David McWilliams Explains Why Austerity Is Doomed In Europe

A very interesting video by an Irish economist explaining how the current reduce government spending (“austerity”) approach to the Eurozone debt and currency crisis is doomed to fail. It is doomed because cutting government spending in a recession only makes the recession worse, which in turn, reduces tax collections which then makes the government deficits worse not better.  But not only is the austerity approach all wrong to solving the debt crisis, it carries very significant risk of social upheaval.  (hat tip to Philip Pilkington and New Economic Perspectives).

Now I’ll offer one pre-emptive comment.  Critics of the arguments McWilliams makes often claim that either government spending isn’t really effective, that somehow only private investment spending will stimulate an economy.  Or, the critics claim that any resources the government puts into use through spending actually detract from the economy by denying those resources to some supposedly better, privately chosen use. Both of these criticism fail.  We are clearly discussing a situation in which there are excess, unused economic resources in the economy.  In plain language:  there’s high unemployment and people are out of work.  The criticisms are all based on an idea called “crowding out”.  For crowding out to occur, the economy must be at full employment – the opposite of being in a recession.

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.

 

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.

The Famine in Horn of Africa and Political Economy Failure

The study of economics starts with recognition of the economic problem: we (humanity) have unlimited wants but limited resources to satisfy those wants, so something has to give. Famine is perhaps the starkest reminder of the economic problem. People die simply because they cannot get enough food to eat.  Yet while there have been famines throughout history, famines today are different.  The reason is because the problem with modern day famines isn’t the stark reality of the physics of too many people, not enough food grown.  Instead there’s no natural reason for famine today with the increases in productivity of agriculture and food preservation in the 20th century.  We (the planet) now grow enough food to feed everybody.  Today when there’s famine, it’s a failure of political economy.

Today we are seeing a major famine in the Horn of Africa, in Somalia, parts of Ethiopia, and Eritrea. The famine threatens the lives of millions of people. It is a human tragedy on a massive scale.  Yet it was avoidable as Maude Barlow, National Chair of the Council of Canadians, writes (bold emphasis is mine):

Most Westerners see the crisis in the Horn of Africa as a combination of a large population, chronic poverty, corruption on the part of African government officials, failed states and no rain, and that none of this will ever change so giving money to this self perpetuating crisis is throwing it away. But I offered another narrative that I believe is closer to the truth.

I believe the water and food crises in the Horn of Africa are the direct result of old-fashioned colonial exploitation: land grabs by foreign hedge and investment funds and wealthy countries setting up large foreign-based agribusinesses that are guzzling the lion’s share of the water resources and using them to grow crops and biofuels for export and drive up speculation. Ethiopia, for instance, has already leasedseven million acres of land at $1 an acre for 100 years and has put another seven million on the market. Lake Naivasha in Kenya (where the movie Out of Africa was filmed) provides most of the cut flowers (88 million tons every year) for Europe. As a result, the local Masai population has no access to its traditional water source, and the lake, like hundreds of others in the region, is dying.

Foreign acquisitions are forcing small farmers and peasants off the land depriving them of access to food and water. The food and water of the region is being used for export for profit and not being used for local people. As a result, food prices in the region have gone up 200 per cent in less than a year and the price of water has risen 300 per cent. The foreign minister of Ethiopia defends his government’s actions with the neo-liberal explanation that these foreign “investments” will make the country wealthy enough that it can stop producing food and start buying it on the world market. But exactly the opposite is happening when you drain the land of its water, as is being done by this agribusiness industry, and the rains stop coming. The drought is directly related to both climate change and the resulting desertification of a land stripped of its water sources.

In my remarks, I pointed out that there is enough food and water for all in that region, (as there is for every region on earth) if they moved to a set of policies based on respect for the land, water and people, instead of the greed and raw power of global food interests increasingly entrenched in global and regional trade agreements.

Here is what is essential to know: deserts can arise because humans treat land and water badly. Desertification is taking place in over 100 countries in the world, as we strip the land of land-based water from aquifers and rivers, sending it to thirsty mega-cities (who dump it untreated into oceans), or using it to grow food and other goods for the world market, where it is transported out of local watersheds in the form of “virtual water exports.”

Water-retentive landscapes, conservation, watershed restoration, rainwater harvesting, small, local and sustainable farming, poverty reduction, and the human right to food and water: these are the guideposts to a sustainable, just and full recovery for the Horn of Africa.

Hurricanes, Disasters, and GDP

Ok, normally I’m writing about the disastrous effects of changes in GDP.  Today, though, I’m going to write about the effects of disasters on GDP. As I write this, it’s mid-day on Saturday, Aug 27.  Hurricane Irene has just hammered North Carolina and the Outer Banks. Irene is continuing in both it’s push up the Eastern seaboard toward New York City.  I have no idea at this moment how bad the damage will be.  What’s clear is that even if the storm weakens to a tropical storm strength, it will bring extensive flooding and wind damage across a very heavily populated area.

Major natural disasters generally do not have a major long-run effect on the economy and GDP.  This is largely because the U.S. is a really large nation and even the most severe natural disasters such as Hurricane Katrina only directly affect a small portion of the country.  So even if a hurricane or earthquake were to stop 40% of the economic activity in a region, as long as the region is only say 2-5% of the nation, the net effect is a short, temporary “blip” on the nation’s GDP.  Hurricane Irene could conceivably be different because the projected path includes over an estimated 65 million Americans – nearly 20% of the nation.

Asking what the effect of a natural disaster will be on GDP is probably the wrong question to ask.  What we’re really interested in is “what is the effect of the natural disaster on the economy and our living standards?”   It’s just that we are so accustomed to using GDP as a proxy measure for the size of the economy and our living standards.  Unfortunately, GDP as a measure of the economy and our welfare has some weaknesses.  These weaknesses are really important in the case of a natural disaster and interpreting it’s effects.  GDP measures economic production by counting the dollar value of all transactions where something new is produced and sold.  GDP doesn’t measure the value of what we own – our wealth. GDP doesn’t measure the value of services produced that aren’t sold (like charitable acts, household production, etc).  GDP doesn’t measure our capability to produce.  It only measures what we actually produce and sell.

The economic effects of a natural disaster are to change exactly these things that GDP does not measure. The primary economic effect of a major disaster such as an earthquake, hurricane, extensive flooding, or  a swath of destructive tornadoes is to destroy wealth and destroy our capacity to produce.  In macroeconomic terms, a natural disaster is a sudden reduction in our resources: capital equipment, buildings, and available labor. None of this is a good thing.  It reduces our ability to produce goods and services in the future and it reduces our welfare right now.  But that effect won’t show up in GDP measures.

What will show up in GDP measures after the natural disaster is a perverse reaction in the months after the disaster.  This comes because of the re-building activity that comes after the disaster.  Repairing buildings, cleaning up, rebuilding all require paid services, building supplies, labor, etc.  These transactions will show up in GDP measures in the months/quarters after the disaster as an slight increase in total GDP.  But it’s a deceptive increase in total GDP because we aren’t really significantly better off.  We’re just getting back to the condition before the disaster.  GDP counts the fixing, but not the damage done.  This is why we sometimes here commentators say that a “disaster is good for the economy”.  It isn’t really.  It’s good for GDP, but that’s not a perfect measure of the economy.  The mistaken idea that damage or disasters are good for the economy is what economists call the Fallacy of the Broken Window. It was first explained by Frederic Bastiat.

Normally the economic impact a natural disaster will be relatively short-lived so long as there is a mechanism to finance reconstruction and the real resources in the larger nation to do it.  Typically in a developed nation like the U.S., the financing for reconstruction comes from insurance company payouts and government, especially national government, loans and payments. In particular it is the responsibility of the national government to help rapidly restore infrastructure.  If adequate financing and national resources exist, then we rarely find a national impact on GDP or the economy lasting beyond perhaps a 6 months to a year.  The smaller the economy, the greater the potential for longer lasting damage and even a failure to rebuild at all.   That’s the problem in New Orleans five years after Katrina.  The city is now permanently smaller since large numbers of people chose not to return and rebuild.  At the U.S. level, though, it’s insignificant.

The lack of financing and resources can severely damage a very small or poor nation for a very long time.  That’s why Haiti, a small and poor nation, is so dependent upon outside help to rebuild. The other exception that can result in lasting damage and reduction of the economy is when the disaster brings permanent physical damage that cannot be repaired or rebuilt easily.  The nuclear disasters in Chernobyl and possibly Fukishima fall into this category.

So overall, a natural disaster is not likely to be a long-term significant

 

President Obama’s Jobs Advisor Ships Jobs Overseas.

No wonder jobs aren’t being created.  The President listens closely to Jeffrey Immelt, the CEO of corporate welfare recipient large multinational General Electric about jobs policy.  So what’s GE doing about jobs?  Bloomberg reports:

General Electric Co.’s health-care unit, the world’s biggest maker of medical-imaging machines, is moving the headquarters of its 115-year-old X-ray business to Beijing to tap growth in China.

“A handful” of top managers will move to the Chinese capital and there won’t be any job cuts, Anne LeGrand, vice president and general manager of X-ray for GE Healthcare, said in an interview. The headquarters will move from Waukesha, Wisconsin, amid a broader parent-company plan to invest about $2 billion across China, including opening six “customer innovation” and development centers.

The move follows the introduction earlier this year of GE Healthcare’s “Spring Wind” initiative to develop and distribute medical products and services in China, GE said in a statement today. More than 20 percent of the X-ray unit’s new products will be developed in China, LeGrand said.

Read more: http://www.bloomberg.com/news/2011-07-25/ge-healthcare-moves-x-ray-base-to-china-no-job-cuts-planned.html#ixzz1UjwUi6Yu