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

The Main Point

Peter Dorman at Econospeak brings us another reminder about policy decisions on the economy.  Reposted from Econospeak:

The Main Point

Macroeconomics is complicated and political economy is devilish, so it is easy to get lost in the details. From time to time, it’s good to come up for air—to remember what the fundamental issue is. In a way, the debate over structural versus cyclical factors invites us to do just that.

Suppose the current recession/depression is mainly structural. Suppose it is due to an immense misallocation of capital and labor, a failure to foresee what our economy would really demand in the years ahead. According to this story, we have trained too many masons and anthropologists and invested in too many building cranes and liberal arts colleges, and it will take years to shift our human and produced resources to more valuable pursuits. (Actually, I think there continues to be an enormous misallocation of investment, but this will become apparent only when the threat of global warming is taken seriously.) If the structuralist story is right, the ongoing slump is necessary and unavoidable and will end only when we have fashioned the resources for producing the right stuff.


If the cyclical story is predominately true, however, we have neither the wrong people nor the wrong capital stock. We have all the ingredients it takes to have a vibrant economy that can fully employ our populations and generate a standard of living that surpasses what we had in the past and that keeps growing further. But think about it: if we have the wherewithal to resume prosperity, what holds us back? And why should rational people accept any excuses for policies that delay it?

Repeat: we have everything we need, right now, to restart our economies. All the unemployment, the hardship, the lost opportunities are unnecessary. That’s the main point.

The secondary point is about the why. There are ultimately two reasons why economies like ours get stuck in a cyclical rut. The first is that there is a reinforcing cycle of insufficient demand and insufficient investment. This is where standard countercyclical policy comes in: through fiscal deficits the government increases demand on its own initiative, and through monetary easing an impetus is added to investment. We are near the limit of what easing can do (diminishing returns to the QE’s), but not anywhere near the limit of fiscal expansion.

The second reason arises in balance sheet recessions: too much private borrowing has taken place, debtors find it difficult to sustain debt service, and both debtors and creditors retrench. In this case, which is ours, the essential problem is that fulfillment of claims on wealth—both credit claims and equity claims on debt-related assets—interferes with the conditions required for restarting growth. In other words, the shadow of past wealth creation is depriving new wealth creation of sunlight. While respecting wealth claims is desirable during normal times, since it supports long-term planning, there come episodes in which a choice must be made between the past and the future. This is such a time. Wealth claims need to be trimmed, quickly and sufficiently, in order to reduce leverage and permit economies to return to growth. We shouldn’t forget the main point, which is that economic growth produces the stuff of which real wealth is made, while satisfying the claims inherited from yesterday only allocates this stuff. (And in a slumping economy the claims can’t be honored anyway.)

If you accept the cyclical story, and the evidence certainly weighs in its favor, you should not accept another month, much less year after year, of excuses for austerity.

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A oh, Some in Europe can’t take the pressure

Seems the austerity thingy is starting to hurt where it really counts. Just read via the AP:
… and amid growing concern in Europe that austerity aimed at cutting ballooning deficits may also be choking growth.
A dozen European Union leaders, including British Prime Minister David Cameron and Italian Premier Mario Monti, called Monday for an open-markets strategy to stimulate growth and jolt the region out of its economic doldrums.
“We meet in Brussels at a perilous moment for economies across Europe,” the leaders said. “Growth has stalled. Unemployment is rising. Citizens and businesses are facing their toughest conditions for years. ”
Of course their solution is “Free the Kraken!*“: 
The letter urges European nations to deregulate their service, research and energy sectors, forge trade ties with growing markets including China, Russia and South America — and even contemplate a free trade agreement with the United States.
How scared are they? They are this frightened: 
“Implicit guarantees to always rescue banks, which distort the single market, should be reduced,” the letter said. “Banks, not taxpayers, should be responsible for bearing the costs of the risks they take.”
Be still my beating heart, be still.

Of course, all of this is related to Greece. I found that the British paper, the Daily Telegraph is liveposting daily on the Debt Crisis:
“Live coverage of the international debt crisis and rollercoaster financial markets in the eurozone and US.” From today’s postings:
20.06 Jeremy Warner [financial editor] writes that the US has proved that the brutality of hire and fire really does work:
It is a simple fact of life that business is more prone to hire if it is allowed to fire. The major risk to business investment, which is that of an ongoing workforce liability, is thereby removed.
Vince Cable’s proposed shake-up of employment law is in truth of much more importance to the future of the UK economy than faffing around either with credit easing or squandering £12bn on a temporary tax cut. It’s vitally important that the task is not ducked.
And yet, considering the 12’s concern about austerity to cut debt and banks taking the hit, there was this today: 
22.02 Here we go. Eurozone ministers agree on ways to cut Greek debt to 123/124pc of GDP by 2020, aiming to go close to 120pc. Eurozone in talks with representatives of private sector about finding further debt relief. Issue of ECB forgoing profits on its holdings of Greek bonds remains a sticking point.
Coming soon to a theater near you!  The Son of Austerity.
*Kraken: In modern German, Krake (plural and declined singular: Kraken) means octopus but can also refer to the legendary Kraken.

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Michael Hudson on Greece

Greece and what is happening to it is not getting enough attention.  What is happening there, in my opinion is an example of the human race at it’s worse.  I do not see the implementation of austerity as an experiment.  I see it as just one more step by those in the world controlling banking to mold the world into its self image.

This is a link to an 11 minute interview of Michael Hudson:  Michael Hudson is President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City… 

In this interview, Prof. Hudson suggests that Greece is the test to see how far the world’s money people can push in preparations for further advancement within the EU.  Interestingly he notes, that in the US, because we privatized our utilities years ago, we are not seeing the same drive of austerity as we are seeing in Europe, including England.  Though we should not be complaisant.

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Welfare, I’m not hurting from it and neither are you.

A good friend and I got into an email debate. He sent me the latest message regarding how wonderful it is that Florida is going to be drug testing welfare recipients. I responded that I’ll consider the policy when we start testing all the CEO’s who get welfare for their sector of the economy, the lawyers, judges and all country club members.
I also noted welfare is not the problem He noted it’s not “the” problem, but it is “a” problem and he knows this from talking to people. I know of welfare too. I have served on two nonprofit boards, one for substance abuse and the other The Providence Center. My family adopted a family when I was in junior high. We had foster children. I was a day counselor for 2 weeks in the summer of ’73 for 7 to 12 year olds from 3 of the most horrible housing developments in the city of Providence. We had the “Institute” literally right around the corner from where I lived.  My daughter is doing a year with NeighborWorks America
Welfare is not the problem. But, my friend is a very smart person and an engineer, so I needed some numbers. Using this site I checked out what the ratio of spending on Family and Children and Housing is to our GDP. I used GDP and not the overall budget because hey, we all worked to earn that money and it might as well be used for something that is heart warming.  The following numbers are total national spending (Fed, State, Local).

The year 1962 is the first year that there is spending listed for both Family and Children and Housing. Prior to that only Housing is listed as having spending. For 1962, the combined total ratio was 0.0027. That is 0.27% of our GDP was spend on families, children and housing. I started with 1970 and went forward using the endings of the presidential terms starting with 1980.
1970: 0.0035
1980: 0.0092
1988: 0.0093
1992: 0.0134
2000: 0.0092
2008: 0.0097
2010: 0.0141
First of all, these are miniscule percentages of our GDP. Second, it sure looks to me like the best way to solve the “welfare problem” is to solve the economic problem.
Of course, this means nothing if we don’t have other government spending patterns to compare too. I mean, how do we know if welfare is “out of control” if we can’t compare it to other spending? The same data set has two other categories: General Government and Other Spending. You can click on each to see the sub categories. But, just so you know General Government consists of Executive and Legislative organ, Financial and General services. Other does not include: Pensions, Education, Health, Defense, Protection, Transportation or interest. Other is just that: Other. Here is how the numbers look.
 
This is how the numbers flow as log function.

 

Call me stupid, but it looks to me like what we spend on welfare is not much more than what the government is spending on just doing the government thingy, unless of course people can’t get a job. Interestingly enough, the share of GDP spent on welfare in 1992 and 2010 is the same. In fact, at the peak of unemployment of the 2001 recession which was 2003, we spent just 0.0098 on welfare.
Here is another comparison. In 2009 we spent $167 billion on Family/Children and Housing. That year, we also spent $161 billion in the Other category of “Economic Affairs”. I don’t know what that is, but if it has anything to do with what we are experiencing I don’t think we got our money’s worth. This item went from -7.0 in 1997 to 7.8 in 2002 to 17.5 in 2005 to 1.3 in 2007 back to 17.7 in 2008. It landed at -79.7 in 2010. Hummmmmmmmm. I think Glen Beck would like this category. You know, who’s been playing with the money in the cookie jar? In fact, why did we not know that a cookie jar exists?
It doesn’t make me feel good to think that we spend about as much on the top office operations of this country as we spend on helping people. Think about it. What percentage of the “welfare problem” do
you believe is a problem? You know those drug addled lazy moochers who are preventing all us moral and hardworking folks from living the good life of our congress persons. Be careful now. This is a trick question. See, it won’t take much of a “problem” subtracted from what we spend to find ourselves spending less to take care of families and their children than we spend on the top office operations in this nation. That’s just plain being cheap. Down right, out and out cheap SOB’s even if we leave in all of the “problem”.

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Deja Vu All Over Again, or On the Whole…

The President of the Federal Reserve Bank of Philadelphia:

We have been putting out credit in a period of depression, when it is not wanted and could not be used, and will have to withdraw credit when it is wanted and can be used.

But this is not Charles I. Plosser, no matter how similar the sound. It’s from September of 1930,* presumably George W. Norris (PDF; see page 4).**

Indeed, reviewing the Calmoris and Wheelock article from which I pulled that quote, we find the same mistakes being made: excess reserves confused with circulating money and therefore treated as harbingers of inflation, squealing for austerity,*** sterilization of shifts in reserves in a desperate attempt to avoid non-visible inflation.

As Owen Wilson’s Gil says in Midnight in Paris, we have antibiotics; the people in Fin de siècle Paris didn’t. It’s just one of our other “sciences” that appears not to have advanced.

*Michael D. Bordo;Claudia Goldin;Eugene N. White. The Defining Moment: The Great Depression and the American Economy in the Twentieth Century (National Bureau of Economic Research Project Report) (p. 36). Kindle Edition.

**Not to be confused with George W. Norris, the Nebraska Senator discussed in Profiles in Courage

***The Norris quote above begins:

We believe that the correction must come about through reduced production, reduced inventories, the gradual reduction of consumer credit, the liquidation of security loans, and the accumulation of savings through the exercise of thrift. These are slow and simple remedies, but just as there is no “royal road to knowledge,” we believe there is no short cut or panacea for the rectification of existing conditions.

Chancellor of the Exchequer George Osborne, not to mention EC President Herman von Rompuy, would be proud.

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Define Rich V: Looking at the historical labor economy

We are taking a little side trip inthis series of defining rich based on the prior tax rate schedulesbut, this post is keeping with the process of looking at history formarkers as to the definition of rich. For any new readers, I believeas a society we knew and had definite boundaries as to what definedrich. I believe we knew how to say the word “when” as the incomeand wealth was pouring into one’s glass These boundaries producedspecific public policy that resulted in a more equal and justsociety.
In our local city there is anothertextile mill going to the grave. We have lost a couple of huge millsto fire in the last decade.  The local paper did an article on thismill known as the French Worsted Mill. It was built in two stages,1906 and then 1906. It was part of the revival of the mill industryvia specific targeting of French industrialists, post water power forthe city. A local person who was eventually governor of the state iscredited with bring $6,000,000 of foreign investment into the cityearly turn of the century. At one point they had a Uniroyal rubberplant that made soles for shoes The last pair of Keds (sneakers) went out thedoor in 1970. Nine hundred and fifty people out of work due to “FarEaster Producers”.  (See the article: Pressure growsrapidly for Congress to to clamp tariffs on foreign goods, 5/19/1970)  This was a city as industrial asanything Detroit or Pittsburgh were. This was a cultural center forthe region with 6 theaters and I don’t mean just movies. We aretalking blue collar all the way. We’re talking jobs that we considerthrow away jobs to the far east today. We’re talking jobs that are notconsidered “good” jobs anymore.
So, now that you have the picture, hereis what this mill and the jobs within it were able to do for theworkers. I think this bit of history also adds to my position thatwe have continually pushed the cost of the American Dream up theincome line such that the middle class can not afford it…even with2 college educated people in one house. This is the sub-context tothe discussion regarding the decline of the middle class or the lossof the middle class. When people say the middle class does notexist, what is being stated is that the American Dream is no longerfinancially possible for this groups of citizens. The Dream is notdead or gone, it is over priced relative to the income of the middleclass. It is just as we are not drowning in debt, we are dehydratingfrom lack of income.

The article in the paper talked about aMr. Bacon. He worked in the mill in 1956 along with 700 to 800 otherresidents. The job was not as a machine tool maker (the mill as mosthad their own machine shop) or a special machine operator thatrequired special skill. He was a laborer. The tasks mentioned werestuffing waste wool into burlap sacks or “picking up the yarn” orfetching parts from the machine shop. We’re talking menial labortasks. Starter jobs.
For this work Mr. Bacon was paid $1.80per hour. The minimum wage was $1.00 per hour. At some point he wasearning $80 per week for 40 hours work. This is $4160 per year. With this income Mr. Bacon was able to put himself through collegeand became a teacher in the local school system. It was not just anyold college he went to. It was Providence College with a tuition of$500 per year. Yes, a private college that cost only 1/8thof his annual income.
Mr. Bacon’s story is the story that notonly are the Republican presidential candidates promoting as to whatwe need to “get back” to, but the democrats are saying we needto go forward to. Mr. Bacon’s story with this mill is the proof thatthe 2 parties are not talking about a fantasy time in our history. It did exist.
Here’s the problem though with both of their directions. I’m justgoing to list them.
  1. $40,000 is the annual tuition at Providence College today.
  2. $1.80 per hour is equivalent to the following: $14.40/hour standard of living, $17.80 real value, $18.20 unskilled labor and $22.00/hour production labor.
  3. Tuition of $500 is equivalent to the following: $4010.00 standard of living, $4960 real value, $5050 unskilled labor and $6120.00 production labor
Are you seeing the problem here? It’snot just the difference of tuition going up 80 times. It’s that the wage equivalent today for what amounts to stacking shelves in Walmartis not being paid at Walmart. Not only is this Walmart job notpaying such wages, this is what the current autoworker is earning. The autoworker was one of the best compensated citizens we had. Lookup the definition of  middle class in the dictionary, and you would have seen anautoworker!
How bad is this? Considered
Thelow-wage benchmark set by the UAW has already set off a competitivestruggle in the global auto industry, with Fiat-Chrysler boss SergioMarchionne telling Italian workers they must accept American-styleconcessions or he will move production to North America for cheaperlabor.
I have read that the German automakersare here in the US for the same reason. We are now the stop for outsourcing.
Here is the other more important aspectof the story of the French Worsted Mill and it’s relationship to theAmerican Dream. All those candidates, all those legislators, allthose governors proposing programs they say will encourage people toget off welfare and join the “productive” class, programs thatwill spur job creation, programs that will grow the economy such thatwe can cut taxes JUST LIKE THE GOOD OLD DAYS have no answer for thelack of pay of $14.00 per hour for the Walmart shelf stocker. Theyhave no answer as to how they are going to return the ratio betweenthe hourly wage and the cost of college education to that of the1950’s such that an individual can accomplish what Mr. Bacon andothers from the same mill accomplished. Not only do they have noanswer, they don’t even want to consider this aspect of theirsolution.
Mr. Bacon’s story is also telling uswhy we think the public sector is so over paid. If a Walmart shelfstocker should be earning $14.00 hour comparatively but are not, ifan autoworker earning $14.00 per hour is underpaid comparatively,then certainly the higher hourly wages of the public sector lookexcessive. Everyone used to know that the public sector was alwayspaid less compared to the private sector. They did not have morebenefits than the autoworker, but they do now. The slowdeterioration of the autoworkers and all the other laborers pay andbenefits has hidden the reality of the finger pointing at the publicsector. It’s not that they are paid so much, and thus look “rich”by comparison, it’s that the autoworker has lost so much over such along time that the loss is not recognized as a loss. Instead, thepublic sector’s economic position is looked at as an unjust gain. Not only is this presented as an unjust gain, it is an injusticeperpetrated via taxation. And the stage is now set for all thearguments such as those we hear coming from governors such as Walkerand Kasich.
This is where the Keds hit the road. We, and I have to say “We” because We voted in those who made thepolicy changes, have decided that a good job is not one which allowsthe experience of Mr. Bacon or the autoworker. We upped it to be onethat required academic education. No longer would trade education orapprenticeship education be of such value that it would define themiddle class. Unfortunately, as I had suggested in 2007, evenacademic education is being defined down as to not resulting in a “goodjob”.
“The dream seems to now only be adefinite with a 2 person, college educated and working household. That combination is not far from being in the 10% group. Thus, wehave raised the dream to something beyond which a large portion ofthe population will not reach considering only 28% have a 4 yeardegree even though 64% of high school students are entering college. It looks even worse with people suggesting that you need an IQ of 110to succeed in college. I mean, can we push the dream any further outor be anymore aristocratic in our arguments? “

In 2003, the homeownership rate for upper-income families withchildren was 90.8 percent, while the rate for their low- tomoderate-income counterparts was significantly lower at 59.6 percent– yet in 1978 some 62.5 percent of low-to moderate-income workingfamilies with children owned their homes. Ultimately, had the 1978homeownership rates for working families with children prevailed in2003, an additional 2.3 million children would now be living inowner-occupied homes.

How’s this little bit of history change your ideas about what toblame for the current housing/mortgage mess? I suppose if you areall for a future that is less than what was accomplished in the pastthen blaming government for promoting housing and people for spendingbeyond there means is all right by you.

No one in the middle class of yore was rich by any means. But,what they had was a life much freer of risk than today. What theylived in was an environment that provided the means to manage therisk of life and living. When we are told by those running for or inoffice that Americans need to be more…(fill in the blank) they aresuggesting such from within their own experience of having grown upin a socially constructed via government environment that was devoidof certain risks of living based on one’s income. In other words,you would not be told that the requirement for food stamps would meanyou had to have less than $2000 in savings.

The removal of these risks allowed one to take what theypersonally had (natural ability and otherwise) and grow it into alife where economically more of life’s risks could be taken onindividually.   It was an environment which removed the concept ofluck from the social justice equation.

This environment was not all welfare. It was an environment thatassured a person of common acuity could live a life free from therisk of weather, malnourishment, illness and aging. It was anenvironment that produced an economy such that the vast majority ofthe 72% without a college education were living this minimal risklife. We had an environment which supported the economic life journeyof the autoworker, simultaneously supporting the economic life journey of Mr.Bacon’s experience, simultaneous supporting the economic life journey of anindividual such as President Obama.

It was an economic environment which produced a directrelationship between income/wealth and risk absorption. As incomeand wealth went up, so did the absorption of risk and vice versa. Today we

have a system that is completely theopposite such that we have arrived at place where the relationship iscompletely reversed. We spare those who as a group can purchase agovernment which insulates them from any risk while pushing all therisks of living on to those who can not afford any risk and then tellthose people “oh well”. The bank bailouts and theausterity plan is the realization of the reversal of the risk/income-wealth relationship.

Our past economic environment also produced a direct relationshipbetween income-wealth and luck. Again, as income-wealth increased,your success was more dependent on luck and vice versa. This too hasbeen reversed as we see with the Washington revolving door and evergreater capture of the nations wealth as one’s income-wealthincreases. The environment produces an ever stronger assurance thatincome and wealth will increase as they both increase. This isunlike the experience of the middle class including all the highly educatedpeople who find themselves under employed or unemployed do to theshear luck of having chosen wrong. Today the closer you are to zeroon the line of income-wealth, the luckier you need to be.

I’ll leave you with this, the class warfare. There is classwarfare. It has always been with us, since the writing of theConstitution. However, I believe the current theater is the mostdevious the vast majority of the US population has ever faced. Thisis because of the two parties in this seemingly perpetual human quest,one has successfully cloaked themselves in the costume worn of athird party observer effectively immunizing themselves from the pain of the fight via camouflageof a messenger.  I even suspect some aregaining a wee bit of entertainment in their ability to manipulate theircounterparts into fighting among themselves. I speak of the laborclass successfully being divided such that those who labor in theprivate sector of the economy accuses those who labor in the publicsector of the economy for their poor economic position and the publicsector laborer does not recognizing themselves in the private laborworld. I tell you, the false messenger is recognized in that theirlabor is money. It is not in their mind or body. Warren Buffet maywant to be taxed more, but Warren Buffet is not working his money asthe Kock Brothers are working theirs…and Warren Buffet isbenefiting from the productivity of the Kock’s Brother’s money.

Next up is 1936’s tax table.

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European Daily Catch: Unemployment and Retail

by Rebecca Wilder

European Daily Catch: Unemployment and Retail

Global labor reports prevailed today, but the US employment report took center stage. I’ll not comment on that report, so as to keep with my generally all things European theme here at The Wilder View. However, a quick sift through my feed reveals rather cynical takes: see Dean Baker’s comments here and here; Spencer’s take here; Jake’s eye candy here; and Ed Dolan’s more positive tone here.

In this post, I present a new series: European Daily Catch (EDC). In this series, I’ll illustrate a selection of the day’s European economic data releases that I find particularly interesting. We’ll start with two complimentary reports: the labor marekt and retail sales.

Bottom line: the divergence is at extreme levels. I expect 2012 to be the year of convergence rather than divergence. Something’s gotta give.

EDC 1. The variance in labour performance further widens in November. Unemployment rates across the EA 12 (excludes the new countries Slovenia, Slovakia, Malta, Cyprus, and Estonia) show 5 countries making new cyclical highs. Ireland, Greece, and Spain all mark unemployment rates that are 130% or more above their cyclical lows. Note the Netherlands is not consistent with core performance – while the unemployment rate is low, 4.9%, it continues to rise. The Netherlands is the first sign of convergence; more will come.

(Note: all data in this chart is for the month of November, except Greece which is current as of September.)

EDC 2. Next up is real and working-day adjusted retail sales. True, retail sales do not describe consumption patterns sufficiently well for some countries listed: the correlation between real retail sales and real consumption in Germany and France is 34% and 61%, respectively. However, for other countries, like Spain, the correlation is near 1, 92.5%.

The way that I read the illustration below is this: German and French real retail sales are stable to rising; that probably characterizes the best possible outcome for domestic consumer demand (just look at domestic orders for consumer manufactured goods in Germany- sorry not included here – or the French unemployment rate). In contrast, we know that domestic demand is falling precipitously in the 3rd and 4th largest EA countries, Italy and Spain. All else equal, core retail sales are likely to slip in 2012.

In both charts, I added the US performance for cross-regional comparison. The US performance provides positive contrast to the domestic catastrophe that fiscal austerity without growth brings.

Rebecca Wilder

Source data: There are too many sources to link to here. I used seasonal-adjusting techniques and multiple data sources. If, however, you would like to access this data, I’ll be happy to send it along. Just send me an Email request.

originally published at The Wilder View…Economonitors

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Go ahead. Implement Austerity at your own peril

by Daniel Becker
(This is a long post. The time for sound bite debate to the demise of learned discussion is over for we are flirting with danger.)
Via a post at Financial Armageddon I learnt of a paper looking at the relationship of austerity implementation and social unrest. It is recent, dated August 2011.
Jacopo Ponticelli, Universitat Pompeu Fabra
Hans-Joachim Voth, UPF-ICREA, CREI and CEPR
Discussion Paper No. 8513
August 2011
Centre for Economic Policy Research
The Financial Armageddon article shows the first chart of the paper which presents: the relationship between fiscal adjustment episodes and the number of incidents indicating instability (CHAOS).
 
 
“CHAOS is the sum of demonstrations, riots, strikes, assassinations, and attempted revolutions in a
single year in each country. The first set of five bars show the frequencies conditional on the size of budget cuts. When expenditure is increasing, the average country-year unit of observation in our data registers less than 1.5 events. When expenditure cuts reach 1% or more of GDP, this grows to nearly 2 events, a relative increase by almost a third compared to the periods of budget expansion. As cuts intensify, the frequency of disturbances rises. Once austerity measures involve expenditure reductions by 5% or more, there are more than 3 events per year and country — twice as many as in times of expenditure increases.”
This is a rather disturbing chart. Certainly the recent events in England play into the subject of this paper. That WE are now setup for our version of austerity implementation, this paper should be put in the hands of all the staff members of congress and the president. If I had my own national news show I would have in the corner of the screen the above chart along with the google map of all the riot locations in London and in big letters: Cut SS, MC, Medicaid. Really? You want to go there?
There is more to this paper than just the apparent connection between austerity and upheaval. “Controlling for economic growth does not change our results. This suggests that we capture more than the general association between economic downturns and unrest.”
This is the most powerful statement of the paper. It implies that “Man” in all his glory is responsible for such social activity. It is not the “natural” course of economic activity that creates such volatile activity.  It is the economic policy implementedthat determines whether there will be unrest or not. Currently, the proposed austerity is based on an a priori of “we’re broke”. It is stated with the authority of natural cause. Mother Nature Economy did it’s thing and well…we’re broke. All we can do is rebuild after the storm. Yet, an economy is totally of human design. The republican who stated that the conservative movement was making reality was more correct than their fantasizing of control and power would allow them to realize. Thus I delve into this paper more after the jump.


 

There are two points that need to be understood if we are to apply the lessons of this social economic paper. Point 1:
“However, countries with very high levels of constraints on the executive show a weaker degree of association…Table 10 demonstrates that in countries with better institutions, the responsiveness of unrest to budget cuts is generally lower. Where constraints on the executive are minimal, the coefficient on expenditure changes is strongly negative – more spending buys a lot of social peace.”
So, some kind of governance that includes self determination is a mechanism for minimizing upheaval/unrest. I believe the American Revolution would be an example of upheaval in the face of “minimal executive” constraint. Finding that constraint of the executive is determinative does not mean such rights are exercised by the people to their benefit:
“The political economy literature on austerity suggests a paradox. There is no significant punishment at the polls for governments pursuing cut-backs (Alesina, Perotti, and Tavares 1998; Alesina, Carloni, and Lecce 2010), and no evidence of gains in response to budget expansion (Brender and A. Drazen
2008).”
I don’t know what to make of such findings. Certainly there must be more in the details of the studies sited. If such lack of response by the electorate is true, then we are in deeper trouble than realized.  
Based on this conclusion, the authors ask: 
“Why, then, is fiscal consolidation often delayed, or only implemented half-heartedly?” 
They suggest fear of unrest may be the reason and footnote the following: 
14 Alesina, Carloni and Lecce (2010) also suggest that implementation of budget measures may be harder if the burden falls disproportionately on some groups.
I would hate to think that austerity measures are not implemented simply because of fear of a reprisal that appears to be short lived with no political loss to those implementing the policy instead of not implementing austerity because research and experience prove it to be actually harmful in it’s results and even contradictory to the desired outcome of greater prosperity with reduced risk of living. If the politico is acting based on the former, it show’s no conviction of ideology and philosophy. If they fail to acted based on the latter, it shows a lack of character of inquiry and enlightenment. In either case, Naomi Kline’s work notes that austerity is always implemented with some form of force. In our country the force appears to be consolidation and control of the media combined with massive amounts of spending thus control of the debate and knowledge of the subject matter. Though the police state is in place thanks to Bush/Cheney and the expansion under Obama. 
Point 2:
“Further, we examine if the spread of mass media changes the probability of unrest. This is not the case. If anything, higher levels of media availability and a more developed telecommunications infrastructure reduce the strength of the mapping from budget cuts to instability.”
In their conclusion they flatly state: Contrary to what might be expected, we also find no evidence that the spread of mass media facilitates the rise of mass protests.
This suggests that cutting communications as some have done recently in an attempt to curb the upheaval is not a procedure that works in the long term. The focus of the complaint, materialized via upheaval will have to be addressed. It is not the ease of rallying the masses, the pep squad going viral that solely explains the materialization or degree of unrest. Though it may explain the reduction in strength of austerity implementation and resulting upheaval. I think the authors have stumbled upon the modern version of the printing press coming into existence and the effects it had.
The authors review current literature on the subject and find there is some confliction as to the effects of budget cutting. I’ll let you read it, but my take home is that it depends on what stage of national development the country is in as to the extent austerity will produce unrest, if the unrest is sustained post implementation and whether it promotes growth. They even site:
Giavazzi and Pagano (1990) and Alesina et al. (2002) find that cuts can be expansionary. Amongst the reasons suggested for this finding are a reduction in uncertainty about the course future spending (Blanchard 1990a), and a positive wealth shock as a result of lower taxes in the future (Bertola and Drazen 1993).3
I guess we know where the current meme comes from. Unfortunately the authors also note:
IMF interventions, on the other hand, often led to more frequent disturbances (Morrison, Lafay, and Dessus 1994).
Similarly, Haggard, Lafay and Morrison (1995) find that IMF interventions and monetary contractions in developing countries led to greater instability.
Recently, work by the IMF has suggested that austerity measures may be less expansionary than previously thought; they may well have the standard negative Keynesian effects as a result of lower demand (IMF 2010; Pescatori, Leigh, and Guajardo 2011).
Oh no! What is the IMF going to do now? I’m still praying for you Greece.
The author’s sum up the literature review with:
Remarkably, to the best of our knowledge, there exists no systematic analysis of how budget cuts affect the level of social instability and unrest in a broad cross-section of developed countries, over a long period.
Wouldn’t you think that such research would be considered key to one’s knowledge base before we start implementing policy that to date has been mostly tried and studied in 3rd world situations?  Wouldn’t you think that the advising 
the proof of effectiveness from these advising economist? Even medicine has acknowledged there is a difference between men and women other than genital development. The review of literature is clear. Start cutting and you will piss people off such that they express it ultimately in violent means though if you can ride it out the violence abates and prosperity looms until it doesn’t because people just plain have no money. The word for today is: Demand. Use it in a sentence as it relates to this discussion.
We can think that there are other issues involved when people protest, but the authors make it clear, austerity brings out the greatest number of people. For those considering how to handle the masses when the austerity gets implemented:
“The simple correlations suggest that these co-movements do not extend to all indicators of unrest equally – riots, revolutions, and demonstrations decline as expenditure rises, but assassinations and strikes seem – at a first pass – uncorrelated. Similarly, output growth seems to correlate negatively with assassinations, riots, revolutions, and demonstrations, but not with strikes.” 
And: “This suggests that unrest reacts particularly strongly to budget cuts and growth when unrest levels are already high.”
Go ahead, implement at your own imperil. In case you think this connection of unrest/upheaval is related to how they measure it, the authors checked that variable: “We conclude that the way in which we measure unrest does not matter for our main finding.”
Looking at the relationship of austerity policy involving taxes: 
Higher taxes and lower expenditure are associated with more unrest, but the relationship is not significant. Tax increases have a positive sign, but the effect is not significant at standard levels of rejection (column 2). It is also small – a one standard deviation rise in the tax/GDP ratio increases unrest by less than 0.01 events. Overall, we find that improvements in the budget balance raise the level of unrest (column 3). As the results in columns (1) and (2) make clear, this reflects the impact of expenditure cuts, and not of tax increases.
And:
We find the same results as before – expenditure cuts wreak havoc, tax increases do so only to a small extent and insignificantly. Overall, the budget balance matters for predicting unrest.
Just to make sure no one gets this wrong: A change in budget balance predicts unrest if the balance is reduced via cuts. Kind of makes it difficult to accept that the masses want something for nothing. In fact, I would suggest “entitlement” as it has come to mean something for nothing is the wrong word to apply to government programs of which people pay for willingly via taxes and don’t get riotous if they are asked to pay more.
If we wanted to avoid the upheaval of austerity implementation we should consider: 
In all specifications, the effect of GDP growth on unrest is negative. In contrast to the results for expenditure changes, the effect is not tightly estimated, except in the case of demonstrations, when it is also large – every 1% increase in GDP cuts the number of demonstrations by close to 0.4 events.
See, do something that actually improves the economy and people don’t protest! Wow, who’d a thunk it? Of course improving the economy such that people do not protest would mean having implemented something which produces an actually experienced improvement in the peoples lives. Something like real rising wages paralleling productivity rise and thus rising wealth. Unlike say, debt driven consumption only to have financing go away and then told to suck it up.
They look further at the connection of spending cuts vs economic growth and find:
In contrast, if expenditure changes are negative, they matter a great deal for unrest, driving up CHAOS by 0.19 incidents for each standard deviation of expenditure cuts. Next, we repeat the exercise for output changes. Increases in output do much to cut unrest (col. 3), with a one standard deviation increase in output (3.77%) reducing CHAOS by 0.2 incidents on average. In contrast, declines do not set off major disruptions to the same degree. Overall, the results in table 12 confirm that the relevant identifying variation for expenditure changes comes from cuts; for output changes, it comes from positive growth, not recessions.
This paper kind of makes you think about our current governance of Wall Street/Corp influence and apparent dominance of policy choices to the exclusion of polls showing people want no cuts in programs referred to as entitlements and instead have the budget balanced via tax revenue enhancement. Wonder what happens when virtual people known as corporations do not experience austerity yet have persuading influence over We the people’s choices via money into the election process.? I guess we are going to find out. As I have heard in the past: tort is the free market response to lax governance of the market. Is upheaval the same free market response to unresponsive policy toward the people?
My concern is that the initial response by those supporting and promoting austerity will be the furthering of the police state we have been developing since 9/11. Only it will also be fired up (pun intended) domestically. It is the response we have experienced in the past with the civil rights motion and even back to the labor movement. It appears that a police response is always the first response to protest as protest is interpreted as potentially criminal regardless of what the Constitution reads. Yet here we have a paper suggesting that all of it can be avoided. Combining this paper with the 2005 World Bank report on what creates wealth in a developed economy it appears to me that we have  in our hands the answer to what appropriate economic policy should look like for our current situation. 
I asked September 2008 if we could please broaden our discussion regarding the crisis. That has not happened. The discussion is still disjointed, segmented and narrow. Now I’m imploring that we broaden the discussion. Pleading!

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Screw Austerity, I have a new theme song

by Daniel Becker

Being that we’re about to experience austerity because we are convinced we can’t spend money properly such that we actually end up with more after rather than less …  which is very depressing to me and defeatist in presentation, I present my new theme song:  That’s how it goes.

I just find it fascinating that we will accept the argument that government needs to run as we run our own houses and thus need to not spend more than we have, blah, blah, blah yet we seem not willing to apply the concept that we apply daily in our own household to get ourselves an education, a house, our own business, improvement to our property and self.  We do this all the time because we understand it is building our wealth, and we do it even though we can’t print our own dollars like the government can.  (Yeah, we’re not Greece in that way.)

Really, just listen to both sides presenting the austerity program arguments.  Can’t you hear how disjointed the reasoning is?  Can’t you hear how selective they are in presenting examples of proof of their argument which is resulting is a totally disjointed line of reasoning.  Ask one question you are told we need to save to prosper.  Ask another question you are told we need to spend less just like you, to prosper.  Ask a third question and you are told we have no money, just like you.  Ask a forth question and we’re told the economy is growing (more money produced) NOT LIKE YOU.  Ask a fifth question and we are told to better yourself, NOT LIKE WE THE PEOPLE.  Ask a sixth question and we are told to get an education, NOT LIKE WE THE PEOPLE.  Ask a seventh question and we are told to…(fill in your own).

My favorite verses of the song and why it is my new theme song:

I help you and you help me
That’s the way the world should be
Tit for tat and give and take
Just be good for goodness sake
I’ll pick you up if you should fall
It works both ways if it works at all
Hold in your heart the people you love
Always thank the powers above
Everyone deserves a share
So keep your promise, fair is fair

So gather ‘round me people
And help me while I sing this song
I’d rather have you with me
Together as we travel along
It’s the feeling of the wind in your face
The sound of the music they play
The friends you make along the way
Don’t you know, that’s how it goes

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These jokers have no idea what they’re doing

by Rebecca Wilder

What do you want to wager that the IMF’s a bit overly optimistic on the outlook for Greek nominal GDP?

Monday, June 27, 2011

Newsneconomics

These jokers have no idea what they’re doing.
The IMF has overshot the ex-post path of Greek nominal GDP in each and every one of their World Economic Outlook forecasts since April 2009. What do you want to wager that they’re wrong about 2011, too? And now they want more fiscal austerity…

The French are devising a plan to compel bondholers to rollover Greek debt by enhancing the bonds. The new bond rate would be equal to Greece’s current borrowing rate on the EU/IMF/EFSF programs plus a variable factor linked to ‘an indicator such as GDP’.
Just amazing.
Rebecca Wilder

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