Economic Dreams - Economic Nightmares

Capitalism's Fatal Flaws

In The Worldly Philosophers, Robert Heilbroner tells us that all the great economists foresaw a time when capitalism would come to an end. In Stabilizing an Unstable Economy (1986), Hyman Minsky outlines an agenda for ending capitalism as we've know it (what Heilbroner called "Capitalism as a Regime" in Behind the Veil of Economics). Minsky suggests that we replace laissez-faire capitalism (Wiki link) with a less-flawed version of Capitalism that allows for much better automatic stabilizers than found in our current system.

Minsky, following his reading of Keynes, tells us that modern financial institutions (with inherent tendencies toward monopoly) inevitably will turn into predators on other economic subsystems. Minsky also tells us that most economic theories, with emphasis on "equilibrium" while allowing only for occasional shocks to the system, are ill-equipped to deal with the systemic problems stemming from stability that breeds instability. Minsky (p.280):

In a world with capitalistic finance it is simply not true that the pursuit by each unit of its own self-interest will lead an economy to equilibrium. The self-interest of bankers, levered investors, and investment producers can lead the economy to inflationary expansions [including asset inflation] and unemployment-creating contractions. Supply and demand analysis—in which market processes lead to an equilibrium—does not explain the behavior of a capitalist economy, for capitalist financial processes mean that the economy has endogenous destabilizing forces. Financial fragility, which is a prerequisite for financial instability is, fundamentally, a result of internal market processes. …

Institutions such as the Federal Reserve, which were introduced in an effort to control and contain disorderly conditions in banking and financial markets, are now slaves of an economic theory that denies the existence of such conditions.

The "stability breeds instability" process is now well-know to complex systems theorists. As systems age, newly emergent systems first gain, then lose redundancy and therefore resilience—they become fragile, brittle, or tightly-coupled. At some point a shock to the system will cause catastrophic failure (if the system just doesn't get stuck in a "poverty trap"), setting the stage for rebirth of that system or newly emergent systems that arise in the wake of the old. (See, e.g. adaptive cycle, or more generally: Resilience Alliance.)

Minksy's dream is a hard sell in the American culture, with our new-found American values. Minsky's agenda is to relegate market mechanisms to relatively minor roles. Minsky's "solutions" which he offered up humbly, are for bigger government, smaller banking institutions, and an elimination of "welfare" via a government-sponsored "employment strategy". It is an agenda that is still being pitched by some of Minsky's disciples, although there is dissension among the disciples as is always the case with economists. Minsky also advocated for a "balanced budget" — balanced not every year, but over a reasonable time-frame so as to avoid hyper-inflationary possibilities.

Time will tell whether Capitalism will survive (and if it does, In what form?). In the meantime we all watch and wait, cuss and discuss.

For more on Minsky and more on the bankster crisis, see:
Economic Perspectives from Kansas City.
For more on monetary complex systems thought, see:
Macroeconomic Resilience

Deconstructing 'Recession 2008?'

I spent an hour yesterday listening to three economists (Brad DeLong, Mike Mandel, and William Beach) discuss our current plight. I found their insights compelling. Areas of agreement, included:

• Don't look to the US Government for effective Fiscal Policy Help — particularly in an election year
• Don't look to the Fed to ease much pain since they are pretty much helpless in the face of a faltering US housing market (See Krugman too)
• Best we can do is to see both borrowers and lenders share the pain, with some pain (how much?) shared by the rest of us

The forum was hosted by Dave Iverson (a different, more erudite Dave Iverson) and aired on KQED, NPR, San Francisco. It's well worth an hour of your time, if only to get better acquainted with Brad DeLong's longer-than-a-post reflections (but skip the questions and answers). From Delong's Grasping Reality…

KQED | Forum: Recession 2008? [Jan. 11]

http://www.kqed.org/.stream/anon/radio/forum/2008/01/2008-01-11a-forum.mp3

Host: Dave Iverson

Guests:

• Brad DeLong, professor of economics at UC Berkeley
• Mike Mandel, chief economist for BusinessWeek
• William Beach, senior economist and director at the Center for Data Analysis at the Heritage Foundation

Workers of the World Uniting: Finally

This was predictable and welcome to all but the most strident free-market fundamentalists. Question is: Will it have legs?

(via Economist's View) Unions for a Global Economy, by Harold Meyerson, Commentary, Washington Post: The business press has barely noticed and the usual champions of globalization have been mute, but an announcement last week in Ottawa signaled a radical new direction for the globalized economy. The United Steelworkers … entered into merger negotiations with two of Britain's largest unions (which are merging with each other next month) to create not only the first transatlantic but the first genuinely multinational trade union. …

All three unions are among their nations' largest; the combined membership, should the merger go through, will total roughly 3 million, making it the planet's largest union. …

The story here, however, isn't the number of members but the adaptation of labor to the globalization of capital. …

[A]s unions begin their inevitable transformation into global entities, globalization's cheerleaders must define themselves more clearly. Do they back globalization because it has … advantaged global investors over … national unions and governments? Or do they believe that government and workers should go global, too, creating on an international scale the kind of mixed economy that governments and unions created in the decades after World War II – the only economy in history to produce broadly shared prosperity? In other words, are they really for globalization, or just the return to the laissez-faire, enrich-the-rich world that existed before the New Deal? …

The Debt and the Deficit

I am a big fan of Peter Bernstein. I recently re-read The Debt and the Deficit to refresh my mind as to where we stand relative to both. Bernstein co-authored the book with Robert Heilbroner back in 1989. Heilbroner and Bernstein argue that, by itself, cutting the American budget deficit will not increase private savings, indeed it might help make it worse. In response to the question, "Can we raise the national savings rate by cutting the budget deficit?", they say:

The answer is no if that will result in a further squeeze on household and business income. The answer is yes if at the same time we are committed to measures to improve the productivity and international competitiveness of the American economy. And the achievement of these goals is critically dependent on a high level of public as well as private investment.

I highly recommend this little book to any who struggle with our current and historical debt and deficit problems. Too bad Heilbroner and Bernstein's insights were not followed. Here in the USA, we might have turned around our slide into household sector "dissaving". We might have rethought our using the military-industrial complex for purposes of Military Keynesianism (to whatever extent this very controversial proposition may have been employed (see also Republic or Empire)). We might have imposed a gas tax, as they then advised, in an era long before allegations of corporate wrong-doing and price gouging became fashionable.

All of it might have been done while keeping an eye open to the need to move more slowly into Globalization with some form of nation-to-nation capital flow controls to keep "hot money" from creating ever-bigger bubbles to later burst wreaking havoc afterwards. All of it might have been done with some form of policy to moderate the waves of outsourcing and offshoring that have plagued middle-class workers in the "more developed" countries. Oh well!

Main Street America Thinks Economy Stinks

Although still generally optimistic when looking at their own prospects, more and more Americans believe that the middle class is slipping away. Not only do Americans worry a lot about retirement, health care, immigration, globalization, and effective represention in the workplace, they also think they are not being listened to by American politicians. The "new economy" has created "new insecurities," says a report [PDF] from the Economic Policy Institute.

Talking Past Each Other: What Everyday Americans Really Think (and Elites Don't Get) About the Economy: …For most people today, their greatest anxiety is not that they will lose their job and be unable to find another, and their greatest hope is not that they will be able to get and keep a job. Instead, they have more complex concerns: Will their jobs be outsourced to a subcontractor or off-shored to another country? Will a full-time, permanent job be converted into a part-time or temporary job? Will their health insurance be cut back or their premiums or co-payments increased? Will they receive regular raises or earn merit raises? Will they be able to stretch their paychecks to cover their family's expenses? Will their employer continue to provide pensions that offer guaranteed retirement benefits? And can they keep their skills current so that they can hold onto their current job and qualify for a promotion or for a new and better job? These uncertainties are more complicated than what worried their parents and can be summarized as a concern about both regular wages and other aspects of "job quality."

Mogambo Guru's latest: Or Don't We Need Jobs/Money to Buy All the Stuff from 'Productivity Gains'?

Sometimes a few words are worth more than a picture. If you don’t occasionally read Richard Daughty's The Mogambo Guru, you are missing some good, dark humor on the state of the World and particularly the US economy. Here is a snip from his latest:

E-Economic Newsletter 12/06/06, The Mogambo Guru: …All this fits in with a good news/bad news article from MarketWatch.com titled "Fed's Big Worry Gets Revised Away". It reports that "A huge spike in wages and salaries in the second quarter proved to be an illusion, according to the latest data from the Bureau of Labor Statistics and the Bureau of Economic Affairs." The toxic good news/bad news cocktail is that "Slower wage growth means less inflation, but also less growth."

The bad news, which is what I fixate upon because that is the pitifully miserable way I am, is that slower wage growth means that "consumers don't have as much money as everyone thought they did ... $100 billion less on an annual basis." A hundred billion bucks less income than they figured! Whew!

Viewed in another light, "The new data show that, instead of growing at a 7.4% annual rate in the second quarter, employee compensation actually grew just 1.4%." Apparently, those are nominal gains, and are not adjusted for inflation. A sneer of contempt crossed the handsome face of The Mogambo (played by, if you recall, Brad Pitt), and they instantly knew that they had made a mistake! Quickly they added "The new data shows that real disposable incomes fell in the second quarter by 1.5%, rather than rising by 1.7%."

Real, inflation-adjusted incomes fell! Not rose! Fell! By this time I can feel a scream of panic rising in my throat, and I am kind of surprised that "panic" tastes sort of like the leftover burrito I had for breakfast. With a Heroic, Manly Mogambo Effort (HMME), I force myself to keep reading, and I am sorry I did, as "Consumers didn't earn the money they spent in the second quarter, they borrowed it. The personal savings rate dipped to negative 1.4%, the lowest since the Great Depression, except for the negative 1.5% seen in the fourth quarter of last year after Hurricane Katrina." Since the Great Depression of the '30s! Seventy years ago!

In case you are keeping score, and I am sure that you are, the savings rate has now been negative for 19 straight months, which is another world record. To give you an appropriate metaphor as to what this portends, I recall that, as a clever teenager, I discovered the miracles of caffeine and alcohol at the same time, and I was roaring drunk and completely crazy for 19 straight, buzzing hours once, and it ended very, very, very badly, which I think may be very instructive.

Continuing on the theme of income diminution, Bloomberg.com sported the headline "Bernanke Scrutinizes Labor Costs for Inflation Signs (Update5)" It says that "Federal Reserve Chairman Ben S. Bernanke said a new source of inflation may be emerging in rising wages and salaries even as energy prices retreat."

To show you the utter cluelessness of this Bernanke character about how the world works, he says he thinks it is a "worrisome possibility'" that companies will "pass all or part of their higher labor costs through to prices." Hahaha!

I can see it now! CFOs and accountants around the world will slap their foreheads and say "That is where we made our big mistake! We lost money because we set our prices too low! We forgot to add in labor costs when we set prices! Hahaha! The jokes on us!"

And it is not, I am sorry to say, just Bernanke, either. As equally clueless is Amar Mann, an economist at the Bureau of Labor Statistics in San Francisco, who says "It's too early to tell if higher labor costs are being passed on to consumers." Hahahaha! Well, if it ain't being passed on to the consumer, then it is being passed on to the business owners in the form of less profits, because all expenses have to be passed along to the consumer, dork! So is one better than the other? Hahaha!

Well, I don't think we have to worry too much about profits, as the Commerce Department said "Corporate profits from current production rose 31 percent in the year through September, the biggest 12-month gain in 22 years."

But in keeping with the depressing news about incomes, they go on to say that increasing productivity (less labor per unit of output) means that more people do not have jobs producing these units of output. …

Jim Webb and Jon Tester on Trade and Globalization

Last Sunday morning Senators-elect Jon Tester (Montana) and Jim Webb (Virginia) joined Tim Russert for MSNBC's Meet the press. I liked what I heard on employment, trade, globalization, and the plight of workers—number 1 issue for each of them. We will all have to stay tuned for more on both talk and delivery from the newly elected Democratic power bases in both the House and the Senate. Here is a snip:

Leontief's Worry: Jobs destroyed much faster than created

In 1982 Wassily Leontief worried about the prospect for jobs in future economies. When asked if he worried about inflation, he said no, "inflation is just a tax." What Leontief worried about was "stripes on the cans in supermarkets," ATM machines, and so on. He worried in short that our technological advances, while enhancing productivity would destroy jobs much faster than they could be created in whatever economy might arise from the ashes of Shumpeter's creative destruction. I have kept a "hard copy" of his interview since, often wondering whether we, as a people, would be clever enough to create a future brighter than the one he and others before him had foretold.

I haven't yet found an online copy of Leontief's 1982 interview, but I did find a 1998 interview (with Ralph Buultjens).

…What are your larger concerns about the global economy?

Among other concerns is the question of technology and employment. Will technology plus movement of jobs to poorer nations result in growth without employment in the industrial economies? We talk about stimulating growth, but unless it is accompanied by increases in employment we will get situations where countries can get richer and people in them get poorer. This will give rise to ser-ious political tensions and inflame anti-internationalist forces. This is what worries me about Western Europe. Their economies are showing signs of recovery, but without creating jobs this means little for most citizens. …

For America, my concern is the impact which some future recession will have on a society where individuals below the age of thirty have not experienced one. Will there be a kind of national nervous break-down among younger people, or will they adjust and fight their way back? This is a test I do not wish on anyone, but one which will surely come at some time. Consumerism is not a good preparation for difficult days - or for periods of stock market decline! …

…[T]he role of the state?

Most of our century has seen a struggle between the idea of state power and the idea of individual rights. In the first half of the century, it looked as if the state would triumph; in the second half, individual rights have emerged as more import-ant. In our enthusiasm for individual rights, we must not forget that there are certain things that only the state can do. For instance, it is states which will have to bring some order into the new world of global finance. Our great quest today is to find the correct balance between the power of the state and the freedom of the individual. Both have a role to play and I think the appropriate balance depends on culture - on the cultural context of a country or a society. This is why international prescriptions for local problems do not always work and sometimes aggravate the ills they seek to cure!
Will there be a global financial regimen?

One will probably emerge in the decades ahead. We have a worldwide system; very new and very active. We do not know whether it can discipline itself effectively. The early indications are that this may not be possible. If an international regimen evolves, it will need to be carefully organized so as not to over-regulate. There is so much money moving so fast that a traffic cop would probably help the flows and see that they are legal. The best national economies have mechanisms to enforce legality. The international economy will probably develop some similar mechanisms. Yet we have to be careful because we may need policemen, but we do not need police states! [emphasis added here]

American-Made Pension Problems?

Ford just dumped up to 30,000 employees. GM announced similarly large layoffs last fall. Together the reductions amount to employee numbers equal to Chrysler's US-based hourly workforce. Assuming that Ford can develop reliable, quality vehicles going forward, that have enough sex appeal to get them back into competition with Nisson, Honda, and Toyota things ought to be come up roses for Ford. But only if they have really resolved their pension fund problem. The plight of the workers is another story.

Ford's layoffs were the subject of Monday's PBS Newshour, showing that the world's playing fields are horribly out of whack w/r/t pension fund liabilities. Is this a problem bigger than most of us realize. Is this a problem shared broadly in its creation, and a problem that needs to be shared much more broadly in its resolution? Is it just the tip of a much bigger "entitlements problem?" I have been skeptical until now that the companies didn't just do it to themselves, but I'm beginning to change my mind.

End of Labor as We Once Knew It

In my recent post on Wal-Martization I mentioned that I could find no reason for history to repeat itself with US job creation to automatically follow productivity growth or financial investment. Yesterday Stephen Roach added to my suspicions with his Jan. 9 "The End of Labor." Here is a taste, with more detail below:

America’s once mighty job machine is struggling as never before. The combination of subpar job creation and real wage stagnation puts extraordinary pressure on the income-generating capacity of the world’s most aggressive consumer. …

The manufacturing share of US employment hit another record low as 2005 came to an end -- down to 10.6% of total nonfarm payrolls, or about one-third the share prevailing as recently as 1970. At the same time, employment and compensation is being squeezed in services as well, where offshore outsourcing is moving rapidly up the value chain. … The Internet is living up to its reputation of being the most disruptive technology in the history of the world.

The implications of these developments are profound. Long lacking in income support, the spending-addicted American consumer has turned to equity extraction from asset holdings in order to support the habit. …

It’s not just jobs and real wages, but also the legacy costs of healthcare and pensions for retired and existing workers. Recently, IBM and Verizon joined the ranks of those in Corporate America who have frozen pension benefits. There can be no mistaking such telltale signs of the global labor arbitrage: Companies in high-wage economies see little choice other than to rewrite social contracts as the means for competitive survival. For the United States, it’s the end of labor as we once knew it.

[Jan 10 Update] macroblogs's David Altig disagrees, or at least adds nuance.