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

The American Conservative: "Extractive Elites" and "Macro-Corruption"

It’s pretty amazing to read a cover story in, and by the publisher of, The American Conservative that could have run in The Nation, Mother Jones, or on Daily Kos — almost.

Certainly America’s top engineers and entrepreneurs have created many of the world’s most important technologies, sometimes becoming enormously wealthy in the process. But these economic successes are not typical nor have their benefits been widely distributed. Over the last 40 years, a large majority of American workers have seen their real incomes stagnate or decline.

Ordinary Americans who work hard and seek to earn an honest living for themselves and their families appear to be suffering the ill effects of exactly this same sort of elite-driven economic pillage. The roots of our national decline will be found at the very top of our society, among the One Percent, or more likely the 0.1 percent.

This is in The American Conservative!

Strangely disguised under the title China’s Rise, America’s Fall, Ron Unz riffs like so many of late on Daron Acemoglu and James A. Robinson’s new Why Nations Fail, describing America over recent decades as a country plagued by “extractive elites” and “macro-corruption.”

Macro-corruption is a great coinage. Former S&L enforcer Bill Black should adopt it in place of his perhaps more descriptive but not very catchy “control fraud.”

Unz (emphasis mine):

although American micro-corruption is rare, we seem to suffer from appalling levels of macro-corruption, situations in which our various ruling elites squander or misappropriate tens or even hundreds of billions of dollars of our national wealth, sometimes doing so just barely on one side of technical legality and sometimes on the other.

Sweden is among the cleanest societies in Europe, while Sicily is perhaps the most corrupt. But suppose a large clan of ruthless Sicilian Mafiosi moved to Sweden and somehow managed to gain control of its government. On a day-to-day basis, little would change, with Swedish traffic policemen and building inspectors performing their duties with the same sort of incorruptible efficiency as before, and I suspect that Sweden’s Transparency International rankings would scarcely decline. But meanwhile, a large fraction of Sweden’s accumulated national wealth might gradually be stolen and transferred to secret Cayman Islands bank accounts, or invested in Latin American drug cartels, and eventually the entire plundered economy would collapse.

Does this sound like the American financial industry to you?

But is Unz talking about the financial industry and its government (particularly Republican) toadies? Of course not. That would be admitting that he and his movement are largely at fault for the problems he’s describing.

When parasitic elites govern a society along “extractive” lines, a central feature is the massive upward flow of extracted wealth, regardless of any contrary laws or regulations. Certainly America has experienced an enormous growth of officially tolerated corruption as our political system has increasingly consolidated into a one-party state controlled by a unified media-plutocracy.

What’s amazing here is the two bolded passages. What in the heck does he mean by “regardless of any contrary laws or regulations”? Perhaps that the institutions responsible for enforcing and writing those laws and regulations are defunded, defanged, and co-opted by the extractive elite? Sound familiar?

And the final passage is just breathtaking. The financial industry, empowered and unleashed by that defanging (with American conservatives cheering and pushing every step of the way), has captured 20-40% of corporate profits over the last decade or so. But it’s the media that’s doing the extracting?

All I can say is they’re not very damned good at it. Wouldn’t you expect the extractive elite to successfully . . . extract a lot of money into offshore bank accounts? Exactly which industry is doing that?

Some might find it significant that the word “banks” never appears in the article.

I don’t need to detail all the other ironies that pervade this piece. (Notably: an excellent extended and off-topic rant against Obama’s continuation and expansion of Bush-era conservative, authoritarian military, intelligence, and surveillance policies, and their popular glorification in shows like 24: “Throughout all of modern history, I am not aware of a single even semi-civilized country that publicly celebrated the activities of its professional government torturers in the popular media.). They’re rife and manifest.

But I would highly recommend this piece to those seeking to understand and explicate the problems plaguing this country. “Extractive elites” and “macro-corruption” encapsulate it pretty perfectly. It’s also essential reading for those like me who can’t seem to look away from the decades-long train wreck of contorted, self-contradictory conservative “thinking.”

* Irresistible aside: I heard an NPR interview years back with a businessman from a South American country saying that his country is far more democratic than ours. In his country, anyone can bribe officials. In America, only the rich get to make bribes.

Hat tip: Beowulf

Cross-posted at Asymptosis.

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Paul Krugman is Very, Very Wrong

by Mike Kimel

Update …Since this post has gotten a lot of attention, jump here for my
final word
on this topic.

I’m sure I’m missing something here, because Paul Krugman is so often extremely perceptive, but I think here he is very, very wrong. He writes:

The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift.

To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre.

Um, I dunno. Perhaps on specific day to day operations Ben B. is not giving money to the banks, but things look very different with a 30,000 foot view. (I suspect “the banks” most people mean if they say there are giveaways going on are not all banks but rather a small subset of basket cases.) Remember the toxic asset purchase? When the Fed spends over a trillion bucks paying the face value for securities whose real worth has declined to a fraction of that face value, to me that is both an expansion of the money supply and a give-away to those from whom one “purchases” those assets. There have been any number of similar, er, programs the Fed has run in the last few years which have had the same purpose: injecting money into a small number of entities that made extremely bad lending decisions in ways that specifically avoid making those entities pay any sort of market or reasonable price for that money.

That isn’t the only error in Krugman’s post. He also tells us this:

Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers. Banks are largely in the business of borrowing short and lending long; anything that compresses the spread between short rates and long rates is likely to be bad for their profits. And the things the Fed is trying to do are in fact largely about compressing that spread, either by persuading investors that it will keep short rates at zero for a longer time or by going out and buying long-term assets. These are actions you would expect to make bankers angry, not happy — and that’s what has actually happened.

Yes, the Fed is sending a message that it well keep short rates at zero for a while longer. But which short rates and which long rates is Krugman talking about? Because banks can borrow at one rate – the effective federal funds rate, and they loan money to the public at a number of other rates.

I wandered over to FRED, the economic database of the St. Louis Fed and downloaded the Effective Federal Funds rate and the Average 30-Year Mortgage rate, which should be a good representation of a long rate used in loans by banks to the public.

The thirty-year mortgage is first reported on 5/7/1976 and is reported weekly thereafter. The FF tends to be reported a day or two earlier or later depending on the week, holiday schedules, and the like. Here’s what the 30-year Mortgage less the Fed Funds rate looks going back that far:

As is evident from the graph, whatever the Fed has been doing since the recession began in December of 2007, it isn’t compressing the spread between the 30-year mortgage rate and the Fed Funds rate.

Perhaps things might look different if the Fed followed more of a Banco do Brasil model, where the public could borrow directly from the Central Bank. But as things stand, pace Krugman, the Fed’s interventions since the recession began have only increased the spread between the rate at which banks can borrow and the rate at which they can loan out money.

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Tax cuts for jobs. NOT! Another tax cut that is not paying out

First a qualification. I am basing the following on info I found on the net. If the info is wrong, then I stand corrected as to who is or is not paying but not as to what happens when a large entity does not pay. The specific city and company are used purely for example purpose because of familiarity. What follows could be any municipality with a similar size company calling it home.
Lately in the city of my flower shop the big talk is a $10 million deficit in the school department. It’s a funny story. See, the department hired a couple people and these people, along with the help of the city council and the school committee the budget numbers became not real. They budgeted $59 million but have spent $66.6 million. The total $10 million is a 2 year deficit. The funny part…we had a surplus. Though, where the surplus went to no one knows. The school committee insists there was no funny business and even voted down an investigation. So, if there was no funny business, then who gained and what did they gain by covering up a deficit? What benefit is there about lying about a deficit?
Of course, this is also a state funding issue. You see, the city has the typical city size problems that the surrounding town do not have. This article notes:
“The committee chair pointed out that Lincoln has a budget of $48 million to educate half the students Woonsocket teaches with a mere $59 million.
“And they don’t have the special needs we have. They don’t even have a quarter of the IEPs we deal with,” she said.”
On top of this, we’re one of those states that has been passing ALEX type legislation. In particular we passed the one that thinks it is smart of a state to set a cap on how much a municipality can raise taxes in any given year. The city notes that default is an option, but is currently begging the state legislature to allow a supplemental tax bill.

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A  few weeks ago I showed energy consumption as a share of  nominal personal consumption expenditures (PCE ) and though it would be interesting to follow up with food and energy as a share of PCE. From 1959 to 1999 food and energy fell from about 33% of PCE to 17.5%.  This almost 50% drop in food and energy as a share of spending reflected several things.  But overall it probably reflect rising standards of living as the fall allowed consumers to spend their income on other things.  But note that since 1999 food and energy have been absorbing a rising share of total consumption.  Something similar happened in the 1970s when the real price of food and energy also rose.

One way consumers adjust to higher energy prices or a lower standard of living  is to delay purchasing a new car.  This is such a strong tendency that energy and autos combined account for almost a constant share of PCE..

Looked at another way, the number of cars and light trucks on the road per household has stagnated since about 1999 .It is an interesting question if this recent flattening is a cyclical or secular development. 

The number of cars and light trucks per driver has followed a similar pattern.


If this is a secular trend it is a basic reason why the auto industry industry is a mature industry with very weak growth prospect, especially if you combine these trends with a much slower growth in the number
of drivers.  The bulge in the number of  drivers in the 1960s-70s is the baby-boomers starting to drive. But in about another 15 years or so  they will be reaching the age where they are going to have to turn in their drivers licenses and quit driving.  Is this the source of demand that Google is targeting with its current experiments with driver-less cars?

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Encouraging Deadly Financial Viruses

Randall Wray highlights two great insights that arose at the annual Minsky conference last week in NYC.

First Joseph Stiglitz (Wray’s words, emphasis mine):

Recall that part of the reason for the creation and explosion of derivatives was to spread risk. For example, mortgage-backed securities were supposed to make the global financial system safer by spreading US real estate risks all over the world. He then compared that to, say, a deadly flu virus. Would you want to spread the virus all over the world, or quarantine it? Remember Warren Buffet’s statement that all these new financial products are “weapons of mass destruction”–like the 1914 flu virus. And, indeed, just as Stiglitz said, spreading those deadly weapons all over the world ensured that when problems hit, the whole world financial system was infected.

Next, Frank Partnoy:

He said that these innovations mostly exploit information asymmetries in order to:

a) dupe customers (think Goldman Sachs and John Paulson constructing synthetic CDOs sure to blow up, and betting against Goldman’s customers who bought them); and

b) engage in regulatory arbitrage (evade rules, laws, supervisors, etc; ie, move trash into SIVs to evade capital requirements).

But the financial industry and its Republican toadies would have you believe that regulating our outlawing these derivatives will destroy American “innovation.” Yeah: and we should also encourage innovation in suicide-vest technology.

21st Annual Hyman P. Minsky Conference: Debt, Deficits, and Financial Instability « Multiplier Effect.

Cross-posted at Asymptosis.

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