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Stockman Lost It

You remember David Stockman I assume. He was Ronald Reagan’s Budget Director and an advocate of the economics that permeated the early years of the exodus from California by the horde of radical right wingers seeking to throw out each and every strand of social safety net, social insurance, and anything remotely attached to the post-Depression social consensus.

Yes. That David Stockman.

Well, whilst he’s been fairly anonymous since he quit his post in protest at Reagan’s fiscal profligacy, he clearly hasn’t changed his mind. All those demons still pre-occupy him. They obviously agitate him. So much so that he has written a long ill-tempered rant that the New York times decided, for reasons clear only to itself, to publish and thus dignify.

The sky is, apparently, falling. Stockman ends his many pages of pain with this stern note:

“If this sounds like advice to get out of the markets and hide out in cash, it is.”

We are doomed!

But, sensible people would like to know, what is dooming us? Is it the Democrats and their fixation of providing government sponsored insurance? Is it the Republicans and their fixation of perpetual warfare and military spending? Is it big government? Is it the Federal Reserve Board and its efforts to save the economy by keeping interest rates too low? Is it the Federal government and it inability to balance its budget? Is it because Nixon kicked away the rigors of the gold standard? Is it because Reagan and George W. Bush ran up the deficit? Was it the bank bail-out engineered by George W. and his underling Hank Paulson? Is it because Alan Greenspan’s easy money pumped up the real estate bubble? Was it the banks? Was it Keynes? Was it Milton Friedman?

Yes it was.

It was all these things.

There is another bubble waiting to burst, and when it does … well let Stockman explain:

“When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.”

The reason? In a nutshell:

“THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy.”

Heavy indeed.

So heavy that only prescient rebels and reformers like Stockman can bear the load.

Fear not! Stockman has the prescription:

“The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.”

There you have it.

The reason capitalism has wrought a mini-depression is because it was not allowed to work its magic. Something got in the way. The State did. Nasty government. Doing all those nasty things like ameliorating poverty for retirees, extending a helping hand to the elderly and the sick, protecting the unemployed, and defending the homeland at too great an expense. Yes it was rotten government.

I like the bit about “Keynesian economics in all its forms”. This is a rare attempt to run a common thread through both Reaganomics and Obamacare. I also like the bit where Stockman says we ought to throw the banks to the wolves. No. Really. It’s exhilarating stuff. Read it for yourself:

“There was never a remote threat of a Great Depression 2.0 or of a financial nuclear winter, contrary to the dire warnings of Ben S. Bernanke, the Fed chairman since 2006. The Great Fear — manifested by the stock market plunge when the House voted down the TARP bailout before caving and passing it — was purely another Wall Street concoction. Had President Bush and his Goldman Sachs adviser (a k a Treasury Secretary) Henry M. Paulson Jr. stood firm, the crisis would have burned out on its own and meted out to speculators the losses they so richly deserved. The Main Street banking system was never in serious jeopardy, ATMs were not going dark and the money market industry was not imploding.”

No, of course not. All that talk of panic was just us being silly. Stockman is made of sterner stuff. Much sterner.

But, alas, the damage is done. We are doomed. The change necessary is just too difficult for the government addled and softened American electorate to contemplate. Reagan was right: Medicare would turn America into a hotbed of socialism. Marxists would run the nation within a few years of its introduction. The middle class would chuck in their precious opportunity to go bankrupt because of illness and opt for big brother’s suffocating embrace. They would toss away every American’s right to live out their retirement in abject poverty and sickness to savor the deadly poison of Social Security instead.

If only we had the courage to allow capitalism to fly free. It would uplift us all.

“Man is born free and everywhere he is in chains.”

Or, to paraphrase somewhat:

“American voters have nothing to lose, but their chains, American voters unite.”

OK. I butchered that last one a bit, but it seems Stockman is following in the footsteps of Rousseau and Marx. He is calling for revolution. He has seen the enemy and it is us. Flabby, fat, and capitalist hating us.

So he ends:

“Revolutions are the locomotives of history.”

Well not really. That’s Marx again. But he sort of goes there.

The world is ending you see. Because we had the temerity to moderate the excesses of capitalism by leaning on the crutch of democratically elected government. We had the gall to look out for ourselves. To try to mitigate the wild swings that capitalism brings with it. To tame those animal spirits that lead us astray sometimes. And to constrain the greed that creates so much hardship for the less fortunate. It was democracy that protected us. “We the People”. Democracy.

And as Stockman would no doubt agree:

“Democracy is the road to socialism.”

Rats. That’s Marx again.

Anyway. You get the picture: put your money in cash. It’s only a matter of time before the Martians and the Federal Reserve Bankers land.

As I said, Stockman lost it. We can safely ignore him.

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Economic Errors?

File under ‘plus ca change … ‘:

“Economic theory went astray when theoreticians focused their attention on the allocative functions of markets to the exclusion of their creative functions, which are far more important since they serve as an instrument for transmitting changes”

“it is true that, at the moment, the status of economics appears to be chaotic and, at the same time, many theoretical papers are becoming more abstract and irrelevant than ever”

Both quotes are by Nicholas Kaldor and are taken from Diego Pizano’s conversation with him.

The interview was in 1977.

No. Nothing changes. Economics manages to stay the same. Especially, it seems, when it’s wrong.

There may be a lot of self-criticism. It just doesn’t lead to self-adjustmnent.

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Inequality Update

In case you missed it: the US is a wildly unequal society, and it’s getting worse by the hour.

No surprise at all, but nonetheless some of the data can be quite eye-opening. Allow me to point you to David Cay Johnston and some of his analysis.

  • Incomes have grown between 2009 and 2011. Great. But 149% of that growth has gone to the top ten percent of all income earners. Yes. More than all the increase has gone to a small minority. You knew that right?
  • How? Because income for the rest actually went down.
  • According to the Internal Revenue Service data you needed an income of above $110,651 to achieve top ten percent status. $366,623 gets you into the top one percent.
  • And it’s worth getting into that top one percent: 81% of all the extra income earned since 2009 has gone to that lucky group.
  • Even better if you can squeeze into the top of the top. The top one percent of the top one percent – bear with me here – managed to make off with 39% of all the income gains nationwide. That’s 15,837 households if you’re counting. Out of 158,400,000 households.

Now Johnston gets cruel:

  • If you are in the bottom 90% the average adjusted gross income – AGI to tax geeks – was $30,437. That’s going in the wrong direction, and is the lowest, when adjusted for inflation, since 1966. Read that again. Now weep.
  • To put this in context: allowing for inflation the AGI of the bottom 90% of tax paying Americans had risen precisely $59 since 1966. $59. Now weep again.
  • Let’s give this even more context: the increase in average AGI for the top 10% rose by $138,793, or 84%, over the same period. Do I need to say it again? Weep!

One last trick: if we make that $59 gain the majority managed to eke out equivalent to a one inch line, the gain the lucky 10% received is a line extending 163 feet. And the line the even luckier top 1%? Well, their line goes on and on. For nearly five whole miles.

OK enough weeping.

Clearly something is amiss in the land of opportunity.

The game is rigged.

Is that a problem?

You bet it is.

Addendum:

The chain of analysis on which Johnston depends has its origins in the work by Thomas Piketty and Emmanuel Saez. You can find an example here.

 

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Where Our Spending [Really] Goes

We are into the silly season of budget debates in Washington. Dueling budgets are flying back and forth. Different ideologies are ensuring that the gulf between the right wing preferred budget and all the rest is enormous. As in unbridgeable. The reason is that our contemporary Republican party wants to dismantle ‘big’ government and reduce spending radically.

Or does it?

Well that depends on what you call ‘spending’.

I know, it ought to be pretty obvious. In a very famous case back in England a judge twas asked to define income tax. It was, he said sagely, a tax on income. But, as in all things that involve lawyers, income, or in our case spending, isn’t as obvious as it could be. The problem stems mainly from when you start to run the clock on what constitute ‘expenditure’. Is it after you have collected all the taxes and are ready to write checks? Or is it before you collect those taxes? Does ‘expenditure’ include all the giveaways in the tax code?

Of course it does.

Think about it. When the government writes a check for a Medicare payment it records that as an expenditure. As it does when it buys an aircraft carrier. As it does when it buys paper clips for its bureaucrats. And so on. Those kinds of government spending are clear and unequivocal. It’s all that hidden spending that can be confusing. And it’s hidden on purpose. Politicians want to spend on lots of pet projects. They want to reward loyal voters. Sometimes it is easier to get that money spent through the backdoor because that way it is less easily computed and the economic impact harder, though never impossible, to estimate. In other words if you have made a lifetime of beating up layabout welfare queens it is a little difficult to syphon off government money to a special pet constituency overtly. It’s better to hide it.

So hide it they do.

In spades.

They do it by devising all sorts of tax credits and deductions. There is no difference between the government writing a check for something, and it giving you a break on your taxes for the same thing. Either way the net revenue of the government is reduced by the cost of the expenditure.

So, to take an egregious example, the US government likes to encourage home ownership. It is seen as a jolly good thing. It helps build communities. And so on. But instead of sending you a check to help you buy a house – that would look a lot like welfare for relatively well-off folks – the government subsidizes your mortgage by giving you a break on the interest cost. It amounts to the same thing.

Welfare is welfare. Spending is spending. And tax breaks are a way of spending the government’s money without drawing too much attention to what’s going on.

And these so-called ‘tax expenditures’ add up. They add up big time. Indeed they are the biggest single thing the US government spends its money on. Bigger than Social Security. Bigger than Medicare. Bigger, even, than defense.

Let me shamelessly borrow a chart from the CBPP:

 

 

 

 

 

 

 

 

 

 

Yes that big.

We spend a lot on ourselves through that backdoor.

The mortgage interest subsidy isn’t alone of course. There’s a ton of others. The biggest is the tax deduction given to businesses on the cost of health care plans they provide their employees.

Think about that for a moment and weep.

The government subsidizes – it pays for – a proportion of every single so-called ‘private’ health care plan provided by employers. And the Republicans think we have a ‘private’ health care system! No we don’t. The government chips in. It chips in a whole lot.

Then there’s the reduced tax paid on capital gains. A gain is income by another name, but it somehow sounds special if we call it a gain. It sounds kind of thrifty. Plus it makes it easier to subsidize by reducing the tax on income from ‘gains’, as opposed to, say, income from wages. So people who get their income from gains rather than wages get a government subsidy. It’s actually welfare for the rich, but that’s difficult to sell at election time, so instead of writing the Rockefeller’s a check at from Welfare office, we give them a tax break instead.

The list of popular tax expenditures is long: employer health care plans; pension plan contributions; mortgage interest rate relief; accelerated depreciation for business; deductions for state and local income taxes; charitable contributions; lower taxes on qualified dividends and capital gains; etc, etc.

And here’s the really important part of the story: the people who benefit the most are the wealthiest. The top 1% of income earners get about 13.5% of all the spending. The rest of the top 20% get another 11.5%. By comparison the bottom 20% – part of the so-called moochers that Mitt Romney referred to – get only about 6.5%. In other words our so-called ‘progressive’ income tax, where the rich are supposed to pay more than the poor, is substantially reversed and made regressive by these hidden welfare programs for the rich and upper middle class.

So who’s mooching most?

This is important. Very important. Because as we prepare to enter the battle to decide what to cut the focus is on the obvious. We are told that we cannot afford those entitlement programs, and that we need to curtail Social Security or Medicare. But we never are told we cannot afford to subsidize capital gains. Or mortgages. Or healthcare plans. Or dividends. Or charitable donations. Or any of those other backdoor expenditures.

Why not?

Because they benefit the rich? The people who donate at election time?

Guess.

We are not having an honest discussion.

What a shock.

 

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As You Were – Again

Today was one of those days. A flurry of new data about the economy all of which left us exactly where we were. I suppose that’s good. But it could, and should, be better.

New claims for unemployment assistance were pretty much unchanged last week. They had been 334,000 the previous week, they edged up slightly to 336,000. That’s meaningless – except for the people involved of course. The better data is the moving average that smooths bout week to week changes. That is now at 339,750 which is its lowest since February 2008. So claims remain at or close to their five year low, which suggests that the job market is in modest health. It is not in good health though, so let’s not get too upbeat about it. The improvement in the job market comes almost exclusively from a rapid decline in layoffs rather than a pick up in new hiring. So while claims are declining nicely, there is still little sign of a hiring boom. That means getting the unemployment rate down remains a long and arduous task.

Sales of existing homes edged up again to an annual rate of 4.98 million. That’s their best rate of growth since November 2009. Rising activity is being helped slightly by lower mortgage rates and the slow improvement in the labor market, but tight credit conditions and poor wage growth are making the improvement slower than it might otherwise be. Rising home prices are bringing more homes onto the market for sale – prices rose 6.5% over the past year according to the FHA – and so the inventory of unsold homes rose 9.6% in February to 1.94 million. This implies an unsold inventory equivalent to 4.7 months of sales, up from 4.3 months in January. This is the first rise since last April. That January inventory ratio was the lowest since May 2005 when the market was tight for all the wrong reasons. Just to add confusion: the National Association of Realtors, the source of this data, say prices rose not the 6.5% reported by the FHA, but by 11.6%, with a median sales price being $173,600. Since the two organizations are looking at different data this is not necessarily a conflict. Either way prices are rising from the depths they plummeted to after the crash. This is to be expected. Many of us argued that prices had fallen too far, and that there is not enough housing available, so prices would inevitably compensate by recovering before flattening out. This explains in part what we see going on.

Lastly, in our brief tour of stasis, the Conference Board released it index of leading indicators today. Plus ca change. The February increase of 0.5% was fueled by improvements in eight of the ten indicators the Conference Board uses to compile its index. It is precisely the same as January’s increase. Under normal circumstances this would mean we are looking at continued, and possibly better, growth later in the year. But we all know that won’t happen. The spending cuts comprising the infamous sequester will eat into growth as the year progresses and act as a brake. No doubt anti-growth activists will applaud this unfortunate turn of events. For the people whose lives are ruined by unemployment, or loss of wages, and for the businesses who lose revenues, it is not something to look forward to.

In sum: today’s news simply confirms our sideways movement. Every policy step being taken in Washington adds to, rather than subtracts from, the friction slowing growth. Unlike some others I see the economy slowing as the year progresses.

Unless, of course, Congress decides to help and not hinder.

Fat chance.

 

 

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