market
fundamentalism. This is what led Ronald Reagan to declare that deregulation
would solve the problems of thrift institutions — the actual result was huge
losses, followed by a gigantic taxpayer bailout — and Alan Greenspan to insist
that the proliferation of derivatives had actually strengthened the financial
system. It was largely thanks to this ideology that regulators ignored the
mounting risks.
So what can we learn from the way Ireland had a U.S.-type financial crisis with
very different institutions? Mainly, that we have to focus as much on the
regulators as on the regulations. By all means, let’s limit both leverage and
the use of securitization — which were part of what Canada did right. But such
measures won’t matter unless they’re enforced by people who see it as their duty
to say no to powerful bankers.
That’s why we need an independent agency protecting financial consumers — again,
something Canada did right — rather than leaving the job to agencies that have
other priorities. And beyond that, we need a sea change in attitudes, a
recognition that letting bankers do what they want is a recipe for disaster. If
that doesn’t happen, we will have failed to learn from recent history — and
we’ll be doomed to repeat it.
Real Personal Income Less Transfer Payments, by Tim Duy: Calculated
Risk directed us to a lesser know economic indicator, real personal
income less transfer payments, a measure intended to strip out some of
the impact of automatic stabilizers in the personal income data. I found it an interesting series to play with. Eyeballing the series, it looked like we were well below trend. How
low? And how does the trend evolve over time?
To
recreate the series, I took the difference of nominal personal income
and current transfer payments and deflated the resulting series by the
personal consumption expenditures price index. I
then estimated the (log) linear trend over various time horizons. We are currently well below the trend extrapolated the
from Jan-91 to Dec-07 period:
An
interest subset of this period is the trend during the tech boom, Jan-95
to Dec. 00. The rapid rate of income growth
during that period, although likely not sustainable, felt good for a
reason:
In a town in a country suffering through a recession, a wealthy person just
happens to live next door to an unemployed worker. The worker has experience in
a variety of trades, and is quite competent, but despite his skill and
reputation, there are no jobs to be found. And it isn't for lack of trying.
Seeing this, and having a kind heart, the wealthier of the two -- much, much
wealthier -- decides his neighbor needs a job, so he sets about creating one.
The first option he considers is just to find something for him to do, it
doesn't much matter what, digging holes and then filling them up, whatever. He decides that if he goes this route he will ask his neighbor
-- wink wink -- to watch his grass grow. Both of them know this is a ruse, a
made up job to justify the payment, but somehow having the ruse in place allows the unemployed neighbor to keep his dignity in a way a direct cash payment would not. It's a job not
a hand out -- he does have to look out his window a few times a day to make sure
it the grass is growing like it's supposed to. But practically it's a means of
support for the neighbor and his family that allows him to continue his diligent
search for a job.
But then the wealthy neighbor thinks, why not hire the unemployed neighbor to
do something useful with his talents? Sure, it will make it harder for him to
look for another job if he's working hard here all day, but he's a good builder
and there must be something I need. Maybe, for example, the fence could be
replaced. He was going to replace it in a few years anyway and, although it
would last a bit longer, why not fix it now and take advantage of the fact that
the neighbor can be hired for much less than it would take to hire a fencing
company? The quality of the work will be just as good. And there must be other
things that could be done both inside and outside the house as well.
There is one problem, he realizes, with the fence building option. Unlike the watching the grass grow job
which could have started the next day, it will take him awhile to pick out the
fence style he wants, to plan it, to get the materials for the neighbor (who
can't finance it himself since he's unemployed), and so on, but maybe not too
long if he gets on it right away. But it is a close call - the family is hurting - and any delay makes it worse.
Still, building the fence turns out to be the solution chosen. It's a generous arrangement, and
everyone feels as though they are getting something. And it dispels any myth
that jobs cannot be created. By hiring a neighbor to do something, especially
something productive, a job is created that wouldn't have existed otherwise.
Since the payment for the fence materials and the fence work comes out of
saving, saving that would not have been spent until a few years later, it also
increased the demand for goods and services overall, perhaps just enough to save
a job at one of the places where the money is spent or even help to create a new job. (The money is just sitting in the banks doing nothing due to all
the fear and loathing about loaning it out, i.e. the money spent on the fence is not being
used by the bank to finance alternative investment. It's as though the money was hidden
in the house in a cookie jar or something. It would have been used later, but is
being used now instead and that generates extra demand.)
So here's the question. Why does having government involved make any
difference? Government can act as an intermediary, take the money from the
wealthy person, and use it to finance projects such as new infrastructure. This
type of social insurance creates jobs just the same as someone can create a job when they hire a neighbor to
build a new fence or repair one that is falling down.
One difference is that the money goes for the social good, not the individual
good. Suppose the money is used to build a fence at a local park. The wealthy
person might not object if he or she uses the park frequently and would somehow
benefit from a fence. But if the money goes to finance something that the person
doesn't want or don't need, there might be quite a bit of resistance.
But that is a question about the social benefits from how the money is used,
it has little to do with the question of whether jobs can be created. Just as
the wealthy neighbor can hire the unemployed worker next door to build a needed
fence or to watch the grass grow, government can do the same, and do it with the
same motivation -- empathy for those who are struggling to make it through the
recession. If those paying taxes don't share that empathy -- if the people
paying the bills don't think those receiving the money deserve it according to
some moral code, if they can't see much direct of indirect value for
themselves from the expenditure they are forced to finance, and if they don't think this is their responsibility -- there will likely
be strong resistance to paying the bill (partly because the personal relationships needed to generate
empathy aren't there).
So yes, to the extent possible, job creation projects should be used to
finance needed infrastructure so that we do not have to rely on empathy. When the benefits are large and obvious to all, the
resistance to such spending is minimized.
But that may not be possible. If the
wealthy neighbor doesn't need anything done or doesn't have enough projects to keep the unemployed neighbor busy -- he had just hired people to fix his
fence last week and can't think of anything else he needs, or the things that are needed would take to long to get started, what then if he still wants to help? He will have to find what he can for the unemployed neighbor to
do -- there's usually something that is needed. And if, in the end, it comes down to
the equivalent of watching grass grow (and it's very clear the neighbor is
trying as heard as he can to find a permanent job), then it may be time to give
a wink and do just that. The alternative is to simply say I'm sorry, there's
nothing I can think of to hire you to do, neighbors aren't my responsibility anyway -- I hardly know you people -- and then turn and walk away leaving
the neighbor and his family to continue struggling. And maybe that is the right
answer. That is, it's the right answer until the day comes when you lose all your wealth in the Great
Crash of 2015 and your neighbor, who has done extraordinarily well and has never
forgotten the help you gave him, steps in to return the favor.
Of course, not all of us are lucky enough to have rich, empathetic neighbors
willing to help out when we are down on our luck, nor can we necessarily expect reciprocity when we are in need. But that's OK, we do have fiscal policy -- a form of social insurance -- and other types of social insurance to play this role.
Fiscal policy can create jobs and provide other types of help
just like a wealthy, benevolent neighbor. Yes, if you are able, if you are one of the
fortunate ones, the presence of social insurance requires you to pay to help those who in need.
But even if the money isn't used to finance something you want, or if it is
essentially given away through make-work to people you don't think deserve it, people that you care nothing about and that aren't your responsibility in any case, you will still benefit. Because even though you are
certain it could never happen to you, in fact it can happen to you, and if it ever does social insurance, including job creation, will be there for you too. Only then will you truly understand
the real value that this insurance provides.
Rajiv Sethi argues that naked credit default swaps can be destabilizing for reasons that defenders of these contracts "would do well to consider":
Defenders and Demonizers of Credit Default Swaps, by Rajiv Sethi: The recent
difficulties faced by Greece (and some
other eurozone states) in rolling over their national debt has let
some to blame hedge fund involvement in the market for credit default swaps.
These contracts can be used to insure bondholders against the risk of default,
but when purchased naked (without holding the underlying bonds), they can serve
as highly leveraged speculative bets on a rise in the cost of borrowing faced by
the sovereign states.
A
cogent case for prohibiting the use of credit default swaps to make
directional bets has been made recently by Wolfgang Münchau... Felix Salmon
objects... Sam Jones also
rises in defense of naked CDS contracts...
So the argument here is that while hedge funds may have raised the cost of
borrowing for Greece in 2008-09, their current actions are making borrowing
easier and less costly.
Leaving aside the question of whether naked CDS trading has been good or bad for
Greece, it is worth asking whether there exist mechanisms through which such
contracts can ever have destabilizing effects. I believe that they can,
for reasons that Salmon and Jones would do well to consider.
“Mark Thoma recently linked to a Gavin Kennedy post that argued Adam Smith did not favor laissez-faire. I don’t agree. The evidence cited was a one page list of government interventions that Smith favored. The US, by contrast, has enough government interventions to fill a New York City phone book, if not a small library. And the US is regarded by the Europeans as “unbridled capitalism.” Even Hong Kong intervenes in far more ways than Adam Smith contemplated. Of course Smith was not an anarchist, he did favor some government intervention in the economy. But relative to any real world economy, his policies views were extremely laissez-faire.”
“I see this as a common cognitive bias. The Gavin Kennedy list posted by Thoma certainly looks impressive, but when you think more deeply about the issue it is a trivial set of policies. I’m reminded of what happens when I discuss Singapore, which usually ranks number two in the world in lists of economic freedom. People will often respond by telling me about all the ways the Singapore government intervenes. My response is “so what?” They could intervene in a 1000 different ways and still be vastly more laissez-faire than the US government. Laissez-faire is a relative concept, and always has been. I’ve read The Wealth of Nations, and Adam Smith is clearly a pragmatic libertarian.”
Comment “The evidence cited was a one-page list of government interventions that Smith favored.”
Yes, that’s why Viner listed the numerous examples of government interventions. They amount to a lot more than can be summarised a single page and the compromise notions that Smith was laissez-faire in the meaning of the term.
Smith never used the phrase ‘laissez-faire’. His association with the idea was an invention in the 19th century and was widely promoted by modern economists from the mid-1950s. About this time Smith was also widely promoted as the author of the notion of there being “an invisible hand” in the market. Both inventions are false.
We can agree that Smith was pragmatic about policies but whether he was a pragmatic libertarian remains problematical.
It’s not clear why the items in the list from Smith’s Wealth Of Nations and his Lectures on Jurisprudence are “trivial” in ... Sumner’s opinion, other than when he looks around the incomparably richer 21st-century United States than were the 13 British colonies in 1776 when Smith was writing.
There were hundreds of miles of inter-city roads in need of construction and repair; scores of harbours that needed to be built and dredged; thousands of bridges in need of construction; hundreds of towns that need to be paved and have street lighting in place; thousands of ‘little school’ constructed and staffed with state-registered teachers; scores of palliative care hospitals established for those afflicted with ‘loathsome diseases’; scores of depots for stamping clothes with government quality marks; a network of post-offices established and organised; and likewise for all the other activities that Smith envisaged should be funded and managed by the state.
In practice this took near on a century to be introduced in Britain. Set against the size of commercial society in 18th-century Britain, the state sector was not ‘trivial’ in any meaningful sense. Nor is it today. On one thing we surely can agree: neither 18th-century Britain with its colonies in North America was not a laissez-faire economy nor are the 21st-century territories that descended from them.
Robert Shiller says financial engineering can "lead us to a different kind of housing, yet preserve our core values":
Mom, Apple Pie and Mortgages, by Robert Shiller, Commentary, NY Times: For decades, the federal government has subsidized ... owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration ... issuing guarantees ... on most new mortgages.
But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? ...
This time, the best answer isn’t found in traditional economics but rather in American culture: a long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Historically, homeownership has been associated with freedom, while renting — often in tenements or mill villages — has been linked to the oppression of a landlord.
In ... 1985..., Kenneth T. Jackson of Columbia University delineated the complex train of thought that ... has produced the American belief that homeownership encourages pride and good citizenship and, ultimately, preservation of liberty. These attitudes are enduring. ...
In short, this all has a great deal to do with culture, and little to do with financial wisdom. After all, financial theory suggests that people should not own their own homes, at least not in the way that many do today. A cardinal tenet is that people should diversify — meaning they shouldn’t put nearly all of their financial eggs in one basket, which is what homeownership now means for so many people.
American mortgage institutions encourage people to take a leveraged position in the real estate market, which is quite risky... Leverage a risky investment 10 to 1 and you can expect trouble — and we have plenty of it today. ...
If we choose to keep subsidizing individual homeownership, we must also commit to adding safeguards so that homeowners are less financially vulnerable. Of course, that will require some creative finance.
But first, we should rethink the idea of renting... Switzerland, for example, is a country with strong patriotism... Yet its homeownership rate is just 34.6 percent, versus 66.2 percent for the United States... Swiss national identity doesn’t depend on homeownership. ... But America isn’t Switzerland. Our values and habits of thought are very different. Moreover, our homes are largely scattered in vast suburbs...
A stock of apartment buildings in central cities, of course, makes rental management much easier. This is true in Switzerland, as well as in American cities like New York, which aren’t typical of the rest of the United States. We need to consider a gradual transition toward new kinds of housing finance institutions — entities that may lead us to a different kind of housing, yet preserve our core values. Although such innovation isn’t likely to end subsidies, it should refocus them on enhancing the qualities of life that we really value.
We need to invent financial institutions that take into account the kinds of communities we want to build. And we need to base this innovation on an approach to economics that captures the richness of human experience — and not on efficient-market economics, which disregards human psychology and assumes that our basic institutions are already perfect.
Most economists ... agree that it is a mistake to look at only one side of a balance sheet (whether for the public or private sector). One has to look not only at what a country or firm owes, but also at its assets. This should help answer those financial sector hawks who are raising alarms about government spending. ... Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits. ...
Faster growth and returns on public investment yield higher tax revenues, and a 5 to 6% return is more than enough to offset temporary increases in the national debt. A social cost-benefit analysis (taking into account impacts other than on the budget) makes such expenditures, even when debt-financed, even more attractive.
Finally, most economists agree that ... a ... weaker economy calls for a larger deficit, and the appropriate size of the deficit in the face of a recession depends on the precise circumstances. ... Yet, even with large deficits, economic growth in the US and Europe is anemic, and forecasts of private-sector growth suggest that in the absence of continued government support, there is risk of continued stagnation...
As the global economy returns to growth, governments should, of course, have plans on the drawing board to raise taxes and cut expenditures. The right balance will inevitably be a subject of dispute. ...
The financial sector has imposed huge externalities on the rest of society. America’s financial industry polluted the world with toxic mortgages, and, in line with the well established “polluter pays” principle, taxes should be imposed on it. Besides, well-designed taxes on the financial sector might help alleviate problems caused by excessive leverage and banks that are too big to fail. Taxes on speculative activity might encourage banks to focus greater attention on performing their key societal role of providing credit.
Over the longer term, most economists agree that governments, especially in advanced industrial countries with aging populations, should be concerned about the sustainability of their policies. But we must be wary of deficit fetishism. Deficits to finance wars or give-aways to the financial sector ... lead to liabilities without corresponding assets, imposing a burden on future generations. But high-return public investments that more than pay for themselves can actually improve the well-being of future generations, and it would be doubly foolish to burden them with debts from unproductive spending and then cut back on productive investments.
These are questions for a later day..., prospects of a robust recovery are, at best, a year or two away. For now, the economics is clear: reducing government spending is a risk not worth taking.
There is a lot of optimism about this report due to the fact that it appears that the rate of deterioration in labor markets is slowing and perhaps even about to turn the corner. But I find it hard to be upbeat about an economy that is moving sideways, especially when the broad measure of unemployment increased, and hours worked fell.
It's good to see that the administration recognizes this. Brad DeLong:
Christy Romer:
Statement on the Employment Situation in February: [A]n unemployment rate of 9.7 percent is unacceptably high and we need to achieve robust employment growth in order to recover from the terrible job losses that began over two years ago. That is why it is essential that Congress pass additional responsible measures to promote job creation. It is also vital that we continue to support those struggling with unemployment...
Such as? What responsible measures?
The biggest and easiest would be another $300 billion in aid to states for the remainder of fiscal 2010 and 2011 to keep state and local services from suffering additional cuts and to shave perhaps 1.5 percentage points off the unemployment rate. Senators, however, are opposed to it: if they give money to governors, governors use them to cut ribbons and then run against senators to try to take their jbos. It would, however, be the right thing to do.
I expect Congress will implment a few token employment measures they can brag about in reeloection speeches, but I don't expect anything anywhere near the amount needed to be enacted. [Also posted at MoneyWatch.]
James Hamilton, University of California, San Diego Zheng Liu, Federal Reserve Bank of San Francisco
5:45 P.M.
Reception – West Market Street Lounge, Fourth Floor
6:30 P.M.
Dinner – Market Street Dining Room, Fourth Floor Introduction: Janet Yellen, Federal Reserve Bank of San Francisco Speaker: Lars Svensson, Sveriges Riksbank
By holding up desperately needed aid to the unemployed unless they get their way on estate taxes, Republicans are making their priorities clear:
Senator Bunning’s Universe, by Paul Krugman, Commentary, NY Times: So the Bunning blockade is over. For days, Senator Jim Bunning of Kentucky exploited Senate rules to block a one-month extension of unemployment benefits. In the end, he gave in, although not soon enough to prevent an interruption of payments to around 100,000 workers.
But while the blockade is over, its lessons remain. ... I want to focus on ... the incredible gap that has opened up between the parties. Today, Democrats and Republicans live in different universes, both intellectually and morally.
Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.
But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say...: unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”
In Mr. Kyl’s view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we’re reducing the incentive of the unemployed to find jobs. To me, that’s a bizarre point of view — but then, I don’t live in Mr. Kyl’s universe.
And the difference between the two universes isn’t just intellectual, it’s also moral. ... Consider, in particular, the position that Mr. Kyl has taken on a proposed bill that would extend unemployment benefits and health insurance subsidies for the jobless for the rest of the year. Republicans will block that bill, said Mr. Kyl, unless they get a “path forward fairly soon” on the estate tax.
Now, the House has already passed a bill that, by exempting the assets of couples up to $7 million, would leave 99.75 percent of estates tax-free. But that doesn’t seem to be enough for Mr. Kyl; he’s willing to hold up desperately needed aid to the unemployed on behalf of the remaining 0.25 percent. That’s a very clear statement of priorities.
So, as I said, the parties now live in different universes, both intellectually and morally. We can ask how that happened... More important, however, what are the implications of this total divergence in views?
The answer, of course, is that bipartisanship is now a foolish dream. How can the parties agree on policy when they have utterly different visions of how the economy works, when one party feels for the unemployed, while the other weeps over affluent victims of the “death tax”?
Which brings us to the central political issue right now: health care reform. If Congress enacts reform in the next few weeks — and the odds are growing that it will — it will do so without any Republican votes. Some people will decry this, insisting that President Obama should have tried harder to gain bipartisan support. But that isn’t going to happen, on health care or anything else, for years to come.
Someday, somehow, we as a nation will once again find ourselves living on the same planet. But for now, we aren’t. And that’s just the way it is.
I don't have time to do much, so let me turn it over to you. John Quiggin hopes to "benefit from your comments":
The reanimation of trickle down, by John Quiggin: The deadline for the manuscript of Zombie Economics is only a few weeks away, and the zombies are popping up faster than I can knock them down. I’m adding a section on reanimated zombies to each chapter. Over the fold is the social mobility defense of trickle down economics, as animated by Thomas Sowell. There’s still time for me to benefit from your comments. ...
With ... the overwhelming evidence that social mobility in the US is both low by the standards of developed countries and decreasing steadily, the task of reanimating this zombie idea looks like a difficult one. But Thomas Sowell of the Hoover Institute is up to the job.
In his latest book, Intellectuals and Society, Sowell ... sweeps aside concerns about declining social mobility with the assertion that, ‘neighborhoods may remain the home of poor people for generations, no matter how many people from the neighborhoods move out to a better life as they move up from one income bracket to another.’ ...
This insouciant attitude to evidence is unsurprising. In earlier writing on the topic, Sowell made the observation that ‘ If mobility is defined as being free to move, then we can all have the same mobility, even if some end up moving faster than others and some of the others do not move at all. ’
In fact, on Sowell’s account, the US would remain the world’s most socially mobile society even if everyone ended up in the exact same social position as their parents.
As Sowell astutely observes ‘A car capable of going 100 miles an hour can sit in a garage all year long without moving. But that does not mean that it has no mobility.’ If the poor don’t succeed, he says, its because they are not willing to make the necessary efforts and sacrifices
Translating to the real world question, if we observe one set of children born into a wealthy family, with parents willing and able to provide high-quality schooling and ‘legacy’ admission to the Ivy League universities they attended, and another whose parents struggled to put food on the table, we should not be concerned that members of the first group almost invariably do better. After all, some people from very disadvantaged backgrounds achieve success, and there was no law preventing the rest from doing so.
Clearly, an idea so appealing to people who can afford to reward its promulgators is unlikely to be killed by mere evidence of its falsehood. Perhaps if the political left is willing to return to class politics (something the rightwing advocates of trickle down have never abandoned) it might, at least find a way to drive this zombie idea out of the assumed knowledge of political debate.
Jamie Galbraith takes on "the deficit phobia of Wall Street":
In Defense of Deficits, by James K. Galbraith, Nation: The Simpson-Bowles Commission, just established by the president, will no doubt deliver an attack on Social Security and Medicare dressed up in the sanctimonious rhetoric of deficit reduction. ... The Obama spending freeze is another symbolic sacrifice to the deficit gods. Most observers believe neither will amount to much, and one can hope that they are right. But what would be the economic consequences if they did? The answer is that a big deficit-reduction program would destroy the economy, or what remains of it, two years into the Great Crisis.
For this reason, the deficit phobia of Wall Street, the press, some economists and practically all politicians is one of the deepest dangers that we face. It's not just the old and the sick who are threatened; we all are. To cut current deficits without first rebuilding the economic engine of the private credit system is a sure path to stagnation, to a double-dip recession--even to a second Great Depression. To focus obsessively on cutting future deficits is also a path that will obstruct, not assist, what we need to do to re-establish strong growth and high employment. ...
All of this should be painfully obvious, but it is deeply obscure. It is obscure because legions of Wall Streeters--led notably in our time by Peter Peterson and his front man, former comptroller general David Walker, and including the Robert Rubin wing of the Democratic Party and numerous "bipartisan" enterprises like the Concord Coalition and the Committee for a Responsible Federal Budget--have labored mightily to confuse the issues. These spirits never uttered a single word of warning about the financial crisis, which originated on Wall Street under the noses of their bag men. But they constantly warn, quite falsely, that the government is a "super subprime" "Ponzi scheme," which it is not.
We also hear, from the same people, about the impending "bankruptcy" of Social Security, Medicare--even the United States itself. Or of the burden that public debts will "impose on our grandchildren." Or about "unfunded liabilities" supposedly facing us all. All of this forms part of one of the great misinformation campaigns of all time. ...[...continue reading...]...
Monopoly power was a much bigger concern in the past than it is today. Why
aren't people more concerned about this?:
A New Age of Monopolies, by Thomas frank, Commentary, WSJ: ...Barry C.
Lynn's recent book ... arises directly from the old antitrust tradition, and it
presents us with an amazing catalogue of present-day monopolies, oligopolies and
economic combinations. Its subjects are, by definition, some of the largest and
most powerful organizations in the world. And yet almost none of it was familiar
to me.
Mr. Lynn tells us, for example, about the power of single companies or small
groups of companies over such disparate fields as eyeglasses, certain categories
of pet food, washer-dryer sales, auto parts, many aspects of food processing,
surfboards, medical syringes...
Nor had I ever heard about what Mr. Lynn calls "the vitamin cartel," or the
"nearly complete roll-up" of advertising agencies, or that the "key industrial
legacy" of now-imprisoned business executive Dennis Kozlowski was a company
"that specialized in forging monopolies over U.S. marketplaces for everything
from catheters to fire sprinklers to clothes hangers," or that a recent
management book encourages readers to see monopoly power as the main goal of
business strategy.
Mr. Lynn is a senior fellow at the New America Foundation in Washington; he
first came to my attention with a memorable 2006 essay in Harper's Magazine in
which he described the power Wal-Mart exerted over its suppliers...
Mr. Lynn ... describes companies that swallow their rivals and then, with
competitive pressure diminished, set about "destroying product variety and
diversity." ... We learn of entire industries where competitors have
grown so close to one another that a collapse at one company would probably
bring down many of the others as well.
This is, we are often reminded, a populist age, with fresh flare-ups of fury
every time Wall Street bonuses hit the headlines. ...Mr. Lynn's anger at the
Wall Street bailout, his fondness for small business, and his frequent homages
to the nation's founders may seem superficially similar to the attitudes of the
tea party protesters. But Mr. Lynn also takes pains to demonstrate that the
economic "freedom" so beloved by the snake-flag set has actually yielded the
opposite of freedom: a "neofeudal" system of "private corporate governments"
answerable to no one. ...
...“The father of modern economics supported a limited role for government. Mark
Skousen writes in "The Making of Modern Economics", Adam Smith believed that,
"Government should limit its activities to administer justice, enforcing private
property rights, and defending the nation against aggression." The point is that
the farther a government gets away from this limited role, the more that
government strays from the ideal path... How this issue is handled will decide
whether the country can more closely follow Adam Smith's prescription for growth
and wealth creation or move farther away from it.”
Jacob Viner addressed the laissez-faire attribution to Adam Smith in 1928...
Here is a list of appropriate activities for government, which goes way, way
beyond Mark Skousen’s extremely limited – and vague – 'ideal' government. That
... he goes on to attribute his ‘ideal’ list to Adam Smith ... is not alright.In fact, its downright deceitful, for which there is no excuse of ignorance
(before attributing the limited ideal to Adam Smith we assume, as scholars must,
that Skousen read Wealth Of Nations and noted what Smith actually identified as
the appropriate roles of government in the mid-18th century).
But even if Skousen was in a hurry and without time to check through Smith’s
two-volume tome..., he, surely, was familiar with Viner’s 1928 essay...?
No? Shame.
Here is a list extracted from Wealth Of Nations:
the Navigation Acts, blessed by Smith under the assertion that ‘defence,
however, is of much more importance than opulence’ (WN464);
Sterling marks on plate and stamps on linen and woollen cloth
(WN138–9);
enforcement of contracts by a system of justice (WN720);
wages to be paid in money, not goods;
regulations of paper money in banking (WN437);
obligations to build party walls to prevent the spread of fire
(WN324);
rights of farmers to send farm produce to the best market (except
‘only in the most urgent necessity’) (WN539);
‘Premiums and other encouragements to advance the linen and woollen
industries’ (TMS185);
‘Police’, or preservation of the ‘cleanliness of roads, streets,
and to prevent the bad effects of corruption and putrifying substances’;
ensuring the ‘cheapness or plenty [of provisions]’ (LJ6; 331);
patrols by town guards and fire fighters to watch for hazardous
accidents (LJ331–2);
erecting and maintaining certain public works and public
institutions intended to facilitate commerce (roads, bridges, canals and
harbours) (WN723);
coinage and the mint (WN478; 1724);
post office (WN724);
regulation of institutions, such as company structures (joint-
stock companies, co-partneries, regulated companies and so on) (WN731–58);
temporary monopolies, including copyright and patents, of fixed
duration (WN754);
education of youth (‘village schools’, curriculum design and so
on) (WN758–89);
education of people of all ages (tythes or land tax) (WN788);
encouragement of ‘the frequency and gaiety of publick
diversions’(WN796);
the prevention of ‘leprosy or any other loathsome and offensive
disease’ from spreading among the population (WN787–88);
encouragement of martial exercises (WN786);
registration of mortgages for land, houses and boats over two tons
(WN861, 863);
government restrictions on interest for borrowing (usury laws) to
overcome investor ‘stupidity’ (WN356–7);
laws against banks issuing low-denomination promissory notes
(WN324);
natural liberty may be breached if individuals ‘endanger the
security of the whole society’ (WN324);
limiting ‘free exportation of corn’ only ‘in cases of the most
urgent necessity’ (‘dearth’ turning into ‘famine’) (WN539); and
moderate export taxes on wool exports for government revenue
(WN879).
"Viner concluded, unsurprisingly, that ‘Adam Smith was not a doctrinaire
advocate of laissez-faire’.
That [Viner] needed to write this 150 years after Wealth of Nations to remind
20th-century readers conclusively that it contained detailed and specific
evidence of advocacy of breaches of laissez-faire, popularly attributed to him,
suggests that a substantial drift away from important elements of Smith’s legacy
had taken place among early-20th-century economists.
How could Smith be so closely linked with laissez-faire policies when he so
clearly and explicitly was not?” ...
Daniel Little is worried about the "nightmare scenario for democracy":
Appearance and reality in public life, by Daniel Little: So what kind of
democracy do we have? Do our institutions do a great job of establishing the
public interest over the medium term, or have our institutions been captured by
private interests, leaving essentially no real power in the hands of citizens?
Why has the response to fiscal stimulus been so hard to detect? Perhaps because, on
net, there wasn't much stimulus. According to this research by Joshua
Aizenman and Gurnain Kaur Pasricha, the federal stimulus filled holes created in state and local budgets, and that was helpful -- I don't think the article does enough to point out what would have happened if the federal government had not offset these cuts. But how much did the stimulus do over and above simply simply offsetting the negative effects of cuts at the state and local government levels? Apparently, not much:
The net fiscal
expenditure stimulus in the US 2008-2009: Less than what you might think, by
Joshua Aizenman and Gurnain Kaur Pasricha, Vox EU: Bailout packages have
dominated political debate in the US and elsewhere. The global financial crisis
led to a massive bailout of the US financial system and significant fiscal
stimulus efforts by the US federal government to offset the resulting severe
economic downturn. The sheer size of the federal commitments, at a time when the
unemployment reached two digit figures, has led observers to question the
efficacy of fiscal policy. Moreover, questions were raised with respect to the
size of the fiscal multiplier in the US, as well as about possible adverse
effects of higher future debt overhang (see de Resende et al. 2010,
Barro and
Redlick 2009, Spilimbergo et al. 2009 and the references therein).
Given that the counterfactual of the performance of the US economy in the
absence of the fiscal stimulus is hard to ascertain, one may thus question its
effectiveness, and hence the logic of continuing it. Before taking a position on
these vexing issues, it is vital to ascertain the net size of the fiscal
expenditure stimulus of the real sector. This issue is of key importance in a
federal system like the US, where the fifty states are restrained from borrowing
in recessions, and frequently refrain from raising taxes at times of collapsing
tax bases. While stabilising the financial system is useful in preventing bank
runs, deepening credit constraints facing key sectors like local government
expenditures imply that financial bailouts would not prevent, in the short-run,
a sizable contraction of aggregate demand.
Bruce Bartlett doesn't think much of a proposal from Jeb Hensarling
and Mike Pence to cap federal spending as a percent of GDP. I don't either:
A Dopey Budget Idea from Jeb Hensarling and Mike Pence, by Bruce Bartlett:
In today’s Wall Street Journal, Republican Reps. Jeb Hensarling of Texas and
Mike Pence of Indiana put forward a dopey idea for reducing federal spending so
that they can appear to be fiscally responsible while still supporting every tax
cut that comes down the pike and opposing any and all tax increases. Their
simplistic idea is to just enact a constitutional amendment that would limit
federal spending to “one fifth of the economy.”
This is a terrible idea on so many levels that it is hard to know where to begin
to dissect it, but here goes.
In conclusion, this is a laughably bad proposal that deserves not one second of
serious consideration. I’m embarrassed that I wasted so much time on it writing
this post. But unfortunately, in this day and age, it appears that there is no
idea too simplistic or unworkable to make the rounds through the right wing
blogosphere to talk radio and hence to Fox News, so I feel obliged to at least
try and stamp it out before it gains traction.
In addition to the ten points in the dissection, one asks why we would want to enshrine an economic philosophy in the constitution, others look at difficulties in implementation and enforcement, let me add that limiting annual spending to a percent of GDP equal to the "historical spending average
since World War II" could also make counter cyclical fiscal policy difficult to
use precisely when you need it the most. In severe recessions, spending automatically increases as the demand for
social programs rises. However, if the spending level is capped, that could limit the ability of government to meet the needs of people relying upon these programs. In addition, it would limit or prevent the government's use of additional spending to stimulate the economy in the event that monetary policy can't get the job done by itself. The proposal limits spending, not taxes, so tax cuts would still be available, but tax cuts alone are not the most effective way to battle a recession. This is not a good idea.
Thanks largely to him, the country has endured a tragedy that elsewhere would
have been an apocalypse.
Stephens' logic is simple. After the U.S.-backed coup in 1973, in which Gen.
Pinochet seized power from the democratically elected president Salvador Allende,
a group of Chilean economists mentored by Friedman, and known to history as "the
Chicago boys," instituted a series of radical free market reforms. Since that
point, averaged over the decades, Chile has experienced the strongest sustained
economic growth in South America. Rich countries, argues Stephens, are more
likely to institute and enforce building codes. Q.E.D. Milton Friedman saved
lives.
Some might find it intellectually provocative to cite Milton Friedman's
authority in an argument that depends on the foundation of successfully enforced
government-mandated building code regulations. The building inspector
is not exactly a libertarian hero. Others might wonder if a more important
factor in Chile's relatively tough building codes might be the devastating 9.5
earthquake the country endured in 1960. Haiti hadn't experienced an earthquake
as bad as the one this January in 240 years. Earthquake resistant building codes
tend to be taken more seriously in regions that are accustomed to regular bouts
of annihilation.
But the earthquake is just a side show for the opinion page of the Wall Street
Journal -- just another opportunity, however shameless, to push free market
fundamentalism. One ... pertinent question might be to ask just how much credit
really is due Chicago-school economics for Chile's current relative prosperity?
Mining alone accounts for 20 percent of Chile's GDP, and it is very much worth
noting that the country's crown jewel, the copper industry, is completely
dominated by one state-owned company, Codelco. Ponder that, for a
second: Latin America's poster child for Chicago school economics features state
control of the single most important economic resource. Huh.
Chile also suffers from some of worst
income
inequality in the world...
The part where the op-ed said that we should be thankful that Milton
Friedman caused more regulation, isn't Milton Friedman great for doing that,
caught my attention as well. After all, from a Chicago perspective, markets don't need external guidance, they're are almost always self-regulating. Markets create the incentives needed to ensure that nobody would ever build unsafe financial assetscars buildings.
Thorolfur Matthiasson, Professor of Economics at the University of Iceland in
Reykjavik, explains some of the issues Iceland faces due to the collapse of IceSave:
An Icelandic Saga by Baron Munchhausen?, by Thorolfur Matthiasson: The
Icelandic Landbanki and its internet branches in London and Amsterdam, IceSave,
collapsed in October of 2008. An emergency law cooked up in haste secured the
operation of the Icelandic branches. Icelandic deposits were moved from the
fallen bank to a new bank along with some of the assets of the fallen banks
necessary to cover the deposits. Hence, the crash caused no disruption for
domestic deposit holders. That was not the fate of the IceSave depositors in
England and the Netherlands. At stake were €1.7bn in the Netherlands and £4.5bn
in England – enough to catch the attention of high ranking government officials.
IceSave depositors had been told by Landsbanki and by Icelandic government
officials that IceSave deposits up to €20.887 were backed by the Icelandic
Depositors and Investors’ Guarantee Fund of Iceland. Furthermore, after the
crash the UK decided its fund would guarantee UK accounts up to £50.000 and the
Netherlands depositors’ guarantee was raised to €100.000. The general
understanding was that the UK and the Dutch schemes would honour the guarantees
whereas the Icelandic Fund would reimburse the other two for their part of the
guarantee, i.e. up to 20,887 euros. All three schemes have prioritized claims to
the Landsbanki estate. The gross coverage of the Icelandic Guarantee Fund is
approx. €4 billion of which the Landsanki estate is expected to reimburse ca.
90%.
The Icelandic, Dutch and the UK governments have agreed that Iceland should
reimburse the Dutch and the UK guarantee funds fully and with interest in
respect of the Icelandic part of the guarantee obligations. First payment is
deferred until 2016 in order to give the Icelandic economy scope for recovery
from the current crisis. Payment is scheduled for a period of 8 years. The
amount owed to the UK and the Netherlands will amount to 15% of Iceland’s GDP in
2016. The refund with interest will amount to 1-3% of GDP during the years
2016-2023. This is a heavy burden, equivalent to the military expenditure of
many small nations. A bill of law to ratify the deal between the three
governments was passed in the Parliament on December 30th 2008 and vetoed by the
President of Iceland few days later. The president thus implicitly accepting the
claims of the opponents of the reimbursement deal who argue that the Icelandic
economy could not sustain the loan and would probably collapse under its burden.
This claim does not stand up to scrutiny when matched with the economic facts
presented above. What is going on? Well, this is where Baron Munchhausen enters
the story. The Icelandic people have been led to believe that they stand to pay
the gross amount of the guarantee, that the debt owed to the Dutch and the UK is
more than 50% of GDP and that it will take generations to pay back this debt.
The opposition in the Parliament, parts of the supporters of the Icelandic
Government in Althingi and private pressure groups possibly with political ties
have put on the clothes of Baron Munchausen and exacerbated the situation.
Icelanders, having been badly burnt by the banks and authorities during and
after the crash in October 2008 were more willing to believe tellers of bad news
than tellers of happier tidings. Furthermore, the division within the supporters
of the Government has crippled its ability to argue its case: That the Icelandic
economy will survive even if the Dutch and the Brits get their money back.
A number of commentators have raised a broader point: Should the people of a
tiny nation pay for the mistakes of adventurous bankers? Take the smallness
first. It is true that in numbers Iceland can be compared to Coventry. I am sure
that no British government would levy a tax on the inhabitants of Coventry
should its bankers or entrepreneurs do something stupid like trying to conquer
Oxford Street. Should that not also extend to tiny Iceland? Well, there is a
difference. Iceland has its own Government, its own judicial system, Parliament,
foreign office, is a member of international organizations and has signed a
number of international treaties – undertakings that the inhabitants of Coventry
have left to Westminster. For Icelanders to enjoy the benefits of being an
independent state they must also be prepared to bear the necessary cost.
But this doesn’t answer the question if Icelanders should suffer due to the
doings of a few Icelandic bankers in private companies? According to the
international treaties that we have signed we promised to control them and
secure that the harm they might evoke would be reigned in. This is where we, the
people of Iceland, failed. We seem to have voted time and again for incompetent
politicians that seemingly supervised incompetent regulators. The Central Bank
of Iceland could have stopped Icesave from growing into the sky by increasing
the reserve ratio. Or, as I understand what the Norwegians did: demand that the
guarantees were held in local currency. How many Brits would have trusted a bank
backed by ISK? It is only fair that we shoulder some of the blame and some of
the costs.
The Presidential denial of ratification of the Act of Law permitting a state
guarantee of the IceSave debt has, according to the Icelandic constitution
triggered a referendum due to be held March 6th 2010. The question asked is long
and complicated. But wording is not the hardest part for the electorate. The
hard part is that fact that the referendum is meaningless as the Dutch and the
Brits have put a new offer on the table. The deal now offered is less costly for
Icelanders than the original deal denied ratification by the president. When
this is written Icelandic politicians are sending in counter offers trying to
squeeze the price a bit downwards. That is a dangerous strategy that could leave
the country in serious and unsolved conflict with the Brits and the Dutch. It
would also seriously derail the implementation of the economic program Iceland
and the IMF have put in place and put the economic recovery of the Icelandic
economy into jeopardy. Icelanders are now living in an interesting time.
. I served as graduate assistant in
Rawls's lectures on this subject in fall 1973, and recently reread my notes of
the course. Here are my notes of a particularly important lecture towards the
end of the course: Rawls's treatment of Marx's ideas about economic justice.
This lecture demonstrates Rawls's understanding of the fundamentals of Marx's
economic theories and the labor theory of value. (I am inclined to think that
Joseph Schumpeter's 
(1954) was an important source for Rawls
on the history of economic thought, including Marx's economics, though I can't
at this moment confirm this.) This lecture is particularly significant in that
it is roughly simultaneous with the emergence of "analytical Marxism" announced
by the publication of an important article by Allen Wood, "The Marxian Critique
of Justice" in Philosophy and Public Affairs in 1972 (
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