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!