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


by Mike Kimel


Watching the slow motion train wreck that is the European economy right now, and the Argentine economy just about always, I started to wonder – should political leaders be personally liable for their failures? Obviously, there is no way that someone whose ineptitude puts a creates a crash that causes severe economic hardship to other people can make the other affected people whole. Additionally, in most cases, many of the other people affected share some of the blame. Don’t like the fact that GW started a war for seemingly no reason in Iraq and left behind an economic mess? Don’t like it that Obama has not only failed to failed to prosecute the scofflaws who created the mess, he has done as much as humanly possible to ensure they continue to profit using your tax dollars? Too bad, because if you’re over reading this you probably voted for at least one of those two guys.

Holding people accountable also faces the problem of mis-placed blame. There are several think tanks, some which have been around for decades, whose primary purpose in practice appears to be “proving” that the period of fastest measured real economic growth in this country’s history, a period that came scarcely four years after the biggest meltdown in this country history, was the height of economic mismanagement. The end result, of course, is that we haven’t so much as had a debate on using the solutions that worked so well in the previous meltdown this time around, and the economy is still shaky. (For reasons that are obscure to me, much of Europe is actually trying the exact opposite approach to the policies that have worked historically.)

But let us say it was possible to correctly assign blame where it is due. Should we then hold those people who create big economic or political disasters accountable? If their actions lead to the senseless deaths of tens or hundreds of thousands, or the reasonless penury of millions, should they be held accountable? Sure, you could never extract the trillions in lost economic output from those whose decisions made and/or enabled the mess, but it should be possible to punish them in some ways, enough so that the next people in the same position face a different set of incentives.

Bear in mind: leading a nation, holding the fate of one’s compatriots in one’s hands is not a right, its a privilege, and arguably, the ultimate privilege. People put huge sums of money and a lot of effort into attaining that privilege, or even just influencing who gets that privilege. Those who do get it, or even are somewhat close to it, not only enjoy that privilege but also profit immensely. Put another way – being a national leader apparently has nothing but upside. Is that really a good thing? Does it encourage especially inept or corrupt people to seek public office, and make it more likely that such people will win? And what should we do about it?

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Reverting back to blogger for the moment

Update: I have been unable to repair the blogspot feed so far 2:30 P.M……can anybody help?

Update 2: MEV repaired the feed and the backlinks problem.

In case you are wondering what is going on, our migration did not work as planned.  Thank you for your patience.  We lost the rss feed, and due to a glitch access to all of our old posts from links from other sites was prevented because the urls were rewritten…access within the site was fine.

MEV is working to correct the glitches and has returned us to blogger in the meantime so we can still provide our readers with new material and maintain links to our friends in the blogosphere.  Eschaton linked to us and posted this Sunday on the Trans Pacific Partnership (via Naked Capitalism) for one example.

I will be restoring the rss feed shortly I hope.  Thanks for your patience.

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The Default Option

Mainly an open thread and effort to see if I can still post using blogger.

But I have very strongly the impression that countries which default on their debts do relatively well after the default.  Default is associated with horrible economic performance, but I think this is because default is caused by horrible economic performance.  I really mean default not renegotiation.

My examples are

1) Argentina: Default occured around the trough of the worst recession in an advanced market economy since WWII and before Greece right now. The year in which the default occured was terrible.  It was followed by a long period of 6% growth per year bringing Argentina well past the pre-crisis trend.
2) Russia:  I added “in an advanced market economy” to case 1, because transition economies had worse recessions.  Russian performance pre-default was catastrophic.  IIRC The Russian econmy has been growing quickly since they defaulted.
3) Iceland:  They had a Cyprus level banking collapse and have low unemployment.

Note that good outcomes after default always astonish voters and lead to the most amazing political outcomes such as 4 consecutive terms for the Fernandez-Kirchner family,  the worlds first openly gay head of government, and the ex USSR repeatedly electing an ex KGB agent (hey 2 out of 3 aint bad).

I think that the world financial system threatens to do horrible things to countries which default and that this is a total bluff which has been called at least 3 times.

What am I forgetting ?

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Migration starting to wordpress

The migration process to wordpress from blogger is to start about 11:30 PM March 21. Hopefully there will be few glitches. Our new design has some features to be added after the migration and can be explained then. Soon we will welcome readers to our new look, and allow readers to explore posts in a more accessible and easy manner.



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Scott Sumner Does Not Understand that S ≠ I

Update April 4: Steve Waldman kindly links to this post, and I’m rather abashed that he does because it’s wrong as written. As pointed out by Ramanan. (Though the spirit is right.) I should have said:

Private Domestic Nonfinancial (i.e. households and businesses, a.k.a. the “real” economy in which people produce, sell, and buy goods and services that are consumed to produce human utility) Saving ≠ Private Domestic Nonfinancial Investment

Because other sectors exist. Sliced one way: Domestic Financial + Fed Gov + International (financial and non-). (One can argue which sector the Fed should be placed in.) And there are massive flows of funds between these sectors and the Private Domestic Nonfinancial sector.

And: those other sectors can (do) create new financial assets, notably bank deposits, which is how the cumulative surplus from production gets monetized over time.

The Scott Sumners and John Cochranes of this world seem to think that S=I for the “private” economy. And it’s unclear what’s included in their imagined private economy. (The financial sector? the International sector? They’re both “private.”). Their failure to understand or address the sectoral accounting makes their S=I thinking completely muddled.

That’s what I meant to say. Here’s what I said:

He expresses befuddlement at Steve Randy Waldman’s typically brilliant post, K is not capital, L is not labor.

S equals I (and properly understood, I = E) only in an imaginary private sector of producers/consumers with no financial sector, no government sector, no international sector, no lending, and no borrowing — really a barter economy in which not consuming corn is “saving.”

This is the walled-off imaginary sector constructed by Kuznets and company in the ’30s and embodied in the National Income and Product Accounts — NIPAs. (It was only properly supplemented years later with Flow of Funds accounting incorporating other sectors properly.) By necessity they had to construct it as if (to quote Garrett Jones). “Everything you delay gratification for is capital.” (I would add: “real” capital.)

This is basic sectoral accounting, a subject in which neoclassical (and “market monetarist”) economists seem to have received no training.

Cross-posted at Angry Bear.

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The Evils of Corporatism

by Linda Beale

The Evils of Corporatism

I have often written in these pages about “corporatism”, an approach that pervades our economy and many government agencies and does not align with the interests of the majority of Americans.

Corporatism runs rampant today in states’ treatment of their public universities, treasures of the American educational system that have been central in continuing basic research into ideas that transform our lives and our understanding of ourselves.  Today, many states are cutting back more and more on funding for state universities, and demanding that the universities turn themselves into contract researchers for private corporations (where the corporations, not the universities, enjoy the commercial fruits of the research).  This is just another form of subsidy for Big Business at the expense of ordinary people. 

In addition, many states–including regressive Michigan under regressive governor Rick Snyder–are cutting funding for state universities in order to provide even more tax cuts to their corporate Big Business buddies.  And they tend to cut funding to those that need it most to serve the neediest populations that find equality of opportunity a meaningless promise in today’s casino capitalist economy–the poor and the disadvantaged. 

In Michigan, for example Wayne State’s paltry increase doesn’t keep pace with inflation, but Wayne serves the region and the region’s population in ways that other institutions in Michigan do not.  Corporatism, of course, also runs rampant in the universities themselves.  Wayne’s current president, who is paid $410,000 for being here only a few days a week and has a “deputy president” paid another $400,000, was a chief corporate officer at Ford and came to the university with very little understanding of academics.  It has shown, as he has run the place like a corporation, with his “never say no to the boss” cabinet of vice presidents and associate vice presidents (ranging around 23-25 these days) operating on a “flatter your boss brings rewards” system.

Corporatism exists all across governments, where Big Business spends billions to win influence on legislators and agency heads, and goes to every length to present a “PR” picture of the world as they want us to believe it exists to ordinary Americans.

Take one example–the Bureau of Land Management.  The BLM is basically a government toady for the wealthy and influential cattlemen and other industries that want to use public lands for private enrichment.  Perhaps the most glaring (but certainly not the only) example of this is the BLM’s treatment of the native American wild mustangs on public lands.  In spite of legislation charging the BLM to protect and preserve these American treasures on public lands, it has engaged in activities that are decimating the population, herding them up and selling them at $25 a head to buyers who take them to inhumane slaughterhouses in Mexico to be butchered while still conscious.  BLM is a toady for big ranchers, not a protector of public treasures.  And it should be stopped.

There is a non-profit organization that works hard on this issue–the Wild Horse Freedom Federation.  Earlier, it presented petitions to President Obama urging him to rein in the BLM and stop its use of tax dollars to wipe America’s wild horses off public lands to which they are legally entitled under the legislation passed in the mid 1970s.

Are you listening, President Obama?  Or is the only tune you hear the one played by Wall Street, Big Business, and corporate wealth?  If the latter, corporatism will continue to expand to cover every aspect of our lives, and the freedom that we pretend to cherish as Americans will disappear as surely as the wild mustangs will vanish from their “protected” public lands.

cross posted with ataxingmatter

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Who is not retiring, and why?

Via Bloomberg comes this note on demographics and the work force, and continues a conversation about how that impacts all of us. Probably not in the way most often provided in punditry…such as taking jobs away from the millenium generation, wealthy old geezers stereotypes, or alarms sounded about who is to pay for services we want, etc.

It’s well known that the U.S. is turning gray. It’s less well known that the workforce is turning gray as well. The percentage of Americans who are 65 and older will rise from 13 percent in 2010 to 20 percent by 2030 — and, if the recent trend continues, a growing share of those elderly Americans will carry on working past the normal retirement age.

Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics

In 1990, 11.8 percent of those 65 and older worked. In 2010 the figure was 17.4 percent. By 2020, the Bureau of Labor Statistics expects it to be 22.6 percent. The numbers are even more surprising for Americans older than 75. Less than 5 percent of them worked in 1990. In 2010, it was 7.4 percent. By 2020, according to the BLS, 10 percent of them will still be toiling away.

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Worms, Pond Scum and Economists

Dean Baker writes

Worms, Pond Scum and Economists

The effort to blame the awful plight of the young on Social Security and Medicare is picking up steam.
In the last week, there were several pieces in The Washington Post and The New York Times that either implicitly or explicitly blamed older workers and retirees for the bad economic plight facing young people today. There is now a full-court press to cut Social Security and Medicare benefits, ostensibly out of a desire to help young workers today and in the future.

Just to be clear, there is no doubt that young workers face dismal economic prospects at the moment.

This means that young people today can expect many more years of dire labor market conditions, because the remedies that could turn around their job situations have been blocked by nonsense spewing from economists. Incidentally, this situation works out very nicely for those on top, who are enjoying the benefits of record-high profit shares, which have also helped to fuel a soaring stock market.
The failure to see the largest asset bubble in the history of the world, coupled with the failure to prescribe an effective remedy to deal with the damage, should be sufficient to earn the economics profession the contempt of right-thinking people everywhere. But there is nothing too low for this group of professionals.

We are now seeing economists joining the crusade to cut Social Security and Medicare by implicitly or explicitly claiming that these programs are somehow responsible for the dismal economic plight of the young. The argument is that we can only free up money for helping our young if we take money from the old, a group with a median income of $20,000 a year.

By contrast, the upward redistribution of income to the richest 1 percent is equal to 10 percentage points of national income, or more than $1.3 trillion a year. To put this in the ten-year-budget-window context that dominates Washington debate, the amount that has been redistributed upward will be more than $16 trillion over the next decade. And that is based on the heroic assumption that the upward redistribution does not continue.

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Social Security is the healthiest component of the U.S.’s retirement saving system

Bloomberg’s Josh Barro is the lead writer for the Ticker, Bloomberg View’s blog on economics, finance and politics.

Social Security is the healthiest component of the U.S.’s retirement saving system

Last week I wrote that Social Security is the healthiest component of the U.S.’s retirement saving system and should therefore be expanded. This isn’t a popular position; liberals tend to prefer defined-benefit pensions from employers and conservatives defined-contribution accounts, such as 401(k)s and individual retirement accounts. But the reason Social Security works so well is that it lacks a fundamental problem that undermines the effectiveness of these other retirement vehicles.

Both defined-benefit pensions and defined-contribution accounts are based on a shared and problematic premise: It is possible to set aside x percent of today’s gross domestic product for retirement and generate retirement income from those savings that exceeds x percent of future GDP. This is to be achieved by investing retirement savings in assets that typically grow at a faster rate than the economy as a whole.

Such returns are possible. Some asset classes have long-run rates of return that exceed GDP growth: equities, for example. But the high returns are a compensation procyclical risk: These assets will tend to strongly outperform GDP when the economy does well and significantly underperform it during recessions.

It doesn’t make sense to finance retirement in such a risky way. Retirement savings exist disproportionately for the benefit of people with low or moderate means and a relatively low tolerance for risk. If retirement assets were invested safely, they would not be expected to grow faster than the economy as a whole.

So 401(k) and traditional pensions are both just efforts to finance retirement on the cheap by taking on excessive risk. The problem created by risk manifests itself in different ways with the different vehicles.

That is, private pensions no longer rely on the premise that retirement can be made cheaper through investment in assets that grow faster than GDP. But such a free lunch was what made the plans attractive for employers in the first place, and as employers have faced the plans’ real costs, they have increasingly eliminated them.

In the public sector, the free lunch lives on in the financial statements of pension funds. Governments fund their pensions based on an expected rate of return on a risky portfolio of assets, most commonly between 7.5 and 8 percent a year, far above the roughly 5 percent growth path we might expect for nominal GDP.

All of these options (expanding Social Security or downshifting the risk in other investment vehicles) would cause retirement saving to appear to become more expensive. But it wouldn’t actually make saving more expensive: It would just replace hidden costs created by risk with explicit costs.
Americans would then face a stark reality: Retirement, which is basically just another word for spending the final sixth of your life on vacation, is expensive. I am agnostic on the question of whether people ought to respond by saving more or retiring later. Advocates of later retirement tend to be elite people with jobs that are interesting and not physically demanding. But facing up to the true cost of adequate retirement saving would help Americans make more sound choices about how to deal with the fact that retirement is expensive.

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What Bush II and Clinton Got Wrong On The Economy

Reader Matthew McOsker writes:

What Bush II and Clinton Got Wrong On The Economy

First, we start off with sectorial balances. Trade deficits must be offset by government and/or private deficits. For example, if we had a $50 billion trade deficit, then that needs to be offset with a $50 billion government deficit. Otherwise, the private sector will be driven into debt, which is not as sustainable long term.

Let’s look at the Bush years in the accompanying chart. Trade deficits far exceeded budget deficits, and grew quite large. As those trade deficits grew as a % of GDP, the budget deficit was shrinking. I think we know the net effect as the private sector was driven further into debt – real estate related debt, which unraveled in 2008. Now going back a little further, this condition also existed under Clinton though to a lessor extent.

Both presidents should have run larger deficits to keep the sectors in balance. This could have been achieved through some combination of policies that either lowered the trade deficit, and/or increased spending, and/or tax cuts. Needless to say they both got it wrong, and Obama’s stimulus spending was the correct move to begin to get the sectorial balances back in check. However, Obama really needs to be running larger deficits to correct for the past imbalances.


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