Occupy Wall Street Meets Fahrenheit 451 – Whose Property Rights?

I’m not the most regular blogger.  I really do strive to post daily, it often doesn’t work out. Sometimes my schedule pinched.  Other times, health issues get in the way (ever try to write with a toothache?).  But then there are times when the news makes me so angry I can’t find civil words that might illuminate instead of inflame.  This past week my tooth hurt, but it was really the latter.

As most know by now, the New York City Police organized and conducted a raid to evict the Occupy Wall Street protesters last week.  They did it under cover of night using paramilitary tactics.  There was excessive and unnecessary violence.  I won’t go into that here. You can try one of the literally thousands of YouTube videos about the police brutality.  It was an apparent coordinated national effort since 18 other cities conducted similar raids with similar tactics on the same day.

Yale University lecturer John Stoehr has written how the order for the police to clear the Occupy Wall Street crowd from Zucotti Park came from Brookfield Properties, a private company, despite a court order allowing the protesters. For Mayor Bloomberg private property rights trump any kind of public rights, even when the public’s right is backed by a court.  Stoehr also observes how Brookfield Properties is also subsidized by the public coffers to the tune of $174.5 million.  Apparently those private property rights include the right to the public’s money.  It’s no wonder that JP Morgan Chase has felt the need to bribe donate to the Police Department.

The mayor and his police force’s concern with property rights doesn’t extend to everybody.  Only the rich, the 1%, are entitled to property rights protection.  Ordinary citizens are not.  Consider the police department’s treatment of the property of a private library.  Many have told the story of the police’s destruction of the Occupy Wall Street movement’s public library, but I’ll let the American Library Association tell it here:

The People’s Library, a library constructed by the New York Occupy Wall Street movement, was seized in the early morning hours of Nov. 15, by the New York Police Department during a planned raid to evict Occupy Wall Street protesters from Zuccotti Park. The library held a collection of more than 5,000 items and provided free access to books, magazines, newspapers and other materials.  According to ALA members who visited the site, the library reflected many of ALA’s core intellectual freedom values and best practices—a balanced, cataloged collection, representing diverse points of view, that included children’s books and reference service often provided by professional librarians.

City officials assured library staff that library materials would be safely transported to a sanitation depot, but the majority of the collection is still missing and returned items were damaged, including laptops and other equipment.  The likelihood of recovering all library materials is bleak, as witnesses reported that library materials were thrown into dumpsters by police and city sanitation workers.

Longstanding ALA policy states:

“The American Library Association deplores the destruction of libraries, library collections and property, and the disruption of the educational purpose by that act, whether it be done by individuals or groups of individuals and whether it be in the name of honest dissent, the desire to control or limit thought or ideas, or for any other purpose.”

American Library Association (ALA) President Molly Raphael released the following statement regarding the destruction of the People’s Library:

“The dissolution of a library is unacceptable. Libraries serve as the cornerstone of our democracy and must be safeguarded. An informed public constitutes the very foundation of a democracy, and libraries ensure that everyone has free access to information.

“The very existence of the People’s Library demonstrates that libraries are an organic part of all communities. Libraries serve the needs of community members and preserve the record of community history.  In the case of the People’s Library, this included irreplaceable records and material related to the occupation movement and the temporary community that it represented.

“We support the librarians and volunteers of the Library Working Group as they re-establish the People’s Library.”

The American Library Association is the oldest and largest library association in the world, with more than 60,000 members. Its mission is to promote the highest quality library and information services and public access to information.

The police and Mayor Bloomberg had no right to destroy these books, magazines, and computers. They had no court orders to do it.  They simply did it because they could. Because they can’t tolerate people learning and thinking for themselves.  In doing so, Mayor Bloomberg and the entire police force have revealed that none of this is about property rights as conservatives and libertarians like to claim. It’s not about the “rule of law” – they ignored the courts. It’s not about protecting some “liberty” or “Western cultural tradition”.  It makes no difference whether the police seize steal private books and destroy them in hiding, or they burn them in public. There’s a long history of  governments and police forces that destroy books. None of it is democratic or supportive of freedom.  It’s about enforcing special privilege for an elite and for destroying democracy.  It is in service to oligarchy, not democracy or liberty.

Awesome Resource – The World Top Incomes Database

Any student, researcher, or #OWS protestor interested in income distribution and income growth should definitely be aware of this resource:  The World’s Top Incomes Database.  (hat tip to Krugman, from whom I learned about it).  It’s a very powerful database combined with a very easy to use interface that allows you to extract exactly the data you want as a spreadsheet (see the Database tab) or to customize your own graphs.

You can pick from a growing list countries -over 25 already and more under development.  It’s particularly interesting because it’s not just the usual developed nation suspects.  There’s also data on developing countries and some less-developed nations.  Then you can pick your time series and variables.  It’s a tremendous variety:  share of national income by the top  x% (without or with capital gains).  In some case, data series are available on actual average real incomes by percentile groups.  What’s also nice is that they don’t just leave it at a split between the top 1% and the bottom 90%.  You can specify the top 1%, 5%, 10%, 0.1% or even the 0.01%.  Amazing.  You pick the time frame from early in the 20th century up to 2008.  Then you regenerate your graph or data table.  The best part is that by right clicking on the graph, you can download and save the graph.  Students: are you listening?  Understand the implications for research papers?  

Income Inequality Does Matter And It Makes Us Worse Off

There is viewpoint that asserts that income inequality and wealth inequality are necessary, that they are the differences that motivate people to work and get ahead.  This viewpoint often implies that without wide income disparities that our economy’s growth would slow.  Supporters of such a viewpoint seem to suggest that the only choices we have are either:  a society of dramatic differences in income distribution or a society where everybody is equal but also poor.  This viewpoint is wrong. Absolutely wrong.  A simple review of U.S. history in the 20th century demonstrates the wrongness.  US GDP real growth in the 3 decades of 1950’s, 1960’s and 1970’s was much stronger than the 3 decades since 1980.  In the high-growth decades, income distribution was more equal and more fair.  Income distribution since 1980 has gotten worse.  But there’s more data to disprove the idea of “income inequality is good”.

Richard Wilkinson is a British researcher who has spent his life studying income inequality and the consequences for societies.  I strongly urge you to view in it’s entirety his TED talk on this subject.


Here are some excerpts from the transcript:

You all know the truth of what I’m going to say. I think the intuition that inequality is divisive and socially corrosive has been around since before the French Revolution. What’s changed is we now can look at the evidence, we can compare societies, more and less equal societies, and see what inequality does. I’m going to take you through that data and then explain why the links I’m going to be showing you exist.

…I want to start though with a paradox. This shows you life expectancy against gross national income –how rich countries are on average. And you see the countries on the right, like Norway and the USA, are twice as rich as Israel, Greece, Portugal on the left.And it makes no difference to their life expectancy at all. There’s no suggestion of a relationship there.But if we look within our societies, there are extraordinary social gradients in health running right across society. This, again, is life expectancy.

…Now I’m going to show you what that does to our societies. We collected data on problems with social gradients, the kind of problems that are more common at the bottom of the social ladder.Internationally comparable data on life expectancy,on kids’ maths and literacy scores, on infant mortality rates, homicide rates, proportion of the population in prison, teenage birthrates, levels of trust, obesity, mental illness — which in standard diagnostic classification includes drug and alcohol addiction — and social mobility. We put them all in one index. They’re all weighted equally. Where a country is is a sort of average score on these things.And there, you see it in relation to the measure of inequality I’ve just shown you, which I shall use over and over again in the data. The more unequal countries are doing worse on all these kinds of social problems. It’s an extraordinarily close correlation. But if you look at that same index of health and social problems in relation to GNP per capita, gross national income, there’s nothing there,no correlation anymore.

…What all the data I’ve shown you so far says is the same thing. The average well-being of our societiesis not dependent any longer on national income and economic growth. That’s very important in poorer countries, but not in the rich developed world. But the differences between us and where we are in relation to each other now matter very much.

…This is mental illness.

…This is violence.

…This is social mobility. .

The other really important point I want to make on this graph is that, if you look at the bottom, Sweden and Japan, they’re very different countries in all sorts of ways. The position of women, how closely they keep to the nuclear family, are on opposite ends of the poles in terms of the rich developed world. But another really important difference is how they get their greater equality. Sweden has huge differences in earnings, and it narrows the gap through taxation, general welfare state, generous benefits and so on. Japan is rather different though.It starts off with much smaller differences in earnings before tax. It has lower taxes. It has a smaller welfare state. And in our analysis of the American states, we find rather the same contrast.There are some states that do well through redistribution, some states that do well because they have smaller income differences before tax. So we conclude that it doesn’t much matter how you get your greater equality, as long as you get there somehow.

I am not talking about perfect equality, I’m talking about what exists in rich developed market democracies. Another really surprising part of this picture is that it’s not just the poor who are affected by inequality. There seems to be some truth in John Donne’s “No man is an island.”

I should say that to deal with this, we’ve got to deal with the post-tax things and the pre-tax things.We’ve got to constrain income, the bonus culture incomes at the top. I think we must make our bosses accountable to their employees in any way we can.I think the take-home message though is that we can improve the real quality of human life by reducing the differences in incomes between us.Suddenly we have a handle on the psychosocial well-being of whole societies, and that’s exciting.

 

The Economy Has Caused Riots Before – In the Great Depression

Washington’s Blog reminds us that things got ugly during the last prolonged depression in the United States.  This interesting historical footage from the Great Depression shows what happens when large numbers of people are unemployed for years at a time, get desperate, and perceive that the game is rigged to the benefit of Wall Street.

This depression isn’t as deep or severe as the Great Depression – the bank bailouts and the 2009 Obama stimulus spending/tax cut bill (ARRA) made sure of that.  But as this week’s GDP numbers show, we simply aren’t growing enough to fully recover.  For workers, the nightmare is real.  With the #OccupyWallStreet movement (#OWS) growing stronger, spreading, and continuing now for well over 6 weeks, perhaps the Wall Street banks are having nightmares of their own about such scenarios as what happened in the video.  Could that be why JP Morgan Chase bank is making such large payoffs donations to the New York City Police department?  Yves Smith at Naked Capitalism fills us in:

Is JP Morgan Getting a Good Return on $4.6 Million “Gift” to NYC Police? (Like Special Protection from OccupyWallStreet?)

No matter how you look at this development, it does not smell right. From JP Morgan’s website, hat tip Lisa Epstein:

JPMorgan Chase recently donated an unprecedented $4.6 million to the New York City Police Foundation. The gift was the largest in the history of the foundation and will enable the New York City Police Department to strengthen security in the Big Apple. The money will pay for 1,000 new patrol car laptops, as well as security monitoring software in the NYPD’s main data center.

New York City Police Commissioner Raymond Kelly sent CEO and Chairman Jamie Dimon a note expressing “profound gratitude” for the company’s donation.

“These officers put their lives on the line every day to keep us safe,” Dimon said. “We’re incredibly proud to help them build this program and let them know how much we value their hard work.”

But what, pray tell, is this about? The JPM money is going directly from the foundation to the NYPD proper, not to, say, cops injured in the course of duty or police widows and orphans…

And look at the magnitude of the JP Morgan “gift”. The Foundation has been in existence for 40 years. If you assume that the $100 million it has received over that time is likely to mean “not much over $100 million” this contribution could easily be 3-4% of the total the Foundation have ever received.

Now readers can point out that this gift is bupkis relative to the budget of the police department, which is close to $4 billion. But looking at it on a mathematical basis likely misses the incentives at work. Dimon is one of the most powerful and connected corporate leaders in Gotham City. If he thinks the police donation was worthwhile, he might encourage other bank and big company CEOs to make large donations.

And what sort of benefits might JPM get? It is unlikely that there would be anything as crass as an explicit quid pro quo. But it certainly is useful to be confident that the police are on your side, say if an executive or worse an entire desk is caught in a sex or drugs scandal. Recall that Charles Ferguson in Inside Job alleged that the use of hookers is pervasive on Wall Street (duh) and is invoiced to the banks.

Or the police might be extra protective of your interests. Today, [Oct 5] OccupyWallStreet decided to march across the Brooklyn Bridge (a proud New York tradition) to Chase Manhattan Plaza in Brooklyn. Reports in the media indicate that the police at first seemed to be encouraging the protestors not only to cross the bridge, but were walking in front of the crowd, seemingly escorting them across…

The wee problem is that the police are in the street, and part of the crowd is also on the street (others are on a pedestrian walkway that is above street level). That puts them in violation of NYC rules that against interfering with traffic. Note the protest were aware fo the rules; they were careful to stay on the sidewalk on the way to the bridge.

…some (many?) the protestors who used the walkway and got across the bridge were also corralled and not permitted to proceed to the Chase plaza. Greg Basta, deputy director of the New York Communities for Change, told me by phone, based on multiple reports from people who participated in the march, that as soon as protestors got to the Brooklyn side of the bridge, they were kettled. Greg was under the impression that there were construction barricades at the foot of the bridge which made it impossible for the marchers not to walk on the street. Because the focus has been on the what happened on the bridge, the coverage of what happened to the rest of crowd is sparse.

Some confirmation in passing comes from MsExPat at Corrente (apparently some of the very first off the bridge were permitted to proceed):

My friends and I made it to the Brooklyn side okay–we ended up with about 350 other marchers in Cadman Plaza, a lovely 19th century park. What I didn’t find out until later is that several hundred people behind me also got kettled and barred from going all the way to Brooklyn. So I was among the lucky marchers in the middle.

But notice even then that the procession to Chase Manhattan Plaza [correction, Cadman Plaza} was effectively barred. [Note JPM may have operations nearby, Bear Stearns had much of its back office there, and if the leases were cheap, JPM may have kept the space].

We simply don’t know whether the police would have behaved one iota differently in the absence of the JP Morgan donation. But it raises the troubling perspective that they might have. …

So far, the JP Morgan donation is an isolated example. But the high odds of continuing deep budget cuts at the state and local level open up the opportunity for corporate funding of preferred services, and with it, much greater private sector influence on the apparatus of government. This is a worrisome enough possibility to warrant a high degree of vigilance by all of us.

On the Occupy Wall Street (and Everywhere Else) Movement

I’ve been asked what I think of the Occupy Wall Street Movements.  I say it’s about d*** time.  The anger and discontentment that the movement has tapped into is real and has been building for a long time.  The mass numbers of people – like say the 99%  – have good reasons to be angry. The  U.S. economy is very sick and it’s not really recovering.  For at least three decades now the rules in the economy have gradually been changed.  The overwhelming net effect of all these institutional and structural changes has been to transfer income and wealth from the bottom 80% of the income scale (odds are that means you!) to the upper 1%.  What about the other 19%, the ones in the top 20% but not the top 1%?  They haven’t really lost in number terms but they’ve struggled to hold on.  Their security is greatly reduced.  And now, the politicians that have been bought by the top 1% are coming for everybody’s Social Security and Medicare.

The American poor, working, and middle classes have been like the proverbial frog put into tepid water and then heated to boiling (note, yes, I know there’s evidence that frogs don’t behave that way in real life – it’s a metaphor, folks).  Gradually the rules were changed.  The banking and finance industries were deregulated – not all at once, but in a series of steps.  Despite massive (for that time) bailouts and bank rescues in the 1980’s savings and loan crash, we continued.  Union power was reduced.  Antitrust enforcement languished under a philosophy of “markets will self-enforce”.  The tax codes were changed to favor hedge fund managers and bankers.  Median household incomes began to stagnate while incomes at the top continued to grow and even accelerate.  A loud chorus of anti-“liberal” media, politicians, and think tanks constantly pounded an anti-government theme.  Meanwhile economic growth gradually slowed.  We lowered our expectations. Instead of demanding the growth rates of the 1950’s, 1960’s, and even much of the 1970’s, we began to settle for less but pretended it was more.  We shifted more and more of the cost of a  college education away from government and to students in the form of student loans.  For a long time, the working and middle classes were distracted from what was really happening.  The leaders blamed the people themselves.  It was getting harder and harder to keep up, let alone get ahead economically. We were distracted for a while by dreams of riches in an Internet dot-com bubble (“just pick the right start up and get rich”) or later in a housing bubble (“your house will make you rich ‘cuz home prices never drop”) or by endless wars and obsessions with terrrorism.

Then the crunch came in 2008.  The economy collapsed. But it wasn’t workers that crashed the economy – it was largely the banking and finance sector.  But the fall out hit just about everybody.  For 5-6 months we were on a trajectory to repeat the Great Crash and Great Depression of the 1930’s.  The same depression that conservative ideologue economists like Robert Lucas had claimed in 2003 was permanently “solved for all practical purposes” .  President Obama promised change and entered office in the midst of the collapse.  He wasn’t really prepared for this situation. The change Obama had originally envisioned was a more conservative, polite cutting back of social programs like Social Security.  The change we needed wasn’t the change that originally motivated him to run.

In response to the crisis and collapsing economy, the government responded – both the Bush and Obama administrations.  And they both pursued rather similar policies:   bailout the banks without even requiring sacrifice by the bank managers or the bank share and bond holders, and meanwhile offering some mild (relative to the problem) stimulus with much of the stimulus being in the form of tax cuts.  It hasn’t worked.  Well, I should be more precise.  It worked for the top 1% – the really, really wealthy and for Wall Street and the banks.  For the rest of us, it’s grim.  The economy stopped it’s free fall.  That was good. But it has never substantially begun a real recovery.  Unemployment is stuck at over 9%. The reality is worse than that number, though since large numbers have dropped out of the labor force and simply abandoned the hope of finding a job for now.  It’s been over 3 years since the crunch on Wall Street and there’s no recovery. Instead, politicians, both Democrat and Republican, have been spent the past year trying to cut spending, cut social programs, and make things worse for the 99% while cutting taxes further for the 1%.  It makes for anger and confusion. We are now in a workers depression.

The Tea Party movement of the last couple years had initially tapped into some of that populist anger.  But the Tea Party wasn’t/isn’t really a broad-based populist grass-roots movement.  It’s more of an Astroturf, faux populist movement with a lot of funding from very, very rich sources like the Koch brothers.  What’s more, it has become clear in the last year in Congress that the Tea Party doesn’t really have any solutions.  Last summer it was clear that some Tea Party people in Congress would rather have the U.S. default reach any kind of do-able compromises.  The vast majority of the 99% do not think a default by the U.S. government is a good thing.  The anger and frustration remains.

To make things worse, recent years have seen an increase in the power of large corporations.  The Supreme Court has ruled that corporations are “people” and that we the people cannot put any limit on political speech or spending by corporations.  Campaigns have become extraordinarily expensive.  The result is that politicians, even more so than ever, basically listen to and do the bidding of people on Wall Street and large corporations.  The average American has been frozen out of their own political processes.

I observed last winter during the uprisings in Tunisia and Eqypt that two ingredients of revolution are an educated population that learns or knows that a better condition is possible, and a political economy where there is no prospect for improved living standards.  Hopelessness turns to frustration which turns to anger.  That produces protest and demands for change.  As John F. Kennedy famously said, “Those who make peaceful revolution impossible will make violent revolution inevitable.”  I also observed last  winter that the inequality in income is worse in the U.S. than it was in Tunisia, Eqypt, or the other Arab spring nations.  I also noted that for now demography was keeping the U.S. from breaking out in mass protest.  Basically the U.S. population is older and revolutionary protest is usually a young people’s phenomenon.  But there are limits.  The U.S. also has a very extensive history of protest-driven social and political change.  It’s really the last few decades of quiet between the civil rights & Vietnam protests of the 1960’s-70’s until recently that have been the unusual phenomenon.  The longer the U.S. persists in pursuing austerity policies that keep the economy from growing and transfer more wealth and power to the top 1%, the more the nation is playing with fire.

As it stands now, I stand with the Occupy Wall Street movement.  The lack of clear “leaders” and “demands” is a good thing.  I will contribute my help in the coming weeks by trying to further illuminate the issues involved.

What a Liquidity Trap Looks Like in Pictures

I want to follow up a little on my discussion of the liquidity trap that we are have been in. Brad Delong has an excellent post today called “Four Years After the Wakeup Call”.  In it he shows some graphs which illustrate very well our the liquidity trap.

Delong first serves us two graphs on the Federal Funds rate since early 2007:

The daily gyrations of the usually-placid Federal Funds market starting in late 2007 told us all that banks were really worried that other banks had jumped the shark and turned themselves insolvent.

FRED Graph  St Louis Fed 7

 

The Federal Funds rate is the interest rate that banks pay to each other when they borrow reserves from each other.  Despite the name, the rate isn’t set by The Fed. It’s set by market supply-and-demand.  It’s a large and brisk market.  When the Fed Funds rate is high (or at least rising), we can infer that banks need and are desperate for reserves, typically because they have profitable opportunities to make loans based on those reserves. When The Fed Funds rate is low and/or dropping, it means that a lot of banks have excess cash on their hands and don’t see any useful or profitable ways to use that money. In other words, a low Fed Funds rate means banks are willing to lend their reserves to other banks because it’s better than nothing and they don’t see any good ways to loan out the money. At the same time, a low rate also shows that few banks are interested in borrowing – again because they don’t see much useful to do with it.  While The Federal Reserve doesn’t set the funds rate, it does set the interest rate for the alternative: direct borrowing from The Fed.

What we see from the first graph is that things were cruising along in early 2007 and then mid- to late 2007 (August to be exact), the rate starts dropping.  We’re moving toward a recession.  Banks are finding it harder to make good loans so they don’t want to borrow more reserves.  Banks start hoarding their cash and assets.  So instead of balance sheets that are full of loans, bonds, and securities, the banks decide they want/need more cash.  Their reserves grow in order to provide a cushion for what was then being seen as the inevitable losses on mortgages and mortgage securities.  Things appear to stablize and then in Sept 2008 comes the Lehman moment.  Fed Funds rate goes virtually to zero.  It’s been stuck there ever since.  Banks have plenty of reserves. They have the cash to lend.  There’s no willingness to lend (banks don’t see many credit-worthy borrowers) and there’s little interest or demand to borrow.

The Federal Reserve has responded during the same period by creating new base money like crazy.  [NOTE: Contrary to the fears of the inflation-fearful crowd, it’s not really “money” until it’s in circulation with the public. It’s only bank reserves – the monetary base.  It creates the ability to create money for the public, but that would necessitate having a bank lend it first. ]  Again Delong shows up graphically just how The Fed has been willing to create new monetary base:

And while the Federal Reserve has taken the monetary base to previously-unimaginable levels–up from $900 billion to $1.7 trillion in late 2008, up to $2 trillion in let 209, and up to $2.7 trillion in early 2011–it has never adopted Milton Friedman’s recommended policy that it start buying bonds for cash and keep buying bonds for cash until nominal spending is on the path that the Federal Reserve wants it to be on:

FRED Graph  St Louis Fed 5

We only need one more graph: GDP.  More precisely a comparison of GDP to an estimate of what GDP could be if we were at full employment and operating at our long-term trend.  Again Delong:

And so right now nominal GDP is $15 trillion/year when it ought to be $16.7 trillion/year:

FRED Graph  St Louis Fed 6

I’ll save inserting the employment graph here.  I’m sure you all know what it looks like. Same story.

And that story is that we had signs of trouble 4 years ago.  Three years ago things went really into the tank.  The economy seriously declined until mid-2009. Ever since then, it’s struggled to hold on.  There really isn’t any recovery.  It’s just going sideways.  We have, in effect, taken a huge chunk of the economy, a huge number of workers, put them on the sideline and said “we’re not interested in you participatin anymore.  We don’t want or need your contribution. We’re happy being smaller”.

So we’ve had monetary stimulus efforts, we’ve had low interest rates, we’ve had the central bank create base money.  There’s plenty of cash out there.  But it’s all in the banks. It’s in deposit accounts. It’s in reserves.  It’s not working. It’s not being used to buy things. It’s not being used for consumption or investment. It’s just sitting around impotent.  That’s a liquidity trap.

Mainstream economic theory, the stuff called “New Classical” or “New Keynesian” (never confuse “New Keynesian” as being “Keynesian”), says keeping interest rates this low for this long would /should fix everything by now.  For over 30 years now, the dominant, orthodox view in the academic and professional world of economists has been that monetary policy exercised by a wise central bank can fix all.  Any weakness in the economy can be solved via lowering interest rates and having the central bank create new bank reserves.  These “modern” theories told us that the concept of a “liquidity trap” was nonsense, a relic of some past era and/or the invention of some crank called Keynes.  These theories claimed that everybody was perfectly rational, all markets (particularly financial markets) were efficient, and uncertainty/risk about the future was unimportant.  They were wrong. We are left with the ideas of the mid-20th century, the stuff that we were told to forget about.  Again Delong:

Four years ago nearly all mainstream economists would have said that, even though the situation appeared serious, by now the economy would be back to normal. …

Very few of us thought that it would be long and nasty…

And as it turned out to be long and nasty, recent economic theories of macroeconomics have fallen like tropical rain forests. The–already implausible–claims that downturns had real causes? Fallen. The claim that downturns lasted only as long as workers misperceived their real wage? Fallen. The claim that the labor market cleared in a small number of years? Fallen. Those of us who believed that the long run came soon, that the cause of downturns was transitory price-level misperceptions, or that downturns had real causes need now to be looking for new jobs, or at least new theories.

And we are left with the live macroeconomic theories being those of the 1960s, at the latest. This is embarrassing for those of us who want to belong to a profession that is a progressive science, rather than an analogue of medieval barbering.

So what would the economic theories of the 1960s and before tell us to do?

  • Milton Friedman: monetary expansion, and more monetary expansion–quantitative easing as deep and as broad as necessary to get nominal GDP back to its trend.
  • John Maynard Keynes (or at least one of the moods of Keynes): have the government borrow and buy stuff, and keep buying stuff until real economic activity is back to some normal trend value.
  • Jacob Viner: Why choose? Do both! Print lots of money and have the government use it to buy stuff and hire people.

The odd thing is that none of those three recommended policies–all of which are sponsored by economists with the purest of purebred pedigrees–have been followed.

It’s time to do two things.  At the policy level we need to go back and try the policies that we understood back in the 50’s and 60’s (economy did pretty well back then, BTW).  Some serious, bold attempts at effective government spending would be nice instead of the weak, too-small, too-timid, niggling efforts dominated by tax cuts we’ve been doing.  And even on the monetary front, it would be more useful to do as Friedman suggested: actually have The Fed keep buying bonds for cash (real circulating money instead of just bank reserves) and keep it up until people start spending it.

On the economics side, we need to get past the perfect rationality and rational expectations stuff (and it’s absurd mathematics) that has dominated the profession.  It would be a good idea to take a more serious look at the heterodox ideas and theories that actually did foresee the crash, the ones based upon realistic models of human behavior and models instead of the perfectly rational, knows-the-future home economicus of the New Classical and New Keynesian models.  We need to seriously look at ideas of Modern Monetary Theorists (MMT), Minsky, the Post-Keynesians, and the behavioral economists.

 

 

Politics and Job-Creation Policies – Disagreements and The Theories Behind Them

Blogging time has been in short supply lately.  To compound things, I’ve had a bunch of inter-woven ideas bouncing around in my head that I want to explain, but  I’ve been struggling to figure out how to do it.  I’ve been stuck in the “can’t explain this until I explain that which in turn needs this explained” circle.  Uggh.  So I’m going to just start taking a shot at it and write some posts that all relate one way or other.

What I want to talk about is why there’s so much disagreement among economists about policies, particularly when it comes to macroeconomic policies.

Few people, regardless of political ideology, dispute the idea that the U.S. economy needs to create more jobs.  It’s obvious to nearly all that persistent unemployment rates over 9% and an economy that month after month fails to create enough net new jobs to keep pace with population growth is problem in need of solution. Likewise, few dispute the idea that the solution will rely upon some sort of policy change.  Even the far-right wing, conservative economists and Austrian school economists argue for policy change. Virtually nobody argues that current policies are ideal.  The issue, then, is how to change policy.  In what direction should policy change so that the government can encourage job creation?

Like many things in political economy, there’s a range or spectrum of recommendations.  I personally don’t like the simple “right vs. left-wing” or “conservative vs. liberal progressive”* terminology. I think things are more complex and positions are richer than that.  But, for purposes of exposition here, I’ll go with it today.

If there are n politicians, there are probably at least n+1 different specific proposals of what to do to change policy to encourage job creation.  But today I’m not looking at specific proposals. Today I want to look at patterns, types, or categories of proposals.  I’m interested in the essence of the logic and economic models/ideas behind the proposals, the thinking that leads people to believe they’ll work.

Right now let’s say there are 4 different categories or generalized views, ranging from what might be called extreme right-wing or libertarian views through conservative views through mildly progressive views and finally a more radical or activist progressive view.  Let’s look at each one, the types of policies advocated and some comments on the economic thinking behind them.  I’ll offer my views afterward.

First, let’s take what we can call the far-conservative view or libertarian (economic libertarian, not necessarily social libertarian).  In the U.S. today, this is represented by the Tea Party positions.  The view here is that it’s  government interference with the free market, private property, and private wealth that causes unemployment in the first place.  Therefore, what’s needed, they argue, is for minimal government with minimalist taxes and as little regulation as possible.  They argue that only the private economy creates jobs at all and that the government cannot by it’s nature create any jobs.  Their proposals will typically take the form of calls for tax cuts, government spending cuts, and repeal of regulations. They will oppose any government programs they see as “welfare” or “redistributionist” such as Social Security or Medicare. Their rhetoric will typically include phrases about “unleashing the private sector”.  In terms of economic theory, supporters of this view find support from what we call Austrian-school economists and the more strict Neo-classical macroeconomists (think University of Chicago school).   These schools of macroeconomics in many ways aren’t about macroeconomics at all.  The theories are heavily based on microeconomics, in particular, the models of pure utility-maximizing rational people interacting in unrestricted markets.  Much of this view in macroeconomics has been called rational expectations schoolefficient markets theory and real business cycle theory.

Next is a the conservative view.  Until the last few years, the milder conservative view was what was espoused mostly by Republican candidates such as both Bushes and Reagan.  In more recent years the Republicans (in general) have moved further toward the far-conservative/libertarian view.  The conservative view is likewise grounded in traditional microeconomic-based neoclassical models.  In many ways, the conservative view is very similar in thinking to the far-conservative libertarian.  They both derive their conclusions from a reliance and embrace of pure-utility maximizing rational micro models of markets.  Both will tend to advocate tax cuts, especially for high-income earners and for corporations. The idea is that high-income earners and corporations would normally create enough new jobs but that taxes discourage them from creating jobs by making business and investment look unprofitable.  The assumption is that if you eliminate or reduce the taxes, investment will naturally look profitable and attractive.  Private sector investment spending will then drive growth in the economy.  This view has also been called supply-side economics. The conservative view typically relies upon rational expectations, efficient markets, and real business cycle theory also, but it also takes a lot from the monetarist views of Milton Friedman and his disciples.

The major point of disagreement between regular conservatives and the far-conservative/libertarian views is really in the area of monetary policy.  Far-conservatives or libertarians dislike central banks (seen as government agencies) and often call for a return to some form of commodity-based money such as gold.  The regular conservative view instead believes that an independent central bank, like the U.S. Federal Reserve Bank, if it follows anti-inflation policies, can usually manage monetary policy and interest rates to encourage growth when needed.  In effect, far-conservative/libertarians believe that no type of government or central bank actions can achieve high employment and high growth by policies.  In effect, recessions are simply events we have to live through -they can only be made worse, not better by government policy.  Regular conservative-types favor using monetary policy, in particular interest rates, to manage the economy. And, if monetary policy is ineffective, then they advocate using tax cuts to stimulate the economy.  They have a strong bias against government spending, or at least spending that is used to stimulate the economy (spending for military and wars is usually OK though).

Next we move to views that owe a greater heritage to John Maynard Keynes, though Keynes is far from the only theorist contributing to the views.  We’ll call the next group of policy recommendations Keynesian.  Not surprisingly, this view owes a lot to Keynes.  But Keynesian theory and models have evolved a lot since Keynes’ time.  Some historians of economic thought have argued that, were he alive today, Keynes might not agree with what much of what today’s “Keynesians” argue.  Nonetheless, standard Keynesian models/theories differ from classical/neo-classical/supply-side theories (the ones that conservatives like) in that it focuses on aggregates in the economy like total demand and total spending.  Keynesian models also try to explain why in aggregate, the total economy doesn’t always behave as if it were a simply made of purely rational micro-markets.  Keynesian theory allows for more situations where markets don’t behave rationally all of the time.  Even more significantly, Keynesian theory observes that if we simply assume the economy is the sum of whatever happens in a bunch of micro-markets, we can commit the fallacy of composition.  Keynesian theory points out the cases where the paradox of thrift takes over or when monetary policy is not likely to be effective.

Despite the allegations of many critics, standard Keynesian theory allows for monetary policy to be effective.  But typically standard Keynesian theory says that when the crisis is big or when interest rates are very, very low, then only fiscal policy, increased deficits, will do the job.  Those deficits could be created by either tax cuts or increases in government spending. But, they won’t be equally effective in creating jobs. Basically what’s needed is more spending (demand for goods) in the economy. People need to be motivated to spend more money.  Tax cuts provide money for households and firms to spend, but they do so weakly.  First, people might not spend all the tax cut – they might save some.  Increased savings won’t increase total demand and therefore won’t create the need for new jobs. Further, firms will only spend if they expect future increases in demand.  They won’t spend and invest just because they have more cash in their hands.  Since we have no assurance that a tax cut will result in enough new spending in the economy, Keynesians are more likely to argue for increased government spending because government spending directly creates demand for goods and services.  Contrary to critics’ claims, Keynesian policies are not based upon any ideological desire for socialism or government control.

So what do Keynesian policy proposals for creating more jobs look like?  Increased government spending is the answer.  In particular, while any spending will help, the most desirable forms of spending are public goods, things like infrastructure and schools, and also on social safety nets, things like unemployment compensation, social security, and Medicare. If a proposal calls for more infrastructure spending or extensions/increases in unemployment compensation, it is clearly inspired by theories/models with Keynesian roots.

Finally, there’s proposals that are inspired by the most progressive branches of modern macroeconomics.  Let’s call these proposals the Progressive proposals. Proposals in this area would involve would build upon the ideas of Keynesian group, but go further.  The spending would be greater and on a larger scale. Proposals in this area would call for programs where the government doesn’t just fund projects and buy goods, it actually creates programs that directly hire the unemployed.  Typically such programs are proposed to be temporary or designed in a way to only hire when the private sector won’t (see Bill Mitchell & Randy Wray’s Jobs Guarantee proposals).  These are not socialist or communist proposals.  That’s a whole different thing.  Often Progressive jobs-creation proposals include having the government initiate and fund large-scale infrastructure projects during periods of high unemployment.   This group, which has little popular voice among modern U.S. politicians, is inspired by what’s called Post-Keynesian and Modern Monetary Theories.   In many ways, the original Keynesian proposals for dealing with unemployment are closer to this group than to what we call Keynesian today.  Today’s Keynesians are actually pretty conservative when compared to historical policies.

So there we have it.  Four schools of thought and proposals for how to create jobs in the economy.

Despite the labels attached and misused by politicians, the reality is that the political discussion and policy recommendations of today, the ones with supporters in Congress or the White House, are actually quite conservative.  Franklin Roosevelt and the New Deal in the 1930’s was actually rather Progressive.  In the 1950’s, 60’s, and 70’s, the dominant thinking in Washington was Keynesian.  In fact  a”centrist” politically in that era would have still been somewhat Keynesian on our scale above.  In the 1980’s though today, the “center” of mainstream politics has increasingly moved towards conservative thinking.  Today, for example, President Obama is actually pretty conservative.  He is certainly more conservative than the Republican Richard Nixon was in the 1970’s.

Let’s look at the latest proposal from the Obama administration for stimulating the economy to create jobs. It’s actually quite conservative and it’s not very Keynesian at all.  In fact, of the proposed $447 billion effort, less than 1/4 involves more spending for infrastructure or unemployment benefits.  That’s less than 1/4 of the proposal is basic Keynesian.  Instead, it’s overwhelmingly focused on tax cuts and business tax credits/incentives.  These are the policy proposals of a conservative.  Even the original 2009 “stimulus bill” was heavily oriented towards tax cuts and tax incentives.  Despite what critics said, less than half of it was traditional Keynesian stimulus. It’s a sign of how the U.S. political dialogue has shifted towards the conservative/far-conservative end that the Obama proposals have been challenged as “Keynesian” and Obama himself accused of being “socialist”.

* The word “liberal” is particularly problematic. The positions argued by today’s “conservatives” in the U.S. are in fact the positions that were historically identified as “liberal” going back to the 1800’s.  In the 1800’s “liberal” meant anti-government and pro-free market.  Yet, thanks to the power of talk radio and Republican presidential campaigns since the 1980’s, the word liberal has come to be used an epithet to describe opponents of conservatism.  I’ll stick with progressive to label this more left-wing end of the political spectrum to avoid the emotional taint that liberal carries these days.