Thursday, August 26, 2010

THE CASE FOR NEW ECONOMIC THINKING

Συνεδρίαση της Επιτροπής StiglitzImage by ΠΑΣΟΚ via Flickr
Dear You—

I have already expressed my doubts about conventional economics so I thought I would follow up by quoting Joseph Stiglitz’s argument verbatim. I’m a great admirer of Stiglitz who, despite his Nobel Prize, does not, I feel, get the attention he deserves. Needless to say, if economics currently worked as well as many economists seem to think it does, we wouldn’t have had the Great Recession and be in the economic pickle we are now. Read on and enjoy.

Needed: a new economic paradigm
By Joseph Stiglitz

The blame game continues over who is responsible for the worst recession since the Great Depression – the financiers who did such a bad job of managing risk or the regulators who failed to stop them. But the economics profession bears more than a little culpability. It provided the models that gave comfort to regulators that markets could be self-regulated; that they were efficient and self-correcting. The efficient markets hypothesis – the notion that market prices fully revealed all the relevant information – ruled the day. Today, not only is our economy in a shambles but so too is the economic paradigm that predominated in the years before the crisis – or at least it should be.
It is hard for non-economists to understand how peculiar the predominant macroeconomic models were. Many assumed demand had to equal supply – and that meant there could be no unemployment. (Right now a lot of people are just enjoying an extra dose of leisure; why they are unhappy is a matter for psychiatry, not economics.) Many used “representative agent models” – all individuals were assumed to be identical, and this meant there could be no meaningful financial markets (who would be lending money to whom?). Information asymmetries, the cornerstone of modern economics, also had no place: they could arise only if individuals suffered from acute schizophrenia, an assumption incompatible with another of the favoured assumptions, full rationality.
Bad models lead to bad policy: central banks, for instance, focused on the small economic inefficiencies arising from inflation, to the exclusion of the far, far greater inefficiencies arising from dysfunctional financial markets and asset price bubbles. After all, their models said that financial markets were always efficient. Remarkably, standard macroeconomic models did not even incorporate adequate analyses of banks. No wonder former Federal Reserve chairman Alan Greenspan, in his famous mea culpa, could express his surprise that banks did not do a better job at risk management. The real surprise was his surprise: even a cursory look at the perverse incentives confronting banks and their managers would have predicted short-sighted behaviour with excessive risk-taking.
The standard models should be graded on their predictive ability – and especially their ability to predict in circumstances that matter. Increasing the accuracy of forecast in normal times (knowing whether the economy will grow at 2.4 per cent or 2.5 per cent) is far less important than knowing the risk of a major recession. In this the models failed miserably, and the predictions of policymakers based on them have, by now, totally undermined their credibility. Policymakers did not see the crisis coming, said its effects were contained after the bubble burst, and thought the consequences would be far more short-lived and less severe than they have been.
Fortunately, while much of the mainstream focused on these flawed models, numerous researchers were engaged in developing alternative approaches. Economic theory had already shown that many of the central conclusions of the standard model were not robust – that is, small changes in assumptions led to large changes in conclusions. Even small information asymmetries, or imperfections in risk markets, meant that markets were not efficient. Celebrated results, such as Adam Smith’s invisible hand, did not hold; the invisible hand was invisible because it was not there. Few today would argue that bank managers, in their pursuit of their self-interest, had promoted the well-being of the global economy.
Monetary policy affects the economy through the availability of credit – and the terms on which it is made available, especially to small- and medium-sized enterprises. Understanding this requires us to analyse banks and their interaction with the shadow banking sector. The spread between the Treasury bill rate and lending rates can change markedly. With a few exceptions, most central banks paid little attention to systemic risk and the risks posed by credit interlinkages. Years before the crisis, a few researchers focused on these issues, including the possibility of the bankruptcy cascades that were to play out in such an important way in the crisis. This is an example of the importance of modelling carefully complex interactions among economic agents (households, companies, banks) – interactions that cannot be studied in models in which everyone is assumed to be the same. Even the sacrosanct assumption of rationality has been attacked: there are systemic deviations from rationality and consequences for macroeconomic behaviour that need to be explored.
Changing paradigms is not easy. Too many have invested too much in the wrong models. Like the Ptolemaic attempts to preserve earth-centric views of the universe, there will be heroic efforts to add complexities and refinements to the standard paradigm. The resulting models will be an improvement and policies based on them may do better, but they too are likely to fail. Nothing less than a paradigm shift will do.
But a new paradigm, I believe, is within our grasp: the intellectual building blocks are there and the Institute for New Economic Thinking is providing a framework for bringing the diverse group of scholars striving to create this new paradigm together. What is at stake, of course, is more than just the credibility of the economics profession or that of the policymakers who rely on their ideas: it is the stability and prosperity of our economies.


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Wednesday, August 25, 2010

ONE KEY REASON (& FIFTEEN OTHERS) WHY OUR ECONONOMY IS CURRENTLY IN TROUBLE

Through the Great DepressionImage by B Tal via Flickr
Dear You—

The general thrust of comment about the economy, whether by the media or by internet bloggers, seem to be oriented towards  a restoration of the economic status quo. It might be summed up this way: If we have growth, and the Stock Market picks up, all will be well. Frankly that is disappointing because one might have thought that all of this combined brainpower would have realized that the American Business Model contains fundamental defects which need to be fixed before the U.S. (as a whole) will prosper adequately.

Let me list some of these defects. The overarching one, which I have not listed separately, because it is so pervasive, is that American Culture, while retaining much good, has become corrupt. The American Way of Life does not stand up to close examination. We have allowed ourselves to become manipulated, greedy, money obsessed, lazy, thoughtless and ignorant to the point where we are not even aware of how much our values have declined; and how poorly we are doing in relation to much of the rest of the world.

  1.   THE HEADLESS CHICKEN FACTOR. We are so ideologically obsessed with the doctrine of unfettered Free Enterprise including Free Trade (which, by the way, is not the way we operated for most of our history) that we seem to be ignoring the lesson that virtually every single country that is growing at a satisfactory rate has an industrial policy and a clear idea of where it is going. We haven’t; and we don’t.
  2. A HOUSE DIVIDED. Despite the fact that we are at war, and in serious economic trouble, our political system is so polarized that the country is spending most of its energies on an ideological civil war, based upon emotional button-pushing rather than facts, instead of focusing on the very real issues that require attention. 
  3. A FLAWED BUSINESS CULTURE. Our business culture is authoritarian, secretive and so obsessed with the short-term bottom line that the very legitimate interests of employees, and other stakeholders, receive scant attention. Our competitors seem to handle such issues better and their superior approaches are resulting in both market success and superior profitability. In effect, despite a belief that U.S. management is the best in the world, we have serious problems with both our business culture and our management skills. 
  4. A NEGLECTED INFRASTRUCTURE. For decades we have failed to re-invest in our infrastructure and have inadequately invested in that required for the future in order to satisfy the short-term interests of the bottom line. 
  5. A DISFUNCTIONAL TAXATION SYSTEM. Our tax system is flawed at just about every level and, in many cases, is counter-productive. It’s unfair, promotes the export of jobs, has helped to destroy our manufacturing base and is de-motivating. 
  6. AN EXCESSIVELY FINANCIALIZED ECONOMY. Prior to the great Recession, the Financial Sector, earned no less than 40 percent of corporate profits. These profits made a relatively small number very wealthy but, fundamentally turned out to be illusory and resulted in the greatest assault on the economic wellbeing of the American public since the great Depression. Having an economy which is so distorted in favor of the Financial Sector is unsound. 
  7. A NEGLECTED MANUFACTURING BASE. Manufacturing jobs underpin an economy in ways which are seriously under-appreciated. They pay better, have a greater employment multiplier effect, and help balance our payments in ways that services just don’t match. The U.S. workforce is supposed to be too expensive to employ. That begs the question of how the German workforce, which is even more expensive, is so successful internationally. 
  8. A FLAWED EDUCATIONAL SYSTEM RESULTING IN AN UNDER-EDUCATED WORKFORCE. We have known about this problem for years and still be progress in baby steps. 
  9. AN EXCESSIVE BIAS IN FAVOR OF BIG BUSINESS. The U.S. economic system is heavily skewed in favor of Big Business despite clear evidence that Small Business creates more jobs and that Big Business often does not operate in the National Interest.
  10. AN INEFFECTIVE GOVERNMENT. The ideological debate is over how much government we should have but very little attention is given to the effectiveness of our government. There is currently considerable evidence that it is ineffective, especially when compared to the governments of our international competitors. 
  11. INADEQUATE INVESTMENT. A sound economy requires massive ongoing investment. We have under-saved, under-invested, invested in the wrong things, and invested in the wrong locations. Worse, for nearly two thirds of a century we have invested in a Military Industrial Congressional Complex that is inefficient, corrupt and a drain on society as a whole. Beyond that, it is provocative, substantially counter-productive, and not too good at winning the kind of wars our politicians chose to wage – despite the undoubted courage of our armed services. 
  12. SERIOUSLY DEFICIENT SOCIAL STRUCTURES. There are certain social structures which are absolutely fundamental to life, to the wellbeing of one’s citizens, and to resultant economic success. These include: Healthcare; Education; Housing; and Pensions. The U.S. is seriously deficient across the board. Our argument is that we cannot afford satisfactory solutions to these issues. One has to ask how so many of our competitors can - and still compete with us so successfully in the marketplace. 
  13. A CRIPPLING NATIONAL DEBT AND BUDGET DEFICIT. Serious though these issues are, they are more a symptom than a cause of our current malaise. However, we are unlikely to resolve them without much misery unless we address more fundamental problems. 
  14. A DIVERGENCE OF INTERESTS BETWEEN THE LEADERS AND THE LEAD. Globalization, as currently practiced, now means that the interests of major corporations can, and do, now diverge significantly from those of this country. That would be serious enough in itself, but since those same corporations have now effectively bought Congress, the interests of the American people are no longer represented to best advantage.
  15. THE NEED FOR CONSTITUTIONAL REFORM. Corporate interests, and the politicians they finance, have now learned to game the Constitution with the electoral process serving more as a distraction than as a genuine process of change. The solution is to amend the Constitution – as was expected by the Founders – starting off with a resolution which would remove the legal fiction that corporations should have the same rights and protections as people.

Well, my friend, there you have it. My underlying point is that, once again, with the Mid-Terms fast approaching, we are allowing ourselves to be distracted by the race instead of focusing on the issues that are fast draining the very life-blood from this country.

Victor.
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Tuesday, August 24, 2010

INTRODUCING THAT ALL SINGING, ALL DANCING DUO FROM THE BASELINE SCENARIO

WASHINGTON - JULY 17:  In this handout image s...Image by Getty Images via @daylife
Dear You--

They say an author, like a journalist, should safeguard his sources. I'm going to break that rule. These two deserve all the kudos they get. 

In an effort to keep up with contortions of our economy – exciting stuff as far as I am concerned - I contribute to a number of economic newsletters. All are good, but one of the best is THE BASELINE SCENARIO written by Simon Johnson and James Kwak. Their ideology may be summarized as commonsense. Here is an example:

HOUSING IN TEN WORDS

Posted: 23 Aug 2010 07:04 AM PDT
By James Kwak

“Housing Fades as a Means to Build Wealth, Analysts Say.” That’s the title of a New York Times article by David Streitfeld. Here’s most of the lead:

“Many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
“The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
“More than likely, that era is gone for good.”



I’ve been telling my friends for a decade that housing is a bad investment. These are real housing prices over the past century, based on data collected by Robert Shiller:
Housing is generally a worse investment than either stocks or simple U.S. Treasury bonds. Then why do so many people think it’s such a great investment?

1.       Leverage. Let’s say inflation is 2% and housing returns 3% (1% real return). If you put 10% down, now your house is returning 30%, or a 28% real return; subtract a 6% fixed-rate mortgage, and you’re making about 22%–or twenty-two times the real return of the underlying asset. Of course, we all know the dangers of leverage.
2.      Price illusion. People remember the nominal price they paid for their houses. When they sell them thirty years later, they look at the difference between the nominal purchase and sale prices and think they made a ton of money. This is especially true of the generation that bought houses in the 1960s and early 1970s before inflation hit; they saw their home prices go up by a factor of ten and thought it was due to high real returns.
3.      Bubbles and optimism bias. Every now and then we have a huge bubble like the one at the right-hand end of the chart above. For a while, people think that’s the new normal. For a while after that, they continue to think it’s the new normal, because they are biased toward optimistic expectations about the world. (Note that during the first half of the decade that I was advising friends that housing was a bad investment, housing was actually a great investment, assuming you could get out in time.)

OK, so now we all now the real story. Or do we? “In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.” There’s that optimism bias. But I don’t think it’s correct to say that an era is over–an era when housing appreciation was the key to the economy. The chart above shows simply that that era never existed; housing was flat for a long time, and then there was a bubble. Instead, we had the illusion of an era of housing appreciation, produced mainly by leverage and price illusion. For every homeowner who made a killing because she got a fixed-rate mortgage in 1970, there was a new family that couldn’t afford a house in 1980 because interest rates were too high, or a savings and loan that failed because it was weighed down by those fixed-rate mortgages. That whole phenomenon was just a transfer of wealth within society.

One last caveat, however. When “analysts say” one thing, they are usually wrong. Remember back in 1999-2000, when most analysts were saying that stocks were the best investment for everyone, all the time? Generally the best time to buy an asset class is when conventional wisdom has shifted against it. So while I still think housing is overpriced–and we should slowly remove the props on that price, like the mortgage interest tax deduction–maybe in the long term it’s not such a bad idea after all.



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GEORGE SOROS’S TANK

DAVOS/SWITZERLAND, 27JAN10 - George Soros, Cha...Image via Wikipedia
Dear You--

I think I'm more or less recovered though I'm getting odd twinges in or around my left shoulder. Can one get whiplash from a fall? Be that as it may, I thought I'd cheer myself up by writing about economics today. It's my not-so-secret obsession.  Fill your glass. Here goes. 

Economics is an odd discipline, made odder still by vehement attempts to turn it into a science complete with immutable laws. Wikipedia sums it up fairly well:

Economics is the social science that is concerned with the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek οκονομία (oikonomia, "management of a household, administration") from οκος (oikos, "house") +νόμος (nomos, "custom" or "law"), hence "rules of the house(hold)".[1] Current economic models developed out of the broader field of political economy in the late 19th century, owing to a desire to use an empirical approach more akin to the physical sciences.

Personally, I have always regarded Economics as a fascinating area of study which is far more akin to Sociology than anything else, and whose theories should be regarded with caution and should absolutely not be confused with physical laws. I came to that conclusion when I was studying it back in the early Sixties based upon simple observation and common sense, and I was particularly suspicious of economic modeling because it seemed to me that however sound the math, the models were so dependent upon assumptions and inadequate data that the results, in real world terms, had to be skewed. Over time, computers have become vastly more powerful and able to cope with both more data and more variables, but I confess I still regard computer modeling as useful rather than  definitive, and, in many cases (such as in Third World Development), no more than rationalization for some decidedly dubious practices. Further, I regard the tendency of many politicians to cherry-pick bits of economic theories to support their political ambitions as being iniquitous -  Supply Side Economics being a classic example.

What has frustrated me about the development of Economics generally has been a sense that an extremely useful area of study – akin to History if you will – has been hijacked and misused for personal gain instead of being utilized to general advantage; and, in addition, has been perverted intellectually to the point where society is in danger of losing sight of its basic utility. Here, the best example of this tendency has been the near worship of ‘Market Fundamentalism’ – the notion that unfettered capitalism in the form of unregulated free markets constitutes the optimum economic system because, apart from yielding maximum growth, it is also inherently self-regulating. Given the Great Recession, whose consequences are far from over as I write, such belief flies in the face of the evidence but it continues nonetheless. It endures because it’s an ideology, because it is politically convenient, and because of massive ignorance.

Nobel laureate Joseph Stiglitz argued in his latest book, FREEFALL, that the whole economics profession needs to do some soul-searching and George Soros has put up $50 million to fund a new think-tank to reconceive the field of economics which he describes as “a dogma whose time has passed.” The new organization will be called The Institute of New Economic thinking and its advisory board will include such economists as Jeffrey Sachs, George Akerlof, Kenneth Rogoff, and Stiglitz himself as well as commentators such as Anatole Kaletsky and John Kay.
Whether you agree with Soros and Stiglitz’s politics or not, I think they are on the right track when it comes to re-thinking the core discipline of Economics. Soros’s own obsession is with “reflexivity,” which is the notion that markets tend to influence perceptions of reality, which in turn feed back into markets. For many years I called that no more than “markets feeding upon themselves” – which seemed to me to be self-evident – but I’ll be the first to admit that Mr. Soros has the edge when it comes to utilizing his insights to financial advantage. On the other hand, after trying to read two of his books, I don’t feel overly concerned about George Soros as a competing thriller writer. That said, I’m curious indeed to see what his think-tank comes up with.

I never thought I would write this line – but here goes: Economics is fun.



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Monday, August 23, 2010

THE BEST SUMMARY OF THE REASONS FOR OUR CURRENT ECONOMIC PLIGHT

Gibbons / Decline of RomeImage by Alastair Dunning via Flickr
Dear you--

Being laid up for a while has meant that I have caught up with some of my reading.

THE BETRAYAL OF AMERICAN PROSPERITY by Clyde Prestowitz is, far and away, the clearest and most credible account of how this Great Nation has squandered its enormous economic advantages that I have encountered – and it is highly readable into the bargain. Beyond that, it exposes a great deal of economic myth including the fact that American prosperity did not rest upon a nation devoted to Free Trade but instead was largely protectionist for most of this country’s history. In fact, in a cheerful, matter of fact way, Prestowitz shows quite clearly that we are largely victims of own misguided policies and ideologies, with greed and arrogance playing major supporting roles; and that currently we are in serious decline.

The book initially establishes how far we have fallen and Prestowitz’s case is damming. In fact an enduring strength of the book is that the author never advances an argument without supporting data. The books starts off with a disturbing quote:

“Rome lived upon its principal till ruin stared it in the face. Industry is the only true source of wealth, and there was no industry in Rome.  By the day the Ostia Road was crowned with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia minor, the timber of the Atlas, the grain of Africa and Egypt – and the carts brought nothing out but loads of dung. That was their return cargo.

WINWOOD READE, THE MARTYRDOM OF MAN

In a damning paragraph, Prestowitz also points out that if one excludes the top 1 percent of earners from all countries, 99 percent of people in countries like Germany, Japan, the UK, and France actually have a higher income than 98-99 percent of Americans.

Prestowitz does offer solutions but makes the point that the interests of American Big Business may no longer be assumed to be identical to those of those country – a fact that our politicians do not seem to have faced up to - perhaps because those same politicians are largely financed by Big Business. Put more simply, it means that this country is no longer led by people who have the Nation’s best interests at heart.

My own book, TITANIC NATION, comes to many of the same conclusions although is more comprehensive in its recommendations for action.

The tragedy is that most Americans, albeit worried about the economy and concerned about the future, still do not seem to understand how far we have fallen already, and how ill-served we are by so many of those who lead us, whether politicians or corporate leaders.

Read and reflect on this saying by Norwegian historian, Geir Lundestad: "The United States is organizing its own decline."

Indeed.


Victor.

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NEWTON WAS RIGHT

Isaac NewtonImage via Wikipedia
Dear You--

There has been a gap in my letter-writing because I’ve been recovering from a fall. Newton was right: There is such a thing as gravity. That fact was demonstrated when I tripped on one of Seattle’s famous protruding paving stones (the roots of all those gorgeous trees push them out of place) and fell face forward onto its fellows, inflicting a painful amount of damage on myself in the process. Fortunately, nothing seems to have been broken, but I was shaken and lacerated and slightly concussed, and it has taken me longer than I expected to revert to a relatively pain-free, sentient, state. Ironically, I had just left a meeting with a pastor at the time and suspect that I was still so preoccupied with some of the matters we had been discussing that I wasn’t paying adequate attention to my surroundings. I’m just glad I was walking not driving.

Ideas can be amazingly invigorating but one can become so preoccupied with them that the practicalities of life receive inadequate attention. Whatever about the impairment of one’s attention while driving from drugs, alcohol, talking on one’s cell phone, and texting, I have to wonder whether an additional offense might be in order for us cerebral types: Thinking while driving.

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Wednesday, August 11, 2010

FAIR WARNING: IRONY MAY BE IN USE HERE


Credit cards
Image via Wikipedia
Dear You—

There are so many good things about this country that I dislike harping on what is ailing us. Still, drawing attention to society’s deficiencies is one of a writer’s designated roles, so I had better not let the side down. In that spirit (‘reluctant yet principled’ one might say), and that of the arguments made in my book, Titanic Nation: How To Avoid Icebergs: The Case For Fundamental change In The American Way Of Life, let me make the following observations. But first, for those who are challenged by nuance, allow me to give fair warning that irony may be in use here:

·         Household net worth has decreased from its peak of $65.86 trillion in Q2 of 2007 to $54.56 trillion as of Q1 2010 (and it is still dropping like a plugged plover). That is a drop of $11.3 trillion – over 17 percent - and members of the Middle Class are the principal losers. Why not indeed! They – we – have been losing out since the early Seventies so, after such a long period of such injustice being the accepted norm, one might credibly advance the argument that it’s just the American Way. After all, this is a democracy and the system which tolerates such a norm is voted in by ‘We, the People.’
NOMI PRINS (Yes, this really is her)
·         The cost of bailing out the banks – who were the primary cause of the Great Recession - to date has been $14 trillion. Source: Nomi Prins’ book It Takes a Pillage The reason that they get bailed out is because Social Welfare for the Rich and Corporate Interests is part of the American Way too. 
·         Out of that $14 trillion, Wall Street received $12, 194 trillion, and American citizens received $1,823 trillion. Now, one might think that a little unfair, but that’s the whole point! If it was fair, the Right would call it 'Socialism;' and we certainly can’t have that in a nation of rugged individualists. Besides, we'd be damned because, as everyone knows, fairness is un-Christian.
·         Extraordinarily low interest rates resulting from the current policies of the Fed have the effect of subsidizing Wall Street massively, because the banks can borrow at minimal cost and then re-lend at a profit (to the U.S. Government if so inclined), while undermining the return made by the average saver, who cannot borrow at the minimal rates charged by the Fed, but instead can experience the joys of double digit credit card interest rates. In effect, once again they promote a transfer of wealth from the Middle Class to the Rich and Corporate Interests because any other way would be un-American and therefore, by definition, wrong, because everyone knows the American Way is the best way in the world..
·         The country’s trade deficit widened 18.8 percent in June 2010 which is what you’d expect if American business had been outsourcing American jobs for decades in the fine tradition of Free Trade.
·         In order to find money to give to the States to keep teachers working, funding for the Food Stamps program was cut, which just goes to show that American Capitalism is truly unfettered exactly as the Chamber of Commerce wants.

All of this cannot but force the conclusion that we seem to have created a society of truly impressive inequality where the Rich and their Corporate Interests get ever richer and the rest exist solely to be pillaged; and that impression has to be reinforced by the feeling that if our American culture is prepared to tolerate this for any length of time, perhaps our core problem is cultural. Or such is my view. In short, in the time tested spirit of rugged individualism and personal responsibility, we are getting exactly what we deserve; and we seem exactly on track to get a great deal more of it.

I’m left with one puzzling thought: If the American Business Model, based upon unfettered capitalism, Free Trade and all this rugged individualism, is the best in the world, how come so many other economies are doing so much better than we are? And why don't most Americans know this?

Farewell from your puzzled friend.



Victor.

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FAIR WARNING: IRONY MAY BE IN USE HERE

Credit cardsImage via Wikipedia

Dear You—

There are so many good things about this country that I dislike harping on what is ailing us. Still, drawing attention to society’s deficiencies is one of a writer’s designated roles, so I had better not let the side down. In that spirit (‘reluctant yet principled’ one might say), and that of the arguments made in my book, Titanic Nation: How To Avoid Icebergs: The Case For Fundamental change In The American Way Of Life, let me make the following observations. For those who are challenged by nuance, let me give fair warning that irony may be in use here:

·         Household net worth has decreased from its peak of $65.86 trillion in Q2 of 2007 to $54.56 trillion as of Q1 2010 (and it is still dropping like a plugged plover). That is a drop of $11.3 trillion – over 17 percent - and members of the Middle Class are the principal losers. Why not indeed! They – we – have been losing out since the early Seventies so, after such a long period of such injustice being the accepted norm, one might credibly advance the argument that it’s just the American Way. After all, this is a democracy and the system which tolerates such a norm is voted in by ‘We, the People.’
·         The cost of bailing out the banks – who were the primary cause of the Great Recession - to date has been $14 trillion. Source: Nomi Prins’ book It Takes a Pillage The reason that they get bailed out is because Social Welfare for the Rich is part of the American Way too.
·         Out of that $14 trillion, Wall Street received $12, 194 trillion, and American citizens received $1,823 trillion. Now, one might think that a little unfair, but that’s the whole point! If it was fair, the Right would call it 'Socialism;' and we certainly can’t have that in a nation of rugged individualists. Besides, we'd be damned because, as everyone knows, fairness is un-Christian.
·         Extraordinarily low interest rates resulting from the current policies of the Fed have the effect of subsidizing Wall Street massively, because the banks can borrow at minimal cost and then re-lend at a profit (to the U.S. Government if so inclined), while undermining the return made by the average saver, who cannot borrow at the minimal rates charged by the Fed, but instead can experience the joys of double digit credit card interest rates. In effect, once again they promote a transfer of wealth from the Middle Class to the Rich and Corporate Interests because any other way would be un-American and therefore, by definition, wrong, because everyone knows the American Way is the best way in the world..
·         The country’s trade deficit widened 18.8 percent in June 2010 which is what you’d expect if American business had been outsourcing American jobs for decades in the fine tradition of Free Trade.
·         In order to find money to give to the States to keep teachers working, funding for the Food Stamps program was cut, which just goes to show that American Capitalism is truly unfettered exactly as the Chamber of Commerce wants.

All of this cannot but force the conclusion that we seem to have created a society of truly impressive inequality where the Rich and their Corporate Interests get ever richer and the rest exist solely to be pillaged; and that impression has to be reinforced by the feeling that if our American culture is prepared to tolerate this for any length of time, perhaps our core problem is cultural. Or such is my view. In short, in the time tested spirit of rugged individualism and personal responsibility, we are getting exactly what we deserve; and we seem exactly on track to get a great deal more of it.

I’m left with one puzzling thought: If the American Business Model, based upon unfettered capitalism, Free Trade and all this rugged individualism, is the best in the world, how come so many other economies are doing so much better than we are? And why don't most Americans know this?

Farewell from your puzzled friend.


Victor.

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Tuesday, August 10, 2010

O’REILLY’S LAW: THE RISE OF CORPORATE POWER IS INVERSELY PROPORTIONAL TO THE AMOUNT OF CORPORATE TAX PAID

Wall Street Sign. Author: Ramy MajoujiImage via Wikipedia

Dear You—


As you will have read in my book Titanic Nation: How To Avoid Icebergs: The Case for Fundamental Change In the American Way Of Life, matters started to go drastically wrong, as far as most Americans were concerned, from roughly 1972. From that period, for a variety of reasons outlined in my book, American business culture abandoned the concept that business should harbor some degree of concern for all the stakeholders (employees, customers, suppliers, the community and the National Interest), and focused entirely on maximizing quarterly shareholder return to the exclusion of all else. 


Well, as you might expect, as U.S. corporate interests squeezed one tax concession after another from a largely bought congress, the corporate contribution to our tax base declined – as is graphically shown in the following chart. Add in the dramatic increase in Social Insurance and the results were predictable. The Rich and Corporate Interests got richer and the position of the Middle Class deteriorated. Other factors contributing to the decline of the Middle Class are covered in my book and include: the suppression of unions; the relative decline of wages; a decrease in pension availability; a squeezing of vacation time; competition from both illegal and legally imported labor; outsourcing; increases in financial charges, professional fees, educational costs and health insurance. 


The impressive thing is how all this was done while keeping the vast majority of Americans from really understanding what was going on. It speaks volumes to the effectiveness of propaganda by the forces who understand it best – business interests. But it's a sad thing because it adds up to a society where a small minority get richer while most lose ground. Is this inevitable because of global competition? The short answer is: "No," and it is easily proven by looking at what is going on elsewhere. However, most Americans are alarmingly ignorant of alternatives to the American Way of Life, and to the fact that there are highly effective free-enterprise alternatives to the American Business Model.

The source of this data is www.deptofnumbers.com and government sources.

U.S. Tax Revenue as a Fraction of GDP by Component.






Farewell for the moment. Write soon. I miss your wit and your company.



Victor.

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DO THEY KNOW SOMETHING WE DON’T KNOW?

President of Brazil Luiz Inacio Lula da Silva ...Image by World Economic Forum via Flickr

Dear You—

It strikes me that we are being remarkable unimaginative when it comes to both reviving the economy and solving our employment problem. I'll return to this theme but just to register the point, here is a piece on Brazil's recent achievements.

Brazil Generated 1.77 Million Jobs Last Year

Earthtimes
August 5, 2010

http://www.earthtimes.org/articles/news/338218,18-million-jobs-2009.html

Brasilia

Brazil generated 1.77 million jobs in 2009, despite the
effects of the international financial crisis that shook
much of the world, Brazilian authorities said Thursday.

"In a crisis year, the country generated 1.77 million
formal jobs. Brazil was the only country in the G20
(Group of 20) that generated that number of jobs,"
Brazilian Labour Minister Carlos Lupi declared.

Lupi said that by the end of this year Brazil will have
achieved the goal of creating 15 million jobs during the
presidency of Luiz Inacio Lula da Silva, who took office
on January 1 2003 and is set to leave on December 31.

Lupi said Lula's government is only 1 million jobs short
of that goal.

"We will reach 15 million with relative ease," he said.

Lupi said public administration was the sector that
created most jobs in 2009. This was partly due to a
change in the law which banned the government from
hiring contractors to carry out tasks.

Civil construction, including the construction of
housing for low- income families and other
infrastructure, played a major role in the 11.37-per-
cent private sector employment expansion last year.


I'd say the above just about speaks for itself, wouldn't you?


Farewell for the moment. Write soon. I miss your wit and your company.

 


Victor.



 

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