Tuesday, December 20, 2011

The World Economy is Out of Balance

Over the last several decades the rewards of productivity have gone to owners of capital, not labor. Automation has reduced the need for labor in manufacturing industries, driving down wages.  Producers have moved production offshore to reduce labor costs even further. At the same time, the financial sector share of GDP has tripled. This has happened not only in the US, but in other developed countries as well.

What has been forgotten is what Henry Ford knew at the beginning of the twentieth century, namely that a thriving middle class is the source of most of the demand in consuming countries. When wages stagnate as they have in the last several decades, middle class buying power is destroyed. This may be in the producers interest if they can find buyers in other markets. But, when it happens all over the world in developed countries that supply 70% of world demand, it results in a sustained decline in the world economy.

No amount of money sloshing around in the pockets of a few wealthy people looking for a place to invest it will solve the problem. The only solution is to rebalance world wealth and incomes to put more money in the hands of people who will spend it, not people who save to invest. Until producers realize that that they need the spending power of wage earners to create demand, they are planting the seeds of their own failure. It’s time to start paying workers that spend their income a decent wage to rebalance the need of demand with the need for capital. If producers won’t do it, governments need step in and increase taxes of capital and reduce taxes on labor.

Monday, December 19, 2011

The Underlying Cause of Depressions

There has been a lot of study of the cause of the Great Depression and now of the current Great Recession. But, answers are clouded by studying primarily what happens after banks get into trouble. This overlooks underlying causes which may be more important. Nobel economist Joseph Stiglitz and Bruce Greenwald of Columbia University have been studying the underlying causes. Stiglitz has presented the results in a recent article in Vanity Fair. It’s a good read.

The scenario goes something like this. Technology improvements take place which increase productivity. This, in turn results in less labor being needed to produce the commodity. Too much labor leads to low wages, lost jobs, and reduced demand. The rewards of increased productivity go increasingly to the providers of capital. As capital accumulates, the return on capital is reduced, so capitalists look for ways to increase it. This usually results in buying up assets that can produce a revenue stream. Asset prices escalate and seeing this, investors buy up more assets to take advantage of increasing asset prices. This is the beginning of a bubble in asset prices.

Seeing a chance to make easy money, more people start investing in the asset bubble. Financial institutions are making money hand or fist from the new lending and capital is freely available from increased productivity and asset investments. The opportunity seems a sure thing so leverage is increased to increase profits dramatically. These profits must be invested to earn income, so banks seek to place new debt with less credit worthy debtors, and so are willing to take higher risks, which they offset by buying credit default swaps, a form of unregulated insurance not fully backed by the assets. Eventually the bubble bursts when these risky investments start to fail and the whole economic system is put in jeopardy by the threat of bank failures.

Only now does the analysis of what happened start. The first place analysts look is why excessive risk was taken on and why not enough liquidity is available to prevent a collapse of the economy. Governments are looked to for bailouts of failing banks. And we know the story from that point on. It’s a battle between people who think government spending is needed to sustain the economy and people who think it all happened because people and governments were irresponsible and what is needed is austerity measures to teach the irresponsible a lesson. The underlying problem has been long forgotten in the process.

The Underlying Problem in the Great Depression

Prior to the banking problems in the great depression, the economy was largely based on agriculture. As technology advanced, farmers were able to produce more food with less labor and the same size farm, so farm commodity prices fell and fewer farmers were needed. But switching from farming to an industrial job was not easy. Most farmers had only an elementary school education, so they continued to do what they knew how to do, farm. With less income per acre, they needed more acreage and loans to buy the acreage. But, this just compounded the problem. More production meant even lower prices and now they had bigger loans to pay off. And a drought in many parts of the country made things even worse. So many of these farmers ended up losing their farms and ended up unemployed. The unemployment among farmers, a large segment of the economy at the time, meant reduced demand for products and service produced elsewhere in the economy, resulting in unemployment there. Banks foreclosed on the farms, but with more production than was needed, banks took losses on the loans. And, the excess of labor and lack of new projects to employ them meant a drop in demand for all goods and services, driving the economy into depression.

The Underlying Problem in the Great Recession

In our current recession the underlying problem was increased productivity in manufacturing, hence less required labor, and moving much of the manufacturing sector overseas where labor costs were much lower. Again the rewards of productivity increases went to capital and wage income stagnated. Capitalists, flushed with newfound wealth looked for places to invest. And consumers, whose wages had stagnated looked for other ways to make ends meet. Investment in land and construction soon supplied the answer.  Average homeowners soon saw the opportunity to increase their income by taking loans on the increasing equity in their homes, and banks, flushed with cash saw another opportunity to make a killing leveraging up on riskier and riskier loans and unregulated insurance. The rest is history, and we know who governments bailed and who is picking up the tab.

So, What is the Solution?

Stiglitz seems to think the solution is to put people to work by embarking on new projects to employ them and education to equip them for new jobs. Just as the war economy pulled us out of the Great Depression by creating new jobs for the unemployed, we can create new jobs for the current unemployed by investing in infrastructure which has deteriorated for lack of maintenance and in research on promising new transportation, communication, and energy technology. But, just as the war required massive government spending and increased government debt, we need to accept greater debt now to ensure a healthy future economy that can pay off the debt. And,  just as the economy after the war required higher taxes on those who could afford to pay them, the same will be required now from people who have profited handsomely from years of productivity rewards, the bubble and the ensuing bailout.

Wednesday, October 26, 2011

The Herman Cain Phenomena

People are wondering how a candidate with no previous political experience, no organization to speak of, and a series of conflicting messages can be leading in the polls. I think it’s perfectly understandable. People are sick and tired of professional candidates who adjust their message or say different things to different groups simply to get elected. They also are wary of the slicksters with a pocket full of money whose main aim is fame and fortune, but who can turn a phrase without ever making a mistake. Cain says it like he sees it, even if it doesn’t make much sense. And, he doesn’t attack people or get nasty. He comes across as a sincere, nice guy. That can be very attractive in a campaign where’s he competing with a bunch of old polls who play politics with everything that comes out of their mouths and have flip-flopped on many issues.

Democrats wonder how Republicans can be so interested in a guy whose policies seem so outrageous to them. Well, they don’t seem so outrageous to many Republicans, who vote their feelings on religion and other social wedge issues, not analytical or scientific constructs about the economy or the environment. Their judgment of the person’s character and his similarity to their way of thinking trumps a lot of policy issues.

Democrats should look at why candidates like Dennis Kucinich and Ralph Nader have gotten nowhere in their party. I would conclude it’s because they aren’t afraid to say it like they see it. They aren’t polished enough, or acceptable enough to the in crowd. Their pronouncements seem too far from the status quo promoted in the press. For this, they are marginalized.

If we still had a Republican president at this time, I think we would be seeing similar behavior from the Democratic Party that we are now seeing from the Republican Party. We are in a major economic and political crisis, and people are looking outside the box for new and more extreme measures to correct the problems. If it were the Democrats with a large field of candidates running against an incumbent Republican president, I think we would be seeing candidates like Kucinich and Nader leading in some polls against more establishment oriented candidates. And, the Republicans would be wondering how the Democrats could be so interested in them.

Tuesday, October 11, 2011

Occupy Wall Street to the Rescue

In the last post I was urging Bernie Sanders to run against Obama to force him to identify what he would do in a second term. Well, there is no longer a need for an opponent to do this. Occupy Wall Street has spread around the country is a good indication that many are disappointed with a system that defers to wealth and corporations while exploiting middle class workers. Mr. Obama will be as much a target of this movement as anyone else if he continues to try to finesse his way back in the White House by being the great compromiser. If there is one thing OWS doesn’t want it is compromise with those seeking to maintain the status quo.

If winter comes and the cold weather results in a retreat of the protesters to warmer quarters, Obama may think he doesn’t need to think big. But, he will be mistaken. The country is ready for deep reforms and any half measures will result in low turnout for progressives and a win for Republicans. On the other hand, if he embraces the discontent demonstrated by protesters and the many who share their discontent, and lays out a program of real reform, he could be on his way to another term. So far, he has been a disappointment as a leader and a man of vision. But, fortunately, none of his likely opponents seem well equipped with those qualities either. Obama has begun to talk the talk, but is it all election hype or the real deal? The OWS crowd and their supporters can help smoke him out and make him take a stand.

Sunday, August 14, 2011

Run, Bernie, Run!

I’m speaking of Bernie Sanders, the Senator from Vermont, of course. He can’t run in the Democratic primary because he’s an independent, not a Democrat. But, he probably won’t run in the general election either, because he caucuses with the Democrats and probably doesn’t want to become a political pariah like Ralph Nader. But, he should run. And, here’s why.

I predict the Republicans will pick Governor Rick Perry of Texas to be their candidate. He’s the perfect candidate for the Republican Party.  He’s religious, a southerner, has better looks and more charisma than the last Republican president, and can speak in complete sentences that his constituency understands. He's also very acceptable to the sane wing of the party, unlike most of the other contenders. And, he's not the recent Mormon governor of a blue state. What more could the Republicans ask of a candidate? If he is the candidate, his party will be energized and, unlike the Democrats and a lot of progressive independents, many of whom can't stand Obama and will sit out the election, will turn out for him in big numbers at the polls. In that situation, Obama, the Republican lite, will be toast.

Even if Obama were to win, do the Democrats really want four more years of Obama continuing to cave to the Tea Party agenda of austerity and no new taxes? Or would they be more successful as an energized opposition party? Look how successful the Republicans have been as the opposition party. With the distinct likelihood of another meltdown due to the austerity measures being pushed by both parties now, won’t the Democrats be better off laying it off on a one term Republican president as the Republicans are now doing with Obama?

If  progressive Democrats had a good spokesperson stumping for their progressive agenda including reducing wealth and income disparities, a single payer health insurance program, investments in education and infrastructure, etc. they would be on a good path to being a successful opposition party and have better prospects for winning in 2016. An energized progressive electorate would also get people to the polls to elect more of their constituency to the Congress.

Bernie Sanders is such a spokesperson. If you haven’t heard him, take a listen to him on the Senate floor here. There is no Democrat that comes close to him in stumping for the progressive agenda.

Monday, August 08, 2011

Why the Government has to Spend when the Private Sector decides to Save

What is necessary for a healthy, stable economy is a balance between savings to provide capital for new productive activity, and spending to sustain demand for goods and services. When these forces get out of balance instability happens.

If everyone decides to save more all at the same time, spending is reduced and economy goes into recession. If everyone decides save less at the same time, spending increases demand and prices go up. If the new spending is to buy assets rather than consumables, asset bubbles develop.

If the balance shifts to to0 much saving of capital, there is more capital chasing a limited number of investment opportunities, rates of return on capital drop, and owners of capital seek ways to stimulate demand for credit, or turn to leverage and speculation to increase returns. This is what happened prior to the current recession. Owners of capital turned to derivatives and leverage to increase returns. When that wasn’t enough, they turned to liar loans in the housing industry to stimulate demand for credit. As the housing bubble built, housing investors got the idea that the housing market could only continue to go up, and started using their home equity as a piggy bank for spending, driving themselves ever deeper in debt. This is what caused the housing bubble. When the loans could no longer be serviced as variable rates went up the bubble burst.

When the bubble burst, the piggy bank closed, the markets dropped, and the rush was on to deleverage and pay down debt. This required spending less and saving more by nearly everyone around the world. So we return to first scenario where there is too much saving and too little spending, and into recession we go.

The difference between this and milder recessions is that this time it happened to nearly everyone, even around the world, because of the strong linkage between financial institutions worldwide, due to the mitigation of risk through investment insurance like credit default swaps on collateralized debt sold as stock. Credit rating agencies were paid by the banks issuing the collateralized debt to give it a high rating so it could be easily sold around the world. All this was done to increase returns on capital because there was way too much capital for the investment opportunities that existed.

Instead of restructuring the banks that had issued the junk debt, allowing the owners and stock holders to take the hit, the government bailed out the banks and allowed them to keep the junk loans, now deeply devalued, on their books at face value rather than market value. So instead of destroying the junk debt, they put repayment in full on the backs of taxpayers. Now everyone is panicked, no one wants to spend, lend, or investment. This is what’s called a liquidity crisis.

Returning to the theme presented at the outset, when everyone in the private sector decides to save at the same time, the government is the only source of spending available to maintain the balance between spending and saving that is required to stabilize the economy. Instead, we now have a bunch of politicians who think they’re at a Tea Party and the government is just another private budget manager that needs to save like the rest of us. They don’t understand the basic need to balance spending and saving overall to stabilize the system. To make things even worse, they think that the wealthy capitalists who created the problem should be exempt from participating in the solution. In fact they think their taxes should be reduced even further. Until taxpayers and politicians understand the basics of how an economy functions, we will continue to be mired in the quagmire and things will only get worse.

Saturday, August 06, 2011

Some Long Range Consequences of the World Economic Crisis

It’s a sad day when a single company can cause world economic turmoil by downgrading the credit worthiness of the world’s only superpower. Standard & Poor’s, the same company that gave junk collateralized debt obligation a AAA rating to cause the current crisis, has downgraded the USA rating to a AA+, and the world goes along with it. This raises the question of whether or not the world has gone seriously off the rails.

How did we come to this point? How did the developed nations of the world become deeply indebted to an oligarchy of private financiers? How did the leading developed democratic nation in the world, the USA, become indebted to a developing authoritarian nation, China to the tune of several trillion dollars? The answer lies in letting wealth become concentrated in the hands of a few wealthy individuals and institutions and allowing a colluding central bank to create credit by simply making entries in its accounting journals.

The creation of credit and the abundant supply of cheap energy are the main ingredients that have lead to the rapid development of the developed nations in the  last several centuries. This has allowed the standard of living in these countries to advance way beyond that of undeveloped and developing countries. Accompanying this phenomena has been the emigration of labor from undeveloped to developing countries where this is possible.

But, advances in transportation and communication, and trade agreements in the last several decades, have allowed the free flow of goods and capital across international borders. This has directed the flow of private capital to countries with low production costs and away from developed countries. Businesses have become multinational, reducing the loyalty of their home countries and accelerating relocation to developing countries.

If international agreements were in place, this could have led to increasing the standard of living in developing countries to to the level of developed countries without reducing the standard of living in developed countries. But, instead, the way this has happened has been left mainly to private interests, resulting a decline of labor rates and employment, and increased debt, in developed countries while developing countries like China have become creditors. Instead of allowing the standard of living of  Chinese workers to rise to the level of developed countries, the Chinese government has accumulated the wealth from its development and used it to fund debt in the countries buying its products.

What remains to be seen is how this will all work out. In ancient times, wealth became concentrated in the hands of kings and their aristocratic cohort and debt in those outside the ruling circles. Periodically, there were Debt Jubilees, where debts would be forgiven and a new cycle of wealth and debt accumulation started. Since, in the modern world, wealth accumulates in private hands, and narrow private interests control government through contributions to politicians, there is no possibility of debt forgiveness.

All signs point to protecting wealthy private interests at the expense of working people. Eventually, debt service eats up all the resources that are needed to sustain productive enterprise and the system collapses. The question people should be asking is whether humans are smart enough to make corrections before the system collapses? The second ingredient of development, energy, may make the decision for us sooner rather than later. As fossil fuel resources decline and debt grows we face a double threat to the world economy and the standard of living of its citizens.

Monday, August 01, 2011

Obama, a Disaster for Progressives

Obama’s appointments and actions during his presidency have shown him to be a moderate Republican. His substituting of mediation with Republicans for leadership in fighting for progressive policy ceded the high ground to Republicans and caused the catastrophe that was the 2010 election. Since then he has ceded even more ground to Republican policy, including the disaster of cutting federal spending in the middle of a deep recession.

He has actually adopted Republican talking points in many of his speeches about the economy, buying into the false comparison between what voters should do in a recession, and what the federal government should do. As Obama has moved to the right in his policy decisions, the Republicans have moved even further to the right, until now Republican policy is essentially wacko Tea Party policy.

It is hard to see what he will do differently in a second term. It is not that he’s fought the good fight for progressive policy and been blocked by Republicans. He has actually agreed more with Republicans than with his progressive constituency. And, it is even harder to see how he will motivate progressive voters, which he needs to win, to the polls in 2012.

On the Republican side, if they win the presidency and both houses in 2012 will they continue their radical Tea Party policies when the results will be laid wholly to their doorstep? Not likely. Having a weak Democratic president that can be easily pushed around, and with their stated paramount objective being to make Obama a one term president, the Republican party has become radicalized. If they should win it all with a candidate like Romney, who is not a Tea Party wacko, they would likely return to a more responsible way of governing, especially if Democrats in Congress kept their feet to the fire and used the filibuster in the Senate the way Republicans have used it.

The time when a president can ignore his own constituency and get reelected has passed. Unless the Democrats field a viable candidate to oppose Obama in the primary, the energy on the Democratic side of the election will be so low it’s hard to see how voters will turn out in the large numbers needed to win. All the excitement will be on the Republican side of the election. If Obama were to win a challenging primary, that made him spell out how he is going to govern, it would give his constituency renewed energy to elect him. If not, it might result in a better candidate, or at least increase the turnout in the general election, which is necessary to maintain control of the Senate as a minimum.

Sunday, June 05, 2011

Natural Recovery Mechanisms

Since political gridlock in the country has precluded much government intervention to facilitate recovery from the financial crisis, we will have to rely on natural mechanisms to recover over an extended period, just as the Japanese have been trying to do for the last couple decades.

So what caused the crisis and what are these natural mechanisms that will allow recovery? For the economy to be healthy, there has to be a balance between saving and spending. Capital and labor are the ingredients for growth. The relatively few, more wealthy, people do most of the saving and middle class labor provides most of the spending. As I have previously discussed here, over the last several decades more of the rewards of productivity have been going to the savers. As the spenders are squeezed, demand wanes and there are fewer opportunities for investment, so the return on investment falls. This results in a search for ways to stimulate demand and increase returns, like easy credit, leverage, and creating derivative instruments that hide risk.

Eventually these mechanisms lead to bubbles of ever increasing asset prices and create a euphoria that perpetuates the growth of the bubble until it bursts, resulting in a financial crisis. First we had the saving and loan crisis, then the dot com bubble and now the housing bubble, which nearly brought the country to ruin. This has resulted in high unemployment, fear of further crises, and stagnated demand because the problem is really that the debt left over from the bubble never has never been addressed. Banks and their investors,  being the primary holders of the debt, have refused to take losses on their bad debts, and the government has stepped in to bail them out, increasing the public debt.

The solution lies in first reducing the debt overhang in the private sector because the private sector is the primary source of demand. Demand must be increased first because the revenue from increased growth is needed to address the public debt. Political gridlock will not allow the government intervention necessary to make this happen. So other mechanisms must be relied upon to correct the problem, stretching out the recovery over the decades ahead.

The primary means for addressing normal recessions is monetary policy, that is, lowering interest rates by increasing the money supply. Lower interest rates means less income is going to savers, and the spendable income to spenders increases because their debt service is reduced. Neither of these these things happen automatically. So it has fallen to the Federal Reserve to insure that low interest rates are maintained. This has not been an altruistic move on their part. Their main interest is in keeping the banks afloat by easing credit and pumping up asset markets, since the government has been reluctant to restructure them. But, a byproduct of the policy has been to ease the burden of homeowners and other private debtors. But, as interest rates approach zero, this mechanism is no longer effective.

The first natural mechanism the comes into play is private loan default. As homeowners and other private borrowers default on their loans, the lenders and their investors are forced to absorb the losses.  Those that don’t default are forced to continue paying off debt rather than spending their income, which reduces the demand necessary for recovery. This prolongs the recovery period. So, defaulting on private debt becomes a mechanism for reducing the recovery time. To the extent that artificial means and deception were used to induce borrowers to borrow, this is a just action and should be encouraged, rather than disparaged.

The second natural mechanism for reducing debt is inflation. As inflation occurs, debts can be paid off in cheaper dollars, erasing debt faster, and promoting a quicker recovery. Controlling inflation falls to the Fed in implementing monetary policy. To reduce the recovery time the Fed needs to allow more inflation in times of crisis, and usually does. The Fed has recently raised inflation targets for this purpose.

The final natural mechanism occurs when flight to safety and political pressure drives funding from institutional investors into public debt at low interest rates. This allows governments to reduce their debt service and spend to increase demand and reduce the burdens of unemployment. These latter two mechanisms are referred to as “financial repression” by savers organizations like the Pete Peterson foundation, who have the most to lose by it. It was practiced extensively after the second world war when large debts had to be liquidated in a timely manner.

It’s unfortunate that these natural mechanisms must be relied upon to get us out of the economic doldrums. They extend the length of the recovery process, when a positive restructuring  of debt by government would have shortened it. But, money is power and it talks in many ways, so we must suffer longer to appease those who refuse to take the hit on their bad investments.

Thursday, May 26, 2011

Historical Limits to Progress

A classic example of history limiting progress is exemplified by the mobile carrier industry. These old telcos have no incentive to innovate because they own the lines and charge by the minute. They all spend millions of dollars every day advertising in media all over the country, when there’s not a dime’s worth of difference between the services they provide. How is it that you can make unlimited free VoIP calls over the internet at speeds much faster than the cell phone networks which charge an average of $50 a month for the same service?

If it weren’t for the extreme hostility between government and industry due to free market ideology we could have had fiber and hot spots along ever interstate highway in the country now and data and VoIP calling services everywhere for little or nothing. Countries like Korea and Japan, where government and industry cooperate, are decades ahead of us.

If you compare progress in bandwidth and technology on the internet to cell phone transmission technology the gap is obvious. Now the telcos want to buy off the government to latch onto the new spectrum freed up by HDTV technology to waste it on their outdated network and retro development practices.

There are some signs that Microsoft, Google, and Apple aren’t going to put up with this much longer. They are getting interested in bidding on spectrum and have developed voice network technology. Google has Google Voice and Microsoft has recently purchased Skype at a very high price. Already, much of the traffic that would normally be on the cell network has moved to WiFi when phone users are near a hot spot or have a home network. You don’t even need a phone. I make free nationwide calls on my iPod Touch at any hot spot using Google Voice.

I’m not holding my breath for things to change because the cable companies and telcos own the Congress, but sooner or later we are going to seen broadband internet carrying the bulk of voice calls, as they are video calls now.

Wednesday, May 11, 2011

The Roots of American Decline

The decline of the US economy has its roots in the deregulation of business and finance and automation of complex manufacturing processes. The decline is aggravated when wealth becomes concentrated in the hands of a few who use it to capture control of the government. As control of government by capital interests increases, regulation further decreases.

A good measure of the how far the loss of democratic control of government has progressed is the income and wealth disparity between the owners of capital and the working classes. The more control wealthy elites have over the government, the greater will be the concentration of wealth and income in the their hands.

As democratic control of government is lost to the owners of capital, the rewards of productivity increases through automation go increasingly toward the owners of capital and away from labor. Only if countries retain democratic control of their government can equity be maintained.

Domestic jobs are lost through automation and the opening of financial flows across borders, which allows factories to be moved offshore.  Allowing foreign labor into the country through lax immigration and border control policies and the liberal use of visas to educated foreign workers further exacerbates the problem.  As the labor supply increases relative to the demand for labor, wages are driven down, allowing a further increase in wealth to the owners of capital and a degradation of the living standards of the working class.

As the standard of living of labor falls, the need for income security, health care, and retirement increases, necessitating greater government involvement, setting up a growing battle between labor and capital for control of the government.

The recent collapse of the economy has demonstrated that the financial industry does not police itself and will go to extreme lengths for its own short term interest at the expense of the national interest.

To sustain domestic demand when working and spending class incomes are decreasing, requires spending from borrowing. This was enabled by the creation of a housing bubble, allowing workers to spend from the ever increasing equity in their homes. The financial sector drove the bubble higher and higher with leverage, derivatives, and liar loans, reaping short term riches at the expense of long term calamity.

When the bubble burst, homeowners and savers lost trillions, causing a severe drop in demand as they turned to saving instead of spending. With millions of bad mortgages on their balance sheets, banks stopped lending. Heavily leveraged, many found themselves bankrupt if loans were marked to market.

In steps the government, itself now starved for tax revenue, but the only entity large enough to rescue the economy. Instead of restructuring many banks that could be restructured, and making those who made bad investments take some of the losses, they allowed the banks to keep the loans on their books at face value and bailed out all but one bank, Lehman Brothers, some at 100 cents on the dollar. This put the government in deficit and further in debt, while working people faced heavy unemployment and depletion of their savings, and while banks were still heavily in debt with bad loans on their books.

Now we face losing the working class safety net and sustained unemployment, while the government provides banks with nearly free money to work off their bad debts buying treasuries and speculating in foreign currencies.

With diminished domestic demand and tax revenue from the working class it is doubtful whether government deficits can ever be eliminated through taxation of this sector, particularly if their safety net is destroyed. The only source of revenue that can be tapped to do this is the income from investors and corporations who are prospering with their factories in developing nations. That’s where the growth will be. But, these are the very people that have control of the government and refuse to impose such taxes.

You may ask, how can this be, when capitalist elites are only a minority of the populace? The answer is propaganda. By keeping enough working people hood-winked regarding where their real interests lie, and by keeping the press in the their elite circle this is easily accomplished.

The politics of special interests and values is a convenient tool to do this. By keeping the electorate distracted with wedge issues like religion, ethic and sexual preference, and demonizing people on welfare, the elites can convince enough people that these are the real problems, while they pay the bills of politicians to get them elected and do their bidding.

By allowing a professional working class, and their retirees, to have sufficiently high incomes to be comfortable, they can keep them in a state of concern for only their personal affairs and a lack of concern for what is happening politically and economically in the country. By promoting the identification of this group with the controlling elites, rather than with the struggling masses they can keep them voting for the candidates they put up.

Businesses organizations like the National Chamber of Commerce and private business owners like the Koch brothers contribute heavily to conservative think tanks to generate such propaganda based on ideology rather than practical considerations. Such propaganda over the last several decades has brought the country back to where it was prior to the Great Depression and there is no sign that things will change until more and more people are pushed into poverty, to the point where the hurt causes them to wake up and vote their real interests. Only when most people identify with the plight of their fellow citizens, rather than aspiring to join the elite oligarchy, will things change.

Wednesday, April 27, 2011

Between a Rock and a Hard Place

I can’t see any way we can avoid another crisis that is even bigger than the one we are in. Basically, what we have is a lot of money sitting on the sidelines waiting for things to get better, and they’re not going to get better. The government and the Fed know this and they don’t have a lot of choices what to do about it.

The basic problem is still the banking crisis. If things get worse the banking system is subject to collapse. So what is happening is the Fed is printing money to buy treasuries. This money ends up in banks, who use it to buy treasuries instead of investing it, because businesses are not expanding domestically so have no need for investment. There is some business expansion but it is overseas. So banks are getting money without interest and investing it treasuries where they earn interest on these reserves. That’s a good deal for banks. It keeps them afloat and provides an income stream to deleverage their bad debts and pay the big bonuses.

The bad part is that the government is running up debt like crazy with no prospect of a revenue stream big enough to pay it back. Its normal obligations are huge and growing. We’re still fighting two wars and assisting in a third while the baby boomers are beginning to retire, increasing the Social Security and Medicare outlays. To compound the problem, we are on the downslope of the peak oil curve where demand from developing countries is still growing and supply has peaked. Since our economy runs on oil for almost everything, this alone spells crisis in the current decade or the next.

I don’t see a way out, and neither does the government or the Fed, although they don’t say much about it because it would just add panic to an already bad situation. Ultimately what will happen is we will be forced into another crisis due to increased cost of commodities like gasoline and food, the production of which is heavily dependent on oil.

There is no way to reduce the federal deficit substantially from the current or future revenue streams. Projections showing this is possible project revenues that can’t be achieved with the problems outlined above. We are in for really bad times this decade and the next. Current legislation puts a large part of the burden on those already overburdened. We don’t let people starve or deprive them of needed shelter and medical care so eventually wealth will be redistributed in one way or another and the overall standard of living will decrease. Meanwhile, we’re fiddling while Rome is burning, not unlike the legendary frog in the pot of soon to be boiling water.

Tuesday, April 19, 2011

Absorbed in the Present, Ignoring the Future

When was the last time you heard the word “sustainability” uttered? The general concern, the world over these days, is debt and growth. It’s as if the only thing important to the first world in the current crisis is getting back on the conspicuous consumption curve. Meanwhile, the big threat, the one that will require a major adjustment in the way we live,  is creeping up on us: PEAK OIL.

Many pundits have pointed out how a 50% increase in the price of oil has affected commodity prices and aggravated the current financial crisis. This is nothing compared to what we will face when oil doubles or triples, and it will. It’s just a matter of time.

Instead of going into even greater debt to sustain an unsustainable lifestyle, why aren’t we considering what’s really necessary to be to be happy with less and planning for the time when this change will be forced upon us. Over-consuming isn’t necessary to live a worthwhile, rewarding life. And, it’s downright unhealthy. Two recent movies have brought this message home in a major way: King Corn and Blind Spot. Watch these two and decide whether you still want to stay on treadmill we’ve been on for a couple hundred years. What has it really gotten us? And, in any event, it’s coming to an end over this century, so why not use the current crisis to change our ways and plan for our grandchildren’s future?

Tuesday, March 29, 2011

Simplifiying Economic Priniciples

There is a current debate going on between Paul Krugman, Nobel Laureate of Princeton and the New York Times and Paulina Tcherneva, an economist at New Economic Perspectives (NEP). NEP is run by people from the University of Missouri, Kansas City, and its contributors include people like Bill Black, who put a lot of shysters in jail after the Savings and Loan crisis; Michael Hudson, an economist who has been helping many foreign countries facing austerity crises; and many other from UMKC that are listed at the blog.

Both parties agree that creating money to stimulate the economy can lead to a devaluation of the currency. But, they disagree on whether or not this can lead to a government default and what the the money should be spent on. To date, essentially all the money has been spent on buying junk bonds from banks to increase their reserves so they can ride out the storm, while taxpayers pick up the tab in the form of higher taxes and reduced services later. Little or nothing has been spent on employing idle labor and other productive resources. Both parties have favored stimulus, but Krugman seems more accepting of what has been done than Tcherneva.  She believes the money should have been spent on putting people back to work with government programs. Tcherneva contends that the government will always be able to pay all its bills, including Social Security benefits, because it can print money. It’s just a question of what that money will be worth in purchasing real goods at a later time.

So, the bottom line is, what is the right course in the long run. If we continue to just bail out the banks we’ll have to continue buying  consumer products from overseas. To do so we’ll have to exchange those inflated dollars for the yen or yuan, so they won’t buy as much. But, if we invest now in putting the unemployed to work  restoring our domestic infrastructure and production capacity, later we can produce those goods ourselves and don’t need to take the hit on the currency exchange to buy them from foreign countries. Tcherneva makes the point in a quite wonkish way, but I think she wins the argument.

Friday, March 18, 2011

The Distorted Picture of Tax Equity

I would like to see a tax analysis organization initiate a project to present a true picture of tax equity which I have been unable to find anywhere.

There is a lot of misunderstanding and controversy over tax policy in this country because people don't have a clear picture of who is paying the taxes and whether or not it comports with their share of income. Most of the interest centers on the income tax, whereas payroll, sales, and property taxes have an equally important role in fairness. If people knew that taxes were being levied fairly and used properly they would more easily see and understand the need for taxes.

What organizations that analyze taxes need to do is present a complete picture of the total taxes people pay vs. their income. Current presentations of this picture use only the income tax and broad categories, the smallest being the top one percentile. Other taxes need to be included and the picture at very high incomes to 0.1 to 0.01 percentile brackets need to be shown.

Consideration also needs to be given to the disparity between taxes on earned income and capital gains. If capital is in short supply capital gains taxes should be lower. If consumer demand is low taxes on earned income need to be lower. In the present situation we have glut of capital and a shortage of demand, yet capital gains taxes have remained much lower than taxes on earned income.

Tax analysts need to do a better job of presenting a true picture of tax equity if we expect to minimize tax avoidance and prevent tax revolts.

As an example compare the two tables below. The top one is from the Tax Foundation. Looking at the shares of income and taxes you would think people in high tax brackets are overpaying their taxes. But, if you assume that taxes should be paid on net income rather than gross income the picture looks much fairer as shown in the bottom table. In this case it is assumed that it is necessary for a taxpayer to be making at least $33,000, the income of the median return, to hold a job, provide a home, transportation, and other expenses necessary to stay employed. Since other taxes are less progressive than income taxes the picture will appear even less fair if these taxes are included. We need fresh thinking on tax policy.

You may argue about what income it takes stay healthy and hold a job, so $33,000 may not be the right number. But, it’s certainly closer to the truth than the exemptions and deductions we now allow for low income people, while corporations get to deduct their martini lunches and other expenses that could hardly be considered necessary in the normal course of business. If everyone below the median tax return were taken off the tax rolls and all the deductions and exemptions were removed think of the money that could be saved on wheel spinning to avoid taxes. This together with higher taxes on the highest 0.1 percent of earners would go a long way to making up the taxes lost by taking everyone below the median return off the tax rolls.