Economic Dreams - Economic Nightmares

How Wall Street Broke the So-Called 'Free Market'

Andrew Leonard suggests that "free marketeers" along with their left-leaning counterparts not get too worked up over sovereign wealth funds flexing their economic/financial muscles as the US-led world financial systems continue to be stressed. After all, those now wielding financial power don't seem to have "our" best interests in mind either. And there is some reason to believe that sovereign wealth funds may help to counteract some of the excesses of greed and blundering that we have become accustomed to, particularly in organizations that appear "too big to fail." Here is a snip from Leonard's insightful commentary:

How Wall Street broke the free market, Andrew Leonard, Salon, Jan. 15:. Globalization, thy name is Wall Street bailout. There is no better demonstration of the new global financial order than the cavalcade of "sovereign wealth fund" white knights riding to the rescue of the world's name-brand investment banks all winter long. On Tuesday, Citigroup and Merrill Lynch both announced huge additional sales of stock to foreign buyers. Some observers are alarmed, fearing a parade of boogeymen out to do the West harm under cover of their aid drops. But they should take heart — the new players will be hard-pressed to do more damage than the old. …

Representatives of both the left and right are united on worrying about the national security implications of foreign government ownership of chunks (even if non-controlling) of key financial institutions. They can take some comfort, in the U.S., in the 2007 passage of the Foreign Investment and National Security Act, legislation spawned by the Dubai Ports World fiasco aimed at precisely this problem. But for some conservative commentators, the clash of civilizations isn't just about geopolitical control of crucial assets, but raises serious ideological questions that many thought had been decisively settled. Wringing their hands with a flutter bordering on hysterical, they worry that the influx of cash from national governments making decisions for strategic reasons, rather than purely economic, will upset the efficient workings of global markets. In Monday's Financial Times, Jeffrey Garten, a professor of international trade and finance at the Yale School of Management, is distraught.

Indeed the reality may be that the era of free markets unleashed by Margaret Thatcher and reinforced by Ronald Reagan in the 1980s is fading away. In place of deregulation and privatization are government efforts to reassert control over their economies and to use this to enhance their global influence. It is an ill wind that blows…

In the late 18th century, capitalism was replacing feudalism. In the 20th century, freer markets won the day. Now the world is flirting with another big transformation in the philosophy and rules of global commerce. Unlike the changes of the past, this new trajectory does not represent progress.

Perhaps it would be more accurate to say freer markets lost the day. The root of Wall Street's woes leads back directly to their own strategic missteps, greed, speculation-run-amok, and lack of appropriate supervision. The brightest minds in finance had exactly what they wanted, a playground where the monitors were looking the other way, and they blew it. When the China Investment Corp. pumps in $5 billion to Morgan Stanley, we are not witnessing the triumph of state capitalism, but rather, the embarrassing, humiliating failure of Reagan-Thatcher style unregulated capitalism. So now the U.S. buys Chinese toys at Wal-Mart, and China uses the resulting cash to buy American banks. Hey, anything's fair in love and war and free markets.

The magnitude of the disaster, from a free market apologist point of view, can hardly be overestimated. By abjectly failing to compensate or cushion the "losers" from globalization — whether by boosting safety nets, improving healthcare, or investing significant resources in education and training — the Bush administration guaranteed a growing groundswell of political opposition to global trade. And by failing to properly oversee financial markets, it provided an opportunity for foreign governments that may not share "American" values to become significant players in the heart of the global financial system. Talk about your legacies! The Bush administration not only may have crippled the Republican Party for a generation, but it also might have broken the free market! Whoops! …

The temptation, especially in an election year, to demonize the outsiders crashing Wall Street's party will be irresistible. But let's take a deep breath before we get too het up about foreign governments influencing the strategic decisions of Citigroup and Merrill Lynch and Morgan Stanley. Could they really manage to wreak more havoc than what the home-grown bumblers in charge of those institutions have already caused?

Robert Kuttner's Parallels to 1920s, and some differences

Below find some of Robert Kuttner's very good, very harsh Oct 2 testimony to the US House of Representatives Committee on Financial Services. In addition to rehashing historical parallels between the era and the 20s euphoria and bubble bust, he talks to more-recent-era deregulation and letting the "free market" good times roll, and, of course, the bubbles that came as a byproduct. Here's a news story from Quote.com covering the hearing. And here are the other testimonies and a webcast of the hearing.

Kuttner's four parallels between this era and the one that led to the 1929 crash are:

• Creation of asset bubbles
• Securitization of credit
• Excessive use of leverage
• Failure of regulation to keep up with financial innovation
• The nearly universal conviction, 80 years ago and today, that markets are so perfectly self-regulating that government's main job is to protect property rights, and otherwise just get out of the way

Kuttner's arguments are not unlike those made by some others over the last few years, that we've tried to chronicle here. It is nice to know, or to at least believe, that more people are listening now. To Kuttner:

Naomi Klein on: 'Shock Doctrine' and Greenspan

{Updated 9/30}

Naomi Kleins' book, The Shock Doctrine: The Rise of Disaster Capitalism is nothing if not controversial. So is Klein. Commentary surrounding Klein's book is raising important questions as to what effect activist economists have on politics. Those familiar with Robert Heilbroner's works, e.g. The Worldly Philosophers, Behind the Veil of Economics already know well what impact the most well-known and powerful economists have on politics.

In The Shock Doctrine Klein takes on Milton Friedman and "the Chicago boys", blaming them for planting the seeds of so-called free-market capitalism in the minds of disciples, paving the way for alleged "crony capitalism" that followed. William Grieder's appraisal of Friedman is also damning. So is Joseph Stiglitz's, in his "Bleakonomics" review of Klein's The Shock Doctrine. Here's Alexander Cockburn's review , which views Friedman in a slightly less evil light. Yesterday, Klein took on Alan Greenspan:

Greenspan and the Myth of the True Believer, Naomi Klein, The Nation,Sept. 27: … Since I began touring with my book The Shock Doctrine, I have had a number of exchanges like this, revolving around the same basic question: When hard-right political leaders and their advisers apply brutal economic shock therapy, do they honestly believe the trickle-down effects will build equitable societies--or are they just deliberately creating the conditions for yet another corporate feeding frenzy? Put bluntly, Has the world been transformed over the past three decades by lofty ideology or by lowly greed?

A definitive answer would require reading the minds of men like Dick Cheney and Paul Bremer, so I tend to dodge. The ideology in question holds that self-interest is the engine that drives society to its greatest heights. Isn't pursuing their own self-interest (and that of their campaign donors) compatible with that philosophy? That's the beauty: They don't have to choose. Unfortunately, this rarely satisfies graduate students looking for deeper meaning. Thankfully I now have a new escape hatch: quoting Alan Greenspan.

His autobiography, The Age of Turbulence, has been marketed as a mystery solved: The man who bit his tongue for eighteen years as head of the Federal Reserve was finally going to tell the world what he really believed. And Greenspan has delivered, using his book and the surrounding publicity as a platform for his "libertarian Republican" ideology, chiding George W. Bush for abandoning the crusade for small government and revealing that he became a policy-maker because he thought he could advance his radical ideology more effectively "as an insider, rather than as a critical pamphleteer" on the margins. Yet what is most interesting about Greenspan's story is what it reveals about the ambiguous role of ideas in the free-market crusade. Given that Greenspan is perhaps the world's most powerful living free-market ideologue, it is significant that his commitment to ideology seems rather thin and perfunctory--less zealous belief, more convenient cover story.

Much of the debate around Greenspan's legacy has revolved around the matter of hypocrisy, of a man preaching laissez-faire who repeatedly intervened in the market to save the wealthiest players. The economy that is Greenspan's legacy hardly fits the definition of a libertarian market but looks very much like another phenomenon described in his book: "When a government's leaders routinely seek out private-sector individuals or businesses and, in exchange for political support, bestow favors on them, the society is said to be in the grip of 'crony capitalism.'" He was talking about Indonesia under Suharto, but my mind went straight to Iraq under Halliburton. Greenspan is currently warning the world about a dangerous looming backlash against capitalism. Apparently, this has nothing at all to do with the policies of negligent deregulation that were his trademark. Nothing to do with stagnant wages due to free trade and weakened unions, nor with pensions lost to Enron or the dot-com crash, or homes seized in the subprime mortgage crisis. According to Greenspan, rampant inequality is caused by lousy high schools (which also has nothing to do with his ideology's war on the public sphere). I debated Greenspan on Democracy Now! recently and was stunned that this man who preaches the doctrine of personal responsibility refuses to take any at all.

Yet ideological contradictions are only relevant if Greenspan really is a true believer. I'm not convinced. Greenspan writes that as a student he had no interest in big ideas. Unlike his classmates who were in the thrall of Keynesianism with its promise of building a better world, Greenspan was simply good at math. He started doing research for powerful corporations; it was profitable, but Greenspan made no claims to a higher social contribution.

Then he discovered Ayn Rand. "What she did…was to make me think why capitalism is not only efficient and practical, but also moral," he said in 1974.

Rand's ideas about the "utopia of greed" allowed Greenspan to keep doing what he was doing but infused his corporate service with a powerful new sense of mission: Making money wasn't just good for him; it was good for society as a whole. Of course, the flip side of this is the cruel disregard for those left behind. "Undeviating purpose and rationality achieve joy and fulfillment," Greenspan wrote as a zealous new convert. "Parasites who persistently avoid either purpose or reason perish as they should." Was it this mindset that served him well as he supported shock therapy in Russia (72 million impoverished) and in East Asia after the 1997 economic crisis (24 million pushed into unemployment)?

Rand has played this role of greed-enabler for countless disciples. According to the New York Times, Atlas Shrugged, her novel that ends with the hero tracing a dollar sign in the air like a benediction, stands as "one of the most influential business books ever written." Since Rand is simply pulped-up Adam Smith, her influence on men like Greenspan suggests an interesting possibility. Perhaps the true purpose of the entire literature of trickle-down theory is to liberate entrepreneurs to pursue their narrowest advantage while claiming global altruistic motives--not so much an economic philosophy as an elaborate, retroactive rationale.

What Greenspan teaches us is that trickle-down isn't really an ideology after all. It's more like the friend we call after some embarrassing excess so that they will tell us, "Don't beat yourself up: You deserve it."

For more Shock Doctrine (and commentary) see:

The Guardian, Shock Doctrine minisite

Joseph Stiglitz's NY Times review, "Bleakonomics",Sept 30:

… Some readers may see Klein's findings as evidence of a giant conspiracy, a conclusion she explicitly disavows. It’s not the conspiracies that wreck the world but the series of wrong turns, failed policies, and little and big unfairnesses that add up. Still, those decisions are guided by larger mind-sets. Market fundamentalists never really appreciated the institutions required to make an economy function well, let alone the broader social fabric that civilizations require to prosper and flourish. Klein ends on a hopeful note, describing nongovernmental organizations and activists around the world who are trying to make a difference. After 500 pages of "The Shock Doctrine," it's clear they have their work cut out for them.

Predatory Oligarchy

Hervé Kemph is a French environmental journalist and a student of global capitalism. His book, How the Rich are Destroying the Planet has caused a bit of a stir thus far, and will likely have more impact once translated into English. Some will call Kemph's writing just another extremist environmental rant. Others, like me, will welcome it as an opportunity to examine ourselves and our culture. We will no doubt be hearing more about Kemph as time goes by. In the meantime, we have a couple of Truthout.org articles to draw from. In part:

The Rich Stand Accused, Louis-Rilles Francoeur, Le Devoir, (via Truthout.org, 01/07/07): …"We cannot understand the simultaneity of the ecological and social crises if we do not analyze them as two facets of the same disaster. This disaster derives from a system piloted by a dominant social stratum that today has no drive but greed, no ideal but conservatism, no dream but technology. This predatory oligarchy is the principal agent of the global crisis," writes Kempf. "The present form of capitalism," he adds in an interview, "has lost its former historic ends, that is to say the creation of wealth and innovation, because it has become a financial capitalism, disparaged even by capitalist economists. This capitalism, which destroys jobs by rationalizations, new technologies and globalizations, overall and everywhere increases the disparities between rich and poor within each country and between different countries," the journalist observes.

…This oligarchy he targets is not satisfied with blindly consuming and wasting the planet's material resources with its big cars, its airplane trips, its unbridled consumption of living products, its uselessly vast houses, its unrestrained energy wastage. It has also, adds Hervé Kempf, spawned a model of hyper-consumption that the lower and especially the middle classes now attempt to imitate, just as developing countries try to imitate Western countries - even though, whether instinctively or rationally, everyone clearly knows that "this ideology of waste" and its drain on planetary resources will inevitably come to an abrupt end. …

… Although he does not address the impact of unchecked [human population growth] on the decline of the planet's "biological services" in his essay, Hervé Kempf immediately acknowledges that this factor certainly has an impact that is greater overall than any hyper-consumption by this oligarchy, composed of several hundred thousand millionaires and billionaires who control the bulk of income and of financial capital. However, he explains, it's this oligarchy that creates an unsustainable model for the planet, the indirect impact of which on other social groups exceeds its direct consumption. "And," he says dryly, "not all humans have the same impact on the planet at birth: a Westerner carries more weight in the planet's fate than a baby from Niger or from India."

It's to put an end to this ostentatious consumption that he advocates radical control of wealth through "a ceiling on maximum salaries and on the accumulation of wealth," a sort of matching piece for the minimum wage, but on the upper side.

"Everyone," Kempf comments, "knows that China will never be able to reach a level of consumption per inhabitant comparable to that of the Americans, with two cars per family, three televisions, four computers and cell phones, a house three times too big for its inhabitants, which generates energy consumption that would be sufficient to the needs of ten, even twenty people on other continents." The environmental chronicler proposes that a reduction of its consumption be imposed on this oligarchy that has globalized poverty, so that it no longer feeds this unsustainable dream, which numbs the critical faculties of the entire planet to the point that it closes its eyes to the wall into which it is careening full speed ahead. …

… [K]nown for his rigor and level-headedness, [Kempf] nevertheless concludes: "It is still necessary for ecological concerns to be based on a radical political analysis of present relationships of domination. We will not be able to reduce global material consumption if the powerful are not brought down and if inequality is not combated. To the ecological principle so useful at the dawning of awareness - "Think globally, act locally" - we must add the principle that the present situation imposes: "Consume less, share better."

Ecologists, he adds, have not often conducted an inquiry into the "ecological misery" that parks the poor next to industrial neighborhoods, polluted and at risk, next to highways or noisy activities, in the most insalubrious houses and in sectors generally the least well-served by public services, including public transportation. It is wrong, he says, to act as though the economic system must grow more to bring these people out of poverty or to allow more poor people to attain greater wealth. The economic system works in the other direction, by monopolizing wealth and power at the expense of those who have the least, and of the middle classes that dream - ever more vainly - of hoisting themselves into the cocoon of the present financial oligarchy, Kempf maintains.

That's why, he says, we must "bring down the rich" rather than pull up the poor, in order to begin to respect the thresholds of irreversible deterioration of the planet's resources.

He takes aim, moreover, at the concept of sustainable development and the alibi it now constitutes for governments and companies that use it to justify other drains on resources in the name of this new rationale that is supposedly harmless for the planet. Sustainable development, he writes, has become "a semantic weapon to remove the dirty word, 'ecology.' Moreover, is there any need to still develop France, Germany, or the United States? The concept has meaning, he concluded in an interview yesterday, but only in developing countries, because it can help them to avoid a development as brutal and lawless as the one we have effected in the West. But in the West, he says, the first of our environmental responsibilities "consists of reducing our consumption of material goods" to attain a level of well-being based rather on values, knowledge, in sum on immaterial, but nonetheless very real, riches.

See also: How the Rich Are Destroying the Planet: A Review by Leslie Thatcher, Truthout.org, 03/15/07

Is 'Free Trade' Over-rated?

Aside from a few personal overloads, my blogging has slowed to a trickle lately because I'm having too much fun reading a couple of new blogs, Dani Rodrik's weblog and naked capitalism (which has been around since December). Rodrik is refreshing in ways he keeps coming up with new and exciting challenges for his blogging-economist counterparts and their readers. Naked Capitalism is refreshing since I find almost all posts interesting and in line with my biases.

Yesterday, Rodrik squared off with the Free Trade advocates:

… having wandered (without professional license) into the politics of trade policy, I cannot avoid the economics. Especially since so many of the comments around my recent posts leave the impression that the economics of trade liberalization is cut-and-dried, with only politicians and ignoramuses standing in the way. See for example the following (from Noah Yetter, via Marginal Revolution):

... peaceful exchange based on free consent benefits both parties and is therefore always good.... true FREE TRADE is the only correct policy.

So here is a straightforward economics question: under what conditions will trade liberalization enhance economic performance?

If you answered "under any and all," you flunk.  Here is the correct answer (adapted from here):

• The liberalization must be complete or else the reduction in import restrictions must take into account the potentially quite complicated structure of substitutability and complementarity across restricted commodities.
• There must be no externalities or microeconomic market imperfections other than the trade restrictions in question, or if there are some, the second-best interactions that are entailed must not be adverse.
• There must not be any increasing returns to scale, or else activities with scale economies must expand "on average."
• The home economy must be "small" in world markets, or else the liberalization must not put the economy on the wrong side of the "optimum tariff."
• The economy must be in reasonably full employment, or if not, the monetary and fiscal authorities must have effective tools of demand management at their disposal.
• The income-redistributive effects of the liberalization should not be judged undesirable by society at large, or if they are, there must be compensatory tax-transfer schemes with low enough excess burden.
• There must be no adverse effects on the fiscal balance, or if there are, there must be alternative and expedient ways of making up for the lost fiscal revenues.
• The economy must not have a trade deficit that is already "too large," or else nominal wages or the exchange rate must adjust to compensate.
• The liberalization must be politically sustainable and hence credible so that economic agents do not fear or anticipate a reversal.

I could expand the list, but you get the point. And all of this is needed just to ensure static benefits. If you want dynamic (growth) benefits, we would have to add an even larger number of other prerequisites. (And just to be absolutely clear, the list above is no argument in favor of trade restrictions either.)

The point is that unconditional supporters of free trade take a whole lot for granted. Our professional training prepares us to be analysts who can make contingent statements.  Policy A is good if conditions X, Y, and Z are in place. Rule-of-thumb economists sweep all the caveats under the rug, and in the end, are not true to their training.

(I can see the next line of objections coming: Forget theory, some people will say. Look at the real world. Countries that follow open trade policies do so much better than those that don't.  Well, not so fast actually. But that has to wait for a later post.)

Two new posts from naked capitalism :

• The Paradox of Offshoring: IBM to Fire 150,000 US Workers
• Inflation Targeting: The Fed's Excuse to Ignore Asset Bubbles?

Marx and Engels' Insights into Globalization

Today while looking for scraps of evidence to finish my income taxes, I stumbled into a copy of Marx and Engels' The Communist Manifesto, written in 1848. Some time back I must have dropped the little book into a basket in a corner. As I will do just about anything to avoid dealing with taxes, I re-read it. What amazed me was the parallels Marx and Engels (and others?) drew between the mid 1800s and today's globalization.

To illustrate, let's condense a bit of Chapter I, "Bourgeois and Proletarians". In addition to condensing, I will embed a few notes to highlight particular points of similarity that I find noteworthy. For those who don't know, I'm drawn to post-Keynsian thought. Still, I find the Marx and Engels' circumstantial descriptions of mid-century 1800s too compellingly similar to what we are seeing today to not share their view with you. At the end I point to some books that may help others see why "free market" capitialsim isn't the end-all, be-all some make it out to be. Marx and Engels:

[Bourgeois and Proletarians:] The history of all hitherto existing society is the history of class struggles. … Our epoch [and continuing until today], the epoch of the bourgeoisie, possesses … this distinctive feature: It has simplified the class antagonisms. Society as a whole is more and more splitting up into two great hostile camps, directly facing each other—bourgeoise [ruling classes under capitalism] and proletariat [the working classes]. …

Modern industry has established the world market, for which the discovery of America [and most recently the opening of China and India] paved the way. This market has given an immense development to commerce, to navigation, to communication [or has been aided an abetted by such immense developments,. Which comes first, chicken or egg?]. … [I]n proportion as industry [and] commerce extended, in the same proportion the bourgeoisie developed, increased its capital, and pushed in the background every class handed down form the Middle Ages. …

Each step in the development of the bourgeoisie was accompanied by a corresponding political advantage of that class. [Remember Warren Buffet's 2004 remark, "If class warfare is being waged in America, my class is winning."] [T]he bourgeoisie has at last … conqured for itself … exclusive political sway. …

The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound men to his "natural superiors." and has left no other bond between man and man than naked self interest, than callous "cash payment." It has drowned the most heavenly ecstasies of religious fervor, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. It has resolved personal worth into exchange value. And in place of the numberless indefeasible chartered freedoms, has set up that single, unconscionable freedom—Free Trade. In one word, for exploitation, veiled by religious and political illusions, it has substituted naked, shameless, direct, brutal exploitation.

The bourgeoisie has stripped of its halo every occupation hitherto honored and looked up to with reverent awe. It has converted the physician, the lawyer, the priest, the poet, the man of science, into its paid wage-laborers.

The bourgeoisie has torn away from the family its sentimental veil, and has reduced the family relation to a mere money relation. [For a modern-day version see, e.g. Gary Becker's "household production function" and related literature. For a contemporary view similar to that of Marx and Engel's see, e.g. economic imperialism] …

Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the bourgeois epoch from all earlier ones. All fixed, fast-frozen relations, with their train of ancient and venerable prejudices and opinions, are swept away, all new-formed ones become antiquated before they can ossify. All that is solid melts into air, all the is holy is profaned, and man is at last compelled to face with sober senses his real conditions of life and his relations with his kind [now when all is reified into "commodity"].

The need of a constantly expanding market for its products chases the bourgeoisie over the whole surface of the globe. It must nestle everywhere, settle everywhere, establishes connections everywhere.

The bourgeoisie has through its exploitation of the world markets given a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilised nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. And as in material, so also in intellectual production. The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible, and from the numerous national and local literatures, there arises a world literature.

The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians' intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.

The bourgeoisie has subjected the country to the rule of the towns. It has created enormous cities, has greatly increased the urban population as compared with the rural….

The bourgeoisie keeps more and more doing away with the scattered state of the population, of the means of production, and of property. It has agglomerated population, centralised the means of production, and has concentrated property in a few hands. The necessary consequence of this was political centralisation. Independent, or but loosely connected provinces, with separate interests, laws, governments, and systems of taxation, became lumped together into one nation, with one government, one code of laws, one national class-interest, one frontier, and one customs-tariff. ….

… Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. … [Rendering an] epidemic of over-production. … The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented. …

Why was The Communist Manifesto kicking around my house? Years ago, my good friend and then co-worker Hank was finishing his PhD in Economics at the University of Utah, curiously then and now a hot-bed of Marxian thought. [Note: It proves curious that the U of U Econ Department leans left, since Utah is a bright red Republican stronghold.]

Hank and I used to spend many an hour debating economics, me from my Milton Friedman-influenced libertarian perspective, and Hank from a Marx/Engels' leftest perspective. Hank has since moved, as he says, "from Marx to Mastercard", and is now comfortably running a growing business. I, on the other hand, and in large part due to Hank's insights, have moved considerably in the direction of what might be called the "new left" despite the political incorrectness of the label.

Here are some of my favorite books — that some argue lean "left of center" as well. They have proved their worth to me in helping figure out where we might go from here, faced with similar conditions to those Marx and Engels saw long ago. Coincidentally these books help debunk today's round of "free market fundamentalism" that seems too pervasive these days.

Deborah Stone. 2002. Policy Paradox: The Art of Political Decision Making (revised edition).
Margaret Jane Radin. 1996. Contested Commodities
Thomas Prugh. 1995. Natural Capital and Human Economic Survival
James G. March. 1994. A Primer on Decision Making: How Decisions Happen
Elizabeth Anderson. 1993. Value in Ethics and Economics
Andrew Bard Schmookler. 1993. The Illusion of Choice: How the Market Economy Shapes Our Destiny
Herman E. Daly and John B. Cobb. 1989. For the Common Good
Robert L. Heilbroner. 1988. Behind the Veil of Economics
Mark Sagoff. 1988. The Economy of the Earth: Philosophy, Law and the Environment
Andrew Sayer. 1984. Method in Social Science: A Realist Approach
E.F. Schumacher. 1977. A Guide for the Perplexed
E.F. Schumacher. 1973. Small is Beautiful: Economics as if People Mattered

If these books don't shed light on where we might go next, maybe I'll once again have to retreat to the desperation of Kurt Vonnegut Jr.'s Player Piano saga. I found Vonnegut's books helpful, long ago, to counteract the propaganda I was getting from business school when studying or my MBA. But that is a story for another time/place.

Willem Buiter's Doubts on Continuing China/India's Meteoric Rise

After airing his positive Moring Coffee spin on China and India's remarkable growth, Brad DeLong highlights Willem Buiter's pessimism re: China and India's recent stellar rise. Buiter identifies financial "credit boom" risks, political risks, and most importantly environmental risks going forward. In follow-up commentary, DeLong adds a fourth, intertwined with Buiter's first: "The People's Bank of China is acting like the world's most enormous hedge fund in reverse."

Willem Buiter
[comment following Ft.Com Economists' forum post, 3/20/07]
Both India and China are in the terminal stages of a credit boom…. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however.

Second, a domestic political question mark… political risk to growth is seriously under-priced by the domestic and global communities of investors. In China economic liberalisation is proceeding side by side with continued political repression through the monopoly on political power of the Communist Party…. The sustainability of such a social-political-economic configuration has never been tested. India has had an open and representative form of government for sixty years. I believe this to be an important socio-political safety valve….

Third and probably most importantly, an environmental question mark. Environmental supply-side constraints on growth in Chindia… invalidates the growth accounting exercise by Bosworth and Collins, reported by Martin [Wolf]…. [O]utput is seriously mis-measured and a key input - the services yielded by the stock of environmental capital - is ignored completely. For Chindia, this omission matters even in the medium run…. It is the local (national) natural resources of clean fresh water and fertile land (some would add clean air as well) that are not only important domestic 'consumer durables' but also key inputs into the production of the goods and services that are captured by conventionally measured GDP indices…. The water constraint is likely to be the first one to become binding in both China and India, certainly within 10 years. It will impair even the production of those goods and services included in conventional GDP measures….

Chindia urgently needs to re-orients its growth policies towards environmental sustainability. Pricing all water and power use (including agricultural) at long-run marginal social cost would be a good start. Without such a radical re-orientation, the 21st century may well become the century of China and India for a very different reason from the one prophesied by the current uncritical Chindia cheerleaders…

Brad DeLong, again in follow-up comments to the FT.com Economists' Forum post, says:

Brad DeLong
I would add a fourth worry, in addition to the environmental, infrastructure, education, and political legitimacy worries that have already been aired. The People's Bank of China is acting like the world's most enormous hedge fund in reverse. Unless there is significant inflation in China or a rapid reversal of global imbalances, the PBoC is likely to have to write off the largest amount of capital of any institution anywhere, anytime, anyhow—with either China's savers or China's taxpayers holding the bag. The political consequences of that may be a further important source of risk.

Finally, a DeLong reader points to Bill McKibbon's recent Mother Jones commentary, Reversal of Fortune, and highlights:

Bill McKibben
… If we do try to keep going, with the entire world aiming for an economy structured like America's, it won't be just oil that we'll run short of. Here are the numbers we have to contend with: Given current rates of growth in the Chinese economy, the 1.3 billion residents of that nation alone will, by 2031, be about as rich as we are. If they then eat meat, milk, and eggs at the rate that we do, calculates ecostatistician Lester Brown, they will consume 1,352 million tons of grain each year—equal to two-thirds of the world's entire 2004 grain harvest. They will use 99 million barrels of oil a day, 15 million more than the entire world consumes at present. They will use more steel than all the West combined, double the world's production of paper, and drive 1.1 billion cars—1.5 times as many as the current world total. And that's just China; by then, India will have a bigger population, and its economy is growing almost as fast. And then there's the rest of the world.

Trying to meet that kind of demand will stress the earth past its breaking point in an almost endless number of ways ….

So many environmental concerns, so little time!

Financial Armageddon: The Blog

Late last year Michael Panzner unveiled Financial Armageddon as a blog to compliment his latest book. Here are a few highlights:

Prepare for Repricing, [1/29/2007]: In "Prepare for Asset Repricing, Warns Trichet," the Financial Times' Gillian Tett describes what seems to be a quickening sense of alarm among some policymakers.

Current conditions in global financial markets look potentially "unstable", suggesting that investors need to prepare themselves for a significant "repricing" of some assets, Jean-Claude Trichet, president of the European Central Bank, warned at the weekend in Davos.

The recent explosion of structured financial products and derivatives had made it more difficult for regulators and investors to judge the current risks in the financial system, Mr Trichet said.

"We are currently seeing elements in global financial markets which are not necessarily stable," he said, pointing to the "low level of rates, spreads and risk premiums" as factors that could trigger a repricing.

"There is now such creativity of new and very sophisticated financial instruments … that we don't know fully where the risks are located," he added. "We are trying to understand what is going on — but it is a big, big challenge."…

Malcolm Knight, managing director of the Bank for International Settlements, said: "Financial innovation has produced vehicles for leverage which are very hard to measure … liquidity is increasing very rapidly and this is affecting asset prices."

Central banks were scrambling to address the problem by intensifying their joint discussions via forums linked to the BIS, he said, but he warned that international co-operation and data gathering efforts "need to be deepened".

A few have even started voicing once unthinkable concerns about who will clean up the mess if and when policymakers' worst fears are realized. …

Unknowable and Uncontrollable, [1/15/2007]: Proponents argue that the benefits of derivatives far outweigh the dangers. In particular, these synthetic securities allow risks to be transferred from those who don't want them to those who do. In their view, such activity makes the financial system healthier and more resistant to shocks.

However, this perspective fails to take account of at least some current realities. Turnover and open interest outstanding have expanded at a mind-boggling rate, making it difficult for anyone, let alone regulators and policymakers, to gain a solid handle on what is going on. Moreover, much of the activity is centered in lightly regulated over-the-counter markets, and increasingly involves instruments that are breath-taking in their complexity. …

"The Stability of the World Financial System May Be More Apparent than Real", [12/26/2006]: Nowadays, optimists pooh-pooh the notion that the failure of a major global financial operator could easily trigger a far-reaching systemic crisis because those in charge have plans in place to deal with such an event. They argue that when circumstances call for level-headed leadership, clarity of purpose, and seamless cooperation between regulators and policymakers, someone will quickly grab the baton and step in resolve the situation — just as the New York Fed President did when he orchestrated a bailout of failed hedge fund LTCM back in 1998.

Perhaps.

Then again, when it comes to the realities of modern global finance, maybe things are different this time …

… Roche's conclusion is that this essentially leaves central bankers increasingly powerless to control liquidity — meaning that not only are they unable to prick the current credit bubble, but will be equally impotent to combat its future collapse.

Financial Armageddon looks to be "one more blog" to watch closely.

As soon as I finish reading the latest edition of Charles Kindelberger's classic Manias, Panics and Crashes: A History of Financial Crises, and take one more look at Peter Bernstein's Against the Gods: The Remarkable Story of Risk, I'll tackle Panzner's book Financial Armageddon. More on all three, later.

PS. Don't expect too much blogging from me in the the next couple of weeks. I'm going on the road (for work) and will be spending evenings with books.

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:

China v. US: Whose Problem? Who moves first?

Eric Margolis just got back from China, where he was "observing a nation that, while rigidly authoritarian, is at least governed by capable, intelligent people rather than the bungling politicians and crackpot ideologues that have run America onto the rocks." Margolis asks, " [W]hy should China pay the price for America’s profligacy in refusing to save and running huge government deficits by revaluing the yuan?" And he argues, "The U.S. Treasury is printing too much money in order to keep America’s debt-ridden economy growing " Sounds reasonable to me, but there must be a whole herd of Federal Reservce folks, and other herds of economists who likely disagree. Here's more:

Future is Made in China, [Toronto Sun/Canada, 11/12/06]… Beijing continues to finance America’s spending binge by lending it billions.

China’s mammoth trade surplus, and a rising flood of foreign investment, has swamped the nation’s banks with cash.

This, in turn, has fueled indiscriminate speculative investments, particularly in real estate, and a gold-rush frenzy that often obscures China’s solid economic development.

This flood of hot money poses a serious danger. Indiscriminate investment leads to overproduction, which then causes a deflationary crisis that could end in financial meltdown. Japan experienced similar phenomena in the 1990s.

China’s government has been struggling without much success to restrain this investment dragon. Beijing refuses, however, to allow its controlled, seriously undervalued currency, the yuan, to float, as its trade partners demand.

The undervalued yuan has given China its huge surplus, the motor of growth that has pulled the nation out of poverty. China still needs to deal with hundreds of millions of struggling farmers, state industry workers, and unemployed. So it refuses to allow the yuan to inch up by more than 5%.
If the yuan were allowed to float, say Chinese bankers, people would rush to convert to dollars, causing a dire financial crisis. …

Anyway, argue Chinese officials, why should China pay the price for America’s profligacy in refusing to save and running huge government deficits by revaluing the yuan? The U.S. Treasury is printing too much money in order to keep America’s debt-ridden economy growing.
Since 60% of all U.S. dollars end up abroad, the Bush administration’s reckless spending and over-stimulative money policies have caused a dangerous world-wide cash flood and serious imbalances to the global economy.

U.S. Republicans would do well to take pointers on capitalism from China’s Communists, who have beaten the Western devils at their own game.