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The economists to whom we should listen

Posted on March 24th, 2009 in Economy,General,Politics by Robert Miller

Spurred by the economic collapse that surrounds us, and realizing that few if any predicted this current catastrophe, one might wonder whether the entire financial system has morphed into a giant collusional shell that engulfs the government and all financial advisers and economists that are visible to us. At one time we believed that our financial system was supposed to be serving us, developed for the best interests of our society and designed to support our social contract, with upward mobility as its principal attribute. But for the past several decades, it seems like it’s the other way around–the master/slave relationship got switched–we are now the slaves of an economy that increasingly does not support us, one that exports jobs and cares little about our financial future and more about securing American  military hegemony. We invent things here and then give them away to foreign competitors who do not honor our patent laws; we do not insist on such recognition because we need their support to maintain our postwar hegemony. The blow by blow accounts of these follies are heartbreaking to those who aspire towards an upward trajectory or assumed a social contract still existed.

There hasn’t been much good news for the middle class for the past 30 to 40 years, even going so far as to include high-definition TV.  But, the crash we are in has hit some of the ultra-rich, like Warren Buffet, who lost substantial value to his investment fund and personal wealth, though his current problem stops short of qualifying for the hurt phase. But, looking at the other end, a recent report indicated that a tent city was rapidly growing in Sacramento California, as massive foreclosures, coupled with the economic downturn, have cast thousands into the streets with very little hope of  returning to their previous life style–these are the newly homeless: some are in house trailers parked on the streets and some are in tents put up in parks. This current recession feels nothing like the one in 1982, which had similar kinds of dislocations, but rarely do I remember people being thrown out of their house and losing their livelihood all in a matter of weeks or months.   Our casino economy has turned into a hurricane economy, as it seems to destroy neighborhoods, though in the case of this hurricane, people are rushing into mobile homes, not running out of them.

One of the dilemmas we face in addressing this crisis is our past history of falsely elevating what economists tell us, as we swallow it whole, accepting their insights and projections as something that came out of a scientific study. Indeed many economists would like us to believe that their theories and mathematical models are predictive enough to entitle them to science status. When the Nobel Committee elevated economics to Nobel Laureate status in 1969,  it seemed to convey a conviction that the field had entered into a new exalted arena of quantitative and predictive vigor. Indeed, no less a figure than Milton Friedman, Nobel Laureate in 1976, made such claims, at least for his own monetarist economic theory, the one that reduced to a fairly simple equation.  In his Nobel acceptance speech, Friedman suggested that economics had attained the same stature as physics, with a rigorously proven mathematical basis and now had to be regarded as a science. To the extent that the public accepted this new virtuous, but tortuous exaltation of a non-science discipline, it sounded a lot more like the transition from “creationism” to “intelligent design”: it was neither creative nor intelligent, but merely an old book with a new cover.

John Maynard Keynes gave us the best part of economics–econometrics or macroeconomics–the idea that you can apply measurements to things like inflation, unemployment,GDP, cost of living, productivity and income distribution. That way you have some idea about how and where the country is moving economically. However, the interpretation of this data and how one might manipulate the economy to give a better outcome is pure politics and with politics, you get a whole stable of economists, including thousands of academic economists who tend to slowly go with the flow.

When physicists began migrating into Wall Street, stimulated in part by cancellation of the Super Collider in Texas in the early 1990s, a new force of mathematical modeling began to consume the interests of Wall Street and increasingly, quantitative models have been developed to guide investment strategies. Our treasury has suffered considerably from the errant belief that equations could be applied to stock market investments and guide us to a better economic future, a higher rate of return, a more rapidly expanding economy with the sense of predictive power equal to those studies of gravitational forces and orbital mathematics that are used predict the date that  Halley’s Comet will return. Well, not quite. All these equations of course leave out the emotional factors guiding the investor. The equation for investor panic or terror has been slow to develop and then there is the matter of trust. An investor needs to expect transparency in the stocks that are being traded and transparency has disappeared from the market portfolio. Can you trust what you are buying? The answer to that question has already been determined for securitized sub-prime mortgages and the disastrous credit swaps that came into play as a financial backup.  Is there any reason to trust Wall Street? Have they not bundled or “securitized” these “instruments” in such a way that no one, including the CEOs of the investment firms or banks that put them together, really understands their substantive composition.

I recently heard  congresswoman Marcy Kaptur from Ohio emphatically state on the House floor that homeowners who have been threatened with foreclosure should stay in their homes until the lender comes up with proof of a mortgage loan, because these loans got sliced,  bundled and moved around in so many ways that many of these supposed “owners” have no idea where the paper work is or where to find it. Her advice was firm: stay in your house until someone shows you proof that they own your mortgage. It was frenetic trading and securitizing that not only triggered this mess, but, in the aftermath, it has become difficult for many to trace and identify the actual whole mortgage paperwork that specified the mortgage loan and captured the deed.  Squatter’s rights? Why not? This has the early beginnings of a new brand of civil rights!

Today there is little that goes own in the public arena that serves to educate the American citizen about economics and the economic policies that shape our future. For the public, economics is politics and reduces to a two party solution.  Ever Since Reagan came to office, the Republicans want to “starve the beast”, by creating big deficits through tax reductions. The Republicans hope that big deficits will force reductions in spending, resulting in smaller government (except for the military) and more money in their pockets through reduced taxes. When Democrats are in office, Republicans accuse them of creating deficits by spending too much and they try to get Americans to quickly forget that the biggest deficits we have seen were in fact created by Republicans through tax cuts, not by Democrats through spending programs. The schizophrenic American electorate oscillates between an emphasis on our public debt, as happened during the Clinton years, and, alternately, an emphasis on our public needs, as we are beginning to emphasize right now.  Republicans want a Darwinian world with survival of the fittest, while Democrats prefer a Wilsonian (E.O. Wilson) Sociobiology emphasis in which survival is critically dependent on a social network of interdependency. I’m for the latter. We need public institutions that work well, including those for health care, public transportation, education and good paying jobs that reflect our energy and creativity. If we have the greatest research universities in the world, we should make sure that the creative ideas and patents that come out of this publicly funded activity go into generating a better American economy, not one we turn around and give away to China,  South Korea or Japan.

If we can be dismissive of most economists that we have heard from, such as Alan Greenspan, who was either incompetent or of sinister fabric, to whom  should we listen? Here is my vote for openers: Robert Kuttner, the economist and journalist who initiated the publication The American Prospect has written a seminal book “The Squandering of America: How the failure of our politics undermines our prosperity.” In this book Kuttner outlines all of the major pathways which produced the dissolution of the social contract that we established under FDR and carried forward in the early postwar years, right up into the 1970s. You can also maintain updated information and comments from him at The American Prospect website. Although Kuttner has written many other books, the “Squandering” book brings you up to date on the elements of our socioeconomic decline– and make no mistake about it–the period of Reaganomics forward has broken our social contract, with a cultural breakout for the rich and the emergence of our financial sector as top dog of our economy. In reading Kuttner’s book, you will become increasingly agitated about what surrounds you, but increasingly energized and educated and hopefully, you will emerge with some idea on what to do about it. If there was ever a time for activism in our social economy this is it!

Kuttner’s book will make you believe that the ideas he brings forward are your own ideas that were just a little shy of fertilization and a bright sunny day to stimulate the solitary act of sprouting–they are grounded in fairness and project a sense of good mental health about financial security and its historical  elimination through the false choices we made, as we created the Cold War and generated the progressive economic disparity we have today. It is not a simple story, but Kuttner weaves it together with clarity and a sense of objectivity. We favored military hegemony over sensible trade policy and created false political choices that favored dismantling of equity of income distribution. We facilitated the growth and dominance of Asian mercantilism and, in the process, did nothing to protect our own economic interests. Other countries have learned to play us like a fiddle. We once had leverage over China, but we gave all that away to the point that it may be the other way around–China now holds considerable leverage over us.

Much of the depressed economy we see around us today was created by a loss of Middle Class wealth that should have been protected by the vigil of our own government. Other economists, such as Paul Krugman and Dean Baker have also written seminal books and articles on our economy, with an equally powerful insight, which reduces to simplicity in guiding our future actions. Yet, none of them writes with the clarity of Kuttner. He also dissects out the false notion that European countries have created too much socialism for their own future well-being. In reality, they are currently in much better shape than we are and, at the same time, they provide much higher levels of service and financial security, health care, day care and generous vacations. On average the European economies spend about 15% of their GDP more than we do to support their social contract. If we had the economy of The Netherlands today, our problems would be greatly diminished.  Kuttner also illustrates the calamitous trade policies we have allowed ourselves to adopt, mostly, but not entirely created by our Cold War mentality. We let some of the best parts of our economy get away from us–we gave it away as a trade-off for American military hegemony that seems to have done us very little good in return. What do we get from generating the best missiles or the best cluster bombs? For one thing, we get the scorn of the international community that is trying to ban them (cluster bombs) as an anti-mother/child weapon. We have made some awfully dumb choices in the past.

If you finish the Kuttner book and need more, you might then turn to James K. Galbraith’s (yes, the son of John Kenneth Galbraith) informative book “The Predator State: how conservatives abandoned the Free Market and why liberals should too.” In this book you get to view a more academic analysis of the lost Republican virtues of the Free Market and trickle-down economy. What Galbraith tells us is that the Republican economic theories of “The Laufer Curve” and Milton Friedman’s “Monetarism” didn’t work and are not seriously considered or promoted in academic economic circles–they were tried once and got bad marks. Just ask all the South American countries that were forced to go through the economic disaster engineered by the Chicago School of Economics. Naomi Klein’s excellent book on “The Shock Doctrine” details these outcomes and adds a dash of cold water in your face, when you realize the sinister outcomes that fell on the people of those countries, particularly those involved in labor movements–in many cases they disappeared. Milton Friedman himself hailed government interventionism before he died, of the kind that he would not have supported during his Nobel Prize heyday. According to Galbraith,  the new economy is one that includes corporate predation against our own interests. This includes the privatization of government functions, each step of which robs us of our wealth by creating new costs, higher service charges and huge new corporate executive pay scales.  Enron is a classic example of a utility company that tried to become a fantasy break-through company of the future. It achieved its huge executive salary levels by fraudulently hiding its true debt structure, with the assistance  and compliance of the auditors. Ironically,  each successive stage of collapse by Enron, Tyco, WorldCom and many others, was rewarded by Wall Street, right up until their fraud schemes could no longer be concealed and then, everyone, including employees who put their entire retirement savings into company stock, lost it all. Yet many executives escaped with huge bonuses and sold their stock before the collapse for a healthy retirement package. Yes, a few are in prison, but most escaped into fresh havens of financial security and wealth. As author William K. Black says “The Best Way to Rob a Bank is to Own One.”

The economy we won’t have

Posted on March 7th, 2009 in Economy,Politics by Robert Miller

Many people throughout our economic spectrum are asking whether we will see a bottom to this financial  crisis.  When will it level out? How can something as seemingly innocuous as a relatively small number of sour sub-prime mortgages trigger off a complete collapse of a giant global economy? What was it that made our economy so fragile? What did we do wrong? How can we right this badly listing ship? At the same time, most of us in the middle class feel that we didn’t do anything wrong, that we worked hard and did what our non-verbal contract asked of us: We expected the same from those running our financial system.  It was primarily a few people at the top, many of whom are still profiting from the bailout, that form the core of the responsible parties. Shouldn’t these people go to jail, if only to serve as the historic example of what can happen if you treat the stock market like your little private toy?

In the last decade plus, we have been witness to two stock market bubbles. Both were falsely created, through hyping either the dot-com companies in the first bubble (~1995-2001), or the sub-prime mortgage bubble that lasted from 2002-2006.   Stock market bubble creation is a means by which wealth is transferred from the middle class to the wealthy and the super rich, from those in the stock market for long-term investment gains and projected economic security, to those in the market that help create and extract wealth from an unsupportable market frenzy of their design and choosing. We don’t think of these bubble creators as criminals, yet they are the masters of thievery. They  have robbed us of billions if not trillions of dollars, to say nothing of their behavior in igniting our fiscal/banking collapse.  Aren’t these people bigger criminals than those who rob grocery stores or gas stations to feed their families? Are they not the arch criminals of our generation? Or, will we eventually thank them and thank G.W. Bush as well for dramatically bringing us to the low point of our errant history over the last 40 years, such that we now have greater clarity of vision about how to best shape our future?

Obama’s plan to get us out of this deep recession is different than what FDR did in the Great Depression of the 1930s. In FDR’s case what he tried to do was ignite a stagnant economy. The factories were still intact in the depression of the 1930s and FDR’s mission was get them running again– get people back to work–open the factory doors that had been shut.  For FDR the intermediary solution was to offer government employment through jobs creation and public works projects.  Obama faces a fundamentally different task and his solution is appropriately geared for this new dimension of responsibility. We don’t need to open the old factory doors that have been shut, as the insides of these factories are bare–everything went to China.  We need to create new buildings that do different things, as we march towards full employment through a brand new economy that is something like the one we had in the post WW II era, but with better health care and less pollution.  The new dimension to our economic needs has been revealed by the fragile nature of our current economy and is reflected in the fact that its collapse was lightening swift, triggered by a relatively small and seemingly insignificant flash point. Our economy was too fragile for our present and future security and for that reason alone, we need a new one.

Obama restores Endangered Species Act

Posted on March 4th, 2009 in ecology,Politics by Robert Miller

Not long after the Endangered Species Act (ESA) was passed by Congress in 1973, the Republicans began to oppose the act and reduce its impact: ESA became  part of the Republican deregulatory mania. The ESA requires that Federal agencies must consult with the Fish and Wildlife Service or the National Oceanic and Atmospheric Administration, before proposing regulations that could affect the environment or further threaten identified species. Fish, wildlife and plants are specifically listed for protection  in the ESA. In some cases, like the Spotted Owl controversy, which played out under the Reagan administration, the ESA  led to hardened opinions over things like  logging rights and land development vs animal and environmental protection.

When Newt Gingrich took control of Congress in the 1990s, he tried to gut the ESA, but the popularity of the law insured its survival. G.W. Bush used his self-appointed executive powers to make the ESA irrelevant by eliminating the normal consultative process between Federal agencies. His elimination of the ESA was one reason why he was able to put vast land tracts in Utah up for oil and gas leases in December 2008, without any environmental or species impact studies. That process would normally have taken years to complete and seems ideally suited for environmental protection by preventing impulsive, destructive behavior: who was more impulsive than G.W. Bush?

Obama’s executive memorandum to restore the ESA has delighted environmentalists throughout the world, since the United States had once established itself as the international leader in environmental protection, going back to the 1960s and 1970s. An increased public awareness of environmental issues was first stimulated by Rachel Carson’s book “Silent Spring, which pointed out the dangers of excessive application of the insecticide DDT (You can read a more detailed, prior comment on this early history here).  The aroused public and sensitized Congress passed many environmental protection laws such as the ESA and the Clean Air Act, while Richard Nixon was president. He and Gerald Ford were the last Republicans that were willing Republican participants in  support of environmental protection laws. Ronald Reagan began the Republican opposition to these Federal regulations through his “starve the beast” policies and Bush as “the decider” effectively gutted them through an administrative regulatory fiat. Thus, Obama has applied another erasure to some of the Bush legacy on environmental policy changes. What’s next–the Clean Air Act?