The Real Meaning of Waxman-Markey

Money! - Tracy OIt’s about the rents, stupid.

Anytime an economic thinker is confused, befuddled, or in love with his own genius, it is profitable to go back to Adam Smith; and realize that most of what has been done is footnotes to The Wealth of Nations. In the case of political economy, the desire to be free of competition and collect revenue forever based on work that was done in the past is the single dominating factor that leads to the dissolution of free markets. Rent is an interest which, almost by definition, knows how good it has it.

In the case of the US, the powerful rents are banking, education, health insurance, defense, suburban real estate, and energy. How are banks doing? Let’s read what one finance guy who was on board with the bubble bursting early:

These companies don’t want to allocate funds to the shadow-banking market and don’t want to hire people to trade. You have the likelihood that loan-loss provisions will increase. The state of the bank balance sheet will now support substantially higher earnings than was ever the case before. The competitive environment changed to focus more heavily on banks as the drivers of financial system than the shadow banking unit. I’m arguing that stocks are very cheap and will triple in value in the next few years.

Dick Bove, in a interview.

How about health care? Here’s the money shot from the Economist’s cover article:

Jonathan Skinner, an economist at Dartmouth College, cautions that factors other than health-care systems—attitudes to teenage pregnancy, say, or smoking—may influence the numbers. Even so, he thinks the system is wasteful. In a paper in the Journal of Economic Perspectives last year he and Alan Garber, of Stanford University, argued that America’s health system was “uniquely inefficient”, producing too little per unit of input and consuming far too much of the country’s resources. (more…)

The Federal Reserve was Asleep at the Wheel on Systematic Risk

Harper’s Magazine fires off a broadside that has mainly, but not exclusively, been confined to the right wing: Barack Hoover Obama. The backside of the downturn, the part where states have to gut spending and raise taxes, and jobs are still very distant for most people, is generating a finally visible disquiet – while Obama is still personally popular, the public is not quite as confident of his economic policies. This disquiet could well be merely a wave in the normal back and forth of opinion, President Bush’s almost gravitational slide in the polls is not the norm for America politics, where most two term Presidents have an approval that resembles a suspension bridge, rather than a chopped down tree. But if there is unease over Obama, the Federal Reserve Chair Ben Bernanke has long since lost public faith:

Federal Reserve Chairman Ben Bernanke, on the other hand, holds a more tenuous position in public opinion than his immediate predecessor. Asked whether Obama should reappointment Bernanke as chairman when his term ends next year, 33 percent replied yes, 39 percent said no, and 28 percent weren’t sure.

This is down because Democrats, who approved of his performance earlier this year, have begun to desert him

Fed doubting, a staple of the libertarian right, and the fuel for Ron Paul’s appeals, is now spreading out into a broader mainstream, embodied by H.R. 1207, a bill he authored, to audit the Federal Reserve. What makes it interesting is that it has won broad support, and its most visible champion is a firebrand liberal, Representative Alan Grayson. The right and left wings of American politics have united in a suspicion of the Federal Reserve as the protector of a failed banking system. To understand how hated banks are in America right now, realize that worst customer service polls are regularly packed with two kinds of companies: banks and telecoms. And Abercrombie and Fitch, a retailer that seems to think it is in the phone business.

In this environment, Obama’s defense of the Federal Reserve, as the arbiter of "systematic risk" to the banking system, constitutes a certain use of political capital. But is his defense really true? (more…)

Twitter Wins the Week, But Not the War

twitterMy two Sunday colleagues raise the specter of slavery and The Great Depression respectively. My goal is far more modest, it is to point out why Twitter won the week, but is losing the war in Iran. The reality is that Twitter is a top down medium; and it magnifies, rather than challenges, the top down society. Twitter is seeing its rise as a tool precisely because of the nadir of the individual. The goal of the top down organization is to speak transparently to a base without intermediaries, or rather through intermediaries that do nothing but transmit message perfectly. They want a perfect rebound back. In reality, the middle layers never disappear. For all of the buzz about Twitter, the most memorable thing about the week is the hyperbole. Twitter will prevent Rwandas? It can’t even stop Basij in Iran.

What Twitter does is provide the ability to measure the temperature of the user base; and that temperature is, largely, obsessed with products of the top, such as the iPhone and AT&T’s crippling of it; or sports and entertainment – or it is obsessed with creating more traffic and links equivalent; or it is obsessed with money spam. Twitter has difficulty creating a topic other than those created for it. The "Twitter Revolution" is, in fact, a demonstration of the total carnage of the social sector and its replacement by a buzz around the products of the top in sports, entertainment, technology – or violence. 

Is this a criticism of the tool or those who have used it to spread the word with ribbons and cries in cyber-space? Not in the least. But it is a criticism of the overblown nature of the praise. Twitter is a pager for the Web 2.0, and useful in the same way that pagers are. By the same measure, pagers are only as useful as the people on the ends. They do not add to the conversation. The real revolutionary tools of this moment are much less heralded: smartphones and proxies. It was the smartphones that had the cameras that made instant documentation possible – Tweets don’t even have pictures – and the opening of proxies and the "small pieces loosely joined" ethos that David Weinberger, author of the "cluetrain manifesto" put forward. To the extent that Twitter helped create those far loose joins, it was able to rapidly color the internet green. (more…)

World Economy Finding a Bottom Because the Keynesians are in China

Starting last June, the global economy began to fall apart; and in September it rolled off the table and entered what can only be called "freefall." That is, usually in economics, one person’s misfortune is another person’s gain. If prices drop, at least someone is convinced to spend. Instead, job losses begat job losses, and bank failures begat bank failures. Comparisons to the Great Depression abounded. It had been a long time in coming, and while slightly earlier than it might have happened, the crash of markets, finances, and real economic activity had been writ large. Some had hoped for "decoupling;" that it would be a US crisis only, and the rest of the world would chug on. These happy people pointed to how many European nations had not entered recession in 2001 when the US did. But that was a narrow and shallow contraction driven by a short term pull back in capital spending; and which was punctuated with 9/11, which for whatever the evil of it, gave governments a large blank check. The American consumer, the source of world demand, kept spending.

In this recession the effects ripped across the globe, causing massive falls in GDP for the last quarter of 2008 and the first quarter of 2009. Some countries on the edges, like Iceland and Ireland, were "super coupled;" that is, they took falls far worse than the rest of the world because they had gone all Chicago School and begged, borrowed, and stolen to get off-shored work from other nations. That work evaporated because, as servants to the moneyed class, they rose and fell further in each direction.

So what do they call "green shoots?" Why did Geithner go to China and promise US deficit reduction? Why is deficit reduction in the face of a weak US economy Obama’s new mantra? Because the world is finding a new source of demand. You can see it in the way resource prices have bounced back, such as oil. That’s why the gas pump is telling you there is a recovery even though the help wanted pages are telling you there is a recession. The Chinese aren’t just buying oil, they are trying to buy oil companies as well. And the Chinese do not want the United States bidding up resource prices that they want for their development. There has been a real shift in global power and it is not towards the United States, nor the United States government. (more…)

The Short Unhappy Life of a Keynesian Moment


You don’t matter, you are only part of the labor force. And there are more of you than is needed. Under normal circumstances, job losses of 345,000 in a single month would be a matter of consternation, particularly because job destruction is continuing at the same pace. What has changed is that for several months, hiring was virtually at a stop. However, in May some hiring began again, though far below the reduction in jobs. This is taken as a sign that there is hope for a new economic cycle. To give you an idea, 345,000 jobs is more losses than any month in the last downturn. The Bush economic cycle created only as many as 345,000 jobs in a month twice: October of 2004, and November of 2005. But the village has moved on.

The country isn’t about to, the time between a deceleration of job losses, and the return of net jobs gains, is usually around 6 months. However, in depressionary cycles, it can be a year, or more, between the first moment that businesses decide that labor isn’t all that expensive, to the time when labor seems worth having in quantity. There is a better than 50% chance that every month of 2009 will see job losses. As the chart shows, this downturn is already deeper, as a percentage of jobs lost, than all but two since World War II; and it looks set to pass 57-58 by next month. More or less, we are seeing the economy demobilize from a war time economy. However, there is no government vision to put people back to work building a civilian economy. This means we are going to fall like ’48, and rise like ’04.

The people who really matter are the people financing America’s debt addiction. Whether it is a trade deficit or a budget deficit, the outcome is the same: someone else must direct capital to the US, hoping to get more back by doing this than by investing in their own economies. One of the most important players in this game is China. China, remember, does not make that much profit on what it does for the rest of the world. There are grocery store chains that have higher net margins than China does as a manufacturer. However, almost all of this profit is concentrated into the hands of its central government. As Martin Wolf quipped: "It is the most capitalist state in the world, that owners of the capital, the government, are getting all of the profits."

It is the appetite of the bond holders for US debt issues that matter: (more…)

The Song Remains The Same: Too Much Money At The Top of The Economy

Last year I was of the school that asserted oil prices were a macro- not micro- problem. That is, it was too much money speculating in oil, and not demand. It wasn’t that demand wasn’t outstripping supply, but neither was it the case that we had reached the point were supplies were so squeezed as to justify prices. The prevailing public view was that it was supply and demand for oil; when in fact, it was demand for parked money. This year there is no such choir saying oil supply and demand as spot prices for oil hit $66 dollars a barrel. Everyone knows that money is rushing into oil, ahead of an expected economic rebound later this year. Since no one has good futures, and because last year they were running over 100 dollars a barrel, more buyers are being forced to the spot market.

This dynamic is unchanged since 2004: no one knows what will lead the recovery, but everyone knows it will involve burning more oil. So buy oil. What is important, is that this creates competition for short term and long term treasury bonds. The reason for the collapse of Treasury Rates, was there was no place else to park money. Not in CDs, not in oil, not in futures, not in corporate bonds. So money poured into treasuries, creating a very short term pot of money. The stimulus and TARP fights were really about how to spend this money. Mostly it was spent on bailing out banks; some of it went back as inflationary tax cuts, which became corporate profits, as was predicted. A small amount went to prevent states from raising taxes, and a few droplets went to some actual counter-cyclical spending. That time, as predicted, is now past. That money can now be parked in places other than government bonds, at a higher yield, but backed by the government; so, in effect, government bonds, it will go there. 

Niall Ferguson gloats:

A month ago Mr Krugman and I sat on a panel convened in New York to discuss the financial crisis. I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.

De haut en bas came the patronising response: I belonged to a “Dark Age” of economics. It was “really sad” that my knowledge of the dismal science had not even got up to 1937 (the year after Keynes’s General Theory was published), much less its zenith in 2005 (the year Mr Krugman’s macro-economics textbook appeared). Did I not grasp that the key to the crisis was “a vast excess of desired savings over willing investment”? “We have a global savings glut,” explained Mr Krugman, “which is why there is, in fact, no upward pressure on interest rates.”

He, and people like Robert J. Barro are part of what can be called "the Treasury School" looking at this crisis: (more…)

The Reaganites Self-Inflicted Recession

us-metro-rate.thumbnail.gifIt should say something that when unemployment has taken off, it has swamped Slate’s interactive unemployment map, rendering it a haze of unreadable red. However, when you look at the metro and county data, some very interesting trends become obvious. The Reaganite revolt against taxes began in California and is most closely associated with it. As the graphic from the Department of Labor shows, the epicenters of that "Reagan Democrat" revolt are now the areas that are hardest hit by the present depression: California, the Upper Midwest, and the Sunbelt South. This is not an accident.

The reality is that the Reagan Democrats revolted against the very system that had protected and fostered them, and in two directions. The metro map here shows one direction: the raw slagging of unemployment in the Upper Mid-West, Coastal areas, and the Atlantic Coast south is clear. The other direction is seen, ironically, in a long belt of low unemployment that runs along the Great Plains. How is low unemployment a problem? In itself, it is not. However, these are areas where it is virtually impossible to be unemployed; and so rather than stay and remain unemployed (there being no government programs to keep them there) young people pour out of these empty stretches, which include parts of the North-East such as rural Maine. This youth drain is a deep political and social issue in these areas.

The only places that are doing well in the Republican universe are those strongly associated with mining, plus Republican metro centers such as Phoenix and Salt Lake City, which are the recipients of the labor draining from the rest of the Republican heartland. Resource extraction is the only bright spot in the Republican world. If one wants to know what was The Matter With Kansas, the answer is that they were voting to kneecap the people they thought were their peer competitors. They were not getting ahead because they were busy getting even.

The force of this becomes even more obvious when looking at the split between male and female unemployment: the unemployment rate for men is a percentage point higher among men than among women. This is true even of white men versus white women. The Reagan Democrat, that disorganized or manual unionized, working class male of socially conservative leanings, is the individual who, statistically speaking, is the target of the downturn. The evidence for this is so obvious that even Andrew Sullivan can see it.

This cuts in two directions. Looking backward, it shows the failure of two mega-trends in the last generation of American society: both the Reaganite Revolt, and the New Democrat attempt to make Reaganism work — while looking forward, it shows why the Republican core is becoming more radicalized along economic, rather than social, lines. It is not that social conservatism is waning in their base; because, remember "Christianist Pseudo-Capitalism" is a unified ideology in that Republicans believe in rent, not capital — but instead they are being focused by message on the second part of that ideology. Teabagging in taxes has replaced the now ubiquitous sexual reference in marriage as the driving rhetorical device of the Republicans; because, it is essential that they get the economically hammered base to blame Pelosi, rather than to blame conservatism. (more…)

Glendon: Torture is Good, Choice is Evil

Already, President Obama’s address and acceptance of an honorary degree have sparked the kind of inbred outrage from the right that you might expect of the most ignorant areas of the country. But what about Harvard Law School, where Learned Hand Professor of Law, and former Bush appointee, Mary Ann Glendon, has castigated Notre Dame for awarding the degree? Strangely, she did not feel so strongly about participating in an Administration which legalized torture, and conducted a war that the Vatican opposed. She is a member of the Institute on Religion and Democracy fronted by the notorious William Donahue. She did not have a problem advising Mitt Romney; so clearly, bombing small children and torture do not bother her conscience in the least. But sharing the stage with a duly elected President who is not as radically narrow-minded as she is, is unthinkable.

It would be one thing if Prof. Glendon had taken a purist line in public life to date; but she has been a partisan and political actor for some time, and shows that rejectionism is deep in the right-wing world view. What makes it a farce is the content of the President’s remarks, which are every bit as generous as her bitter attack is small minded, every bit as open as her mind is closed, every bit in search of unity as her public existence has been one of division and discord. This is Harvard, not Bob Jones University.

It might seem that it is difficult to sink lower than partisan double-think; however, the right-wing manages it with a campaign to replace Jenkins which accepts fake donations. Tom Matzzie stumbled on this, and delivered a hard smack down. The right complains about how it is discriminated against, and yet shows that it’s own objective is to create walled dungeons in academia, where their opponents are unwelcome to even stand and speak.

It was Kennedy who had to explicitly answer why he would be an American first, and not take dictates from any foreign power. It is Prof. Glendon who shows that the right-wing takes such dictates in an attempt to censor and silence, and places America a distant second, if at all, in their calculus.

The Depression that Hayek Built

april-payroll.thumbnail.jpgTo read the British press is to realize how fundamental the failure the theory of libertarian economic thinking has been. In this theory, the wealthy possess a special insight into the allocation of capital, and governments should abandon their role in allocating effort to a small extremely wealthy elite. It was a theory adopted by Iceland, which was lauded for its open laws and "flat tax." It was adopted by Lithuania, and to a lesser extent, by Spain. One country that embraced this idea more than any other, was Ireland, which took neo-liberal policies as virtually a doctrine. It attracted 40% of all American direct foreign investment in Europe, which liked it’s educated English speaking population, proximity to the UK, and low prices. For its part, the government of Ireland threw the doors open. As the Guardian reports by piecing together individual stories the plunge has been swift and dramatic. A new Irish diaspora has begun, as the weight of debt and the utter absence of an internally driven capital system, leaves behind the husk of an economy.

What created this collapse was the pure corruption at the top.  A corruption seen in the expenses scandal now unfolding in Great Britain is destined to topple the ruling New Labor party — as was seen in the borrowing binge of the very wealthy in Ireland. These two pieces are not unconnected: the culture of flowing money lubricated politicians, who naturally saw that its continuation was essential for their own secure life style. This is not an issue of left or right in the context of the age. There was no left, merely a right that wanted slightly more of the money to flow to socially useful causes.

The aftermath? Spanish unemployment hits 17.4%, that is not a mistake. It is a number that is associated with the Great Depression, or the devastation of the post-war era. An economic bomb has hit what was a go go periphery. Ireland’s economy is projected to contract by a total of 9% this year, with the decline extending into next year. (more…)

The Collapse of the Conservative Order and the Search for a Digital “Westphalia”

At the dawn of the 1600’s, disruptive forces that had torn across Europe in the previous century were to produce a series of military collisions and catastrophes which are known to history as the Thirty Years War. The scale of the destruction was enormous, with some areas losing as much as three quarters of their population to death and dislocation. Over all, the region known as "Germany," not yet a country, lost between 15% and 30% of it’s population.

The disruptive forces included the printing press, which created the ability to disseminate not just information, but control and consent. While the glamorous part of printing includes the book, as much of the ink was spilt on rather more specific instruments, such as dissemination of laws and cases.

One of the consequences of the changes produced a paradox: it became dramatically cheaper to raise and equip an army, but no cheaper to feed it in the field. Thus armies, which had been around 25,000 men through most of the 16th century in Europe ballooned in size, but had to strip the country side bare to stay in the field. The pillaging brought direct and indirect destruction: people weakened by loss of food became easy prey for outbreaks of the epidemic diseases of that time.

With the "Peace of Westphalia," a dismal and chaotic era of European history came to an end. It was not warfare that would end, but the scattered and uncontrolled nature of it. From thence forward, the state would have to be able carry what it could lift.

In our own moment, similar disruption is occurring. Digital communications is most lauded for abstract information storage and retrieval, such as Google or Wolfram Alpha, but more of their impact has been the ability to run world wide grids of finance and production. As with the powers of the Thirty Years War, the world now can create more organization, and more demand, than it can control or carry. (more…)