WB: Why People Think the Economy Sucks

April 12, 2006

Billmon:

It’s sobering to think that what we’ve seen so far may be just the beginning of our journey back to the good old days of the Robber Barons.
[…]
Given the current power structure and the elite consensus that globalization can’t be stopped, or even slowed, the solution isn’t obvious, at least not to me. The New Deal is dead; the New New Deal hasn’t been invented yet. But the political effects are easy enough to see. The immigration debate has been saturated by them.

[…]
The economists might think it’s lunacy for a country with a personal savings rate of zero and a current account deficit of 8% to turn protectionist. But to a politician looking to advance his career, a lunacy that is shared by a majority of the voters – or even a vocal minority – can look awfully appealing. Just ask John McCain and Jerry Falwell.

This isn’t going to end well, but like I said, I don’t know of any viable solutions – other than to encourage the creation of price bubbles in the assets most widely held by the American middle class. It may be a quick fix, but it works.

[…]
When it deflates, the corporate conservatives are going to have a job on their hands staving off the kind of populist revolt that would make the rest of the world begin to doubt America’s commitment to the global economic order America has created. And if that happens . . . well, even John Snow – the $112 million dollar man – may start to have his doubts about trusting the marketplace.

Why People Think the Economy Sucks

Posted by b on April 12, 2006 at 18:23 UTC | Permalink

Comments

The “Free Market” is no longer a mechanism: it has become an ideology, one to be imposed by force if necessary and reagardless of the consequences.
I still find it amazing that some of the staunches supporters of “free markets” come from industries like defense, energy, transportation, agriculture and pharmaceuticals: all highly dependent on government regulation and/or intervention.

Posted by: ralphieboy | Apr 12 2006 18:31 utc | 1

i have been getting that ‘right around the corner’ feeling for sometime now, but when the weekly standard article was linked here @ moon a coupe days ago, i not only knew they knew, the warning was the clincher.
all the mind stretching w/regards to unions, free market and immigration etc we’ve been contemplating here these last few weeks, thanks billmon, for your analysis.

Posted by: annie | Apr 12 2006 18:55 utc | 2

I just read Ravi Batra’s book, Greenspan’s Fraud. For a book on economics, it’s a remarkably easy read. Now, thanks to his simple illustrations, I understand why wages need to keep up with productivity gains in order to avoid a credit bubble much like the one we are now experiencing. While most of the text was devoted to tearing Greenspan a new one, he did conclude with suggestions for reforms to return the US (and world) economy to balance. Have a look at the following:

1. Cut the Social Security tax to pre-Reagan levels (i.e. half of what we pay now).

2. Raise the corporate income tax from the current 34 percent to 45 percent and eliminate tax loopholes.

3. Raise the top-bracket income tax rate to 40 percent, and rescind the preferential treatment of dividends and capital gains.

4. Raise the minimum wage in steps to $8 per hour – to $6 immediately, followed by a dollar raise per year until it reaches $8. Furthermore, index the minimum wage to the GDP deflator, the price index incorporating all goods and services.

5. Enforce the antitrust laws vigorously to break up giant conglomerates like Exxon-Mobile, General Electric, AOL, WorldCom and other profitable companies that absorbed their rivals through mergers in the 1980’s and 1990’s.

6. Persuade other nations to adopt free trade, so that the trade deficit is eliminated, and America has balanced free trade.

I’m pretty well on board with all of them with the possible exception of number six. I wonder if a little protectionism aimed at boosting our own manufacturing sector would be more effective in the short-run at least. Also, while we’re dreaming, I would suggest repealing Taft-Hartley to give the labor movement a little shot in the arm.

Posted by: Sopor0qv | Apr 12 2006 19:08 utc | 3

And what a mix- a deflated housing market for macmansions in those exurbs when gas prices are going to keep climbing…a double whammy for soccer dad.
what’s so amazing is that ppl are so stupid in America that they think it’s illegal aliens who are causing problems in their lives.
they can never seem to understand that the richest 10% of the population are the ones making and breaking the rules.
as I heard on tv not too long ago– duhdeduuh.

Posted by: fauxreal | Apr 12 2006 19:35 utc | 4

Billmon himself sketched a potential solution here:
Reinventing the New Deal
Which was echoed recently by Harold Meyerson:
Will Your Job Survive?
These (lengthy) Nation pieces also have some ideas:
Taming Global Capitalism Anew
These were particularly good:
Build the High Road Here
A North American Social Contract
Reform the International Financial System
Now all we have to do is make it politically viable 🙂

Posted by: Tom Geraghty | Apr 12 2006 20:05 utc | 5

Two words: John Rawls .
The Internet Encyclopedia Of Philosophy: John Rawls
Also, here are some other articles that discuss Rawls Ideals and If I get time later I will hunt them down and produce acess to them.:
“Reply to Alexander and Musgrave.” Quarterly Journal of Economics (November 1974), 88 (4): 633-655.
Some Reasons for the Maximin Criterion.” American Economic Review (May 1974), 64 (2): 141-146.
“Distributive Justice.” In Edmund S. Phelps, ed., Economic Justice: Selected Readings, pp. 319-362. Penguin Modern Economics Readings. Harmondsworth & Baltimore: Penguin Books, 1973.

Posted by: Uncle $cam | Apr 12 2006 20:08 utc | 6

There is evidence from monkey’s that a sense of fairness in genetically hard wired into us. This article from New Scientist
http://www.newscientist.com/article.ns?id=dn4179
describes an experiment testing monkey’s ability to understand fairness using a simple game of rewards for behaviour. When the monkey’s realised they were being unfairly rewarded they refused to play the game any further and threw hissy fits and gave up rewards they had already been given.
I wonder what that looks like in humans in a society of hundreds of millions?

Posted by: still working it out | Apr 12 2006 22:17 utc | 7

I apologize in advance for not having the time and skill to flesh the following ideas out, but perhaps someone else among the gifted contributors here can do so or rubbish them as the case may be…
Speaking about economics in terms of finance is a modern and costly mistake. Economics is about utility (which definition is one of it’s central problems, but it loosely equates to happiness) and finance is completely and only about monetary wealth. GDP is a purely financial concept, and really has nothing to do with economics. Unless and until we can measure the utility of clean air, trust between neighbors, an informed electorate, peace, competition, etc. in monetary terms (which effort may be a mistake in itself) these things will never enter into the financial debate we mistakenly call economics. By being seduced into discussing finance (ie. building and preserving monetary wealth, GDP) instead of economics (ie. what we actually want as individuals and as a society) we are being sidetracked.
I think the second most costly mistaken assumption in looking at the US economy is that any nation’s economic problems can be solved in this era on a purely national basis. The corporate profits Billmon graphs have been achieved through relocating production to those countries with cheaper labour. Make something in China for $1, sell it in Dallas for $3. This is the same thing that happens when your grocer buys radishes in the next town. The trade and financial flows between countries have to be understood in terms of the overall world economy. Because there are different currencies and monetary authorities involved it is much more confusing than the essentially similar flows between say New England and the Sunbelt.

Posted by: PeeDee | Apr 12 2006 23:04 utc | 8

Hi TGeraghty, nice to see you here 🙂
Rawls is on my reading list Unca, thanks.

Posted by: DeAnander | Apr 13 2006 0:14 utc | 9

perry anderson’s lucid review of rawls, habermas, bobbio, is worth rereading.

Posted by: slothrop | Apr 13 2006 1:13 utc | 10

1. Entrench debt peonage before the lumpenproletariat catches on so they internalize their insolvency as shame.
2. Provide scapegoats for sublimation of residual rage.
3. Supply messianic vision of redemption and revenge.

Posted by: Sourdes Menées | Apr 13 2006 2:09 utc | 11

@Sourdes Menées
Thanks for the link about Public Law 109-8. We discussed a bit about that here last December. I speculated then that this was an effort on the part of the rich (credit agencies, at the least) to cushion themselves in the face of a perceived impending financial crisis. I was afraid to prognisticate too much at that time for fear of looking a bit hysterical, but it doesn’t look now like I was all that far from wrong.

Posted by: Monolycus | Apr 13 2006 3:23 utc | 12

Check out this short film – Ha Ha Ha America for a visual interpretation of what most of us have been saying about the dynamic between the American and Chinese economies.

Posted by: conchita | Apr 13 2006 3:36 utc | 13

The current tax policies are one of the reasons we have lack of wage growth. The dividends, interest and capital gains tax make it to easy to leave money lay. If the cap gains and interest taxes were higher, people would invest for greater return and longer. Now all we have is renters. Renting their money for interest and dividends. Stocks like Intel with record earnings the last two years has been flat and falling and hasn’t recovered it 2000 price. It 1/3 as much. The rotation to dividend paying stocks, shift to foriegn investment and interest payments is killing the economy. Our current growth is nothing more than a war economy with federal pork spending and no sacrifice with it.
The lower capital gains makes it easy for hedge funds and elites to take money out of the market and re-appropriate it to foriegn investment. The stock market has been sideways for years, yet, millions of Americans are paying into those 401ks, IRAs etc. Where is the money going? It being sucked away by the connected.
I see reference to Ravi Batra above. He’s a great economist. I had his book Debt Virus. The book was about the current fractional reserve borrowing system. What people fail to understand is there will never be enough money in the economy to pay off debts. This creates winners and losers through no fault of their own. The elite would say it’s because the winners are more driven, it likely whos more connected. That may be true in certain terms, but when the economy contracts due to lack of money, the least are the ones to fall on hard times and fail to pay debts. This is another reason the bankruptsy bill is so bad.
According to Batra, the answer is to print more money. His philosophy is that money is only a system of exchange for goods and services. Inflation is only caused by the ability to raise prices. Currently, commodities prices are through the roof, and labor is boring the brunt of inflation control as billmon points out.

Posted by: jdp | Apr 13 2006 3:49 utc | 14

Thanks, DeA, nice to be here.
A couple more references that help identify the links between corporate governance, sluggish investment, slow job and wage growth, and rising inequality are:
Corporate Governance and the “Job Loss” Recovery
The Inequality Economy: How New Corporate Practices Redistribute Income to the Top

Posted by: Tom Geraghty | Apr 13 2006 5:15 utc | 15

@slothrop,
whoa! thanks for the perry anderson post.
That is going to take some time to digest and reflect on for someone as thick as I. However, It is always worth bending ones mind.
As for my promise to get you guys acess to further Rawls articles above, my status as alumni use to include Lexus Nexus, however the “new rules” now excludes that unless you pay some “I’m in the club” fee, where it use to be part of perks of the blood sweat and tears of ones time at university. Like most used car sales, er, uh I mean University Presidents That is no longer the case, I am sorry to report.
@still working it out
I also had that NS article in the back of my mind when that article first came out about monkey’s and the Justice as fairness Rawls Milieu was broached last time . It’s quite interesting in light of us “civilized” domesticated primates eh?
@conchita
Yeah, I spent most of 2000 in China and was pretty amazed
at it’s infastucture even in the South West of the country. Khunming was a pretty impressive expirence.
@others, welcome
Tom Geraghty, Sopor0qv, Sourdes Menées
and the rest of the MOA gang “who loves ya baby”…lol

Posted by: Uncle $cam | Apr 13 2006 6:28 utc | 16

Broder in WaPo: Red Ink Run Amok

Cooper, a member of the Budget Committee, had referred to the document several times during that panel’s truncated debate on the budget resolution. Like many of the others in the room — including the legislators — I had no idea what he was talking about. So I went to inquire.
Turns out there was an excuse for the widespread ignorance. The report had been completed in early December but was issued on Dec. 15. The Treasury Department, which compiled it, did not even put out a news release announcing its existence. Cooper said the total press run was 1,000 copies, and they have become such rarities that he suggested I could probably take the one he procured for me and put it up for auction on eBay.
…
The cover letter in the report from Treasury Secretary John Snow contains the bad news. Whereas the budget deficit for fiscal 2005 was officially given as $319 billion, “the government’s accrual-based net operating cost . . . was $760 billion in 2005.”
That $760 billion is the real difference between the money the government received and the obligations it added in the past year — in other words, the unfunded costs being passed on to our children and grandchildren.
…
David Walker, the head of the Government Accountability Office, official bookkeeper for Congress, said at a briefing last week that the $760 billion accrual deficit “amounts to $156,000 of debt for every man, woman and child in America. For a family, it’s like having a $750,000 mortgage — and no house.”

And that is only ONE year!

Posted by: b | Apr 13 2006 8:31 utc | 17

Joseph Stiglitz lauds China:
Development in defiance of the Washington consensus

Part of the key to China’s long-run success has been its almost unique combination of pragmatism and vision. While much of the rest of the developing world, following the Washington consensus, has been directed at a quixotic quest for higher GDP, China has again made clear that it seeks sustainable and more equitable increases in real living standards. China realises that it has entered a phase of economic growth that is imposing enormous – and unsustainable – demands on the environment. Unless there is a change in course, living standards will eventually be compromised. That is why the new plan places great emphasis on the environment.
…
As China has moved toward a market economy, it has developed some of the problems that have plagued the developed countries: special interests that clothe self-serving arguments behind a veil of market ideology. Some will argue for trickle-down economics. And some will oppose competition policy and corporate governance laws. Growth arguments will be advanced to counter strong social and environmental policies. Such allegedly pro-growth policies would not only fail to deliver growth; they would threaten the entire vision of China’s future.
There is only one way to prevent this: open discussion of economic policies to expose fallacies and provide scope for creative solutions to the challenges facing China. George Bush has shown the dangers of excessive secrecy and confining decision-making to a narrow circle of sycophants. Most people outside China do not fully appreciate the extent to which its leaders, by contrast, have engaged in extensive deliberations and consultations as they strive to solve the enormous problems they face.
Market economies are not self-regulating. They cannot simply be left on autopilot, especially if one wants to ensure that their benefits are shared widely. But managing a market economy is no easy task. It is a balancing act that must constantly respond to economic changes. China’s plan provides a road map for that response. The world watches in awe, and hope, as the lives of 1.3 billion people continue to be transformed.

Posted by: b | Apr 13 2006 9:09 utc | 18

Any other simpletons who think that a stock has to exist to be sold? Ha Ha…fooled again…
A firm on Wednesday filed an antitrust lawsuit against 11 major U.S. broker-dealers, accusing them of colluding over six years to collect unearned fees as a result of a “naked short selling” practice. . . .
[The usual suspects] include the broker-dealer units of Bank of America, Bank of New York, Bear Stearns, Citigroup, Credit Suisse Group, Deutsche Bank, Goldman Sachs Group, Lehman Brothers Holdings, Merrill Lynch, Morgan Stanley and UBS AG.
Short-selling involves a bet that a company’s stock will fall. Typically, an investor sells borrowed stock, and hopes to buy it back at a lower price to replenish the lender.
In a naked short sale, the investor sells stock that has not yet been borrowed. Naked short selling is usually illegal, in part because the stock supposedly underlying the transaction may never be borrowed or may not exist. It can be permitted to promote market stability.link
So if I read that line right it’s not problemo to sell stock that doesn’t even exist to prevent a market crash??
Would MoA econ freaks care to weigh in on this?
(Note to b- , Germany’s in on this too! Ain’t just us 🙂 )

Posted by: jj | Apr 13 2006 20:43 utc | 19

(Note to b- , Germany’s in on this too! Ain’t just us 🙂 )
(Note to jj- , I very well know this and do what I can do to fight this in Germany too 🙂

Posted by: b | Apr 13 2006 20:54 utc | 20

Looks like ETG is suing because the defendants’ stock borrowing takes place through collusive agreements that shut them out. The plaintiff might really be aggrieved because they’re excluded from some arrangement to net out stock transactions, like a joint back office. No one’s doing this to prop the market up. “if it’s not collusion, then it must be illegal naked shorting,” that just sounds like a legal stratagem.

Posted by: psh | Apr 13 2006 22:09 utc | 21

GDP is a purely financial concept
I wonder when GDP first entered as a concept. I am willing to bet it was soon after most incomes were taxed, therefore creating the need of catalogized almost all incomes, thus creating easy data for theories.
In an encyklopedia from around 1920 I found not GDP but national wealth, which meant the sum of stuff, especially valueable stuff like railroads, buildings and gold, a nation possesed. The lack of good data limited the usefullness of the national wealth concept but nevertheless the author of the article wrote about it as the variable in measuring richness and poverty among nations.

Posted by: a swedish kind of death | Apr 13 2006 22:28 utc | 22

swedish-
The concept of GDP (more broadly known as “national income accounting”) was developed during World War II. Economic and military planners needed to know the production capacity of the economy so they could make realistic plans for military and civilian production; it turned out the generals’ initial requests far outstripped the ability of the economy to supply them (and leave anything left over for the civilian population.)

Posted by: Tom Geraghty | Apr 14 2006 5:19 utc | 23

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