Stephen King on Doing Your Share
This is too good not to pass along (via Tom Head on Facebook):
Stephen King: Tax Me, for F@%&’s Sake!
The Euro Crisis: It Looks Bad
The idea of a common currency has a certain appeal. First, it eliminates exchange rate friction, and second, it provides a stable basis for trade between countries with a common medium of exchange. In short, it eliminates exchange rate risks. A seller in Germany, for instance, selling a widget to a purchaser in France, is spared the uncertainty that he will be paid in a currency that declines in value between the time the contract is made and the time that payment is tendered.
As lenders are discovering, however, the elimination of exchange rate risk does not automatically eliminate other forms of risk, the most obvious one being that of default.
Default is now a real possibility, if not a certainty, in the case of Greece. The incorporation into the Eurozone of nations with very different economic structures and very different levels of efficiency almost guaranteed unequal trade balances between the member countries, and led to continually increasing debt on the part of those nations that experienced a negative balance of trade. One of the prerogatives of sovereignty is the power to create money. A sovereign that gives up the power to create money has lost much of its power.
A new article at the Levy economics Institute of Bard College discusses these problems in non–technical terms that a lay person can understand with minimal training in economics.
Fiddling in Euroland as the Global Meltdown Nears
The nations of the Eurozone are, to a great extent, in the position of American states without Washington. Since American states cannot create their own money, they are users, rather than creators of currency. If they need more money than they receive in taxes and fees, they must borrow money in a currency they do not create. As the article points out, the federal government for this reason has assumed responsibility for many expenditures that would be problematic if undertaken by the individual states: Social Security, Medicare, Medicaid, unemployment insurance, aid in natural disasters, and the bailout of financial institutions. My own state, Mississippi, would rapidly become a basket case under a system like the Eurozone. As it stands now, Mississippi receives more than $2 from the rest of the nation through the federal government for every $1 it pays to the rest of the nation in the form of federal taxes.
The Eurozone simply has no mechanism for resolving the imbalances that have resulted from the introduction of a common currency without a common fiscal policy. The European Central Bank is forbidden by law to purchase bonds of its member states. Europe has no equivalent of our Department of the Treasury or the Federal Reserve system. It is clear at this point that the Germans have insufficiently contemplated the simple fact that when one nation runs a trade surplus in a closed economic community, it must be balanced by a deficit in the remainder of the community.
We have been told by people that almost certainly know better that governments are like families, where a deficit ultimately leads to bankruptcy. Likewise, the idea of a trade surplus is considered morally good and a deficit morally reprehensible. The Germans, models of thrift and efficiency, are reluctant to bail out the countries of the periphery who have been running deficits so that Germany can enjoy the economic benefits of the surplus. It is a matter of virtue and vice, and they see the southern European nations as addicted to borrowing to finance their balance of payments deficits.
Governments, however, are not like families. For a family to be like a government would require that the family be able to make its purchases solely with IOUs and have the power to satisfy the debt represented by the IOUs simply by exchanging them for more IOUs. Our hypothetical family would also have to possess the legal power to tax its neighbors, accepting only its IOUs in payment, thus creating a demand for them.
Sovereign currencies, with all their inefficiencies, automatically compensate for inequalities in the balance of payments with changes in the exchange rates. If Italy is spending more on German goods than Germany is spending on Italian goods, then ultimately the mark must appreciate against the Italian lira.
When the lira depreciates, Italian goods become cheaper in Germany and German goods become more expensive in Italy, and thus Germans buy more Italian goods and Italians purchase fewer German goods. The balance of payments is thus automatically equalized by the exchange rate adjustment. Because this automatic mechanism was blocked by the Maastricht Treaty, an imbalance in currency flows must be balanced by borrowing or by investment. The treaty also imposes one more blockage in conjunction with the common currency, and that is that individual nations are not allowed to accumulate excessive debt as a percentage of national GDP. This limit has been observed in the breach more than in the keeping, but the Greek debt has finally reached such extreme proportions that it is unlikely to ever be paid. As every second-semester economics student is aware, the austerity measures imposed upon Greece as a method of bringing its balance of payments into balance will only serve to depress its economy and make it even more unable to pay its debts when due.
The field of economics, in spite of its claims to scientific validity, is still a strange amalgam of political philosophy and group psychology. The mathematical side of economics consists of very precise calculations based upon nebulous data and highly questionable assumptions about the way human beings perceive reality and make decisions. Historically, mainstream economists have chosen assumptions that virtually guaranteed outcomes that favored elites currently in power. It was therefore a foregone conclusion when Ronald Reagan was elected president that neoclassical economics (Milton Friedman) directed the economic policy of the United States and favored the very wealthy at the expense of the remainder of the population. Income statistics compiled by the Bureau of the Census show an immediate surge in inequality beginning almost immediately with Reagan's inauguration and proceeding apace to the present, with only a few setbacks in the late 1990s.
It should not be surprising, therefore, that the Germans have become attached to an economic system that has enabled them to run a surplus and thereby maintain low unemployment and a high standard of living. Any solution to the debt crisis whose epicenter is Greece but which also encompasses Italy, Spain, and Ireland, must either reduce that surplus or provide a means for recycling euros from north to south by a mechanism other than borrowing from private banks, which has been the principal recourse up to today. The Germans feel that they have earned their power and prosperity and understandably are resisting any solution that would diminish what they now have.
Since Germany is the economic powerhouse of the European economic community, and France is going along with Germany, there are few avenues leading to a mutually satisfactory arrangement that takes into account the reality of currency flows, differences in national economies, and national sovereignty.
It is clear that the members of the EEC are not ready to form a United States of Europe, with the equivalent of national treasury and a true central bank, and thus it is hard to see how the Eurozone can survive. My prediction is that Greece will leave or be expelled from the Eurozone within the next year. Italy, Spain, and Ireland will remain longer, but their departure is almost foreordained. This will lead to severe hardship and instability, both social and financial, and the United States will not remain unscathed, since our banks possess quite a large quantity of European bank debt. If those banks become insolvent, then our domestic banks will suffer serious losses. The future of our financial system will thus be strongly influenced by the solvency of the European banking system—not a reassuring prospect.
A Short History of Debt as Applied to Our Current Situation
Michael Hudson, President of The Institute for the Study of Long-Term Economic Trends and Distinguished Research Professor of Economics at the University of Missouri, Kansas City, has written a remarkably perceptive essay on the history of debtor-creditor relationships and forms of government, applying them to what is happening here in the U.S. and in Europe. His conclusion:
The entire article is well worth reading: Debt and Democracy: Has the Link been Broken?Democracy involves subordinating financial dynamics to serve economic balance and growth – and taxing rentier income or keeping basic monopolies in the public domain. Untaxing or privatizing property income “frees” it to be pledged to the banks, to be capitalized into larger loans. Financed by debt leveraging, asset-price inflation increases rentier wealth while indebting the economy at large. The economy shrinks, falling into negative equity.
The financial sector has gained sufficient influence to use such emergencies as an opportunity to convince governments that that the economy will collapse they it do not “save the banks.” In practice this means consolidating their control over policy, which they use in ways that further polarize economies. The basic model is what occurred in ancient Rome, moving from democracy to oligarchy. In fact, giving priority to bankers and leaving economic planning to be dictated by the EU, ECB and IMF threatens to strip the nation-state of the power to coin or print money and levy taxes.
Also, you can read on Hudson’s web site the full version of the article, which appeared in the Frankfurter Allgemeine Zeitung on December 6, 2011
The article recalls Thomas Cahill’s recounting of the last years of the Roman Empire in How the Irish Saved Civilization (Hinges of History)
. The nobility of the empire—the 1% of that time—acquired larger and larger landholdings and personal wealth, but were able by their political power to exempt themselves from paying any taxes, the burden of which increasingly fell upon a diminishing middle class and growing underclass. Things became so bad that for the first time the emperor promulgated laws forbidding infanticide, as parents became increasingly unwilling to subject their children to such a miserable life. In the early Fifth Century, when the barbarians broke through the Roman legions guarding the Rhine, they experienced little resistance from a population that simply didn’t care, that couldn’t imagine that the Germans could possibly be any more oppressive than their Roman masters.Hudson’s analysis uncovers a cyclic process:
Every economy is planned. This traditionally has been the function of government. Relinquishing this role under the slogan of “free markets” leaves it in the hands of banks. Yet the planning privilege of credit creation and allocation turns out to be even more centralized than that of elected public officials. And to make matters worse, the financial time frame is short-term hit-and-run, ending up as asset stripping. By seeking their own gains, the banks tend to destroy the economy. The surplus ends up being consumed by interest and other financial charges, leaving no revenue for new capital investment or basic social spending.
This is why relinquishing policy control to a creditor class rarely has gone together with economic growth and rising living standards. The tendency for debts to grow faster than the population’s ability to pay has been a basic constant throughout all recorded history. Debts mount up exponentially, absorbing the surplus and reducing much of the population to the equivalent of debt peonage. To restore economic balance, antiquity’s cry for debt cancellation sought what the Bronze Age Near East achieved by royal fiat: to cancel the overgrowth of debts.
It appears that we are experiencing the same process, and probably have passed the tipping point economically and politically. What will happen, however, when the almost inevitable natural disasters caused by global warming come upon us? There will be a mind-boggling disruption of what we call the economy that could sweep everything away, especially the house of cards built with obscene levels of debt. Get ready for a bumpy ride.
Does the Budget Deficit Have to be Fixed on the Backs of the Middle Class?
Dean Baker has an excellent column on fixing the budget deficit.
I believe, however, that he needs to address the balance-of-payments problem, as well. Other nations—China being the most obvious—are maintaining their employment level by running positive balance-of-payments levels. This has also vastly enriched American corporations, who, with the assistance of low foreign wages and a high dollar, are able to manufacture goods overseas cheaply and sell them to Americans extremely profitably. That policy, however, is destroying our middle class and impoverishing almost all of us not in the top 1%.
Baker has written about the overpriced dollar and the so-called “free trade agreements” as part of the problem, but I haven’t read any discussion about how it relates to the domestic budget deficit. If the current account (balance-of-payments) were perfectly balanced, that is, if we were selling goods overseas equal in value to the ones we purchase from overseas, we would have literally millions of additional jobs in this country, many of them in manufacturing, where wages tend to be decent.
With millions more employed, tax revenues would increase and the budget deficit would not seem so overwhelming.
The foreign trade deficit may seem abstract next to the budget deficit, but its effect on Americans is far greater. One of the reasons that stimulative measures have limited value is the tendency of so much of the stimulus to go overseas, since so much of what we buy comes from overseas.
The only reason that the current account deficit hasn’t already been fixed, I suspect, is due to the fact that corporations and individuals who are profiting the most from the current arrangement possess the political power to squelch any ameliorative actions in Congress or the executive branch. Wall Street depends upon a strong dollar to draw investments from overseas. Virtually all major manufacturers have moved their manufacturing facilities overseas, a process that began in the ‘70s, and accelerated when the Reagan administration actively encouraged offshoring.
Michael Moore, in his latest book, “Here Comes Trouble: Stories from My Life
That process has continued with a vengeance under NAFTA and other trade agreements that make it profitable to export jobs, rather than goods. No president or Congress has attempted to change any of this, which makes me believe that they are actually comfortable with it. Obama has made little noise about the current account deficit. The Republicans seem to have a pathological obsession with the budget deficit, the reduction of which would bring about a sharp recession (as it did in 1937 under Roosevelt), which would, of course, make the deficit even worse.
It’s hard to be hopeful in the middle of such craziness.
Krugman Nails It
An excerpt:
What’s going on here? The answer, surely, is that Wall Street’s Masters of the Universe realize, deep down, how morally indefensible their position is. They’re not John Galt; they’re not even Steve Jobs. They’re people who got rich by peddling complex financial schemes that, far from delivering clear benefits to the American people, helped push us into a crisis whose aftereffects continue to blight the lives of tens of millions of their fellow citizens.
Yet they have paid no price. Their institutions were bailed out by taxpayers, with few strings attached. They continue to benefit from explicit and implicit federal guarantees — basically, they’re still in a game of heads they win, tails taxpayers lose. And they benefit from tax loopholes that in many cases have people with multimillion-dollar incomes paying lower rates than middle-class families.
Does "States' Rights" Mean Mississippi Loses the Federal Gravy?
The large blue states, on the other hand, are actually supporting the red states: California gets back 78 cents for every dollar it pays to Washington, New York 79 cents, and Massachusetts 82 cents.
My own state, Mississippi, the biggest freeloader of all, seems to be one of the most eager to balance the budget with painful benefit cuts to the less-fortunate, and at the rate we are going down that path, we may just get what we think we want.
Go on and bite the hand!
But read this first:
Robert Reich: Rick Perry's Secret Plan to Save Blue States from the Red States
What's Happing to Medical Insurance and Why We are Being Scammed
These are lies, pure and simple. The conservative plutocracy has bitterly resisted any benefit that went to the bottom 90% of the people of this nation and done everything in its power to make the vast majority of U. S. citizens insecure, deeply in debt, and beholden to the whims of employers for their very survival. They want the elderly to move in with their children when they no longer can work and then die early for lack of decent medical care - to “reduce the surplus population,” as Ebeneezer Scrooge would say.
Let me put it plainly: modern American conservatism is dishonest and corrupt to the core. There is no truth in it. Conservative leaders are worse that con-men; their thievery is on a far more colossal scale, because they aim to impoverish just about everyone except the extremely wealthy and powerful. Once they have accomplished that, they will blame the losers in this class war for not working hard enough.
On such a pessimistic note, a recent article by Shamus Cooke on the website of the Centre for Global Research is worth reading for the insight into what the power elite is planning for the future delivery of medical care in the United States:
America's Great Health Care Takeaway
The article concludes:
Read and ponder. Then act.The above health care policies are the natural result of a health care system based on the principles of private profit. Corporate profits demand that companies provide the least amount of health care services at a minimal cost. From this vantage point, health care is a commodity that is bought by those who can afford it, instead of it being the human right of every person, as the U.N. Universal Declaration of Human Rights asserts. Europe has already proved that a nationwide, single payer system is vastly superior when it comes to quality, cost, availability, and results.
The single payer system did not come into existence from the benevolence of kind governments, but from the demands of people in the street. Organized workers must fight to maintain their benefits; unorganized workers must organize to fight for better insurance; and older workers/retirees must fight to maintain and expand Medicare. The logical end to such struggles would be to demand a Medicare For All system, financed by taxing the wealthy and corporations.
Why Manufacturing is Important
Those jobs disappeared as a result of a high dollar and international trade agreements, like NAFTA. We are poorer because of it in more ways than one.
Economist Dani Rodrick, Professor of International Political Economy at Harvard University, explains why manufacturing is important:
Dani Rodrik: The Manufacturing ImperativeIndeed, the manufacturing sector is also where the world’s middle classes take shape and grow. Without a vibrant manufacturing base, societies tend to divide between rich and poor – those who have access to steady, well-paying jobs, and those whose jobs are less secure and lives more precarious. Manufacturing may ultimately be central to the vigor of a nation’s democracy.
As I have mentioned before, we cannot indefinitely buy manufactured goods from China in exchange for government bonds. We need to be manufacturing goods and selling them at a profit, not pushing money and property around, grabbing a piece each time it passes by, which is basically how the financial system makes money.
Renewing our manufacturing sector will require tax, monetary and fiscal policies that reward manufacturing and discourage the financier and rentier. Today, the incentives run the opposite way and thus encourage highly destructive behavior.
Riots in Britain - Could it Happen Here?
When enough people have nothing whatever to lose by barbaric behavior and the prospect of temporary gain, we should expect barbaric behavior.
Is this complicated?
Here's what British blogger Peggy Red writes (via alternet.org):
Panic on the streets of LondonNo one expected this. The so-called leaders who have taken three solid days to return from their foreign holidays to a country in flames did not anticipate this. The people running Britain had absolutely no clue how desperate things had become. They thought that after thirty years of soaring inequality, in the middle of a recession, they could take away the last little things that gave people hope, the benefits, the jobs, the possibility of higher education, the support structures, and nothing would happen. They were wrong. And now my city is burning, and it will continue to burn until we stop the blanket condemnations and blind conjecture and try to understand just what has brought viral civil unrest to Britain. Let me give you a hint: it ain’t Twitter.
It's not a coincidence that the vast shift in wealth and income from the lower and middle classes to the wealthy in the United States, beginning with Reagan, was accompanied by the militarization of the police, the dismantling of the Bill of Rights (justified by the war on drugs and then the war on terror), the gutting of the social safety net, the destruction of our unionized industrial base by a deliberate policy of overvaluing the dollar on the international exchanges, and the relentless underfunding of public education from infancy through graduate school. This was all intentional. Margaret Thatcher’s neo-conservative austerity (for the middle and lower classes) happened more quickly, hence more obviously.
The insane but absolute logic of movement conservatism, given its reptilian premises, virtually mandates a political and economic downward spiral for everyone but a tiny and fabulously wealthy minority, along with their political enablers, apologists and enforcers.
And it is difficult, if not impossible, to see how this can be averted. The momentum is powerful and the will to fight back is weak to nonexistent. The middle class of this nation is voting itself into extinction.
More insight:
Nina Power: As London Explodes in Riots, There Is a Context That Can't Be Ignored: Brutal Cuts and Enforced Austerity Measures
William Bowles: Riots in Britain: Back to the Future
Ilona Catherine Burton: Manchester Riots
Michael McCarthy: No shame, no limits: Has the behaviour of the mob destroyed the idea of British civility for ever?
Update 8/11/2011:
Michelle Chen: Police and Thieves: Making Sense of the English Riots (via alternet.org)
Emily Manuel: Why Riot and Not Revolt in London?
Riots are what happens when people—almost always young men—stop believing in their communities, in their country, in their rights as a citizen. Riots are what happens when whole groups are treated as potential or actual criminals by the police. Riots happen when anger, resentment, testosterone and yes, consumerist desire are greater than civic pride or fear of the police, when the facade of power finally cracks and people realise they outnumber the forces of order. And mostly particularly, riots are what happens when people despair, when there appears to be few options in the present and none in the future, and no way to fix the situation.
A Sobering Summary of the American Condition
On the blog Balkinization, Frank Pasquale paints a bleak picture of our prospects:
When TV talking heads prate about "shared sacrifice," they might want to pause to consider stories like Soto's [a quadriplegic whose story appears earlier in the blog post]. They should also reveal where a particular multimillionaire will invest gains from, say, the continuation of the Bush tax cuts, or the zeroed out estate tax of 2010. How much gold does the rotting teeth of the poor buy? Are volunteer dentists effectively subsidizing summer houses? Executive protection dogs? Private jets to summer camp?
These trade-offs become more compelling as data renders the narrative of "trickle down job creation" implausible. The most recent "recovery" saw 88% of gains go to corporate profits, and about 1% go to wages. Workers are caught in a downward spiral: unemployment reduces their bargaining power, which in turn lets bosses pile more duties onto fewer people, who effectively increase unemployment more by doing the work or 1.5 or 2 or 3 workers for the price of 1. Many women face the brunt of the transition: "When companies decide to lay off secretaries and assistants while making employees pick up the slack, women take the hit." Every margin has to be worked to keep CEOs' pay averaging hundreds of times that of their typical workers.
It’s an ugly picture.
And we (particularly those of us here in Mississippi) are in denial—deep, deep denial—and our elected officials are doing the very things guaranteed to make it worse.
Read the blog post, Shared Sacrifice of Whom?
The Significance of the S&P Downgrade on the Ability of the U. S. Government to Borrow Money
(You guessed it.)
For an intelligent perspective on the “downgrade” take a look at a recent article in the Naked Capitalism Blog.
Krugman on the "Deficit Agreement"
Read the entire article.For the deal itself, given the available information, is a disaster, and not just for President Obama and his party. It will damage an already depressed economy; it will probably make America’s long-run deficit problem worse, not better; and most important, by demonstrating that raw extortion works and carries no political cost, it will take America a long way down the road to banana-republic status.
Krugman concludes, as I do, that the nation is currently ungovernable:
What Republicans have just gotten away with calls our whole system of government into question. After all, how can American democracy work if whichever party is most prepared to be ruthless, to threaten the nation’s economic security, gets to dictate policy? And the answer is, maybe it can’t.
Thanks to our Republican legislators from Mississippi. They just consigned their constituents to a meaner, poorer and less educated existence for the foreseeable future. And thanks to all you fellow Mississippians who voted to turn the entire nation into a banana republic, because that’s what you have been doing.
Pah!
Deficit Agreement
The American people are royally screwed.
Wall Street Dictionary: Trust, Credibility
Trust - belief by one that another is honest and dependable;
Credibility - the appearance of trustworthiness;
Wall Street Dictionary definition:
Trust, credibility - commodities convertible to cash or other valuable things through a process commonly known as fraud.
Serious Deficit Nuttiness
Our three Republican representatives are either scoundrels, who would sell their state and country down the river just to spite Obama, or idiots, with no clue about what every student of first-year economics would flunk for not knowing.
Obama has also failed to educate the American people as to the real issues involved and has allowed the deficit vultures to frame the national debt as a family debt issue, rather than the debt of a sovereign that creates its own currency. In the end, Obama must be held as responsible for this manufactured crisis as the tea-party Republicans.
Boehner is clearly not the sharpest tack in the box and Reid has not exactly distinguished himself as an upholder of American Democratic ideals.
What a sorry bunch.
All of them.
*****************
For a rousing declaration of what the American Dream really stands for read this article by George Lakoff and Glenn W. Smith:
http://www.truth-out.org/why-democracy-public-american-dream-beats-nightmare/1311952058
USA Today's Economic Lolapalooza
For example, here’s the closing statement: “The government has promised pension and health benefits worth more than $700,000 per retired civil servant. The pension fund's key asset: federal IOUs.”
Considering that the “IOUs”—commonly referred to in the financial world as government paper or government bonds—are considered to be the soundest investment-grade instrument in the world, backed by the full faith and credit of the U.S. government, to the degree that investors are willing to pay a small negative interest in return for the safety of their investments, the idea that federal IOUs are somehow unsound is ludicrous. Where are the funds to be kept? In an underground vault a la Uncle Scrooge?
No, the owners of USA Today, like good plutocrats everywhere, want to reduce public goods like medical care, retirement security and infrastructure in order to reduce their obligations to society, and thus to become even richer and even meaner plutocrats. There is something about acquiring a fortune, either by hook, crook, luck or inheritance, that renders the possessor stingier, meaner, and less compassionate towards everyone else.
Is the Deficit Unsustainable? Depends.
Galbraith begins “By general agreement, the federal budget is on an ‘unsustainable path.’ Try typing that phrase into Google News. When I did it, 19 of the first 20 hits referred to the federal debt.”
When I tried it, the first 24 entries referred to the federal deficit, and virtually all of them pronounced our current fiscal course unsustainable.
Of course, it all depends upon what one means by unsustainable. For many it refers to some future moment when the government can no longer roll over its debts and the bond market closes, forcing the equivalent of a bankruptcy. Obviously, at least if you understand what it means to be a sovereign nation with its own currency, this is idiotic, since sovereign governments can always pay their debts by creating new money.
A more reasonable concern is inflation, but the Congressional Budget Office (CBO) whose work is often cited as proving that the economy is set on an unsustainable path, predicts that inflation will stay at around 2% per annum for the foreseeable future, even if the federal government stays on the same unsustainable budget path. Here is a link to the CBO analysis of the president’s budgetary proposals for FY 2012.
Galbraith, always the practical economist, shows us in the article the result of a rising debt–to–GDP ratio using a formula by economist (and former Bank of England advisor) William Buiter:
∆d = -s + d * [r-g/(1+g)]
where
∆d = change in the ratio of debt to GDP
d = starting ratio of debt to GDP
s = “primary surplus” or government budget surplus after deducting net interest payments (as shares of GDP). A positive surplus reduces ∆d, which is why it carries a minus sign
r = the real interest rate, defined for our purposes as the interest rate adjusted for inflation.
g = the real rate of GDP growth, again defined for our purposes as the rate of GDP growth adjusted for inflation.
(This is taken from Galbraith’s description in the article)
Clearly, the change in the ratio of debt to GDP is linearly related to the actual annual deficit as a share of GDP (represented by s in the formula).
The interesting part of the formula comes after the plus sign. If the real interest rate on government debt is less than the rate of GDP growth then d * [r-g/(1+g)] will be negative and therefore tend to reduce the growth in the debt to GDP ratio. Galbraith points out that this was mostly the case from the end of WWII until 1980, that average real returns investors received from investment in public debt was negative in 18 of those 36 years, and slightly negative on the average during that period. The CBO assumes that the interest on federal debt will rise to about 4.5% nominal or 2.5% real within five years. Galbraith finds no reason why that has to be so:
Because to an investor safety is valuable, and because under capitalism making money ought to require taking risk. There is no reason why a 100 percent–safe borrower should pay a positive real rate of return on a liquid borrowing! The federal government doesn’t need to compensate for risk. It isn’t trying to kill off a high and intractable inflation. It also doesn’t need to lock in borrowing over time; it pays the higher rate on long bonds mainly as a gift to banks. Moreover, it controls both the short-term rate and the maturity structure of the public debt, and so can issue as much short debt at a near-zero rate as it needs to.
Given the assumption that the government pays a slightly negative real rate on its debts, and the further assumption that the primary deficit stays at 5 percent of GDP, the debt-to GDP ratio will stabilize at below 130 percent of GDP, not much above the ratio in 1946. As Galbraith points out, it may be unattractive, but it is stable, and therefore by definition, it is not unsustainable.
Galbraith’s conclusion:
The significant conclusion is that there is a devil in the [CBO] interest rate assumption. If the real interest rate on the public debt is assumed to be greater than the real growth rate, unstable debt dynamics are likely. The offsetting primary surplus that is required for stability is an onerous burden for most countries, and to achieve it in the United States would be practically impossible, since the required cuts would undermine GDP growth and tax revenues. This is why the various budget plans now in circulation will not work out, if they are ever implemented. However, where the real interest rate is below the growth rate or even slightly negative, the fiscal balance required for stability is a primary deficit, and the sustainable deficit gets larger as the debt “burden” grows. This is why big countries with big public debts can run big deficits and get away with it, as the United States has done almost without interruption since the 1930s.
In short, the deficit vultures are dead wrong. Their “remedies” are nothing but snake oil, and their real objective— to dismantle every single public institution in the United States that actually helps the average guy—is obscured by a faux rectitude about public thrift.
Nuclear Power and the Perception of Risk
Nuclear reactors share much in common with other machines and devices which humans have constructed and fabricated: they wear out from use and must be eventually be either discarded or recycled. Many of the reactors in use, however, have exceeded what the manufacturers—mainly General Electric and Westinghouse—specified to be the life of the reactors, but the Nuclear Regulatory Agency has allowed the utility companies to continue to operate the reactors in spite of their advanced age and fragility.
In addition to the age of the reactors, which presents an increased risk of structural failure, the spent fuel rods generated by the fission process have been stored on-site in large containers of circulating water to keep them cool, since they generate enough heat from the remaining radioactivity to combust in the atmosphere if left alone. The government has all but given up its efforts to find a safe repository to store the spent fuel rods for the thousands of years before they become safe.
I wrote a fairy tale for the Jackson Progressive in 1999 that illustrates the problem, The Persistent Genie. The story was prompted by the September 30, 1999 accident at the JCO nuclear fuel plant at the village of Tokaimura, Japan. It began when workers attempted to dissolve 16 kilograms of enriched uranium in nitric acid, although it is considered dangerous to process more than 2.4kg at one time. This set off an uncontrolled chain reaction, resulting in a 'blue flash' at the processing plant. The reaction punched a hole through the roof of the building, radiation began spewing into the atmosphere, and radiation levels went up to 4,000 times normal levels within a minute. There was no containment around the plant, because it was not thought that an accident like this could happen.
America Isn't Going Broke. It's a Big Lie.
The reason is simple: a sovereign government can create money. As long as inflation stays low, there is no reason why a government cannot pay its bills and stimulate its economy by increasing the supply of money by printing more of it. At the moment, the danger is deflation, not inflation, and the former is far more devastating that the latter, that is, unless you happen to hold a lot of money, in which case deflation will increase your wealth. If you owe money, however, the size of your debt will actually increase, since you must repay it in currency that has increased in value.
Michael Moore has his own take on the current crisis in Wisconsin, but one thing that he said really hit me hard: “I have nothing more than a high school degree. But back when I was in school, every student had to take one semester of economics in order to graduate.” Today, few high schools even offer economics, much less require it. When I attended Murrah High in Jackson in the early ‘60s, the school ostensibly offered a semester of economics paired with a semester of commercial law, but I never knew anyone who actually took the courses or whether they were even taught. How different our politics would be if a substantial portion of our citizens knew a little about macroeconomics. It’s very difficult to argue or even converse with someone who has no idea of what the Federal Reserve does, or how consumption and government spending are related. From what I read in the papers, it is clear that our congressional delegation (and most of Congress) is clueless as to the way the economy works. And as Paul Krugman writes of the Tea-Partyers in Congress, they seem to be on a rampage to repeal the laws of arithmetic. Krugman’s column calls out for a quote, but I am resisting the impulse. You must read it all to understand what is happening in the Congress on the economics front.
Austerity in a Nutshell
"Austerity" Comes to America
I’ve been asking myself the following question over and over for the past year and have received no satisfying answer: How can one of the brightest and seemingly most progressive presidents in the past 50 years manage to do so little for the working people of this nation? How did he attach himself to an unwinnable war in an area known to historians as the “graveyard of empires”? Was he so naive as to think that bailing out megabanks would make them behave or assure their political loyalty? Doesn’t he have the slightest idea of how the national debt works and how it affects the economy?
In the midst of record unemployment he should have never have allowed the idea of an austerity program into his brain, or any economist or politician advocating austerity into his office. Deficits are normal and predictable in times of recession. Tax collections go down and public relief goes up, or at least it should go up. In boom times, the government should run a surplus and reduce the national debt, a process that tends to dampen the irrational exuberance that characterizes those periods. In short, fiscal policy should be counter-cyclical. This is Econ 101, not nuclear physics.
Yet Obama appears to have bought into the delusional realm of neoclassical economics, a bogus collection of teachings whose sole object is to justify the aggrandizement of wealth to the already wealthy at the expense of everyone else. Its most prominent huckster was Milton Friedman, but his disciples seem to have the ear of the media to the exclusion of all but a few reasonable voices, like Paul Krugman.
An alternative explanation for Obama’s lean to Republican-lite is that the president has very little power and must do the bidding of the power elite, irrespective of his own inclinations.
Either explanation causes a sick feeling in the pit of my stomach. I hope there’s a better, more benign, explanation.
Do No Evil
Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes
Why Germany is Doing Great and the U.S. is Floundering
Fact: German workers work less that Americans—by an enormous margin—but are more productive, and their economy is in great shape, with a favorable balance of payments and a banking system that is in excellent condition.
Fact: They are doing it with a real social safety net, including a form of national health insurance, generous pensions, livable wages, and a standard of living that uses half the energy that Americans use.
Fact: Americans have been consistently lied to by the media (and not just Fox, although they are by far the worst) about how productive and how well-treated German and other European workers are. By enacting policies and programs we have been told are “socialistic” they are more democratic, more secure, and their economy is in far better condition that ours.
Here’s a worthwhile interview with Thomas Geoghegan, author of Were You Born on the Wrong Continent? Why Germany Has It So Good -- and Why America Is Going Down the Drain.
Geoghegan points out that Germans have six weeks of federally mandated vacation, free university tuition, and free nursing care. They really take care of their people and at the same time have built an economic powerhouse that is the envy of the rest of the world, excepting perhaps the U.S., where we are told that, being “socialism,” it is crumbling at this very moment. I heard the same prevarications 30 years ago in the respectable media. It was untrue then and it is untrue now.
The secret, dear reader, is that Germany actually manufactures things, like autos, chemicals, electronics and other products that they can sell to other nations, like the U.S. and China. We, on the other hand, manufacture pieces of paper that are quickly becoming radioactive among investors and central bankers the world over. This obviously cannot continue. Our legal and tax structure, Geoghegan points out, is biased towards finance, not manufacturing. For the past 30 years, our brightest graduates have gone into the paper business, because the system made financial manipulation far more profitable than manufacturing. Without something tangible to sell, however, those pieces of paper (bonds, other debit instruments and exotic derivatives) will eventually decline to junk status and we will be unable to swap them for the tangible things that China and Germany have to offer. At that point, we will be forced to rely on our own hideously shrunken manufacturing sector to supply us with our needs, and the moment of truth will be upon us.
To illustrate the dilemma we are in: The Mississippi Manufacturers Association, the political lobbying organization for business owners, makes it a custom to present a small gift to each legislator at the beginning of the new legislature. The gift is traditionally a product manufactured in Mississippi that reminds the legislators of the importance of manufacturing to the state. This year, the association had a hard time finding such a gift, due to the departure of so many manufacturers from Mississippi to Mexico and the far East. Clearly, a Nissan was out of the question. A frozen chicken lacks class. The association eventually found a product from a factory that had gone out of business and was purchased by a buyer who moved into the state from elsewhere.
Why has all this happened? The answer will not suit most Mississippians. Too many people in high places (and their followers in low places) accepted and acted upon the conservative claptrap that the Republican Party and others have been excreting since the middle 1970s. Even some Democrats drank the Kool-Aid. We have consequently created a system in which inequality has grown to levels last seen in the ‘20s and the golden age that preceded WWI, and which can accurately be described as a series of increasingly dangerous asset bubbles whose main purpose is to transfer money and property from the middle class to large banks and corporations and the outrageously wealthy persons who own and run them.
We let ourselves be fooled into thinking that the elites were on our side. At one time, I thought Mississippians would see through it all. I was mistaken.
That’s why we are where we are. It’s not a pretty picture. And we brought much of this upon ourselves.
Who Makes Money on Austerity?
I haven’t read anyone who makes a reasonable case for immediate austerity, but I haven’t read every article on the subject, either. If anyone knows of an intelligent article justifying budget-balancing at the present time, please leave a comment.
Such a push to balance the budget clearly is not made with the intent of putting people back to work or restoring the economic health of the United States and therefore the economic health of the global economy upon which it depends. One must conclude that the budget vultures (or in the case of Congressional budget vultures, their sponsors) have a monetary interest in a tightening of the currency supply and will not experience the resultant suffering it will cause amongst the population.
Who are these vultures? In a deflationary economy, the only good that rises in value is money. Gold declines as money becomes scarce. People with money hang on to their money in the expectation that it will purchase more tomorrow than today, the very opposite of inflation. Debts suddenly become more and more burdensome to debtors as the dollar value of their collateral declines and their employment prospects become progressively worse. Merchants must reduce prices to sell their goods because demand is down. Holders of debt, like banks, see the purchasing power of their assets increase, but they also must suffer the increasing number of defaults that accompany a deflationary spiral.
So who stands to gain from economic austerity measures?
Since there are few Uncle Scrooges with vast underground vaults of money, we can eliminate hoarders of cash as a significant factor. What remains are holders of very high quality, very safe debts, and the very highest quality, safest, blue-chip debts are the obligations of the United States. If your money is sunk into government paper, you are very well set for a depression, because the purchasing power of your bonds will increase as prices fall.
There are also the Wall Street banks. A strong currency makes the dollar the favored choice for many international financial deals. It draws investments from abroad into the stock and bond markets, filling the coffers of the bankers. The aborted coup against Franklin D. Roosevelt in 1932—exposed by General Smedley Butler (ret)—was most likely instigated by some of the biggest banks in the world, including the House of Morgan, motivated by Roosevelt’s decision to cut the dollar loose from the gold standard, which caused it to sink in value against other national currencies. This was good for the economy, since American goods sold more cheaply in overseas markets and foreign products became more expensive here. But it clearly hurt the holders of dollar-denominated debt, and as a result the banks did everything in their power to defeat Roosevelt.
The budget-balancing tide, unfortunately, seems to be rising. If Congress attempts to balance the budget in the middle of a recession—and we most assuredly are in the middle of a nasty recession—it will bring about severe and undeserved hardship for a large number of Americans, as well as people overseas. It will also fail to balance the budget, as tax revenues will decline with a deepening recession exacerbated by the very austerity measures undertaken to balance the budget.
But a few people and a few institutions will do very well, including bankruptcy attorneys, who always thrive in hard times.
What Mississippi & Nepal Have in Common
The article lists each state and its Gini coefficients along with the third-world nation with the closest-matching Gini coefficient. Mississippi (Gini coefficient = .471) most closely resembles Nepal by that measure.
The title of the linked article, “Is the U.S. Becoming a Third-World Country?” thus has an answer: Mississippi is already a third-world country. The rest of the U.S. is following us onto the plantation.
The Big Banks are Financial Vampires
At a Jungian dream seminar I once attended, led by the late Fr. Michael Dwinell, the vampire was presented as the archetype for addiction, a monster that reducea its victim and those close to him to zombies. But that is a subject for another place and time.
Similarly, the big banks of Wall Street, still holding debt assets at their face value for purposes of calculating their balance sheets, have become veritable vampires, lacking solvency themselves and frantically attempting to suck money out of any convenient victims, whether they be the Federal Reserve, the U. S. Treasury, investors, or debtors, most notably their mortgagors and credit card holders. The latest propaganda meme put out by the banks is the threat of “strategic defaulters,” loosely defined as homeowners who can make their house payments but walk away from the house because it is underwater. The meme has the same deceitful purpose as Reagan’s non-existent “welfare queens” and Bush’s “war on terror”: to conceal the real reasons behind otherwise unacceptable public policies.
It would not be too far out to say that the archetype for financial meltdown is the vampire.
For the last few months it has been more and more obvious to me that the behavior of the big banks can be explained only by assuming that they are insolvent and are remaining in existence only through accounting dishonesty, that is, valuing their assets far above their real value. Before I decided to write a blog post setting out these conclusions, a recent post on Naked Capitalism, Strategic Defaulters are the New Welfare Queens, made such an article superfluous. Here’s an excerpt:
So why all this hysteria about strategic defaulters? If I were conspiracy-minded, I’d say this is a very clever push to stoke jealousy among what is left of the middle class to keep the focus off the way the banksters wrecked the economy, got lots of cash and prizes, and have every reason to repeat that profitable exercise. So focus public ire instead about the commies in our midst, um, the new welfare queens, aka various forms of alleged housing deadbeats. The immediate reason is that the more people are made to resent the breaks they fantasize their neighbors are getting, the more they will oppose deep principal mods, which historically is what banks always did when they had a borrower get in trouble who still had a remotely viable income.
Why would the banks oppose principal mods? It will force an end to extend and pretend, and when THAT happens, a lot of financial firms will be shown to be undercapitalized and in need of rescue or resolution (as we and others have pointed out repeatedly, Mike Konczal’s conservative analysis of second mortgage portfolios at the four biggest US banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo, shows that they probably need another $150 billion in equity among them, and others contend the writedowns on seconds should be much more aggressive than Konczal assumed).
The entire article is well-worth reading.
The term “deep principal mods” means that either the banks would be forced to carry the debts on their books at actual value, taking into account the decline in collateral values (the bursting of the housing bubble, in other words) or bankruptcy courts would be empowered to adjust mortgage principals downwards to reflect the actual value of the mortgaged property. The latter process is known as “cram down” and a bill to give bankruptcy cram down power was defeated in Congress by the finance lobby.
The basis of the problem is politics and denial. The housing bubble was, for the most part, a bipartisan project, hence the reluctance of either major political party to make it an issue. The mainstream media, including its economic experts, was inexcusably negligent for years in ignoring the housing bubble and they are reluctant to admit that the emperor has no clothes. With a few exceptions, it is still spouting economic nonsense. Economist Dean Baker has been chronicling this willful blindness for years and his has been a lone voice in the wilderness.
Disconnection from reality eventually exacts a fearsome price. We have already experienced housing value losses in excess of $6 trillion and the reduction in demand that invariably results from such a loss. The financial reform bill, despite all the hype it has been given by its proponents, is inadequate to address the real causes of our current malaise and does little to lessen the likelihood of another speculative bubble and meltdown. Nevertheless, it is a start.
7/19/2010 Update:
Nobel laureate Joseph Stiglitz puts it very well in his latest column:
The “innovations” unleashed by modern finance did not lead to higher long-term efficiency, faster growth, or more prosperity for all. Instead, they were designed to circumvent accounting standards and to evade and avoid taxes that are required to finance the public investments in infrastructure and technology – like the Internet – that underlie real growth, not the phantom growth promoted by the financial sector.
The financial sector pontificated not only about how to create a dynamic economy, but also about what to do in the event of a recession (which, according to their ideology, could be caused only by a failure of government, not of markets). Whenever an economy enters recession, revenues fall, and expenditures – say, for unemployment benefits – increase. So deficits grow.
Financial-sector deficit hawks said that governments should focus on eliminating deficits, preferably by cutting back on expenditures. The reduced deficits would restore confidence, which would restore investment – and thus growth. But, as plausible as this line of reasoning may sound, the historical evidence repeatedly refutes it.
How Goldman Sachs, Merrill Lynch, and Others Managed to Starve a Lot of People
Johann Hari: How Goldman Gambled on Starvation
The reader should keep in mind that until the financial system was deregulated in the ’80s, ’90s and the last decade, this kind of depraved behavior would not have happened.
Global Research on Austerity & Class War
What’s happening to us is what has happened over and over to third-world countries in the grip of the Word Bank and IMF ”structural adjustment” programs that extract wealth from natural resources and impoverish their citizens through the mechanism of overwhelming debt. It does not take a lot of insight to realize that if our elites can impoverish yellow, brown, black and red people in other lands without the slightest twinges of conscience, they could to the same thing to their own people -- us, in other words.Working people don’t rise to the task because they have been propagandized into believing that “fiscal austerity” is something that needs to be done in order to save their children from an even worse fate. What actually needs to happen in a deflationary collapse is to spend more money into the system, not pull it back out by paying off the federal debt; but the money needs to go into the real economy – into factories, farms, businesses, housing, transportation, sustainable energy systems, health care, education. Instead, the stimulus money has been hijacked, diverted into cleaning up the toxic balance sheets of the financial gamblers who propelled the economy into its perilous dive.
If you doubt this, you should acquaint yourself with two of John Perkins’s books, Confessions of an Economic Hit Man
and The Secret History of the American Empire: The Truth About Economic Hit Men, Jackals, and How to Change the World
. They are eye-openers.Update 6/3/2010; An even more trenchant explanation of the austerity program of global financial and political elites from New Economic Perspectives:
From the article Europe’s Fiscal Dystopia: The “New Austerity” Road to NeoserfdomSo we are witnessing a policy long in the planning, now being unleashed in a full-court press. The rentier interests, the vested interests that a century of Progressive Era, New Deal and kindred reforms sought to subordinate to the economy at large, are fighting back. And they are in control, with their own representatives in power – ironically, as Social Democrats and Labour party leaders, from President Obama here to President Papandreou in Greece and President Jose Luis Rodriguez Zapatero in Spain.
Having bided their time for the past few years the global predatory class is now making its move to "free" economies from the social philosophy long thought to have been built into the economic system irreversibly: Social Security and old-age pensions so that labor didn't have to be paid higher wages to save for its own retirement; public education and health care to raise labor productivity; basic infrastructure spending to lower the costs of doing business; anti-monopoly price regulation to prevent prices from rising above the necessary costs of production; and central banking to stabilize economies by monetizing government deficits rather than forcing the economy to rely on commercial bank credit under conditions where property and income are collateralized to pay the interest-bearing debts culminating in forfeitures as the logical culmination of the Miracle of Compound Interest.
Austerity Flowchart
Update 7/2/2010: Krugman is becoming even more nervous over the deficit vultures and their capacity to wreck the economy. Examine the flowchart above once again. If you don’t understand it, try reading any basic macroeconomics textbook.
Yet More on the Stupidity of Austerity in a Recession (III)
Admittedly, some of the letter may be a little difficult for the lay reader, but it is not abstruse or deliberately obfuscating. Anyone who retains some of what s/he learned in Econ 101 should not find it difficult. Chalk up its difficulties to the economic instruction all high schools graduates and most college graduates lack. But read the letter.Mr. President, this has been a long open letter, and I'll close it with some short statements. First, you will hurt, not help fiscal sustainability by pursuing austerity in Federal spending. Second, austerity in these times is not fiscally responsible. It is fiscally irresponsible. Third, real fiscal responsibility means spending what Government needs to spend to fulfill public purposes, and spending in such a way that spending can continue in the future, until public purposes are achieved. There are all kinds of public purposes going begging right now, and you're proposing that achieving those has to be subjected to austerity constraints because we are running out of money. Fourth, I can't imagine a more fiscally irresponsible course than the one you appear to be moving towards now. And that fiscally irresponsible course will, make no mistake about it, also hurt fiscal sustainability. While it won't destroy our solvency, it will destroy part of our productive capacity, and this will give us less room for government spending in the future to both heal our economic problems and avoid inflation while doing it.
So, please Mr. President, don't do austerity. Don't assume you know all about economics. Don't believe we have solvency problems when we have none. Don't believe we have to worry about inflation, when there is not the slightest chance of it anytime soon. Look at what you've done so far and evaluate it honestly. No excuses, please. It can't be right, because it has not worked. Don't be fiscally irresponsible and join the other global elites in following an ignorant and mistaken economic policy, likely to drive the world into a double-dip recession, or perhaps even a Great Depression 2.0. Instead, change course right now! Act like our President, an American President. Give us what we need, not what they need. Be loyal to us, not to them. And end this recession before it ruins any more American lives.
It is becoming all too clear that President Obama is in over his head in the field of economics. Receiving instruction from Bernake, Geithner and Summers will not put him any closer to economic reality, and especially its impact upon the average citizen. As I wrote over a year ago, real progress will come only when he fires this plutocratic threesome who genuinely believe that anything good for the financial sector (read “Goldman Sachs”) is good for America.
The Stupidity of Austerity in a Recession II
Paul Krugman is similarly nonplussed. His version of a typical dialogue between himself and a German deficit vulture is all too representative of what passes for most political argument that goes on today:
So on it goes. I blame most of this idiocy on total ignorance of economic history. If anyone has a better explanation, please enlighten us in the comments.German hawk: “We must cut deficits immediately, because we have to deal with the fiscal burden of an aging population.”
Ugly American: “But that doesn’t make sense. Even if you manage to save 80 billion euros — which you won’t, because the budget cuts will hurt your economy and reduce revenues — the interest payments on that much debt would be less than a tenth of a percent of your G.D.P. So the austerity you’re pursuing will threaten economic recovery while doing next to nothing to improve your long-run budget position.”
German hawk: “I won’t try to argue the arithmetic. You have to take into account the market reaction.”
Ugly American: “But how do you know how the market will react? And anyway, why should the market be moved by policies that have almost no impact on the long-run fiscal position?”
German hawk: “You just don’t understand our situation.”
The Stupidity of Austerity in a Recession
The reason governments are in deficit is the financial collapse and the recession that followed hard upon it. (For the time, let us ignore the mammoth tax cuts for the wealthy during the Bush administration that turned surpluses into deficits.)
When people lose their jobs they pay less in taxes, including sales tax (affecting states and cities) and income tax (affecting the Federal government), and they spend less. Austerity accelerates these very processes and thus deepens the recession and further reduces tax revenues.
Can’t these people understand something so mind-bogglingly simple? Let us demand that Obama and the Democrats don’t make the same mistake that Roosevelt made in 1937, when he submitted a balanced budget and created a sharp recession.
Here’s an historical unemployment chart from the Wikipedia:
Notice the sharp spike in unemployment around 1938? That was the result of enacting a balanced budget while the nation was still in recession.
There are present grounds for concern. The commission Obama has assembled to work on the deficit is packed with conservative dinosaurs known to have opposed Social Security and who would like nothing better than to eliminate the deficit on the backs of the most vulnerable of the American people. Exhibit A: former congressman Alan Simpson, an extreme rightist, is the Republican co-chairman of the commission.
Economist Robert Kuttner has issued serious warnings about austerity in times of recession:
The current global economic crisis, now entering a new phase as a crisis of sovereign debt, has only one rough precedent. The last time major nations (such as Germany, its European creditors, and much of Latin America) faced insolvency, the combination of financial collapse and deflation helped create depression, dictatorship, and then World War II.
In the US, we finally ended the Great Depression with massive wartime borrowing and public outlay. We ended the war with a debt-to-GDP ratio of more than 120 percent, more than double today's ratio. In Britain, debt-to-GDP peaked at about 250 percent.
He points out the difference this time, however:
Today’s situation is different. The origin of all the debt is not a war but a financial collapse. The new round of financial panic is the result of still fearful markets, a still fragile banking system, and deficits caused mainly by reduced output, not overspending.
In this context, it is insane to think that we can recover from a financial panic and an economic recession by inducing a worse recession in the name of fiscal soundness. For now, while the real economy heals, there is no substitute for aggressive central bank intervention to restore markets in sovereign debt. The right grand bargain is tough financial reform and limits on Wall Street--so that this crisis is never repeated. The wrong grand bargain is austerity for everyone else.
I was always under the impression that this was Economics 101, but obviously, the deficit hawks took a different class—one that required them to completely forget history and abjure common sense.
Obama is no fool, and he undoubtedly knows all this. Is the commission merely window-dressing, so that Obama can say that he attempted to be bipartisan but was thwarted at every turn by the Republicans? Or is it simply a means of delay, so that the stimulus can lower unemployment and lower the deficit by election time in November and nothing more needs to be done? That’s a risky game.
The stimulus was almost certainly inadequate and Congress is reluctant to enact another one any time soon. Obama will be stuck with whatever happens. For all our sakes, l hope he succeeds.
Volcker Prevails, Geithner & Summers Lose
Obama is reacting because he must.
From his comments yesterday, which I missed because of high fever, it appears that the Goldman Sachs contingent, Tim Geithner and Larry Summers, were shut out of a come-to-jesus meeting between President Obama, former Federal Reserve Chairman Paul Volcker, and Bill Donaldson, former head of the Securities and Exchange Commission. It is further clear from Obama’s remarks that the Glass-Steagall Act, the Depression Era statute that separated commercial banking and investment banking, must be reenacted in some form, and that the government cannot ever again allow itself to be put in the position of standing behind banks that speculate with their depositors’ money.
Obama also made it clear that something would have to be done about institutions that are “too big to fail.”
It was only a couple of months ago that the New York Times reported that there was no possibility of Glass-Steagall becoming reenacted, but what a difference two months and the election of a right-wing Republican in a safe Democratic state can do!
As I see it, Obama was expected to do two things in his first year: 1. See universal health care enacted and 2. Take affirmative action to fix the financial system. The first has certainly hit a buzz-saw, and as for number 2, Obama simply did not seem to have the stomach to pick a fight with Wall Street—or anyone else, for that matter. I was aghast when I learned who Obama’s economic team would be and predicted that they would sooner or later have to be cast overboard if there were to be any real hope of reform. The gangplank was prepared at 11:34 AM, EST yesterday. Expect the Goldman Sach contingent to soon discover the importance of spending more time with their families.
The Obama honeymoon is over. The low-hanging fruit, admittedly meager after eight years of Bush, has been harvested. The hard and unpopular decisions that have been put off must soon be made. Obama has been as bipartisan as any president could be and he has been rewarded with snarls, curses, prevarication and stonewalling from his opponents. He will have to use the immense power of the presidency to push through real change. Not to draw too fine a line—he will have to put his foot on the neck of Wall Street and some of the other powerful corporations that are fattening themselves on the back of average Americans. That is not his preferred mode of dealing, but it is the only way that will produce results in the political climate today.
How Obama handles himself and his administration over the next six months will determine the success of his presidency.
Here beginneth the trial—by fire—of Barack Obama.
Why Oil Companies Haven't Been Constructing Refineries
It was obvious at the time that neither an increase in demand nor a constriction in supply was responsible for the run-up in energy prices. Indeed, reserves were expanding at the same time that prices were making their breathtaking climb. As a general economic rule, prices do not rise when inventories are rising.
As Sherlock Holmes once said, “It is an old maxim of mine that when you have excluded the impossible, whatever remains, however improbable, must be the truth.”
What remains in this case is speculation.
At the time, there was a lot of money seeking large returns—returns far in excess of what investors were then making in the stock market. If enough speculators invest in hydrocarbons the price of hydrocarbons will rise. If the price rises to unsustainable levels, we call that a bubble. Bubbles, unfortunately, end, sooner or later, and like most bubbles created by easy money, the oil bubble, once it reached its peak, declined even faster than it ascended, as investors dumped energy futures and the derivatives based upon them, all of which had become radioactive.
But back to Dr. Shugart: his article in the Clarion-Ledger stated that we haven’t built a new refinery since 1976, in part because of “not-in-my-backyard” attitudes and costly environment regulations. As a result, according to Dr. Shugart, US oil refining capacity was nearly 4,000,000 barrels a day below current consumer demand, a shortfall that must be met by importing petroleum products. My answer to Dr. Shugart at the time was that oil companies had plenty of money to build oil refineries that were environmentally sustainable, and the real reason for not building refineries was that they did not anticipate being able to make a profit by selling their output.
Today’s article in the New York Times, Chilly Climate for Oil Refiners, confirms what I wrote over two years ago and confounds Dr. Shugart and his neoconservative economic arguments. The article begins:
Only a few years ago, a cry went up that the United States needed more oil refineries. The perceived shortage was so acute that George W. Bush, president at the time, even offered disused military bases as sites for building them.
Not only did that never come to pass, but the reverse is now happening. The business of oil refining is mired in a deep crisis, with five refineries being shut down this year, including plants in Delaware, New Jersey, California and New Mexico.
Gasoline demand, which many analysts had long expected to keep rising for decades, is down sharply in the recession. And refiners are increasingly convinced that even after the economy recovers, demand will not grow much in coming years because of the rise of alternative fuel supplies and the advent of tougher efficiency standards for automobiles.
In retrospect, it appears that an ongoing windfall profits tax with a trigger based upon the rise in the cost of living would have been an efficient and fair method of preventing oil and gas bubbles by heavily taxing price increases enabled by easy money and directly caused by rampant speculation. During the bubble, the windfall profits reaped by speculators and oil companies had no relation to the workings of supply and demand and represented no less than theft from the energy-consuming public. A windfall profits tax would have clawed back the spoils for the benefit of the victims.
There is a public interest, however, in preventing energy from becoming too cheap. Ideally, energy prices should reflect the total cost not only of extraction and the return to investors for the risk undertaken in exploration, but also the externalities imposed upon the environment and society in general by the extraction, transportation, refining, and usage of hydrocarbons, including the likely changes in world climate brought about by the greenhouse gases generated.
For 100 years, the energy industry has fluctuated between over-supply and under-supply, boom-or-bust, and these cycles are not directly related to the reserves in the ground but to the fluctuations in demand caused by economic booms, busts, and the consequent over- or under-investment in production. An oil well has an optimum production level, depending upon the producing formation and the technology used in getting the oil to flow out of the rock in which it is trapped into the bore hole. Producing too quickly from the well can cause the well to flood with water from the formations directly underneath the producing formation. Producing too slowly can necessitate additional workovers, thus adding to the cost of producing the oil. If demand slackens, suddenly there are millions of barrels of oil being pumped through the distribution system into reserves that are small in comparison to the total amount of oil produced worldwide. Once the reserves fill up, the oil has no place to go, thus the resulting dilemma of oil tankers forced to sit at anchor in the oceans, waiting to offload their contents.
The US government, through its strategic reserves, has at times been able to moderate prices by releasing oil onto the market when prices were high and by buying up oil for the reserve when prices fell. Unfortunately, this has not worked very well during the oil industry-dominated Bush administration for reasons that are patently obvious. It is in everyone’s interest, however, beyond the narrow interests of a few oil tycoons, that the price of oil and gas remain relatively stable. Investing in productive capital, which entails considerable risk in itself, cannot be made without a minimum of confidence that the cost of doing business will remain predictable. Energy is one of those costs.
Ultimately, fossil fuel will become extremely expensive and we will be forced to not only switch to renewable sources of energy but become far more sparing in our consumption. A national energy policy that succeeds in making the transition smooth should be the aim of energy policy. We already have the science and technology to make the switch. All that remains is that hydrocarbons become too expensive to continue to use them we way we are now.
Goldman Sachs and the Brother-In-Law Strategy
It is widely and correctly understood that Wall Street, with Goldman as a leader and with regulators in thrall, helped to inflate and profited from a credit bubble that burst and cost tens of millions of Americans their jobs, incomes, savings and home equity. American taxpayers continue to stand behind the bailouts and other government interventions that have stabilized the financial system, including Goldman, enabling the firm to post blowout profits in 2009 and to set aside $16.7 billion for bonuses so far this year.
Goldman, having received $10 billion in the initial bailout, has paid it back to the U. S. Treasury, and now claims that it really never needed the money. Rich points out, however, that $12.9 billion of the taxpayers’ money that went to bail out AIG went immediately to Goldman Sachs, to whom it owed the money as the result of its insuring Goldman’s bad debts.
And we do not know how much money the Federal Reserve pumped into Goldman as part of its efforts to preserve the banking system.
The truth is that Goldman clearly knew what it was doing all along, and calculated that the Treasury would have to bail out AIG, which would in turn reimburse Goldman for losses on its own toxic assets. It may have been legal, but if so, it was a legal scam on businesses and the public.
Think about it this way: Imagine yourself at a party where everyone, including yourself, was so drunk that they could barely get off the floor, much less drive their car home. The neighborhood is swarming with police officers with breathalyzers and there is no way you can avoid being stopped and asked to walk a straight line if you attempt to drive home. What do you do?
Simple. You find the brother-in-law of the police chief (who happens to be a guest) and ask him to drive you home. If your host has been smart enough to invite the chief himself or even the mayor, you prevail upon one of them to drive. They won’t be stopped and you avoid even the risk of being charged with public drunkenness, which is what usually happens when the driver is arrested for DUI and the passenger is too inebriated to drive the car home.
AIG was the brother-in-law. The Goldman veterans at Treasury and the Fed running the show—both in the Bush and Obama administrations—knew they couldn’t let AIG go under, and of course, they didn’t mind helping their alma mater in the process of bailing out AIG.
It’s a ripoff of Bromdingnagian proportions, but it looks like they will get away with it.
Assessing Obama and Other Thoughts
That hasn’t changed.
It probably has something to do with a lack of originality and a failure to leaven his advisory loaf with some truly creative and radical yeast. In the field of economics--a field so corrupted with the largesse of plutocrats, corporations, and wealthy right-wing cranks--the absence of a few brave, if not foolhardy, souls to question the given wisdom can make it difficult for a policy maker to envision practical and necessary—but unorthodox—solutions.
Given the economic advisors that Obama has gathered around him, I suspect that he is overawed by Ivy League intellectualism, even though he ought to be able to see through it, having spent three years at Harvard Law School. He is a very bright and decent but conventional thinker, however, and unless he is violently pushed in a different direction by the unfolding of events, he will follow the conventional wisdom. It is entirely possible that, like Roosevelt, he will ultimately find himself being pushed. Let us hope that we will have not already sunk too far into the abyss by then.
I have been thinking about Bernard Lietaer quite a bit lately. I've also been thinking about banking (who hasn’t?), and have concluded that by increasing banking reserve requirements to 100% and nationalizing the Federal Reserve System, which would prevent banks from creating money, we would solve 50% of our Wall Street banking problems. If we severely restricted margin purchases, options, and derivatives, and raised the top marginal income tax rate back to 90%, we would solve another 40%. Increasing the Federal Estate Tax and eliminating the step-up basis would take care of another 5%. Imposing a Tobin Tax on all monetary transfers would also be a good measure, as well as a 10-year holding period for an investment to be taxed as a capital gain and an end to the investment tax credit. That would take us well over 100%. ;-)
Alternative or complementary currencies, recommended by Lietaer, could be a huge benefit in many instances. I like the idea of eldercare credits. Also, a community mutual credit system could strengthen local connections between people and local businesses. It could also help the community survive bad times when people have less official cash. Alternative or complementary currencies have profound political implications, however, as they circumvent the government's monopoly (currently delegated to the banking system) on creating money and levying taxes. They will therefore provoke opposition from the banks and the government. Pity. We could use the resilience they provide for our fiat currency system.
Why Geithner, Summers and the Rest Must Go
Incidentally, Rubin was handsomely rewarded by Citicorp when he resigned from the government a few months later.
It is becoming increasingly clear that these officials have not the slightest interest in restructuring our ailing financial system. Indeed, why would they be eager to change a system that has rewarded them as well as they have been rewarded? Hank Paulson (former treasury secretary) and Robert Rubin grew wealthy at Goldman Sachs, for whose welfare they have been particularly solicitous.
They want to put things back the way they were--to put Humpty Dumpty back on the wall, as it were.
Humpty Dumpty, however, isn’t going to be put back together. Wall Street, having conclusively demonstrated beyond a reasonable doubt that it is incapable of self-regulation, has completely lost the confidence of the public. Corruption matters. Conflicts of interest are inherently corrupt, and ignoring them leads to disaster. Excessive power and wealth corrupt. That is the lesson that has to be relearned every three of four generations.
Obama, if he is to accomplish a true turnaround, will have to clean house. The entire crowd of former Wall Street financiers and bankers will have to go, to be replaced with economists, financiers and bankers not beholden to the former power-brokers. The current financial czars have far too many conflicts of interest. It is only a matter of time before Obama must find solutions beyond throwing money at insolvent banks and insurance companies. As the debacle at AIG over bonuses clearly demonstrates, the present institutions and their kleptocratic managers are simply too corrupt to be allowed to continue business as usual. It is inconceivable in the current atmosphere that AIG would award bonuses for any reason, and the fact that they were awarded shows that they have no intention of changing their ways. Talk about a sense of entitlement!
I suspect that events will force Obama to clean house, and the sooner, the better. He is a quick study, and he is certainly aware that he has a severe problem with the economic advice he is getting.
Tom Lowe
An article by Steve Clemons prompted this post: Alexander Hamilton's Scorn: Reflecting on AIG, Goldman, Hank Paulson and Bob Rubin
Need versus Demand
During recessions, there is far more need than demand. Not just folks with the gimmes, but people who are destitute or in danger of becoming destitute. The market, however, in its solemn majesty, can allow people to starve or freeze to death without a thought, because without money they simply do not exist from an economic standpoint.
Give it Back
Some Banks, Feeling Chained, Want to Return Bailout Money
If the banks can afford to return the money, it is rather obvious that they never needed it and their CEOs and CFOs were lying when they told Congress that they were about to go under without massive infusions of fresh capital. Something smells unbelievably rotten about what is happening on Wall Street and we need to get to the bottom of it quickly. It’s looking more and more like a shell game designed to benefit the people at the top of the financial sector at the expense of just about everyone else.
Throughout this extraordinary economic episode that began last September, Wall Street (and its mostly Republican allies in Congress) have protested violently at any government effort to help poor and middle-class families that are losing their jobs and their homes. They are choking on the requirement that if they accept public monies they must actually do something in return for the public whose taxes make it possible for the bailouts to happen.
The government should immediately accept--even demand--a refund of the bailout money and begin investigating the banks for fraud, perjury, and perhaps even worse criminal offenses. Thorough audits by independent auditors of all the bailout recipients should be the first order of the day. The FDIC already has the authority to audit and then take over an insolvent bank. The president should instruct them to do so, no matter how large a bank may be.
Paulson's Big Gift to the Banks
What’s worse, it appears that the change was illegal and in contravention of the statute upon which the regulation is supposedly based. If this is not a crime, it ought to be.
Via Citizens for Tax Justice, the American News Project made a six-minute video explaining the giveaway.
http://americannewsproject.com/videos/paulsons-140-billion-surprise
This is outrageous behavior from a treasury secretary, but, alas, there have been so many outrageous acts by the Bush administration that the public’s organ of outrage has just about been worn out. One more theft, one more brazen transfer of taxpayers money to the well-connected--a mere droplet of corruption in a veritable ocean of official theft and corruption that has been inundating the nation the past eight years ...
Call your senators and representative if you still have the energy, and tell them to close the loophole.
By the way, the aforementioned Citizens for Tax Justice has posted a comparison of the Democratic and Republican proposed bailouts. It’s worth reading.
Tax Cuts in House Democratic Stimulus Plan Better Targeted Than Those of House Republican Plan
What to Do About the Automakers
Joseph Stieglitz has a contrary view in FT.com.
Stieglitz raises two very important issues:
1. Is it wise to keep the big three afloat so they can keep doing the things that got them into this impasse? Clearly, the upper management of these corporations has given idiots a bad name. Whenever there was a decision to be made about the direction they were going, they invariably made the worst possible choice. With this kind of management, a bridge loan would be more like a bridge to nowhere.
2. Do we want to save the companies and restore them to profitability, or do we want do merely bail out the stockholders and creditors? Normally, when a company fails, the stockholders lose their investment and the creditors receive a pro-rated share of a company’s assets. In a Chapter 11 bankruptcy, the stockholders also lose everything, but the company remains in business and the creditors are forced to take a loss on their debt for the sake of being repaid the rest of it.
Stieglitz believes that a carefully-structured Chapter 11 bankruptcy is the only way to revive the auto industry because it is the only way that the structural defects can be eliminated:
One thing is certain: nothing will improve until top management is replaced. Any plan that leaves them in control is doomed to failure.The US car industry will not be shut down, but it does need to be restructured. That is what Chapter 11 of America’s bankruptcy code is supposed to do. A variant of pre-packaged bankruptcy – where all the terms are set before going before the bankruptcy court – can allow them to produce better and more environmentally sound cars. It can also address legacy retiree obligations. The companies may need additional finance. Given the state of financial markets, the US government may have to provide that at terms that give the taxpayers a full return to compensate them for the risk. Government guarantees can provide assurances, as they did two decades ago when Chrysler faced its crisis.
With financial restructuring, the real assets do not disappear. Equity investors (who failed to fulfil their responsibility of oversight) lose everything; bondholders get converted into equity owners and may lose substantial amounts. Freed of the obligation to pay interest, the carmakers will be in a better position. Taxpayer dollars will go far further. Moral hazard – the undermining of incentives – will be averted: a strong message will be sent.
Interesting articles discovered on the way to something else
Al Giordano on Hillary Clinton and Human Rights - a Cautionary Tale
And if - as the mass media seems to agree right now - US President-elect Barack Obama is about to install someone as the next Secretary of State who has shown zero understanding of, much less passion and action for, human rights in Mexico, Colombia and elsewhere (except in isolated cases where the same mass media has turned a particular case into an international cause celébre), we're going to see more of the same terrible story happen over and over again.
From Sam Smith’s Progressive Review: What the Banks, Academics, the Media and Politicians Don’t Tell You About Money
The power to create money is an awesome power - at times stronger than the executive, legislative or judicial powers combined. It's like having a "magic checkbook," where checks can't bounce. When controlled privately it can be used to gain riches, but more importantly it determines the direction of our society by deciding where the money goes - what gets funded and what does not. Will it be used to build and repair vital infrastructure such as levees to protect major cities? Or will it go into warfare or real estate loans, creating asset price inflation - the real estate bubble.
Thus the money issuing power should never be alienated from democratically elected government and placed ambiguously into private hands as it is in America in the Federal Reserve system today.
Indeed most people would be surprised to learn that the bulk of our money supply is not created by our government, but by private banks when they make loans. Most of our money is issued as interest-bearing debt.
We are borrowing this money system from private banks when instead we should own the system, not rent it. Our government has the sovereign power to issue money (Art.1, Sect.8) and spend it into circulation to promote the general welfare through the creation and repair of infrastructure, including human infrastructure - health and education - rather than misusing the money system for speculation as banking has historically done. Our lawmakers must now reclaim that power. . .
Naomi Klein: In Praise of a Rocky Transition
The more details emerge, the clearer it becomes that Washington's handling of the Wall Street bailout is not merely incompetent. It is borderline criminal.
Chossudovsky on the Financial Collapse
The Great Depression of the 21st Century: Collapse of the Real Economy
Michel Chossudovsky is Professor of Economics at the University of Ottawa and Director of the Centre for Research on Globalization (CRG), which hosts the critically acclaimed website www.globalresearch.ca.
I became acquainted with Chossudovsty’s writings around the time the Clinton administration decided to bomb Serbia, ostensibly on behalf of the Albanians in Kosovo. Chossudovsky, in his paper, Dismantling Former Yugoslavia,
Recolonising Bosnia (1996), exposed the deliberate and ultimately successful campaign to dismantle Yugoslavia by the western powers. A later article also posted on this website, NATO’s War of Aggression Against Yugoslavia: An Overview (1999), is a powerful indictment against the entire war. There are some interesting tidbits in that report:
The reader will recall that prior to 9/11, hardly anyone in the U. S. had ever heard of Osama bin Laden, and even fewer were aware that he was allied to the Kosovo Liberation Army, an organization that the U. S. was supporting.An Unholy "Marriage of Convenience"
In addition to the dispatch of Western special forces, Mujehadeen mercenaries and other Islamic fundamentalist groups (financed inter alia by Iran and Saudi financier Osmane Bin Laden) have been collaborating with the KLA in the ground war.
"[B]y early December 1997, Iranian intelligence had already delivered the first shipments of hand grenades, machine-guns, assault rifles, night vision equipment, and communications gear... Moreover, the Iranians began sending promising Albanian and UCK [KLA] commanders for advanced military training in al-Quds [special] forces and IRGC camps in Iran.....
Bin Laden's Al Qa'ida allegedly responsible for last year's African embassy bombings "was one of several fundamentalist groups that had sent units to fight in Kosovo, ... Bin Laden is believed to have established an operation in Albania in 1994 ... Albanian sources say Sali Berisha, who was then president, had links with some groups that later proved to be extreme fundamentalists".
Interestingly enough, the Kosovo Pages on the Jackson Progressive, even though seldom updated now, are some of the most frequently-visited pages on this website. It is as though the entire Balkans have slipped down a memory hole.
The Meltdown - an Exemplar
S. 190 - Federal Housing Enterprise Regulatory Reform Act of 2005
It is possible that all this was perfectly legal—but it stinks of corruption. In fact, it was corrupt.
I’m a lawyer, and I know how easy it is to find a way to violate the spirit of a law without violating the letter, and that is particularly true of criminal statutes, which must be strictly interpreted to avoid running afoul of the due process requirements of the U. S. Constitution. On the other hand, using corporate funds to lobby lawmakers for the specific purpose of passing legislation to keep the investigators away from an ongoing crime (or a conspiracy) ought to be a crime, both for the corporations and their officers, and for the lobbyists that do the actual dirty work. It is obstruction of justice, pure and simple.
The 20th Percentile Solution
Here’s a proposal for part of the solution: Pass a constitutional amendment fixing the salaries and pensions of the president, vice president, senators, congressmen and all federal judges at a multiple (not necessarily the same multiple for all of them, however) of the 20th percentile of family income. These are folks who are struggling hard to stay in their houses and put food on their tables, so if our congresscritters continue what they have been doing since 1981, their income will either stagnate or decline. Make the salary generous.
Interestingly enough, the income of the president and members of congress have actually been going down as a multiple of the 20th percentile’s family income. For instance, the president’s pay in 1951 was 51.2 times the 20th percentile’s family income (100,000/1953), whereas the multiple in 2003 was 16.6 (400,000/24,117). A fair multiple would be 25.
Congressional salaries, on the other hand, have moved less but still ought to be raised to at least a multiple of 10 times the 20th percentile.
Year Salary 20th per. multiple
1951 12500 1953 6.4
1969 42500 5000 8.5
1979 60662 8000 7.6
1994 133600 17949 7.4
2003 154700 24117 6.4
In order to reinforce this alignment, forbid all outside income, gifts or speculative earnings, irrespective of the source, to all these officials. All outside income goes into the treasury, period. No exceptions. That includes income from blind trusts and retirement income. Officials must live on their government salary as long as they remain in the government. If you happen to own a private jet, you can use it, but you must make the payments for it, maintain it and pay for fuel out of your government earnings. You get the idea ....
There are other provisions that could further strengthen that alignment. For instance, we could add an additional factor - the Gini ratio, a measure of income inequality that has been climbing ever since Ronald Reagan became president. Zero is perfect equality and 1 is total inequality. Subtract the Gini ratio from 1 and multiply the difference by the multiple above, increasing the multiple to meet the initial income target. Then the more unequal society becomes, the higher the Gini index goes, and the folks ultimately responsible for the increasing inequality get a taste of what it is like to see their incomes decline.
Another possibility would be to tie executive and legislative income to the minimum wage. The president’s income has declined compared the minimum wage, but Congress’s income has grown almost twice as fast as the minimum wage since 1951.
Establish a retirement system that enables public servants to retire with a generous stipend, on the condition that they do not lobby or work for the federal government or a corporation that does business with the government until they have been out of office at least 6 years.
Establish progressive tax brackets that are multiples of the 20th percentile of family incomes. In 2007 the 20th percentile earned $27,864, so any family earning less than $27,864 pays nothing, which is a good thing; at that income, taxes literally take food off the table. The brackets would then go $27,865-55,728; $55,729--83,592; $83,593--111,456, etc. If everyone’s income rises in the same proportion, then the brackets would proportionately expand and no one’s tax bite would change. If the income at the bottom stagnates, however, then the brackets stay put and the higher earners suffer tax bracket creep as their income increases. This would have the effect of aligning the interest of the wealthy with the welfare of the far-less-wealthy. It would then be in everyone’s interest to adopt policies to pull up the income at the bottom.
Needless to say, such an arrangement would have to be done by constitutional amendment, as no congress would vote to tie their incomes to the fortunes of the less well-off.
Finally, the money-chase for campaign contributions must cease. It is unrealistic (I originally wrote idiotic) to expect our representatives in Washington to do their job if they must spend most of their time begging the rich and powerful for campaign contributions. All elective federal offices simply must be financed by public funds and those funds must be dispensed in a way that will shorten the campaigns to a reasonable length. Television, radio and cable must, as a condition of doing business, furnish adequate prime time at no cost for the candidates to put their messages before the voters. If it takes a constitutional amendment to make this work, then enact it.
References:
http://www.uscourts.gov/judicialpay.pdf
http://www.senate.gov/reference/resources/pdf/97-1011.pdf
http://www.census.gov/hhes/www/income/histinc/f01AR.html
http://www.lib.umich.edu/govdocs/fedprssal.html
http://usgovinfo.about.com/library/blminwage.htm
http://www.census.gov/hhes/www/income/histinc/f04.html
McCain & Keating & Lincoln S & L
Here is a film from the Obama campaign exploring what happened.
Looks like this election could become very interesting.
N. Klein and the Shock Doctrine
http://rawstory.com/news/2008/Naomi_Klein_Bush_admin_invented_no_1003.html
The Free Market Economy - only a small incident
Bailout Bill Defeated
The proposed bailout was a gift to a gang of thieves.
Back to the drawing board. No mitigation without regulation.
The Bailout Scam
Dean Baker in the Huffington Post writes that The Banks Have a Gun Pointed at Their Head and Are Threatening to Pull the Trigger:
The basic argument for the bailout is that the banks are filled with so much bad debt that the banks can't trust each other to repay loans. This creates a situation in which the system of payments breaks down. That would mean that we cannot use our ATMs or credit cards or cash checks.
That is a very frightening scenario, but this is not where things end. The Federal Reserve Board would surely step in and take over the major money center banks so that the system of payments would begin functioning again. The Fed was prepared to take over the major banks back in the 80s when bad debt to developing countries threatened to make them insolvent. It is inconceivable that it has not made similar preparations in the current crisis.
In other words, the worst case scenario is that we have an extremely scary day in which the markets freeze for a few hours. Then the Fed steps in and takes over the major banks. The system of payments continues to operate exactly as before, but the bank executives are out of their jobs and the bank shareholders have likely lost most of their money. In other words, the banks have a gun pointed to their heads and are threatening to pull the trigger unless we hand them $700 billion.
Michael Moore puts it even more bluntly on his mailing list:
As usual, the taxpayers are getting screwed.Let me cut to the chase. The biggest robbery in the history of this country is taking place as you read this. Though no guns are being used, 300 million hostages are being taken. Make no mistake about it: After stealing a half trillion dollars to line the pockets of their war-profiteering backers for the past five years, after lining the pockets of their fellow oilmen to the tune of over a hundred billion dollars in just the last two years, Bush and his cronies -- who must soon vacate the White House -- are looting the U.S. Treasury of every dollar they can grab. They are swiping as much of the silverware as they can on their way out the door.
Remember, Mississippi Republicans, you voted this gang of thieves into office and kept them there. Now all of us are going to pay hell for this folly.
On the Bailout
Clouds have been forming on the horizon for at least 15 years. Whenever a CEO can continue to be paid millions while running a corporation into bankruptcy, there is a severe disconnect between performance and reward which bodes ill for the corporate world, as well as for the entire economy.
Opposition to Treasury Secretary Paulsen’s request for virtually unlimited powers is mounting, even among conservatives, who are suddenly worried about unaccountable executive power. Funny, it hasn’t bothered them for the last seven years, as Glenn Greenwald points out.
Economist Dean Baker writes the most intelligent suggestions I have yet seen on the subject, Progressive Conditions for a Bailout.
Perhaps his most logical proposal, which would be resisted by the banks to the last man, is to reform the governance of the Federal Reserve:
The structure of the Fed should be changed so that all the officials with a direct say in monetary policy are appointed by the president and approved by Congress. The Fed is supposed to act in the public interest, not in the service of the financial industry. It is disturbing that the public is being represented in this debate over the restructuring of the financial industry almost entirely by top figures from the financial industry. This would be comparable to having national policy on the auto industry determined by former top officials with the United Auto Workers. It is difficult to believe that the views of Treasury Secretary Paulson and other government officials from the financial industry are not influenced by their long association with the industry.
This problem should not be worsened by giving the banking industry a direct voice in the conduct of monetary policy, by allowing it to appoint Federal Reserve district bank presidents who take part in open market committee discussions. There should be a strict separation between the conduct of open market policy, which should be done exclusively by people appointed by the president and approved by Congress and the responsibilities of the district bank presidents. The banking industry deserves no special voice in the conduct of monetary policy.
Social Security: The Real Issue
Read the article. PDF version.
Medical Tourism
Real competition can have some good effects. I wonder how the increase in air fares will affect medical tourism? Perhaps someone will convert a cruise ship into a first-class hospital. Recuperate while sailing to France — or back home. There are many opportunities to capture American medical dollars.
The Economist: Operating profit
Doha Trade Negotiations Fail
It would have been nice to know exactly what each side proposed in the trade talks, but apparently our government does not have much confidence in the ability of Americans to understand the fine points of international trade. Or perhaps it's the opposite fear--that the people will understand all too well.
Of course, those fine points have made the difference between the industrial powerhouse this nation was before Reagan and his wrecking crew took power and starting sending manufacturing overseas and concentrating the wealth of the nation into the hands of the superrich, and what it is today, a declining power, foolishly squandering its diminishing resources on a colonial war intended to make a few people rich and to establish control of oil production in the middle east. Fine points, indeed!
I would like to believe that an Obama presidency would at least attempt to encourage capital formation in the U.S., but I don't have much faith that it will.
Without a robust industrial capacity, we are destined to loose our economic and technological preeminence, if, indeed we have not already lost it.
Solving the Mortgage Crisis
When a home is sold under foreclosure, the lender usually winds up buying it for the mortgage balance. If the value of the home exceeds the debt, the lender can sell it at a profit, but when the housing market is down, the lender must sell at a loss, that is, if it can find a buyer. As every JP reader knows, investors in mortgages and securities based on mortgages have seen their investments lose much of their value in the last six months. Since most of these investors are either very wealthy individuals or institutions with political clout, Congress is struggling to find ways to keep them solvent.
There is also some talk of helping homeowners threatened by foreclosure.
This crisis was predictable long ago. So was the Savings & Loan Crisis, the Dot Com Crisis, the stock market collapse, and the Asian meltdown. The problem each time was that no one who was able was willing to put a damper on what anyone with a grain of sense could see was a bubble — Congress, the Federal Reserve, the Treasury Department, the SEC, or even the mainstream media. Mainstream economists are just now noticing the problem, it appears. Dean Baker, of the Center for Economic and Policy Research, goes beyond sarcasm in criticizing an article in the Washington Post:
The [Washington] Post bizarrely describes a scenario in which Greenspan "puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that the subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier."
If this is true, then it implies an incredible level of incompetence on Greenspan's part. The rise in subprime lending was not some obscure fact known only to a privileged few. It was a widely noted development in the housing market over the years 2003-2005. If Greenspan was just made aware of this growth as in the last month of his tenure in January of 2006, then he was incredibly negligent in performing his job.
The growth in housing prices had been the central fuel of the U.S. economy in the recovery following the 2001 recession. Greenspan had been an eager proponent of housing dismissing the concerns of those who warned of a housing bubble. If he did not even know of the surge in subprime lending, then it is difficult to imagine any possible basis on which he could have ruled out the existence of a bubble in the housing market. (The article says that Greenspan "did not recall" whether he mentioned the growth in subprime lending to Bernanke. If Bernanke, did not already know about the growth in subprime, then he is not competent to be chairman of the Fed.)
In short, this article does more to conceal than reveal the developments that led to the current housing crash. There were no deep mysteries that had to be uncovered. House prices had gotten badly out of line with fundamentals by 2002. This was possible for any competent analyst to recognize just as it was possible to recognize the stock bubble by 1998. Unfortunately, the Post and the rest of the media relied almost exclusively on analysts who somehow failed to recognize the housing (and stock) bubbles or worse, had a direct interest in perpetuating these bubbles. Even after the fact, the Post is still choosing to rely almost exclusively on those who failed to see the bubble, rather than the experts who foresaw and warned of the problems ahead.
Dean Baker: The Post Misses the Housing Bubble Yet Again
We have seen all this before. Bubbles and busts have been part of the American experience since the time of Andrew Jackson. Economic systems structured around debt leverage are inherently unstable. A debt doesn't automatically change when the situation of the debtor changes; debt is inflexible, whereas income, equity, and value are at the mercy of the market. Debts are like shoals; inconsequential when the water is high, but deadly when just beneath the surface.
Now that the weaknesses of the mortgage industry are becoming apparent, I would invite readers with imagination to brainstorm in the comments a different system of providing housing to the vast majority of the public. Given the power of the financial sector, it is unlikely that radical restructuring of home financing would have a chance of becoming a reality any time soon, but, given an extended crisis, who knows how many minds might be open to something fundamentally different?
The problem, as conceived by the economists, the media, and government, is how to keep the present system going.
The question we ought to be asking is how we can house people as cheaply and comfortably as possible without pauperizing them, and at the same time giving them the maximum freedom to choose where to live and what to live in.
There has got to be a better way.
Since the '30s, government policy has had a profound effect upon what kind of homes were built, where they were built and how they were paid for. There is no reason why that policy cannot be altered for beneficial results.
For what it's worth, here's a proposal: The government lends you up to, say $150,000, on a house valued at no more than $175,000, interest-free, with equal monthly payments for 20 years. If you sell it at a profit, you have to put it into another house or the government gets to recoup the foregone interest out of the equity. After age 65 you get to keep the equity. You would still have to qualify for the loan, however, and a house whose price exceeds the $175,000 maximum (indexed for inflation) + any equity you might have accumulated in the sale of your previous house, would not qualify. If you want a MacMansion, you would still have to go to the bank and pay the interest on the entire amount financed.
Here's another idea: Finance mortgages the traditional way, but limit annual total payments to a fixed percentage of the homeowner's gross adjusted income for the year (with a reasonable floor to protect the lender), with any shortfall subtracted from interest and automatically forgiven. That way, the lender assumes some of the risk of declining wages and rising unemployment.
Neither of these suggestions may turn out to be practical or even possible, but I am offering them in an effort to stimulate some creative thought about our way of housing Americans.
It would be desirable, in my opinion, to eliminate debt completely from housing transactions, but I'm not sure that is possible. For many years, a home has been the nest egg for the middle class, subsidized by the mortgage interest deduction and capital gains tax break, and fed by the rising value of residential real estate. Now that many nest eggs are vanishing, it behooves us to examine the laying of nest eggs. A speculative nest egg is about as secure as Humpty-Dumpty, and just as likely as Humpty-Dumpty to be put back together again after it goes.
Of course, it is entirely possible that the bursting of the housing bubble and the "great fall of the offwall entailed at such short notice," is merely another phase of the great campaign to fleece the middle class of its remaining wealth, a campaign that has been effectively waged since Reagan became president.
Put your out-of-the-box ideas for housing in the comments.
Amory Lovins on the Oil Endgame
The following is a talk Lovins made in 2005.
Dr. Shughart Gets it Wrong on Oil Taxes
1. Imposing additional taxes on the U.S. oil and gas industry undermines the goal of providing stable and cost-effective supplies of energy for consumers and discourages the enormous capital investments needed to meet the nation's growing energy demands. The House energy bill would reduce incentives to develop domestic energy resources and would discourage investment in new refinery capacity–thereby increasing our dependence on foreign suppliers.
2. We haven't built a new refinery since 1976, in part because of "not-in-my-backyard" attitudes and costly environmental regulations. As a result, U.S. oil refining capacity is nearly 4 million barrels a day below current consumer demand, a shortfall that must be met by importing petroleum products.
3. The absurd windfall profits tax on oil companies imposed during the Carter administration reduced U.S. oil production, cost thousands of jobs and let to an increase in imports.
The very heart of the argument for Capitalism is that the system rewards those who create wealth, as opposed to systems that merely siphon off wealth from the many for the benefit of the few. There is no other moral argument that justifies the enormous concentration of wealth and power that characterizes the modern capitalistic system.
The record profits reaped by Exxon, BP and the other major oil producers, however, have not come about through their own efforts (other than perhaps backing George W. Bush and his Iraq invasion), but through the increase in the price of oil. Speculative profits amount to a transfer of wealth from someone—in this case, the purchaser of petroleum products—to the speculator, who has created no wealth in return. Translated into simple terms, we pay more at the pump and Exxon makes higher profits without lifting a corporate finger. No capital investments are necessary, no sacrifice required. Just rake in the dough and contribute to friendly politicians who will let you keep that dough.
Keeping this in mind, we first examine points 1 and 3. I happened to work for a small independent oil company during the time that the windfall profits tax was in effect. The tax was an effort to recoup some of the windfall profits of oil producers when OPEC raised the price of oil in the late 1970s. The statute made a distinction between existing production (old oil) and production from newly-drilled wells (new oil). Only the old oil was subject to the windfall profits tax.
The result was an explosion of oil exploration in the U.S.A. During the early '80s the most valuable piece of property you could possibly own was an oil rig, because the demand for oil rigs was astronomical. The oil companies were spending money like drunken sailors and the wealth seemed inexhaustible.
Then it all went away.
Shughart indirectly blames the WFT for the collapse of the domestic oil industry in the early '80s, but that signal honor must go to Ronald Reagan, who cut a deal with the Saudis to increase production and lower the price of oil close to $10/bbl. All the independent oil producers went out of business in short order, including the company I worked for. It was good for the economy overall, but it made domestic exploration unprofitable. Thousands of producing wells were plugged and abandoned in the '80s. Oil at $10/bbl rendered the WFT irrelevant and inoperative. It expired by its own terms shortly thereafter. It had no effect whatever on exploration.
With respect to point 2, the investment argument, stark reality refutes Dr. Schughart. If it had been profitable to construct refineries, then the major oil companies would have been building them all along. They have never lacked the resources to do whatever they needed in that respect. The fact that they have not been building, are not now building, nor are they planning to build new refineries any time soon is a dramatic demonstration that they are satisfied with their capacity as it now stands. The environmental regulations that prevent them from operating unsafe and unhealthy workplaces and poisoning the groundwater and air are neither onerous nor unreasonable. In planning and operating new refineries they would merely have to pay costs that were formerly paid by their employes, their neighbors and the environment.
Most likely, the petroleum industry has not constructed new refineries because world oil production has either peaked or will soon peak, and thus additional refining capacity will never be needed. Considering the 5-10 years it takes to bring a refinery on-line from the planning stage, it would be insane to begin the process now, no matter how much money is available to invest.
Dr. Shugart's curriculum vitae reveals that he is an apologist for powerful corporations, with ties to the right-wing Heartland Institute, George Mason University, and a number of other pro-corporate organizations. The ideological threads that run through all these institutions are the sanctity of private property, corporate profits and the highly-managed and controlled industrial/financial system whose plutocratic nature is concealed by the term "market economy."
Always beware of economists that seek to justify the powerful acquiring more power and the wealthy acquiring more wealth.
Subprime Rescue
This is how the system works. Big players can, and do, put the Federal Reserve over a barrel. The Fed doesn't like it, but what can it do? Not to bail, when the markets implode, isn't an option. Too many innocents would get massacred on the way by.
Sordid necessity thus killed Bernanke's "inflation targeting" approach to monetary policy. And this leaves the true nature of Fed policy plainly exposed. In normal times, a Fed chair can pretend to follow his academic formulae. But once the air-raid sirens sound, policy isn't made on Constitution Avenue at all. It's made on Wall Street, and don't let us forget it.
Wall Street likes volatility. And so we have a system based on credit bubbles, one after the other. The information-technology bubble from the late nineties to 2001 brought us full employment and budget surpluses, but it could not be sustained. The housing bubble has kept us going ever since. It too was bringing us high employment and falling budget deficits. And it too could not be sustained.
I suppose this is one of the reasons that economics is not a required subject, either in high school or college. Most people, even if taught badly, would know that this is a shell game designed to fleece one more time the great unwashed, as well as most of the washed.
These con games will continue until the economy completely collapses or we restructure the financial system. Don't bet on the latter.
Fiat Money
...I believe that greed and competition are not a result of immutable human temperament; I have come to the conclusion that greed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using. For example, we can produce more than enough food to feed everybody, and there is definitely enough work for everybody in the world, but there is clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity. The direct consequence is that we have to fight with each other in order to survive.
Lietaer, a former Belgian banker instrumental in the establishment of the Euro and a recognized world authority on money, believes that people should create their own currencies—he calls them "complementary currencies"—as a part of the answer.
The problem with our current system is not hard to define: There is not enough money in circulation to mediate the optimal number of transactions in our society and world. Put more simply, work needs to be done and there are workers needing work, and the only thing keeping them from doing the work is the lack of money. Lietaer believes that people can overcome many of these problems by creating their own currencies that operate alongside the official money system. In his book, The Future of Money, he makes a powerful argument for complementary currencies based on actual human experience, citing historical examples from ancient Egypt to the present time.
Unfortunately, Amazon.com lists the book as "unavailable," but it is available on amazon.co.uk, which will ship to the U.S.
It is time to bring some of the most brilliant minds to bear upon the subject of our monetary/financial system and how it may be changed to reverse its mindless rush towards ecological, political and social disaster for the whole Earth. In order to make our civilization sustainable, people must be rewarded for actions that promote sustainability. The system now rewards people for exactly the opposite behavior. Classical economics, with its one-dimensional conception of humankind as homo acquisitivus, has become no more than an elaborate mathematical justification for even more destructive corporate and national behavior, if such a thing were possible.
Having been immersed all our lives in the world of fiat currencies, it is hard for us to imagine something different. It is even more difficult, if not impossible, to comprehend how the very nature of the money we earn, spend, and think about so much of the time contributes to many, if not most, of the world's major problems. But Lietaer shows that is indeed the case and it doesn't have to be that way. We humans created money a certain way and we can change it. Most professional economists, unfortunately, will be of little help; they have too much stake in existing theory and their paymasters have too much at stake in keeping the present system going as long as possible. Solving the current crisis will require leaders with the openness and breadth of intelligence of an Adam Smith, and they are rare in any age. Let us hope.
Gated Communities and Slums
When was a kid in the '50s, gated communities were unknown in Jackson and the very idea of building a suburban McMansion 30 or 45 minutes out of town in a walled enclosure was not only unthinkable, but would have been regarded as contemptible. Why would anyone other than a farmer or a hermit choose to isolate himself (or especially herself) from the life of the city, the very word from which the term "civilization" is derived?
The answer stares us in the face. We have convinced ourselves that we are helpless in the face of economic laws that dictate constantly increasing inequality. They cannot be resisted, because, like a Calvinistic deity that foreordained from the beginning of creation who is to be damned and who is to be saved by some unknowable divine decision-making process, we believe that the almighty market has declared there must be winners and losers and the best a person can do is to try to be a winner by whatever means are available, and the devil take the hindmost.
From the time of the New Deal until the conservative counter-revolution in the '70s and '80s, most Americans saw through this market theology as so much plutocratic claptrap. They would not had changed their minds, either, had the right-wing forces, through their bogus think-tanks and their increasing control over a rapidly consolidating mass media, not, in effect, edited reality, so that news that did not support the conservative agenda simply ceased to exist in the public mind. The dominance of television news, to which superficiality comes naturally, made the task far easier than it would have been in print media alone.
Aside from the almost incontrovertible fact that these remote, gated communities will not survive in an energy-scarce world, there are other policy considerations that make these communities highly undesirable:
1. They are energy-intensive in many ways: obviously the long commute, either to work or shop requires a lot of gasoline. Walking anywhere is simply out of the question. In addition, these homes are large, single family dwellings that must be heated and cooled. Sizable lawns must be fertilized and watered. Because they are usually located away from lower-income areas, their "help" must drive to work, often over long distances. I read recently that workers in Aspen, Colorado have to commute 50-60 miles because they cannot afford housing any closer to their jobs. None of this is going to work when oil becomes $150/bbl or $250/bbl. These communities will become foreclosure cites when that happens.
2. It is bad for society when the rich and powerful are able to isolate themselves from even the middle class. In the case of Jackson, it is obvious that the leadership vacuum is harming not only the city itself, but the entire metropolitan area. A large piece of Jackson's leadership has moved into gated communities in Madison and Rankin counties, and even though it continues to conduct business and exert influence over city policy, it is mostly insulated from the effects of those policies upon the citizens of Jackson. When the rich and powerful must live amongst the hoi polloi and rub elbows with one and all, they tend to be more aware of this relationship and consequently more concerned for the general welfare.
3. Taxes. It has always been a mystery to me why people who benefit the most from the wealth generated by the community and who are most able to afford paying taxes are the most resistant to giving back their fair share to the community. The entire history of English property law from the Norman conquest until the modern era can largely be explained as the efforts of the nobility to avoid paying feudal land taxes to the Crown. The Republican Party since 1980 often seems to have had no other significant economic policies than cutting taxes for the wealthy and lowering wages for everyone else through union-busting. Gated communities are invariably built in areas with low property taxes. They therefore represent a reduction of the urban tax base and an increase in the suburban (or more likely, exurban) tax base. In order to provide municipal services to a population that cannot afford their own private security guards and to pay for the infrastructure that modern cities must have, cities must raise taxes, which increasingly drives out more of the well-to-do. It's a vicious circle.
Because of a leadership vacuum--especially a vacuum of talented leadership that experiences what it's like to actually live in a Jackson neighborhood--the city is faced with a scarcity from which all other scarcities spring: a scarcity of imagination.
Clearly, there exists a crying need for new ideas about how to make cities work. Increasingly higher energy prices will force most exurbanites and many suburbanites to move closer to their work, thus raising the cost of housing in the city and putting pressure on the poor to find affordable housing in a rapidly-gentrifying city. Will the poor then gravitate to the suburbs, where there is no public transportation worth speaking of and, because of low-density development, where public transportation will be prohibitively expensive? The prospects do not look good.
Committees and blue-ribbon commissions have met and made recommendations world without end, and nothing happens. Societies die when they lose their imagination, when they cannot change because change is blocked by the forces that have grown fat on the status quo and would lose their privileged position if what is needed to be done were done.
Have we reached that point in our society?
We will probably know the answer to that question in the next few years.
Open Democracy: A Tale of Two Towns
The United States can always use another Albert Einstein or Alexander Graham Bell (or a dozen each)
Congress at the moment seems to favor low-skill, low-wage immigrants and to disfavor the more intelligent and skilled ones, on the grounds that the high-level ones tend to displace Americans who would otherwise be holding those high-level tech jobs. There is some truth in the latter accusation, as has been discussed previously here and here. Smart, highly trained people, however, create wealth. We ultimately gain and their foresaken homelands ultimately lose. It seems that other nations have learned this lesson and our leaders have forgotten it:
The number of outstanding persons in a multitude of fields who have come to this land is simply staggering. To name some of the 20th Century's greatest merely scratches the surface: Einstein, Stravinsky, Von Neuman, Fermi, Strauss, Arendt, Tillich, Heifetz, Toscanini, Nabokov .... the list is endless.While the United States perversely tries to corner the market in uneducated hotel maids and tomato harvesters, other industrial democracies are reshaping their immigration policies to invite the skilled immigrants that we turn away. Britain is following Australia and Canada in adopting a points system that gives higher scores to skilled immigrants with advanced education and proficiency in English. British, Canadian, German and even French universities are overflowing in undergraduate and graduate enrollment as they absorb the foreign talent that America is repelling.
Even now, the Mississippi Symphony would be almost fatally crippled without its Polish, Russian, Lithuanian, Moldavian, Chinese, and Japanese musicians who have helped it become an orchestra of which the city and state can be proud.
Talented, intelligent people give to society far more than they take. Congress should be mindful of this when it formulates our nation's immigration policies.
More NAFTA in the Offing
Last night Bill Moyers interviewed John MacArthur, author of The Selling of Free Trade and critic of NAFTA and other free trade agreements, who believes that the new free trade agreement in the works is no more or less than an attempt by the Democratic leadership to attract political contributions from Wall Street by offering something that the large manufacturing and retailing corporations want: fewer restraints on employing overseas labor to undercut jobs and wages in the U.S. The bill has not reached Congress, but the big players, such as the National Chamber of Commerce and the National Association of Manufacturers, have already endorsed it, which means that it bodes ill for the American worker.
Expect our Republican senators and representatives to vote for it automatically. Unless pushed, Gene Taylor will vote for it, just as he voted for the corrupt Bankruptcy Bill. Bennie Thompson will probably do the right thing, especially if he knows that Mississippians are watching.
Bill Moyers Journal: Trade Talks
Cars, Corn and Castro
Biofuels are being widely acclaimed as the solution to the energy crisis.
There's one catch, however. Crops grown for fuel require the same land as food crops, and given the increasing demand for fuel and current world population trends, the transformation of crop lands to fuel lands will inevitably collide with the need for food, a development which has ominous implications for the vast majority of the world's peoples who barely have enough to eat even now. The price of corn has already doubled since last year, principally due to the demand for biofuel.
There's even a bigger catch, however: It takes energy to produce biofuels. In the case of ethanol, the cost of fertilization, harvesting, fermentation and distillation require so much energy input that gasohol, for example, a popular blend of gasoline and alcohol, must be subsidized through tax breaks to make its production possible.
So how does Fidel Castro, communist dictator of Cuba, come into the picture?
Simple. Since the fall of the Soviet Union, and thus the cessation of its oil subsidies to Cuba, the latter has been forced to adapt to an energy-poor and petroleum-poor (and thus fertilizer-poor) economy that likely foreshadows our own future here in the U.S. Considering the unremitting hostility of the U.S. to the Castro regime and the resulting long-term economic sanctions imposed by the U. S. government on Cuba, the Cuban people have done admirably well under the circumstances.
Via Stan Goff's Feral Scholar, Casto, who has earned the right to comment upon such matters, has written a thoughtful paper based on the writings of Atilio Borón, a prestigious leftist intellectual who until recently headed the Latin American Council of Social Sciences (CLACSO), on the pitfalls of biofuels. He spares no words:
Read the paper and the comments, many of which are very insightful. Castro may be an odious dictator, but he is no fool and he is now approaching the end of his life, a time when persons are supposed to become mellower and wiser.Transforming food into fuels is a monstrosity.
Capitalism is preparing to perpetrate a massive euthanasia on the poor, and particularly on the poor of the South, since it is there that the greatest reserves of the earth’s biomass required to produce biofuels are found. Regardless of numerous official statements assuring that this is not a choice between food and fuel, reality shows that this, and no other, is exactly the alternative: either the land is used to produce food or to produce biofuels.
We Can’t Have Our Ethanol and Eat It Too — Castro on Biofuels
Update (5/21/2007): The Wall Street Journal is running an article (subscribers only) today on the problems pig farmers are having with the rising cost of corn. Many are feeding their pigs trail mix. Even the pig farmers who grow feed corn are selling their corn to ethanol producers and using discarded trimmings from the food industry. The article points out that the 51-cent tax credit paid to producers that blend ethanol and gasoline has encouraged this trend. Like many other subsidies that indirectly benefit farmers, it seems to me that we would be better off simply paying the money to the farmers.
On the other hand, the entire corn, livestock and gasahol carnival is an economic, agricultural, environmental and public health disaster. Economic, because the market is distorted by unwise subsidies and fuel addiction on the part of the public; agricultural, because corn erodes the topsoil, especially when it is the exclusive crop; environmental because of the wastes from livestock farming and a host of other pollutants introduced into the environment, including carbon; finally, the excessive consumption of meat is a major factor in cardiovascular diseases. This is merely a sample of the hidden costs of our multiple addictions and their enabling by our industrial-financial system.
And you heard it right; any sane economic theory would consider addiction to be a form of market failure.
The Coming Recession
The Global Asset Price Bubble
Palley's analysis make sense. When you raise the average person's income, he will usually spend it to raise his standard of living. Not so in the case of the wealthy, who already have a high standard of living. The wealthy invest their additional income, principally in stock and hard assets that are likely to increase in value. They have little incentive to purchase bonds, since interest rates are so low. The predictable result is the bidding up of asset prices. Thus the recent massive tax cuts for the wealthy have had little positive effect on the lower 90% of the American people, while they have maintained high stock values in the face of an increasingly weak economy. The last time this happened was in the 1920s.
To this amateur economist, Palley's analysis bodes ill for most of the world's peoples, with rising inequality leading to increased hopelessness among the overwhelming majority owning no substantial assets which can be collateralized and thus with no access to capital. The growing gulf between the fabulously wealthy 1% and the rest of us who are experiencing more and more economic stress (or worse), increases the likelihood of political and economic instability, with all the pain and suffering that invariably accompany them.The “supply-side” collateral shortage hypothesis and asset “demand-side” hypothesis have radically different public policy implications. The former views asset price bubbles as largely benevolent, reflecting the market’s attempt to solve collateral shortages. Policy may even wish to encourage bubbles by further lowering interest rates, thereby increasing asset values and collateral.
The latter sees things very differently. The rise in asset prices reflects significant adverse trends regarding rising income inequality and shifts in income distribution to profits. It also reflects the distorting effect of excessive export-led growth and weak global demand that have driven low interest rates. Furthermore, asset price inflation aggravates income inequality since it is tantamount to a terms-of-trade improvement for the wealthy, whose assets are now worth more. Consequently, workers must give over more to acquire retirement assets, and they are also vulnerable to price declines. Lastly, asset price inflation creates a form of economic lock-in since attempts to alter income distribution or taxes can undermine asset prices, potentially causing financial crisis. This is particularly so if asset purchases have been credit financed.
Finally, the collateral shortage hypothesis camouflages a regressive political economy. Nobel laureate Joseph Stiglitz’s work on credit rationing shows how economies can be constrained by lack of collateral that limits access to credit. This is a real problem in developing countries where wealth inequality means that most have no collateral, inhibiting their entrepreneurial possibilities. The asset boom - collateral shortage hypothesis implicitly puts this insight in the service of developing country elites who own most of the wealth, encouraging policies that further raise the value of their assets. Look for this idea to soon show up at the IMF and World Bank.
Not a pretty picture. Look around and see for yourself if Pally is on the wrong track.
World Asset Prices: What’s Really Going on?
Former Navy Secretary Webb Lays it on the Line
The object of elites everywhere is to exploit everyone else as much as possible without stirring up rebellion. Mississippi elites have performed this balancing act for well over a hundred years using techniques of social control that are so familiar as to be almost invisible to its inhabitants, much like water is invisible to fish.
The tried and proven method of the American South has been racism, a con game that sets blacks and whites against each other and causes them to blame each other for their wretched condition. Racism is difficult to deal with rationally, since it contains a strong component of psychological projection coupled with a profound ignorance of how the economic system works, Southern fundamentalist religion facilitates the process of projection by its Manichaean division of humanity into the children of darkness and the children of light and by its hostility towards the intellect. Dispensationalism and creationism have replaced history and science with alternative explanations of reality that are almost impossible to dislodge by evidence and rational argument.
The plantation system has now been spread throughout the United States. Its basic principle, "divide and conquer," has proven to be a flexible, efficient tool of social control far outside the Mason-Dixon line. Rush Limbaugh made a fortune persuading male blue-collar workers that their economic decline was the fault of "liberals." Right-wing politicians have recently demonized Illegal immigrants from Latin America as a danger to the American way of life.
Like a cheap perfume, a subtle racism permeates southern society from top to bottom.
Conservatism, with its emphasis on hierarchies, class, and control of society by the "better sort of people," has frequently encouraged that peculiarly American combination of racism and fundamentalism that keeps the lower classes distracted and docile.
For this reason, it is surprising to see the rabidly right-wing editorial pages of the Wall Street Journal feature a column by Jim Webb, former secretary of the Navy under Reagan and newly-elected Democratic senator from Virginia, warning the nation that if the huge chasm in income and wealth between the elites and the rest of us continues to widen, we risk what he charitably causes "political unrest." Webb has peered into the abyss and doesn't like what he sees.
If it remains unchecked, this bifurcation of opportunities and advantages along class lines has the potential to bring a period of political unrest. Up to now, most American workers have simply been worried about their job prospects. Once they understand that there are (and were) clear alternatives to the policies that have dislocated careers and altered futures, they will demand more accountability from the leaders who have failed to protect their interests. The "Wal-Marting" of cheap consumer products brought in from places like China, and the easy money from low-interest home mortgage refinancing, have softened the blows in recent years. But the balance point is tipping in both cases, away from the consumer and away from our national interest.
In this author's opinion, the ultimate outcome of this process, if it is allowed to continue, is a nation of gated communities surrounded by vast slums policed by soldiers, paramilitaries, and probably organized crime. If you don't believe this, drive around southern Madison County, where one one gated community after another lines the main roads.
Both Democrats and Republicans bear the blame for this, having succumbed to the siren call of free trade, deregulation and reliance on a harsh, punitive criminal justice system that sweeps up the entirely predictable army of the dispossessed produced by those policies and imprisons them at a rate that rivals some of the most vicious and repressive regimes in the world.
So read Webb's column and ponder.
Jim Webb: Class Struggle : American workers have a chance to be heard (Via Daily Kos)
Why Our Gigantic Foreign Trade Deficits are Hurting Mississippi
Thomas Paley has a new article on his web site, Why the Trade Deficit Matters. For non-experts on economics, this is a good explanation on how a large, persistent trade deficit can harm an economy. During Reagan's administration the dollar was kept very high and the unhappy result was the "Rust Belt" throughout the northeast and middle west. Factory after factory closed down and moved overseas to compete with other companies that had already made the move. Profits went way up and wages went way down. It was a disaster for those areas.
That same policy is hollowing out the rest of our industrial base. It makes for big profits along with the impoverishment of the non-elite. Read the article. Paley's language lacks the intensity of a crusader, but his message is no less serious.
Tax Fairness and Mississippi's Representatives
The tax fairness winner for Mississippi over this period is representative Gene Taylor, who scored 100%. As a Democrat who voted for the odious Bankruptcy "Reform" Act and this year's torture-authorizing legislation, I had just about lost faith in him.
Bennie Thompson, who usually votes in favor of the lower and middles classes, scored only 83%, due to an "F" he earned for his vote in 2004 for the “The American Jobs Creation Act of 2004,” H.R. 4520, appropriately titled The 2004 Corporate Tax Giveaway Bill. Here's a description:
This bill began as an attempt to resolve a trade dispute between the United States and Europe over a $5 billion a year U.S. tax subsidy for American exporters that had been (repeatedly) ruled illegal by the World Trade Organization.It expanded into a huge array of corporate tax giveaways, totaling $214 billion over 10 years.
The true cost of the bill was masked by gimmicks and false assumptions, including: $49 billion in revenue “saved” from complying with our trade treaties; $82 billion in added revenues from what Sen. Max Baucus (D-Mt.), co-sponsor of the Senate bill, accurately called “measures which in themselves should be good public policy and we should pass anyway”; and $79 billion in probably phony “sunsets” on many of the new tax breaks in the bill. So, despite the fact that these supposed offsets fall into the categories of things that Congress had to do, ought to do anyway or probably won’t do, the bill was officially “scored” as cost-free.
The vote on the bill was taken just prior to the 2004 elections. There is little doubt that many members of Congress voted for the bill in an attempt to show a friendly face to business, and thereby gain campaign contributions. As a result, the vote is the most lopsided of any of the votes we surveyed. In the House, the vote was 251–178, and in the Senate, 69–17. Members of Congress who opposed this bill received an “A” grade, while those who voted for it received an “F.”
So kudos to Taylor, qualified kudos to Thompson, and a pox on the rest of them. They have done Mississippi no favor.
Tags: taxes, tax fairness, Lott, Cochran, Wicker, Taylor,Thompson, Pickering
The Labor Box
Pally proposes an alternative metaphor—the box:
The box describes how workers are being boxed in and squeezed from all sides by today’s corporate inspired economic order. The box has four sides: globalization, less than full employment, small government, and labor market flexibility. These four sides describe the neo-liberal policy paradigm, which puts workers under continuous economic pressure that none can escape.
The four sides of Palley's box all describe the same thing, only from different angles.
- Globalization creates a worldwide labor market in which workers bid against each other for work. American workers are thus drawn into competition with Chinese workers earning miniscule wages compared to the minimum wage in the U.S.
- Less than full employment creates a game of musical chairs for workers that guarantees insecurity for individual workers and dampens demands for higher wages.
- A truly democratic government would look to the interests of the majority of its citizens, who happen to be the workers. A small government, no matter how democratic, will lack the power to protect those interests, to the benefit of the owners of capital. It also pits public workers against private workers.
- Finally, labor market flexibility is furthered by globalization, in that a worldwide labor market, combined with little or no legal or regulatory protection of jobs, guarantees that capital, in its quest to drive down labor cost, is able to hire and fire with without regard to social cost.
In addition to providing a common frame for labor-oriented communication, Palley points out that this vision of labor's dilemma makes it easy to identify and critique the anti-labor policies that both Republicans and Democrats have implemented over the past two decades, such as NAFTA, the WTO and the massive tax cuts for the most wealthy. Most people nowadays have been conditioned to believe that their economic difficulties are the result of either universal economic laws or their own personal inadequacies, rather that the predictable outcome of deliberate decisions by political elites to shift wealth and income from the bottom two-thirds of the population to the top one percent.
We've seen all these things in Mississippi for years. From antebellum times, the power elite in this state has been unremittingly hostile to labor rights and determined to keep wages as close to subsistence level as possible. The state bases its economic development program on low wages, labor flexibility, underemployment, and weak or nonexistent labor unions. The results are predictable: poverty, ignorance, and the shortest life expectancy and highest infant mortality in the nation.
Tags: Palley, capital, labor, economics, NAFTA, WTO, neoliberal, Mississippi
Back in Jackson
By way of Feral Scholar, Counterpunch ran an article by historian Gabriel Kolko, "Bankers Fear World Economic Meltdown." Kolko seems to know what he is talking about. Financial derivatives and hedge funds have put literally trillions of dollars at risk, all enabled by low interests rates. Scary.
Argentinean Economics, Post-IMF
The Silent Revolution
Microsoft Punished for Doing Research?
As I see it, there are three factors that explain Microsoft's problems:
1. Microsoft has been a monopoly since the '80s, which means that its earnings have been based upon monopoly pricing of its operating systems and applications, not a true market price set by many buyers and many sellers. Because Windows and Microsoft Office are on virtually all the desktops of the business world, the file formats and protocols established by Microsoft have locked most businesses into a never-ending process of expensive upgrades that have enriched the management and shareholders of both Intel and Microsoft to an enormous degree.
2. As I mentioned the other day, monopolies have no intrinsic reason to innovate, and Microsoft is no exception. While there might be considerable differences between Windows 95 and Windows XP under the hood (which I doubt), the overall concept, GUI and "feel" have remained unchanged for eleven years and Vista, even after years and years of development, is looking to be more of the same with a few more bells and whistles.
3. Microsoft is now encountering competition from three directions: free software, (licensed under the GNU Public License and other licensing arrangements that limit the ability of developers to privatize code by simply altering it), Apple's OSX, and, perhaps most of all, Microsoft's existing software.
PC owners now have free, user-friendly alternatives to Windows and MS Office that didn't exist a few years ago. Many Linux packages come with word processing, spreadsheet, presentation and email software, all of which are as easy or nearly as easy to use as Windows/Office. It is a trivial task to download, install, and run Ubuntu Linux on either a PC or Macintosh. It comes with OpenOffice (word processing, spreadsheet and presentation software compatible with MS Office files), Firefox (web browser), and Thunderbird (email), all first-class applications that are comparable with their MS equivalents. Although Microsoft may brag that its software is easier to use and comes pre-installed, the difference in convenience is becoming smaller and smaller, and free exerts an attraction that is hard for expensive to beat.
Then there is Apple's OSX, based on the NEXT operating system, which is, in turn, based on BSD Unix, a tried-and-proven OS. Apple's GUI is reliable, relatively bug-free and an order of magnitude more secure out of the box than Windows. While Macintoshes form only a small percentage of computers in use, Apple's share is increasing, as it's easy-to-use software is attracting both businesses and home users. Further, the Macintosh's total cost to own has always been less than that of Window's machines, even though the computers themselves are considerably more expensive. Windows machines have always required an army of network and maintenance gurus to make them work, hence the preference of IT departments and consultants for a platform that justifies their existence. As the business world wakes up to this subtle con game Apple products are becoming more attractive.
Finally, Microsoft's biggest competition is Windows 98, Windows ME, Windows 2000, and before long, Windows XP. Windows XP is acceptably stable (finally!) and reasonably secure, provided that the user faithfully updates the software every week. As Moore's Law no longer guarantees the doubling of computer power every 18 months, the marginal advantage of upgrading is rapidly declining, resulting in longer upgrade cycles on the part of governments and businesses. Further, there is little to recommend the latest version of MS Office over Office 97 in terms of usability. Sure, there are enhancements and improvements, but for most businesses and home users the old software does the job just fine.
Seen in this light, Microsoft's predicament becomes obvious. Without an unassailable monopoly on the desktop and regular, significant improvements in the stability and power of its software along with faster microprocessors to run the new software, Microsoft must actually devote resources to innovation in order to stay ahead. Microsoft's tried and proven method of developing new products—buying up innovative companies—no longer seems to work as well as it once did.
Microsoft, one of the richest corporations in the world, has the talent and resources to easily maintain its lead as an operating system and application provider. The only question is whether its corporate culture will allow it to do so.
The Immigrant "Problem"
PETITION FOR: President Bush , Gov. Schwarzenegger and Congressman Dana Rohrbacher
Gentlemen and Mr. President: The petition below is a protest against what the senate voted on recently which was to allow illegals to access our social security! We demand that you and all congressional representative require citizenship for anyone to be eligible for social services in the United States. We further demand that there not be any amnesty given to illegals, and NO free services or funding, or payments to and for illegal immigrants.
We are fed up with the lack of action about this matter and are tired of "paying" for services to illegals! Tell Senor Fox to pay for his own people!
======
Agree or Delete: Instructions to sign are at the bottom.
The message was followed by some 247 names of petitioners, the last of which was the acquaintance who sent me the message.
The "illegal immigrant" crisis is a manufactured crisis, pure and simple.
Once again, let's look at some facts:
1. Why now, rather than long ago?
As Thom Hartmann put it so well, "we had an open border with Mexico for several centuries, and "illegal immigration" was never a serious problem. Before Reagan's presidency, an estimated million or so people a year came into the US from Mexico - and the same number, more or less, left the US for Mexico at the end of the agricultural harvest season. Very few stayed, because there weren't jobs for them."
2. Employers given a green light to hire undocumented aliens.
Reagan made it easier for employers to hire undocumented aliens at pay below the minimum wage by simply not enforcing the laws forbidding employers from hiring undocumented aliens. He also did everything in his power to destroy labor unions. By increasing the size of the labor force with workers willing to work for a pittance he weakened organized labor and kept wages down. In other words, he legitimatized scabs.
3. Mexican farmers rendered destitute by the North American Free Trade Agreement.
NAFTA destroyed Mexican agriculture by allowing U.S. agribusiness to dump its subsidized product, mainly corn, on the Mexican market at a price below Mexican farmers' cost to produce. The totally predictable result was mass migration of destitute Mexican farmers into urban areas in search of jobs. The influx of laborers depressed wages in the cities, resulting in the migration of farmers and workers from Mexican cities across the border into the U.S., where employers, always looking for a way to cut labor costs, welcomed them with open arms. NAFTA and other trade agreements ratified during the Clinton years by a Republican-dominated Congress (and an unprincipled president) made it profitable for corporations to outsource manufacturing to low-wage countries and thus destroy our manufacturing sector, thus eliminating the high-paying jobs that historically enabled so many industrial workers to join the middle class.
4. Desperate people will do what is necessary to survive.
No one leaves their home, their community, their friends and their family to work furtively in a foreign land unless they are desperate. No one else would be willing to brave the hazards of crossing the border, walking over miles and miles of desert, and risking being shot by nut jobs who have appointed themselves to patrol the border. You and I would do exactly the same thing under the same circumstances, so there's no point in demonizing people who do what they must.
5. They didn't come here to freeload.
Is it necessary to point out that these undocumented immigrants from Mexico came here to work? That's the entire purpose of making the journey. They are not the ones cheating the IRS out of withholding taxes; it is their criminal employers who are not making payroll deductions and remitting them to the IRS. They pay sales tax, gasoline tax, and all the other ad valorem and excise taxes, directly or indirectly, that local and state governments levy. They give value and in return receive far less than Americans doing the same work. They contribute more than their share, not less.
More than half the citizens of this nation in their foolishness and their ignorance voted twice for Reagan, once for Bush the Elder, and twice for Clinton, all of whom carried out this project as though it were part of one, single bipartisan plan to eliminate the American middle class. (I omit George W. Bush because the evidence is overwhelming that Bush lost the elections of 2000 and 2004 through voter supression, spoliation of ballots, and other more subtle devices like Kathleen Harris's notorious "felon list," not to mention two Supreme Court Justices with clear conflicts of interest that formed part of the 5-4 majority in Bush v. Gore. They should have been impeached and removed from office for gross violations of legal and judicial ethics.)
The human disaster imposed by our government on Mexico has blown back on us. We are reaping here in Mississippi what has been sown by the kleptocrats whom we allowed to control our national government.
What to do? Humpty-Dumpty has fallen off the wall and can't be put back together again. The Mexican farmers cannot return to their farms because one of the requirements of NAFTA was a repeal of Mexico's statutory scheme that prevented foreclosures on farms. Their farms are now owned by people with the money to purchase their land at fire-sale prices. They are stuck. Send them back over the border and they will find a way back, and they will find jobs waiting for them, because under the eternal laws of the free market god that is worshipped in the temple of Ricardo, Spencer, Von Mises and Friedman, employers can—nay must—pay their workers as parsimonous a wage as they can get by with. With a plentiful supply of cheap, docile labor, they can get by with paying very little.
So, dear Americans, we created this problem ourselves, or rather, the kleptocracy that has been in control of the government since 1980 did it to us with our consent. It is difficult to sympathize with this foolish and complacent generation that has so willingly allowed itself to be duped and that is even now deluding itself that its problems arise from elsewhere.
Tort "Reform," Texas Style
Hurt? Injured? Need a lawyer? Too bad.
Why Bushonomics Hasn't Created Jobs (or anything else worth having)
Actually, as wages are driven down, pension funds are under funded or looted, public services are cut and the public debt is increased, it means that the money Bushenomics is spending is from the general population. In that circumstance, corporate profits are not so much profits, but a transfer of value and productivity into cash. It is a sort of hollowing out of our businesses and indeed of the entire country.
My conservative acquaintances, most of them arrogant in their certainty, have been avoiding me lately. It's always been a mystery how otherwise intelligent and well-meaning persons can persuade themselves to believe economic and political propositions no sensible person of even ordinary intelligence would entertain for a second. The only reason I can think of is that they hope to cash in on the booty before it all falls down around our ears.
Peak Oil: Depends on What You are Willing to Pay
Palast is, of course, correct. Oil hasn't peaked when it is priced at $80/bbl because it is profitable to spend more money getting it out of the ground and transporting it to customers
He failed to mention, however, that, although the demand for oil is highly inelastic in the short run, $80/bbl for oil will reduce demand in the long run. People will gradually acquire the habits appropriate to a civilization based on expensive, as opposed to cheap, energy. Worn-out automobiles will be replaced with high-mileage models. New houses will be smaller and use less oil and gas for cooling and heating. If we are wise, we will build mass-transit systems and adopt policies to discourage low-density housing and long commutes. All these developments will reduce the demand for oil.
All this takes time. The American dream will die hard and therein lies the possibility of disaster. The vast, energy-wasting economy that we have come to love took over a century to build and it will not be rebuilt in a year or two. While people are adjusting to the new reality, wealth will flow in a huge torrent from users to producers, even more than in the past. It will be a sellers' market .
Our nation, as well as the rest of the world, will probably be politically unstable and more dangerous for many years. The Bush administration, under the control of the extraction industry, has already wasted six years in which we could have taken remedial actions to lessen the pain of transition. The task will therefore be far more difficult for its successor and for us. Let us pray.
Postscript: There will be a peak and decline in oil production eventually, no matter the price, when the energy to extract the oil approaches and then exceeds the energy the oil can yield. That's the problem with ethanol; the energy used in production of corn plus the energy to distill the fermented grain exceeds the energy yielded by the end product. For that reason, gasahol must be subsidized.
Jerome Levy Institute: Current economic trends unsustainable
The JP has been writing about the economy ever since the beginning. of the publication, and much of the inspiration for the columns has come from the bright economists at Levy, who have been consistently posting first-class material on the Levy web site. One of our strongest interests is the interplay of debt, oil, currency and international cash flows, hence the January 21, 2000 article Debt and Oil: Two Ominous Clouds on the Economic Horizon, a topic that is finally forcing itself into public consciousness.
I recently listened to the unabridged audiobook version of Kevin Phillips's American Theocracy, which I can recommend without reservation. Phillips, who worked for the Nixon administration and wrote The Emerging Republican Majority had an integrity attack some years ago when he began to comprehend the results of so-called free market economics imposed by the Reagan and Bush administrations and wrote the Politics of Rich and Poor. In his latest book Phillips singles out oil, debt and Christian fundamentalism as the three factors driving our national politics and culture, discusses their history, and explains how each of these factors threatens not only American hegemony but the American nation. This is "must" reading for any concerned American. Phillips has done the nation a great service in all of his recent books.
Palley Strikes Again: The China Conundrum
But to the point: Readers of this blog will be familiar with my admiration for Thomas Palley's blog, Economics for Democratic and Open Societies. Palley has recently posted an excellent article on how the trade imbalance between the U.S. and China is distorting the economies of both nations, as well as the economies of the rest of the world. The article will require considerable effort for the economically unschooled, but the efforts will be well-rewarded.
After reading the article, I decided out of idle curiosity to invoke the Yi-Ching with the question "What should the United States be doing with respect to China?" Using a program I wrote a for the Mac several years ago that duplicates the yarrow stick method of selecting a hexagram, I was presented with Hexagram 63 - "Chi Chi / After Completion." Here is a portion of the Wilhelm translation that explains the hexagram:
____________________________________
This hexagram is the evolution of T'ai PEACE ( 11 ). The transition from confusion to order is completed, and everything is in its proper place even in particulars. The strong lines are in the strong places, the weak lines in the weak places. This is a very favorable outlook, yet it gives reason for thought. For it is just when perfect equilibrium has been reached that any movement may cause order to revert to disorder. The one strong line that has moved to the top, thus effecting complete order in details, is followed by the other lines. Each moving according to its nature, and thus suddenly there arises again the hexagram P'i, STANDSTILL ( 12 ).
Hence the present hexagram indicates the conditions of a time of climax, which necessitate the utmost caution.
THE JUDGMENT
AFTER COMPLETION. Success in small matters.
Perseverance furthers.
At the beginning good fortune.
At the end disorder.
The transition from the old to the new time is already accomplished. In principle, everything stands systematized, and it is only in regard to details that success is still to be achieved. In respect to this, however, we must be careful to maintain the right attitude. Everything proceeds as if of its own accord, and this can all too easily tempt us to relax and let thing take their course without troubling over details. Such indifference is the root of all evil. Symptoms of decay are bound to be the result. Here we have the rule indicating the usual course of history. But this rule is not an inescapable law. He who understands it is in position to avoid its effects by dint of unremitting perseverance and caution.
THE IMAGE
Water over fire: the image of the condition
In AFTER COMPLETION.
Thus the superior man
Takes thought of misfortune
And arms himself against it in advance.
When water in a kettle hangs over fire, the two elements stand in relation and thus generate energy (cf. the production of steam). But the resulting tension demands caution. If the water boils over, the fire is extinguished and its energy is lost. If the heat is too great, the water evaporates into the air. These elements here brought in to relation and thus generating energy are by nature hostile to each other. Only the most extreme caution can prevent damage. In life too there are junctures when all forces are in balance and work in harmony, so that everything seems to be in the best of order. In such times only the sage recognizes the moments that bode danger and knows how to banish it by means of timely precautions.
____________________________________
I leave it to the reader to determine the significance.
Postscript: The purpose of this post was to encourage the reader to read Palley's article, not to convince the reader to learn the Book of Changes, which I find to be an amusing and often effective way of stirring up new ideas. The Tarot can be used similarly. If your tastes tend to the more contemporary, you might find Oblique Strategies (Mac Dashboard Widget or Windows ) amusing and useful.
Yes, We Need Energy Independence, but are we Willing to Pay for It?
What the pollsters aren't measuring at the moment, however, is what Americans are willing to give up in order to become truly energy-independent. Are they willing to give up low-density housing? 3000+ square foot homes? cheap personal transportation such as autos and trucks? recreational driving? 68-degree F. houses in summer and 78-degree F. houses in winter? cheap imports of consumer electronic equipment such as cameras, TVs and computers? cheap imported food?
The entire American way of life—which George Bush characterized as non-negotiable—is based on cheap energy.
People may be worried about energy, but they are mainly worried about how they are going to hang on to all the things they believe they are entitled to when hard times come. They are worried about how to avoid bankruptcy when the economy begins to come apart and their mountainous debts mature. The idea that everyone will have to drastically change their way of living if we are to weather the end of cheap oil is still unthinkable.
We are like the trapped monkey, fist caught in a coconut, unwilling to let go of the nut he holds, but stuck because the nut makes his fist too large to withdraw it from the hole.
That kind of thinking courts—nay, almost guarantees—disaster. In a Hobbsian state of nature, which is exactly what will come about if we don't pull our heads out of our gas tanks, hardly anyone gets to keep the goodies. Everyone loses. Life becomes nasty, brutish and short. A good set of readings on this subject is Jim Kunsler's blog. Read and heed. An example:
Happenstance led me to take a trip on the Washington DC beltway in a rent-a-car last week, when some putz graduate student from the U. of Maryland failed to pick me up at the airport. It was a navigational challenge for a stranger to get from Northern Virginia to the campus up in College Park, MD. And it was impressive to see how ghastly the suburban build-out has gotten in recent years there. One could not fail to be conscious of how the viability of all that stuff — including hundreds of millions of dollars of beltway widenings and new ramps I encountered under construction — depended utterly on a continued stream of Middle East oil imports. And you had to wonder whether any of the senators, congressmen, or executive officials saw a link between this tragic clusterfuck of car dependency that they live in day in and day out and our troubles out in the world.
The time is not becoming short; it has already arrived. See how far you can drive your Hummer on ten dollars worth of premium gas. The time for putting off doing something pending further studies and research has passed. Incantations to the free market won't cut the mustard. We are getting to the point that we should not be allowed to buy just anything we can afford. The price of most resources, including energy, is unrelated in the short run to existing reserves, but is determined only by immediate supply and demand. Given what we know about energy reserves we have no excuse not to immediately alter our collective usage of oil and gas in light of the inevitable flattening and then decline in world production.
Oil producers have discovered no major oil and gas fields in the world since the 1960s. None. Really.
We are presently burning up 4 barrels of oil for every barrel we discover. Really.
You don't have to be a rocket scientist to know that we can't go on doing this indefinitely.
Now is the time for reality therapy. The writing is upon the gas station billboard. It takes no prophet Daniel to interpret it.
The Implications of Outsourcing for Americans
As the factories move overseas, the technology and expertise will follow them. American “manufacturers” are becoming merely marketers of foreign made goods. The CEOs and shareholders have too short a time horizon to understand that once foreigners control the manufacture-design- innovation process, they will bypass American brand names. US companies will simply cease to exist.
Yet we are being told by the power elite and the economists that are paid by them that outsourcing is the key to future economic prosperity and all we need to do is retrain and reeducate displaced workers to participate in this coming abundance. Roberts swats that one down, too:
The assertion that we hear every day that America is falling behind because it doesn’t produce enough science, mathematics and engineering graduates is a bald-faced lie. The problem is always brought back to education failures in K-12, that is, to more education subsidies. When CEOs say they can’t find American engineers, they mean they cannot find Americans who will work for Chinese or Indian wages. That is what the so-called “shortage” is all about.
I receive a constant stream of emails from unemployed and underemployed engineers with many years of experience and advanced degrees. Many have been out of work for years. They describe the movement of their jobs offshore or their replacement by foreigners brought in on work visas. Many no longer even know American engineers who are employed in the profession. Some are now working in sawmills, others in Home Depot, and others are attempting to eke out a living as consultants. Many describe lost homes, broken marriages, even imprisonment for inability to make child support payments.
I hope everyone concerned with the welfare of our children and grandchildren reads this article. I hope every Mississippian that isn't completely blinded by political prejudice realizes that the people that lead Washington today are not our friends unless we are millionaires. The time is getting short.
Read and heed: http://www.counterpunch.org/roberts02162006.html
The Army Gets It (At Least Somebody Gets It)
In these times of tightening classical energy options, the Army needs to take steps comparable to those in the national agenda mentioned above by modernizing infrastructure, optimizing end-use, minimizing environmental impact, pulling technology markets, cooperating in regional purchases, and leveraging alternate financing. Special attention to the diversification of sources is appropriate. This incorporates a massive expansion in renewable energy purchases, a vast increase in renewable distributed generation including photovoltaic, solar thermal, wind, microturbines and biomass, and the large-scale networking of on-site generation. (Emphasis added)
Now ask yourself—honestly—do you think that a single one of these suggestions has the slightest chance of being implemented by the Bush administration? Is the Pope a Cajun? Should I even bother to ask?
You can download the document from the military website here.
If you cannot get it from the military website you can download it here (1.3 Mb).
Stirling Newberry Strikes Again
One irresistible quote out of many:
But what the government of the US should be doing, rather than fighting a Boer War in Iraq - is realizing that the petro-engine economy is coming to an end. The very existence of an era of globalization is a sure sign of it, because it means that production is not improving quickly enough to create zones of higher productive value, merely the ability to equalize zones that exist.
This means focusing on the reality of The End of Extraction. It is extraction that is distorting our economic system, because everything has to be protected, or made to be fictionally as profitable as extracting oil from the sands of Saudi Arabia. As Professor [Lester] Thurow correctly points out, this leads to fudging the books, and eventually to financial scandals and collapse.
The State of the Dollar
A move away from the dollar as an international settlement currency would not bode well for the U.S. or the rest of the world economy. It's hard to blame Chavez, though; the Bush administration has done everything short of an invasion to depose Chavez and void the Venezuelan Constitution. Chavez, however, does not fear an invasion from the U.S. as our forces are tied down in Iraq and otherwise over-extended.
The next few years are going to be a bumpy ride. Fasten your seat-belts.
Why the Economy Cannot Continue Like it Has
I think it is more likely that the final words were "We've always done it that way."
Civilization makes progress by trial and error. If it works, do it again; if it doesn't work try something else. Common sense says that it's more likely to work this time if it worked before than if it didn't work before. As creatures of habit, however, we eventually assume that if something has worked well for a long time, then it will keep on working forever. Doing what has always been successful becomes a mark of virtue, of acceptability, of stability. We become so set in our ways that we succeed in ignoring accumulating evidence that doing it the way we have always done it no longer works. The world changes. We are changing the world. The sad and fascinating history of Easter Island is a metaphor for the inability to change leading to virtual extinction.
Nature works the same way. Organisms that over-specialize frequently die off when the environment changes. They cannot adapt quickly enough.
The economy of the United States cannot continue as it is, but we have remained uncomfortably oblivious to trends for which we ought to be preparing. Because the governmental and private institutions involved are still driven by the same economic assumptions they have held for forty years, the world economy, including the U.S. economy, is likely to have a nasty downturn before long. Have we forgotten what monsters slink out of the gutters and caves when the economy goes south? The last major economic convulsion, the Great Depression, ended in WWII.
Thomas Palley, an unabashed Keynsian, explains in reasonably simple terms what is now happening in the economy and why it cannot continue. The usual remedies of fiscal and monetary fixes will shortly be inadequate to insure stability worldwide.
For the past five years the global economy has been flying on one engine. That engine is the U.S. consumer who has been on a consumption binge financed by borrowing, in turn backed by a housing price bubble. This situation poses the threat of a serious hard landing when that engine eventually stalls, as it must. Ever inflating house prices and rising debt-to-income levels are not sustainable. And as the late Herbert Stein, Chairman of President Nixon’s Council of Economic Advisers, wryly observed: “If something cannot go on forever, it will stop.”
Let us hope that economic policy makers have some workable ideas on how to soften that landing.
Interesting View on the Economy
Paley was formerly Chief Economist of the US – China Economic and Security Review Commission. Prior to joining the Commission, he was Director of the Open Society Institute’s Globalization Reform Project, and before that he was Assistant Director of Public Policy at the AFL-CIO. He holds a B.A. degree from Oxford University, and a M.A. degree in International Relations and Ph.D. in Economics, both from Yale University. He's a "heavy."
What Can't the Corporations Outsource?
"The inventiveness of individuals depends on the context, including sociopolitical, economic, cultural and institutional factors," said Merton C. Flemings, a professor emeritus at M.I.T. who holds 28 patents and oversees the Lemelson-M.I.T. Program for inventors. "We remain one of the most inventive countries in the world. But all the signs suggest that we won't retain that pre-eminence much longer. The future is very bleak, I'm afraid."
Mr. Flemings said that private and public capital was not being adequately funneled to the kinds of projects and people that foster invention. The study of science is not valued in enough homes, he observed, and science education in grade school and high school is sorely lacking.
But quantitative goals, he said, are not enough. Singapore posts high national scores in mathematics, he said, but does not have a reputation for churning out new inventions. In fact, he added, researchers from Singapore have studied school systems in America to try to glean the source of something ineffable and not really quantifiable: creativity.
Noticeably absent from the article is an effort to get at the real reasons why the government and corporate America are not fostering inventiveness. Our inadequate educational system is merely a symptom of the problem, not the cause.
The likely cause of the declining support for invention in the United States is that corporations are either already outsourcing or planning to outsource invention to places like China, Taiwan, and South Korea, where it is cheaper. Americans do not have a monopoly on brains; there is no reason at all why China, Taiwan or South Korea cannot foster inventiveness much like what the U.S. has done for the past 150 years if they are willing to devote the resources to that end, and it appears that they are willing to do whatever it takes.
All work that can be done more cheaply elsewhere will be outsourced. Corporations are driven to this by competition and the pressure to maintain profits. The effect of such policies on individuals, communities and nations is irrelevant. There is no patriotism in a modern corporation. Jack Welch, former CEO of GE, once said that the ideal factory was located on a boat, so that it could move where the cheapest labor could be found.
That means not only manual tasks will move offshore, but intellectual and professional work that brings high incomes and much prestige here. As long as the work doesn't have to be on the spot it can be outsourced. Computer programming is already being outsourced to India, for example. In my own field, law, I can envision legal research, writing and even consulting done from Asia by highly-educated men and women trained in the law willing to work for a fraction of what an American lawyer makes.
What is to be done? A high standard of living in this country depends upon technological superiority. Given a schooling system that deliberately suppresses excellence, creativity and independent thinking, it is difficult to imagine much improvement without our doing something entirely different about the education of the young. Unfortunately, it is difficult to imagine that happening.
Over and over again, inventors and creative thinkers have done their work in spite of the educational system. The long and productive career of James E. West, member of the Inventors Hall of Fame, who appears in the NY Times article is illustrative:
Mr. West began testing his limits at an early age, defying his family's wishes that he become a dentist and setting his sights on a doctorate in physics. To dissuade him, his father introduced him to other African-American friends with doctorates - all of whom had failed to land university posts and held blue-collar jobs instead. Still, Mr. West pressed on, coached by a series of mentors, memorizing text and numbers to mask his reading problems, building on his mathematical gifts and eventually enrolling as an undergraduate in physics at Temple University.
AFTER a summer internship at Bell Labs, he invented a pair of headphones; enthralled by his lab work, he decided to forgo his physics studies and to stay on at Bell Labs, where he developed microphone technologies and explored a range of interests in acoustics. When Bell Labs became part of Lucent after AT&T reorganized, the scope of its research operations shifted, and Mr. West eventually moved on as well. At Ms. Busch-Vishniac's invitation, he joined Johns Hopkins in 2000.
West, an African American, was lucky to have the mentors and the burning desire to learn physics as a boy. His real luck, however, was in being recognized by one of the few corporate institutions in the nation that cultivated genuine out-of-the-box thinking: Bell Labs. His kind of mental attitude would not be welcome elsewhere. Somehow, this nation must figure out a way to cultivate exactly those same attitudes and mental abilities in a myriad of fields and then learn how to create institutions that allow them to flourish. In order to do their work, they must be insulated from the drive for short-term profits.
Of one thing we can be sure: corporate America will not be very helpful.
When the Economy Shrinks
If our economy must contract with the end of cheap oil, is it possible to restructure the financial/industrial world so as to avoid disaster?
The more inequality in income and wealth, the harder it will be. The haves not only have more, but they have the power to keep their share, buttressed by the law of property rights. History shows that the powerful have used property rights to justify the most cruel and inhumane treatment imaginable of the less fortunate. Never forget that at the height of the Irish potato famine, English landholders were exporting food right under the hungary mouths of starving children. Unless there is a plan that provides for everyone there will be widespread suffering and perhaps chaos
I've seen little effort on this front by economists, liberal or conservative. They seem to be happy with determining how to maintain consumption as the engine to drive the economy, ignoring the fact that unless a miraculous technical breakthrough occurs, we will be consuming less--a lot less--ten years from now, perhaps sooner, as the scarcity of cheap oil makes itself felt everywhere.
Col Lawrence Wilkerson, USA (retired) Speaks
The other thing that no one ever likes to talk about is SUVs and oil and consumption and, as one little girl said yesterday at the Yoshiyama Awards, do you know that we consume 60 percent of the world’s resources? We do; we consume 60 percent of the world’s resources. Well, we have an economy and we have a society that is built on the consumption of those resources. We better get fast at work changing the foundation – and I don’t see us fast at work on that, by the way, another failure of this administration, in my mind – or we better be ready to take those assets. We had a discussion in policy planning about actually mounting an operation to take the oilfields in the Middle East, internationalize them, put them under some sort of U.N. trusteeship and administer the revenues and the oil accordingly. That’s how serious[ly] we thought about it.
What he didn't say was that even if we conquered and exploited all that mideast oil, we would only put off the scarcity a few years. As I keep writing over and over, the oil industry hasn't discovered any major oil fields since the '60s and, given the improvement in prospecting technology, there's good reason to believe that there aren't any more North Sea, Prudhoe Bay, or Ghawar fields to be discovered. Since the world is using 4-5 barrels of oil for every barrel discovered, the arithmetic is elementary that this rate of usage will not continue indefinitely, much less grow. The conclusion: things are going to get really tough before long.
Who Will Tell the People?
The demand for energy is highly inelastic in the short run. In order to reduce energy consumption it's not just people's habits that have to change; the entire infrastructure has to shift and that requires investment of large amounts of capital. In normal times, the shift is usually glacial. If one lives in a house 40 minutes from work, one cannot shorten the commute without moving closer to work or moving the work closer to home. The SUV cannot be exchanged with a fuel-efficient hybrid overnight, especially when the demand for SUVs has fallen off a cliff.
The result: one does without something else until adjustments can be made. People can combine shopping trips, take public transportation, spend several days per week telecommuting, turn up thermostats in the summer and down in the winter, eat out less, vacation closer to home, eat cheaper food, hang clothes on the line, et cetera. The savings will not be as spectacular as one might hope because many of the substitutes are dependent on oil and will become more expensive along with gasoline.
The change will be inconvenient if gradual; a sudden spike in energy cost, however, could lead to economic catastrophe.
It is inconceivable that the persons in charge of our national government have remained ignorant of these facts; they were apparent most likely in the '70s when the oil industry couldn't discover any more major oil fields anywhere in the world. It should have been patently obvious to the industry and the major intelligence services by the '80s, as the success of Hubbert's predictions about U.S. oil production sank in. By the '90s, it was clear that oil was driving foreign policy. Gulf War I and Kosovo were directly related to our need to secure reliable oil sources.
Why Didn't Our Leaders in Government Tell Us About This?
That is the big question. Now that the predictable outcome of this outrageous irresponsibility on the part of at least four administrations is becoming manifest, President Bush advises us to drive less. When the human race is faced with the virtual certainty that our energy-based civilization cannot continue to maintain even our current energy usage, much less increase it, as it has for the past two hundred years, all this president does is tell us to drive less! It is like a doctor handing us an aspirin and a band-aid for appendicitis or FEMA giving us football helmets to protect against a thermonuclear attack.
So what gives? There are three possible explanations for this dereliction:
1. The administration is populated by fools. This theory fails to explain why three other administrations were equally irresponsible.
2. The administration is populated by oil men who would stand to reap obscene profits from everyone else's misery. Although the lure of windfall profits is a plausible explanation for the Bush I and Bush II administrations, it fails to account for Reagan and Clinton. While both presidents shamefully cozened up to the oil industry, their administrations were not outright extensions of the oil patch, as is the current one.
3. Telling the people they will have to change their way of life is political suicide. This is the only reasonable explanation. The first principle--and often the only principle--common to all politicians is doing what is necessary to be reelected.
Further, the ancient Greek practice of killing the bearer of bad news is alive and well here in America. The political landscape of this nation since 1950 is littered with the carcasses of the political careers of politicians who were too honest or visionary for their own good, and the lesson is not lost on the rest. Our presidents, from Jimmy Carter on, knew perfectly well the disaster that was coming down the pike, and they remained silent, leaving the problem to their successors. The Congress knew, or ought to have known, also. The intelligence was available for the asking. Hubbert's curve has never been a secret. Anyone able to use Google can learn that the world is consuming between four and five barrels of oil for every barrel discovered. It doesn't take a genius to figure out that we can't continue to do this indefinitely.
The problem, therefore, is ultimately ourselves, in promoting persons to the highest positions of national leadership that lack the integrity to tell us hard truths and in punishing honest politicians. Civilizations and nations often have a run of good luck, but, as any professional gambler can tell you, relying on luck alone is a losing strategy. This nation has been extraordinarily lucky over its past 200+ years and that streak of luck has exempted us from much of the pain and suffering the rest of the world has experienced. It looks, however, that we won't be able to rely on luck to get us through the energy crisis; if we do not take action immediately, we will undergo a most unpleasant and perhaps fatal session of reality therapy.
Two Short Snapshots on the Federal Estate Tax
Death and Taxes, Part I
Death and Taxes, Part II
Ironically, the Estate Tax was originally enacted by Republicans just like original anti-trust legislation. Things sure have changed.
CAFTA Passed by One Vote. The President Will Sign
Representatives Gene Taylor (D) and Bennie Thompson (D) voted against the bill and Roger Wicker (R) and Chip Pickering (R) voted in favor. When there's a trade bill that will hurt Mississippians, our two Republican congressmen can be expected to bite the bullet and put party above they people they are supposed to represent. It's tough job messing over one's state, but somebody has to do it.
They did not disappoint.
Like NAFTA, enacted in the mid-90s, CAFTA will further hasten the flight of textile mills and other manufacturing concerns from Mississippi and the rest of the U. S. Southeast to lower wage countries, but it will also harm farming in those countries by allowing U.S. agricultural goods, mostly wheat and corn, subsidized by the government, into the countries at a far lower price than the local farmers can grow it. This has been the pattern in many undeveloped countries. Farmers, lacking credit on reasonable terms and unable to sell their produce at a high enough price to survive, abandon their land and move into the urban areas, where they look for work and live in barrios. Many of them make their way to the U.S., where they work as illegal immigrants and send money back to their families. Our actions really do come back to haunt us.
Here is an article on the impact of CAFTA on farmers in Nicaragua, The War of Hunger: CAFTA Threatens to Eliminate Nicaragua's Small Farms by Sean Donahue in the Narcosphere blog. It's an excellent description of what happens in these underdeveloped countries when the trade gates are opened wide.