demandside

Three years ago the world was happily booming, everyone had a job, miners and merchants, factory workers and farmers, all gainfully employed helping each other out.

Today, job losses mean idleness has replaced industry.  Need replaces plenty.  Insecurity replaces confidence.  People are not able to obtain the goods and services they need.  Artists and artisans go wanting.  The higher aspects of our culture are discretionary purposes.

What is the difference between then and now?  Are there fewer industrious people, less commodities, a cut in plant and equipment?  No.  The difference between then and now is that the financial sector has screwed up the medium of exchange.

It is not that there is not enough money, it is that the money itself is compromised.  The way we transfer value from the future to the present, from one person to another, from producer to consumer.

We’re going to wander around this subject today and see how it affects the discussion of debt, bailouts, and rebuilding the economy.  We’ll compare the Obama budgets and stimulus plans with those of the previous president.

On Idiot of the Week, we have David Frum from the American Enterprise Institute, and on the History Note it is back to the Depression, with an assist from Paul Kasriel of Northern Trust.

MUSIC

First here’s some context, news to Wednesday, March 11.

The stock market is …  bouncing back …… or bouncing upward for the moment at least.  The Dow is up over four percent as we record this, near noon on Tuesday.  The credit is being given to reports of a Citigroup profit.  How likely is that?  Citigroup is up thirty-three cents, but that is thirty percent.  The S&P over seven hundred.  Well, there’s a lot of money with nowhere to go.  It’s now driving up the price of Treasuries, which is driving down the interest rate on federal borrowing.

Much has been made of Barack Obama’s responsibility for the bear market.  A lot of it comes from the talking heads at CNBC and other financial channels.  We think Mr. Obama benefitted as much as anybody from the crashing economy and the stocks that fell along with it, insofar as he was elected.  In 45 days in office, unfortunately, the man has not been able to turn things around.  The only thing more ridiculous than an expectation like that is the fact that it is getting serious airplay.

It demonstrates a determined bias against the new president, ready and willing to take up any talking point, so long as it furthers a political purpose.  This does not bode well for the future, since there will no doubt be times when the contentions are less preposterous.  CNBC stock jocks are very good at interpreting what the Market is saying.  It’s like priests interpreting the Oracle at Delphi.  “The market is telling us this, the market is telling us ……”  THE PUBLIC IS TELLING THE MARKET TO TAKE A HIKE.  YOU TOOK OUR RETIREMENT SAVINGS AND TURNED IT INTO AIR.  WE’RE LUCKY YOU DIDN’T GET YOUR HANDS ON SOCIAL SECURITY.”

We do note that even as the private sector continues to shed jobs, government is hiring.  We suspect that much of the weakness in the stock market is not from domestic policy at all, but from the globalization of the economy.  And the rest of the world is tanking faster than we are.
From EPI, the Economic Policy Insititute

• Private and government payrolls combined have shrunk for 14 straight months, and net job losses since the start of the recession total 4.4 million.  (Private sector payrolls have shrunk by 4.6 million jobs over the same period.)

• Job losses have averaged almost 650,000 a month over the last four months.

• The official unemployment rate, which was 4.9 percent at the start of the recession in December 2007, reached 8.1 percent last month.

• Other indicators show the breadth of labor market weakness.  For example, the percentage of the population with a job (60.3 percent) has fallen to its lowest level since early 1986.

• The Labor Department’s most comprehensive alternative unemployment rate measure — U6  — which includes people who want to work but are discouraged from looking and people working part time because they can’t find full-time jobs — stood at 14.8 percent in February, up over six percentage points since the recession began and the highest level on record in data that go back to 1994.

• Well over one-fifth (23.1 percent) of the 12.5 million unemployed have not been able to  find a job despite looking for 27 weeks or more.  (Regular unemployment insurance benefits typically run out after 26 weeks.

Paul Krugman had these observations this past week.

AIG is much in the news these days. But I’m not sure, even now, if people are getting the ultimate message.

AIG is in trouble because it wrote many credit default swaps, in effect guaranteeing others against losses it lacked the resources to cover. We, the taxpayers, are now covering those losses, for fear that not doing so would cause a financial catastrophe. But this means that US taxpayers have now assumed the downside risks for all of AIG’s counterparties.

In effect, then, we’ve already nationalized a large part of the financial industry’s potential losses.

So at the very least, we have a right to know who the counterparties are: who are we subsidizing, here? And beyond that, shouldn’t there be some quid pro quo? Shouldn’t the US government get something in return for taking on so much of the risk?

Krugman is right.  I have heard two rationales for not revealing the counterparties.  One is that it would frighten people into dumping the stocks or shorting them.  The second is that many of those on the hook are foreign banks, and what would Americans think of bailing out foreign banks?

Believe me, all the banks are foreign to responsible business practices.  On the shorting question, the stocks are already in the low single digits.  Stockholders have already been wiped out  On the real point, we need to get the financial system working.  It is becoming more and more apparent that subsidizing their bad decisions is not doing the trick.

The public has an interest in functioning credit and payment systems.  Otherwise, these are business decisions.  Maybe we need to unwind them in a slow and orderly way.  But more money into AIG as a backdoor bailout to banks we’re already bailing out through the front door.  The Fed needs to move on.  The Treasury needs to move on.

From Joseph Stiglitz and Nicholas Stern

Obama’s chance to lead the green recovery

http://www.ft.com/cms/s/0/7c51644a-075b-11de-9294-000077b07658.html

Joseph Stiglitz is the best economist in the world, often featured here on Demand Side, Nobel laureate, author of Making Globalization Work. Lord Stern is the chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and leading analyst of the economic aspects of climate change.

MUSIC

Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. The personal savings rate dropped from 9 percent in the 1980s to 5 percent in the 1990s, to just 0.6 percent from 2005 to 2007, and household debt grew much faster than personal income. Why should we have expected our net worth to go up?

Paul Krugman

The major problem today, according to some, is the high and rising federal deficit.  The stimulus, or recovery, plan and now the federal budget depend entirely too much on borrowing. …  We could ask the market.  There it seems that the lenders don’t seem to have much of a problem, willingly lending at record low rates.  But what do they know?  After all, they lent to individuals and corporations here and abroad who now have no ability to pay back unless the government provides them the money.

Instead of looking at the market, however, today’s Debt edition of the Demand Side Podcast is going to look at the Bush stimulus and recovery plan.  What was the impact on total indebtedness of the Bush strategy?  What was the result for the economy?

THE BUSH STIMULUS

People - notably the Reactionary Right — Complain about government borrowing and the stimulus spending in the trillions of dollars, leaving aside the indisputable fact that fully one trillion of the deficit is directly inherited from the last Bush year.  Also, as we noted, those who are lending the money do not seem to be persuaded that the government is a bad risk, since the interest rates seem to be as low as one could imagine.  That is, the market price of Treasuries is remarkably low.

But let’s take another tack and compare the Obama stimulus with the Bush stimulus.

Over eight years, the national debt under George W. Bush rose from about five and three-quarter trillion to over ten trillion dollars.  That nearly five trillion was incurred by way of a combination of tax cuts, whose biggest beneficiaries were the wealthy, and spending increases, much on an unpopular and ill-advised invasion of Iraq.  The first time tax cuts have been paired with a war in American history.

The Bush economic stimulus had the advantage of expansionary Fed policy.  The blame for the housing bubble has been allocated roughly equally between the Administration’s antipathy to regulation and ineptness in policy and the Federal Reserve’s holding interest rates too low for too long.  Thus you have expansion of the money supply, high spending from the government and huge borrowing very much along the lines of the program today.  Except in the cowboy capitalism the monetary policy actually generated expanded borrowing.  That is debt.

The investment was not in infrastructure and public goods, but passive housing and financial engineering.  Forty percent of profits in the period came in the financial sector.

Housing is now in freefall with regard to price.  The amounts entered in the National Income and Product Accounts for residential investment during the middle and later Bush years are made a lie by the fall in price.

In reality, during the past four years, the federal government was in a deficit far greater than the official numbers indicated, because the bubble economy was creating tax revenues.  The Laffer curve failed to materialize, but economic activity was spurred by the debt bubble and huge private borrowing and financial “leverage” involved in hedge funds, leveraged buyouts, collateralized debt obligations, uncovered swaps, and so on.  It created the illusion of wealth among those wealthy enough to play the game.  This is the only reason the economy of the Bush years had any life in it.

Absent that juice, the economy would have been stagnant and aimless.  With it, we have the toxicity of today’s economy, and the crashing revenues.  New York, for example, is experiencing immense budget pressures caused by the withdrawal of the illusory gains.  These budget gaps are directly caused by the Bush/Greenspan stimulus.

Compare this to the Obama stimulus.

Well, you can’t.  The deficits, as above, are in place from the Bush years but on the accounts of Obama.  Further, there is no market pricing mechanism for public goods, which is the investment of choice in the current Administration.  There is no market in roads, no education exchange, no police or fire protection clearing house.  You will hear in a moment, on Idiot of the Week, David Frum expressing the market fundamentalist view that the private sector is much more productive.  Much of this perception is due to this pricing problem.  For example, health care that the private sector produces more money, but is this more efficient.  Much of the problem of comparison is right here.  Private goods have a market price.  The value of public goods is assumed at cost.

The great absurdity that only the private sector creates wealth, which is literally the position of the Right Wing market fundamentalists, is given lie by the simple observation of an automobile. What is the wealth inherent in an automobile without the public road, the traffic organization, the policing, the consumer protection of product?  What is the wealth involved in computers absent the intellectual capital developed by those who build and use them?  That the contracts between two parties may have enormous inherent value absent the legal structure to enforce those contracts is a proposition that is simply ludicrous.

People who hold to the idea that the private sector creates all wealth ought to examine the difference between wealthy and poor societies.  Certainly plenty of companies have moved production to poorer societies and any individual or group is more than welcome to relocate itself to take advantage of the absence of government interference.

There is a reason the wealthier societies have the larger, more stable governments.  There is a reason that stability and prosperity in the years of big government after World War II were substantially greater than in the small government years before the War.

But this is getting beyond the comparison.  We suspect that the Obama approach will produce something other than a market crash and the Great Recession.  We expect recovery, as we’ve noted before, at a rate determined by the willingness to make the major policy moves in housing, finance and conversion to a public goods economy.

MUSIC

History 5 min

Idiot of the Week

FORECAST TOWER

Calculated Risk

We follow calculated risk as far as he goes.  The consumer of houses and the consumer of personal consumption expenditures will not be the engine of recovery.  The public sector can be.  It can borrow in the markets easily.  It has plenty of productive investments to make.  There will likely be little competition for capital.  The burden of debt may even make it less likely that big deficits will lead to big inflation.

We began the podcast:

Three years ago the world was happily booming, everyone had a job, miners and merchants, factory workers and farmers, all gainfully employed helping each other out.  Okay, maybe it wasn’t really so sweet, but it was better than today.  There is little difference in the capacity of the plant, equipment, infrastructure or labor force between 2005 and 2009.  The considerable difference in output and well-being has its root in the mismanagement of money and credit.

What is the difference between then and now?  Are there fewer industrious people, less commodities, a cut in plant and equipment?  No.  The difference between then and now is that the financial sector has screwed up the medium of exchange.

It is not that there is not enough money, it is that the money itself is compromised.  The way we transfer value from the future to the present, from one person to another, from producer to consumer.  The object of any economy, market, socialist, or Martian, should be to keep its members employed in productive enterprises and provision them as well as sustainably possible.

Where is the money going to come from?  Well, Where did it go?  Who has it?

Money is the medium of exchange.  It allows my work to be traded for your work without barter.  It allows me to accumulate credits to use in my retirement, exchanging work then for resources now.  It allows the future benefit of a good, say a car or house, to be tapped to pay for it today.

Unfortunately, the credit aspect has been ultimately compromised by those we have allowed to be in charge of it, and in turn has compromised the system.  Much of the activity was for the purpose of getting rich, rather than producing value, and in consequence has done neither.  Now the unwinding of all that leverage is eating the money up.

To compensate, the Federal Reserve is producing as much money in as many different ways as it can think of, under the assumption that more money will produce more activity.  In normal times, such a frantic effort by the Fed would have created hyperinflation.  But it is not the amount of money, but the amount of exchange.  This amount of exchange is called by economists, the “velocity” of money.

Never well understood by Monetarists, it has always frustrated their math.

The private sector has never been responsible enough to have the authority we have given them by abdication.  The province of greed is no place for discipline in this most sensitive mechanism of exchange.

The dollar may still be strong, but the currencies of other countries have been compromised by the free flow of capital.  The credit these economies need is flowing into the perceived safety of the strongest money.  The dollar.  The strength of the dollar comes from the weakness of the system.  Not a good sign.

But by returning to basics, the activities, the productive activities of the societies, we can return value and stability to the medium of exchange.