Human Rationality and the Monopoly of Public Space

Found this post on nakedcapitalism, a guest post from Washington's blog about a recent study on why people aren't more rational, but, rather, are so prone to use faulty reasoning and emotion to reinforce false beliefs in spite of evidence that their beliefs are incorrect.  After reading, I had the following comment:


The idea that people are rational actors is a fiction that some of the classical and now neo-classical economists dreamed up to justify their models and theories. The enlightenment writers all struggled with the problem of wanting a more business friendly and, therefore, more democratic world but having such irrational human creatures populate it. Two central planks were proposed and built that were supposed to promote more rational thought among the masses, state-protected free speech rights in the public sphere and universal liberal arts education. Realizing either of these has been problematic since the late 18th century. Certainly in the US the state protects free speech but does nothing to control the monopoly of access to the public sphere where speech must be freest if people are to be able to weigh different opinions. The US state also has provided public education but it is nothing remotely close to a liberal education, much more indoctrination than anything else. Again, the US state allows a monopoly of the public sphere in education (either by state bureaucrats or corporations -- often a marriage of the two).

Notes on Social Class in America (Part 1)

I recently starting working with a friend on a study of kids social relationships in school, with the main question being how much 'race'/ethnicity* and social class influence children's social relationships in the school. The school itself is an interesting site for this question as it is a lab school at a major university, drawing children from a range of income levels and 'race'/ethnicity groups in the Los Angeles area. So, unlike many neighborhood schools in Southern California where there is likely lower levels of diversity both in terms of income groups and in terms of 'race'/ethnicity, the levels of diversity in this school are much higher.

This research project dovetales with the teaching I have been doing in urban anthropology, particularly involving the comparative and ethnographic studies of urban poverty. Naturally, in discussing urban poverty, notions of class and 'race'/ethnicity (as Wacquant defines it below) are central, and the two are fundamentally intertwined. However, for today, I want to get some thoughts down on the dimension of social class and some basic ideas about how it is defined.

When trying to understand what class means in society, there are two general themes that I have noticed so far across multiple readings. The first theme locates social class by the ranking of various groups that make up the larger society. These groups are identified according to the assumptions the theorists make about the organization of society. Within these discussions of class one can find theories of society based on the structural organization of society according to the logic of its inherent economic & bureaucratic/political processes (e.g., Marx and Weber) or the more "empirical" model of society that has no theory of society other than that yielded by the particular means of measuring the construct of "social-economic status". So, while Marx and Weber understood society and the social class-system within it as a system of relations of economic production and political power, the empirical theorists have understood social class simply in terms of the empirical indicators that have traditionally been used to measure the construct "social-economic status" since over the last 50 or 60 years (e.g., William Warner, Social Class in America, 1949). These empirical indicators of "social-economic status" traditionally consist of levels of income, education, and occupational prestige. This latter view of social class affords a very simple model of society as a social-economic pyramid, where classes are arranged from low to high, primarily based on their levels of income.

The second theme focuses on the problem of "economic mobility," this is is essentially a liberal-economic problem, focused on how individuals can be given the full range of opportunities to improve their social economic status. Naturally, it is based on the theory of social class as "social-economic status" and how levels of education and occupational prestige naturally translate to increased income (and, as a result, the elevation of one's social economic status). The main project of social mobility theory is to understand the individual and social barriers to full economic participation --or the full availability of "opportunity" in America-- and then advocate policies that would aid in removing these barriers.

Apropos of these last comments, Ron Haskins and Elizabeth Sawhill at The Brookings Institute have a new volume that examines the question of "economic mobility" in America available online today. Check it out at its web site.

I should say that the continental view of class (represented by Marx and Weber) still presents itself as a very important model, but not one that is adequately handled by social-economic status and social mobility theories. For me, I am specifically thinking of the way one position in the system of production, i.e., the way one earns income (i.e., wages vs. profit vs. rents), has a fundamental role in shaping strategies for household management -- not to mention political interests -- ...But I digress, this topic will have to wait for another day.

*Loic Wacquant in his recent book Urban Outcasts (2008) gives a wonderful justification for the placement of 'race' in quotation mark:

'Race' is put in quotation marks to stress that (i) racial identity is but a particular case of ethnicity (one that falsely presents itself as, and is believed to be based on, biological inheritance), i.e., a historically constructed principle of social classification; (ii) the gamut of social and symbolic relations designated by 'race' (or 'colour') varies significantly from one society to the next and from one historical moment to the next; and with it (iii) the mechanisms of (re)production of racism as a mode of domination invoking nature as the principle of domination. (p. 17)

More on GDP vs. Well-Being measures....

Here is another take on the Stiglitz and Sen effort to move metrics of economic health beyond GDP ...

Snip/

Simply put, the GDP is a measure of economic performance that represents the value of all the goods and services in an economy based on prices being charged. But there has long been discussion of the metric's alleged deficiencies; namely, that it does not take into account factors such as disparity in the distribution of wealth, depletion of natural resources, underground economies, and the quality of goods and services.

Stiglitz, Sen, and their colleagues say that such deficiencies helped portray the U.S. economy, and to a larger extent the global economy, as being in better shape than it actually was before the credit crisis hit. "In a performance-oriented society, what you measure affects what you do. If you have the wrong measures, you can wind up doing the wrong thing," asserted Stiglitz at a seminar last Friday sponsored by law firm Labaton Sucharow.

A key problem, according to Stiglitz, was that faux profits were factored into GDP calculations. He noted that, for example, 41% of all corporate profits in 2007 were generated in the financial sector and tied to debt. In other words, the gains were "borrowed from the future," he said.

As a result, the massive subprime-related losses that financial institutions booked in 2008 wiped out not only the profits from 2007 but also those from the preceding five years. "They were not really profits, but we recorded them as fantastic years," asserted Stiglitz.

Further, during the bubble-based run-up to the economic crisis, prices of output or capital were much higher than they should have been — 30% or more higher in the case of real estate. So the value of all goods and services being used to calculate the GDP "overestimated output," he concluded.

The GDP also fell short as a measure of sustainable growth, because the U.S. consumption boom between 2003 and 2007 was based on debt, and borrowing to generate consumption is unsustainable, added Stiglitz.

Another fundamental measuring mistake relates to household income. Adjusted for inflation, median household income in 2008 fell to $50,303, which was 4% below its 2000 level and continued a downward trend that had been accelerating for some time. That's "a striking statistic," said Stiglitz, because the GDP per capita for the same period climbed from $33,700 in 2000 to $38,100 in 2008 (adjusted for inflation).

The counterintuitive trend is explained by the increasing financial inequality within American society, which allows the two measures to go in absolutely different directions. The implication, according to Stiglitz, is that most citizens' standard of living goes down while the GDP goes up.

/Snip

Read the whole thing for more.... [Link]

Two Economic Realities

The semester I am teaching a course on anthropology and urban poverty. Right now, we have been reading some classic America works on poverty, its definitions, causes, and solutions. On the other hand, I have been reading alot of finance stuff, mainly posted by bloggers or commentators in the media. Though, I am still also slowly getting through Polanyi's Great Transformation ... But technically, his book falls between the two concerns, or rather encompasses them both.

Thinking about the juxtaposition of the two, I am struck by the way the poverty literature emphasizes the important connection between labor and well-being, that one earns a place in society through work, so long as he is not unfairly blocked by external circumstance or otherwise handicapped by personal characteristics. The world of finance is obsessed with speculative profit. Indeed other than the regular worry about the poor who find themselves unemployed, the finance set holds all labor in disdain.  *Real* money is won through successful bets in the markets.

The world of labor remains in some sense a world of practical necessity, of sweat and substance. Finance is about abstraction, math, breathing in the ether, and, of course, power.

Stiglitz on Measures of Well-Being

This is a very interesting by Joseph Stiglitz in the Financial Times.  Amartya Sen lurks in the background here.  ...

TOWARDS A BETTER MEASURE OF WELL-BEING
By Joseph StiglitzPublished: September 13 2009 19:59 | Last updated: September 13 2009 19:59
Apolitical leader attempting to promote the well-being of his citizens is pulled in different directions: he will be graded on economic performance but there are many other dimensions to the quality of life, including the state of the environment. While there is no single indicator that can capture something as complex as our society, the metrics commonly used, such as gross domestic product, suggest a trade-off: one can improve the environment only by sacrificing growth. But if we had a comprehensive measure of well-being, perhaps we would see this as a false choice. Such a metric might indicate an increase in wellbeing as the environment improved, even if conventionally measured output went down.
This was one of several motivations for Nicolas Sarkozy, president of France, when he established the International Commission on the Measurement of Economic Performance and Social Progress, which I chaired and for which Amartya Sen served as adviser and Professor Jean-Paul Fitoussi of the Institut d'Etudes Politiques served as co-ordinator, and whose final report is issued on Monday.

This article can be found at:
http://www.ft.com/cms/s/0/95b492a8-a095-11de-b9ef-00144feabdc0,_i_email=y.html
"FT" and "Financial Times" are trademarks of The Financial Times.
Copyright The Financial Times Ltd 2009

US Median Incomes 2008 Update

The US Census just released median income estimates for 2008.  When broken out by the age of the household head, an interesting pattern emerges. For those households headed by individuals older than 55 years, the last decade was a period of sustained income growth, until the 2007 recession hit.  For the rest of American households, the last decade was not so great, the last couple of years have been particularly ugly for the younger baby boomers (45-55 year olds). Given the historic highs in levels of household debt, particularly for mortgage holders, there is now overwhelming evidence that the last decade of 'growth' was a mirage. Consider me still firmly in the bearish camp for household economic well-being.

The Flu Epidemic Panic

There's a rumblin' in the e-heard this morning. The Ticker Guy captures the concern nicely with the title, "Depression Assured? Maybe (Swine Flu)." And offers this quote from some backwoods mononzine:

The Centers for Disease Control has predicted a 2.1 percent to 3.3 percent death rate among those who come down with swine flu this fall, which translates into an additional 52,000 to 86,000 deaths in the city over a three-month period, Kasdan said.

So, are we all gonna get sick and die this fall and winter from the pig flu?! Specifically, H1N1. Well you don't need to follow the heard and get all-a-twitter worrying, you can do some simple digging on the intertubes yourself and find out the facts.

The CDC has been so kind as to use our tax money to post some simple facts about the normal influenza mortality. That's right Karl, people get the flu every single year and some die from flu related complications, sadly enough. But how many? I typed, "how many people die from the flu each year" into google and this CDC site came up immediately. Here's the relevant bit for our purposes,

Each flu season is unique, but it is estimated that, on average, approximately 5% to 20% of U.S. residents get the flu, and more than 200,000 persons are hospitalized for flu-related complications each year. About 36,000 Americans die on average per year from the complications of flu.

Here's the site for hospitalizations, with more details on the variability from year to year:

During the 1990s, the average number of people hospitalized was over 200,000 but individual seasons ranged from a low of 157,911 in 1990-91 to a high of 430,960 in 1997-98.

SO, given the first quote, with an average hospitalization rate of about 200,000 and an average annual mortality rate of about 35,000, we get about 17.5 deaths per 100 hospitalizations for complications associated with the normal ol' flu bug.

Well, how about H1N1?! Turns out that the CDC has been tracking this carefully since the outbreak and --- what a wonderful world this is!--- posts their data on the intertubes!

According to the most recent reports (August 13, 2009), only 7511 people have been hospitalized with H1N1 complications in the United States -- remember that in an average year about 200,000 people in the United States are hospitalized for normal influenza complications, if we annualize the 7511 number we only get to 10,000 (I know ... the flu is worse in the fall and winter than summer and spring, so we will have to watch closely). Still, 10,000 is a far cry from the 200,000 hospitalizations we get from the normal flu on average. Even at 100,000 H1N1 related hospitalizations, it would be a rather wimpy flu season (that's assuming exponential growth in rates of H1N1 related illnesses this fall and winter.

The CDC reports that about 477 deaths have been attributed to H1N1 so far this year. That's a rate of about 6 deaths per 100 hospitalizations ((477/7511)*100) -- or only about ONE THIRD the rate of a normal flu season!

Um ... so... sorry Ticker Guy, no Flu Pandemic from wimpy little H1N1.

The heard may go back to its regularly scheduled anxiety over the pending 2012 end of the world stuff*.




*Note: um the Mayan world ended well before the planned 2012 date (about 900 AD). Looks like their calendar had the last laugh!

Case Schiller Index California

I decided to graph the June 2009 Case Schiller Index report (seasonally adjusted data). As a reminder of the dictum that all real estate is local. Well, all economic realities are local ... so I wanted to get a picture of the local pictures close to me ...

Spinning the Markets, July 12 2009

Here's the headline from Bloomberg, prior to the Aisan markets opening:

"Retail Probably Rose, Factory Slump Eased: U.S. Economy Preview"

My initial reaction, "Probably rose? What the ...?"

So, what is this rosey prediction based on? A "median estimate" from Bloomberg's "News survey" .... Whatever that means....

Here are some rather official looking details:

Sales gained 0.4 percent after a 0.5 percent increase in May, according to the median estimate in a Bloomberg News survey before the Commerce Department’s report on July 14. The next day, Federal Reserve figures may show industrial output fell 0.6 percent last month after a 1.1 percent drop in May.

Looks like hard numbers, right? I mean those are rather specific seeming statistics, right? The language is so, well, statistical sounding, right?

But it is utter and complete nonsense. There are no actual measures of retail sales behind these numbers.

Bloomberg could have just as easily written, "We did a "news survey" and about half of those we talked to thought that retail sales were going to improve a little bit from the month before. Of course, no one we talked to actually has hard data, so, please understand that these estimates are really guesses, so please read these with some caution."

Nope ... the market manipulation will have no refreshing honesty. Instead, the reporting is presented as if survey respondents actually had some clue as to what they are talking about.

Well, these reports are due this week ... so we will see what actually comes out...

Trade Volumes Down

A very interesting read over at the LA Times: Here're the opening lines:

Trade at international ports is on track to drop more than 10% this year,
one of the steepest declines ever, according to a new maritime industry
report.

Cargo ships will carry 27 million fewer containers by year's end than they
did in 2008 -- a reduction roughly equivalent to all of the cargo containers
handled by the five busiest U.S. seaports in a typical year, according to
London-based Drewry Shipping Consultants' Container Forecaster Report.

Thoughts and musings on course design no 1

I have the very good fortune this summer of being part of a team that has been tasked by my little university to assess the educational effectiveness of the Social and Behavioraal Science program.

I won't bore anyone with the details, and they're not for public consumption anyway. [A Bottom Line: "We Aren't too Shabby -- Nor are We Too Chic"]

But as I am looking over how various courses are being designed I have been forced to reflect on some of my own courses, and the design issues that I confront with those.

The issue that I keep thinking about is the degree to which the course is a selection of topics to be covered with the hope that students will be able to demonstrate their understanding of those topics, to analyze key themes, issues, concepts and theories that have been identified by specialists working in those areas, and to bring those into critical or corrective synthesis with their own ideas or the ideas they encounter in other contexts.

On the other hand, does the course present a series of problems and ask the students to bring in empirical information and competing theories that might explain the problem, then work on solutions by reconciling both theory and evidence.

This second option is practically unheard of as one peruses the course syllabi at just about every school on the planet. This observation bugs me. Why? Because I personally do not learn about something very well by trying to catalog all of the themes and topics that relate to the problem or area that I have become interested in. I learn about things, and write about what I have learned, much more effectively when I am able to ask a question about the problem, and then systematically gather information and ideas that help me to answer those questions, share my work with others to get feedback on the adequacy of the solultions I am thinking of, and finally releasing the product for further examination and comment by others should they choose to do so. Indeed, this is the heart of the scientific endeavor, or any critical exercise for that matter. It is, frankly, the method toward enlightenment (thinking of Kant here).

So I wonder ... why do we tend to organize courses the way that we do? [i.e., As a selection of topics that we review with students. ]

A Poem on "The City"

While rooting around for media for my last post, I ran across this poem by Constantin Cavafy. It was written in 1894, and very much reflects the sense of anomie that Emile Durkheim wrote about at about the same time. [original link for the poem]

The City
By Constantine P. Cavafy

You said, “I will go to another land, I will go to another sea.
Another city will be found, a better one than this.
Every effort of mine is a condemnation of fate;
and my heart is — like a corpse — buried.
How long will my mind remain in this wasteland.
Wherever I turn my eyes, wherever I may look
I see black ruins of my life here,
where I spent so many years destroying and wasting.”

You will find no new lands, you will find no other seas.
The city will follow you. You will roam the same
streets. And you will age in the same neighborhoods;
and you will grow gray in these same houses.
Always you will arrive in this city. Do not hope for any other —
There is no ship for you, there is no road.
As you have destroyed your life here
in this little corner, you have ruined it in the entire world.

Poetry/Clash Mashup!

Another Interesting Piece by Michael Hudson

Michael Hudson has published a nice round up of Obama's financial reform package on Counter Punch on Monday (June 22).
Here are the opening lines:

In reaching across the aisle for Republican support – and no doubt future campaign contributions from the financial sector Pres. Obama is morphing into Joe Lieberman. There also is a touch of Boris Yeltsin in his sponsorship of a financial “reform” ominously similar to what advisor Larry Summers backed in Russia – relinquishing government power to a banking elite. The Financial Regulatory Reform proposal promotes Wall Street’s “product,” debt creation, at the expense of the economy at large, and lets financial chieftains continue to self-regulate the debt industry – and to keep scot-free all their gains from the past decade’s worth of fraudulent lending.

[Read More ...]
Toward the end of the piece is this interesting nugget that one should keep in mind when trying to get their head around the nature of the US economy, and its impact on our political culture right now ...

More bank lending – that is, more debt – is the heart of today’s economic problem, not the solution. Finance capitalism is undercutting industrial capitalism, replacing the production of goods and services with predatory extraction of rent and interest via economic “tollbooths,” from parking meters in Chicago to roads in New Jersey. States and localities are facing fiscal shortfalls obliging them to sell off their roads, parking meters and public enterprises to buyers who erect expensive tollbooths and extract yet more income from the shrinking “real” economy. The economy is heading toward debt peonage as it polarizes between wealthy patrons and a work force reduced to patron-client dependency relationships.

When friends and commentators wonder why there are not more -- well, any actually -- public protests over the rapidly deteriorating situations from the kitchen tables to the local schools out there on main street, it is largely because these friends and commentators have an urban-industrial model of political culture given them in the college-level story books they study [mostly written 150 years ago or derivative from those written 150 years ago]. We live in a very different post-urban, post-industrial world here in the US now, one that is deeply de-centralized, patron-client, rather than highly centralized worker-management ...

Something to ponder ...

Searching for Green Shoots No. 2

"Housing Starts Soared in May," Or so the Bloomberg headline says. Could this be another "green shoot"?! Could this be more evidence that we are not mired in a severe economic crisis, but just a little downturn that will self-correct by November of this year or so? [Just in time for Obama's Health Care "Reform" debate in congress?]

I mean after all, the post-war (that's WW II) economy was driven fundamentally by the project of building American suburbia to its present high state of development. If house building is "soaring," then we are all safe to pick up with the American Dream right where we left it about a year ago.

Well, at least the US Census Dept. release their data for us to examine for ourselves, so we don't have to rely on the cheerleaders in the press.

Here's what US Census actually reported in this morning's press release:

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 532,000. This is 17.2 percent (±14.4%) above the revised April estimate of 454,000, but is 45.2 percent (±5.8%) below the May 2008 rate of 971,000.

Wow, May 2009 came in 17.2% above April 2009! Housing Starts a soaring to be sure! Just don't look beyond that first number Mr. and Mrs. American Citizen, please do not look beyond that first number! PLEASE! The S&P 500 NEEDS to go up, particularly the financial stocks!

But ... if you do look ... you will see that housing starts are 45.2% lower than just one year ago (not really a soaring figure; more of a sobering figure).

Well, sure the month to month gain is positive right? -- Hey, wait a second, what are those pesky numbers in parentheses (±14.4%) -- CRAP, since the 17.2% number is an ESTIMATE based on a sample not on all the actual houses being started ... it means that there is error and the true value is equally likely to lie somewhere between a meager 2.8% increase and a much more impressive 31.6% increase. ANY value in that range has the same chance of being the true value as the 17.2% number.



Of course, month to month changes are notoriously not meaningful. It is much better to see where we are in terms of the long-term historical trends....

Check out the following graph:

Oh for crying-out-loud! Are you kidding me?!

Housing starts are still mired at the lowest levels of activity in 50 years! 50 YEARS! Housing is in a full blown depression, the current levels have not been recorded since census started keeping track. I mean come on people.

"Housing Starts Soared in May,"

Selling your book again, are you Bloomie?

Where is all the money going?

As one reads the various financial bits Out There in medialand (blogger too!), one gets the distinct impression that this community still has no flippin' theory of money creation as it currently exists. And THAT is a serious problem for our everyday lives and for a more humane society.

Take this little bit from yesterday posted by Rolfe Winkler at Option ARMageddon. Rolfe's concern is that

The Fed published its latest Flow of Funds report today. One key takeaway: While total debt is growing more slowly, it is still growing. Since Q3 ‘08 households have cut their debt (slightly), but the federal government is borrowing so rapidly, overall debt continues to expand.

And,

The only way to climb out of a debt-induced depression is to pay down debt or to write it off. Levering up only delays the inevitable.

Unfortunately Americans, and lately the Obama administration, have shown absolutely no political will to do this. Republicans decry growing deficits, but do you ever hear them enumerate cuts they would make? Clearly our plan is to keep borrowing until our lenders cut us off.

Check out this nice graphic that Rolfe has nicely posted to give us an idea of what he is on about.


Now, to be sure, Rolfe is right about total debt still rising, and is doing so largely because the Federal Government is trying to fill in where businesses and consumers once led. But, the idea that paying off this debt or just allowing unmanageable debts to be written off would not be a nice tonic for our current malaise, it would be (it in fact is) a disaster for you and me.

Why, well, Rolfe has no idea where most of the money you and I earn and spend each day comes from. In short, that money (about 95% of it anyway) has come from all of that debt listed in this picture. What's worse is that that money/debt is both created and destroyed each and every day that you and I breathe. So, if new money/debt is not created to replace the money that is destroyed, the net amount of money available for you and I to earn and spend goes down and down. Meaning: you and I have less and less money to earn and spend (in the aggregate). -- This is a bit of an oversimplification, and I am not even mentioning the problem of compound interest that we all pay in addition to the actual money that we borrow when we pay off our debts!

Well, to those of your brave enough to take a look, I urge you to watch Paul Grignon's excellent animation that explains the whole process.



Some of you might also check out Chris Martenson's "Crash Course" which covers some of the ground for exponential growth as a practical impossibility in a world of physical limits; though I don't think Chris has a very clear understanding of the theory of money as debt, either.

Once you have enjoyed these must see presentations -- I particularly like Paul's animation because gives us all a sense of what we might be able to do about this situation in the long run -- let's reconsider Rolfe's graph above. Clearly debt is no longer growing exponentially. THAT is a problem for you and me. What's worse ... much of the new debt being invented by the Fed and the Treasury as we speak is NOT coming back to you and me in the form of new debt/money that you and I can earn and spend. It is going right into banks around the world, where it is being horded to allow them to gamble and pay their bookies in the World Casino called the global financial marketplace.

Net result to you and me, there's not enough money to service our debts AND buy the stuff you and I need each week, month, and year to get by and raise our families (hence all the foreclosures and bankruptcies and plummeting tax receipts). So far this money crunch is slamming some business sectors (e.g., autos & real estate) ... if the curve on that graph above turns down (as it inevitably will as the vicious cycle of debt destruction continues to accelerate in the coming months and -- yup, I'm going to say it -- years) expect the money crunch to hit more and more of those parts of the economy you and I depend upon for our more basic needs.

Not that I want to scare the hell out of anybody, but driving with our eyes shut hasn't worked out so well so far, now has it?

Well, what can we do about it? Now that is the conversation EVERYONE should be having. People will find alternative economies to get their basic needs; but ultimately we need to think more broadly, both in terms of ethics and in terms of politics.

Having a shared understanding of Money as Debt is a great place to start -- not to mention understanding how the current banking/global financial system is both amoral and inefficient -- promoting as it does stupid inequality and wasteful accumulation at all levels of society (yeah, that's right I am implying there can be smart inequality -- given the division of labor) .

Now, let's have some F'in Pink Floyd!

Searching for Green Shoots No. 1

I am basically a 'green shoots' skeptic, meaning that I believe all the blather we hear in the -- *ahem* -- media and from our -- cough, cough -- public representatives about economic recovery being just around the corner is a bunch of hokum. Why? Because we pulled forward trillions of dollars of future earnings to pay for our apparently prosperous lifestyles as a society, betting on the expectation that those future earnings would grow exponentially ad-infinitum (a mathematical practical impossibility (Check out Chris Martenson's crash course for a primer). What's worse, the whole flipping planet got in on the act, borrowing trillions in the present and betting that unending future prosperity or future growth toward prosperity would pay for the luxuries and wasteful spending of the present. Now, the real future is here and we ain't nearly as prosperous as we hoped we'd be, as a result huge sections of the global political-economy are under enormous stress, past debts will need to be paid off or written off, and that process is well underway right now.

But, so what? Who care what I think. Let's have some data. After all, those green shoots just might be out there, we are just not paying attention to them.

Today, the United States commerce department released preliminary estimates of imports and exports for April, 2009. Let's take a look at all of the monthly estimates for US imports and exports going back to 1992.




See the [dot] bomb bubble? Nice little bit of trade growth there, eh? But --oh Mommy! -- how about that housing bubble? Now that drove a nice little trade boom for the Good Ol' US of A, now didn't it? And that little bit of chimeric macro-economic activity has been crashing spectacularly since last summer! No upturn seen in these data!

Of course, Lawrence Summers, President Obama's Rasputin-like economic adviser, has been promising "green shoots" since February. Let's take a closer look at the same data to see if we can detect those green shoots! [zooming in on the recent boom-bust cycle]



Yup, sure enough, in February this year the crash reversed a bit and there was a little uptick in trade activity, particularly with exports of goods and services. A little 'green shoot' in support of Larry's little propaganda campaign. Since then? Down the slide we go! Wheee!

I want my 'green shoots!'

Can I get a witness!

Life in a world of unlimited horizons and limited means

I ran across this bit while rereading Durkheim's Suicide [first published in 1897]. I thought it very timely.

“For a whole century, economic progress has mainly consisted in freeing industrial relations from all regulation.
…[N]ations are declared to have the single or chief purpose of achieving industrial prosperity; such is the implication of the dogma of economic materialism …. And as these theories merely express the state of opinion, industry instead of being as a mean to an end transcending itself, has become the supreme end of individuals and societies alike. Thereupon the appetites thus excited have become freed of any living authority [either church or state]. By sanctifying them, so to speak, this apotheosis of well-being has placed them above all human law. Their restraint seems like a sort of sacrilege. For this reason, even the purely utilitarian regulation of them exercised by the industrial world itself through the medium of occupational groups has been unable to persist. Ultimately, this liberation of desires has been made worse by the very development of industry and the almost infinite extension of the market. So long as the producer could gain his or her profits only in his or her immediate neighborhood, the restricted amount of the possible gain could not overexcite ambition. Now that he or she may have almost the entire world as his or her customer, how could passions accept their former confinement in the face of such limitless prospects.
Such is the source of the excitement predominating this part of the society, and which has thence extended to the other parts. There, the state of crisis and anomy is constant and, so to speak, greed is aroused without knowing where to find ultimate foothold. Nothing can calm it, since its goal is far beyond all it can attain. Reality seems valueless by comparison with the dreams of fevered imaginations; reality is therefore abandoned, but so too possibility is abandoned when it in turn become reality. A thirst arises for novelties, unfamiliar pleasures, nameless sensations, all of which lose their savor once known. Henceforth one has so strength to endure the least reverse. The whole fever subsides and the sterility of all tumult is apparent, and it is seen that all these new sensations in their infinite quantity cannot form a solid foundation of happiness to support one during days of trial. The wise person, knowing how to enjoy achieved results without having constantly to replace them with others, finds in them an attachment to life in the hour of difficulty. But that humanity who has always pinned all its hopes on the future and lived with his eyes fixed upon it, has nothing in the past as a pleasure against the present’s afflictions, for the past was nothing to it but a series of hastily experienced stages. What blinded that person to him- or herself was his expectation always to find further on the happiness he or she had so far missed. Now he or she is stopped in his or her tracks; from now on nothing remains behind or ahead to fix his or her gaze upon. Weariness alone, moreover, is enough to bring disillusionment, for he or she cannot in the end escape the futility of an endless pursuit.
We may even wonder if this moral state is not principally what makes economic catastrophes of our day so fertile in suicides. In societies where a person is subjected to a healthy discipline, he or she submits more readily to the blows of chance. The necessary effort for sustaining a little more discomfort costs him or her relatively little, since he or she is accustomed to discomfort and constraint. But when every constraint is hateful in itself, how can closer constraint not seem intolerable? There is no tendency to resignation in the feverish impatience people’s lives. When there is no other aim but to outstrip constantly the point arrived at, how painful to be thrown back! Now this very lack of organization characterizing our economic condition throws the door wide to every sort of adventure. Since imagination is hungry for novelty, and ungoverned, it gropes at random. Setbacks necessarily increase with risks and thus crises multiply, just when they are becoming more destructive.
Yet these dispositions are so inbred that society has grown to accept them and is accustomed to think them normal. It is everlastingly repeated that it is human’s nature to be eternally dissatisfied, constantly to advance, without relief or rest, toward an indefinite goal. The longing for infinity is daily represented as a mark of moral distinction, whereas it can only appear within unregulated consciences which [sic] elevate to a rule the lack of rule from which they suffer. The doctrine of the most ruthless and swift progress has become an article of faith. But other theories appear parallel with those praising the advantages of instability, which, generalizing the situation that gives them birth, declare life evil, claim that it is richer in grief than in pleasure and that it attracts people only by false claims. Since this disorder is greatest in the economic world, it has most victims there.”

Emile Durkheim, Suicide: A Study in Sociology, 1897 [1951 trans. by John Spaulding]. [Edited for archaic use of masculine gendered pronouns.]

Lies! Damn Lies! And Statistics! :D

I have long been fascinated with social statistics, and for some time, business statistics or economic statistics have been a major preoccupation -- although to be fair, I spend plenty of time with census and health statistics too!

It's not just because I like to derive some feeling of control from them, you know, are things really that bad, are things really that good. For some stupid reason, "things" are always reduced to economic activity in my mind.

Social statistics are not just a form of clairvoyance and anxiety management. I am also fascinated by them as a cultural product. The people that report them and consume them use them to gauge reality, there is a whole social apparatus that is dedicated to their production and distribution. All too often, I am surprised by the way people use them not to discern reality, but as talismans to ward off fears of social ills, often with little or no understanding of what these number mean.

Today for example, The Institute for Supply Management released its monthly "Report on Business" Index for non-manufacturing industries. The basic measure attempts to divine whether business activity is expanding or contracting relative to the previous month. A score below 50 represent overall contraction from the previous month, a score above 50 represents overall business expansion. The report for may is summarized as, "

The NMI (Non-Manufacturing Index) registered 44 percent in May, 0.3 percentage point higher than the 43.7 percent registered in April, indicating contraction in the non-manufacturing sector for the eighth consecutive month, but at a slightly slower rate.

Now, generally everyone on the various sites I read interprets this to mean what the ISM implies it means, that overall business activity is contracting but not as rapidly as it had been the previous month. The take home message, the recession is losing steam, or, to paraphrase one blogger, it turns out that the aircraft carrier that is the US economy cannot turn on a dime [note the implied optimism, that the aircraft carrier is turning!]

But can we have any confidence in the validity or the reality behind such an interpretation of this number? Actually, no. The ISM index is compromised of a number of measures taken from a questionnaire sent to a panel of 300 purchasing and supply managers from around the country. As near as I can tell from the website, the sample is not representative of all, but even if it is a representative sample, which requires a precise sampling strategy, it is a relatively small group of a much, much larger population of purchasing and supply managers around the country.

So what you ask? Well, the statistics taken from the ISM represent business activity for these 300 members of the panel, but it is only an approximation of the real value in the real world (assuming the sample is representative of the whole). The real world number lies either somewhat higher than the survey statistic or somewhat lower -- and, if the sample is representative of the whole, this range of error is knowable with a fairly high probability of certainty (say 95 or 99 percent). So, the ISM misleads, or better, the ISM ritually reproduces an economic talisman that can give a sense of where we might be going in terms of economic activity in the past month. But we cannot know from this statistic where we are going. In point of fact there is an equal chance that the contraction of business activity is actually slightly worse than last month, as much as it is to be the case that it is slightly better! We'd be given this range and more information about the sample if this statistic was, in fact, intended to be used as a indicator or reality. That we are not given this information suggests to me that its purpose is for clairvoyance and other anxiety management purposes.

Of course, if the sample of 300 executives is a non-random, convenience sample ... well all bet are off. The statistic in that case is not very helpful at all.

Seems increasingly like the race for 19th Century social inequality is on! Interesting reads by Henry C.K. Liu and a story in the LA Times about the Governator's plans to dismantle the state's Temporary Aid to Needy Families system.


From the LA Times:

Gov. Arnold Schwarzenegger on Tuesday sent lawmakers his plan to trim more than $5 billion in spending by dismantling or drastically curtailing state programs that provide Californians with healthcare, higher education, welfare, parks, AIDS treatment and counseling, prisoner rehabilitation and other services.

I know that many people will read this and think, "Good, make the shiftless welfare queens work for a living like everyone else!!!" Of course, even before the reforms of national welfare programs in 1996, which have essentially made life as a 'welfare queen' financially impossible, and time-limited to 5 years of total support across one's adult life, trying to eke out a living on welfare supports was always a miserable thing and practiced by a tiny few.

The greater concern is that now it is the very low wage workers that are losing their work in the housing collapse who need these supports as short term unemployment, for those even eligible to access such supports, runs out. Schwarzenegger is essentially promising emiseration as his 'solution' to the fiscal crisis, for a generation and more. If the Democratic majority legislature goes along with this, God help us, this state is going to end up looking like much of the rest of Latin America, little oases of comfort and wealth, surrounded by teeming masses huddled in shanty towns along the urban perimeter.

And so it goes for all the attempts to rescue the financial industry by the world's central bankers, Liu writes,

Central bankers are savvy enough to know that while they can create money, they cannot create wealth. To bind money to wealth, central bankers must fight inflation as if it were a financial plague. But the first law of growth economics states that to create wealth through growth, some inflation needs to be tolerated.

The solution then is to make the working poor pay for the pain of inflation by giving the rich a bigger share of the monetized wealth created via inflation, so that the loss of purchasing power from inflation is mostly borne by the low-wage working poor and not by the owners of capital, the monetary value of which is protected from inflation through low wages. Thus the working poor loses in both boom times and bust times.

Inflation is deemed benign by monetarism as long as wages rise at a slower pace than asset prices. The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption of the moneyed class, although it eventually heralded in the age of revolutions. But the iron law of wages no longer works in the post-industrial age in which growth can only come from mass demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy.

That has been the basic problem of the global economy for the past three decades. Low wages even in boom times have landed the world in its current sorry state of overcapacity masked by unsustainable demand created by a debt bubble that finally imploded in July 2007. The whole world is now producing goods and services made by low-wage workers who cannot afford to buy what they make except by taking on debt on which they eventually will default because their low income cannot service it.

So, the plan, such as it is it to try and 'save' the global economy by driving ever more wealth into the coffers of the wealthy. Yet, all the money creation plans in process cannot and will not create new wealth. This means that the wealthy must take wealth from the 99% masses (yea, that's you and me too!) in order to see any personal wealth increase. And, it is the poorest among us who feel this the most immediately, and the most painfully. In this light, Schwarzenegger's 'plan' to balance the budget on the backs of the poor, while protecting the interests of his friends in the Oligarchy makes total, if misguided, sense.

Where does this end up, exactly where is ended in the middle to late 19th century,

The monetarist iron law of wages worked in the industrial age, with the resultant excess capacity absorbed by conspicuous consumption of the moneyed class, although it eventually heralded in the age of revolutions." (Henry C.K.Liu)

Only this time, Paris Hilton's conspicuous consumption is not enough,

But the iron law of wages no longer works in the post-industrial age in which growth can only come from mass demand management because overcapacity has grown beyond the ability of conspicuous consumption of a few to absorb in an economic democracy. (Henry C.K. Liu)

And with that in mind, there is this little nuggett, also from the LA Times,

Like everybody else in his farming village, Zhan Changchun used to get around on a bicycle. This month, the 29-year-old walked into a local dealership, pulled out $7,300 in cash from his leather satchel and drove away with the family's first car: a seven-seat micro-minivan that's jointly produced by China's Wuling and General Motors.

The Zhans drained their life savings and borrowed from relatives, bold moves in a slowing economy. But they couldn't resist a slew of government incentives: a 50% sales tax reduction, elimination of hundreds of dollars in road maintenance fees, plus the biggest of them all, a 10% rebate for rural residents buying vehicles with engines smaller than 1.3 liters.

It's all part of Beijing's "Send Automobiles to the Countryside" campaign, an effort to speed rural development and boost domestic consumption at a time when foreign demand for China's manufacturing exports is slumping. The government is also giving people in the countryside rebates for buying refrigerators and other appliances. ...

I love it when the theory of the day is so easily exemplified in the news of the day, don't you?

Random Bits April 6, 2009

Economic Vignettes

Selling eggs door to door. A man came to the door today while I was at work and spoke to my wife. He was selling new doorbell face covers and offering installations for $65.00. Apparently, he was peddling quite a collection. I imagine brass suns or little carriage houses. My thought was this was a little like selling eggs during the depression. When there is no work, people get creative.

Minimum wages and non-profits. Two graduating students drove up to UCLA for a big "job fair" from SUA. Dressed to the nines, hoping to convey professionalism. Spoke to one in the coffee shop on campus just after they had returned. [Definite worry over an uncertain future etched in her face]. She did not want to return home and live with the family again, though she said it might be OK for a while ... Most firms were not hiring full-time but looking for interns for volunteers. Seems the minimum starting wage in this sector starts at zero. A few public sector divisions were hiring, the Federal Government needs new agents for all sorts of new work in an imploding national economy.

Students not ready ... seek lifelong learning as solution to failures of education. This report belongs in the "irony bin." Seems a colleague was meeting with some recent grads on a recent trip to the east coast. Wanted to get the low down on strength and weaknesses in their SUA experience. One student wished that formal logic was emphasized more or that he had been able to take more econ. He decided to work on his own to develop both. So, in pursuing additional learning on his own, the college succeeded by failing in the most satisfying way for an educator like me. "Give a man a fish and ..."

There are no homunculi running the system. I assigned a couple of pages from John Gray's collection, Straw Dogs, for my CORE 200 class this week. I wanted to discuss the possibility of the illusory self with the students after reading Nietzsche and Sartre last week (each building their ideas on the idea of the self as center of individual will and action). I like the selections because they deal with the illusion of central control in systems that actually have none (i.e., ants, termites, markets, human cognition). Gray writes (p. 72),

The notion that our lives are guided by a humonculus -- an inner person driving our behavior -- arises from our ability to view ourselves from the outside. We project a self into our actions because by doing so we can account for the way they seem to hang together. The continuities we find are frequently imaginary, but when they are real it is not because anyone put them there. Our behavior displays a good deal of order, but it does not come about through any inner person ordering it.

Gray quotes R A Brooks at length:

Just as there is no central representation there is no central system. Each activity connects perception and action directly. It is only the observer of the creature who imputes a central representation or central control. The creature itself has none: it is a collection of competing behaviors. Out of the local chaos of their interactions there emerges, in the eye of the observer, a coherent pattern of behavior.

Is this not also possible for systems like the "economy" or "nation"?

Some Financial News by the Numbers

Bloomberg is spinning the news to juice the markets this morning. The Wall Street Juice Em Up before Q1 ends goes on unabated. Here's their reporting for new home sales in February this morning. "Purchases of new homes in the U.S. unexpectedly rose in February from a record low as plummeting prices and cheaper mortgage rates lured some buyers. Sales increased 4.7 percent to an annual pace of 337,000 after a 322,000 rate in January, the Commerce Department said today in Washington. The median sales price fell 18 percent, and unsold homes at the current sales pace were the fewest since June 2002."

Boy that sure sounds like good times are set to roll in the housing markets once again, eh? Notice how little context Bloomberg bothers with (investors don't need no stinkin' context!). The annualized rate (i.e., take the actual estimate and multiply it times 12) for new home sales was the second lowest rate since at least 1963 according to records at US Census. The lowest rate of sales was just 1 month earlier, January 2009. Indeed, the number is substantially lower than all of 2008, a rather pathetic year for new home sales! One more thing, the peak month, according to US Census, was July 2005 with 1,389,000 new homes sold at an annualized rate. So, the morning good news is that the new homes market is only down about 75% from the peak! Wahoo! Let's go shopping!

More Long Term Income Data

Three graphs for future reference.

(1) The changes in nominal GDP for the United States from 1929 to 1947. I was interested in these data because of a graph that has been going around that shows total credit market debt as a % of GDP back to the 1920's in the United States. The image seems to indicate a level of indebtedness skyrocketing during the great depression to about 260% of GDP, currently the overall debt to GDP ratio is about 350%. The reason I got concerned has to do with the collapse of GDP from 1929-1933 as this first image shows. This means that the ratio of debt to GDP had only increased marginally during the "roaring twenties" from about 150% to about 160% of GDP. The spike is the result of bout a 50% decline in GDP from 1929-1933. Not an increase in the total amount of debt. This means the the current era (1973-present) is unprecedented in terms of the debt to GDP ratio at the start of the current downturn.


(2) I was interested in changes in prices during the depression and now. The graph above shows that CPI was relatively flat )well, a little wavy before and after WWI. Prices did decline after 1929, but they didn't collapse either. The present period (1973-2008) is unprecedented in terms of price increases.


(3) How have real wages (on average) kept up with inflation? See for yourself:

Looking for a New Normal

A very useful read appeared in the Washington Monthly by James K. Galbraith. In it he provides an excellent analysis of the assumptions inherent in Team Obama's response to the economic crisis over the past several months. He diagnoses the problems with these assumptions, and presents a series of alternative ideas that could shape the President's response to the current economic crisis in a fundamentally different way.

So, what are these assumptions and how do they fit into Obama's policy response? Galbraith sums it up this way,

The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) The difference between conservatives and liberals is over whether policy can usefully speed things up. Conservatives say no, liberals say yes, and on this point Obama’s economists lean left. Hence the priority they gave, in their first days, to the stimulus package.

But, there is more, how does current policy plan to return the economy to "normal." Here's more from Prof. Galbraith,

The chance of a return to normal depends, in turn, on the banking strategy. To Obama’s economists a "normal" economy is led and guided by private banks. When domestic credit booms are under way, they tend to generate high employment and low inflation; this makes the public budget look good, and spares the president and Congress many hard decisions. For this reason the new team instinctively seeks to return the bankers to their normal position at the top of the economic hill. Secretary Geithner told CNBC, "We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system."he chance of a return to normal depends, in turn, on the banking strategy. To Obama’s economists a "normal" economy is led and guided by private banks. When domestic credit booms are under way, they tend to generate high employment and low inflation; this makes the public budget look good, and spares the president and Congress many hard decisions. For this reason the new team instinctively seeks to return the bankers to their normal position at the top of the economic hill. Secretary Geithner told CNBC, "We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system."

But, is this a realistic hope? Is it even a possibility? The normal mechanics of a credit cycle do involve interludes when asset values crash and credit relations collapse. In 1981, Paul Volcker’s campaign against inflation caused such a crash. But, though they came close, the big banks did not fail then. (I learned recently from William Isaac, Ronald Reagan’s chair of the FDIC, that the government had contingency plans to nationalize the large banks in 1982, had Mexico, Argentina, or Brazil defaulted outright on their debts.) When monetary policy relaxed and the delayed tax cuts of 1981 kicked in, there was both pent-up demand for credit and the capacity to supply it. The final result was that the economy recovered quickly. Again in 1994, after a long period of credit crunch, banks and households were strong enough, even without a stimulus, to support a vast renewal of lending which propelled the economy forward for six years.

The Bush-era disasters guarantee that these happy patterns will not be repeated. For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash—protected by deposit insurance and now desperately being conserved—the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare—illiquid and intangible but real and inalienable in a way that home and equity values are not. And so it will remain, as long as future benefits are not cut.

So, it is not likely that we can return to the "normal" of the last few recessions. Yet, this is precisely what is planned and hoped for in the current policy climate. Obviously, we have a very large disconnect here. A disconnect that I suspect will become more and more apparent to policy advocates and policy makers alike in the coming months. It is only unfortunate that in their rush to return the economy to a "normal" footing, so the usually party political agendas might resume in time for the 2010 elections, Team Obama has gotten it, partly, wrong -- specifically in their attempts to save insolvent banking behemoths in the most inefficient manner possible. Here's Galbraith

Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work.

Geithner is continuing Paulson's policy of intervening in the financial sector without (1) requiring any substantial changes in bank management (2) addressing the real reason the demand for credit has collapsed, households and businesses can not assume the risk associated with additional debt giving their deteriorating balance sheets. Unfortunately, we are already beginning to see the negative consequences in the bad behavior of financial firms that are currently being propped up with infusions of government money.

When a bank’s insolvency is ignored, the incentives for normal prudent banking collapse. Management has nothing to lose. It may take big new risks, in volatile markets like commodities, in the hope of salvation before the regulators close in. Or it may loot the institution—nomenklatura privatization, as the Russians would say—through unjustified bonuses, dividends, and options. It will never fully disclose the extent of insolvency on its own.

The most likely scenario, should the Geithner plan go through, is a combination of looting, fraud, and a renewed speculation in volatile commodity markets such as oil. Ultimately the losses fall on the public anyway, since deposits are largely insured. There is no chance that the banks will simply resume normal long-term lending. To whom would they lend? For what? Against what collateral? And if banks are recapitalized without changing their management, why should we expect them to change the behavior that caused the insolvency in the first place?

This point is quite serious, for it portends a period of financial recklessness as government backed actors, who are not held accountable in any appreciable way, seek financial returns for themselves in any way that they can, regardless of the long term consequences! So, one concern is that large banks and other insolvent financial actors will turn to complete financial recklessness as their "new normal." The consequences for the US Government that has guaranteed the losses from this reckless behavior is that the value of the treasuries that it issues to pay for the losses will come into serious doubt, as there is little long term investment going on and a lot of short sighted gambling in the economy.

For households, one can envision a "new normal" as well. Essentially, households will learn to save for those needs beyond their basic day to day expenditures rather than rely on credit and future income to pay for present consumption as they have in the recent past. In the short term, this inevitably means a collapse in demand as households, even those not greatly effected by the current downturn, build up their savings. Once this adjustment has been made, I suspect that consumer spending will return. Of course, this depends on whether or not the overall economy can return to a more productive state. That would mean building up industries that offer higher wages in exchange for higher worker productivity and also industries that look forward to the needs of this century rather than the needs of the century past. Galbraith also suggests that we should be investing in human capital (i.e., education and knowledge production) and human health as well as basic infrastructure that moves us away from the 20th century model of energy profligacy and toward a 21st century model of energy efficiency. Galbraith makes a number of suggestions at the end of his article that might just do the trick. Of course, to see policy shift in the direction Galbraith suggests, Obama is going to have to sack his entire economic team. I would hope that he calls Galbraith up and ask for suggestions about who to bring in as their replacements! His article is definitely worth a read for all who are interested.

Getting Credit Moving Again?

Anyone reading the policy pronouncements of the masters of the banker-verse will hear that the solution to the current economic crisis is to get "credit moving again." Alternatively, to make more credit available to consumers in the form of auto loans, consumer credit cards, etc. Yet, try as they might, all of the efforts in this direction over the past 18 months has not really worked. Credit continues to contract or stagnate as the graph above shows. And, as near as I can tell, this does not include credit created in the myriad off-books, off-shore vehicles that our financial wizards cooked up over the past few decades, so the decline in total credit may be much, much steeper than the image above implies.

Why isn't policy working? The reason, seems to me, to be that policy makers are playing with the standard recessionary handbook. An ordinary recession is described by Edward Harrison as

In a normal recession, credit becomes tight, but it is not central to the downturn. In fact, 80% of the decline in GDP is due to a de-stocking of inventory. Basically, businesses get ahead of themselves and forecast future demand that turns out not to exist. They are forced to ratchet back production and sell off inventories. In this case, policy makers can step in with fiscal and monetary stimulus and re-kindle domestic demand with a bit of a lag. Bing, presto, we are off to the races again. That's why recessions are over in 12-18 months tops.

In this context, one can easily understand just what Helicopter Ben and Tiny Tim Geithner think they are up to. But, their efforts are certainly not being rewarded with any significant expansion of cheap consumer credit. So, what's up? The answer seems to be that they have misdiagnosed the problem. We are dealing with a depression process not an ordinary recession process. Harrison continues,

That's not what happens in a depression - and this is a depression. In a depression, what happens is macro disequilibria build up so much and become so unsustainable that when the break in demand happens, there is no bing, presto from traditional policy responses. The leverage and debt in the system is just too large. The debt cannot be worked off without de-leveraging (See my post "De-leveraging").

The failure by team fed to define the problem correctly will now doubt result in a massive waste of taxpayer resources. The failure to define the problem correctly means that attempts to stoke consumer demand is not going to work to end the current economic malaise. Until we begin to hear the shift in the view of what is going on, we cannot expect much from the president's men on the scene.

Harrison's post on Naked Capitalism is a must read.

A Thought from D.T. Suzuki

In his introduction to a series of lectures from a conference on Zen Buddhism and Psychoanalysis, D.T. Suzuki opens with some a general comparison between Eastern and Western philosophical systems and their attendant modes of ethical living. In once section he concerns himself with the long standing critique of the mechanization of human productive activity, citing the 3rd century Chinese philosopher, Chuang-tze story of a farmer who refused to use modern mechanical technologies to draw water from a well more efficiently, preferring instead to use a pail, to demonstrate his point. Suzuki wrote,

"Mechanization means intellection, and as the intellect is primarily utilitarian there is no spiritual aestheticism or ethical spirituality in the machine. The reason that induced Chuang-tze's farmer not to be machine-minded lies here. The machine hurries one to finish the work and reach the objective for which the machine was made. The work or labor in itself has no value except as the means. That is to say, life here loses its creativity and turns into an instrument, man [sic] is now a goods producing mechanism. Philosophers talk about the significance of the person; as we see now in our highly industrialized and mechanized age the machine is everything and man is almost entirely reduced to thralldom. This is, I think, what Chuang-tze was afraid of. Of course, we cannot turn the wheel of industrialism back to the primitive handcraft age. But it is well for us to be mindful of the significance of the hands and also of the evils attendant on the mechanization of modern life, which emphasizes the intellect too much at the expense of life as a whole." (p. 8)

Thou Must Stay Chained to the Treadmill of Debt!

This is an interesting bit of news.
U.S. Treasury Announces Mortgage-Modification Program Details

We certainly don't want any debt slaves cheating and getting off the treadmill of home ownership on their own. No sir! only help to those who are already falling into the abyss to ... stay chained to the debt treadmill.

We gonna help 9 million home owners stay chained to the banks! No matter what, the American Mortgagee must stay on the plantation.

Change You CAN Believe In. Yes, We Can!!

Passport to Extinction

Ian Tattersal is supposed to have said, "Adaptation to sepcific conditions is a passport to extinction." Man, that hits the spot. I can think of about 100 ways that this rings true.

Don't Panic!

Have been reading around the net and finding a great deal of dissatisfaction with one of the recurrent threads in the finance and energy blogs (no doubt repeated in the eco-climate blogs as well). It is the great fear of a Mad Max future that will befall us if the wealthy part of the world falls into economic depression. This fear is built out of a belief that humanity is, at its natural core, a violent, rapacious species. That if it were not for the "thin veneer of culture" we would all turn into psychopathic predators literally tearing each other limb from limb. In the current form, the modern consumerist lifestyle is equated with the thin veneer of civilization. The idea being that if people can no longer be placated with regular shopping binges or new kitchen appliances, their inner animal instincts will be unleashed upon the world, and the world of humanity will sink into a Hobbesian war of all against all.

This general idea has a long history in modern European thought, and no wonder, Europe had been an incredibly violent place for much of the past millenium. Something about Feudalism and the competition of premodern land-owning groups over the power inherent in controlling productive land and those who labored on it for survival encouraged those in power to wage war with one another in a more of less continual fashion. The underlying logic of continual wars of expansion among land-owning elites seem to dominate right up to the end of the second world war.

But violence of this sort is not really the human norm, no matter the degree of supposed 'civilization.' Indeed, if one considers that humans are now approaching perhaps about 6 or 7 billion in number of souls present on this earth, and in spite of this incredible number, the relative numbers of brutal senseless attrocities committed on a monthly basis may number in the 10,000's world wide, we may be looking at a level of senseless, psychopathic violence of about 10 in 7 million, or a whopping 120 in 7 million annually globally. I am sorry folks, but that rate does not portend a species wide predilection for depravity. Quite the opposite, we as a species are paragons of peace and tranquility. Of course, for a city the size of Los Angeles to lose even 1 soul to the predations of the aberrant few is intolerable, much less 120! But, this is an issue for law enforcement, not for the total condemnation of our species!

So, this leads to another concern. Perhaps we need to let the oracles of senseless destruction go. Prior to the present economic crisis they served a valuable role as voices in the wilderness that helped to bring out attention to the mounting problems in the way we finance a consumption based society. But, they really don't have much to offer now that the crisis is here. With the economic horizon shifting so dramatically to a future of lower cost lifestyles, it is perhaps better to begin to really think about and work on what life on this new horizon might be like. It seems to me that this is a much more productive way forward than that proposed by the profits of senseless doom and destruction.

The Rentiers

Just some quick thoughts on the economy of the rentier class. I have been thinking about this for sometime in the back of my mind and Michael Hudson's essay in counterpunch yesterday helped to clarify it (once again). The problem with the modern political-economy is that it is one that has been captured by a class that makes its living merely by extracting income from productive sectors of the economy. Like a landlord who simply sits on his property collecting rents from his or her tenants. The property channels the income from the renters labor into the landlord's pockets. The landlord does no work, but generates income anyway. This is a form of parasitism.

Banks who make loans at interest are no different. They extend credit (i.e., allow people to pull forward their earning from the future into the present) that allows people to make needed or desired purchases now that they could otherwise afford. By charging interest the bank also acts to siphon its income off of the income generated by productive labor.

Now, where the loan is made such that it enhances the future value of labor, one can potentially see the value of making such an investment against future income, and gladly pay interest on the loan so long as that interest does not wipe out the gains in added value to ones productive labor (or, so long as the person who does the labor retains the value of the added labor and not the bankermen). One can even imagine a labor friendly loan contract that essentially guarantees such an outcome, forcing bankers to assume more risk of the failed investment (and incentivising more prudent lending).

But in the current economy, banks are extended credit mainly for the purpose of aiding the rentier class to set up commercial and domestic "venus-flytraps" to capture the income of productive labor through extractive rents (and, up until recently, for the purpose of allowing speculators to pull that potential for future rental income forward by developing and selling these spaces at tremendous profit -- or engaging in securitization which promises the same only in a much more abstract form). This is true both in residential real estate (a racket since the New Deal of the 1930's) and in commercial real estate (roughly the same period). A whole economic sector emerged in service of this particular economy.

The problem, of course, being that the whole inverted pyramid is based on the value of productive labor. You know, people that actually make and do stuff and exchange that stuff with other people who make and do stuff. When the value of that portion of the economy stagnates or declines (as it has since the early 1970's on an individual basis -- for men and certain core industries in particular) then the ability to realize the income that one has already "pulled forward" to purchase houses, cars, clothing or office space diminishes greatly leading to an increased inability to service the contracts with the banks, landlords, and insurance companies.

What is interesting about the current situation is that the USG has been completely captured by the rentier class. So, as the FIRE economy of the rentier begins to collapse, the federal response is to pull forward (technically pull back) future tax income (remember the government is also an extractive entity) and shovel this money into failing FIRE institutions. Of course, their efforts can only fail because such actions DO NOTHING to shore up the value of labor, either in the present or, through productive investments, in the future. In fact, it is much worse, because it adds additional, crushing debt that future productive labor must pay (with a diminishing value due to the complete absence of productive investment --- this is a recipe for government insolvency).

What are "free markets"

Michael Hudson produced a very nice essay today on counterpunch. It expresses so clearly what I have been thinking about the Big Lie of calling recent history of finance capitalism "free market" capitalism. He also does an admirable job reminding us of the original liberal and progressive definitions of "free markets" that were typical of the classical political-economists.

Here's a selection that captures the heart of the argument;

The fact that today’s neoliberals claim to be the intellectual descendants of Adam Smith make it necessary to restore a more accurate historical perspective. Their concept of “free markets” is the antithesis of Smith’s. It is the opposite of that of the classical political economists down through John Stuart Mill, Karl Marx and the Progressive Era reforms that sought to create markets free of extractive rentier claims by special interests whose institutional power can be traced back to medieval Europe and its age of military conquest.

Economic writers from the 16th through 20th centuries recognized that free markets required government oversight to prevent monopoly pricing and other charges levied by special privilege. By contrast, today’s neoliberal ideologues are public relations advocates for vested interests to depict a “free market” is one free of government regulation, “free” of anti-trust protection, and even of protection against fraud, as evidenced by the SEC’s refusal to move against Madoff, Enron, Citibank et al.). The neoliberal ideal of free markets is thus basically that of a bank robber or embezzler, wishing for a world without police so as to be sufficiently free to siphon off other peoples’ money without constraint.

Unrestrained predator capitalism is what we have. Sadly, Obama is increasingly looking like a head shark in a tank of very nasty others. There seems to be no limit to his complicity in the neoliberal project of raiding the public resources for maximum private gain. Looks like Hoover will get his replacement in the history books. Good news is, we will be rid of him in 4 years -- I just hope we don't get Pinochet as his replacement.