Archive for December, 2009

Throwing in the towel…

December 22, 2009 Leave a comment

With today’s revision of third quarter GDP, from 3.5 percent growth to 2.2 percent, it is clear that we were right: What failed in 2008 was not simply the five biggest investment houses on Wall Street, but the actual Rube Goldberg mechanism that is the American Dollar Empire itself.

First, with Krugman, DeLong, and Galbraith, now the defeatism is setting in among the independent economics writers as they begin to throw in the towel on stimulus measures as well.

From Naked Capitalism:

From the very start, Obama’s lead by negotiating with oneself approach led to a weak and poorly crafted stimulus package.  My comments in “Obama takes middle road on stimulus and taxes that leads nowhere” from February sum up what was likely to happen (emphasis added):

In my view, it has become ever more apparent that the Obama administration is caught in some sort of muddle, trying to fudge between the calls for fiscal discipline from conservatives and the calls for stimulus from liberals.  Obviously, it is in Obama’s nature to lead by consensus, and he has looked for an inclusive political and economic strategy since he came to office.  However admirable these intentions may be, this middle path is unfortunate because it will leave no one satisfied.  Moreover, taking this middle path on the economic front — some stimulus but not massive stimulus, some tax cuts but also some increased spending, increased spending now but tax increases or budget cuts in a few years – is the worst of all outcomes; the economy will not gain enough traction to get the desired ‘jump-start’ and stimulus will ultimately be seen as ineffective.  If the Obama Administration later attempts to return to Congress for more of the same after a failed stimulus bill, it will find a more skeptical response

My view here is that Obama is forging a middle path that leads to a dead-end. The stimulus is not nearly enough by half to get the job done. The proposed deficit reduction measures for 2013 are outright scary as they risk repeating a mistake from the 1930s. And the banking sector and mortgage plans, both of which I failed to mention, are dubious half-measures as well. One needs to act aggressively and proactively or not at all.

This is exactly what has transpired.  To make matters worse, his team’s lack of accurate economic forecasting has led to an Armageddon scenario at the state and local level, where even unemployment benefits are not adequately funded. All of this was predictable as evidenced by these two posts from early in the year.

The President has effectively discredited fiscal stimulus as a policy tool. What’s more is the bailout of the too-big-to-fail institutions without strings, the apparent cronyism in how these bailouts were done, and the gutting of financial reforms by the financial lobby has also discredited government as an agent to level the playing field for struggling households and taxpayers. See Blodget: Obama suffers because “taxpayer always finishes last” for now, but I will take this subject up in another thematic post.

I certainly underestimated the degree to which cronyism and special interests ruled the roost in Washington. I no longer believe government can be an effective agent of change in the U.S any more than it has been in Japan (see “Japan: stimulus without reform leads to a policy cul de sac”).   As I wrote in “Stop the madness now!

If you are going to deficit spend you need to do it in a big way. You need to stop the deflationary spiral.  That means hitting the reset button by promoting private sector savings and deleveraging and purging all built-up malinvestments. The risk in addressing the situation this way, of course, is replacing the imperfect invisible hand of markets with the imperfect hand of politicians and legislative fiat.

This is a risk I no longer see as worth taking. I have bailout and deficit fatigue just like most Americans. It is abundantly clear that this Administration has absolutely zero intention of purging any malinvestment or promoting any deleveraging. All they want to do is continue business as usual and go back to the asset-based economy that caused this mess. This is why we have seen bailout after bailout coupled with easy money. It makes for record profits on Wall Street but it does nothing for the unemployed.

Moreover, the political process in the U.S. is such that any stimulus money will be diverted to pet projects and used to pay off political constituents. While this may increase aggregate demand, it does so at the risk of serious social unrest as the outrage will certainly spill over into populism.

So, I have developed a case of big government revulsion as I suspect many Americans have done. I will let Marshall Auerback argue the case for fiscal stimulus and its role leading to a sustainable recovery.  I am moving away from stimulus happy talk to focus on malinvestment.

No comment…

December 21, 2009 Leave a comment

Health care stocks since Obamacare was unveiled:

Click the image to read the dirty details.

Obscure, Deny, Qualify: How economists lie…

December 21, 2009 1 comment

Pravin Krishna

Two economists, Pravin Krishna and Mine Z. Senses, recently undertook a study of the impact of global trade on the wage income of American workers.

A good study, you might say, since as American corporations appear committed to off-shoring most – if not all – of American production to places like China, Brazil, and other low wage nations, the affected workers might want to know how this process will affect their ability to put food on the table and keep warm in the winter.

So what did our scholars find?

Well, you are jumping into the study far too quickly, you see. First, we have to advance the prevailing viewpoint of the American corporation: namely, that,

As has been argued on this site before, protectionism is the wrong response because import protection stifles access to a greater variety of goods, raises prices and hinders the efficient allocation of resources. Moreover, if the major trading nations were to engage in retaliatory protection against each other, the impact on world growth would be devastating.

Mine Z. Senses

This is to get your head shaking, “Yes.” Protectionism, bad! Free trade, good! “Free trade good for everyone, because it means the price of 42 inch high definition wide screen plasma television go down.”

OK. Cool. We agree that free trade is good. Nobody wants to pay a penny more than they need to for toilet paper – now what?

Unfortunately, for the economist, free trade poses something of a problem since, despite all the propaganda and hype, a bunch of auto workers in Detroit are living in $7,000 homes, and freezing this winter, because their jobs went, “Bye, bye.”

The problem is solved by treating the propaganda about free trade as a fact rather than an as yet unproven assertion:

Despite these facts, heightened public concerns regarding globalisation remain – and not without justification since greater trade may induce reallocation of workers across sectors and firms and in the process expose workers to the possibility of income losses and unemployment.

Well, you see, there is the fact, asserted but never proved, that we all benefit when trade is open and free, and then there is the fact called Detroit.

The first fact looks like this:

Stock market 1980-2009

And, the second fact looks like this:

Detroit, after globalization (Don't worry. Obama can fix it by giving billions to the health care industry.)

You see? Everyone has their facts. It is not up to us to judge which facts are real and which facts are total fucking bullshit, because, we’re just economists.

As to the latter shock, the authors acknowledge that, “Shit happens.”:

… an increase in foreign competition increases the elasticity of demand for domestic goods and thereby raises the elasticity of derived labour demand. This, in turn implies that shocks to labour demand could lead to large variations in wages and employment with significant economic consequences.

Yes, such significant economic consequences as the collapse of an American city, and the resulting catastrophic immiseration of its entire population.

But, now that we established the ground rules:

  1. Free Trade is good for everyone, but
  2. Shit happens

There are still problem with facts like Detroit.

The first problem is that they are unpredictable – even though Michael Moore made a fucking movie about it – and, second, no one knows if they will be temporary or permanent. Because, you see, the fact that your job ended up in a maquiladora in Mexico, and then was moved a slave labor camp in China, doesn’t mean it might not eventually return to you in Detroit.

Moreover, we really do have to factor in that your skills designing, engineering, building, and assembling automobiles may not be fucking valued at your new job with Wal-Mart, or Home Depot.

(Yes. The authors of this study really did say this.)

For example, during the adjustment process following trade liberalisation, workers may experience temporary job loss resulting in a temporary loss of income. Alternately, individuals moving across sectors may see permanent income losses since their work experience may not be valued and, thus not be rewarded, in their new sector.

You cannot make this shit up.

Not surprising, the potential impact on your wages might just hinge on how long it takes for that inmate in China to lose HIS job to off-shoring back to the United States:

When faced with transitory income shocks workers can borrow or use their own savings to smooth consumption. However, this is clearly not feasible when income shocks are permanent. As a result, highly persistent income shocks will have a far more significant effect on the well-being of workers compared to transitory shocks.

Wow! Gravity is real!

So just how much do you have saved up? Can you go a couple of decades on only half of your previous wages? Economists really want to know this, because retail consumer goods companies want to know it. They need to know how many 42 inch high definition wide screen plasma televisions to put on order for the next Christmas glut-o-fest.

And, everyone has a share – except you.

As shareholders of J.C. Penney (we are all shareholders of J.C. Penney, right?) we are all interested in two things:

  1. Will your boat sink? And,
  2. How long can you tread water?

The answer to the first question is: “Boy, you’re gonna need a bigger boat!”

How big? Well, China has 700 million peasants just itching to do your job, and the shareholders at J.C. Penney want to take the kids on an educational rock climbing tour of Kazakhstan with their own private tutors.

Which means, if it can be made, it will be made in China – with technical support from India and the Philippines.

You’re fucked! LOL

Totally fucked.

In the dictionary, there is a definition of fucked with your picture.

Lorin Feldpausch, aka Fucked

Yes, the authors found what appears to be an outsized impact of free trade on your wages:

The relationship is strongly positive. An increase in import penetration by 10% of its initial (1993) level raises the standard deviation of shocks to income by around 23%.

Most of that sentence is gobbledygook to us, but it look pretty bad, guys. Home Depot just ain’t paying union wages. If someone told us that our deviations would be penetrated by such shocking standards, we just might punch them – but, you can vote Republican (or, Democrat, we do get these things mixed up.)

Again, the authors insist at the close of their article that they are not saying free trade is bad for everyone – just you, asshole.

You, and, some guy named Lorin Feldpausch, who used to have a real job.

The abolition of work and The Overton Window

December 14, 2009 2 comments

Tom Walker has floated a question that deserve consideration.

The question comes in the form of a quote from a conservative commenter who has asserted there is only so much room in any political system for political change.

We think Tom’s comments deserves to be read in its entirety, and publish it below:

The Overton Window

Joe Overton was a policy researcher for the conservative think-tank, the Mackinac Center. His idea of the “window of political possibility” illustrates the principle that it is not only the realism of a particular policy proposal that counts but also how any proposal fits into a spectrum of acceptable ideas, which is necessarily much narrower than the entire range of possible positions. That is to say, what makes an idea “clear, simple and realistic” has at least as much to do with the receptivity of the audience to that specific idea as it does with the inherent properties of that proposal or its advocates’ adherence to a specific, easily communicated message. Below is a description of the Overton window from the Mackinac Center’s website. I’ll leave it to SWTers to imagine how this applies to our issue:

Imagine, if you will, a yardstick standing on end. On either end are the extreme policy actions for any political issue. Between the ends lie all gradations of policy from one extreme to the other. The yardstick represents the full political spectrum for a particular issue. The essence of the Overton window is that only a portion of this policy spectrum is within the realm of the politically possible at any time. Regardless of how vigorously a think tank or other group may campaign, only policy initiatives within this window of the politically possible will meet with success. Why is this?

Politicians are constrained by ideas, even if they have no interest in them personally. What they can accomplish, the legislation they can sponsor and support while still achieving political success (i.e. winning reelection or leaving the party strong for their successor), is framed by the set of ideas held by their constituents — the way people think. Politicians have the flexibility to make up their own minds, but negative consequences await the elected officeholder who strays too far. A politician’s success or failure stems from how well they understand and amplify the ideas and ideals held by those who elected them.

In addition to being dependent on the ideas that form the boundaries of the political climate, politicians are also known to be self-interested and desirous of obtaining the best political result for themselves. Therefore, they will almost always constrain themselves to taking actions within the “window” of ideas approved of by the electorate. Actions outside of this window, while theoretically possible, and maybe more optimal in terms of sound policy, are politically unsuccessful. Even if a few legislators were willing to stick out their necks for an action outside the window, most would not risk the disfavor of their constituents. They may seek the good of those who elected them, and even the good of the state or nation as a whole, but in pursuing the course they think is best, most will certainly take into account their political future. This is the heart of the Overton window theory.

So, if a think tank’s research and the principles of sound policy suggest a particular idea that lies outside the Overton window, what is to be done? /Shift the window/. Since commonly held ideas, attitudes and presumptions frame what is politically possible and create the “window,” a change in the opinions held by politicians and the people in general will shift it. Move the window of what is politically possible and those policies previously impractical can become the next great popular and legislative rage.

Likewise, policies that were once acceptable become politically infeasible as the window shifts away from them. Think tanks can shape public opinion and shift the Overton window by educating legislators and the public about sound policy, by creating a vision for how things /could/ be done, by conducting research and presenting facts, and by involving people in the exchange of ideas.

Freedom from work is not a political demand

We responded to Tom’s quote with the comment that, in our opinion, reducing hours of work is not a political demand, but one that is aimed at government as well as the private sector economy. “Shorter hours of work is not a political demand, precisely because Washington has an interest in longer hours of work to the extent it means more economic turnover, and, therefore, more opportunities for tax revenue.”

Beyond this fact, it has been known since Karl Marx first wrote on the subject, that the present economic system rests on the hours a society works in addition to that necessary to feed and clothe itself, and buy that 42 inch high definition wide screen plasma television. It has also been known, for at least as long, that government revenues rest on these hours as well.

Moreover, it has been generally understood by politicians since at least the First World War that the military power of any nation is proportional to the excess hours of work performed by the rubes in that country. People can build bombs only after they are fed.

To maximize the military power of a country, you must maximize the hours of work of it population – and no country has sought to maximize its military power more than the United States. Hence, no nation has combined long hours of work with high productivity of labor and flexible labor markets better than the US.

So, at least from the standpoint of Washington, the demand for freedom from work is not a political demand; it amounts to a demand against government itself.

Freedom from Work and the Freedom to Starve

But, how does it look from your viewpoint? A letter in response to our comments was provided by Jeffrey Platt:

This is the serious point of our issues, we are proposing adjustments in the way people have been conditioned to believe is the reality, the normality.  The wallet, the purse, the bank account, the amount of available credit, the job  – how that all adds up and subtracts is being threatened by our proposals when people would need to be convinced it is in their own personal and collective interest to support this adjustment.  We know redistributing work hours would benefit people collectively and personally but challenging the status quo is difficult.

Jeff has a good point:  Freedom from work is, as a practical matter, experienced only as unemployment by the vast majority of us. It means hunger and homelessness and financial ruin. Everything about unemployment contradicts the argument that freedom from work benefits the individual.

How does one both confront the ‘superficial appearance’ – that freedom from work is the freedom to starve –  and the underlying reality – that freedom from work is the beginning of true freedom – when that “superficial appearance” is as real as sleeping on a sidewalk grate in winter.

It does not seem likely that people will risk starvation merely to prevent the Messiah from killing more wedding guests in Afghanistan. Nor, will they do it even if we could show that reduced hours of work is the only way to end poverty here and around the world, trade deficits, budget deficits, and global warming – kill 99 percent of the germs that cause bad breath.

Finally, they certainly won’t do it based on some fantasy about the realm of true freedom awaiting them after work is abolished.

Given the only just dawning realization that they bought into the Messiah’s bullshit and are now eating that particular sandwich – while pretending its bologna – should be enough to caution against selling reduced hours of work as the next Paradise on Earth.

The abolition of work and the Overton Window

All of the above go toward explaining why we tend to be pessimistic about the possibility of convincing large numbers of people to support shorter hours of work. And, why so little has been accomplished in this direction over the past seven decades since the Great Depression.

It is still a fact, however, that the abolition of work is the actual trajectory of society.

For this reason alone, we believe it is not acceptable to simply ignore the issue and will continue to show the close connection between all of the problems we discussed above and hours of work.


Because the trajectory on which society is now traveling presupposes that the practical gulf between working and not working will be narrowed.

In case that statement seems too obscure, let us be very clear on this: Eventually, the economy will approach a point where you will be threatened with starvation, homelessness and economic ruin whether you are working or unemployed.

Wages for most Americans have been stagnant for three or four decades now. To add to this problem, China and India – with their massive pool of cheap labor – have begun to integrate themselves into the American dollar empire. American companies have spent most of the past decade shifting their operations offshore to take advantage of these pools of cheap labor and – they anticipate – the consumer markets which will emerge as those poor farmers are drawn into production. Closely connected with this, if Washington is to maintain its dominance of the global market, it must come up with revenues at the expense of your living standard.

None of this bodes well for you: Your wages will be under pressure from low waged competitors, and government will be squeezing you for more revenue.

The applicability of the Overton Window in this case is obvious: At some point along this trajectory, your economic situation will decline to such a point that merely to assure your continued survival you will be forced to abolish work, and the Washington dollar empire.

Whatever argument we can make to advance that day – to avoid the worst of this disaster – we will try to do.

The Messiah has no independent estimate for job losses

December 14, 2009 Leave a comment

Summers catching a catnap in the middle of a meeting

According to Larry Summers, the Messiah is apparently relying on private forecasters as it develops a response to the rising unemployment catastrophe:

“Most professional forecasters are now looking for a return to job growth by spring,” though it would take longer for the unemployment rate to fall, he said.

Summers did not explain why the Messiah did not have his own estimate for when net job growth would restart, nor what that estimate might be if the Messiah were to make one.

He also did not explain why the Messiah is paying him to provide economic advice, when Summers could only offer the free advice available to anyone with access to Google News.

Why Afghanis die in groups of 30…

December 11, 2009 Leave a comment

The not surprising answer is here

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Oh, really? Well that would explain the dead Afghanis…

December 10, 2009 Leave a comment

From Matt Taibbi:

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers “at the expense of hardworking Americans.” Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it’s not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

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