Acemoglu and Robinson’s blind spot

Today’s must read is a compelling expression of nausea at the state of American political economy by itself and compared to that of the Chinese.  As someone who has spent a little time in China, I can say that there is a greater sense of the collective welfare there than in America, perhaps driven by higher kinship coefficients across the population.

When I try to explain my politics to folks I generally say something like, “I’m out there at the intersection of Noam Chomsky and Ron Paul and Simon Johnson and Acemoglu and Robinson and Richard Wilkinson…,” and if their eyes glaze over that’s generally the end of the conversation.  The learned helplessness of the American people is stunning, but they keep falling for the lies of the false god of Econ spun by the politicians.

I believe the wedge that will drive reform—if we escape falling into a repressive neofeudalism that could persist for a century—will be a Constitutional amendment to repeal Citizens United, to state once and for all (and these are terms that people should be able to understand) that corporations are not people, money is not speech.

From The American Conservative:

China’s Rise, America’s Fall

The great sorting-out

Americans are becoming more and more divided along class lines, even geographically.  This does not bode well for social cohesiveness or the ability to execute effective social policies.  (And you can say “government is the problem” all you want, but I tell you we will have government for the rest of our lives, and I’d rather have government that works.)

Middle-class areas shrinking in US: study – yahoo.com

I recently reread my oldie-but-goodie, “On the coming neo-feudalism,” from two and a half years ago, and was amazed at its prescience.

Whose cash?

I keep hearing that “corporations have $2 trillion of cash on their balance sheets,” and that if they would just spend it, the economy would recover.

This is further evidence to me of the separation of ownership and control of the American corporation, in effect since Berle and Means' seminal book of the same title (link).  From one of the reviews of the book:  “The plain and simple bottom line is that unless you're an insider, you're nothing more than overhead to be tolerated.”

This money supposedly belongs to the shareholders, many of whom are pension funds (remember Peter Drucker’s dream of pension fund socialism)?  He got off that horse quickly and joined the board of GE to tutor Jack Welch and feed his five kids.

The gang leaders of today’s dominant gangs, the modern multinational corporations, are simply waiting the for the right moment to loot their corporate treasuries, again.

Perhaps we can see CEO salaries climb to a thousand times the (declining) median household income!  They can start to give themselves titles, and perhaps permanent inheritable seats in Congress, so that they don’t have to buy every election! 

Who will be king?  Don’t we need a king to complete the picture?

Education & class: can you say “indentured servitude”?

While it is well known that “education pays,” at least for the seasoned worker, the barriers to entry into well-paying jobs are being raised.  The popping of the student debt bubble promises to be extremely unpleasant, with many heavily indebted graduates entering a state of virtual indentured servitude.  Like health care, education in America seems to be only for those that can afford it.  The ruling class tightens its grip on the country.

A few excerpts from articles worth reading in their entirety:

Student debt in America will surge past $1 trillion next year and has already surpassed credit card borrowing, promising to turn out the most hocked generation of college graduates in history.
http://moneywatch.bnet.com/retirement-planning/blog/bank-dad/students-in-debt-1-trillion-hole-and-more-dropouts/740/#ixzz1W9OR3MSE

Student loans are tough. They can follow you for a long time after graduation and can be hard to manage with other debts you take on. Generally, you can't get rid of student loan debt in bankruptcy. This is non-dischargeable debt, which means it remains after bankruptcy and you must pay it.

However, there is one exception you should know about. Some student loans may be considered an undue hardship, and can be discharged, or eliminated, if the loan payments put an extreme burden on you or your family.

Show Your Hardship to the Bankruptcy Court

The first step to filing for undo hardship is to file a separate motion with the court and then meet with the judge to explain your hardship. This isn't easy to do. You have to show three things to prove undue hardship:

• That in your current situation, you can't maintain a minimum standard of living and repay your loans
• Your bad financial situation is likely to continue
• You made honest efforts to pay off the loans

It's almost impossible to show undue hardship unless you're physically unable to work and your situation isn't likely to improve in the future. So, if your student loans make up most of your debt, it probably isn't wise to attempt this unless you're disabled.

In the past, some privately funded student loans could be discharged in a Chapter 7 bankruptcy. However, the law changed with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Now, any education loan that qualifies for a tax deduction is non-dischargeable, unless you show "undue hardship."  
http://bankruptcy.lawyers.com/consumer-bankruptcy/Student-Loans-In-Bankruptcy.html

Just like the labor force as a whole, recent college graduates have seen a near doubling of their unemployment rates. This pattern is similar to the labor market experience of recent college graduates during the cyclical recession of 2001.
http://www.frbsf.org/publications/economics/letter/2011/el2011-09.html

Now evidence is emerging that the damage wrought by the sour economy is more widespread than just a few careers led astray or postponed. Even for college graduates — the people who were most protected from the slings and arrows of recession — the outlook is rather bleak.

Employment rates for new college graduates have fallen sharply in the last two years, as have starting salaries for those who can find work. What’s more, only half of the jobs landed by these new graduates even require a college degree, reviving debates about whether higher education is “worth it” after all.

“I have friends with the same degree as me, from a worse school, but because of who they knew or when they happened to graduate, they’re in much better jobs,” said Kyle Bishop, 23, a 2009 graduate of the University of Pittsburgh who has spent the last two years waiting tables, delivering beer, working at a bookstore and entering data. “It’s more about luck than anything else.”

The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008, according to a study released on Wednesday by the John J. Heldrich Center for Workforce Development at Rutgers University. That is a decline of 10 percent, even before taking inflation into account.

Of course, these are the lucky ones — the graduates who found a job. Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted. That compares with 90 percent of graduates from the classes of 2006 and 2007. (Some have gone for further education or opted out of the labor force, while many are still pounding the pavement.)

Even these figures understate the damage done to these workers’ careers. Many have taken jobs that do not make use of their skills; about only half of recent college graduates said that their first job required a college degree.

The choice of major is quite important. Certain majors had better luck finding a job that required a college degree, according to an analysis by Andrew M. Sum, an economist at Northeastern University, of 2009 Labor Department data for college graduates under 25.

Young graduates who majored in education and teaching or engineering were most likely to find a job requiring a college degree, while area studies majors — those who majored in Latin American studies, for example — and humanities majors were least likely to do so. Among all recent education graduates, 71.1 percent were in jobs that required a college degree; of all area studies majors, the share was 44.7 percent.
http://www.nytimes.com/2011/05/19/business/economy/19grads.html

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….

On taxing consumption, the rich, and other matters

I read The Atlantic’s colorful piece on The Rise of the New Global Elite with appreciation.  Upon reflection, it makes me wonder if Marx’s historical vision wasn’t right after all.  We’ve been saying for several generations that capitalism won because a rising tide lifts all boats and the immiseration of the proletariat never happened.

While shopping for a vendor to do some analytical work recently, I heard from the Indian firm’s young American sales rep, “Why don’t you play the labor arbitrage?”  Does playing the labor arbitrage justify Jeffrey Immelt’s huge compensation at GE?  How much intelligence does it take to do that?

For every genuine innovator who becomes a billionaire there are a hundred twenty hedge fund managers who take their money out of the markets by trading, often manipulatively, if Jim Cramer can be believed on anything (maybe just this).  One hedge fund manager of my acquaintance said in a moment of weakness that he really didn’t believe (the neoclassical economics-finance line) that what he did contributed in any way to “efficient allocation of resources.”

So, we have a class of ultra-rich folks who control the government and its labor and tax laws, and the markets, who think they are smart enough to deserve everything they get.  It’s private property, right? 

And now that the bottom 90 percent in America have been expropriated of much of their share of the nation’s wealth, the conventional wisdom says, “Tax consumption, all the other developed nations do.”

Why?  To provide funds for investment?  And where will that investment be?  Not in America, in all likelihood.  The rich will invest in the high-growth areas (as anyone can do through a mutual fund).  With the wealth lost in the housing bust and household deleveraging, consumption is already going to take a hit. 

How is this not going to further the descent into serfdom of the majority of Americans?  The last thirty years have proven that trickle down economics doesn’t work.  How to kill domestic demand.  Anything to avoid having the rich pay their fair share of taxes.

But The Atlantic’s article makes clear that the global elite sees themselves as world shape-shifters:  if a deal can lift three Indian families into the middle class at the expense of one American family, they call it a win.  They are blithely unconcerned with the rising gulf of inequality between their class and everyone else.

The big money has no national allegiances.  They see themselves “doing God’s work.” 

The moneychangers rule the world.  National governments take their orders.

+    +    +

U.S. aggregate demand, not adjusted for inflation:

To show how in-your-face the don’t-tax-the-rich movement has become, see this article from the Heritage Foundation (bold added—or read The Economist’s special report on the global elite):

Slow-Growth U.S. Now Ripe for Consumption Tax: Kevin Hassett

Kevin Hassett, On Sunday January 23, 2011, 9:00 pm EST

The prospect of meaningful tax reform has become the hot topic in the hearing rooms and, just as important, the back rooms of Washington.

House Ways and Means Committee Chairman David Camp, Republican of Michigan, devoted his first hearing to the topic, and President Barack Obama’s team is talking up the subject in private and in public.

“We’re examining whether we can find the political support for a comprehensive tax reform,” U.S. Treasury Secretary Timothy Geithner said on Jan. 12. Two days later, he met with financial officers from major companies, including Microsoft and Cisco Systems, to discuss the corporate tax rate.

The last overhaul of the tax code was in 1986, when President Ronald Reagan and congressional Democrats including Representative Dan Rostenkowski and Senator Bill Bradley crafted legislation that should be in the Tax Policy Hall of Fame, if there was one. In pairing lower marginal rates with an assault on exemptions and other loopholes, the Tax Reform Act of 1986 proved the benefit of broadening the tax base.

Now it’s time to take that one step further.

In 1651, the English philosopher Thomas Hobbes became the patron saint of tax geeks when he called for government to switch to a consumption tax -- one based on the money people spend, not what they earn. Such a tax, he argued in his book, “Leviathan,” was morally preferable:

“For what reason is there that he which laboureth much and, sparing the fruits of his labour, consumeth little should be more charged than he that living idly, getteth little and spendeth all he gets; seeing the one hath no more protection from the Commonwealth than the other?”

Passing Favors

Like Hobbes, those who today decry the irrationality of the tax code and advocate fundamental reform are ignored by elected officials. Rather than a simple-to-understand code, politicians prefer the current mess, a tangle of exceptions that makes it easy to pass out favors without being noticed.

Just figuring out what you owe is so complicated that few Americans dare do their own taxes. Talk about busywork: In her annual report, the Internal Revenue Service’s national taxpayer advocate, Nina Olson, estimated that American taxpayers and their hired preparers spend 6.1 billion hours annually complying with the law. That’s equivalent to the hours of 3 million full- time workers.

What might we accomplish by dedicating the work of these hypothetical 3 million people to something more productive?

Big Idea

Persistently slow growth has become the kind of problem that calls out for a big idea, one that can produce steady improvement, not just a short-term jolt. Moving toward a consumption tax would encourage investment in capital, potentially increasing future growth.

Lawrence Summers, writing in 1981 -- more than 25 years before he would serve as Obama’s chief economic adviser -- estimated that “a complete shift to consumption taxation might raise steady-state output by as much as 18 percent.”

Harvard University economist Dale Jorgenson, in a 2003 article, said a U.S. move to a true consumption tax is unlikely because it “would shift the burden of taxation from the rich to the poor.”

Instead, he proposed redrawing the existing income-based system so that that earned income is taxed at 10 percent, investment income is taxed at 30 percent, and every dollar of a business’s income generates a credit against its taxes. Jorgenson estimated that such a system would produce gains “equivalent to 19 cents for every dollar of U.S. national wealth.”

Boosting Output

For a book on fundamental tax reform that I edited in 2005 with Alan Auerbach of the University of California-Berkeley, we looked at literature on different models and concluded that switching to an ideal system might eventually increase economic output by 5 to 10 percent.

Our glaring need for economic growth is why, after so many years of talk, there seems to be a growing consensus behind real improvement to our tax code.

The groundwork for this consensus was established by President Obama’s National Commission on Fiscal Responsibility and Reform, which recommended reducing individual tax rates to three tiers of 8 percent, 14 percent and 23 percent, and reducing corporate taxation to a single rate between 23 percent and 29 percent, down from today’s top rate of 35 percent.

Political realities also argue for progress. House Republicans need to give their animated base a win, of course, and Obama needs a big reform as he approaches his 2012 reelection bid.

It’s been 360 years since Hobbes first called for the elimination of income taxation and wholesale adoption of a consumption tax. Its time may finally have come.

Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. The opinions expressed are his own.)

The Great Accommodator strikes again

Alan Greenspan’s face says it all:  “I am a servant of the ruling class, I will accommodate the ruling class, whether as a Fed chief or as an ex-Fed chief.”  BTW, I find a certain similarity between the faces of Greenspan and the President.  These are not strong men.

Greenspan correctly diagnoses the split between the economy of the ruling class and that of everyone else.  Here is Barry Ritholtz at The Big Picture:

“Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the–and everyone’s pointing out, are in excellent shape.

The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy.”

-former Fed Chair Alan Greenspan, Meet the Press

Fascinating quote from Easy Al on Meet the Press via Bloomberg. It has 3 subtexts that might not be readily apparent — until we break it down:

1) Extend the Bush tax cuts on highest bracket earners: Since its the 401(k) crowd that are carrying the recovery, Greenspan suggests, then we best not crimp the income of these big spenders

2) Two Americas: Greenspan seems to be channeling John Edwards when he discusses two economies. The bailouts reduced competition. They extended the life of badly structured financial firms, and forced smaller firms to scramble.

3) Greenspan’s Legacy: It seems that Easy Al can figure out precisely what he has wrought. The secret to getting such candor out of the former Fed chief is to trick him into discussing the broader economy.  That way, he does not realize that he is discussing the effects of his tenure as FOMC chair.

Of course, Greenspan is still wrong on Housing. Recall that he failed to recognize the impending housing correction (collapse more accurately) and made claims that the worst was behind us — just as housing was accelerating downwards:

“If home prices stay stable, then I think we will skirt the worst of the housing problem.  But right under this current price level, maybe 5, 7 or 8 percent below is a very large block of mortgages which are underwater, so to speak, or could be underwater, and that would induce a major increase in foreclosures.  Foreclosures would feed on the weakness in prices, and it would create a problem.  So that–it’s touch and go.”

One last thing: I have to give Greenspan credit for this touch of tax cut honesty:

“Look, I’m very much in favor of tax cuts, but not with borrowed money.  And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous.”

For once, I agree with him . . .

Ah, Barry, you are usually so reasonable.  Why don’t we raise marginal tax rates on the ruling class who have manipulated the tax system and the governance of big corporations so much in their favor?  Are CEOs really worth 400 times the average workers salary today when the multiple was a tenth of that thirty years ago?  In other times of fiscal distress marginal tax rates on super-high incomes were higher, almost as if there were a sense that “shared sacrifice” was a good thing.  Are you and Alan the Mess-Meister suggesting that we should leave marginal tax rates on high incomes alone and raise them on the middle class?

Let’s get real.  Here’s the picture that tells the story of how America has moved from “we’re all in this together” to “you first, after me—it’s the free market way!":

Until Americans start to function as a nation again, we descend into deeper banana republicdom.  Is it the end of the nation-state?  Is the only path to survival to join a strong corporation (i.e., “gang”)?  Will corporations that perpetuate stark inequality survive, if there is truly an “optimal” degree of income inequality that American corporations have clearly exceeded?  Will more egalitarian corporations benefit from higher productivity and resiliency, if the nation-state dies, and prove the template for the next major form of social organization?  (Unfortunately, the immediate associations that come to mind are of the perpetually-warring native American tribes prior to European overrun; and the incredibly funny scenes of warring office buildings in Monty Python’s “The Meaning of Life.”…)

Big changes coming.  The old order is falling apart.  Do unto others as you would have them do unto you.

Announcement and links 2/4

Free will is an illusion, biologist says - PhysOrg

Our indiscretion sometimes serves us well,
When our deep plots do pall: and that should teach us
There's a divinity that shapes our ends,
Rough-hew them how we will,--

-- William Shakespeare, The Tragedy of Hamlet, Prince of Denmark

No Wonder the Economy Isn’t Improving – George Washington

The second article is a nice summary of the myriad problems we face, many related to moral hazard, that are weighing upon the economy.

While I agree the economy is very sick, largely due to the expropriation of a morally disproportionate share of income and wealth by a ruling class that has manipulated both the corporations (our dominant social form) and federal income tax structure (which was put up for sale most recently by Ronald Reagan near the beginning of the current movement to record-high inequality), my expertise is in modeling the collapse of “animal spirits” that is the fundamental proximate cause of every business slump. 

By these lights, we are in an “expansion” phase of the business cycle, and will be until the next collapse of “animal spirits,” which I tentatively forecast for about 2013, but which I’ll be able to forecast with much greater certainty a year ahead of the event.

The announcement is that I will be out-of-pocket tomorrow and Saturday.  The next “animal spirits” update will be available by Monday morning.

Fiscal policy in a classical failure of effective demand

As Professor Saez has shown, the top 1 percent of the income distribution receives 20 percent of income; the top 10 percent 50 percent of income.  This represents a level of inequality greater than that preceding the Great Depression.  Effective demand is failing because most people don’t have enough money, and many people who would like to work can’t get a job.  The current Great Recession is primarily affecting the folks at the bottom.

About half of Americans, the bottom half of the income distribution, pay no federal taxes other than Social Security.  This is where demand is failing.  A tax cut will do them no good.

Now, other things equal, a simple transfer of ten percent of the top 10 percent’s incomes to the bottom 90 percent would contribute greatly to aggregate demand and production.  Or, a tax-financed infrastructure program paid for by the rich would create jobs and incomes for many in the bottom tiers. 

The problem is, no one trusts our government to do anything right.  The Congress is full of pimps representing their Big Money sponsors.  The President is an appeaser.

It is common to say that we’re suffering because wages are converging to global norms.  But what explains the huge increase in income multiples of the people at the top?  Why should the distribution have widened?

Rather, a global ruling class seems to be making its appearance, giving rise to speculation on neo-medievalism, or as I have called it, neo-feudalism, and Dani Rodik’s worry that

democracy, national sovereignty and global economic integration are mutually incompatible: we can combine any two of the three, but never have all three simultaneously and in full. (link)

My belief is that we let the rich have their way out of a delusion that we would be joining them, and that once that dream is over, the scales fall from our eyes, and we begin actively to shame the rich, that the sheer force of human imagination will restore the balance.

If you don’t believe in the power of thought to affect the world directly, read Lynn McTaggart’s books, The Field and The Intention Experiment.  (I’m not linking so you can choose your bookstore.)

I’ve seen the power of thought in an experiment you can try with friends.  Have one person face away from the group, with arms extended horizontally, facing another who puts their fingers on the subject’s wrists, pressing down.  Let the group signal whether it permits the subject to resist the downward pressure—thumbs up—or not—thumbs down.  I’ve seen this done several times, and every time the subject was unable to keep their arms extended when the group signaled thumbs down.

Direct your thoughts to envision social justice in this world.  It will happen if enough of us get beyond the lies.

Dennis Kucinich: a truth teller in Congress

Via:  RawStory.com

Kucinich: ‘Class war is over, working people lost’

By Sahil Kapur
Thursday, December 17th, 2009 -- 3:05 pm

WASHINGTON -- Reflecting on the growing divide between Wall Street and Main Street, Rep. Dennis Kucinich (D-OH) on Wednesday offered a powerful critique on the state of the economy in an open committee hearing.

"The class warfare is over -- we lost," Kucinich said before the Committee on Oversight and Government Reform. "I want to make that announcement today. Working people lost.  The middle class lost."

The harrowing comments from Kucinich, who is Chairman of the Domestic Policy Subcommittee, come amidst a national unemployment rate of 10 percent, one year and several months after the economic collapse of 2008 has marred the livelihoods of many.

"Don't tell me about class warfare," he continued. "Come to my neighborhoods in Cleveland.  I will show you class warfare.  I’ll show you hollowed out areas. I’ll show you businesses that went down because they don’t have access to capital.  And on Wall Street it is fat city.  Don’t tell me about class warfare."

Kucinich, a former presidential candidate who is viewed across the nation as a progressive champion on many issues, said that despite the recent uptick in economic figures, many regular Americans continue to struggle.

"All across this country people are starved for capital," Kucinich said. "Small businesses are failing, you have shopping centers that are becoming vacant because people can’t afford the rents anymore because the people who own the malls the developers are getting cash calls and credit is tightening."

"The separation between the finance economy and the real economy is real. This is not some fake idea. You can’t call that class warfare. That’s a fact."

Kucinich, who voted against the Emergency Economic Stabilization Act of 2008 (also known as the Wall Street bailout), lamented it as a catalyzing force for the rising inequality of income in the United States.

"The wealth of this nation is being accelerated upward," Kucinich said. "That’s one of the problems that I had with the bailout."

"You could say that it helped stabilize the American economy, but what I see is the separation between the real economy and Wall Street. Wall Street is stabilizing, markets are a lot better, banks are doing well -- they parked their money at the Fed for a while so they could get higher interest rates."

With income and wealth inequality at levels greater than in 1929, Kucinich’s statement is not an exaggeration.  Presidents George W. Bush and Barack W. Obama, along with Hank Paulson, Ben Bernanke, Timothy Geithner, Larry Summers and the rest of the Whole Sick Economic Policy Crew, will go down in history as the puppets of the plutocracy who drove the nail into the coffin of the American middle class for a generation or more.  Just wait until they start raising taxes to pay for the bank bailouts!  You never hear these shysters ever talk about raising taxes on the rich (see previous post).  They are good lackeys of the plutocracy, all.

Combined with his sickening Nobel Prize acceptance speech, which displays a stunning ignorance of the realities of terrorism, social justice and proportionality (see Global Guerillas for up-to-speed discussion of asymmetric conflict) President Obama, with his soaring yesteryear rhetoric and good-little-boy conformism to his masters’ wishes, may go down as our most fey, quixotic president ever.

The New York Times on class; Pinochiobama

h/t Mark Thoma

• Interactive graphic (cool)

It is so painful to watch the shredding of our social contract that I’m having trouble posting much.  When I read Mish Shedlock complaining that the healthy will subsidize the sick in a health care program as if this is a proper indictment of “government,” I become very sad that the old right wing meme “government is evil” will be used to complete the neo-feudalization of America.  Much as I admire Peter Schiff for his prescient economic analysis (see for example this) I would be very unhappy to see him in the Senate.  Even Ron Paul has said he would provide health care to the poor and fund it by bringing troops home.

The American people are being snookered again by the right into voting against their own interests.  It is very sad.

Those who voted for Obama thinking they were going to get real change rather than a executive facsimile of Alan Greenspan (I used to irritate liberal friends in the ‘Nineties by calling Alan “The Great Accommodator”—liberals can be so blind to the persuasions of money, too—easy money was good for the people, no?) those who voted for Obama are perhaps the most devastated by the way things are going, now that we see that Obama is just a puppet, an appeaser of Wall Street, a politician who knows his place.