Relevant and even prescient commentary on news, politics and the economy.

Follow up to a Libertarian future

Reader Jazzbumpa suggests taking a look at Yves Smith’s Journey into a Libertarian Future series as part of Mike’s thought experiment on the subject here. A very good read.

He also offers one of his own posts on the matter at Retirement Blues
Brute economics of slavery.

And opines at the end of his e-mail “It really makes me think about the 13th century”.

In comments at Mike’s post is an interesting discussion in real terms using the development of the electricity industry as an example of interaction of government and private enterprise.

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OWS and economics

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Her post in the NYT Economix begins:

The Occupy Wall Street movement, displaced from some key geographic locations, now enjoys a small but significant encampment among economists.

Concerns about the impact of growing economic inequality fit neatly into a larger critique of mainstream economic theory and its deep faith in the efficiency of markets.

Many unbelievers (including me) insist that we inhabit a global capitalist system rather than an efficient market. Willingness to use the C-word (capitalism) often signals concerns about a concentration of economic power that unfairly limits individual choices, undermines political democracy, generates financial and ecological crises and limits access to alternative economic ideas.

We can’t address these concerns effectively without a wider discussion of them.

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Closing Wall Street’s casino

Via Reuters comes David Cay Johnston’s musing on Closing Wall Street’s casino:

A superb example of a sound rule in law and economics that needs reviving, because it can halt the rampant speculation in derivatives, is the ancient legal principle that gambling debts are not enforceable through court action.

Not so long ago — before casinos, currency and commodities speculation, and credit default swaps became big business — U.S. courts would not enforce gambling debts.

Restoring this principle offers a simple way to shrink the rampant speculation in derivatives that was central to the 2008 meltdown on Wall Street.

Professor Lynn Stout, a deeply principled Republican capitalist who teaches corporate law at the University of California, Los Angeles, raised this issue at a conference where we both spoke about the 2008 Wall Street meltdown.

“Derivatives are gambling,” she said, referring to credit default swaps, at the University of Missouri-Kansas City law school conference on the financial crisis. “They are a zero-sum game in which one side loses the bet and one side wins,” Stout said.

Actually they are worse than that, since the hefty fees Wall Street pockets for arranging the bets result in a less-than-zero-sum game.

As Wall Street fights meaningful financial regulations, and draft regulations remind us how complex and unfathomable regulations can be, this is a good time to remember the basic principles that served society so well until Chicago School theorists, and casino corporations, together with commodities and currency traders convinced us we were too modern to need them.

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Hank Paulson and Some Animals Are More Equal than Others

byMike Kimel

Barry Ritholtz points us to a Bloomberg article showing, once again, that when it came to measures to prop up the economy in 2008, some animals are more equal than others:

Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.

The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.

There’s no evidence that they did so after the meeting; tracking firm-specific short stock sales isn’t possible using public documents.

And law professors say that Paulson himself broke no law by disclosing what amounted to inside information.

The article goes on:

At the time Paulson privately addressed the fund managers at Eton Park, he had given the market some positive signals — and the GSEs’ shares were rallying, with Fannie Mae’s nearly doubling in four days.

William Black, associate professor of economics and law at the University of Missouri-Kansas City, can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.

“You just never ever do that as a government regulator — transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”

Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.

“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”

The Bloomberg article is worth reading in its entirety.

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A Though Experiment: What Would a Perfect Libertarian State Look Like a Hundred Years Later?

byMike Kimel [edited to make authorship clearer]

Libertarians come in many flavors, but I think most of them would agree that in an ideal world, the government would be very small and have limited powers – essentially, the government would control national defense and perhaps adjudicate over property rights disputes (i.e., maintain police and/or the courts). Otherwise, people would be free to engage in whatever activities they wished provided the specific purpose of that activity was to harm a third party. Based on conversations with libertarians, I believe negative externalities, or inadvertent harm to third parties is OK. I have yet to have a discussion with a libertarian and come away thinking: now this is a person who views negative externalities as an intrusion on someone else’s private property requiring government intervention to halt. (If I am incorrect about this, I’ll be happy to stand corrected… but it has little effect on the rest of this post.)

Now, one of the side effects of a very small, laissez-faire government is that tax rates will be very low. This means that the accumulation of wealth will be faster for those with a comparative advantage at creating goods and services other people want to buy. (I’m ignoring this effect, which is easy to verify empirically, but then libertarians believe lower taxes result in faster economic growth and I want to focus on their assumptions here.)

Furthermore, without an inheritance tax or estate tax (I think it is fair to say most, perhaps even all libertarians are against these types of taxes), fortunes would pass on more intact from one generation to the next than we see happening today. In such a world, the accumulation wealth over two or more generations could allow a person or family to accumulate a greater percent of a given area’s wealth than we see happening today.

But… the libertarian world is one without public infrastructure. So who would build or own the roads in a given area? Well, it won’t be folks who don’t have any money, that much is evident. Presumably those who otherwise have accumulated significant resources… such as a person or a family that controls a sizable piece of the wealth in that area.

Now, a lot of types of infrastructure, such as roads, electric grids, and the like, have significant first mover advantages. There may be a lot of traffic on a road from A to B, or an electric grid serving the area, and monopoly rents could easily be extracted. If a second mover built a duplicate road or electric grid, it would harm the first mover… but it also wouldn’t happen, because the second mover knows the price war would make it impossible for it to profit as well.

This, by the way, isn’t pie in the sky theorizing or guesswork. We’ve seen precisely that in the real world. For example, in the years following the 1996 Telecom Act, incumbent phone companies were deathly afraid that their network would be duplicated… and except for a few BLECs in big cities (most of which promptly went under even so) there was no replication of the last mile. Similarly, you don’t see replication of the last mile in the electricity industry, which I mention because when it comes to deregulation, the electricity industry is where telecom was in the late 1990s. (Yes, it is not a perfect analogy, but electricity and phone calls aren’t the same thing.)

We do, occasionally, see the private provision of toll roads, but usually after the owner of that toll road extracts a promise from the government to reduce maintenance of any competing publicly owned road. Which means… in any given area, there isn’t going to be competition in the provision of roads and other infrastructure.

This is important for a combination of two reasons. The first is that a monopoly extracts monopoly rents. Monopoly rents, of course, will increase and speed the process by which wealth is concentrated, and, as most libertarians will tell you, monopoly rents create market inefficiencies. But movie theaters run their own concession stands, and if you want to set up a snack bar in a Wal-Mart, you better expect to turn over most of your profits to Wal-Mart. Unless there are rules preventing it (not likely in a libertarian paradise), the owner of the infrastructure calls the shots, deciding who can and who cannot do business.

But the second problem with a monopoly in roads and other infrastructure is far more important. It means, simply put, there is no voting with one’s feet if the road owner chooses to prevent it. (Of course, the next region over might be run the same way anyhow.) So if you don’t like the way the people that own the roads and the markets and the apartment you rent do business, you can’t exactly up and leave without using their road or otherwise cutting across their land. And if they don’t let you do it, well, you’re breaking the law… and the Pinkertons could easily prevent you from doing that. The average person, the person not born into resources, could be left with one option to full cooperation – loss of shelter, food, and even membership in society.

Now, if this sounds unrealistically dystopian to you, remember that it took far less coercion than that to keep people tied to Company Towns not a hundred years ago in this country. The Company Towns did not own the roads or the land once you were out of town, the only chains were financial.

The road to serfdom is very pretty when you first get on it, so much so that those who are most vocal in warning us about the perils of where it leads don’t realize that’s the destination they’re promoting.

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Guess who wrote this op-ed??

(Elizabeth Warren has hired a campaign manager and has thousands of volunteers signing up for her campaign for the Senate seat in MA that Senator Scott Brown currently occupies. He has a lot of work to do for this election.)

Guess who wrote this op-ed??

The moment you threaten to strip politicians of their legal graft, they’ll moan that they can’t govern effectively without it. Perhaps they’ll gravitate toward reform, but often their idea of reform is to limit the right of “We the people” to exercise our freedom of speech in the political process.

I’ve learned from local, state and national political experience that the only solution to entrenched corruption is sudden and relentless reform. Sudden because our permanent political class is adept at changing the subject to divert the public’s attention—and we can no longer afford to be indifferent to this system of graft when our country is going bankrupt. Reform must be relentless because fighting corruption is like a game of whack-a-mole. You knock it down in one area only to see it pop up in another.

What are the solutions? We need reform that provides real transparency. Congress should be subject to the Freedom of Information Act like everyone else. We need more detailed financial disclosure reports, and members should submit reports much more often than once a year. All stock transactions above $5,000 should be disclosed within five days.

We need equality under the law. From now on, laws that apply to the private sector must apply to Congress, including whistleblower, conflict-of-interest and insider-trading laws. Trading on nonpublic government information should be illegal both for those who pass on the information and those who trade on it. (This should close the loophole of the blind trusts that aren’t really blind because they’re managed by family members or friends.)

No more sweetheart land deals with campaign contributors. No gifts of IPO shares. No trading of stocks related to committee assignments. No earmarks where the congressman receives a direct benefit. No accepting campaign contributions while Congress is in session. No lobbyists as family members, and no transitioning into a lobbying career after leaving office. No more revolving door, ever.

Sarah Palin

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Why did the English equivalent of Occupy Wallstreet pick St Paul’s as the place to protest?

[update: Links fixed 11/30.]

by Stormy

Why did the English equivalent of Occupy Wallstreet pick St Paul’s as the place to protest?

Because St. Paul’s is hand in glove with the City of London Corporation, the place where democracy and light “goes to die,” the place where there is no accountability or transparency for the powerful 1%.

An overview by George Monbiot

A comment by the protesters: Why are they there, in that spot of London?

An attempt to shed light on the dark heart of capitalism, the City of London Corporation.

Watch the events in London carefully. I am surprised that economists have not commented on what the City of London Corporation. Our banks are there…unfettered by any regulation, any oversight. Goldman and Sachs? You betcha.

The priests and clergy that have resigned have resigned because they know the truth of what this place is—and how St. Paul’s is complicit.

Anyway, this will whet your conspiracy bug…and it is true.

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Jobs, jobs, jobs

Hale Stewart of BondDad blog discusses jobs…and jobs…

1. V shaped real retail sales and industrial production recoveries vs. jobs:

…Comparing those with private jobs (red) and total payrolls (green), we can see that the percentage losses in sales and production were steeper, and have made up nearly or more than all of their ground compared with jobs. Meanwhile, private jobs have regained only slightly over 30% of their losses. When government employment is added for the total jobs picture, fewer than 25% of the losses have been regained.

2. Comparing improvements in aggregate hours and jobs:

…Another point I have frequently made is that aggregate hours worked are recovering faster than new jobs. Since more hours were lost than jobs during the recession, if past was prologue then we would have to wait for aggregate hours to regain their lost comparative ground before job growth would match the growth in hours….

3. Comparing real retail sales with jobs:

…This is yet another indication of just how significant government job losses have been to the relatively poor jobs recovery. At the same time, because real retail sales are a leading indicator for jobs, this reinforces that we should expect to continue to see positive job growth in the economy, with private jobs at least being added at something like a 2% YoY rate.

4. Comparing initial jobless claims with jobs added:

…In 2010 I thoroughly debunked the idea that we needed 400,000 or less in initial jobless claims to be consistent with job growth. It simply makes a lot of difference how deep the recession is, and also the pattern declining into a recession is quite different from the pattern during a recovery. I pointed out half a year ago that if we were to descend into a “double dip,” I would expect to see a break in trend in the scatter graph comparing these two series, with a new trend line to the left of the recovery trend line developing.

5. Okun’s Law

Okun’s law is actually a rule of thumb that holds that for every 2% YoY increase in GDP, there should be a 1% decline in the unemployment rate. Generally speaking, 2% YoY GDP growth equals no change in unemployment. A 4% GDP increase gives you a 1% decrease in unemployment. Contrarily a 0% YoY change in GDP gives you a 1% increase in unemployment.

I make use of a corollary, which is the YoY% growth in GDP minus 2% approximately equals the YoY% change in job growth 3 to 6 months later. Here is the graph of this relationship going back 65 years, and it has ominous implications:

As I said, this contradicts virtually all of the previous indicators we have discussed. A possible explanation comes via Jeff Miller of A Dash of Insight, who informed us yesterday that the BLS’s Dynamic Business Report of actual job data collected from the states showed that in the first quarter of this year only 250,000 jobs were created, rather than the 500,000 previously reported.

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Pell grant austerity

The House Appropriations Committee recently offered up a bill that would cut students’ Pell Grants – the cornerstone of the student aid system – by $44 billion over 10 years. The bill, if passed, would slash millions of students’ Pell Grants: completely eliminating grants for more than 550,000 students next year and for more than 1 million students in 2017, and reducing grants for millions more.

The statistics can’t be ignored: though the unemployment rate for recent college graduates was 9.1 percent in 2010, that’s still less than half the unemployment rate for young adults with only a high school diploma. A recent bipartisan poll showed that young adults of all backgrounds and across the political spectrum oppose cutting access to Pell Grants.

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