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James Meade Redux

Well, that was fun. A rebellion has swept away the establishment. I never thought I would say that the rebellion would be manifested within the GOP and that the establishment would be within the Democrats, but that’s what we just witnessed. We on the left must accept that whatever we were saying just didn’t resonate with enough people. The Democrat’s obsession with identity politics that allowed it to ignore the consequences of its embrace of neoliberal economics has led to its separation from its foundational support. The GOP is not the party of the working class, far from it, but its dysfunction and rupture in recent years has allowed it to be co-opted by a demagogue who saw a route to power by using its base to vault himself to the top. Both parties bear equal blame for the morass and malaise. Both parties need reconstructing. Else the rebellion will continue.

For those of you of a left-of-center bent let me quote from James Meade’s wonderful little book “The Intelligent Radical’s Guide to Economic Policy”. It dates from 1975, but still has relevance as we think about how to ditch neoliberalism:

“The intelligent radical is at heart an incurable egalitarian and is appalled by the gross inequalities she observes in modern society. But she desires to cope with them by methods which are compatible with maintenance of a free and efficient system.”

That was written, of course, before inequality really exploded as neoliberalism took hold.

Some of you will object to the inclusion of the idea of a free and efficient system in any radical economic design, but I don’t. I might wonder whether the use of the word “efficient” is appropriate given the incurable uncertainty that prevents finding any pure solution to efficiency, but I think we ought use the word more loosely as a kind of placeholder for a general ability to adapt freely to circumstances.

More importantly, I think any true radical will allow plenty of space for the people who comprise the economy to pursue their own individual goals freely. This suggests an economy not socialized but socially responsive. There’s a big difference between those two concepts. A socialized economy remains the pipe dream of the old guard on the left. It has been rejected by its own failures. It is not radical. It is repressive. Socially responsive is, however, a sound basis on which to construct an active role for society in any future economic system.

Let me go back to Meade, later in his book he says this:

“We have now discussed the general principles on which governmental policies might be devised for three basic purposes: the control of inflation, the promotion of a a competitive market mechanism to combine economics freedom with economic efficiency, and the redistribution of income and property.”

We could modernize the wording of that trilogy of purposes to make it more relevant to our current problems, but even Meade’s wording sets out our goal. The purpose of economic policy is to maintain stable money so that transacting can continue securely; and then it is to balance the tension between capitalism and democracy such that we benefit from enterprise, yet mitigate its obvious anti-social by-product of inequality and unequal political power.

Yes: any radical economic policy has a redistributive political goal. It is unavoidable. It is what distinguishes it from neoliberalism. Redistribution is a core principle of democracy. It is a tenet of all democrats that we seek equal citizenship and equal rights within society. Since capitalism naturally, and within its own logic, seeks to unbalance equality and exploit such inequality as it can create for profit, all democrats are committed to a constant re-balancing. A re-balancing, crucially, that does not destroy enterprise, but encourages it within strictly enforced guidelines.

I think this is what Meade is telling us, and I agree. It is both intelligent and radical to see policy through Meade’s lens.

His three purposes ought be elevated into our own three principles to govern our way forward.

Perhaps I would go further: in this highly changeable and uncertain economy, where technological change clearly benefits some but hurts others there might be a fourth principle beyond redistribution. This would be protection or the mitigation of risk.

We already have government supplied safety nets and pension programs. They are both risk mitigation systems. But we need a more updated version: it isn’t just retirement that is tenuous in a rapidly changing environment, it is within-working-life risks that need better attention too. The so-called gig economy has fractured the old association of employment with reliable benefits. Here in America heath care is an obvious example of the risk increasingly exclusively shouldered by the employee. Unemployment, under-employment, and periodic employment all add to the separation of risk protection from the old employment ‘contract’ [such as it existed].

What this implies, to me, is that as we see the private sector getting more fragmented, less reliable, and thus more risky for the individual, it is only natural that the public sector balances that rise in risk through the provision of more flexible services.

We need to re-fit the public sector to the newly developing private sector instead of complaining about that private sector. Government’s role is increasing, not decreasing, as individuals are presumed to manage their lives more directly instead of relying on the paternalism of their old employer. In other words: as capitalism evolves to be a more cost conscious and less socially aware system, we need to re-up our commitment to the democratic ideals that undergird a strong role for government. As business gets more “at will” so government gets more robust to compensate.

This is the mirror image of the heyday economic years of the 1950’s and 1960’s when business was more benign, more restrained by union pressures, and less vicious than its is now. In those paternalistic years government could be less involved because the risks were more managed in the private sector. There was a balance. Nowadays to get back to that balance we need to offset vicious capitalism with more robust democracy.

In any case: Meade is worth reading, if only to remind us of what we all lost when both our political parties went rogue and became mouthpieces for neoliberalism.

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Extreme or Not Extreme?

That is the question.

A friend of mine pointed me to Thomas Friedman’s latest effort in the New York Times. It’s too long for me to copy over en masse, so let me highlight a few things.

Set aside the silly column title: “Up With Extremism”, I assume Friedman had nothing to do with that choice. The thrust of the article seems to be that we are in need of some radical policies if we are truly to deal with our various problems. Let’s assume we can all agree on what these problems are, although it isn’t evident to me, at least, that such a consensus exists anywhere. Which, perhaps, is more than half our problem. In any case Friedman certainly thinks the problems are obvious because he then goes on to advocate a series of policies that he considers extreme, but also necessary.

Here’s his first proposal:

“A single-payer universal health care system. If it can work for Canada, Australia and Sweden and provide generally better health outcomes at lower prices, it can work for us, and get U.S. companies out of the health care business.”

My question is this: what on earth is ‘extreme’ about this? Universal health care is the norm throughout the civilized industrial world. Not having it is the exception. Given this reality I consider it extreme not to have universal health. The proposal to provide universal health care is therefore an attempt to move to the moderate, centrist, and more normal position. It is not extreme.

Likewise Friedman’s proposals on tighter gun control, limitations of money in politics, centrally established educational standards, increased infrastructure spending and so on.

Where I do side with Friedman in using the word ‘extreme’ to describe a policy is when he gets to taxation:

“To pay for all this, a phased-in innovation and tax agenda that incentivizes start-ups and hiring. That means: Slash all corporate taxes, income taxes, personal deductions and corporate subsidies and replace them with a carbon tax, a value-added consumption tax (except on groceries and other necessities), a tax on bullets and a tax on all sugary drinks — with offsets for the lowest-income earners.”

Really, this is extreme. It is simple supply side stuff, but plops the burden of taxation on consumption, rather than incomes, which will increase inequality even further, and is very regressive. This is a radical departure from the last century’s general acceptance of a progressive tax schedule.

Then he adds this:

 “An independent commission appointed to review Dodd-Frank and Sarbanes-Oxley to determine which, if any, of their provisions are needlessly making it harder for entrepreneurs to raise capital or start businesses. We need to be sure we’re preventing recklessness — not risk-taking.”

Presumably the American Association of Bankers must have written that proposal. Dodd-Frank is an abomination of a law, not because it imposes capital constraints on the banks, which it does rightly, but because it is almost 11,000 pages of incomprehensible legalese written by bank and regulatory lawyers whose livelihoods depend on interpreting obscure laws. Glass-Steagall, the law that prevented major bank calamities in America for the best part of seventy years before it was gutted and then trashed in the 1990’s took up about 40 pages. Dodd-Frank is an archetype of why we need political reform: the industry has its hands all over the law. Yet it bleats about the “anti-business” nature of it, and apparently has been able to convince people like Friedman that the banks have a good case.

The big banks caused the last crisis, they need to be broken up and reduced in scale so they cannot repeat that level of damage. Ensuring there is no such thing as a “too big to fail bank” would be a radical departure from current policy. It would earn the right to be called extreme – with respect to the industry friendly regime we currently have. So if we are going to review Dodd-Frank it is to strengthen and extend it, not to cast aspersions on its possible effect on high risk lending.

One final thing: the banking industry became a leach on the economy when it shifted from being a provider of credit and began to absorb capital for its own profit padding. Bank regulation needs to get banking back to the boring old days when bankers acted as allocators of capital to the real economy and not as end points for investment.

I won’t respond here to the usual suspects who believe all that is ill in the world flows from rotten private banks – having been a banker myself I just won’t get involved in that debate. But I will argue that banks need much tighter regulation than they’ve been subject to in the past two decades.

Back to Friedman: unfortunately his list has the hallmark of elitist centrist ‘sensibility’. He includes a pile of things that are extreme nowhere but in America, that are sensible and much needed – thus hardly extreme – and then in order to achieve a political balance he tosses in a few pro-business supply side giveaways of the kind that have failed to produce any positive economic value over the last few decades. This may be politically astute in an era of so-called extreme politics, but that can only be the case if our political environment has shifted so radically such that erstwhile sensible policies are now viewed as ‘extreme’.

Instead of calling it what it is, and arguing that our political ‘center’ is actually quite a bit to the right, he is reduced to calling some sensible and centrist things extreme. Which, I suppose, is useful in its own right.

But that’s my point, not his.

 

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Santa Claus, Taxes and Deficits

“Deficits don’t matter”, to borrow a phrase made famous by Dick Cheney. Hardly a left of center guy, Cheney was defending the sea of red ink Ronald Reagan created in the early 1980’s. Reagan, please recall, was the first president to plunge the US into deficits that were not related to war, economic downturn, or macro-economic management. They were simply an outcome of an ideologically driven set of policies. So Cheney was right: they didn’t matter.

According to the modern Republican party they especially don’t matter when the slashing of Federal revenues is done at the behest of business. That’s because the tax cuts involved are “pro-growth”, and, so we are assured, the increased growth presumed to be stimulated by the cuts will more than offset the red ink.

That’s never happened, but such is the allure of the magic of markets that otherwise sensible people can fall for fairy tales. The University of Chicago is thick with such folk.

Anyway, for those who aren’t obsessing over the rise of Trump and the imminent invasion of America by ISIS – both of which dominate our febrile media – I would like to draw your attention to Washington where a big government funding bill is in the process of wending its hapless way through Congress.

The good part of the bill is that it provides funding to keep government running. So we have no fiscal cliffhanger this year. Sorry, I know they are so much fun, but with the media’s attention elsewhere there’s no point in having a cliffhanger this year.

The bad part of the bill is pretty much everything else.

It includes an astonishing array of tax breaks for business, and its net effect is to add about $680 billion to the national deficit.

Now I think it’s slightly hypocritical for any of us to get too upset over this: we were all berating the Republicans for being stupid about the deficit back in the dark days of 2009/2010. That was when the deficit was rising quickly and looked to be out of control. It wasn’t, it was simply a function of the crisis we created by being so attached to rotten economics for the past few decades.

Still, it is rather quaint to watch was the Republicans, even the most trenchant “austerians” amongst them, rattle off dozens of well worn reasons why adding $680 billion to the deficit is no big deal.

Here’s one such comment, by Ways and Means Chairman Kevin Brady (R-Texas):

“We’re making permanent some very key pro-growth provisions that are going to grow the economy, these are tax provisions we’re extending one year at a time; making the pro-growth provisions permanent doesn’t add any level of funding to our deficit. It’s simply honest budgeting going forward.”

Honest budgeting. I like that.

Brady is a math whizz too, he also said that the cost of these tax cuts over a decade is about the same as one year multiplied by ten. Presumably the cost of interest and so on isn’t a factor in Texas.

Then there’s the old line about making it up in volume, or, in this case, getting the lost revenue back from all that magical growth down the line, Bill Flores, also from Texas tells us not to worry about figuring out the deficit impact – known as “scoring” in Washington speak:

“We don’t score them because economic growth helps them. … We’ll get that back multiple times over in economic growth,”

Just like we always have. Never.

Listen, I am in a radical mood for a change. This entire charade is simply a giveaway to business. Congress is pretty much run by business through its lobbying and election donations. So I have a plan. Call it my “holiday gift plan”.

Get rid of corporate taxes.

Yes. You read that correctly. Just do away with corporate tax.

No, I am not nuts. There are strings attached to this.

Getting rid of corporate taxes will reduce the stranglehold business has on our politics in terms of the stupidity and pretense that surrounds the budget process. But they would still lobby like crazy over social legislation: things like work and labor regulation, family leave, product safety, and so on. All the things businesses have tried to tell us make it hard to do business.

Well: the same bill that eliminates corporate tax will include provisions restoring all the rules and regulations done away with over the last forty years. It will also include rules making it easy for workers to set up unions and a return to collective bargaining for wages and work conditions. Let’s toss in family leave as well. Oh, and obligatory paid annual vacation time. Businesses will be able to afford all sorts of pro-worker goodies now that they can fire their tax departments and not pay all those fees to lawyers looking for loopholes. Not to mention the extra cash from the taxes they no longer pay.

I am sure we can come up with a good long list of things that business has taken away from us in the name of being “pro-growth”. Let’s be imaginative.

And, hey, It’s Christmas isn’t it? Well holidays are upon us. So we, aren’t done yet.

Let’s also throw in the abolition of the capital gains tax.

Gulp.

No: listen to me. We will simply tax capital gains as income. At income tax rates. Income is income, whatever its source. The privilege given to capital owners needs to go. And let’s get the estate tax rate back to a level where it inhibits the growth of a rentier class. That’s why we have an estate tax after all. Well I think so.

And why not reform the income tax for all of us? Get rid of all deductions, lower all the rates at the bottom, add a couple of new higher rates at the top – those top income earners have all the income anyway – and, just for good measure, replace all our hodgepodge of welfare and poverty programs by a simple annual check from the government for anyone earning under some ratio of the median wage.

We can pay for that by adding a little rule that extracts a penalty – not a tax – from any business paying its CEO and top executives a wage/pay package of more than 40 times the lowest wage the business pays. We could be generous to our poor CEO’s and make the ratio set to the average wage, but that’s a detail we can negotiate later.

None of this is controversial at all. Really. At least in a country that thinks Donald Trump is qualified to be president. So we ought to add a lot more.

After all it’s “pro-growth”. And that’s all that counts. At least that’s what everyone seems to think.

 

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Oh, Those Crazy Mega-Banks

Oh dear. I managed to avoid talking about banks for quite a while. It seems time to revisit our favorite villains. They’re up to no good again.

The problem with banking, as someone far wiser than I once said, is that banks are more dangerous than standing armies. I guess he must have said that back before the contemporary American infatuation with all things military. But the point remains the same.

Banks are dangerous. Really and truly dangerous. And the bigger they get the more dangerous they get. Comparing a mega-bank like Citibank with our local three branch small bank is ludicrous. They may look and sound similar, but they are in different universes. It’s like comparing a bee-bee gun to a nuclear bomb. They both can go pop. But one can do an awful lot more harm.

So much so that our regulators are scared stiff of regulating them.

You probably missed it, but one of our regulators recently admitted that his agency was afraid of enforcing the law against a big bank because of the mess it could make of the economy were it even rumored to fail, let alone actually fail. This attitude effectively moves the mega-banks outside the law. They used to be too big to fail. Now they are too big to prosecute. Don’t you wish you could be outside the law? You could trash entire economies and then bitch about being inconvenienced by those bad economies. Heck you could even get yourself bailed out whilst you foreclose on the poor people you sold rotten loans to. You would become truly blameless. For everything. You could even brag publicly, as Jamie Dimon CEO of JP Morgan Chase did, that your bank does really well in recessions.

No wonder banks cause so many recessions. They profit from them.

Not that Dimon is very good. He managed to lose a pot load of money for his shareholders in a great scam scheme risk avoidance strategy known affectionately as the ‘London Whale’. The ‘Whale’ bit being a reference to the extent of the losses the brilliant yahoos involved managed to accumulate. Not that, mind you, any of the senior executives knew about those losses. Heavens forfend! Not once were the people who earn gazillion dollar bonuses for being the epicenter of all things good involved in such plans. Oh dear heaven no. The poor dears were just as surprised as you or I when the losses started oozing from every pore of the beast they purportedly manage. Never mind. Their bonuses and stellar reputations remain intact. Safe too are the yahoos.

No. The only idiots in the episode of the ‘Whale’ are you and I who steadfastly underwrite JP Morgan Chase and its peers, tolerate it excesses, allow it to roll over its regulators, and generally muck around with our economy.

And: Yes we do underwrite the mega-banks.

They benefit from being too big to fail, prosecute, and stop. Because of this their creditors, who are the devil incarnate when they deal with your or me, become cream puffs and hand over money at ever cheaper rates to the mega-banks. You see, because bank stupidity goes unpunished – we bail them out and set them on their way every time – their creditors could care less about silly schemes like the ‘Whale’. Those losses just don’t matter. The taxpayers will step in and pay up.

Why?

Because if a mega-bank goes down, the economy goes down with it. In another context it would be called hostage taking. In banking it’s called being regulated. With the definition of regulated being that you can get away with anything.

It was not always thus. And for small banks it still isn’t thus. Small banks get closed down all the time. When they fail, the regulators think nothing of stepping in, taking over, and selling off the profit making bits to other, usually larger, banks. It goes on all the time. I know. I helped buy a few. So small bank creditors are a lot more careful and charge a lot more for their money.

So the big banks – the really dangerous ones – get all the breaks. The little ones get none.

And the bigger you get, the more breaks you get. Eventually you can even rise to lawless status. The only thing you have to fear – apart from not having enough space to accommodate your bonus – is those pesky anti-trust laws. But in post-Reagan America we don’t use those laws. Indeed we encourage bigness.

So it is both refreshing and curious to see a small, but determined, band in Congress beginning to beat the ‘break up the banks drum’.

Yes. Please. Break up the banks.

And if you think this is academic think, if you will, for a moment about poor Cyprus.

Cyprus is one of those unfortunate small places that allowed its banks to outgrow its economy. Cypriot bank assets are about 800% of the island’s GDP. Its banks had become a favorite offshore location for Russian ‘hot’ money. The Cypriot economy has been destabilized in recent years, it is shrinking and needs Euro Zone help.

This is another one of those paradoxes. Euro Zone help is the same as applying the leeches. If the first leech doesn’t work – it never does – then they apply more. In this case the leech takes the form of a one time tax on savings accounts. Your savings account, were you a Cypriot bank customer, is about to get zapped by as much as 10%. So whereas your retirement nest egg was $10,000, it could now be as little as $9,000. All because of hot money and unregulated international capital flows.

So Cyprus is going the way of Iceland and Ireland before it. All because its banks swam in the shark infested waters of global capital flows. I am sure it won’t be long before we read stern messages about how the sudden rise in poverty and unemployment within the island’s citizenry is a small and necessary price to pay for stabilizing the banking system.  Oh. And you may hear homilies from sundry German bankers about then need for fiscal discipline as if Cyprus had lax budgets. It didn’t. It was a model of fiscal rectitude.

Nope. It was just bad at regulating its banks.

Like us.

The danger of us following in Greek or Spanish footsteps comes not from our debt or our deficit. It comes from our unwillingness to confront the mega-banks.

Our biggest banks are a clear and present danger. They represent a threat to national security.

That ought to get everyone’s attention.

Let’s stomp on the mega-banks. Let’s break them up.

 

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Standard & Poor’s

It is good news that Standard & Poor’s is being sued by the government. S&P was complicit in the market rigging that led us to the bubble and the destruction of a boatload of wealth. It has escaped, thus far, any serious damage from its involvement in the creation of crisis and deserves to be taken down a peg or two. The amount of damages being sought is roughly equivalent to one year’s income of S&P’s parent company McGraw-Hill. That’s not enough to put the company out of business, but it is noticeable.

Anyone who is committed to a free market system will applaud the suit. Market rigging is about as serious a problem as can be imagined in a free market. It impedes the flow of information that is essential to proper price setting, distorts outcomes, and exposes those market players not involved in the scam to potentially massive losses. While I would never argue that any participant in the sale or purchase of complex derivatives is entirely innocent – they all claim to be sophisticated investors and/or advisors – clearly some folks were duped. The loss to pension funds was significant, which means that many an average retiree or average worker saving for retirement was exposed to possible loss.

Anyone, like me, who has a more jaundiced view of markets  and their ability to work without significant external propping up, will also applaud. Although in our case we will also ask why it took this long for the suit to be filed.

The question is, of course, whether S&P was complicit in rigging the market.

To me the answer is unequivocal: Yes.

But was it fraud?

The problem with the rating agencies is that they collect their fees and thus make their living by charging for the ratings they issue. This deprives them of any impartiality. It exposes them to the lure of bribery. It makes them an insider rather than an outsider offering objective opinions. No matter how hard they try to create artificial barriers and to protect their analysts from these problems the cold hard fact is that the rating agencies – S&P is not alone – are all part of the Wall Street ecosystem. They are thus feeders at the same trough as the investment banks, and rely on the deal flow the banks generate. Giving negative ratings would block that deal flow. It would reduce earnings and bonuses. So the bias is always to give positive reviews.

The only plausible defense that S&P can offer for its manifest errors is that it was simply deploying industry standard financial thinking when it gave out AAA ratings to what turned out to be junk investment products. In this it was not alone. The issue I have with this is that it implies that S&P has no higher standard or analytical ability than the average market player. This undermines its credibility as an expert. If S&P has no particular higher skill its opinions are not that useful. So why would we rely on its ratings? Furthermore, since we now know that the analytics underlying the entire mortgage derivative market were deeply and fatally flawed, to argue that S&P simply adhered to those analytics is tantamount to admitting duplicitous stupidity. In which case those ratings are even less useful. No one would pay top dollar to listen to the ramblings of a dunce.

And S&P was either a dunce or was trying to dupe innocent investors. Its business model was either built upon its own ignorance or upon preying on that of others.

I think the reality of the crisis was that the banks and their various co-parties were complete fools. They all jumped in willingly. They turned out to be latter day alchemists trying to turn lead into gold. Along the way they convinced themselves, in a spectacular example of group think, that they were brilliant and consequently deserving of enormous compensation. That they turned out to be petulant fools deserving of nothing hasn’t quite sunk in yet. S&P’s special corner of the Wall Street fools and idiots club was that it was the organization waving the magic wand over the lead and saying that it was gold. For this catastrophic stupidity it ought to be held accountable.

I am not sure that what S&P did was criminal. The fraud all took place inside the banks where distorted incentives and lax oversight encouraged, or at least turned a blind eye, to persistent lying. I tend to see S&P simply as a blind fool who was easily ensnared in the wider scam and made to feel significant by the flow of cash. Greed took over and S&P moved quickly from dupe to complicit duper. The problem being that it didn’t know what it was doing.

Remember that in the feeding frenzy of the bubble years all standards dropped to historic lows. Idiots were seen as geniuses. Pedestrian analysts were viewed as unparalleled seers. The self regard of the entire ecosystem shot through the roof. That it was all alchemy was yet to be revealed. The banks, the rating agencies, the lawyers, and the accountants all feeding at the trough never gave a second thought to intelligence, severe analysis, or public responsibility. They were all blinded by the cash. The massive volume of activity, the late night meetings, the urgency of getting the deal done, the adrenaline of the rapid pace and the lure of bonuses  all drove them totally mad. They were all irresponsible and utterly stupid. None should be trusted ever again. But they were not all criminal.

They were gigantically negligent. They were horribly destructive. They deserve all the opprobrium we can muster and hurl at them. This law suit is merely a start. Their culture still exists. The error could be repeated. They still represent a danger to us all. They need to be broken and discarded.

 

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