Our forecast has not changed over the past six months, so we have not drawn too much attention to it. Today we will, along with an explicit description of the current state of the economy and the obstacles to a complete recovery. Forecast: Stagnation. Currrent State: Failing. Obstacles: Continued Fed Obtusess, Unwillingness to pay bills in cash, and the Meanness that arises from a general Me-ness.
We will expand from these brief descriptions in the forecast section of today's podcast.
Later we will dig a bit deeper into the Fed on Idiot of the Week, and we have comment on the Taylor Rule and other nonsense, taking off from Paul Krugman.
First, though, complete and unedited, the statement by Barack Obama on the Financial Products Safety Commission. We view this new regulatory body as essential to moving out of the current case of market domination by big banks and bad practice.
As we've said before, this is a non-intrusive means of regulation. This has nothing to do with audits, pay restrictions, capital requirements, or any of your back rooms. One must ask Why the big banks have marshaled their money and purchased representatives in opposition to such a bill. As I said, it is not intrusive. One is examining products, not producers. Legitimate real economy firms welcome such consumer safety regulation as a way of weeding out the less competent and presumably less well-funded and at the same time increasing confidence among purchasers.
We suspect that it is precisely because such a financial products safety commission would bring order to the market and prevent exploitation by the well-positioned that it is being resisted by those well-positioned. And we are extremely pleased that Obama has invested political capital in this venture. Here he is, beginning with a calling of the roll.
OBAMA
Barack Obama
If nothing else, the current crisis has demonstrated how thoroughly the financial sector has captured its main regulator, the Fed. This new agency is an important escape from that corrupt arrangement.
Now. The Forecast.
First let's line up the opposition.
The consensus of economists suggests recovery proceed before too long into an equilibrium of high unemployment and lower trend growth, what I will a recovery, that is, slight improvement, into stagnation. Not a V-shaped, not a W-shaped, but a square root shaped -- down, up and out at a lower level.
This is mistaken because of the stable tail.
Another camp, primarily at the Fed, predicts a somewhat stronger rebound and posits a danger, even mortal danger, from an inflation arising from the need to unwind the Fed's injections of liquidity with a fire hose.
These guys have long been clueless and serve only as powerfully placed voices standing ready to sabotage any real recovery in the real economy.
The true context for policy is an economy that is highly fragile and posed for another leg down. The financial sector is a millstone, the zombie banks are hardly rowing, and the prospect of further weakness in residential and commercial real estate and continued negative contributions from derivative and commodity speculation are already on the charts.
Specifically, zombie banks are profitable because they are gouging consumer credit users, playing in commodity and futures casinos, and eating the interest payments from the toxic securities which are still on their balance sheets. The financial sector is not enabling productive investment activity because they don't have to. They have the government. Besides, the prospect of profit from new investment in the context of overcapacity and a retreating consumer is very low.
Aside from propping up the zombie banks and other formerly private sector markets, the Fed's policy has done nothing. There are no more bubbles to blow up, even at zero percent, that will generate private investment. No more high tech booms, no more residential housing booms, no more commercial real estate booms. There are only financial market casinos to play in. Fine if you have the zero percent chips and are playing with the house, but for people looking for productivity in the real economy. Not so much.
The only route to real recovery and a return to strong growth is through the Demand Side. Only with a renewed job market and a recovery of incomes can we escape the blunders of the past few decades. As we've said, this demand side recovery does not need a return to the consumer economy. The consumer economy, after all, was premised on borrowing and the idea of selling houses back and forth to each other. Consumer baubles large and small were the end point of this economy.
The public goods of infrastructure, education, public health and climate change mitigation are ample and productive occupations that can support prosperity. As incomes grow, the overcapacity of the private sector will shrink. But more to the point for private investment, a new emphasis on public goods opens new industries where there is currently NO overcapacity and where new investment would not be redundant. (To be clear for the simple, spending on public goods is income to private economic actors, whether employees or contractors.) These types of industries are very much not currently dominated by foreign industry. Health care, education, domestic infrastructure, energy retrofitting, reengineering transportation and energy and information infrastructure. All domestic activities. All productive activities, in that they generate improvements in the productive framework. These are not BMW's or flat screen tvs or perfume in one hundred dollar bottles.
Three main obstacles are likely overwhelming, however.
1. Fed intransigence in its error.
2. Political opposition to paying cash for public goods, and
3. A social psychology which believes the good of the whole is code for taking away from me.
The Demand Side way out is really the only way out. And that's why we've outlined it here in the context section. Insofar as the path diverges from this prescription, and by the same dimension, it will be a reduction from the optimal outcome.
The three main obstacles are likely overwhelming, however.
Demand Side is not revolutionary in the sense it is new or complicated, but only because it is fundamentally separate from these errors.
Oh, and four, such a solution likely means inflation in non-core commodities like energy and food. That is because any investment-led growth would mean inflation, as we read Minsky. No less investment-led growth tied to public goods. In the early stages, such inflation would be very mild. In every stage it could be controlled by tax policy -- by reducing inflationary demand via increases in taxes. (This would make sense in that we have bills to pay, but see below.)
But lets go back to one through three.
One, the Fed stands ready to kill any recovery with monetary policy. We have hammered the Fed elsewhere and we have debunked the effectiveness of monetary policy relentlessly. We will do it again next week, but soon we will begin to leave them alone, not because they are unimportant or are gaining a new comprehension, but because they are hopelessly wedded to their doctrines.
Two, Consumer and mortgage credit inflated the housing bubble. It may take public borrowing to create the public goods that can lead us forward. But not because it is necessary or advisable, only because it has been one of the signal successes of the Rovian or Reagan Right to turn the word "taxes" into a synonym for "incest." Since taxes are the way we pay for public goods in the absence of deficit spending, the prospect of paying outright is diminished. One of the continuing marvels of this age is that the non-results from tax cutting fevers have been ignored. The rhetoric continues that cutting taxes will lead us to water even as we go further into the desert.
Three. The Me culture. To some extent "Don't tax me" is a function of this broader "Me" culture. The focus on consumerism and the consumer is also a function of this "Me." And the resistance, as before, to strengthening the whole is very often an affirmation that what is mine is what is most important.
In previous generations, the influence of and dependence on family was felt strongly. Community was essential. "Me" was impolite, at best. The religeon of primitive economics is 180 degrees divergent. Greed is good. Getting what I can is not only all right, it is of positive benefit to everyone. Beliefe that strong community, stable environments, planning, and public goods produce a positive sum game is viewed as dangerously naive. So we keep digging.
All Right. All right. Forecast.
Yes, if you've noticed, we've drawn back in from DemandSide dot net to get more proprietorial. We've decided if we're going to be right, we should look into getting paid for it. Nevertheless, we'll be dropping those charts back onto another vehicle soon, for those of you who have been cribbing off our work.
Forecast continued recession.
The happy talk on Wall Street of recovery is based on a definition of recovery as two successive quarters of positive GDP growth. This is, of course, not a very sophisticated description of the economy, and it is not the formula used by the NBER when they make their official determination. If it were, they wouldn't need twelve months. It is our belief that even considering the strong political winds now blowing in favor of quote recovery unquote and the flimsy increase in activity that is needed to justify such a determination, the NBER will not be persuaded to declare recovery in the same quarter as rising unemployment and continued industrial stagnation.
Our Demand Side descriptions are not recovery and recession, which have peculiar and not well understood technical definitions, but on the three levels of failing, weak and strong economies. The current situation is failing.
We have the stimulus and recovery potential of the Recovery Act on one hand. On the other, we have the negative stimulus of no private investment and contracting state and local governments.
Specifically, real GDP growth will be somewhat volatile around zero. Nominal GDP volatile around 1.5. Unemployment in the narrow measure will continue to trend upward into 2010. Unemployment in the broad U-6 measure will go up less quickly than it has over the past 18 months, but at a steeper slope than the narrow measure.
We have a idiosyncratic measure called Net Real GDP, which is essentially GDP minus the federal deficit needed to make it happen, that will continue to decline. That will likely be our first chart up on the new site.
Demand Side does not see forecasts as a crap shoot, which is the consensus view, but as the evidence of understanding. Neither do we put stock in precision. Better to be approximately right than precisely wrong, as John Maynard Keynes said. Nor do we see economic outcomes as independent of policy choices. All of which creates a different platform than the typical statistical model based forecasts.
(We notice Ellen Zentner, a chief advocate of "The recovery began in June" camp, reserves the right to tweak forecasts up to the day before the next official data come out. This displays sensitivity to statistical trends, but not really forecasts.)
So, having been right, we will continue to tell you about it until we are wrong. Not a V. Not a W. Not a square root. There is upside, but not until the employment situation has been fully addressed and the drag from the financial sector's systemic meltdown is cut away. There are upturns on the charts, and strong ones, but these depend on policy choices not yet made. Until then, it is the Great Stagnation, with a distinct risk of another leg down.
Showing posts with label Transcript. Show all posts
Showing posts with label Transcript. Show all posts
Tuesday, October 13, 2009
Wednesday, October 7, 2009
Crowding in or crowding out?
One only needs to reflect on the explosion of investment in a boom. Surely one investor is bidding against another, just as these folks see all investors bidding against the government, yet investment surges in booms.
Another debate continues around the multiplier.
To say the multiplier is a constant number that can be isolated empirically is to ignore the fact that it depends on the savings rate. The higher the savings rate, the lower the multiplier.
To say the propensity to spend a tax rebate is the same as the propensity to spend the income from a new job is also nonsense. Thus the stimulus from the tax cuts of 2008 will be much lower than the stimulus from the job-creating infrastructure spending. The multiplier from the former may well be less than one. The multiplier from the latter is already one when it employs the first person.
And the multiplier works in reverse, as well. So the multiplier effect of the collapse of business investment may well wash away much of that of the stimulus bill.
This is not that difficult for those not entangled in protecting their reputations.
Compare recessions by percentage of job loss
Elsewhere, a comparison of recessions inspired by a chart at Calculated Risk demonstrates that the so-called mild recessions of 2001 and 1990, were not so mild in terms of job losses. True they were not as deep as others, but they were longer and in terms of jobs lost were more severe than the short, sharp recession and recoveries of 1953, 1960, 1969, and 1974. That is percentage terms, so it is not skewed by the size of the workforce. Plus, job growth emerged from the past two recessions at a much flatter angle than earlier, pre-Greenspan recessions. Put bluntly, in terms of jobs, the recessions have not been getting more mild, just longer. No longer V-shaped, these are basin-shaped.
All other recessions pale in comparison to the current one in terms of employment. Each of the others, aside from the 2001 Bush recession and the 1981 Reagan recession reached a trough in job losses by the 13th month. The current recession is still going down sharply in the twenty first month. This is, indeed, the Big One.
And although the employment crisis is continuing to deepen, the original published numbers understate it. As CR says,
Get that link to Calculated Risk in the transcript of today's podcast on the blog at Demandsideblog.blogspot.com.
Link to Calculated Risk
Economists still hiding out in crumbling efficient market theory
One of the principal illusions, or delusions, of the primitive orthodoxy is that markets are efficient. The efficient market hypotheses is, in fact, the core of the Chicago School's error and of -- due to the consequent damage done by those who follow it -- that school's moral liability.
Markets would be efficient, or at least more efficient, if all goods were private goods, or if all costs were included in the price, or (as Joseph Stiglitz has pointed out) if information were symetrical between buyers and sellers, or if market imperfections such as monopoly and monopsony did not exist. Unfortunately, that hypothetical world exists somewhere other than the industrial states in which efficient market zealots preach.
To be fair, the Chicago School concentrated on the efficiency of financial markets, a preposterous proposition to which they still cling despite all evidence to the contrary. Nevertheless the idea of efficient markets has been carried everywhere and so, too, it seems, the perception that somehow markets are working today to maximize benefit.
No better demonstration of the absence of critical thinking in economics exists than the continued deference to the Chicago School and its efficient markets. How absurd, for example, that the outcome now extant in the financial sector might be considered an optimal outcome, or that the proliferation of McMansions and underwater mortgages might be considered the maximum benefit for the whole, or that the degradation and imminent collapse of the environment might be somehow to the advantage of a substantial percentage of the population, or that the shift of wealth to developed countries and native elites in the wake of the opening of Third World markets might be somehow efficient. These are plainly the result of markets let loose to be controlled by the powerful, rather than structured and confined to be efficient.
That may be a lengthy introduction to today's audio clip, but it is just the tip of the iceberg in terms of the vacuous understanding of markets displayed by the primitive orthodoxy and its cathedral the University of Chicago.
Ray Anderson is founder and chairman at InterfaceInc. Anderson sees tax policy as a way of rectifying some of the fatal shortcomings of markets.
ANDERSON
That was Ray Anderson on internalizing externalities. Anderson was interviewed here on Bloomberg. He has led his company InterfaceInc into a dominant place in the supply of carpeting to business and industry. He did this with vision and an appreciation for all the costs of production, not just those traditionally internalized.
There is much more to be said about the role and power of market participants and the structure and scope of markets themselves, and we will say it here sooner or later. In their place and structured rationally, markets are great. When entrenched powers dominate others via market distortions and then resist correction in the name of market efficiency, it is the lingering stench of the Chicago School.
Let us take the most extreme example of the nonworking of markets. Suppose there is a market in household goods and there is no police authority. The market in goods is bustling with the contraband of thieves and robbers. It is an efficient activity to go house to house and extract people's wealth to take to the market. The first activity is an externality to the market. Is such antisocial robbery on a large scale possible without the market, the place to sell? No. It is called an externality only because it exists apart from the point of purchase-sale.
This is not too far a step from the degradation and exploitation of the environment. Large corporations with the correct industrial capacity and small dumpers of toxic material both enjoy a capacity to steal from and harm future generations that is inextricable from the market for the goods in question, yet these are considered outside markets. Externalities.
Is the market efficient? Well, it finds the right price considering the subsidies of future generations -- and current -- and the structure and rules of traffic in the particular goods.
James K. Galbraith
In our series looking for the perspective of those who got it right, we turn to James K. Galbraith, son of the great economist John Kenneth Galbraith and apparently invisible to those who say nobody saw it coming.
We've promoted Galbraith's book the Predator State ad nauseum here on the podcast. Let's review a few of the anti-orthodox principles that organize that book.
One, and quoting:
Two, and continuing to quote:
And three, with a final quote:
Galbraith traces the fall of conservativism from the Reagan Revolution into the more or less overt plundering of the society by the politically well-positioned oligarchs of Big Oil, Big Pharma, Insurance, Finance, Agriculture and Media.
Galbraith in 1981 as a young director of the Congressional Goint Economic Committee organized what he called "a largely futile frontline resistance to Reaganomics." The vapid combination of Supply Side pap and Milton Friedman Monetarism resulted in immediate large deficits and the beginning of hte deindustrialization of America. (Whatever might be contested about the causes of the events, the timing is not debatable.) Earlier Galbraith drafted the Humphrey-Hawkins bill, which generated the dual mandate for the Fed, and other mechanisms that focused on full employment.
The bill was created by Representative Augustus Hawkins and Senator Hubert Humphrey and signed into law in 1978. Its full title is the Full Employment and Balanced Growth Act. As written it was a worthy successor to the most important piece of economics legislation, the Full Employment Act of 1946. As implemented, it has been a way to get the Fed Chairman before Congress a couple of times a year, but otherwise has been limited to creative footnotes. Lip service is a strong description.
In particular, the Act requires the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals and requires the Chairman of the Federal Reserve to connect the monetary policy with the Presidential economic policy.
The Act sets specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. The Act allows Congress to revise these goals as time progresses. If private enterprise is lacking in power to achieve these goals, the Act expressly allows the government to create a "reservoir of public employment." These jobs are required to be in the lower ranges of skill and pay so as to not draw the workforce away from the private sector.
Coordination between fiscal policy and economic policy has not occurred, of course, and it was actually one of the accomplishments of the Reagan Revolution to drive them as far apart as they have become. Unemployment rates of 3 and 4 percent are now considered the stuff of fantasy. A public employment program?
The Reagan Revolution, whatever its tenets, resulted not in principled conservativism, but in a corporate takeover of the state, as Galbraith has described in his book. By the way, this digression on Galbraith's early work is not from the book, but our contribution with an assist from Wikipedia.
The American economic model in Galbraith's view, is not the free rein to the markets and public be damned approach of Reagan and Bush, but is the structure created by the New Deal. The institutions, Galbraith writes, "are neither purely private nor wholly public. They are not like the socialist welfare institutions of Europe, but neither are they private enterprise."
Some are supported by state spending -- entitlements, but also bank credit, credit guaranetees, and implicit guarantees, and -- Galbraith is writing prior to the massive bailouts when he says -- quote --- the expectation of rescue in the event of trouble. Mortgages, health, agriculture, and the military are some of the other areas receiving massive public subsidies.
And Galbraith is also adamant about the need for standards, which rises from the delusion that markets will produce a competitive market price. Quoting
[and]
...
[continuing]
p. 179-180
Paul Krugman and others are battling over crowding out and crowding in. Do government deficits steal investment capital or make it more expensive for private borrowers?
Our reading of Minsky suggests that deficits and investment are indeed substitutes for each other, but not competitors. Government deficits keep business cash flow from collapsing altogether. Minsky's equation profits equal investments plus deficits indicates that business, far from suffering from deficits, actually benefits.
Others have suggested that government deficits increase expected inflation and so will help investment, since deflation is death to current investment.
Our reading of Minsky suggests that the drop in demand is the problem. It may lead to deflation among price takers, but even if prices can be supported by market power, pricing power, as demand drops the revenue that would support new investment disappears.
One only needs to reflect on the explosion of investment in a boom. Surely one investor is bidding against another, just as these folks see all investors bidding against the government, yet investment surges in booms.
Another debate continues around the multiplier.
To say the multiplier is a constant number that can be isolated empirically is to ignore the fact that it depends on the savings rate. The higher the savings rate, the lower the multiplier.
To say the propensity to spend a tax rebate is the same as the propensity to spend the income from a new job is also nonsense. Thus the stimulus from the tax cuts of 2008 will be much lower than the stimulus from the job-creating infrastructure spending. The multiplier from the former may well be less than one. The multiplier from the latter is already one when it employs the first person.
And the multiplier works in reverse, as well. So the multiplier effect of the collapse of business investment may well wash away much of that of the stimulus bill.
This is not that difficult for those not entangled in protecting their reputations.
Compare recessions by percentage of job loss
Elsewhere, a comparison of recessions inspired by a chart at Calculated Risk demonstrates that the so-called mild recessions of 2001 and 1990, were not so mild in terms of job losses. True they were not as deep as others, but they were longer and in terms of jobs lost were more severe than the short, sharp recession and recoveries of 1953, 1960, 1969, and 1974. That is percentage terms, so it is not skewed by the size of the workforce. Plus, job growth emerged from the past two recessions at a much flatter angle than earlier, pre-Greenspan recessions. Put bluntly, in terms of jobs, the recessions have not been getting more mild, just longer. No longer V-shaped, these are basin-shaped.
All other recessions pale in comparison to the current one in terms of employment. Each of the others, aside from the 2001 Bush recession and the 1981 Reagan recession reached a trough in job losses by the 13th month. The current recession is still going down sharply in the twenty first month. This is, indeed, the Big One.
And although the employment crisis is continuing to deepen, the original published numbers understate it. As CR says,
Note: The the preliminary benchmark payroll revision is minus 824,000 jobs. (This is the preliminary estimate of the annual revision - this is very large).
Get that link to Calculated Risk in the transcript of today's podcast on the blog at Demandsideblog.blogspot.com.
Link to Calculated Risk
Economists still hiding out in crumbling efficient market theory
One of the principal illusions, or delusions, of the primitive orthodoxy is that markets are efficient. The efficient market hypotheses is, in fact, the core of the Chicago School's error and of -- due to the consequent damage done by those who follow it -- that school's moral liability.
Markets would be efficient, or at least more efficient, if all goods were private goods, or if all costs were included in the price, or (as Joseph Stiglitz has pointed out) if information were symetrical between buyers and sellers, or if market imperfections such as monopoly and monopsony did not exist. Unfortunately, that hypothetical world exists somewhere other than the industrial states in which efficient market zealots preach.
To be fair, the Chicago School concentrated on the efficiency of financial markets, a preposterous proposition to which they still cling despite all evidence to the contrary. Nevertheless the idea of efficient markets has been carried everywhere and so, too, it seems, the perception that somehow markets are working today to maximize benefit.
No better demonstration of the absence of critical thinking in economics exists than the continued deference to the Chicago School and its efficient markets. How absurd, for example, that the outcome now extant in the financial sector might be considered an optimal outcome, or that the proliferation of McMansions and underwater mortgages might be considered the maximum benefit for the whole, or that the degradation and imminent collapse of the environment might be somehow to the advantage of a substantial percentage of the population, or that the shift of wealth to developed countries and native elites in the wake of the opening of Third World markets might be somehow efficient. These are plainly the result of markets let loose to be controlled by the powerful, rather than structured and confined to be efficient.
That may be a lengthy introduction to today's audio clip, but it is just the tip of the iceberg in terms of the vacuous understanding of markets displayed by the primitive orthodoxy and its cathedral the University of Chicago.
Ray Anderson is founder and chairman at InterfaceInc. Anderson sees tax policy as a way of rectifying some of the fatal shortcomings of markets.
ANDERSON
That was Ray Anderson on internalizing externalities. Anderson was interviewed here on Bloomberg. He has led his company InterfaceInc into a dominant place in the supply of carpeting to business and industry. He did this with vision and an appreciation for all the costs of production, not just those traditionally internalized.
There is much more to be said about the role and power of market participants and the structure and scope of markets themselves, and we will say it here sooner or later. In their place and structured rationally, markets are great. When entrenched powers dominate others via market distortions and then resist correction in the name of market efficiency, it is the lingering stench of the Chicago School.
Let us take the most extreme example of the nonworking of markets. Suppose there is a market in household goods and there is no police authority. The market in goods is bustling with the contraband of thieves and robbers. It is an efficient activity to go house to house and extract people's wealth to take to the market. The first activity is an externality to the market. Is such antisocial robbery on a large scale possible without the market, the place to sell? No. It is called an externality only because it exists apart from the point of purchase-sale.
This is not too far a step from the degradation and exploitation of the environment. Large corporations with the correct industrial capacity and small dumpers of toxic material both enjoy a capacity to steal from and harm future generations that is inextricable from the market for the goods in question, yet these are considered outside markets. Externalities.
Is the market efficient? Well, it finds the right price considering the subsidies of future generations -- and current -- and the structure and rules of traffic in the particular goods.
James K. Galbraith
In our series looking for the perspective of those who got it right, we turn to James K. Galbraith, son of the great economist John Kenneth Galbraith and apparently invisible to those who say nobody saw it coming.
We've promoted Galbraith's book the Predator State ad nauseum here on the podcast. Let's review a few of the anti-orthodox principles that organize that book.
One, and quoting:
Because markets cannot and do not think ahead, the United States needs a capacity to plan. To build such a capacity, we must, first of all, overcome our taboo against planning. Planning is inherently imperfect, but in the absence of planning, disaster is certain.
Two, and continuing to quote:
The setting of wages and control of the distribution of pay and incomes is a social, and not a market, decision. It is not the case that technology dictates what people are worth and should be paid. Rather, society decides what the distribution of pay should be, and the technology adjusts to that configuration. Standards -- for pay but also for product and occupational safety and for the environment -- are a device whereby society fashions technology to its needs. And more egalitarian standards -- those that lead to a more just society -- also promote the most rapid and effective forms of technological change, so that there is no trade-off, in a properly designed economic policy, between efficiency and fairness.
And three, with a final quote:
At this juncture in history, the United States needs to come to grips with its position in the global economy and prepare for the day when the unlimited privilege of issuing never-to-be-paid chits to the rest of the world may come to an end. We should not hasten that day. In fact, if possible, we should delay it. We should take reasonable steps to try to keep the current system intact. But given the rot in the system, we should also be prepared for a crisis that could come up very fast. The fate of the country, and indeed the security and prosperity of the entire world, could depend on whether we are able to deal with such a crisis once it starts.
Galbraith traces the fall of conservativism from the Reagan Revolution into the more or less overt plundering of the society by the politically well-positioned oligarchs of Big Oil, Big Pharma, Insurance, Finance, Agriculture and Media.
Galbraith in 1981 as a young director of the Congressional Goint Economic Committee organized what he called "a largely futile frontline resistance to Reaganomics." The vapid combination of Supply Side pap and Milton Friedman Monetarism resulted in immediate large deficits and the beginning of hte deindustrialization of America. (Whatever might be contested about the causes of the events, the timing is not debatable.) Earlier Galbraith drafted the Humphrey-Hawkins bill, which generated the dual mandate for the Fed, and other mechanisms that focused on full employment.
The bill was created by Representative Augustus Hawkins and Senator Hubert Humphrey and signed into law in 1978. Its full title is the Full Employment and Balanced Growth Act. As written it was a worthy successor to the most important piece of economics legislation, the Full Employment Act of 1946. As implemented, it has been a way to get the Fed Chairman before Congress a couple of times a year, but otherwise has been limited to creative footnotes. Lip service is a strong description.
In particular, the Act requires the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals and requires the Chairman of the Federal Reserve to connect the monetary policy with the Presidential economic policy.
The Act sets specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. The Act allows Congress to revise these goals as time progresses. If private enterprise is lacking in power to achieve these goals, the Act expressly allows the government to create a "reservoir of public employment." These jobs are required to be in the lower ranges of skill and pay so as to not draw the workforce away from the private sector.
Coordination between fiscal policy and economic policy has not occurred, of course, and it was actually one of the accomplishments of the Reagan Revolution to drive them as far apart as they have become. Unemployment rates of 3 and 4 percent are now considered the stuff of fantasy. A public employment program?
The Reagan Revolution, whatever its tenets, resulted not in principled conservativism, but in a corporate takeover of the state, as Galbraith has described in his book. By the way, this digression on Galbraith's early work is not from the book, but our contribution with an assist from Wikipedia.
The American economic model in Galbraith's view, is not the free rein to the markets and public be damned approach of Reagan and Bush, but is the structure created by the New Deal. The institutions, Galbraith writes, "are neither purely private nor wholly public. They are not like the socialist welfare institutions of Europe, but neither are they private enterprise."
Some are supported by state spending -- entitlements, but also bank credit, credit guaranetees, and implicit guarantees, and -- Galbraith is writing prior to the massive bailouts when he says -- quote --- the expectation of rescue in the event of trouble. Mortgages, health, agriculture, and the military are some of the other areas receiving massive public subsidies.
And Galbraith is also adamant about the need for standards, which rises from the delusion that markets will produce a competitive market price. Quoting
"As economic theorists know, the real world is necessarily devoid of any such thing [as a competitive market price]. If there is one administered, or controlled, or monopolistic price in the system -- an oil price or an interest rate -- then even if all the other markets are perfectly competitive, all of them will be "distorted" by the presence of that one monopolistic price ...
[and]
The fact is that monopoly and market power are not only pervasive, they are at the center of economic life. The very purpose of a new technology is, of course, to create a monopoly where none previously existed.
...
[continuing]
That being so, prices and wages would serve a quite different function in the real world than the market model assigns to them. Instead of being set so as to maximize efficiency in production, they are set essentially by social relations between groups of workers and by the pattern of prices that are explicitly controlled. They express, in other words, the preixisting matrix ...
... Seen in this light, deregulation of wages and prices ... is nothing more than a rearrangement of social power relations. And the consequences have little or nothing to do with the efficiency whereby a good or service is produced...
... Seen in this light, deregulation of wages and prices ... is nothing more than a rearrangement of social power relations. And the consequences have little or nothing to do with the efficiency whereby a good or service is produced...
p. 179-180
Wednesday, March 4, 2009
After some context from Robert Reich and Adam Posen, we get directly into what will happen next. What will happen to the economy, not so much the stock market. The markets continue their decline -- toward six thousand on the Dow and six hundred on the S&P.
Robert Reich encapsulated the bad news last week
On February 24, the Conference Board reported that its consumer confidence index plummuted further in February. The Index now stands at 25.0 (1985=100), down from 37.4 in January. The Present Situation Index declined to 21.2 from 29.7 last month. The Expectations Index decreased to 27.5 from 42.5 in January.
Consumers' appraisal of overall current conditions, which was already bleak, worsened further. Consumers' short-term outlook turned significantly more negative this month. The employment outlook was also much grimmer.
Meanwhile the American Recovery and Reinvestment Act began moving federal money into infrastructure, help for states, education, unemployment extensions and other avenues.
Robert Reich encapsulated the bad news last week
All told, according to the new Commerce Department data, the nation's economy shrank at an annual rate of 6.2 percent. Last month, the government's preliminary estimate was only 3.8 percent. Roughly half the revision was due to a sharper drop in business spending than had been anticipated. As a result, business inventories -- the amount of stuff they they have on hand to sell -- have dropped. That's good news because eventually businesses will have to replace their inventories, in anticipation of at least some consumer buying, and such replacement spending will spur the economy. But here's the bad news: Inventories still aren't dropping as fast as sales are dropping, suggesting even less business spending and investing coming up.And from Adam Posen, whom Paul Krugman describes as the go-to guy for understanding Japan's lost decade, some perspective on the monetary side. From testimony for a Joint Economic Committee hearing on the 26th.
Keep your eyes on the gap between what the economy could produce at full employment and the paltry level of aggregate demand (consumers plus businesses plus exports). That's why the stimulus is too small -- and why Reich is betting the President will be back for more stimulus.
There's no reason to suppose the 1st quarter of 2009 will be any better, and lots of reason to think it will be worse. Government is spender of last resort. We're at the last resort now. $787 billion over two years, and only two-thirds of it real spending, is way below what will be needed to get the economy moving back toward full capacity. Do Republicans know this? Is this why they're continuing to bet that the economy won't be recovering by November, 2010, and why they're going to continue to say no?
The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses.
The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.
These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …
Consumers' appraisal of overall current conditions, which was already bleak, worsened further. Consumers' short-term outlook turned significantly more negative this month. The employment outlook was also much grimmer.
Meanwhile the American Recovery and Reinvestment Act began moving federal money into infrastructure, help for states, education, unemployment extensions and other avenues.
Tuesday, April 18, 2006
My neighbor Dan won't be watching the Enron corruption trial this week when Jeffrey Skilling and Kenny Boy Lay go under cross-examination. But Dan is as much a victim as anybody of the orgy of fraud that permeated and exuded from the energy trader as any of its workers or stockholders.
Dan was the last employee at Pioneer Industries here on the Tacoma Tideflats. Pioneer produced chemicals – sodium hydroxide, chlor alkili (used in pulp production) and others. Pioneer came to the Tideflats when industrial rates were a fraction of a penny per kilowatt-hour. It closed in 2002, a move directly related to the Enron-rigged energy price spikes.
That energy price manipulation was a key to the economic malaise up and down the West Coast. (Had Gray Davis appropriately highlighted this fact, the nation would never have had to endure the humiliation of a Governor Arnold Schwarzenegger.) The Federal Energy Regulatory Commission (FERC) did nothing but aid in the coverup. In fact, it was the Snohomish County PUD whose lawyers uncovered and publicized the some of the most grotesque fraud.
"Kenny Boy" used to roam the governor's mansion in Texas as the deep pockets for W's campaign operation. He was the single largest donor. Later he collaborated with Dick Cheney to construct the energy policy Enron exploited.
The costs are still being paid. Portland General Electric, for example, was bought by Enron in 1997 for $2 billion in stock and $1.1 billion in assumed debt. (How much this was eventually worth is an unanswered question.) It was from the offices of PGE that the inventor of "Death Star," John Forney, operated. The sleazy dealings have continued there.
It is amazing that it became cheaper to import the wood products chemicals for Weyerhaueser rather than have them produced just down the street. The city council and everybody else did what they could do, but heavy users of energy – Kaiser Aluminum went down, too – had to be thrown overboard in those high seas. Of 175 employees in 2002, Dan became the last one. He just ran through his accumulated vacation, and I guess his pension is sound, but .... He loves to work, and he's looking at taking whatever work he can find that doesn't focus on driving. But it should have been Pioneer on the Tideflats.
So let's remember, when the focus is narrowed by the camera lens to a courthouse in Houston, that the fraud of Enron – Skilling, Lay, Fastow and the rest – was far, far, far broader. It not only ruined the employees of that company and gouged its stockholders, it put people out of work as far away as Tacoma. It disrupted and retarded the economies of more than a few states and burdened the lives of millions of people.
Were I their jailer (and were they in jail), I would be tempted to leave the keys to their cell inadvertently on the table, so perhaps a crew of those most directly lied to and cheated and ruined could "discover" them and dispense a little more direct justice.
Dan was the last employee at Pioneer Industries here on the Tacoma Tideflats. Pioneer produced chemicals – sodium hydroxide, chlor alkili (used in pulp production) and others. Pioneer came to the Tideflats when industrial rates were a fraction of a penny per kilowatt-hour. It closed in 2002, a move directly related to the Enron-rigged energy price spikes.
That energy price manipulation was a key to the economic malaise up and down the West Coast. (Had Gray Davis appropriately highlighted this fact, the nation would never have had to endure the humiliation of a Governor Arnold Schwarzenegger.) The Federal Energy Regulatory Commission (FERC) did nothing but aid in the coverup. In fact, it was the Snohomish County PUD whose lawyers uncovered and publicized the some of the most grotesque fraud.
"Kenny Boy" used to roam the governor's mansion in Texas as the deep pockets for W's campaign operation. He was the single largest donor. Later he collaborated with Dick Cheney to construct the energy policy Enron exploited.
The costs are still being paid. Portland General Electric, for example, was bought by Enron in 1997 for $2 billion in stock and $1.1 billion in assumed debt. (How much this was eventually worth is an unanswered question.) It was from the offices of PGE that the inventor of "Death Star," John Forney, operated. The sleazy dealings have continued there.
It is amazing that it became cheaper to import the wood products chemicals for Weyerhaueser rather than have them produced just down the street. The city council and everybody else did what they could do, but heavy users of energy – Kaiser Aluminum went down, too – had to be thrown overboard in those high seas. Of 175 employees in 2002, Dan became the last one. He just ran through his accumulated vacation, and I guess his pension is sound, but .... He loves to work, and he's looking at taking whatever work he can find that doesn't focus on driving. But it should have been Pioneer on the Tideflats.
So let's remember, when the focus is narrowed by the camera lens to a courthouse in Houston, that the fraud of Enron – Skilling, Lay, Fastow and the rest – was far, far, far broader. It not only ruined the employees of that company and gouged its stockholders, it put people out of work as far away as Tacoma. It disrupted and retarded the economies of more than a few states and burdened the lives of millions of people.
Were I their jailer (and were they in jail), I would be tempted to leave the keys to their cell inadvertently on the table, so perhaps a crew of those most directly lied to and cheated and ruined could "discover" them and dispense a little more direct justice.
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