Tag Archives: economics

The Sifted Books of 2011: Rethinking Economics

December 26, 2011 – 12:33 pm

I don’t have a book-review strategy on the Sift. In deciding what to read and what to write about, I usually just follow my nose and figure out later what it all means. So I don’t know why I reviewed exactly half as many books in 2011 as in 2010: 8 instead of 16.

In retrospect, it’s interesting to note that more than half of the 2011 books were about economics: Debt: The First 5,000 Years by David Graeber, The Seven Deadly Innocent Frauds of Economic Policy by Warren Mosler (reviewed in two parts: first, second), Why Marx Was Right by Terry Eagleton, The Lights in the Tunnel by Martin Ford, and Consumed by Benjamin Barber.

There’s a strong contrast here with last year’s economics books. Then I was often telling you about books by economists from the liberal mainstream, like Robert Reich and Paul Krugman. But these five are more radical start-over-from-scratch books.

In retrospect, here’s what I think that means: For a long time now, I have doubted the conservative conventional wisdom that the market can solve any and all problems. But lately I’ve also begun to doubt the liberal conventional wisdom that we can achieve a fair and vibrant economy by tinkering with interest rates, regulations, and government spending. This year’s books reflect my search for a new way of thinking about the economy.

Both Graeber and Mosler are telling us that money isn’t what we think it is. Mosler’s book examines the nuts-and-bolts of how the banking system creates money, while Graeber takes a long anthropological look at where this whole idea of money comes from and how it changed society.

Eagleton challenges the capitalism-has-won narrative of the post Cold War world, and shows how our “victorious” capitalism is displaying the flaws that Marx predicted a century and a half ago. And Ford goes back to the Luddite claim that machines destroy jobs, arguing that even if it wasn’t true then, it is now.

Barber’s book is on the boundary between economics and politics, arguing that if capitalism is allowed to run wild it will destroy democracy. Consumer and citizen are two very different roles, and the more we identify with our consumer role, the less we will be able to perform our duties as citizens.

Barber presents a different side of the scene portrayed by Ford. I summarized Barber’s point like this:

The root of the problem Barber presents is capitalism’s success in satisfying all the genuine needs of people who have money, creating a situation in which “the needy are without income and the well-heeled are without needs.”

Here’s the Ford/Barber connection: In our mechanized world, the one thing the well-heeled don’t need is more labor, which is all the needy have to sell.

Given this theme, there are two books that I should have written about but didn’t. Race Against the Machine by Erik Brynjolfsson and Andrew McAfee, and the 1944 classic The Great Transformation by Karl Polanyi. Both are woefully short of effective prescriptions, but they add important ideas to the diagnosis.

Brynjolfsson and McAfee bring in this arresting image from a book I haven’t read, A Farewell to Alms by Gregory Clark: In 1901, the British economy found jobs for more than 3 million horses. All those jobs are done by machines now, and horses are purely recreational.

There was always a wage at which all these horses could have remained employed. But that wage was so low that it did not pay for their feed.

How many human workers will go the way of the horse?

Polanyi’s book is a hard read, but fascinating. He tells the story of how the market economy was created in the 1800s. That statement is already radical, because so many people believe that the market economy is natural and goes back into deep antiquity.

In fact, Polanyi says (and Graeber agrees), markets used to be only a small part of the economy. In order to have what we now think of as a market economy, markets had to be created for what Polanyi calls the three “fictitious commodities”: labor, land, and money.

Labor is only another name for a human activity that goes with life itself, which in its turn is not produced for sale but for entirely different reasons, nor can that activity be detached from the rest of life, be stored or mobilized; land is only another name for nature, which is not produced by man; actual money, finally, is merely a token of purchasing power which, as a rule, is not produced at all, but comes into being through the mechanisms of banking or state finance. None of them is produced for sale. The commodity description of labor, land, and money is entirely fictitious.

My hunch is that the re-thinking of economics has to start there.

A related question is why our political system can’t adjust to our new economic realities. That led me to look at So Damn Much Money by Robert Kaiser, which is a history of lobbying.

The possibility of another way of functioning entirely led me to Reality is Broken by Jane McGonigal. McGonigal starts with the observation that the multi-player computer games like World of Warcraft and Halo soak up vast amounts of human time, effort, and ingenuity. What makes these invented worlds so much more engaging than reality?

Part of the answer is that successful games appeal to aspects of the human character that have been left out of the homo economicus model of human nature. In other words, we aren’t all trying to get as much stuff as we can for as little effort as possible — at least not all the time. Sometimes we want to achieve self-respect and honor even if it costs us effort and money.

McGonigal describes the widespread perception among gamers that their game persona is a better human being than their work persona. Something can be done with that. (One fictional view of how that could work is the Daemon/Freedom™ series by Daniel Suarez.)

Another book I should have reviewed made a similar point looking backward rather than forward: The Honor Code by Kwame Anthony Appiah. Major social changes, he claims, come not from self-interest but from a sense of honor. Society changes because our ideas about what is honorable change.

Appiah looks at societies that ended dueling, slavery, foot-binding, and honor killings of sexually activity female relatives. In each case, he finds that the cause is not economic and not fundamentally rational; in fact, the rational arguments against the practice were well known long before they became convincing. Instead, change happens via an invisible shift in the community’s honor code: Practices that once defended honor suddenly become dishonorable.

Two books I should have reviewed that deserve more than a paragraph here are 23 Things They Don’t Tell You About Capitalism by Ha-Joon Chang and The Myth of Individualism by Peter Callero. Maybe next year.

The one book I reviewed that doesn’t fit this pattern is The Hour of Sunlight by Sami al Jundi, which is one Palestinian’s attempt to envision peace between his people and the Israelis. Interestingly, that review was an afterthought: The article I wanted to write fell through at the last minute, and I needed something to fill the space.

By weeklysift | Posted in The Sifted Bookshelf | Comments (2)

Jobless Recoveries are Normal Now

November 7, 2011 – 2:27 pm

This might be the most important graph in American economics, but in the popular media hardly anybody talks about what it means.

It comes from the blog Calculated Risk (which has been updating it for a long while now), and is based on data from the Bureau of Labor Statistics.

Each colored line represents a different recession in the American economy since World War II, starting with the 1948 recession (in blue). The longest and deepest (in red) is the current recession. The curves are scaled according to the percentage of jobs lost, to make the different recessions more comparable. (Otherwise the 1948 recession would look small just because the economy was smaller then.) The horizontal scale is months, and the recessions are lined up so that Month Zero is when employment bottomed out.

For the purposes of the graph, a recession starts when the number of jobs peaks, and it ends when employment returns to that previous high. That’s a little different than the definitions most economists use. Typically, economists say a recession is over when GDP starts rising again, which is why the Wikipedia says the current recession ended in June, 2009. But employment is what is known in the trade as a “lagging indicator”. In other words, even after the recession is technically over, you’ve still got a lot of jobless people wandering around.

At its simplest level, this jobs-based graph just verifies something you probably already feel in your bones: This recession is longer and deeper than anything we’ve seen since the Depression, and it’s not over yet.

But that’s not what I want to point out. Instead, I want you to notice this: The last three recessions have a different shape from the others. The earlier recessions are short and sharp. Jobs go away fast and come back fast. The job market hits a definite bottom, and 8-10 months later everything is back to normal.

But the recessions of 1990 and 2000 look like smaller versions of the recession we’re in. In each of them, the bottom is flat rather than sharp, and employment doesn’t come all the way back for a long time after that — two years for the 2000 recession and nearly-two-and-counting for the current one.

Therefore: The job market is changing in some long-term way that has little to do with our month-to-month political squabbles. The 1990 recession starts and ends under President Bush the First. The 2000 recession gets started under Clinton and its long, slow recovery happens under Bush II. The worst of the current recession is on Obama’s watch, but the shape and depth of the curve was already well established when he took office.

It’s hard to find a Republican/Democrat pattern here. About all you can say for or against Obama, for example, is that the deep recession curve that had already developed under Bush II has gone on to have the same shape you’d expect from the previous two recessions.

Other simple explanations similarly fall flat. For example, we had a modest budget surplus and no wars at the beginning of the 2000 recession, but a huge deficit and two wars going into the current recession. But the two curves have the same shape.

I’m going to go on to list some characteristics and possible explanations for the new-style recession, but I don’t claim to have answers for it. (There are things I’d like to see done, but ending this article with any policy proposals I can think of would do a disservice to the data. I’m pointing to something solidly real, and my “solutions” would be speculative.) Mainly, I want to offer two principles for critiquing anybody else’s proposals:

  • If you’re not talking in terms of decades, you’re not dealing with the real problem. Whatever the causes are, they’ve been brewing since at least the late 1980s.
  • You can’t fine-tune your way out. Any change in policy that is going to make a dent will have to be big and fundamental. If the pattern is unaffected by the differences between Clinton and Bush, or Bush and Obama, we’ve either got to think a lot bigger or accept these long slow recessions as fate.

The old recession pattern. OK, now let me try to express the change in words rather than curves. The old-style recessions fit the inventory-correction model of the business cycle in a manufacturing economy.

To say that in English: Good times cause everybody to get too optimistic at the same time. (GM builds too many cars, contractors put up too many new subdivisions, Sears stocks too much merchandise, and so on.) When this over-optimism starts to become apparent, everybody slams on the brakes at the same time.

So orders drop, factories get shut down, and workers get laid off. But it’s all temporary. After a few months, retailers manage to sell off their overstocked inventories and need to order new stuff again. Then the workers get called back, the factories re-open, and the recession is over.

The last few recessions haven’t looked like that in several ways.

Bubbles. First, financial bubbles play a much bigger role in setting the recession off. The current recession starts with the housing bubble, the 2000 recession with the dot-com bubble, the 1990 recession with the savings-and-loan crisis.

Psychologically, it’s the same cause: Good times make people over-optimistic. But in the old model it was producers who became too optimistic about what they could sell, so they produced more than the market could consume.

In a bubble, on the other hand, it’s speculators who become too optimistic. So condos are built in Florida not because anybody expects people to live in them, but because speculators think they can flip them to other speculators for a quick profit. Or mortgages are written without any expectation that the payments will be made, because investment bankers have figured out a way to package those mortgages into CDOs that the ratings agencies will stamp AAA.

That’s a very different problem than GM building too many Corvettes or Sears stocking too many washing machines.

Bubble-popping recessions are harder to recover from because there is no “normal” to get back to. The NASDAQ stock index peaked over 5000 in March, 2000. That level was justified by visions of limitless future profits that turned out to be imaginary. So even 11 years later, the NASDAQ is still only about half what it was.

Inventory recessions are like taking a wrong turn. Bubble recessions are like dreaming something and then waking up. You can’t just go back.

Job destruction. Partly due to changes in the economy and partly due to changes in the social contract, businesses are now actively looking for ways to get rid of their workers. So the old model (where GM laid off some workers until things got better, then hired them back) looks quaint now.

These days when you lose a job, it’s gone. The company has probably closed the factory for good, merged with a competitor, or otherwise re-engineered its process to get along without you. When demand comes back, your former employer will open a new factory in Mexico or subcontract to a supplier in China or buy robots. At best, it might only threaten to do those things so that it can hire you back as a temporary contractor at half your old rate.

[BTW, this week I ran into a joke that is probably from the 50s or 60s. Union leader Walter Reuther and industrialist Henry Ford II are touring a new highly mechanized Ford plant. “Tell me, Walter,” Ford says, “How do you plan to get these machines to join your union?” Reuther replies: “The same way you’re going to get them to buy your cars.”]

Job recovery takes longer now because the economy has to create brand new jobs, not just re-start the old jobs. This means that the experience of being unemployed is completely different. The laid-off GM worker could collect unemployment, fix up the house, coach Little League, and be reasonably certain to go back to work in a few months.

Today the unemployed have to have a plan, and searching for a new job can be harder and more stressful than working. Worse, the new job often pays significantly less than the lost one.

Inequality. A long-term trend in back of the other trends is increasing inequality. As more and more money flows to the 1%, they don’t need more goods and services; they need more investment opportunities. That restless cash looking for a home pumps up the bubbles, funds the mergers, and buys the robots. But it doesn’t create new markets that need more workers.

What should we do? I’m not sure, but it needs to be much bigger and very, very different from anything currently on the table.

By weeklysift | Posted in Articles | Also tagged | Comments (7)

Economics Works Backwards Now

September 12, 2011 – 12:24 pm

Do you ever think about how strange it is to worry about “creating jobs”? Wednesday, Douglas Rushkoff observed this:

Our problem is not that we don’t have enough stuff — it’s that we don’t have enough ways for people to work and prove that they deserve this stuff.

Originally, economics was supposed to be about scarcity. People didn’t have enough food, clothing, housing, or tools. So you worked to make some, and then traded your surplus for somebody else’s surplus of the things you needed.

Today it’s all backwards. We produce plenty of goods, and if necessary we could dial the process up and produce more. What’s scarce now is work.

Try to imagine that on a personal level: It’s dinnertime. You’re hungry. There’s so much good food in the frig that you worry about it spoiling. But you haven’t justified your meal yet and you can’t think how you’re going to do it. So you have to sit there and be hungry until you can create a task for yourself.

Or on a family level: The kids each had jobs to do to help with dinner. But then we got a dishwasher, so now Jenny doesn’t get to eat dinner because we haven’t found a new job for her yet.

Crazy, isn’t it?

This week the big news was President Obama’s jobs speech, the Republican reaction, and the various economists who mostly told us that these were pretty good ideas.

But think about that speech’s focus. Not that we need to grow more food or make more cars or build more houses because those things are needed, but that we need to produce more of something so that people can be employed producing it. He tried to justify the needfulness of the jobs, but all the same it would miss the point if Obama could accomplish the same things by snapping his fingers instead of hiring people.

Rushkoff again:

it seems to me there’s something backwards in that logic. I find myself wondering if we may be accepting a premise that deserves to be questioned.

I am afraid to even ask this, but since when is unemployment really a problem? I understand we all want paychecks — or at least money. We want food, shelter, clothing, and all the things that money buys us. But do we all really want jobs?

John Kenneth Galbraith was making similar observations half a century ago. In The Affluent Society he described the following paradox: We judge our nation’s economic success by how much it produces, and we justify production because it satisfies demand. But demand has to be created by advertising, because without constant hectoring people would not want all the things we produce.

After a certain point, Galbraith said, “Production only fills a void that it has itself created.”

So why are we doing all this? In theory, our society could work less, produce less, advertise less, and we’d have no more unmet desires than we have now. But then there wouldn’t be as many jobs.

If production is a paradox, productivity as an even bigger one. On the one hand, productivity is our best friend. The reason the standard of living today is so much higher than in the Middle Ages is that an hour of work now (with the assistance of machinery, electronics, fossil fuels, and a better-organized society) produces so much more than an hour of work did then. Beyond an occasional hobbyist project, why would you choose to work all week making something that you could buy for 20 minutes worth of your salary?

But productivity and new technology kills jobs. Rushkoff begins his essay talking about the Post Office, which faces massive layoffs because email and electronic bill payments don’t require human sorters and couriers.

Again, that’s not a new idea. The French economist Sismondi satirized the pure productivity-is-good view in 1819 in New Principles of Political Economy:

In truth then, there is nothing more to wish for than that the king, remaining alone on the island, by constantly turning a crank, might produce, through automata, all the output of England.

That fantasy gets closer and closer to reality. In his 1995 book The End of Work, Jeremy Rifkin wrote:

The quickening pace of automation is fast moving the global economy to the day of the workerless factory.

Sismondi’s image of the king turning a crank captures the social problem of the workerless factory: The only reason to care whether it is in Topeka, Taipei, or Timbuktu is who owns it and who gets to tax it. Wherever it is, it will make goods, but it won’t provide jobs.

So even if “the output of England” stays the same, all the value of it now belongs to the crank-turning king (or maybe to the Workless Factory Corporation). No matter how plentiful those goods are, what can the people of England trade in order to get them?

In 1930, at the depths of the Depression, John Maynard Keynes wrote the hopeful essay “Economic Possibilities for our Grandchildren“:

We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come — namely, technological unemployment. This means unemployment due to our discovery of means of economising the use of labour outrunning the pace at which we can find new uses for labour.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem.

Imagine if humanity really did “solve its economic problem”. Suppose we got off the hamster wheel of ever-increasing desires, and kept improving our productivity until we could comfortably supply everything people really wanted.

Now imagine that we could do all that with only a few people working. The way we’re currently organized, that would be Hell. Whoever owned the machines and the natural resources would have the whip hand over the rest of us, who would scratch and claw to get the few remaining jobs.

So I want to suggest this: Yes, in the short-to-medium term we really do need to create jobs. But maybe our economic problems seem so intractable because we’re using economic tools to attack what is really a social problem. Currently (because in centuries past scarcity seemed eternal and the production system needed as many workers as possible) jobs organize our lives, give us our identities, and (most of all) allow us to prove that we deserve to eat.

But unless we either outlaw progress or keep inflating our desires until we consume the planet, eventually we’re going to have to rethink our lives, our identities, and the system that distributes goods. Otherwise we’re headed for Cornucopian Hell.

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Six True Things Politicians Can’t Say

September 12, 2011 – 12:16 pm

Remember how things were in high school? If a truth was unpopular, you’d be ridiculed for saying it, no matter how obvious it was. Even people who knew you were right wouldn’t defend you, because then they’d be ridiculed too. They might even think they had to speak against you, just to be safe.

Politics is like that, but mostly just on one side. The rich and powerful can emphasize the effect when it works for them (by hiring professional ridiculers) or minimize it when it works against them (via spokesmen and front groups who absorb ridicule until things are safe for conservative politicians). If the PR professionals do their jobs well, the pro-wealth politicians don’t have to offer evidence or answer opposing arguments, they can just laugh and scoff — like the cool kids used to.

But a popular lie that damages the poor or even the middle class can go unchallenged for a long, long time. If we want to hear the corresponding truths, we’ll have to start saying them ourselves.

1. Most government money is well spent. The opposite idea — that government pours money down a rat hole — is broadcast every day. But strangely, anybody who sets out to find this wasteful spending and eliminate it ends up firing teachers, getting rid of food inspectors, letting bridges fall down, or cutting off somebody’s medical care.

I’m sure the people in the path of Texas’ wildfires appreciate the “waste” Gov. Perry managed to cut from the budgets of volunteer fire departments and the Texas Forest Service. When the antibiotic-resistant plague gets rolling, I’m sure we’ll be similarly grateful to House Republicans for the “waste” they’re finding at the CDC.

Speaking this truth in public takes courage, because the ridiculers can point to famous anecdotes of government waste — bridges to nowhere, $600 toilet seats — and nearly everyone knows some story of a mismanaged local project, an acquaintance who scammed disability, or a lazy civil servant who can’t be fired.

But the private sector has its own examples of spectacular waste. How many welfare cheats would it take to equal the $300-500 million CEO Dick Fuld “earned” by managing Lehman Brothers into extinction and touching off the 2008 financial collapse? I can find waste in my own apartment — things I didn’t need, never used, or paid too much for. A certain amount of waste is the natural friction you’ll find in any human activity.

Government is a human project, so it has waste in it and always will. Except for unnecessary wars, is it more wasteful than the private sector? Does its inevitable waste cancel out the vital services it performs? Could we get those services without waste? No.

2. Regulations save money and lives. Corporations can often make a short-term profit doing something that eventually costs the public far more than the corporation makes. (The guy at Hooker Chemical who suggested burying toxic waste at Love Canal saved the company a bundle. He probably got a raise.) Stopping those bad deals is what government regulation is all about.

We hear every day how much companies spend complying with regulations, as if that were the whole story. What we gain from that spending is far more valuable. In the 60s and 70s, the auto companies fought tooth and nail against making cars safer. A car with seat belts used to cost extra. Air bags weren’t even an option, much less standard equipment. Hard, unpadded, and sometimes even sharp steering wheels killed thousands.

Traffic deaths in the U.S. peaked in the late 70s, even though the number of people, cars, and miles driven keeps going up. That’s government regulation for you.

Or consider this: Taking the lead out of gasoline has made American children measurably smarter. What’s that worth to our future economy? What’s that worth personally, to them and to us?

3. The rich are job destroyers, not job creators. You can’t have a mass-production economy if the masses can’t afford the products they make. So when the rich get too rich, growth suffers.

The last time the rich captured this much of our nation’s income was 1929 — the last time the economy crashed this badly. It’s not a coincidence.

4. Rich heirs are parasites. In political rhetoric, rich people are all hard-working, risk-taking entrepreneurs. Because politicians need contributions from the rich, they can’t point out just how useless most second-and-third-generation millionaires and billionaires are.

We are encouraged to resent the unemployed worker who doesn’t try hard enough to find a new job, but not the heir who never works. We’re encouraged to resent the black or Hispanic who gets into Harvard through affirmative action, but not the “legacy” Ivy Leaguer whose test scores are even worse.

Our plunging inheritance tax has increased inequality in the worst possible way, and makes us more like the hereditary aristocracies of 18th-century Europe. In spite of the pop-culture vampire revival, we’re still missing the underlying social metaphor of the original Dracula: Those exotically beguiling aristocrats are sucking our blood.

5. The U.S. government can’t go bankrupt (unless it decides to). Even President Obama has been invoking the spectre of government bankruptcy, but it can’t happen in any literal sense.

Why? The overwhelming majority of federal government’s expenses are in dollars. Its debt is in dollars. So what are dollars? Whatever the Federal Reserve says they are.

The Fed creates dollars the way that Delta creates frequent flier miles: It enters them on a spreadsheet. The U.S. Treasury has an account at the Fed, which the Fed can replenish by creating dollars to buy government bonds. Or it could just let the Treasury’s balance go negative. No sparks would fly out of the Fed’s computers. Negative numbers work just fine.

The only way the U. S. government can go bankrupt is if it creates a crisis for itself, like the recent debt-ceiling debacle. As long as Congress is willing to authorize the government to pay its debts, the government can pay its debts.

Though it can’t go bankrupt, the government could pay a penalty for running a big deficit in two ways: The markets could drive up interest rates (which isn’t happening), or the Fed creating dollars could increase inflation (which isn’t happening, but should).

6. Some inflation right now would be a good thing. The official mandate of the Federal Reserve is to balance inflation against unemployment. It doesn’t. The Fed goes on red-alert at every hint of inflation, but the current unemployment is not inspiring similar alarm.

An easier money policy would lower unemployment at the “cost” of inflation — which would actually be a benefit. Anybody who lived through the 70s remembers the mindset inflation brings: You don’t sit on piles of cash. You buy or invest now, because stuff is only going to cost more later.

Corporations are sitting on a trillion dollars of cash. Rich people are probably sitting on even more. A little fear of inflation would get that money moving again.

7. Fill in your own unspoken truth. …

By weeklysift | Posted in Articles | Also tagged | Comments (68)

Why I Am Not a Libertarian

August 22, 2011 – 12:15 pm

Of all the political movements out there, the Libertarians have the coolest rhetoric. No matter what the issue is, they get to talk about Freedom vs. Tyranny and quote all that rousing stuff the Founders said about King George.

It’s also the perfect belief system for a young male (and maybe, by now, young females too). You don’t need knowledge or experience of any specific situations, you just need to understand the One Big Idea That Solves Everything: Other than a small and appropriately humbled military and judicial establishment, government is bad. Protect life, protect property, enforce contracts — and leave everything else to the market.

I should know. Thirty-five years ago, I was a 19-year-old libertarian, and I learned all the arguments. Now I’m a progressive — a liberal, whatever — and these days even I have to shake my head at how often I’m tempted to quote Marx.

What happened? Well, I suppose I could stroke my white beard and pontificate vaguely about the benefits of 35 years of experience. But I’m thinking that a decent respect to the opinions of mankind requires me to be a little more specific.

When you escape a sweeping worldview like Libertarianism, you usually don’t find an equally sweeping critique right away. A broad reframing may come later, but the transformation starts with a few things that stick in your craw and refuse to let themselves be swallowed.

For example, when I was leaving fundamentalist Christianity, one of the first things that bothered me was the genealogy of Jesus. The Bible contains two irreconcilable ones (in Matthew and Luke); they can’t both be the “gospel Truth”. Now, decades later, that issue is nowhere near the top of my why-I’m-not-a-fundamentalist list.

So let me start with some specific, simple things before I launch into more abstract philosophy.

Plague. I recommend that anyone thinking about becoming a Libertarian read The Great Influenza by John Barry. It doesn’t say a word about political philosophy, but it does compare how various American cities handled the Spanish Flu of 1918, which globally killed more people than World War I. The cities that did best were the ones that aggressively quarantined, shut down public meeting places, imposed hygiene standards, and in general behaved like tyrants.

As you read, try to imagine a Libertarian approach to a serious plague. I don’t think there is one. Maybe most people would respond to sensible leadership, but public health is one of those areas where a few people with the freedom to pursue screwy ideas can mess up everybody.

Global warming. There’s a reason why small-government candidates deny global warming: Denial is the only answer they have. Global warming is a collective problem, and there is no individualistic solution to it. Even market-based approaches like cap-and-trade require a massive government intervention to create the market that attacks the problem.

Property. Now let’s get to that more serious reframing.

I had to live outside the Libertarian worldview for many years before I began to grasp the deeper problem with it: property. Every property system in history (and all the ones I’ve been able to imagine) are unjust. So a government that establishes a property system, defends it, and then stops is an agent of injustice.

Libertarians tend to take property as a given, as if it were natural or existed prior to any government. But defining what can be owned, what owning it means, and keeping track of who owns what — that’s a government intervention in the economy that dwarfs all other government interventions. You see, ownership is a social thing, not an individual thing. I can claim I own something, but what makes my ownership real is that the rest of you don’t own it. My ownership isn’t something I do, it’s something we do.

[Aside: This is why it’s completely false to say that government programs primarily benefit the poor. Property is a creation of government, so the primary beneficiaries of government are the people who own things — the rich.]

Property and Labor. It’s worthwhile to go back and read the justifications of property that were given in the early days of capitalism. The most famous and influential such justification was in John Locke’s 1690 classic The Second Treatise of Civil Government. Locke admits that both reason and Christian revelation say that God gave the world to all people in common.

But I shall endeavour to shew, how men might come to have a property in several parts of that which God gave to mankind in common, and that without any express compact of all the commoners.

Locke argues that we individually own our bodies, and so we own our labor. So when our labor gets mingled with physical objects, we develop a special claim on those objects. The person who gathers apples in a wild forest, Locke says, owns those apples.

The labour that was mine, removing them out of that common state they were in, hath fixed my property in them. … Though the water running in the fountain be every one’s, yet who can doubt, but that in the pitcher is his only who drew it out? His labour hath taken it out of the hands of nature, where it was common, and belonged equally to all her children, and hath thereby appropriated it to himself.

But Locke attaches a condition to this justification: It only works if your appropriation doesn’t prevent the next person from doing the same.

No body could think himself injured by the drinking of another man, though he took a good draught, who had a whole river of the same water left him to quench his thirst

And that’s where the whole thing breaks down. Today, a baby abandoned in a dumpster has as valid a moral claim to the Earth as anybody else. But as that child grows it will find that in fact everything of value has already been claimed. Locke’s metaphorical water is all in private pitchers now, and the common river is dry.

When that individual tries to mingle labor with physical objects, he or she will be rebuffed at every turn. Gather apples? The orchard belongs to someone else. Hunt or fish? The forest and the lake are private property.

The industrial economy is in the same condition. You can’t go down to the Ford plant and start working on your new car. You have to be hired first. You need an owner’s permission before your labor can start to create property for you. If no owner will give you that permission, then you could starve.

Access to the means of production. In Locke’s hunter-gatherer state of Nature, only laziness could keep an able-bodied person poor, because the means of production — Nature — was just sitting there waiting for human labor to turn it into property.

Today’s economic environment is very different, but our intuitions haven’t kept up. Our anxiety today isn’t that there won’t be enough goods in the world, and it isn’t fear that our own laziness will prevent us from working to produce those goods. Our fear is that the owners of the means of production won’t grant us access, so we will never have the opportunity to apply our labor.

I meet very few able-bodied adults whose first choice is to sit around demanding a handout. But I meet a lot who want a job and can’t find one. I also meet young people who would be happy to study whatever subject and train in whatever skill would get them a decent job. I am frustrated that I can’t tell them what subject or what skill that is.

Justice. A Libertarian government that simply maintained this property system would be enforcing a great injustice. Access to the means of production should be a human birthright. Everyone ought to have the chance to turn his or her labor into products that he or she could own.

What’s more, everyone should get the benefit of the increased productivity of society. No individual created that productivity single-handedly. No individual has a right to siphon it off.

But instead, our society has a class of owners, and everyone else participates in the bounty of the Earth and the wealth of human progress only by their permission. Increasingly, they maneuver into a position that allows them to drive a hard bargain for that permission. And so higher productivity means higher unemployment, and the average person’s standard of living decreases even as total wealth increases.

The role of government. I anticipate this objection: “You want to go back to being hunter-gatherers. We’ll all starve.”

Not at all. I want a modern economy. But a lassez-faire economy that takes the property system as given is unjust. It is the proper role of government to balance that injustice, to provide many paths of access to the means of production, and to compensate those who are still shut out.

To prevent government from doing so, in today’s world, is no way to champion freedom. Quite the opposite, it’s tyrannical.

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A Week of Down

August 8, 2011 – 11:59 am

It’s been an eventful week economically. The debt ceiling deal got passed and signed, but the stock market tanked and S&P downgraded U.S. government bonds anyway.

For the most part the media has covered this constellation of issues the way they cover anything: What-happened and what-it-means-for-citizens has gotten short shrift, in favor of assessing blame (always awarding it equally to both sides) and trying to predict how this tactical skirmish will affect future elections.

But we’re talking about trillions of dollars here, so it must have some effect on real people. Let’s start there.

What got cut first. “Only” $917 billion of spending cuts have been passed so far, including only $21-25 billion in the 2012 budget. (I’m seeing different numbers in different places; not sure why.) So worries about immediate contraction in the economy (at least from this deal) are overblown. The rest of the $900 billion is cut over the next decade.

Apparently, $350 billion comes from “security” — defense, homeland security, etc — and $567 billion (although this article in The Hill claims $756 billion) from domestic discretionary spending (i.e., not entitlements like Social Security and Medicare). That’s as specific as things have gotten so far. The Hill:

The law does not itemize the cuts, instead leaving those decisions to appropriators. But the size of reductions makes it inevitable they will impact a long list of discretionary programs, including those related to environmental protection, food safety, education and infrastructure.

<sarcasm> Food safety. Just the other day I was noticing that I hadn’t gotten food poisoning lately and thought, “That’s probably something we could cut back on.” <end sarcasm> The long-term unemployed are probably going to suffer too.

The next round of cuts. Boehner, Pelosi, Reid, and McConnell each get to name three people to a “Super Committee” to recommend another $1.5 trillion in deficit reduction by November. Their recommendations will get an up-or-down vote in both houses of Congress, with no amendments.

The problem with agreements like this is that no Congress can force a future Congress to do anything. So the agreement contains automatic cuts that will happen if the $1.5 trillion deficit reduction doesn’t pass. The automatic cuts are supposed to be ugly to both sides, so that they’ll be motivated to negotiate a deal to avoid them.

Republicans are so set against any tax increases on the wealthy that they wouldn’t agree to them even in this automatic deficit-reduction package that isn’t supposed to happen. Their motivation is supposed to come from defense spending cuts.

The painful-automatic-reduction feature of the agreement sets up another hostage crisis in November, with the idea that both sides will have hostages, so no one will get shot. Somehow I don’t find this comforting. Jonathan Chait has compared such agreements to ransoming your child from kidnappers for “$100,000 and your other child”.

The precedent we’ve set. Keep in mind that the debt ceiling has never been used this way before. Most other countries don’t even have a debt ceiling, because it’s redundant: If Congress passes a budget with a deficit, it shouldn’t have to separately authorize borrowing to cover it. (That’s like going to a restaurant with nothing but your Visa card, eating, and then debating whether you’re going to take on this additional debt by signing the receipt.)

In the past, debt-ceiling increases have been opportunities for the out-of-power party to posture about the irresponsibility of the in-power party. But never has there been a negotiation in which the president made concessions to get the ceiling raised. That’s because the debt ceiling is a doomsday device. Nobody seriously believed that the country would be better off if our government couldn’t meet its commitments.  So there was nothing to negotiate about.

But now hostage-taking has become a respectable tactic. Don’t take my word for it, listen to Senate Minority Leader Mitch McConnell.

I think some of our members may have thought the default issue was a hostage you might take a chance at shooting. Most of us didn’t think that. What we did learn is this — it’s a hostage that’s worth ransoming.

McConnell says this “set a template for the future. … we’ll be doing it all over.”

I keep flashing back to the novel The First Man in Rome. As the story begins, the Roman Republic has few rules but a lot of traditions. In a gradual back-and-forth escalation of advantage-seeking, Marius (the main character) and his enemies violate the traditions — sometimes with justification, sometimes not. By the end, Marius is mounting his enemies’ heads on spikes in the Forum.

So yeah, there is nothing illegal about holding the American economy hostage until you get what you want. It’s just a violation of tradition, something we’ve never done before. But if you go far enough down that road, you wind up with heads on spikes.

The downgrade. Raising the debt ceiling and cutting future deficits was supposed to keep our credit rating up. It didn’t. On Friday S&P downgraded the U.S. government’s bonds from AAA to AA+, which is still pretty good. (Japan is at AA-, and they manage to sell 30-year bonds at less than a 2% interest rate.) The other major ratings service, Moody’s, is maintaining the AAA rating, at least for now.

As with the debt-ceiling crisis, lots of blame is going back and forth. Democrats and Republicans are blaming each other, the administration is criticizing S&P, and so on.

Here’s the thing to understand: What bothers S&P isn’t the sheer size of the federal debt. (Again, Japan is much worse fiscal shape, and they’re far from bankrupt.) It’s the dysfunctionality of our political system. If you look at the trends and do the math, our current level of taxation doesn’t cover the expenses of a world empire with an aging population and an inefficient health care system. None of that is unsolvable, but S&P says:

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed.

No one has a plan to disengage our military commitments, the Republicans have drawn a line in the sand against any increase in revenues, and our society is probably not willing to let large numbers of old people die in the streets. So how does that situation resolve? Inflation? Or maybe one of the future fiscal hostage crises goes bad and we actually default.

Given what we’ve just seen, it’s hard to make the case that loaning money to the U.S. government is risk-free.

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The Mosler Proposals

August 1, 2011 – 10:58 am

Two weeks ago I introduced you to Warren Mosler’s Seven Deadly Innocent Frauds of Economic Policy, a short and insightful book you can read for free.

Review. Mosler’s main point is simple: Money doesn’t work the way you think it does. A dollar is just a data entry at the Federal Reserve, and doesn’t represent any physical substance. So if the Fed’s computer says you have a billion dollars, then you do. Those dollars didn’t have to “come from” anywhere or correspond to anything; they’re just data. (If Delta gave you a million frequent flier miles, would those miles have to come from somewhere?)

Consequently, the U.S. government’s spending is not limited by it’s ability to tax or borrow. Dollars can simply be created out of nothing by making an entry in the Fed’s database. Here’s how it works: The Treasury “borrows” by issuing a bond which the Fed “buys” by entering a credit in the Treasury’s account. Checks to Social Security recipients, defense contractors, or whoever eventually wind up at the Fed, which “cashes” them against the balance in the Treasury’s account.

According to the Fed balance sheet at Wikipedia, the Fed currently owns $1.6 trillion of the total $14.5 trillion of Treasury securities. That’s $1.6 trillion that came from nowhere.

A debt-ceiling aside. Those debt-ceiling clocks have been ticking down to the moment when the Treasury’s account at the Fed hits zero. Tuesday, CNBC’s John Carney asked the trillion-dollar question: Does that event actually mean anything? Or would a negative number in the Fed’s database work just as well?

Carney thinks it would.

Think about it. The check comes into the Federal Reserve. It looks at the U.S. government balance and discovers that we’re at zero. What does the Federal Reserve do?

I’m pretty sure the Federal Reserve would go ahead and credit the bank submitting the check with the deposit to account for the fund transfer.

What are the constraints? Then what keeps the government from giving us all a few million? Fear of inflation. Since our economy doesn’t produce enough goods to satisfy 300 million millionaires, those magically-created dollars would bid up the price of everything.

But here’s the next major point: We have unemployed workers, idle factories, empty storefronts, and so forth. The economy is just dying to produce more, if only somebody had dollars to pay for it. In this situation, there really is a free lunch: The government creates more money by spending without taxing or borrowing, and the economy creates more goods and services. No extra inflation.

Go back to the airline analogy. If Delta created and distributed massive numbers of frequent-flier miles, all the frequent-flier seats would fill up instantly, making most people’s miles more-or-less worthless. But what if most those seats had been flying empty? Then Delta could create some quantity of new miles without damaging the value of existing miles.

If you believe that, what do you do? Obviously you spend more and tax less, until the economy starts producing close to capacity.

Some of Mosler’s proposals are larger versions of things that have already been tried: suspending the collection of Social Security and Medicare taxes while continuing to pay benefits (not threatening future benefits, since the trust funds are also just data at the Fed), and giving money to the states (because it makes no sense to lay off teachers and construction workers when we still have work for them to do).

Mosler also wants to establish universal health care through a combination of a conservative idea (health savings accounts for the first $5000 each year) and a liberal idea (Medicare-for-everybody for larger expenses).

His most creative proposal is for a new category of federal job, which pays $8 per hour plus benefits. These new hires would work throughout the government rather than in a few big make-work projects. Any government office that wanted to employ them could do so without using money from its budget.

If you’ve ever worked in an office, you know that there are always useful projects that nobody can get around to doing. You may not be able to pull a shovel-ready thousand-worker project out of the air, but you could easily put two temps to work tomorrow morning, if you could just find the money.

As the economy moves closer to capacity, many of these workers will move into better jobs (aided by their continuous work history). If industry starts to have trouble finding workers, the government can ramp up the amount that the $8 workers cost project budgets.

Mosler would clean up the residue of the housing bubble in two ways: (1) Give banks freer access to loans from the Fed in exchange for tighter regulation. (2) Have the government buy foreclosed houses from the banks (making the banks eat any negative equity) and rent them back to their owners for two years. After two years, the owners have first crack at re-buying before a general auction is held.

The real economy. Probably the best thing to glean from Mosler’s book is a respect for the real economy (goods and services) as opposed to the financial economy (dollars).

This comes through clearest when you think about future generations. We have worried way too much about the numbers in future Fed databases, as if numbers make an economy robust. Instead of good numbers, we should be trying to leave future generations skills, good health, peace, a clean environment, social cohesion, and a solid physical infrastructure.

If they have those things, they will be able to produce the goods and services they need. If not, dollars won’t help them.

By weeklysift | Posted in The Sifted Bookshelf | Comments (7)

Digging into the Deficit

July 25, 2011 – 10:58 am

At the heart of the debt-ceiling debate is the question: How did the deficit get so high? It’s really pretty simple: We cut taxes, and healthcare got expensive. It all boils down to the next two charts.

The first chart refutes John Boehner’s mantra: “Washington has a spending problem, not a revenue problem.” We’ve got both.

spending and revenue

[Source: economist Jared Bernstein, who says he got it from the Office of Management and Budget. Here at the outset, I should justify the scales. I think there are only two legitimate ways to track government spending through time: as a percentage of GDP or inflation-adjusted per capita. A common conservative trick is to show raw revenues/expenditures tracking ever upward, which just proves that the country is getting bigger.]

Revenue (in blue) peaks just before the Bush tax cuts take effect, and then takes a second plunge when the Great Recession starts in 2007. Spending (red) is in a slow downward trend from the beginning of the graph until 2000. There’s a bump in 2000-2002 that could be blamed on a recession. (Recessions not only increase safety-net spending like unemployment insurance, they lower GDP. So spending-as-a-percentage-of-GDP gets a push from both sides.) But spending stays up (probably due to the Iraq War) during the tepid “Bush Boom” of 2003-2007, before jumping again when the Great Recession hits in 2007.

The second chart focuses entirely on spending.

health care spending

[Source: Christopher Conover at the conservative American Enterprise Institute, who attributes his numbers to the federal Bureau of Economic Analysis. This chart is about total government spending — state and local as well as federal — so the percentages of GDP are higher than in the first graph. It also goes back much further. The big spike is World War II.]

Conover notes:

Between 1966 and 2007, the entire increase in the size of government relative to the economy resulted from growth in tax-financed health spending.

And Matt Yglesias draws the obvious conclusion:

[G]rowth in government spending is overwhelmingly not the consequence of grasping liberals coming up with evermore things for the government to do. Instead, the government has for a long time shouldered responsibility for health care finance, and health care is very expensive.

So a more precise statement of the deficit problem is: We have a revenue problem and a healthcare spending problem.

Now let’s dig deeper into revenue. This chart shows revenue by type of tax:

taxes by type

[Source: The Department of Numbers blog. The vertical scale is percentage of GDP.]

Income tax stays within a range, with a blip up to create the Clinton surplus, and then a dive from the Bush tax cuts. (BTW: Unless you are willfully blind, it should be obvious that tax cuts do not increase revenue.) When this chart ends in 2007 we’re near the bottom of that range.  Payroll taxes (Social Security and Medicare — in yellow) go steadily upwards, while corporate taxes go steadily downwards from nearly 6% of GDP under Eisenhower to less than 2% now.

OK, so at the very least we have a corporate tax revenue problem.

Now let’s look at income tax. Conservatives make a big deal about how much tax the rich  pay — more than ever, by just about any measure.

tax burden of the rich

But that’s mostly because they are raking off a much higher percentage of the total national income. (In 50 years, when one guy is making all the income, he’ll necessarily pay all the income tax. Wouldn’t you hate to be him?)

In fact, the effective income tax rate (i.e., what they actually pay) has dropped considerably for the very rich, even as their income has shot up.

income and tax rates of the rich[Source: Ezra Klein, who attributes it to the economists listed at the bottom of the graphic.]

So: We have a problem getting revenue from corporations and the rich, and a healthcare spending problem.

Finally, let’s delve into that healthcare problem. Part of it isn’t a problem at all. As a society, we’re spending more on healthcare partly because the healthcare industry has better products than it used to.

A century ago, hospitals couldn’t do much more for you than a dedicated family member could do at home. Today, they can. People who a generation ago would have died in their 50s from heart attacks and cancer are surviving into their 80s and dying in nursing homes. It costs more, but personally, surviving into my 80s is precisely what I want to spend my money on. The option to buy a longer life is an opportunity, not a problem.

But there is a related problem: Compared to other countries, we’re not getting what we pay for.

Americans spend more, live less

[Source: University of California Atlas of Global Inequality. This data is from 2000, but things have only gotten worse since then, as the next chart will show.]

For all our healthcare spending, we live about as long as Cubans — four years less than the Japanese, and even two years less than our Canadian neighbors. (You might picture the Japanese living some spartan lifestyle we’d find unacceptable. But Canadians?)

And while all nations are spending more on healthcare — because everybody wants a longer life — the U.S. is pulling away.

rising American costs

[Source: Ezra Klein. The vertical scale is inflation-adjusted dollars per capita.]

And that’s the worrisome issue: If we’re on a higher exponential-growth path than everyone else, eventually healthcare spending will swamp the rest of our economy.

Total cost vs. government cost. Maybe you noticed I pulled a switch: The last two charts have been about total healthcare spending, not just government healthcare spending. Only about half of our healthcare spending goes through the government (Medicare, Medicaid, Veterans Administration, etc.).

If you think that government healthcare spending is the whole problem, then you do what Paul Ryan proposed: Replace Medicare and Medicaid with capped private health-insurance subsidies. The cap can be wherever the budget needs it to be, so the government-spending problem is solved.

But if total healthcare costs stay on their exponential path, they swamp the economy anyway. Eventually the government subsidies are tiny compared to the real cost of healthcare, and middle-class people start dying of curable diseases because they can’t afford treatment.

To an extent, it already happens. The U.S. performs badly in what public-health professionals call amenable mortality — i.e., preventable deaths.

preventable deaths by country

Now, I can’t see any democracy allowing middle-class people to die for lack of care, so either we’ll scrap democracy or government will end up paying for care no matter what Ryan’s projections say. And that’s why I focus on the total cost of healthcare.

Single-payer. Paul Ryan believes dialing back government funding will slow the rising costs, but his justification is a combination of wishful thinking and just-so stories about the market. The countries that get better results do the exact opposite: Virtually all their healthcare spending goes through the government.

All the evidence of actual countries tells us this: Government healthcare is more efficient than private healthcare.

In the private part of our healthcare system, the easiest way to make money is to shift costs to somebody else  — insure the people who don’t get sick — not lower the cost of care. (Ryan’s plan is similar — it shifts costs from the government to individuals.) Only single-payer systems, where there is nobody to shift costs to, deal with the real problem.

So the long-term answer to the healthcare spending problem is paradoxical: Extend Medicare to everybody.

In the short run, it will essentially double government healthcare spending. (Done right, this would be invisible to both the federal deficit and your personal budget. What you pay now in health-insurance premiums you would instead pay as taxes.) But in the long run, a single-payer system would get our costs (and outcomes) in line with countries that do healthcare much better than we do.

Summing up. So that’s my answer to the long-term deficit: End the Bush tax cuts at least for the wealthy and maybe for everybody (because the economy did fine with the Clinton tax rates). Close loopholes until corporate taxes get back to Eisenhower-era levels. And move to a single-payer system to get healthcare costs under control.

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The Sifted Bookshelf: Seven Deadly Innocent Frauds

July 18, 2011 – 11:29 am

In one memorable scene from The Matrix, a boy apparently bends a spoon with his mind, and then gives Neo advice on how it’s done: by realizing that there is no spoon.

At first “there is no spoon” sounds like mystic mumbo-jumbo, but eventually you come to understand that it is literally true: The world the boy and Neo share is a computer simulation, and the apparent spoon is just a pattern of data. If you believe it is a solid object, you expect it to obey physical laws and not bend. But if it is a pattern of data, why couldn’t it be a different pattern of data — a bent spoon — instead?

As you watched that scene, you may not have realized you were learning about economics, but you were. If you need that idea spelled out more clearly (as I did) you should read a down-to-earth little book that is available for free on the internet: The Seven Deadly Innocent Frauds of Economic Policy by Warren Mosler. (Don’t let the blank first page confuse you. Keep scrolling.)

The deadly frauds, which very serious pundits and politicans tell you every day (innocently, because they don’t know any better) are:

  1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.
  2. With government deficits, we are leaving our debt burden to our children.
  3. Government budget deficits take away savings.
  4. Social Security is broken.
  5. The trade deficit is an unsustainable imbalance that takes away jobs and output.
  6. We need savings to provide the funds for investment.
  7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.

Now, chances are all seven of those seem like common sense to you, just as the spoon looked very solidly spoonlike to Neo. What people have trouble grasping, Mosler explains, is what dollars are: Dollars are numbers on a spreadsheet at the Federal Reserve. Dollars are a pattern of data, and (like Neo’s spoon) could just as easily be a different pattern of data.

When, for example, the government pays my Dad’s monthly Social Security benefit, the Fed just increases the balance in the account of Dad’s bank. No object of any real-world value moves or changes.

Where else do we see this happen? Your team kicks a field goal and on the scoreboard, the score changes from, say, 7 points to 10 points. Does anyone wonder where the stadium got those three points? … Do you think all bowling alleys and football stadiums should have a “reserve of points” in a “lock box” to make sure you can get the points you have scored? …

Just keep this in mind as a starting point: The federal government doesn’t ever “have” or “not have” any dollars. It’s just like the stadium, which doesn’t “have” or “not have” a hoard of points to give out. When it comes to the dollar, our government, working through its Federal agencies, the Federal Reserve Bank and the U.S. Treasury Department, is the score keeper.

Not bankrupt. So Mosler immediately discards any notion that the U. S. government might “go broke”. Paying interest or redeeming a bond means changing the numbers in the spreadsheet, not coming up with real assets that are conserved by physical laws.

Ditto for parts of the government going bankrupt. If the Social Security Trust Fund “runs out”, that just means that the corresponding entry in the spreadsheet is zero and about to go negative, not that some real cupboard is now bare.

Taxes and inflation. The purpose of taxing is not to acquire assets that the government needs to fund its programs (because the government never has or doesn’t have any dollars). It is to take dollars out of circulation so that they don’t cause inflation.

Inflation happens when the real economy isn’t able to produce enough goods to satisfy all the people who have money to spend. So consumers bid up the price of scarce goods and businesses bid up the wages of scarce workers.

Seen any scarcities of goods or workers lately? There are occasional bottlenecks (like gasoline), but in general the economy has plenty of room to produce more goods to cover more dollars. There is no good reason not to create those dollars so that more people can work and spend.

What about saddling future generations with government debt? Again, the problem is our mis-framing of what money and debt means: Everything produced in the future will be consumed in the future, not sent back in time to pay for our spending today.

Some day it will be our children changing numbers on what will be their spreadsheet, just as seamlessly as we did, and our parents did, though hopefully with a better understanding!

There are many more quotable passages, but I’ll limit myself to this one, where Mosler answers the people who think that we need to change Social Security because the worker-to-retiree ratio is shrinking.

Let’s look at it this way: 50 years from now when there is one person left working and 300 million retired people (I exaggerate to make the point), that guy is going to be pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. etc. etc. What we need to do is make sure that those 300 million retired people have the funds to pay him??? I don’t think so! This problem obviously isn’t about money.

Mosler’s book falls into three parts: the explanation of the seven frauds (56 easy-to-read pages), the story of his career as a banker and fund manager (entertaining if you like business stories, but not necessary to get the point), and his prescription for the economy (which I’ll cover next week).

Another common-sense story that explains money-supply issues is Paul Krugman’s 1998 article about a baby-sitting co-op whose “money” consisted of coupons the participating parents traded when they baby-sat for each other.

Now what happened in the Sweeneys’ co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low. As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple’s decision to go out was another’s chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.

In short, the co-op had fallen into a recession.

They got out of the recession by printing and distributing more coupons, which worked because their “economy” was willing and able to produce more nights-out and more hours of babysitting.

A related discussion this week has concerned a novel solution to the debt-ceiling “crisis”. The Pragmatic Capitalism blog claims that the Treasury, which unlike the Fed is completely under the President’s control, has unlimited authority to produce palladium coins. Treasury could strike a small coin, stamp $1 trillion on it, and use it to redeem $1 T worth of bonds, thereby creating $1 T of space under the debt ceiling.

Independent of whether this is good economic policy, it completely avoids the current hostage situation. Even skeptics like Matt Yglesias are coming to believe that this would work.

By weeklysift | Posted in The Sifted Bookshelf | Comments (25)

Appropriation

October 25, 2010 – 3:27 pm

Whenever there are in any country uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right. The earth is given as a common stock for man to labor and live on. If for the encouragement of industry we allow it to be appropriated, we must take care that other employment be provided to those excluded from the appropriation.

— Thomas Jefferson, from a letter to James Madison (1785)

In this week’s Sift:

  • Where Jobs Come From. Conservatives would have you believe that capitalists create jobs, conjuring both workers and customers out of the aether. Right now, it looks more like customers create jobs — workers and capitalists would pop up as needed if only we had customers.
  • Short Notes. A government report has global warming leading to droughts sooner rather than later. Bush-haters and Obama-haters compared. Kansans will respond to global warming as long as they don’t have to admit it’s happening. Obama used to just be the anti-Christ; now he’s the Angel of Death. The Times takes a closer look at Chamber of Commerce donors. And more.
Where Jobs Come From

In the Pollyanna world of free-market economic theory, long-term unemployment is impossible: When people are unemployed, wages drop. That makes it possible to produce products more cheaply, which makes it possible for people to buy more stuff. At some point, then, it makes sense to produce stuff that you wouldn’t have produced at the higher wage, and so you hire people. It’s the Invisible Hand of the Market; it fixes everything.

The same thing is supposed to happen for services. At some wage, it makes sense to start hiring gas-station attendants and movie-theater ushers again. So people will, and unemployment will go away.

In theory, only a few things can keep this from happening: Union contracts or minimum-wage laws might prevent wages from falling far enough. Unemployment benefits or welfare might keep potential workers from becoming desperate enough to take the very-low-wage jobs. Or maybe the workers are just lazy, and they’re lying about the fact that they want to work.

The intoxicating thing about theory is that it saves you from needing to know anything. You don’t need to know any of the lying, lazy unemployed yourself to know that they must be out there. You don’t need to ask the unemployed whether they’re willing to take less money — they can’t be, or otherwise the theory says they’d have jobs by now. You don’t need elaborate economic models to tell you to cut the minimum wage or break the unions or cut off unemployment benefits — if there’s still unemployment, that must be the reason. The theory says so.

The problem, of course, is that as wages go down, people’s ability to buy things goes down too. So it’s easier to make things but harder to sell them. Imagine taking this as far as it can go: If you could cut everybody’s wages to zero, you could make damn near anything and sell it for pennies. But no one would have pennies, so it wouldn’t matter.

Emotions complicate the problem. You might stop buying stuff just because you’re afraid of losing your job, even though everything looks secure. They can cut prices all they want, but you’re still going to wait and see. If you’re a business, you may stop making stuff just because you’re afraid you won’t be able to sell it. Things may look fine at the moment, but who knows what the economy will be like by the time your new product hits the shelves next spring?

Debt complicates things too. Maybe my business looks fine, until my customers go bankrupt and can’t pay me. Now I can’t pay the people I owe, and they can’t pay the people they owe, and so.

In short, economies are complicated. You can’t just reduce them to one variable (wages) and assume things will work out if that variable goes low enough. If you take things a step further and use your one-variable economic model to infer things about the moral character of people you haven’t met, you’re just fantasizing. And if it makes you happy to fantasize a world full of lying, lazy people who expect you to feed them … well, maybe the wages of therapists will go down far enough that you’ll hire one.

So where do jobs come from? A bunch of factors need to come together to create a job. There has to be something worth doing, a worker willing and able to do it, a capitalist to pull together all the tools and materials of production, and a customer willing and able to pay for the product or service.

In conservative economics, though, all that really matters is the capitalist. If the capitalist has money and a good idea, the worker and the customer will appear by magic. If that were true, then a lot of conservative policies would make sense: Cut taxes on rich people, and they’ll use that money to become capitalists and create jobs. (The slogan here is “I never got a job from a poor person.” Daily Kos’ Citizen K takes that line apart — and incidentally is my source for this week’s Sift quote.)

The reason conservative economics hasn’t been working — we’ve been cutting taxes since Reagan and all it ever seems to produce is government debt — is that lack of capital and capitalists isn’t the problem. Lack of customers is. At this point, a customer with money would make workers and capitalists appear by magic. Lack of demand, not lack of capital, is the reason businesses aren’t hiring.

And now we get to the most serious problem with conservative trickle-down economics: Rich people make bad customers. There aren’t enough of them, and they don’t really need the things they buy, so they’re unreliable. Also, they use a lot of one-of-a-kind services that don’t scale up and so don’t lead to long-term growth. So an economy that depends on rich people to be its customers is not going to be as healthy as an economy that sells to the middle class.

In the same letter to Madison I quoted at the top of this post, Jefferson (who was living in pre-revolutionary France as the US ambassador) reflected on:

that unequal division of property which occasions the numberless instances of wretchedness which I had observed in this country and is to be observed all over Europe. The property of this country is absolutely concentred in a very few hands, having revenues of from half a million of guineas a year downwards. These employ the flower of the country as servants, some of them having as many as 200 domestics

In Jeffersonian America, on the other hand, it was easy to find work and even to learn a trade that you could turn into a business of your own. (Visiting Frenchman Alexis De Tocqueville observed “hands are always in request” in early America.) It wasn’t because we had more rich people than France did. We had more unappropriated land and reliable middle-class customers, not richer capitalists.

Market Failures. When we talk about jobs, it’s easy to confuse the mechanisms of unemployment with the causes. In any particular industry, for example, technology is likely to be putting people out of work. That’s been happening since the invention of the plow.

But if the same stuff can be produced with less work, that’s a good thing. It only becomes a problem if we make it a problem. Two possibilities arise: Either there is still undone stuff worth doing, or there isn’t. If there isn’t — if everything everybody wants is producible without everybody working — then we have a distribution problem; either we’ll have to figure out a better way to share the work around, or we’ll have to disconnect work from consumption.

But I don’t think that’s where we are. It seems to me that there is plenty of stuff that needs doing. To give just one example, we need a new electrical grid. We need the grid to do at least two things the current one won’t: move electricity cheaply from sunny and windy places to densely populated places; and interact with smart houses to schedule non-urgent uses of electricity for times of low demand.

In the long run a smart grid would be a tremendous investment, and in the short run it would create a lot of jobs, but it’s not getting built. The only private interests in a position to build it are power companies, and their motivations run both ways. (If you already own a coal plant, you don’t want to make it easy for wind farms to compete with you.) And government can’t build it because it would cost money and government spending is evil.

The smart grid is an example of a market failure. Overall, a dollar invested in a smart grid today might net the economy two dollars or ten dollars or a hundred dollars down the road. But the market isn’t able to capture that profit in a package it can sell to an investor, so the private sector won’t build it. The same thing was true about the public infrastructure projects of the past — the canals, the highways, the airports, rural electrification, the TVA, and so on. They were great ideas, but the private sector would never have built them, because the profit from them scatters throughout the economy rather than concentrating in the hands of the investors.

The only way to build big public infrastructure is through government. We need to tax the rich and invest the money in building a healthy economy for the future — the same way America always did before conservatives took over in the 1980s.

Or we could not tax the rich and they could hire more domestics, like the pre-revolutionary French aristocrats did. That’s the alternative jobs plan.

James Kroeger’s Response to My Affluent Republican Brother is worth reading in its entirety, but it contains one argument for taxing the rich that I had never thought of before: Raising taxes on the rich actually has very little effect on their lives.

Here’s why: Poor people buy bread because they want to eat bread, not because they want to own the biggest loaf on the block. And if poor people suddenly had more money to spend on bread, it wouldn’t be that hard for the economic system to adjust and bake more of it.

But the stuff rich people buy is different. If rich people have more money to spend on beachfront property, the price of it will go up. But they won’t manage to buy any more of it, because there isn’t any more of it. The same thing is true of Renoirs or century-old bottles of wine. The whole point of buying these things is to win the competition with other rich people.

So what happens if taxes go up and rich people suddenly have less disposable income? Nothing much. As long as you maintain the same relative ranking among the other rich people, you win the same auctions for the same objects — just at a lower price.

A similar thing happens with manufactured luxury goods. The only reason to buy a 500-foot yacht is to outclass the other billionaires. If all billionaires had less money, maybe you could outclass them with a mere 400-foot yacht. The biggest would still be the biggest, and that’s all that really matters.

One result of cutting taxes is that we don’t have the money to pay teachers, so we’re laying them off. This is another example where the jobs issue has gotten disconnected from what needs doing. Have we discovered some more efficient way to educate children that makes teachers obsolete, or lets one teacher effectively handle more students? Not that I’ve noticed. Do we have a vision of the future that makes a place for large numbers of poorly educated workers? I don’t think so.

So teaching kids is still something that needs doing. We have unemployed people who are trained to do it. It’s a long-term good investment. And we are still a rich country. But we’re going to lay teachers off because rich Americans don’t want to pay taxes.

Citizen K says we should substitute “unused business opportunities” for Jefferson’s “uncultivated lands” in this week’s Sift quote. I’ve talked elsewhere about the idea that “appropriation” is about more than just land. The stock of ideas and inventions passed down from previous generations is also part of the common inheritance. If those ideas seem to belong to the corporations who own our industries, people are once again being “excluded from the appropriation”.

Short Notes

It’s about life rather than politics, but check out my article Sudden Death for UU World.

I have the feeling there’s the root of a big idea in here: A small nonprofit group is getting people in Kansas to “conserve energy and consider renewable fuels” by “focusing on thrift, patriotism, spiritual conviction and economic prosperity” rather than on scientific evidence of global warming.

Here’s what I think is going on: Conservatives have gotten very good at demonizing certain words and people. The kind of folks who watch Glenn Beck will often know nothing about an issue other than the name of a villain and a phrase that describes the conspiracy he’s supposed to be masterminding. So if you mention Al Gore or global warming, you belong to the Dark Side.

At the same time, though, conservative indoctrination hasn’t rewired people’s basic intuitions, many of which are sound. So a lot of the same people who are sure that global warming is a socialist plot also sense that burning all this fossil fuel can’t be a good idea — eventually the outdoors will smell like a big truck idling in a small garage.

That is the challenge of liberal messaging: How do we reach the basically healthy intuitions of low-information voters, even the ones who have been trained to have a Pavlovian aversion to certain words and names?

Atlantic’s Kevin Drum summarizes a new paper from the National Center for Atmospheric Research:

In other words, virtually all of the world except for China and Russia will experience increased drought by 2030 and severe drought by 2060

It’s a global-warming effect, which means Republicans will refuse to believe it and will filibuster doing to avoid it anytime soon.

Now that it doesn’t matter any more, we can get accurate coverage of the Dick Cheney hunting accident. The guy he shot in the face was not an “old friend” as the media reported at the time. His injuries were serious. It was Cheney who was violating safety protocols, not his victim. And Cheney has never apologized.

Kevin Drum again, this time comparing left-wing craziness to right-wing craziness, and in particular Bush-hatred to Obama-hatred and Clinton-hatred. He notes these differences:

(1) Conservatives go nuts faster. It took a couple of years for anti-Bush sentiment to really get up to speed. Both Clinton and Obama got the full treatment within weeks of taking office.

(2) Conservatives go nuts in greater numbers. Two-thirds of Republicans think Obama is a socialist and upwards of half aren’t sure he was born in America. Nobody ever bothered polling Democrats on whether they thought Bush was a fascist or a raging alcoholic, but I think it’s safe to say the numbers would have been way, way less than half.

(3) Conservatives go nuts at higher levels. There are lots of big-time conservatives — members of Congress, radio and TV talkers, think tankers — who are every bit as hard edged as the most hard edged tea partier. But how many big-time Democrats thought Bush had stolen Ohio? Or that banks should have been nationalized following the financial collapse?

(4) Conservatives go nuts in the media. During the Clinton era, it was talk radio and Drudge and the Wall Street Journal editorial page. These days it’s Fox News (and talk radio and Drudge and the Wall Street Journal editorial page). Liberals just don’t have anything even close. Our nutballs are mostly relegated to C-list blogs and a few low-wattage radio stations. Keith Olbermann is about as outrageous as liberals get in the big-time media, and he’s a shrinking violet compared to guys like Rush Limbaugh and Glenn Beck.

Colorado is voting on Prop 62, which will make every fertilized ovum a person under the law — including those in test tubes. I think the most convincing arguments against Prop 62 come from its supporters, so I’ll link to some: Here, Personhood Colorado explains why the facts you may be hearing against Prop 62 are “lies” and “scare tactics”. So, for example, Prop 62 won’t ban contraception — just certain kinds of contraception. It won’t ban in vitro fertilization — it will just make in vitro fertilization impractical. And so on.

And if you weren’t convinced by those arguments, maybe morphing Obama into the Angel of Death will persuade you.

Apparently it’s outrageous to accuse Sharron Angle of racism when all she’s done is connect Harry Reid to scary Latino thugs in a misleading ad. “Illegal immigration is not about race,” said an Angle spokesman. That must be why so many people are worried about illegal Canadian immigrants.

The NYT looks into the U.S. Chamber of Commerce’s political activity and the donors who support it. The Chamber’s doesn’t disclose its donors, but the Times was able to find out this much:

  • they’re spending $144 million on lobbying this year, more than any other group
  • the Chamber claims to represent small businesses, but half of its contributions in 2008 came from just 45 donors
  • big gifts from specific companies coincide with big campaigns on issues that affect those companies

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