POLITICAL ECONOMY: The Original Sin

With the president on the Brink of Waging the Fight Progressives Have Been Hoping for, News Comes of an Original Sin  

Let me just take a moment to thank President Obama and the leadership of our military in overturning the shameful policy of Don't Ask, Don't Tell.  

There I feel better.  It's good to thank the president from time to time for a job well done.  And it will be the last time I do so in this post...

I am suffering today from a serious and painful bout of cognitive dissonance.  On the same day that Obama lifted, at long last, DADT; on the same day that he gave a stinging speech, possibly setting up a trap for the GOP that my friend and co-author John Farley predicted months ago (either the GOP support cutting things like Social Security, or they go back on their no tax pledges); comes this bit of highly depressing news:

http://delong.typepad.com/sdj/2011/09/from-ron-suskinds-confidence-men.html

In journalist Ron Suskind's new book, Obama is reported to have been to the right of Larry Summers on economic policy.  Larry Summers--who more than any other single human on the planet, is responsible for the destruction of the world in 2008--is someone Obama had no business appointing to his economic team in any capacity, let alone putting him in charge of it all.  But now to find out that the president was even more conservative than Summers is a truly despicable reality. 

Forgive me if I rant a bit. Economic policy is my area of expertise.  For all the other aspects of Obama that I admire, I simply can't forgive him for being such a complete stooge to Wall Street and the Conventional Wisdom of the economic elite who sunk the ship. They bailed out Wall Street--a move I supported for the good of all--but then dropped the ball on helping Main Street and average home owners.  Now the public are nearly as likely to associate Democrats with protecting big business as they do the GOP.  So, it is especially damning that Suskind quotes the president as saying the rise in unemployment is essentially the fault of the workers themselves.     

The White House is of course distancing itself from Suskind's book---just as the Bush administration did when he wrote his award winners on them.  But Suskind is no rookie.  He is no suspect muckraker-mud slinger either.  He is a top journalist. If progressives believed him about Bush, it is not credible to distrust him over Obama.    

The president no doubt had some truly daunting odds against him from the start in the weak-kneed blue Dog Democrats in congress--many who came in on his coat tails.  But now it begins to emerge that Obama didn't even see stimulus as the silver bullet.  No wonder he never tried to use the bully pulpit to push for more spending when he had the only chance he would have ever gotten: he didn't buy the argument!

So he thinks a rise in productivity is to blame for the greater rise in unemployment than his "crack team" predicted?  When all the time folks like Paul Krugman and others were screaming at him that he was underestimating unemployment by two percentage points (a claim almost exactly accurate, it would turn out) and that his stimulus package was not large enough! 

I am sick of hearing myself make this argument, but I think the future of progressive politics literally hung on that decision of stimulus.  Because now the public thinks the whole idea of Keynesianism is dead and discredited.  And we all may be saddled with PresidentPerry and a GOP congress as a result. 

Obama's leadership style of compromising with himself before he enters the bargaining table resulted in his not even attempting a stimulus that was large enough.  Partly driven by his refusal to appoint even one member of his economic leadership that saw the crisis coming, and dutifully failed to perceive the depth of the crisis that would come once in office.  We will never know if a stimulus with sufficient size was possible because he ruled it out from the start. 

We can only hope that the president's recent rhetoric signals that he has, at long last, learned his lesson.  The GOP are not interested in compromise, nor have they ever been.  Obama has a habit of coming back from the brink of oblivion.  He also has the luck of usually running against very weak opponents.  Many would say both a Rick Perry and Mitt Romney fit those bills.  But the truth is, Mr. Obama trails them both in several recent head-to-head polls, especially to Romney. 

Let's hope that Obama's new fighting spirit may change that.  For as poor as he has been on economic policy, the GOP candidates are running on a platform that can be summed up in a simple bumper sticker now gaining popularity: "Repeal the 20th Century:Vote GOP."  

Interestingly the GOP candidates are running significantly to the right of most self-identified Republicans in opinion polls.  Indicating they are being controlled the by the extreme right in the so-called Tea Party.  If the GOP hopes to win in 2012 they will need to control this extreme faction in their midst.  That they have thus far been unable to may be Mr. Obama's saving grace.   

One that, as far as economic policy goes, he does not deserve. 

ECONOMY: Money that Grows on Trees!

I wish to propose the radical notion that we grow our money on trees. 

Seriously. 

Think I'm crazy?  Then let me give you some back ground...

When my students first learn about the complexities and problems of the international financial system; the technocratic imperfections of running a money supply; and the other arcane issues involved in monetary economics, one of the first solutions they come to is a return to the Gold Standard. 

What could be more elemental?  Gold is sound.  It is a reliable store of value.  I tell them that in times of trouble investors tend to seek shelter in the stable price of gold.  So, I routinely forgive them of this leap of logic. Young minds, like all minds, seek the path of least resistance to solve problems, and kudos to them for trying.  And we do indeed now have major politicians who have caught the new Gold Bug (Ron Paul, please stand up!).

But besides the empirical problems of how the system actually functioned, we can see the problems with such an approach at a far more fundamental level: gold is only valuable because it is scarce.  And the reason gold is scarce is completely socially constructed.  Gold has value because we have said it has value. 

This is ironic.  The reason so many students flock to the gold standard as an answer is the response to their "shocking" discovery of fiat currencies.  Fiat currencies are forms of money that have simply been deemed legal tender.  You have to pay your taxes in it, therefore, it has value.  It is a total social construction. 

So, many students, and now evidently, many Tea Party politicians, jump to the conclusion that a retreat to a solid store of value is warranted.  Back to the Gold Standard. 

They forget, or never consider that the value of gold itself is a social construction.  Every bit as much a social construction as a fiat currency.

Now if both the gold standard and fiat currencies are based on social constructions, one might conclude that they are in fact equal in terms of their effectiveness. This is false.

Gold has value because it is scarce.  Never mind the complexities of trying to balance global trade by having to trade equivalent amounts of gold and the like.  I'll leave that for another post, another day, when I might actually be interested to take that on (don't hold your breath...). 

Fiat currencies have no such constraint, at least in theory.  Money can be printed in any quantity needed.  The real constraints comes by way of interest rate or inflation.  But the inflation threat argument is normally hauled out long before it is truly threatening.  In a slack economy with lots of unemployment (sound familiar?) such a threat is greatly muted, and the benefits of such money creation normally far outweigh the costs. 

So, the main difference between a "fiat social construction" and a "gold social construction" is one of plenty versus scarcity. 

But in the real world, even fiat currencies impose artificial scarcity.  This is done mainly by the socially constructed monetary creation process.   In the USA, for instance, the government ceded creation of currency to the Federal Reserve and its fractional reserve banking system.

Money is created as debt.  With interest.  A debt even the federal government must repay at some point (though this is done often by simply printing more currency--a fact that often unnecessarily alarms my students).  So, the fact that this debt must be paid off before profits are realized imposes a kind of scarcity on the system. 

So, if both fiat and gold are scarce social constructions.  Is it possible to imagine a plentiful social construction? 

Maybe we could just produce more gold.  Of course, there is a limited supply of this and it turns out that the mining of gold is damaging to both the Earth it is mined from and the human beings who do the mining. 

So, we need a plentiful, non-polluting, non-harming social construction. 

We need trees.  Or more accurately, more leaves. 

I like oxygen, you like oxygen, we all like oxygen.  

What if every so often we counted the leaves on trees to determine the money supply?  We could create lots of new jobs employing all those tree climbers.  And if we need more money, we just plant more trees. 

Something we need to do anyway!

The supply of trees and leaves is virtually unlimited and if we continue as we are and deplete the world's resources of trees, we are all going to die. 

So, the Leaf Standard, as it were, is more than just a social construction, it is also a store of real value.  That is something your average, everyday gold standard does not have.  My Leaf Standard punks your Gold Standard any day of the week!

Of course, the point here is not to propose a new Leaf Standard, it is instead to point out the futility and rather ridiculous nature of arguing for a return to the gold standard. 

But if I had to choose between the two, I'd opt for money growing on trees every time!

ECONOMY: Securing Social Security

So the President's National Commission on Fiscal Responsibility and Reform has released its proposal. Tasked with the job of looking at ways to reduce the nation's growing debt and deficit, the Commission's proposals have been widely anticipated. And, as to be expected, it is full of lots of really bad ideas and very few good ones.

At least if you define "good" as "doing the most good for the most people"; and "bad" as "doing the most harm to the most people." I don't know, maybe it's just me, but those seem like really reasonable definitions.

One of the biggest targets in the crosshairs of the Commission is Social Security. And the Commission's big brains have clearly thought long and hard on what to do about the future of Social Security (insert sarcasm into this sentence please).

For one thing, the entire enterprise is highly suspect. The best way to reduce the debt and the deficit is to grow out of it. As this graph shows, even the record high deficits of World War II were turned into surpluses by the high rates of economic growth that created the great American middle class, spurred in large part by those very deficits.

(The above source is from a right-wing website, by the way, however the site owner is commendably using the real numbers and the site is very user friendly if you want to play around with the stats).

The other thing that the Commission "achieved" was to propose a whole lot of ideas that have been on the books for years. Literally. For instance, let me point you to a site:

http://www.actuary.org/socialsecurity/game.html

This is the website for the American Academy of Actuaries (the main professional--and non-partisan--organization for the nation's actuaries) as well as a little online game/simulation where you can try your hand at solving the nation's "terribly difficult" Social Security "crisis." Here's what I want you to do. Follow the above link to the site and follow these instructions:

1) Click "Continue" to get to the game.

2) Click "Start Game" (don't worry about reading the instructions for now, you can always go back and do that later). C'mon trust me!

3) On the left hit the button marked "Revenue Increases"

4) You should now be on Question 6 (make sure you are).

5) select 'b" --"Eliminate cap and pay Social Security tax on all taxed earnings. But calculate earnings only on the current law-cap."

6) BOOM! You're done. Congratulate yourself. You just fixed Social Security.

You also fixed one of the worst taxes in American history. You see Social Security is today taxed at 6.2% of all income up to $106,800. After that, nobody pays one red cent! What that means is that for the overwhelming number of Americans who make less than $106,800 per year, they pay a 6.2% flat tax for their part of the Social Security Trust Fund. But for the very few wealthy Americans who make more than $106,800, they pay an increasingly smaller amount of tax the wealthier they are. If you make $300,000, for instance then you only pay that 6.2% tax on a third of your income.

What you did in the game is to pass a law that says all income will be subject to the 6.2% flat tax but the benefits will continue to be paid out as they are now. In other words, the only folks who will be less well off after this change will be the very wealthy, while the bottom 80% of Americans will not have to see their benefits reduced or the retirement age increased or any of that.

But that is not likely to be any of the final proposals that come out of the President's commission. Instead, like the Plutocratic Working Group that they really are, they will propose both a reduction in benefits and an increase in the retirement age. Something that hurts 100% of the population.

Instead, we could make all income taxable and raise the Social Security tax to 6.7% and fund a big benefit increase to every senior in America as well as create robust solvency for the Trust Fund for the foreseeable future.

The answer is quite easy unless your goal is to protect the wealthy at any cost--then the choices you have to make are indeed "painful." Painful because politically they are risky. Voters just hate it when you put them at risk of poverty and destitution. And painful for the vast majority when you cut back life-saving economic security.

But let's not forget what is really behind all of this: the attempt to privatize, either partially or in whole, Social Security itself. There are billions in profits to be made in the private provision of social security.

Gee, I'm feeling quite insecure at the moment...

Black Tuesday

The Democrats are on the eve of an historic election defeat. While there is evidence that African Americans are at least as energized about this election as the previous one, all other demographics are moving against them and toward the GOP. As of this writing, it looks like the GOP will take the House with about 55% of the seats or around 240 of 435. The Senate is likely to stay Democratic at 51-49, but the Senate was nearly unworkable for Democrats at 60-40. Thus, like after the 1994 election, this should pit a Democratic president against a Republican House. Many prognosticators are predicting that this will be a political windfall to the president. I am not so sure. Given the state of the economy and the stated goals of the Republican party leaders, this is likely to spell disaster for the country. If that translates into good politics for Mr. Obama, he might as well step down right now.


Divided, immobilized government is the last thing we need right now. The modern Know-Nothings (AKA The Tea Party) are shouting about government spending and taxes (which, you might note, were actually cut by the stimulus) but this is much like a cancer patient condemning their doctor for the chemotherapy treatments they are receiving. The national cancer patient, the US economy, is about to go off her treatments with only half of them administered. So far, they have staved off any further progression of the disease, and a few other brands of mild treatment have been administered, like financial reform, but these alone are unlikely to protect the patient from a further deterioration of her condition without further stimulus chemotherapy. Lady Liberty is very sick and she is likely to get much sicker. At best, she'll remain bedridden just as she is now for a very long time.


None of this had to happen. Mr. Obama and the Democrats have been overly timid, politically stupid and they have done exactly what Rahm Emanuel swore they would not do: they have wasted the opportunities the economic crisis presented them. Opportunities that may not come again in our life-times. And if they do come again, they are likely to reemerge with such a ferocity that it may be beyond the grasp of either political party to control it. The Tea Party's most extreme elements might be the "moderate, reasonable" voices under such conditions of social desperation.


As for the Republicans, they have earned a place of unprecedented national shame...they just don't know it yet. They are no longer a party of governors, but instead a party of poll-watching, political operatives intent on only two major goals: winning elections at all costs and protecting the obscene wealth of their plutocratic benefactors. Instead of reigning in the fascistic, racist elements of the Tea Party (no, not all of them are fascists or racists), they have largely embraced them, a move I fear will come back to haunt them in more than one way. Abraham Lincoln has been assassinated all over again.


While the road here was fairly easy to see, the road back is not.


To move the economy from where it is as of this writing (9.6% unemployment) to full employment (estimated conservatively at 5.2%) one would need to spend about $1.3 trillion in new stimulus, by my calculations. The president nor the Democrats in congress have ever been willing to do that.


Instead, with ineffective, but expensive government programs passed in the last congressional session, they have allowed the GOP to paint them not only as inept, but the entire concept of government intervention is itself now highly distrusted by the American public. So, the Democratic political leadership has managed to fail both in the short term by getting trounced in the up-coming election and by allowing their organizing ideology to be defined as once again, unworkable. Something, I feel justified in saying was entirely avoidable and predictable. And this means that we are now at the functional equivalent of being a cancer patient who no longer believes in medicine. The moniker "Great Recession" may just become a lot more apt than many people ever intended as the long road out of this hole gets longer and harder.


After Tuesday, what the hell anyone can do about it, is beyond me.

ECONOMY: The Triple Threat

The American economy is under a triple threat: Inadequate stimulus, Ideology of the budget balancers and Our National Margin Call.

Let's take these in reverse order. A margin call is when the person to whom you owe money asks for their money back. Hopefully you have enough cash to pay them. If not, you're in trouble. In banking crises, things go from bad to worse when everyone panics and "calls in their margins" at once or, in other words, demands all their money NOW! This is part of what made the crash of '08 so bad. The United States has had its own national margin call. Namely: the bubble of consumption that was fueled by credit cards, manic property markets, internet stock crazes and an upper class waging the most effective class warfare in U.S. history, concentrating outrageous amounts of wealth and income upwards to the top 1% while the rest of the population sees stable manufacturing jobs disappear and replace their consumptive prowess with large amounts of household debt. The rich got richer, everyone else got credit cards, and double mortgages, and reverse mortgages and every other thing that the priests of American capitalism told them was good for them.

But you cannot run a successful advanced economy on borrowing when you have less and less to back it up in actual physical infrastructure. Unlike the Germans, we really don't make stuff here anymore. And now, the bill has come due. And there is little reason to have much optimism about a full recovery anytime soon. Here's why: the answer to this gluttony of debt and theft is...wait for it...more debt. That's right. The only way to bring the economy out of the doldrums is to inject yet more stimulus (read: deficit spending) into the US economy. But the problem is worse than that. We also need to invest some of that stimulus into projects that will improve the infrastructure, both physically (in new roads, bridges, environmental improvements, etc) and technologically (to restart the hi-tech manufacturing base).

And this brings us to our second Threat. Too many leaders from the Democratic president to his (self-professed) enemies in the Republican party all share a superstitious belief in the evils of the budget deficit. It's a sad day when one of the smartest guys on economic policy is Dick Cheney, but in today's political class, Cheney's the man. He has actually looked at American political economic history and seen what is splattered right in front of all our faces: "Reagan proved deficits don't matter." At least they don't matter in the same sense that borrowing for college education doesn't matter. In fact we encourage that. It doesn't matter in the same sense that businesses investing in new technologies to improve their productivity doesn't matter. In fact we encourage that. In doesn't matter in the same sense that consumers who take out mortgages to own their own homes doesn't matter. In fact we encourage that. Oh wait...it does matter if those mortgages are made out of funny money like derivatives and bought and sold like mad.

It isn't that deficits don't matter (I take it back, Cheney's wrong) it's that they matter in very different ways than what most people seem to think. If a deficit or a debt is taken out to pay for wasteful projects, then the debtor would have been better off not to have taken out the debt: for instance a drunken binge during finals week if you are a college student--not so good; or fighting a war against a non-existent threat half way across the globe--Also not so good! The key is that we need the investment to be for good things that help. But the ideology of the budget hawks is that all deficit spending is bad because all government spending is bad. This is just ideology run amok with no basis in fact. Like all spending, it depends what it is going for. There are some things the government has no businesses spending money on and there are some things that only the government can spend money on and make work-like universal health care, universal mail service, fire protect, etc. Private industry will never be able to run a light house profitably, nor would we want them to. Safety should not be up to the highest bidder. But when it comes to our economy, the Budget Hawks are endangering our economic safety everyday. And every day things get a bit more unsafe.

This leads us to our third Threat. We need to have another massive injection of spending into the economy to get things kick started and reduce unemployment. Paul Krugman estimated back before the stimulus bill had even passed that it was about half as big as it needed to be and too much of it was in the form of tax breaks (always the least efficient form of stimulus). Looking back, he seems to have been quite accurate. The deficit spending that stimulated the American economy out of the Great Depression came from war spending during WWII and we are not even beginning to approach that level of deficit as a percentage of our economy. These massive 1940s deficits were not an albatross around the necks of our children, they are what helped to create the "Great American Century" and the prosperity of the next decades. Today we are increasingly hearing that we must cut the budget deficit or face doom. The truth is, if we cut the budget deficit we are going to see 9-10% unemployment for a long time. It has also become vogue to blame this whole mess on homeowners and the poor schlubs that took out those mortgages. But as Stanley Milgram proved many years ago, people respond to authority--especially when that authority is dangling a five bedroom, three car garager with a swimming pool in front of your face and swearing you can afford it.

Most of the chances to do something truly historic for our economy have slipped through our fingers, but there is still time to minimize the damage. Or who knows, maybe what it will take is another slide off the cliff, dangling over oblivion. There is, it seems to me, every chance that this "crapolla" economy is going to last a long, long time. And its possible we could even face another dramatic collapse if the dominoes fall just right.

Maybe then we'll do what we should have done the first time around.

SPORTS: Super Bowl Prediction

New Orleans: 37
Indianapolis: 35


I predict a barn burner that goes right down to the wire. Peyton Manning is likely to have a great game against a very tough Saints defense. But, unlike most of the other Saint QB opponents, I think Manning will get it done. But Brees is a superstar also. Expect big things from these guys.

In the end: a little redemption for the Big Easy.

I picked the Saints to beat the Ravens in the Big One at the start of the season, so I have to pull for them. And my heart is with them as well. It should be a good game.

POLITICS: Brownie, You Did a Heck of a Job...

Outrage is swirling over news that Michael Brown, the disgraced former head of FEMA, is going to speak at a conference of the Alliance of Hazardous Materials Professionals as their key note speaker. Brown, you may remember, resigned after the debacle that was the disaster relief efforts in the wake of 2005's Hurricane Katrina.

In one of the more iconic moments of the Bush administration, the former president forever tarnished Brown with a supposed compliment as Bush finally, after an inexplicable delay, traveled to the storm stricken areas and proclaimed, in front of all the TV cameras, that "Brownie, you're doing a heck of a job." Of course it was plain to the entire world that the relief effort was its own disaster. No one was doing a heck of job.

With that one line the president made Brown the personification of everything the administration's critics saw wrong with how they operated. Brown had no disaster relief experience. He seemed uniquely unqualified to be a part of FEMA, let alone the Director. He was the former head of an International Arabian Horse Association before taking over FEMA and a lawyer by trade. He was, however, a friend of the president though, and that seemed to be good enough for the Bush administration.

But here is where the story is wrong:

Of all the colossal screw ups that happened in the wake of the hurricane, Michael Brown did not commit any of them. In fact, quite to the contrary, Brown was the one man in the Bush inner-circle who sounded the warning, who tried to marshal the equipment, the people and the bureaucracy to save lives.

By placing the blame on the "Arabian Horse guy" most people miss the most incredible part of the entire episode: in the immense ineptitude of the Bush administration, it was the guy with no experience, the Arabian Horse guy--who got it right.

And no one listened to him.