Wednesday, March 30, 2011

The American sheeple

I wish I could believe Paul Farrell, but I think Gerald Celente gets it right when he says the American people have sunk the level of being complete schlubs, adopting a street-gang affect, tuned out from reality their brains scrambled by their throbbing ear buds, and they thumb their latest tweets into their I-Phones.  Farrell is right a depression is coming, but a revolution?  The American sheeple aren’t up to it.  Their government has them in an electoral strait jacket with no real choice, and has federal troops and hired goons ready to round them up into domestic concentration camps if they act up.  And as I pointed out a couple of posts back, the Great Depression did not solve the inequality problem last time around, as I’m sure the rich are aware…. 

Tax the Super Rich now or face a revolution – MarketWatch

The rich want a fast-breeding proletariat to fight their imperialistic wars.  They are (mostly) lacking in the subject of the next link.

The science of empathy Guardian

Madness in high places now….

Sunday, March 27, 2011

More on Modern Monetary Theory

I view this debate as another round of “deficits don’t matter,” which was the hue and cry from both the left and the right a decade or so back as we were digging the hole we’re now in.

Let me say at the outset that I sympathize with the goals of Jamie Galbraith and others who would like to see the Fed finance Great Depression-type jobs programs, education, and other investments in human and physical capital.  It is what the country needs.

However, I view the problem not as insufficient aggregate demand but as our broken social contract, our broken government, our broken American dream.  Printing more money will just go into the pockets of the plutocracy if the banking bailouts and the Stimulus are any indication.  MMT is a joke in the present monetary historical context.  The American income distribution is like a Detroit V8 firing on one cylinder:  it doesn’t matter how much you step on the gas, only one cylinder going to fire.

Until we address the distribution directly, debating the issues in terms of distribution-blind standard macroeconomics is just obfuscation of the real issue, which gives the plutocracy no end of pleasure, I’m sure.  “Raise taxes on the rich?  How dare you speak those taboo words?”

Talking about the income distribution or “incomes policies” has been taboo in academic economics for generations.  “Why should the other developed economies like Germany and Japan with essentially the same aggregate production functions be able to have so much flatter income distributions?” we asked to deafening silence thirty years ago, as Reagan led the charge toward increasing inequality.

Now Emmanuel Saez and colleagues have gotten the distribution into the universe of discourse, but the debate is still stuck in distribution-blind macroeconomics.  Maybe after the revolution the academic economists will talk about why the revolution occurred, and discover that there are standards of fairness that seem to be hard-wired into people (plus or minus a cultural bias) that, once absolutely binding constraints on acceptability are violated, create systemic blowback.

So, again, my sympathies are with the goals of MMT as represented by Jamie Galbraith and others.  But I’d rather see the lessons learned be that (1) fiat currencies always fail because no group of human primates can responsibly handle having the power to print money, and (2) once you’ve gotten rid of the fiat currency, target your social policies (notice I am not saying “economic policies”) on helping people, not with stabilizing the business cycle.  My personal view is that a brisk business cycle is good for us, keeps us on our toes, permits necessary adjustments, etc.; and that we should abandon counter-cyclical economic policies and replace them with [approximately what the Germans have] social policies to provide health insurance, a poverty level dole, job search and retraining assistance.  And pay for it out of tax revenues.

How we get from point A to point B is going to be the challenge of the next generation, and I do believe it will entail revolutionary changes in the structure of American government and society.

Here are the links that inspired this comment:

Paul Takes Another Swipe at MMT - Lambert Strether (Pro MMT)

US Employment and Wages, Modern Monetary Theory, Trade, and Financial Reform – M. Jesse (anti MMT)

Tuesday, March 22, 2011

Links 3/22/2011

Obama is as much of a budget-buster as GWB, from whom he inherited the worst deficit in the nation’s history.  Washington is totally out of control.

My thoughts recently, watching disasters unfold on two sides of the world, have been toward historical parallels with the ‘Thirties.  If Washington decides to take the first steps toward restoring a landed aristocracy by further smashing labor, virtually precluding the higher education of any children but those of the rich, and slashing government budgets across the land—what will we do with the tens of millions of unemployed families that will fill our streets?  This is essentially the problem FDR faced in the ‘Thirties.  Acting in loco parentis as if the market had failed miserably (it had, due to unbalanced aggregate demand due to unbalanced income and wealth distributions, IMHO), he put people to work, mostly to give them hope, as his programs did not get the nation out of the Depression.  World War II equalized the income distribution as “the Pearl Harbor of the 21st Century” failed miserably to do, and set the stage for renewed growth….


(click chart to go to source)

What will America do in the deflationary collapse probably just over the horizon?

Monday, March 14, 2011

Comment on MMT approach to sectoral balances

Yves links to an MMT-oriented site ( this morning that delves into the issue of “sectoral balances,” which are related to the national income and product account identities.  I find that any argument based on an identity is weak to begin with, but the conclusions forced upon this identity by the blogger are not necessary.  Here’s the basic idea:

Sectoral Balances 101

I have written before on this blog about the idea of sectoral balances (as has my fellow blogger Delusional Economics). As you may recall, this is a basic accounting identity which states that in any economy over a fixed period of time, the following must hold true:

Private Sector Balance + Government Sector Balance – Current Account Balance = 0

  • The private sector balance is the excess of savings over expenditure for businesses and households.
  • The government sector balance is government tax revenues less spending.
  • And the current account balance is (in simplified terms) a country’s exports less its imports.

I buy this.  Fact is the U.S. has been running both private and public sector deficits for a long time.  By one estimate I heard at a conference recently, all but one year of positive real GDP growth in the prior decade would not have occurred without home mortgage equity extraction.  And we all know the government has busted its budget royally, accelerating under Bush II and Obama especially.

One thing about identities is that they don’t really capture real economic forces.  Say we wanted to balance the government’s budget.  Rewriting, we have

                 (-)          +                    (-)                =               (-)
Private Sector Balance + Government Sector Balance = Current Account Balance

So if we left the private sector balance alone, all we have to do is reduce the current account balance!  Then we’d only be borrowing to support our private over-consumption!

See how misleading this is?  The problem with balancing the budget in the near term is that it puts the nail in the coffin of effective demand.  Government workers are fired across the land.  Retail sales collapse.  Unemployment shoots up.  Confidence collapses, multiplier and multiplier-accelerator effects proliferate, private investment evaporates, and we are in a more serious depression than we’re in now.

The MMT solution, of course, is to continue printing our “monopoly money” (really!) until inflation becomes a problem, which they say is far away.  This is a Ponzi scheme, as the dollar is the reserve currency.  We are exporting our fiscal failures.  Carry trade excesses are inevitable, as is major blowback from the rest of the world when they get tired of holding our fiscal feces.  War-induced inflation is more probable in the near term.

The one inescapable implication of the identity above is that when as a nation you’re spending more than you make, you must borrow from the rest of the world.  To remedy that requires an across-the-board belt tightening.

Given that, the only long-run solution is to rebalance domestic demand to avoid the country splitting apart (see on “the gathering storm”).  In the intermediate term this will require mitigating extreme income inequality with more progressive taxation; a poverty level dole for families displaced by the depression offered as workfare; a decent education for the kids; and an extension of Medicaid in lieu of the ridiculous “solution” forced on the Democrats by the health insurance industry.  Otherwise we will destroy our most valuable asset, our human capital. 

What we have now is socialism for the rich.  Let’s call a spade a spade.  The banking bailouts were the largest transfer of wealth from working taxpayers to the rich in the history of the world, as Barry Ritholtz ( never tires of pointing out.  “Winner take all” compensation schemes are everywhere.  The rich have manipulated virtually every aspect of taxation and corporate governance to their benefit.  No nation is better than its treatment of its poor.  (A deeper question:  Does the nation-state still have any power, when multinational corporations run the world?)  America ignores the lessons of history at its gravest peril.

What we need is a little more “socialism” for the rest of America.  Or, as Adam Smith and I would prefer, a return to a capitalism within a framework of upgraded “moral sentiments” on the part of all Americans.

Cain asked the question, “Am I my brother’s keeper?” 

Do you know the answer?

Sunday, March 13, 2011

Keeping the proles in their place

The assault on teachers can be viewed as part of a semi-conscious program to keep the bottom ninety percent or so of the American population in a disadvantaged situation.  After all, if the children of public schools can’t really compete cognitively with the private-school educated children of the rich, the class structure survives as a pseudo-“meritocracy.”  Actually, given that public schools are locally funded by property taxes, the rich can also fund the best public schools for their children in their communities—but even in these communities, mine included, the grass roots Republican wannabes are leading an attack on teacher salaries, even where teacher salaries rank near the bottom on a national scale… which confirms my belief that greed and stupidity frequently go together and are seeing a flourishing in the Republican party today.

Once the unions are broken and the tenure system (which I do not support) is gone, there will be no choice but to pay teachers more to make up for lost job security that has significant positive net present value, especially when the economy is in a low grade depression—just to attract a crop of teachers at today’s low standards.  See the bold-added passages below. 

The destruction of human capital continues apace in the Great Recession.

“Pay Teachers More” – NYT

Pay Teachers More


From the debates in Wisconsin and elsewhere about public sector unions, you might get the impression that we’re going bust because teachers are overpaid.

That’s a pernicious fallacy. A basic educational challenge is not that teachers are raking it in, but that they are underpaid. If we want to compete with other countries, and chip away at poverty across America, then we need to pay teachers more so as to attract better people into the profession.

Until a few decades ago, employment discrimination perversely strengthened our teaching force. Brilliant women became elementary school teachers, because better jobs weren’t open to them. It was profoundly unfair, but the discrimination did benefit America’s children.

These days, brilliant women become surgeons and investment bankers — and 47 percent of America’s kindergarten through 12th-grade teachers come from the bottom one-third of their college classes (as measured by SAT scores). The figure is from a study by McKinsey & Company, “Closing the Talent Gap.”

Changes in relative pay have reinforced the problem. In 1970, in New York City, a newly minted teacher at a public school earned about $2,000 less in salary than a starting lawyer at a prominent law firm. These days the lawyer takes home, including bonus, $115,000 more than the teacher, the McKinsey study found.

We all understand intuitively the difference a great teacher makes. I think of Juanita Trantina, who left my fifth-grade class intoxicated with excitement for learning and fascinated by the current events she spoke about. You probably have a Miss Trantina in your own past.

One Los Angeles study found that having a teacher from the 25 percent most effective group of teachers for four years in a row would be enough to eliminate the black-white achievement gap.

Recent scholarship suggests that good teachers, even kindergarten teachers, increase their students’ earnings many years later. Eric A. Hanushek of Stanford University found that an excellent teacher (one a standard deviation better than average, or better than 84 percent of teachers) raises each student’s lifetime earnings by $20,000. If there are 20 students in the class, that is an extra $400,000 generated, compared with a teacher who is merely average.

A teacher better than 93 percent of other teachers would add $640,000 to lifetime pay of a class of 20, the study found.

Look, I’m not a fan of teachers’ unions. They used their clout to gain job security more than pay, thus making the field safe for low achievers. Teaching work rules are often inflexible, benefits are generous relative to salaries, and it is difficult or impossible to dismiss teachers who are ineffective.

But none of this means that teachers are overpaid. And if governments nibble away at pensions and reduce job security, then they must pay more in wages to stay even.

Moreover, part of compensation is public esteem. When governors mock teachers as lazy, avaricious incompetents, they demean the profession and make it harder to attract the best and brightest. We should be elevating teachers, not throwing darts at them.

Consider three other countries renowned for their educational performance: Singapore, South Korea and Finland. In each country, teachers are drawn from the top third of their cohort, are hugely respected and are paid well (although that’s less true in Finland). In South Korea and Singapore, teachers on average earn more than lawyers and engineers, the McKinsey study found.

“We’re not going to get better teachers unless we pay them more,” notes Amy Wilkins of the Education Trust, an education reform organization. Likewise, Jeanne Allen of the Center for Education Reform says, “We’re the first people to say, throw them $100,000, throw them whatever it takes.”

Both Ms. Wilkins and Ms. Allen add in the next breath that pay should be for performance, with more rigorous evaluation. That makes sense to me.

Starting teacher pay, which now averages $39,000, would have to rise to $65,000 to fill most new teaching positions in high-needs schools with graduates from the top third of their classes, the McKinsey study found. That would be a bargain.

Indeed, it makes sense to cut corners elsewhere to boost teacher salaries. Research suggests that students would benefit from a tradeoff of better teachers but worse teacher-student ratios. Thus there are growing calls for a Japanese model of larger classes, but with outstanding, respected, well-paid teachers.


Monday, March 7, 2011

Dynamic income distribution

Very cool configurable graphic based on Saez’ work that allows you to see which segments of income distribution gained or lost during various time periods.  Briefly playing around with it, it appears that during periods of average income loss the distribution of losses is more equal than the typical distribution of income gains.  Try it!  from the Economic Policy Institute

Friday, March 4, 2011

‘Animal spirits’ poised to go positive

See CalculatedRisk for news coverage.  The labor market is still on life support, half-dead. 

My interest is when the next collapse of confidence will occur in America.  In my view it is a necessary and sufficient condition for a recession.


Recall that my measure of animal spirits is

A = - (U – UMEAN)/sigma(U)

over a rolling 48-month span.

My forecast of the unemployment rate is judgmental.  It probably will not go up much between now and a presidential election, but any crossing to the low side of the adaptation level—so that things are better than we’re used to—will be a stretch, in my view.  And from there any increase in unemployment will quickly push animal spirits lower.  Also, there is a general awakening to the fact that the unemployment rate masks a lot of unemployment.  If the labor force hadn’t declined as steeply as it has recently, the unemployment rate would be 12 percent.  And to call work at subsistence wages “employment” is a bit of a stretch (Study: Most new jobs added in 2010 are low-paying). 

I am dealing with the distortions to the Treasury term structure due to ZIRP, and if anyone can send me monthly time series on Treasury debt from 1928 to 1952 I’d appreciate it.

Other times when animal spirits were in a weak approach to being positive like this are these:

  • Fall 1972, just before the Nixon reelection, and just before the economy spiraled into the deep ‘Seventies recession
  • Winter 1977, coming out of the ‘Seventies recession, with Jimmy Carter at the helm, trying to figure out how to whip inflation (which Carter did in 1979 after appointing Paul Volcker to the Fed)
  • September 1983, coming out of the steep ‘Eighties Carter-“Stay the Course” Reagan-Volcker double-dip recession, as Reagan was putting in the place the tax system that would help kill the American middle class (“Mourning in America”)
  • Spring and Summer 1993, as the economy was coming out of the Clinton recession of the early ‘Nineties, our first “jobless recovery,” as aggregate income and demand began to get skewed (and Clinton got busy assisting his buddy Bob Rubin in screwing the middle class by further deregulating Wall Street)
  • Winter and Spring 2004, in the jobless recovery from the Dot-Com bubble-burst-recession, as W. ramped up the wars to goose the economy, while further cutting taxes on the rich
  • And now….

On average, the next collapse of animal spirits was over four years away.  The shortest interval was from 1972 to the onset of the 1973-1975 recession, about a year.  We may have a longer cycle ahead of us—as wars grind away, commodities rally and fade and rally again, and the dragon inflation slowly awakens from its slumber—than my judgmental forecast allows.  This is not to say the economy will recover.  If we track the ‘Thirties in basic shape, we can remain in a depressed condition for the rest of the decade, before major war or revolution occurs.  But a collapse of confidence—and a new downturn—could begin in as little as a year, should the unemployment rate rise persistently.  Government budget cuts could accomplish this.  The collapse of animal spirits then causes multiplier effects through reduced MPCs and spending.  Increased interest rates would also cause massive fiscal stress (see ‘s current offering for a dismal meditation on this). 

The big difference, as and never tire of reminding us, is peak oil.  Unless a miraculous energy alternative is found, this “depression” is permanent.

Thursday, March 3, 2011

Rational health insurance systems exist—but not in US

Via:  Miller-Mccune  h/t

Why Should I Buy Health Insurance?

Europe has answered that question to its own satisfaction with a mandatory system that treats health care as a social insurance handled by private firms.

By Michael Scott Moore

As judges around the U.S. weigh the constitutionality of the Affordable Care Act — Obama’s sweeping health care reform law — it’s worth asking how Europe navigated the same questions.

The problem in most state challenges to the new law is the un-American-sounding mandate, the requirement that everyone in the nation must buy health insurance. Europeans have had similar mandates for decades, but you hear very little soul-searching here about fairness or freedom of choice. Is it because Europeans are all a bunch of socialist weenies who don’t mind an overregulated market?

Not quite. The European Union — that garden of overregulation — has fair-competition rules meant to keep markets free, just as the U.S. Constitution has the Commerce Clause. Now, no less than the years after World War II, when Western European countries built their modern health care systems, forcing the public to buy something, whether bowling balls or fire insurance, would seem un-European as well as un-American. It would be an artificial prop for an industry.

But health care, early on, was judged to be different. In the freest European systems — the Swiss, Dutch and German schemes — people can choose from a vast variety of health care providers. But by law they have to choose one. In return for this gift of guaranteed business, the government regulates the companies heavily. The justification for such meddling is that health care is a “social insurance,” a basic service, not a standard sold product.

As Timothy Stoltzfus Jost, a law professor at Washington and Lee University, pointed out in a paper last year, the result is not exactly a market-disciplined health care system. “This [European] understanding of the nature of health insurance is not merely conceptual, but is reflected in the approach that Switzerland and the Netherlands take to financing and regulating health insurance,” he writes. “In both countries, public funding is extensive.”

The German system, intriguingly, reverses the grim “risk-based” equation familiar to every American looking to buy insurance. German citizens pay into a pool for health care according to their income, not their health risks — but the Krankenkasse receives a lump of money back from the pool according to each patient’s risk. That means German insurance companies draw more money for taking on patients with more risk — a built-in reason to cover the old and infirm.

It involves a lot of government fiddling, but what Krankenkassen don’t do under this system is suffer. They do, however, act like insurance companies. When you buy coverage in Europe, you get it.

The incentive structure in America right now pushes companies in the other direction, away from paying coverage wherever they can. That’s the problem Obamacare wants to solve. No purely market-driven system on earth has yet solved it. The systems in Switzerland and the Netherlands were held up for a while as possible free-market models for the U.S., but they’re not strictly market-driven, founded as they are on a notion of health care as a social service.

Legal arguments over the mandates in Obamacare focus on whether the Commerce Clause of the Constitution gives Washington the power to regulate an industry that tends, historically, to be handled by individuals, or by localities and states. It probably does, but the idea of being forced to buy insurance by law will still confuse a lot of Americans when Obamacare kicks into high gear in 2014.

America has to find her own way through this thicket of legal distinctions. There’s no reason to ape the Europeans, because their systems aren’t perfect; in fact it would be nice to watch the American legal process forge something new. But Europeans settled the underlying moral questions — to their own satisfaction — decades ago.

Wednesday, March 2, 2011

A propaganda blast from Morgan Stanley

Via:  Mish  Download “USA, Inc.” here.

Here is a trenchant, cutting analysis (not) of what ails America, looking at the USA as if it were a private company, not a nation—and we all know how American companies deal with excessive costs.  They take it out of labor’s hide.

Of course, the recommendations are to cut the entitlements of everyone, including “those for whom there are few alternatives” (paraphrase).  And naturally, we should tax consumption (make the tax system more regressive)—because everyone else does.  (In Euroland they get a lot more for their money, but that isn’t mentioned.)  I will credit them with showing that we could basically solve the fiscal problem by raising the marginal tax rate on the highest two tiers of income to around 75 percent, something I’ve been advocating for a while.

The basic flaw of the report—other than treating a nation as a private corporation, which carries a frightening amount of pernicious subliminal baggage—is its excessive reliance on arithmetic, scenarios and other corporate finance style BS that has nothing to do with what ails us (IMHO), namely, that our social contract no longer works.  Prima facie evidence of which is the prevailing kleptocracy that has replaced democracy in the United States.  The rules of corporate governance, the interlocking boards and CEOs, the tax system, the bought-and-paid-for Congress and its major client, the military-industrial complex, the massively messed up health insurance system—everything today conspires to make the USA, our nation, a banana republic.  Yes, we have no democracy.  The rich get richer, the poor get poorer.

How do you address a massively unequal rigged economic system, according to Morgan Stanley?  By cutting the entitlements of those at the bottom.  To make us more competitive, so the rich can get richer on the backs of American serfs.

The American social contract is broken.  It will take more than arithmetic to solve this problem.  It will take a massing of social will to reinstitute democracy in America. 


See also:  Fix Congress First!