A Further Response on the Weakness in Modern Monetary Theory and Modern Economics

“A concept is a brick. It can be used to build a courthouse of reason. Or it can be thrown through the window.”

Gilles Deleuze

A reader 'Joyce' sent an email to me today, and rather than just provide a complete answer to her I thought I would take the opportunity to expand on this to further explain what I said about Modern Monetary Theory yesterday.  

 

There were more responses from those from the fiscally conservative economic right, who support MMT as a rationale for eliminating the income tax.   The progressive voices speaking out for MMT as a cure for austerity ought to think long and hard about this. 

 

They would propose using MMT printing rather than progressive direct taxation.  This is a more regressive taxation of currency depreciation, or monetary inflation, that would adversely impact those without resort to holding inflation senstive assets as a store of wealth.   I might write something more about this later, 

 

Joyce's observations are in italics, with my reactions to them just below.

"I am just learning about MMT myself but I see that you are conflating the value of the currency with the use of the currency (no matter what its valuation is). MMT just describes the way money works in a sovereign country with its own currency. MMT makes no claims for the goodness of the politicians that are elected to the government that spends money into the economy."

The method of how a currency is created and used is intimately involved with its valuation.  As a medium of exchange and a store of value, the method in which money is created, distributed, and valued impacts every transaction that occurs within an economy, and in trans-economic (international if you will) commerce.

To say that assuming that printing money at will by the government without limit can have no effect on value flies in the face of historical experience.   MMT seems to be based on this assumption and a few others that do not hold up well to practical examination.

"The government has to spend money into the economy in order for the public and private sectors to "save" or use that money. The people accept the currency that is spent into the economy because they use it to pay their debts, such as income tax, to

government. I suppose the valuation can change but it remains true that the sovereign government can afford to pay for anything that it needs or wants to as long as it is in their own currency and is available."

The government manages the currency.  It provides it to the economy under certain sets of economic rules.  'Government spending' is one of them.   There are others.  These are not particularly germane to my major objection to MMT, but they do serve to divert the discussion from it so I will let that go for now.

But it is not true that 'the sovereign can afford to pay for anything that it needs or wants as long as it is in their own currency and is available.'   There must be an agreement on value for an exchange to occur between entities.  This is easier to see if you assume that one of the parties is another sovereign government.

What troubles me about some of the unspoken assumptions in MMT is that individuals within an economy are not 'sovereign' or free actors.   What comes out in discussions with MMT believers is that government rules by force, that individuals are compelled to accept the currency, presumably at some valuation well above worthlessness. 

This is why I say that there is nothing particularly 'modern' about Modern Monetary Theory.  It is the same old canard where the state sets the values, and dictates them to the people by force, whether it be official exchange rates, currency controls, or other draconian measure THAT  hold whether the governing authority is abusive or not.  If politicians were angels, it would not be such a worry that their power is largely unchecked by market forces in the MMT theory.

"Basically, the market is the people purchasing commodities or commercial dealings of companies and individuals; therefore, the market is the people."

The market is not only the people, but the set of rules under which they act.  The notion that there are no rules, spoken or unspoken, is romantic nonsense.   A 'society' is a group of people with a common set of rules and conventions.  The default condition of a failed society is that 'might makes right.'

MMT is a theory and can only be dangerous if it creates a dangerous environment. How can a theory create a dangerous environment? It is a belief system. MMT tries to describe how money works not how bad politicians and appointees use it for their own purposes."

If only this were true, if only these things were immutably decided for us.  Well they are, but that is another theory.   Theories and assumptions about values are the key to civilization if you think about it more deeply.  And they have a tendency to create a dangerous environment where there are not checks and balances on power because, quite frankly, people are not angels.

"There are, of course, limits on the use of money which rest on whether or not the resources are available and on whether or not there are arbitrary limitations such as the periodic caps placed on the deficit by politicians."

This I think is an oblique reason why some very smart people might find MMT to be attractive.  We are in a very contentious period of political history.  The current financial and political system is acting unevenly, unjustly if you will, and seeks to impose austerity on the unfortunate while subsidizing the wealthy and powerful with tax breaks and bailouts.

Well intentioned people see MMT as a wonderful methods of avoiding this conflict by asserting that money can flow without practical limit or consequence.   It reminds me of the common talk about the 'Trillion Dollar Platinum Coin' that was proposed by some Very Serious People as a response to the budget and debt ceiling impasse.

Like so many attractive expediencies, it had some very serious unintended consequences attached.  It would have signaled to the other sovereigns of the world, rightly or wrongly, that the US was willing to create money without regard to value in order to solve its own political difficulties.  It would have sent a chill through our trading partners (and creditors whom MMT desire to reduce to helpless subservience like our own citizens apparently) about the reliability of the full faith and confidence which is the basis of a modern fiat currency.  

It is a dangerous game, because once one loses that confidence, it can lead to collateral damage rather quickly, and provide a difficult situation that inflicts much damage and pain on many.

"MMT is not about justice and fairness. As far as I know, MMT does not have an 'efficient market hypothesis.'"

 All rules, particularly financial rules, are about justice and fairness.  Justice and fairness are not abstractions that sit on a shelf to be pulled out now and then.  Justice and fairness are a priori values encapsulated in the laws of the land,  and reasonably well stated in the Declaration of Independence and the Constitution.    Men and women have given their lives for justice and fairness, which are inherent qualities of liberty. 

We allow our choices to be limited by being members of a society.  But in return we demand certain services and considerations for it. 

A system that has not regard to justice and fairness is a tyranny, or quickly becomes one.

Now, I want to put a different meaning on what you said, that I think strikes a little closer to what you intended to say. 

I think you mean to say that MMT merely describes what is, some natural occurrence, like physics or any other pure science.   And this is one of the great fallacies that some promote about economics in general, that it is a pure science merely describing natural phenomena like the movement of the tides or the planets.

Economics is a social science.  It is all about interpreting realities and especially theoretical realities or systems through a prism of assumptions and values.   It is unavoidable for any macroeconomic system NOT to embody certain assumptions and values, whether they are spoken or just assumed.

And the whole point of my example about 'efficient market hypothesis' was that it 'worked' if one assumed certain qualities about people acting in groups that are not only incorrect, but radically so in the case of a persistent minority of the sociopathically inclined.

MMT does not have its own efficient market hypothesis.  It is like the efficient market hypothesis in that it assumes an otherworldly goodness in politicians and government bureaucrats in using the assumed to be unlimited power to create and spend money only wisely and for the greater good.  Try that idea out on any historian or political scientist and see how far it gets you.

And as a side note, politicians refused to regulate the shadow banking system that includes trillions of dollars of debt by banks and near banks, debts which can never be paid back should we have another recession.

I surmise that some of that QE money from the Fed was used by companies to create more wealth for themselves and I'm sure that some of it ended up in the shadow banking system where trillions of dollars of derivatives still thrive.  

This is precisely my point   The political class has been corrupted by Big Money.  I write about this all the time.   The bailouts were a clear abuse of power, especially in their collateral damage to innocents.

I do not think that MMT is a solution to  the problem of 'debts that can never be paid back should we have another recession.'   But I do think that this is the motivation for some who know deep down that MMT is founded on rubbish, but is the lesser of two evils in finding a way out of a bad situation.

My God, with our political class as corrupt as it is, would one wish to give them the power to create and spend money at will, under the assumption that they can never do it too much?

I will not muddy the waters here by getting into other solutions, but to willingly accept a belief system not founded in practical reality as a mean of escaping a dilemma does not encourage the rational person who has not given themselves over to the belief as a means of economic salvation.  

Reform is the most viable solution longer term.  We did it before and we must do it again.  Reform is a continual struggle against the worst tendencies of people.  

As Lord Acton said, "The danger is not that a particular class is unfit to govern.  Every class is unfit to govern. The law of liberty tends to abolish the reign of race over race, of faith over faith, of class over class."

In other words, no one is above the law, and their power is to be constrained by the restraints of the liberty of others, and therefore required to act justly and openly, under a system of checks and balances on their power.

One of the recurring myths throughout history is that a group of 'better men' are naturally equipped to rule.   There is much in modern economics that assumes that very dangerous idea, of superior people of natural rationality and virtue being naturally able to rule wisely and benignly without corruption.  And they may do so with secrecy, and independent of checks and balances, the better to serve the dispensation of their gnostic knowledge that is conflated by other mere mortals who simply cannot understand it.

And this is one of the major drawbacks with the methods of the central banks and the in particular Federal Reserve today.  Economics is no science, but a branch social science that at best casts some light on public policy, but with absolutely no claim to pure scientific objectivity or the ability to dictate outcomes independent of choices based on higher values.

History is the story of the never ending struggle between tyranny and liberty, the individual and the state, right and might, anarchy and society, with most of the action occurring in the vast area between.  

 

No system can guarantee freedom of the individual, or the rule of law over lawlessness.  But some may provide the means and the methods of giving individual rights a more even footing with organized power, and organized society with the means to hold individual power in restraint.

I have come to believe that the most critical step for our sustainable recovery is not more laws, the gold standard, a new system of currency like modern monetary theory, or one political party or another.

The key to our return to a sound economy is to be found in meaningful reform. And so far we have merely struck uselessly at a few largely symbolic branches, and failed to address the problem with a serious commitment to our values. The heart of the problem is the power of the financial sector over the greater part of society, through the corrupting power of Big Money over the political process.

 

 

Robert Johnson: New Perspectives For Economics

Some of Johnson's remarks are extraordinarily insightful.

I enjoyed his comments on the modern preoccupation with modeling. But I do think his looking back to the Thirty Years War for the trend towards abstract theory over the empirical method in general is a bit of a stretch. But it was kind of cool to think about it.

Quite the opposite, much of the rest of science is very much more empirically oriented, and based on experimentation, replication, and testing. Perhaps he intended that economics be considered more as a social philosophy, and that this trend is particular to that area of knowledge, and I did not understand this.

I think that economics had draped itself with the math and rigor of science, but bent over backwards to say those things that were politically expedient, depending on one's particular biases and opinions. The intricacy and jargon were there to provide the accoutrements, the flames and smoke and loud pronouncements, that make ordinarily people tremble before those modern Wizards of Oz.

He is otherwise rather kind towards those in his profession who, when the predators appeared on the horizon, swam out to meet the boats and came ashore with them in their plundering. Not all of course, but far too many, and for far too long. Where was the peer review and the discipline of the profession? While the coins were flowing, it seemed as though it was 'go along to get along' with the proper professional courtesy. Perhaps the tone was set for the trade by the Fed under Alan Greenspan.

I believe that his comments are primarily directed towards the economics profession in the US and England, who have taken point on the modeling bandwagon and have given themselves over to viewing reality through the prism of abstractions, shaped top down by ideology.

Gold Daily and Silver Weekly Charts - Economics, a Thoroughly Disgraced Profession

"I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis.

Concepts including “rational expectations,” “market discipline,” and the “efficient markets hypothesis” led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur.

Not all economists believed this – but most did."

James K. Galbraith

But in the defense of the economists I would like to add:

“It is difficult to get a man to understand something, when his salary depends on his not understanding [or seeing] it.”

Upton Sinclair

In other words, I don't think in many cases that there was a failure of the intellect, so much as a failure of intellectual and moral integrity.

Economics is a profession that succumbed almost en masse, whether by individual actions or the complicit silence of careerism, to the pervasive corruption of financial fraud, and of the persuasive power of Wall Street, the Banks, and big money. The only group that approaches their failure is the national political and financial class, including the accountants and the regulators.

For the most part this has not yet changed because of the unreformed state of the financial system, combined with the snare of the credibility trap. And they cover their shame by calling themselves the 'scholar-gentry' and tut tutting about the failure of the public in much the same tones that the plutocrats of past colonial empires would agonize over the plight of the victims of their perfidy in terms of the white man's burden.

Scotia Mocatta managed to squeeze out another 20,000 or so ounces of bullion for the registered (deliverable) category at the Comex. The bullion banks now have it back up to 723,000 which should be more than enough to meet deliveries.

So when will there be any actual deliveries of gold bullion out of these warehouses?

Someone redeemed 19,200 ounces of gold out of the Sprott gold fund.

Have a pleasant evening.

Neoliberalism: Rise of the Machine

Miranda: O brave new world that has such people in it!

Prospero: 'Tis new, to thee.

The Tempest Act 5, scene 1

In my reading today I came across this relatively good description of Neoliberalism in economics excerpted below, and its implications for society.  The name for this school is often confusing to some, because it is a school of the right, more akin to political neoconservatism than anything commonly known as liberal.

Here is the schoolbook definition of neoliberalism in economics:

"Neoliberalism is a label for economic liberalizations, free trade, and open markets. Neoliberalism supports privatization of state-owned enterprises, deregulation of markets, and promotion of the private sector's role in society. In the 1980s, much of neoliberal theory was incorporated into mainstream economics."

I have to reiterate my own perspective that economics is not a physical science with rules generally tested by replicable experimentation on the macro level, but is at most a 'social science' that attempts to approximate a complex human reality, like sociology.

Microeconomics 'works' because it is less dependent on the human element, and involves itself with mechanical processes and pricing functions. By 'economics' I am discussing what is called macroeconomics, or the economics not of a discreet process or set of processes called a 'business' but of a broad economy with enormous sets of variables and processes that are far too complex to represent well mathematically.  They most often trim and crush reality to fit some compactly useful model, as in the manner of Nassim Taleb's Procrustean Bed.

When it ventures into the realm of public policy discussions, economics often resembles a belief system very much like a religion.   It is easily twisted to serve the desires and actions of its acolytes while conferring an aura of logic.  But there is almost always some 'leap of faith' made that spans the enormous gulf between the model, its assumptions, and reality.

Economics is only as good as its assumptions, which may in fact be terribly distorted with each step towards a more general application from a simple a priori observation that sounds self-evident at first.  Economics is a veritable cornucopia of non sequiturs encased in obscurantist terminology.

People are reasoning, therefore in their actions they act reasonably. And in the mass of financial transactions that is the market, these rational actors and their actions impute a natural rationality to the market that makes it efficient. Therefore the law of supply and demand and the perfect clearing price of the market, which are central tenets of market efficiency, are not to be interfered with by outside forces, like regulation and government.

And what makes this believable is that this can be true, if people are as good and perfectly wise and uniform in their actions as angels; but they are not, not a one of them, but especially those who are drawn to making their money from money, and especially from speculation in the markets.  This type of activity attracts people from the tails of human behaviour, like most sources of wealth and power.

This assertion  of natural market efficiency sounds good, especially when it is delivered by academics in nice suits with lots of degrees and titles, backed by a multimillion dollar PR campaign that contains well crafted, thinly disguised appeals to more visceral emotions.   But it is a theory that is easily shown to be founded in fantasy to anyone who has driven on a crowded multi-lane highway in rush hour.

And a corollary to this is that the system grades or objectively and perfectly evaluates people on their merits. If one suffers some misfortune or fails to rise 'to the top' of the heap, then this is an objective judgement on them and their value, their character, their worthiness as a human being.   And some would say that this speaks to their status as a fully valued member of that society, to have rights and to vote, to receive food and vital medical attention, and to have families and to procreate.

Because the system is perfectly efficient and rewards the best, the most successful are sanctified by it. I am wealthy, therefore I am among the elect, whether it is marked by an aristocratic title or an enormous bank account.  I am above all the rest, and this proves my value, and provides all the things which are stuffed into my hollowed being.

One can certainly and legitimately use economics, among other things, to support their particular policy arguments to estimate effects. But the listeners should accept this with plenty of skepticism, because the proofs are largely based on statistics, or statistically based models, that are filled with often unspoken assumptions, questionable estimates, and too often critical omissions, both conscious or inadvertent.

But to take an economic model out of its place, and put it above the discussion as policy maker in the manner of a computing machine which spits out the ultimate solutions, to capitalize 'Market' as a type of god on earth, to put that false idol as an unfettered decision-making machine above the individuals of a society and the rule of law, is inhuman, and ultimately a tyranny of the anti-human.

Economics is a tool, in some implementations better than others, but overall not a particularly reliable one.  It is better in 'explaining' than predicting; its explanations are more often rationalizations founded in its malleability and lack of rigor, especially in its use of correlations and assumptions.

The elevation of macroeconomics today reminds one of the perversions of the discoveries in biology that led to the theories of eugenics and the race worship, the mythology of the blood that motivated much of the social thinking and many serious political movements at the beginnings of the twentieth century.   It was when the intelligentsia and the professions, the doctors and lawyers, threw in their lot with the financial and industrial elite that European society began to quickly fall apart.

"I believe that if a canvass of the entire civilized world were put to the vote in this matter, the proposition that it is desirable that the better sort of people should intermarry and have plentiful children, and that the inferior sort of people should abstain from multiplication, would be carried by an overwhelming majority...

Indeed, Mr. Galton has drawn up certain definite proposals. He has suggested that "noble families" should collect "fine specimens of humanity" around them, employing these fine specimens in menial occupations of a light and comfortable sort, that will leave a sufficient portion of their energies free for the multiplication of their superior type."

Source: H.G. Wells, Mankind in the Making

People forget that a whole range of intellectuals and popular thinkers, from George Bernard Shaw to H.G. Wells and a large measure of the economic, professional and political aristocracy of the day, embraced the notion of the natural superiority of certain human types, and the scientific necessity of encouraging their proliferation, and the dominance of the untermensch as not only their right but their obligation.

The medical profession disgraced itself, amongst the first of those in Germany, with their willingness and devotion to implement euthanasia based on these 'scientific principles.' And the elite in the West broadly looked at this movement with quiet compliance and even admiration for the will to make these 'hard decisions.'  It was only when the definition of the master race became increasingly narrow and their methods madly brutal that they recoiled in horror.  But by then it was too late, although many adherents to the basic principles remained sympathetic in England and America.

Science serves at its best, but it does not rule well, except to blind the heart and the mind to madness.

And one might look at these people from the past with revulsion and wonder, but the self-proclaimed ruling class of the West is doing the same thing today, largely by financial means for now. Their rhetoric and reasoning is filled with it, a sense of the obligation of their natural superiority. And if they steal from you, it is a privilege. And if a little of their spoils trickles down, you should be grateful.

There are plenty of believers in the ascendancy of a new master class, as long as they think they are a part of it. You may see them and their ideas on display this week from Brussels and Berlin, to Tampa and Jackson Hole. And they are not members of learning organizations, but protectors and promoters of the status quo.

"There is a lack of critical assessment of the past. But you have to understand that the current ruling elite is actually the old ruling elite. So they are incapable of a self-critical approach to the past."

Ryszard Kapuscinski

If one wishes to have an oligarchy or even a dictatorship based on power and unscrupulous behaviour in which the 'superior,' as one may choose to define them, use the weak as servants and prey, then decide to do so and say it, and hope the people will support it.

But it seems particularly hypocritical and cheap to set up a god of economic science which is elevated to speak these same words as an inspired dictum from above, but which is in reality a false idol carrying the calculated whisperings of its high priests, and then expect the people to bow to it forever without any eventual reaction. 

The Tyranny of Neoliberalism

Unapologetic in its implementation of austerity measures that cause massive amounts of human hardship and suffering, neoliberal capitalism consolidates class power on the backs of young people, workers, and others marginalized by class, race, and ethnicity. Neoliberal capitalism appears to no longer need the legitimacy garnered through its false claim to democratic ideals such as free speech, individual liberty, or justice—however tepid these appeals have always been.  (cf. Glenn Greenwald - Jesse)

In the absence of alternative social visions to market-driven values and the increasing separation of global corporate power from national politics, neoliberalism has wrested itself free of any regulatory controls while at the same time removing economics from any consideration of social costs, ethics, or social responsibility. Such a disposition is evident in the fact that neoliberalism's only imperatives are profits and growing investments in global power structures unmoored from any form of accountable, democratic governance.

The devastating fallout of neoliberal capitalism's reorganization of society, the destruction of communities and impoverishment of individuals and families, now becomes its most embraced mode of expression as it is championed, ironically, as the only viable route to economic stability.

In this widely accepted, yet dystopian world view, collective misfortune is no longer interpreted as a sign of failing governance or the tawdry willingness of politicians to serve corporate interests, but attributed to the character flaws of individuals and defined chiefly as a matter of personal responsibility. In fact, government-provided social protections are viewed as pathological. Matters of life and death are removed from traditional modes of democratic governance and made subject to the sovereignty of the market.  (Don't feed the 'losers' or the undesirables - isolate and then euthanise them, indirectly at first - Jesse)

In this new age of biocapital, or what Eric Cazdyn calls "bioeconomics," "all ideals are at the mercy of a larger economic logic" —one that unapologetically generates policies that "trample over millions of people if necessary." Neoliberalism's defining ideologies, values, and policies harness all institutions, social practices, and modes of thought to the demands of corporations and the needs of the warfare state. They are as narrowly self-serving as they are destructive.  (The individuals, even in their millions, must die if not for the good of the state or the race, then for the good of the market and corporate profits.  - Jesse)

As collective responsibility is privatized, politics loses its social and democratic character, and the formative culture necessary for the production of engaged critical agents is gravely undermined. An utterly reduced form of agency is now embodied in the figure of the isolated automaton, who is driven by self-interest and eschews any responsibility for the other.

As Stuart J. Murray points out, neoliberalism's totalizing discourse of privatization, commodification, deregulation, and hyper-individualism "co-opts and eviscerates the language of the common good." The ascendancy of neoliberal ideology also manifests in an ongoing assault on democratic public spheres, public goods, and any viable notion of equality and social justice.

As corporate power is consolidated into fewer and fewer hands, ideological and structural reforms are implemented to transfer wealth and income into the hands of a ruling financial and corporate elite.  This concentration of power is all the more alarming since both Canada and the United States have experienced unprecedented growth in wealth concentration and income inequality since the 1970s.

Henry Giroux, Days of Rage: The Quebec Student Protest Movement

The Problem with the Banking System and the Failure of Economics

This is a discussion of the financial crisis and economics between Nassim Taleb and Daniel Kahneman on January 27 in Munich.

It is an important discussion for anyone looking beyond the surface into our current financial crisis.

There is a use of jargon and technical terms at some points but not overmuch. It is useful if you just listen, and obtain what you can, and do not fret over that for which you are not grounded by education or experience.

If what they say is valid, there are enormous implications for our financial system and economics as a profession.

The economists are sure to hate it, in particular the Americans who are enamored of equations and studies to a fault. There is a new school of Economics that will rise out of this financial crisis, as Keynesianism rose out of the 1930 and monetarism the 1970's.

If I had been there, I would have made a stronger point that people tend to use these equations, these irrelevant maps as it were, as 'excuses' or rationales for doing things which they know are wrong, but wish to do anyway because it is to their short term benefit.

Taleb is directionally correct about his prescription for the banking system and financial instruments. Banks, especially large ones, must be simple, transparent, stable to a fault. Hedge funds and speculation is another matter completely.

There was a wisdom in the limitations imposed by Glass-Steagall. More profound than most realize. And the bankers hated it because it limited their ability to game the system.

And this confirms that Bernanke and Geithner and Summers are taking us in entirely the wrong direction, and are going to make this crisis much worse.

You may wish to start this video about five minutes into this recording since it does not start with the show itself, but people being seated.

Taleb and Kahneman Video Discussion in Munich on January 27

In Defense of Economics

Yves Smith at Naked Capitalism has an interesting essay on her site Why So Little Self-recrimination Among Economists? which we would urge you to read if you are interested at all in this topic, as it is sincerely well thought and written, for which we her readers are always grateful.

It is difficult to assess the quality of an unfamiliar game if one does not know the rules, and even more if one does not understand the objectives. What is the 'goal' of the economics game which we all have been observing with greater than usual interest these past few years?

For the past twenty five years at least modern economics has not been seeking objective truth and the advancement of learning as much as the rationalization of policy positions in pursuit of power, awards, grants, and influence. This is not to say that there was a utopia before this, but rather that the less admirable aspects of the profession were in the minority, and not so widely accepted and tolerated and respected.

Our society on the whole does not value the truth as it had done before, but worships money and power and cleverness. That is both the long and short of it. We obtain the politicians and economists and news commentators that we encourage according to the character of the age.

Economics is a social science, with somewhat murky experimental methods, more like redacted statistical vignettes, and difficult to measure theories with grading periods too widely interspersed to be meaningful. This introduces a strong element of peer pressure and factionalism, of quack theories and nostrums hiding in the safe harbors of ambiguity and plausible error.

Granted, the academics are protected by tenure, but tenure is a weak consolation to the ambitious. It can be at worst a kind of exile, a quiet humiliation. And professors are weak in their resources as compared to the think tanks who have no qualms about pursuing their desired objectives. There is a power to the lie that can overwhelm those who stumble about in pursuit of the truth, or at least a better approximation of it.

Economics is not a purely objective science, because its theories are not readily verifiable through controlled experimentation, even allowing for the work of some of the behaviourists.

In this economics is not alone among the sciences, not at all, especially to those in the leading edge of some disciplines like theoretical physics, where experimentation is difficult, and grading periods are also interspersed widely. We often hear of courageous minds who hold out through years of isolated persistence to be eventually vindicated by new discoveries from experimentation and observation.

But is economics so much the problem? We would suggest that its condition, its character, merely makes it vulnerable, a thing to be encouraged and protected, but not to be relied upon as a bulwark against adverse societal influences.

If anything, economics is guilty of pretension, of having more influence and authority than its knowledge would allow. Was there anything so artfully disingenuous as the Congressional testimony of Alan Greenspan regarding critical policy decisions? Or more craven than the way in which many of the Congressmen sought to gain cover for their action under his prevarication?

How can there be self-recrimination where there is no outrage in general? Where is the objective analysis of what went wrong, and proposals to change things to correct this?

Most academics are notorious followers, trodding the well worn and well marked paths, no matter where they might lead. It is only the exceptional, both in mind and spirit, that dare to blaze new trails. Tenure is no armor for the ego, and there are no politics more vicious and petty than those of academia, excepting perhaps the fashion industry.

We ought not to blame economics, beyond its pretensions to administer advice from some position of authority because of superior knowledge. That has been shown to be hollow, false, a totemism. The pseudo-religious aspects of the extreme elements of some economic schools of thought is apparent, almost hysterically funny, when viewed from a distance.

We ought not to single out economists for not being virtuous because there were too few virtuous people on the whole both then and now, if one defines 'virtuous' as one who tells the truth, come what may, as the facts and their analysis leads them even in their lack of certainty.

This is not to say there is no blame to be attached, no criminality to be assessed, that 'society is to blame.' The problem is that there is so much of it that we can spend years striking at the branches, the scapegoats, without approaching the root.

The remedy is the law, and to affect this we must take back the rule of law from those who have corrupted it.

The Federal Reserve raised an enormous debt bubble to lift the economy out of the slump of 2002, and for this trouble we were rewarded with a housing and stock market bubble, and remarkable imbalances that are just now being unwound. This is what happens when one liberally applies monetary and Keynesian stimulus without reform. And we are doing it again.

Things will change for the study of economics, and probably for the better. There are more extreme examples of professions which were co-opted by the political world, like psychology in the Soviet Union and medicine in the Third Reich, sciences subjected to what some might call deep capture.

How can a society which defines its first principle, the ultimate good, as greed be anything but what it is? Cruel, self-absorbed, shallow, unjust, delusional and imbalanced. Nothing made this more apparent than the spectacle of the outgoing President's press conference today. And, we might add, the actions of his predecessor in that office.

Fear is the tool of a tyranny, and greed is a horse to be harnessed, not the measure of policy or an administrator of justice to run maximized, or even unchecked.

Why the lack of self-recrimination among the economists? Because they are no different than anyone else who failed to exercise their stewardship and basic human obligation to protect the innocent and to stand for justice, and uphold the standards of their profession. In this they are no different than politicians and lawyers and accountants and the mainstream media, although we foolishly expected more.

Economics will recover eventually from this lapse, as the majority of economists look back in quiet horror at the carnage that was inflicted on the world, accommodated by their silence. There were many who spoke out. There were even some who took the time and trouble to go to places where economists frequently discuss things, and caution that their silence would discredit the profession.

What is the next step? Forward, off the beaten path.

Capitalism II: Brave New World

"The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew." Abraham Lincoln

"All conservatism is based upon the idea that if you leave things alone you leave them as they are. But you do not. If you leave a thing alone you leave it twisting in a torrent of change." G.K.Chesteron

"If you don't like change, you are going to like irrelevance even less." US Army General Eric Shinseki

When you have thoroughly made a mess of things, and realize that it is time for a change, one goes to wise mentors and more experienced friends, if you are lucky enough to have them, for constructive and sound advice.

But there are times when hearing from your critics as well is a good idea, because they will often tell you things too difficult for a friend to say openly and directly.

This essay below by Michael Hudson and Jeffrey Sommers strikes me as such a critical analysis of the US economy as it exists today. It is useful because it looks at the US from the eyes of the non-G7 countries through the lenses of what the authors call 'Managed Capitalism' in contrast to what they call Neo-Liberalism but what I might refer to as "Financial Capitalism."

There are things with which I disagree in this essay especially in terms of recommended courses of action. But there are a significant number of observations "from the other guy's point of view" that makes it worth reading, carefully.

We need to recognize that Japan, China, and many countries today are not free markets, and that they embrace a very strong industrial policy formed by central bureaucracies. We may even have more of a structure such as this than we realize, with our outsized financial sector. These countries have a form of Managed Capitalism.

The argument against that form of economic structure is that centralized decision making, especially as it applies to the particular, tends to get it wrong much more often than consensus decisions widely spread among market participants if information is transparently dispersed.

This is because bias and temperament tend to be blended out to the tails in a broad consensus. Yes you may get a run of great leadership every so often in a centrally planned economy, but you will too often get a Hitler, Stalin, or a Mao, and the damage they can do to a country is measured in the millions of the dead in addition to economic and structural loss.

To me, financial capitalism is a clear excess, a distortion of free market capitalism in the same way that managed capitalism is. They both assert unbalancing forces on the course of the neural structure of natural decision making and transmission of values to productivity.

I do not think the US status quo is willing change yet. Why should it? The strong dollar has served the financial sector well. The change will first occur in the international trade mechanisms, with the displacement of that lynch pin of the Washington consensus, the dollar as reserve currency. More change and restructuring will necessarily flow from that.

It is useful to read this essay not because you agree with it, but because a number of other countries who are your critics will agree, and change is coming. That is without doubt. The current financial system is inherently unstable because the self-correcting market and price discovery mechanisms are broken.

The solution for the US will be to move back to a more progressive, less financially-oriented, more productive economy.

The cult of pervasive globalization is a hoax, an excuse to centralize power that is not compatible with a world in which people have choices, and wish to maintain societies with the values and policies of their choosing.

If the US stays on its current course and seeks to maintain the status quo, the next step will be an attempt to establish stronger central planning, and a New World Order. One can already see those in the Anglo-American establishment and the Neo-cons trying to pave the way for it.

It is true always and everywhere that if you surrender the management of your currency to another you have handed over the keys to your fiscal and societal freedom, because the control of the money supply strikes to the heart of your economy in ways that permeate interest rates, industrial production, health care, and personal freedoms. Social choices are also economic choices.

As an aside, it will be interesting to see how Europe progresses in this, and whether the European Union will grow and transform, or fragment. The great variable will be leadership and vision.

Change is coming, whether we like it or not. It will be coming from the outside if not from within.

The days of both Soviet and Dollar imperialism are ending. The latest attempt to establish a New World Order is already failing.

The world's superpowers are dismantling neo-colonial empires once again, and decision making will be moving from a central planning for the world at the Federal Reserve and Washington, as well as Moscow, and back to individual countries who for good or ill will be trying to manage their own economies for themselves.

"Few will have the greatness to bend history itself; but each of us can work to change a small portion of events, and in the total of all those acts will be written the history of this generation." Robert Kennedy

Counterpunch
What is to be Done?
The End of the Washington Consensus
By MICHAEL HUDSON and JEFFREY SOMMERS
December 12, 2008

Wall Street’s financial meltdown marks the end of an era. What has ended is the credibility of the Washington Consensus – open markets to foreign investors and tight money austerity programs (high interest rates and credit cutbacks) to “cure” balance-of-payments deficits, domestic budget deficits and price inflation. On the negative side, this model has failed to produce the prosperity it promises. Raising interest rates and dismantling protective tariffs and subsidies worsen rather than help the trade and payments balance, aggravate rather than reduce domestic budget deficits, and raise prices. The reason? Interest is a cost of doing business while foreign trade dependency and currency depreciation raise import prices.

But even more striking is the positive side of what can be done as an alternative to the Washington Consensus. The $700 billion U.S. Treasury bailout of Wall Street’s bad loans on October 3 shows that the United States has no intention of applying this model to its own economy. Austerity and “fiscal responsibility” are for other countries. America acts ruthlessly in its own economic interest at any given moment of time. It freely spends more than it earns, flooding the global economy with what has now risen to $4 trillion in U.S. government debt to foreign central banks.

This amount is unpayable, given the chronic U.S. trade deficit and overseas military spending. But it does pose an interesting problem: why can’t other countries do the same thing? Is today’s policy asymmetry a fact of nature, or is it merely voluntary and the result of ignorance (spurred by an intensive globalist ideological propaganda program, to be sure)? Does India, for instance, need to privatize its state-owned banks as earlier was planned, or is it right to pull back? More to the point, have the neoliberal programs imposed on the former Soviet Union succeeded in “Americanizing” their economies and raising production capacity and living standards as promised? Or, was it all a dream, indeed, a nightmare?

The three Baltic countries, for instance – Latvia, Estonia and Lithuania – have long been praised in the Western press as great success stories. The World Bank classifies them among the most “business friendly” countries, and their real estate prices have soared, fueled by foreign-currency mortgages from neighboring Scandinavian banks. Their industry has been dismantled, their agriculture is in ruins, their male population below the age of 35 is emigrating. But real estate prices added to the net worth on their national balance sheets for nearly a decade. Has a new “moment of truth” arrived? Just because the Soviet economic system culminated in bureaucratic kleptocracy, has the neoliberal model really been so much better? Most important of all, was there a better alternative all along?

We expect the post-Soviet economies to go the way of Iceland, having taken on foreign debt with no visible means of paying it off via exports (the same situation in which the United States finds itself), or even further asset sales. Emigrants’ remittances are becoming a mainstay of their balance of payments, reflecting their economic shrinkage at the hands of neoliberal “reformers” and the free-market international dependency that the Washington Consensus promotes. So, just as this crisis has led the U.S. government to shift gears, is it time for foreign countries to seek to become more in the character of “mixed economies”? This has been the route taken by every successful economy in history, after all. Total private-sector markets (in practice, markets run by the banks and money managers) have shown themselves to be just as destructive, wasteful and corrupt and, indeed, centrally planned as those of totally “statist” governments from Stalin’s Russia to Hitler’s Germany. Is the political pendulum about to swing back more toward a better public-private balance?

Washington’s idealized picture of how free markets operate (as if such a thing ever existed) promised that countries outside the United States would get rich faster, approaching U.S.-style living standards if they let global investors buy their key industries and basic infrastructure. For half a century, this neoliberal model has been a hypocritical exercise in poor policy at best, and deception at worst, to convince other economies to impose self-destructive financial and tax policies, enabling U.S. investors to swoop in and buy their key assets at distress prices. (And for the U.S. economy to pay for these investment outflows in the form of more and more U.S. Treasury IOUs, yielding a low or even negative return when denominated in hard currencies.)

The neoliberal global system never was open in practice. America never imposed on itself the kind of shock therapy that President Clinton’s Treasury Secretary (and now Obama’s advisor) Robert Rubin promoted in Russia and the rest of the former Soviet bloc, from the Baltic countries in the northwest to Central Asia in the southeast. Just the opposite! Despite the fact that America’s own balance of trade and payments is soaring, consumer prices are rising and financial and property markets are plunging, there are no calls among its power elite to let the system self-correct. The Treasury is subsidizing America’s financial markets so as to save its financial class (minus some sacrificial lambs) and support its asset prices. Interest rates are being lowered to re-inflate asset prices, not raised to stabilize the dollar or slow domestic price inflation.

The policy implications go far beyond the United States itself. If the United States can create so much credit so quickly and so freely – and if Europe can follow suit, as it has done in recent days – why can’t all countries do this? Why can’t they get rich by following that path that the United States actually has taken, rather than merely doing what its economic diplomats tell them to do with sweet self-serving rhetoric? U.S. experience itself provides the major reason why the free market, run by financial institutions allocating credit, is a myth, a false map of reality to substitute for actual gunboats in getting other countries to open their asset markets to U.S. investors and food markets to U.S. farmers.

By contrast, the financial and trade model that U.S. oligarchs and their allies are promoting is a double standard. Most notoriously, when the 1997 Asian financial crisis broke out, the IMF demanded that foreign governments sell out their banks and industry at fire-sale prices to foreigners. U.S. vulture capital firms were especially aggressive in grabbing Asian and other global assets. But the U.S. financial bailout stands in sharp contrast to what Washington Consensus institutions imposed on other countries. There is no intention of letting foreign investors buy into the commanding U.S. heights, except at exorbitant prices. And for industry, the United States has once more violated international trade rules by offering special bailout money and subsidies to its own Big Three U.S. automakers (General Motors, Ford and Chrysler) but not to foreign-owned automakers in the United States. In thus favoring its own national industry and taking punitive measures to injure foreign-owned investments, the United States is once again providing an object lesson in nationalistic economic policy.

Most important, the U.S. bailout provides a model that is far preferable to the Washington Consensus-for-export. It shows that countries do not need to borrow credit from foreign banks at all. The government could have created its own money and credit system rather than leaving foreign creditors to accrue interest charges that now represent a permanent and seemingly irreversible balance-of-payments drain. The United States has shown that any country can monetize its own credit, at least domestic credit. A large part of the problem for Third World and post-Soviet economies is that they never experienced the successful model of managerial capitalism that predated the neoliberal model, advocated since the 1980s by Washington.

The managerial model of capitalism, predominating during the post-World War II period until the 1980s (with antecedents in 18th-century British mercantilism and 19th-century American protectionism), delivered high growth. Postwar planners, such as John Maynard Keynes in England and Harry Dexter White in the United States, favored production over finance. As Winston Churchill quipped, “nations typically do the right thing [pause], after exhausting all other options.” But it took two world wars, interspersed by an economic depression triggered by debts in excess of the ability to pay, to give the final nudge required to promote manufacturing over finance and finally do “the right thing.”

Finance was made subordinate to industrial development and full employment. When this economic philosophy reached its peak in the early 1960s, the financial sector accounted for only 2 per cent of U.S. corporate profits. Today, it is 40 per cent! Carrying charges on America’s exponentially growing debt are diverting income away from purchasing goods and services to pay creditors, who use the money mainly to lend out afresh to borrowers to bid up real estate prices and stock prices. Tangible capital investment is financed almost entirely out of retained corporate earnings – and these too are being diverted to pay interest on soaring industrial debt. The result is debt deflation – a shrinkage of spending power as the economic surplus is “financialized,” a new word, only recently added to the world’s economic vocabulary.

Since the 1980s, the U.S. tax system has promoted rent seeking and speculation on credit to ride the wave of asset-price inflation. This strategy increased balance sheets as long as asset prices rose faster than debts (that is, until last year). But it did not add to industrial capacity. And meanwhile, tax cuts caused the national debt to soar, prompting U.S. Vice President Dick Cheney to comment, “Reagan proved deficits don’t matter.”

On the international front, the larger the U.S. trade and payments deficit, the more dollars were pumped into foreign hands. Their central banks recycled them back to the U.S. economy in the form of purchases of Treasury bonds and, when the interest rates fell almost to zero, securitized mortgage packages. Current Treasury Secretary Henry Paulson assured Chinese and other foreign investors that the government would stand behind Fannie Mae and Freddie Mac as privatized mortgage-packaging agencies, guaranteeing a $5.2 trillion supply of mortgages. This matched in size the U.S. public debt in private hands.

Meanwhile, the Treasury cut special deals with the Saudis to recycle their oil revenues into investments in Citibank and other U.S. financial institutions – investments, on which they have lost many tens of billions of dollars. To cap matters, pricing world oil in dollars kept the U.S. currency stronger than underlying economic fundamentals justified. The U.S. economy paid for its imports with government debt never intended to be repaid, even if it could be (which it can’t at today’s $4 trillion level, cited earlier). The American economy, thus, has seen its trade deficit and asset prices rise in accordance with economic laws that no other nation can emulate, topped by the ability to run freely into international debt without limit.

Managerial capitalism mobilized rising corporate net worth and equity value to build up in the real economy. But since the 1980s, a new breed of financial managers has pledged assets as collateral for new loans to buy back corporate stock and even to pay out as dividends. This has pushed up corporate stock prices and, with them, the value of stock options that corporate managers give themselves. But it has not spurred tangible capital formation.

A real estate bubble in all countries has been fueled by rising mortgage debt. To buy a new home, buyers must take on a lifetime of debt. This has made many employees afraid to go on strike or even to press for better working conditions, because they are “one check away from homelessness,” or mortgage foreclosure. Meanwhile, companies have been outsourcing and downsizing their labor force, eliminating benefits, imposing longer hours, and bringing more women and children into the workforce.

Today’s “new economy” is based not on new technology and capital investment, as former Fed chairman Alan Greenspan trumpeted in the late 1990s, but on price inflation generating capital gains (mainly in land prices, as land is still the largest asset in the U.S. and other industrial economies). The economic surplus is absorbed by debt service payments (and higher priced health care), not investment in production or in sharing productivity gains with labor and professionals. Wages and living standards are stagnant for most people, as the economy tries to get rich by “the miracle of compound interest,” while capital gains emanating from the financial sector provide a foundation for new credit to bid up asset prices, all the more in a seemingly perpetual motion credit-and-debt machine. But the effect has been for the richest 1 per cent of the population to increase its share of interest extraction, dividends and capital gains from 37 per cent ten years ago to 57 per cent five years ago, and nearly 70 per cent today. Savings remain high, but only the wealthiest 10 per cent are saving – and this money is being lent out to the bottom 90 per cent, so no net saving is occurring.

Internationally, too, the global economy has polarized rather than converged. Just as independence arrived for many Third World countries only after their former European colonial powers had put in place inequitable land tenure patterns (latifundia, owned by domestic oligarchies) and export-oriented production, so independence for the post-Soviet countries from Russia arrived after managerial capitalism had given way to a neoliberal model that viewed “wealth creation” simply as rising prices for real estate, stocks and bonds. Western advisors and former emigrants descended to convince these countries to play the same game that other countries were playing – except that real estate debt for many of these countries was denominated in foreign currency, as no domestic banking tradition had been developed. This became increasingly dangerous for economies that did not put in place sufficient export capacity to cover the price of imports and the mounting volume of foreign-currency debt attached to their real estate. And nearly all the post-Soviet countries ran structural trade deficit, as production patterns were disrupted with the breakup of the U.S.S.R.

Real estate and capital gains from asset-price inflation (not industrial capital formation) were promoted as the way to future prosperity in countries whose profits from manufacturing were low and wages were stagnant. The problem is this alchemy is not sustainable. An illusion of success could be maintained as long as Washington was flooding the globe with cheap money. This led Swedes and other Europeans to find capital gains by extending loans to feed neighboring countries from Iceland to Latvia, above all via their real estate markets. For some exporters (especially Russia), rising oil and metal export prices became the basis for capital outflows into Third World and post-Soviet financial markets. Some of the backwash, for example, flowed into the world’s burgeoning offshore banking and real estate sectors – only to stop abruptly when the real estate bubble burst.

In these circumstances, what is to be done? First, countries outside the United States need to recognize how dysfunctional the neoliberalized world economy has been made, and to decide which assumptions underlying the neoliberal model must be discarded. Its preferred tax and financial policies favor finance over industry and, hence, financial maneuvering and asset-price inflation over tangible capital formation. Its anti-labor austerity policies and un-taxing of real estate, stocks and bonds divert resources away from growth and rising living standards.

Likewise destructive are compound interest and capital gains over the long term. The real economy can grow only a few per cent a year at best. Therefore, it is mathematically impossible for compound interest to continue unabated and for capital gains to grow well in excess of the underlying rate of economic growth. Historically, economic crises wipe out these gains when they outpace real economic growth by too far a margin. The moral is that compound interest and hopes for capital gains cannot guarantee income for its retirees or continue attracting foreign capital. Over a period of a lifetime, financial investments may not deliver significant gains. For the United States, it took markets about twenty-five years, from 1929 to the mid-1950s, to recover their previous value.

Today’s desperate U.S. attempt to re-inflate post-crash prices cannot cure the bad-debt problem. Foreign attempts to do this will merely aid foreign bankers and financial investors, not the domestic economy. Countries need to invest in their real economy, to raise productivity and wages. Governments must punish speculation and capital gains that merely reflect asset-price inflation, not real value. Otherwise, the real economy’s productive powers and living standards will be impaired and, in the neoliberal model, loaded down with debt. Policies should encourage enterprise, not speculation. Investment seeks growing markets, which tend to be thwarted by macroeconomic targets such as low inflation and balanced budgets. We are not arguing that inflation and deficits can be ignored, but rather that inflation and deficits are not all created equally. Some variants hurt the economy, while others reflect healthy investment in real production. Distinguishing between the two effects is vital, if economies are to move forward to achieve self-dependency.

In sum, a much better economy can be created by rejecting Washington’s financial model of austerity programs, privatization selloffs and trade dependency, financed by foreign-currency credit. Prosperity cannot be achieved by creating a favorable climate for extractive foreign capital, or by tightening credit and balancing budgets, decade after decade. The United States itself has always rejected these policies, and foreign countries also must do this if they wish to follow the policies, by which America actually grew rich, not by what U.S. neoliberal advisors tell other countries to do to please U.S. banks and foreign investors.

Also to be rejected is the anti-labor neoliberal tax policy (heavy taxes on employees and employers, low or zero taxes on real estate, finance and capital gains) and anti-labor workplace policies, ranging from safety protection and health care to working conditions. The U.S. economy rose to dominance as a result of Progressive Era regulatory reforms prior to World War I, reinforced by popular New Deal reforms put in place in the Great Depression. Neoliberal economics was promoted as a means of undoing these reforms. By undoing them, the Washington Consensus would deny to foreign countries the development strategy that has best succeeded in creating thriving domestic markets, rising productivity, capital formation and living standards. The effect has been to decouple saving from tangible capital formation. They need to be re-coupled, and this can be achieved only by restoring the kind of mixed economy by which North America and Europe achieved their economic growth.


Michael Hudson is professor of Economics at the University of Missouri (Kansas City) and chief economic advisor to Rep. Dennis Kucinich. He has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). He is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002). He can be reached via his website, mh@michael-hudson.com.

Jeffrey Sommers is a professor at Raritan Valley College, NJ, visiting professor at the Stockholm School of Economics in Riga, former Fulbrighter to Latvia, and fellow at Boris Kagarlitsky’s Institute for Global Studies in Moscow. He can be reached at jsommers@sseriga.edu.lv.

Are Markets Naturally Efficient? Are All People Naturally Rational and Good?

There is a ideology that would like to believe that all people are naturally good and rational, and that markets are therefore naturally efficient and free if just left alone to themselves and allowed to function without regulation or management.

This line of argument is often pursued by certain faux conservatives when arguing that the police should be dismissed and the locks removed from the doors, in advance of a period of sustained looting of the common folk by the wealthy elite.

One thing almost all idealists have in common is that their work exists largely on paper, and is rarely to be found in practical implementations over any sustained period.

That is why there are so few farmers and women in this camp of free market idealists because their daily struggle with disorder and decay teaches them that nothing goes the way of order and productive results without plenty of hard work, repeated effort and at least occasional observation.

It is the man in his easy chair reading his books that believes that the dishes clean themselves, the clothes are self-folding and storing, and the children organize their rooms and personal hygiene willingly without 'interference.'

This romantic belief in natural goodness is a great fallacy underlying the Greenspan-Reagan doctrine of trickle down easy money and the prima facie good of boundless deregulation.

It is similar to the belief in the natural goodness of all men and the self-ordering of large societies towards justice and equality without effort. It sounds nice, but in practice it is just ridiculous and almost utterly without support except in the minds of its philosophical adherents. No one who has ever driven in a major metropolitan area can possible believe it.

What people forget is that it takes rules and referees and a great deal of hard work and repeated efforts to create and maintain a fair game and a level playing field for the many who may wish to play.

So too with the notion of a natural tendency to free markets. Its just not true. Markets tend to gravitate to oligopoly, insider dealing, fraud and utter inefficiency. Free market capitalists quickly come to hate competition with their success, and are always seeking to avoid the zero profit outcome through unfair market advantages and the stifling of competition.

Markets can be over-regulated by central planners, and it is always the road to ruin. But they can also be under-regulated and allowed to degenerate into the same awful excesses that governments and peoples fall into at various times in their history, periods of seemingly collective madness, disregard for the individual, and the rise of the will to power.

Government is best that governs least indeed, but with the appropriate level of government to uphold the principles under which people come together to interact in a society and avoid despotism and anarchy. There is a range of good and evil in people, and they join in society for their mutual protection, and the accomplishment of efforts requiring a broad participation.

It is no accident that Jefferson was one of the framers of the Constitution, which although remarkable in its simplicity is ingeniously complex in its design, and fine balances of powers that endure with the commitment and sacrifice for the greater good of each succeeding generation.

Appearance versus Reality in the Prism of Economics

"Decency, security and liberty alike demand that government officials shall be subjected to the same rules of conduct that are commands to the citizen.

In a government of laws, existence of the government will be imperiled if it fails to observe the laws scrupulously. Our government is the potent omnipresent teacher. For good or ill, it teaches the whole people by it's example.

Crime is contagious. If the government becomes a law breaker, it breeds contempt for the law; it invites every man to become a law unto himself; it invites anarchy." Supreme Court Justice Louis Brandeis, Olmstead v. United States

"And they healed the pain of my people disgracefully, saying: Peace, prosperity, when there was no peace or prosperity." Jeremiah 6:12

The problem of official US statistics not fully reflecting the actual economic situation is reasonably well-documented and accessible to any literate person. It is remarkably underreported and unremarked upon by the economic and media establishment however.

It may often be crap, but it is the crap we use to buy and sell, trade, derive values, and base policy decisions. It does not matter to the buyers and sellers in the short term, but in the longer term it can be seriously misleading, as witnessed by our latest financial crisis.

Peer pressure discourages negativity and outlying opinions amongst many economists, so recognition of trend changes and innovation in ideas become particularly problematic. This is an issue in the leading edge of many sciences, particularly in those that are rapidly evolving such as theoretical physics. Exegesis succumbs more readily to eisigesis in what might be described as a nascent science like economics with so many conflicting opinions and theories influenced by political agendas and ideology.

Nouriel Roubini is hailed as a prophet for predicting a downturn that common sense and an examination of the statistics should have made obvious to a first year economics student in March at the latest. Roubini was a maverick in that as a tenured professor with a reputation he dared to state the obvious before it became painfully obvious to everyone.

There are others who were equally forthcoming, if not as famed, in "telling it like it is." Meredith Whitney and Yves Smith are two outstanding examples of those who are led by the data, who are remarkable in the integrity of their thought processes, even when they might be incorrect as we all are.

Why is there a reluctance to state the probable amongst the economic establishment? It is most likely the fear of appearing foolish, of being wrong, because the methods and measures underlying the work of all the economic schools is simply unreliable. In an atmosphere such as this, playing safe and building 'reputation' and a place in a pecking order becomes a higher priority than innovation and advancement of understanding.

It fosters an ideological balkanization of knowledge, and the tendency to impress and intimidate rather than illumnate, because the economic professional understands that they simply do not know the answer with certainty, but can never admit it or explain it sufficiently to a non-practioner or even worse, a client. Perhaps that is why some of the best information has been coming from those who have less vested interest in the established order. There is a certain freedom conferred by the glass ceiling or a lack of material need and ambition.

Then there are the economists who act as hired opinion slingers or unpaid angry villagers for ideological causes and think tanks, tending to dominate the landscape in the short term because it is easier to declare yourself and work for a group of true believers whose first principles you hold, whether in true love or a paid embrace. And you will be right every so often, and will always find a place to hang your hat and park your shoes.

And on the far end of the spectrum are the used car salesmen of the economic and financial industry, who appear in the news and on television program generally with a 'pretty' interviewer as a set piece to promote a view of reality that favors the pocketbook of their employers, with a shamelessness that is almost comic at times, and would almost certainly not be so tolerated in any other aspect of human endeavor.

Can you imagine the state of the food and drug industries if such blatantly fallacious claims and interpretations of the prognosis and prior results were tolerated? It recalls the early days of traveling medicine show salesmen.

Gratefully there are more independents these days, with a forum provided by the internet for their thoughts, who operate outside of the conventional journals and channels of economic orthodoxy. Independent minds like Mark Thoma's Economist's View, Paul Kedrosky's Infectious Greed, Barry Ritholz's Big Picture, Yves Smith's Naked Capitalism, Eric Janszen's iTulip, and of course the benchmark for all, Calculated Risk, among others listed in the Divertissement Éducatif section on the left side of this blog. Their task is too often thankless but a candle lit in the darkness nonetheless.

Change is coming, and a renewal of thought is in the air. Monetarism has clearly run its course, and Keynesianism needs a significant update if not transformation from a genius equal to the original. It also may be time for a radical change in rethinking old ideas of how an economy can operate efficiently, ironically by often viewing even older ideas and theories in the light of new experience.

Out of the destruction of our current system will arise new ideas, new concepts, new attempts to promote the advancement of knowledge, a difficult marriage of economic science and public policy which don't quite speak the same language or have the same core principles, and at least a new look at the operation of human financial interactions.


Numbers Racket: Why the Economy Is Worse Than We Know - Kevin Phillips 1 May 2008 - Harper's Magazine

Down and Out: Discouraged Workers - Time Magazine, 9 September 1991

NY Times
Grim Job Report Not Showing Full Picture
By DAVID LEONHARDT and CATHERINE RAMPELL
December 6, 2008

As bad as the headline numbers in Friday’s employment report were, they still made the job market look better than it really is.

The unemployment rate reached its highest point since 1993, and overall employment fell by more than a half million jobs. Yet that was just the beginning. Thanks to the vagaries of the way that the government’s best-known jobs statistics are calculated, they have overlooked many workers who have been deeply affected by the current recession.

The number of people out of the labor force — meaning that they were neither working nor looking for work and that the government did not consider them unemployed — jumped by 637,000 last month, the Labor Department said. The number of part-time workers who said they wanted full-time work — all counted as fully employed — rose by an additional 621,000.

Take these people into account, and the job market may be in its worst condition since the early 1980s. It is still deteriorating rapidly, too.

Already, the share of men older than 20 with jobs was at its lowest point last month since 1983, and very close to the low point of the last 60 years. The share of women with jobs is lower than it was eight years ago, which never happened in previous decades.

Liz Perkins, 24 and the mother of four young children in Colorado Springs, began looking for work in October after she learned that her husband, James, was about to lose his job at a bed-making factory.

But the jobs she found either did not pay enough to cover child care or required her to work overnight. “I can’t do overnight work with four children,” she said. She has since stopped looking for work.

The family has paid its bills by dipping into its savings and borrowing money from relatives. But Ms. Perkins said that unless her husband found a job in the next three months, she feared the family would become homeless.

Even Wall Street economists, whose analysis usually comes shaded in rose, seemed taken aback by the report. Goldman Sachs called the new numbers “horrendous.” Others said “dreadful” and “almost indescribably terrible.” In a note to clients, Morgan Stanley economists wrote, “Quite simply, there was nothing good in this report.” HSBC forecasters said they now expected the Federal Reserve to reduce its benchmark interest rate all the way to zero.

Such language may sound out of step with a jobless rate that, despite its recent rise, remains at 6.7 percent; the rate exceeded 10 percent in the early 1980s. But over the last few decades, the jobless rate has become a significantly less useful measure of the country’s economic health.

That is because far more people than in the past fall into the gray area of the labor market — not having a job and not looking for one, but interested in working. This group includes many former factory workers who have been unable to find new work that pays nearly as well and are unwilling to accept a job that pays much less. Some get by with help from disability payments, while others rely on their spouses’ paychecks.

For much of the last year, the ranks of these labor force dropouts were not changing rapidly, said Thomas Nardone, a Labor Department economist who oversees the collection of the unemployment data. People who had lost their jobs generally began looking for new work. But that changed in November.

Much as many stock market investors threw in the towel in early October, and consumers quickly followed suit by cutting their spending, job seekers seemed to turn darkly pessimistic about the American economy in November. Unless the numbers turn out to have been a one-month blip, large numbers of people seem to have decided that a job search is, for now, futile.

“It’s not only that there’s nothing out there,” said Lorena Garcia, an organizer in Denver for 9to5, National Association of Working Women, a group that helps low-wage women and women who are looking for work. “But it also costs money to job hunt.”

Just how bad is the labor market? Coming up with a measure that is comparable across decades is not easy.

The unemployment rate has been made less meaningful by the long-term rise in dropouts from the labor force. The simple percentage of people without jobs — including retirees, stay-at-home parents and discouraged would-be job seekers — can also be misleading, though. It has dropped in recent decades mainly because of the influx of women into the work force, not because the job market is fundamentally healthier than it used to be.

The Labor Department does publish an alternate measure of unemployment, which counts part-time workers who want full-time work, as well as anyone who has looked for work in the last year. (The official rate includes only people who told a government surveyor that they had looked in the last four weeks.)

This alternate measure rose to 12.5 percent in November. That is the highest level since the government began calculating the measure in 1994.

Perhaps the best historical measure of the job market, however, is the one set by the market itself: pay.

During the economic expansion that lasted from 2001 until December 2007, when the recession began, incomes for most households barely outpaced inflation. It was the weakest income growth in any expansion since World War II.

The one bit of good news in Friday’s jobs report, economists said, was that pay had not yet begun to fall sharply. Average weekly wages for rank-and-file workers, who make up about four-fifths of the work force, rose 2.8 percent over the last year, only slightly below inflation.

But economists said those pay gains would begin to shrink next year, if not in the next few weeks, given the rapid drop in demand for workers. “Wage increases of this magnitude will be history very soon,” said Joshua Shapiro, an economist at MFR Incorporated, a research firm in New York.