Archive for the ‘Economy’ Category

Snapshot of the coronavirus recession

June 17, 2020

 

Click to enlarge.

It’s going to take more than reopening to repair the damage.

Thomas Piketty on corporate co-determination

June 5, 2020

I’ve written a good bit about Thomas Piketty’s new book.  Click on the Capital and Ideology tag to read my previous posts about it.  In this post, I’m going to discuss his ideas on corporate governance.

Great corporations typically begin with an individual who has a vision—a Steve Jobs, a Walt Disney, a George Eastman, a Henry Ford, a Soichiro Honda or a Jack Ma.

The drive and creativity of the individuals make the companies what they are.  Over time, though, the companies devolve into authoritarian bureaucracies, little junior watered-down versions of the Soviet Union.

Click to enlarge.  Source: Oxford Law Faculty

The goal of reform would be how to prevent corporate abuse without stifling enterprise and beneficial innovation.  Piketty’s solution is to adopt German-Scandinavian co-determination, under which corporations of a certain size have to allow employees to choose a certain number of corporate directors.

In Germany, according to Piketty,  all firms with more than 2,000 employees must reserve half the seats on their oversight committees to worker representatives.  All firms with 500 to 1,999 employees must reserve a third of their oversight committee seats to worker representatives.  There also are factory committees with union representatives who have a say one work rules and training.

However, in Germany, the oversight committees only supervise day-to-day operations of companies.  Policy is set by directorates, on which workers have no representation.

Other countries reserve one-third of seats for workers on companies of a certain size.  In Sweden, the threshold is 35 employees; in Norway, 50 employees; in Austria, 500 employees.

In April 2018, according to Wikipedia, U.S. Senators Tammy Baldwin, Elizabeth Warren and Brian Schatz sponsored the Reward Work Act,  which would amend federal legislation to require all companies listed on national stock exchanges to have one-third board representation for workers.  Polls showed majority support among Americans for the measure.

In August 2018, Elizabeth Warren sponsored a new Accountable Capitalism Act that would require 40 percent of the board of directors be elected by employees in federal corporations with taxable incomes over $1 billion.

In Britain, the Bullock Report in 1977, during the Harold Wilson administration, called for co-determination in big businesses based on the formula 2x + y. In this, workers and stockholders would have equal representation on boards of directors, but there would be two government representatives to break a tie.  It never became reality.

In practice, even though workers have a voice, the final authority rests with the owners.  I think there still is a benefit to having worker representatives.

Employees usually know things about how companies operate that the top managers don’t.  This can be valuable in avoiding the Stupidity Paradox, in which layers of bureaucrats demand good news and truthful information doesn’t filter up.

It’s also good for employees, especially union representatives, to have access to the same information that top management has.  Of course all these desirable goals can be thwarted by a sufficiently cunning and authoritarian management.

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Thomas Piketty on equality through taxation

June 4, 2020

Thomas Piketty’s Capital and Ideology is the most comprehensive study I know about the causes of economic inequality.  He gathered a vast amount of data and made sense of it.  To read my comments on his research, click on this, this, this and this.

In the last chapter, he outlined proposals for a “participatory socialism” to make society less unequal.  He saw three main ways to do this: (1) taxation, (2) reform of corporate governance and (3) educational reform.  This post will be about taxation.  I will take up the other two later.

His plan is based on steeply graduated income taxes, inheritance taxes and new taxes on wealth.  These were to be used to finance a wealth endowment of 60 percent of average wealth to every citizen at age 25 and a guaranteed income of 60 percent of average income.

He does not make absolute equality his goal, but he would allow a much narrower band of inequality than exists today.

I’ve long been indignant at the growing extremes of inequality in my country and the abuses of power of the very rich.  Reading Piketty forces me to think about just how much equality I want and how much I would give up to attain it.

Piketty wrote in earlier chapters of Capital and Ideology about how higher taxes have often been the key to greater national power and wealth.

One of history’s mysteries is how it was that European nations could defeat great Asian empires, such as the Ottoman Empire, the Mughal Empire in India or the Manchu (Qing) Dynasty in China, when, prior to the Industrial Revolution, they were equal in wealth and technology to the European nations.  It was the Chinese, for example, who invented gunpowder.

Piketty’s answer is that the Europeans gained an advantage through a higher level of taxation.  Tax revenue across Europe and Asia prior to the modern era was roughly 1 to 2 percent of national income.  This gave a king or emperor enough revenue to reign, but not to exercise tight control over his realm.

This changed in Europe, during the wars of the 16th and 17th centuries, when military competition forced kings to increase their revenues to 8 to 10 percent of national income.

Click to enlarge

The greater revenue enabled kings to become absolute monarchs, exercising almost as much control over their citizens as a 20th century president or prime minister.  It also enabled them to put armies in the field that the Turks, Persians, Indians, Chinese and Japanese could not match.

Western governments’ revenue was bumped up again in the early 20th century, to 30 to 50 percent of national income.  This made possible the total wars of the early 20th century.  But it also gave governments enough money to pay for universal public education, old age pensions, public health and the other services of the welfare state.

This was only tolerable because the Western nations had grown rich enough that their people could give up a big fraction of their incomes to government and still enjoy a high material standard of living.

It would not have been possible in, say, France in the time of Louis XIV.  The taxes he levied to finance his wars reduced the peasantry to misery and, in some cases, starvation (because the nobles enjoyed most of the national income, but paid no taxes).

The same conditions may exist in poor African countries today.  But in rich Western countries, it is technologically and economically feasible to raise taxes revenues to 50 percent of national income, which is necessary for PIketty’s program.

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Piketty on the sacredness of property rights

May 27, 2020

When English settlers first dealt with American Indians, there was a fundamental misunderstanding of the nature of property rights.

The Indians had no idea of buying the exclusive right to use a tract of land, keep everybody else off it and sell the land to someone else.

Thomas Piketty pointed out in his new book, Capital and Ideology, that, in fact, this was a fairly new idea even for the English and other Europeans.

The idea of absolute property rights did not exist in the European middle ages. Someone might have a hereditary right to grow crops on a certain tract of land, a second person the right to 10 percent of all crops grown on the land, a third person the right to grind grain produced on the land for a fixed fee, and so on.

Furthermore the right to land use was not so much bought and sold as inherited.

Medieval France was what Piketty called a “ternary” society—a society in which political power and property ownership were divided between a hereditary noble class who “fought for all” and a priestly class who “prayed for all,” leaving very little for a lower class who “worked for all.”

The “ternary” system existed in the Islamic world, India and many other parts of the world, and it casts its shadow over the present world.  Saudi Arabia and the Gulf states (mostly Sunni) are ruled by hereditary monarchs while Iran (mostly Shiite) is ruled by clerics.  In India, the descendants of Brahmins (priests) and Kshatriyas (warriors) are richer and more influential than the Vaishyas (farmers, craftsmen and traders) and Shudras (laborers).

In Europe, uniquely, priests were celibate.  They could not found dynasties.  This mean that the Roman Catholic institutions had to be corporations.  They had to have a continuing existence that was independent of who was in charge.  It’s not accidental that business corporations originated in Europe.

The French Revolution overthrew hereditary property rights and established what Piketty called “proprietarianism” or “the ownership society”—the idea that property rights were sacred, provided that the property was acquired through legitimate purchase.

The accepted story in France is that the revolutionaries divided up the aristocrats’ estates among the peasants and turned France into a nation of small landowners.  In fact, according to Piketty, the revolutionaries made arbitrary distinctions between land that was owned through hereditary privilege and land acquired through voluntary contract, and, in many areas,  property ownership remained almost as concentrated as before.

Piketty wrote that the revolution was one of history’s “switch points.”  He thinks it could have been more radically egalitarian than it was.

In fact, concentration of wealth in France at the beginning of the 20th century was even greater than at the time of the French Revolution.

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Piketty’s new book on economic inequality

May 26, 2020

The French economist Thomas Piketty made a big splash with Capital in the 21st Century (published 2013, translated into English 2014).  He showed why, all other things being equal, the rich will get richer and the rest of us will get less.

In different countries in different historical periods, the rate of return on income-producing property exceeded the rate of economic growth.  This was true whether the income-producing property was real estate, government bonds, corporate stocks or something else.

What this meant was that, in the absence of revolution, war or something else that wiped out the value of their assets, the rich would get richer and everybody else would be left behind.

Piketty’s new book, CAPITAL AND IDEOLOGY  (published 2019, translated 2020), is more ambitious and complicated.  He thinks it is an even better book that its predecessor and I agree.  It is a great work.

He looked at all the forms that economic inequality has taken in the past few centuries and all the different ways that inequality has been rationalized.  While his earlier book was based mainly on data from France, Great Britain and the United States, the new book tries to be global in scope.

He said it is important to understand not only the forms of economic inequality, but the reasons why people accept them.

His book covers several kinds of “inequality regimes”:

  • “Ternary” societies in which most wealth is controlled by hereditary kings and aristocrats and an established church or religious institution.
  • “Ownership” societies in which property ownership is regarded as a sacred right, superseding everything else.
  • Slave and colonial societies.
  • “Social democratic” societies, which limit the rights of property owners.
  • The hyper-capitalism of today, which is a backlash against social democracy and Communism.

The degree of inequality in any nation or society is not the result of impersonal economic law, he wrote; it is the result of choices that could have been different.  History does not consist of class struggles; it consists of a struggle of ideas and a struggle for justice.

To understand inequality, he wrote, it is necessary to understand the reasons for choices at various “switch points” of history—the French Revolution, the British constitutional crisis of 1911, privatization in Russia after the fall of Communism.

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The irrelevance of old-time Keynesianism

May 12, 2020

John Maynard Keynes was one of the great economists of the 20th century,  Maybe he was the greatest.  He is the father of the idea of economic stimulus.

His insight was that, in a capitalist free-enterprise economy, economic growth depends on a growing mass consumer market, which depends on masses of the public having money in their pockets.

So when the economy stalls and people are out of work, the best way to stimulate the economy is to give the people more purchasing power.

J.M. Keynes

Once they started buying things, businesses would hire more people, and there would be a multiplier effect that spread through the entire economy.

The important thing, according to Keynes, was to get people back to work and earning money—no matter how.  He famously said that hiring workers to dig holes and fill them up again would be better than nothing.

In the pandemic lockdown, governments are doing exactly the opposite of what Keynes recommended.  The government is actively trying to prevent millions of Americans from going to work.  By staying at home, they help limit the spread of the virus.

Congress recently voted an economic bailout that was called a “stimulus” bill.   But economic stimulus was not, and is not, needed.  What is needed is an economic sedative, combined with an economic life support system.

We do not need employment for the sake of employment.  We need to have virtually necessary jobs get done, less necessary jobs put on hold and useless jobs not to be done at all.  We Americans as a nation have not yet figured out how to do this.

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The economic consequences of the lockdown (3)

May 9, 2020

The best thing I’ve read so far on this topic is an interview of Thomas Ferguson by Paul Jay.

They’re both interesting characters. Ferguson is a professor emeritus of political scientist and the best U.S. expert on money in politics.

Paul Jay

Paul Jay, along with Sharmini Perez, is a co-founder of The Real News Network, an alternative web-based news site.  Last summer they left or were ejected from the organization for reasons unknown to the public.  Jay has started a new podcast called theAnalysis.news.

In the interview, Ferguson made the point that, in the recent bailout, Congress chose to bail out big businesses with the expectation that this would enable them to hire laid-off and idled workers.

Instead, he said, most of the CEOs decided to keep the money and let working people fend for themselves.  Ferguson said it would have been far better to provide individual relief.  They would have spent money and helped to revive the economy when the lockdown ended.

Congress also should have provided aid to cash-strapped state, county and municipal governments, he said.  One economic effect of the lockdown has been to choke off tax revenue they need to provide essential services.  The federal government, unlike the states, has the power to create money and isn’t limited, as many states are, by constitutions requiring balanced budgets.

LINKS

Big Business Takes Cash As Workers Laid Off, States and Cities Go Bust, an interview of Thomas Ferguson by Paul Jay for theAnalysis.news.  A bit long, but comprehensive and highly recommended.

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The economic consequences of the lockdown (2)

May 8, 2020

Click to enlarge. Via Ian Welsh

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Click to enlarge. Via Calculated Risk

Looking at these numbers, I can understand why some U.S. governors are eager to end the lockdown and get people back to work.  But the economic system isn’t something you can turn on and off like an appliance.  The impact of business losses, wage losses and job losses won’t be wiped out by a re-opening,

There weren’t any good choices in dealing with the coronavirus pandemic, even if you decide to consider nothing except dollars and cents.  Sick, dying and scared people are bad for business, whether you have a government-ordered lockdown or not.

Also, the U.S. economy was fragile to begin with.  We U.S. citizens never fully recovered from the previous recession.  We were due for another one anyway.

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The economic consequences of the lockdown

May 7, 2020

Adam Tooze is one of the world’s outstanding economic historians.  He is the author of The Deluge: The Great War, America and the Remaking of Global Order, 1916-1931; The Wages of Destruction: the Making and Breaking of the Nazi Economyand Crashed: How a Decade of Financial Crises Changed the World.

In the interview above, he talks about the impact of the coronavirus on the global economy.  The actual interview begins about four minutes in.

He points out that ending the lockdowns won’t automatically restart the economy.  Ford and General Motors closed their plants without any lockdown order.

Labor unions that represented their workers protested working under unsafe conditions.  Suppliers were unable to provide necessary components on schedule.  And the automobile sales collapsed.  So what was the point of staying open?

Tooze also says that the talk of being in a war economy is wrong.  In a war economy, the objective is to mobilize everyone to produce war materials.  In a pandemic economy, the objective is to limit production to what is absolutely necessary. People should be paid to stay home to help limit the spread of the virus.

He doesn’t predict a second Great Depression, but neither does he rule it out.

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The coronavirus pandemic in perspective

May 4, 2020

Over the weekend, I read an insightful five-part on-line series of articles on the coronavirus pandemic by Prof. Maximilian C. Forte of Concordia University in Montreal, Quebec, on his Zero Anthropology Project web site.

He doesn’t think the pandemic is a temporary emergency that will soon blow over.  He thinks it is a major turning point in history.  So do I.  Of course we both could be wrong, but I don’t think we are.

Here is an excerpt from the first article.  Links to the full five-part series are below.

Max C. Forte

The plain fact of the matter is that until a vaccine is developed, and everyone on Earth has been vaccinated, the struggle against the virus will not truly be won.

Anything less than that is merely a temporary, selective and fragmentary means of approximating an end—something that is better than nothing, with each decrease in lives lost being something that is heroically gained by front line workers risking their own health.

Otherwise, anything short of total vaccination boils down to a way of indirectly apportioning the virus to some, while managing it for everyone else.

Unnecessary deaths will not be rendered any less unnecessary, they will simply be confined and reduced in number, for a while.  In other words, without vaccination it is absolutely inevitable that what comes next will be worse.

The main issue now for public officials appears to be how to ensure that what comes next will not be as bad as it could be—making worse less worse.

To be clear, the most recent estimates are that a vaccine for COVID-19, which has not yet been invented, would—to be optimistic—become available within the next year to 18 months.

Not only has a vaccine never been invented for any prior coronavirus (with previous research prematurely shut down), even discovering a vaccine before five years would be a record-breaking pace when compared with other vaccines.

Experts think it would be unprecedented.  Plus the coronavirus is apparently mutating profusely, which complicates efforts to develop a vaccine.

Without a vaccine or effective therapy, the assessment from Harvard University’s T.H. Chan School of Public Health is that “prolonged or intermittent social distancing may be necessary into 2022,” and that there could be a resurgence of the outbreak as late as 2024.

Instead, from the UK to the US and Quebec, an understanding that is prevalent among officials involves foggy, even dangerous ideas about “herd immunity,” which assumes—with little conclusive evidence and despite some contrary evidence—that (a) immunity against COVID-19 can be acquired and (b) that the immunity is permanent or long-term.

To make matters worse, some researchers think a vaccine for COVID-19 may never be found and that the virus is likely not to be containable.

No matter which decisions governments take—whether to continue mass confinement and a closure of most of the economy, or to gradually reopen economic activity (though it was never fully closed) and loosen restrictions—it will seem like the wrong decision will have been taken.

It’s not even a matter of choice between the “economy” versus “health.”  Without health, there can be no economy.  Without production, distribution, and consumption, health may be undermined.

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Off-and-on lockdowns and a pandemic yo-yo

April 13, 2020

Tyler Cowen, an economics professor at George Mason University, expects off-and-on lockdowns and no quick end to the coronavirus pandemic.  Here’s what he had to say—

I don’t view “optimal length of shutdown” arguments compelling, rather it is about how much pain the political process can stand. 

I expect partial reopenings by mid-May, sometimes driven by governors in the healthier states, even if that is sub-optimal for the nation as a whole. 

Besides you can’t have all the banks insolvent because of missed mortgage payments

But R0 won’t stay below 1 for long, even if it gets there at all. 

We will then have to shut down again within two months, but will then reopen again a bit after that. 

At each step along the way, we will self-deceive rather than confront the level of pain involved with our choices. 

We may lose a coherent national policy on the shutdown issue altogether, not that we have one now. 

The pandemic yo-yo will hold. 

At some point antivirals or antibodies will kick in (read Scott Gottlieb), or here: “There are perhaps 4-6 drugs that could be available by Fall and have robust enough treatment effect to impact risk of another epidemic or large outbreaks after current wave passes. We should be placing policy bets on these likeliest opportunities.” 

We will then continue the rinse and repeat of the yo-yo, but with the new drugs and treatments on-line with a death rate at maybe half current levels and typical hospital stays at three days rather than ten. 

It will seem more manageable, but how eager will consumers be to resume their old habits? 

Eventually a vaccine will be found, but getting it to everyone will be slower than expected. 

The lingering uncertainty and “value of waiting,” due to the risk of second and third waves, will badly damage economies along the way.

Source: Marginal REVOLUTION

I think he’s right.  But what does the need for this trade-off say about our economic system?

Here’s a quote from In These Times.

What would the federal government do to best mitigate the devastation that this pandemic will visit upon human beings?  It would, first of all, provide free healthcare to everyone. ..Imagine instead, if you had an entirely different goal: protecting capital.  What would you do then?  Well, you would prioritize the health of corporate balance sheets, rather than human bodies.  You would keep the healthcare industry, now booming, in private hands.

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The new lockdown-induced poverty

April 5, 2020

If you deny people the right to provide for themselves, you have a responsibility to provide for them.

Lockdowns are preventing millions from going out and earning a living.  The fact that their jobs may be deemed nonessential doesn’t lessen their need to pay for food, rent and utilities.  There are more serious problems in the world than boredom.

Click to enlarge

The U.S. government will provide some minimal relief—one-time-only checks to be mailed to households, extension of unemployment compensation benefits, etc.

But it doesn’t appear as if it will be enough to offset the coming lockdown-triggered recession.  I think a recession would have happened even without a pandemic, but the lockdown will bring it sooner and make it worse.

Deaths and infections from the coronavirus are doubling every few days.  The lockdown is necessary.  A lot of people are going to die in U.S. states who would have lived if their governors had ordered lockdowns sooner.

At the same time, I can understand why those governors hesitated.  The governors who’ve waited longest are, in general, the governors of the poorest states.

Usually, when huge numbers of people suddenly lose their jobs and are plunged into poverty, they take to the streets to protest and strike.

But under lockdown, it’s illegal to take to the streets.  Repressive governments suppress uprisings by, among other things, ordering curfews.  Because of the pandemic, these curfews are already in place.

If a government orders a lockdown, it has a duty to make it possible for everyone, no matter who, to observe the lockdown without fear of hunger or homelessness.

Leaders of some countries realize this.  Others don’t.  The ones that don’t can expect an explosion of mass defiance sooner or later.

LINKS

Somebody’s Screwing You and It Ain’t China by Caitlin Johnstone.

Location Data Says It All: Staying at Home During Coronavirus Is a Luxury by Jennifer Valention-DeVries, Denise Lu and Gabriel T.X. Dane for the New York Times.

Jobs Aren’t Being Destroyed This Fast Elsewhere – Why Is That? by Emmanuel Saez and Gabriel Zucman for the New York Times.

New Inequalities and People-to-People Social Protection by Nora Lustig and Nancy Birdsall for Vox & CEPR Policy Portal.

Services Sector Falls Off Cliff: First Data Points from the Eurozone Where Lockdowns Started Earlier by Wolf Richter for Wolf Street.

‘I just want to go home’: the desperate millions hit by Modi’s brutal lockdown by Hannah Ellis-Peterson and Shaikh Azizur Rahman for The Guardian.

The progressives surrender to the plutocracy 2

March 30, 2020

Is universal basic income the answer?

March 27, 2020

Universal Basic Income as it’s usually presented is a solution to an economic problem that doesn’t yet exist.

The imaginary problem is what happens after automation and computer algorithms make a majority of American workers unnecessary and unemployable.

The real problem is that our present economic system rewards useless and harmful work more than it does necessary work and even allows much necessary work to go undone.

There are a great many unmet needs in society and a great many unemployed people available to meet them.  It ought to be simple to match them up, but it isn’t, not within our present economic and political setup.

The coronavirus pandemic is a great revealer of who’s necessary in our society and who isn’t.  Grocery store clerks risk their lives so that I can have food in my pantry.  Yet as a class they’re on the bottom rungs in pay and social status.

They should get the equivalent of combat pay and maybe a military-type medal in awards ceremonies after the crisis is over.

I do think a UBI could be useful in the present emergency.

Send a $1,000 check every month to every man, woman and child who are willing to pledge to socially isolate themselves.

Send $2,000 or $3,000 every month to those who are doing the necessary work to keep us alive and well—health care workers and emergency responders, farmers and agricultural workers, truck drivers, grocery and drug store clerks, public utility workers, etc.  Shut down everything that’s not necessary for life and health.

[Added Later.  My idea is that the income grants would be supplementary to what people already are earning or drawing from savings.  The specific amounts are just to illustrate the concept and could be more; I don’t think they could be much less.]

The problem is – the USA may not have the capacity to do something so seemingly simple.  I read somewhere that it may take months before the government can mail physical checks in its one-time-only economic stimulus plan.

Laissez-faire conservatives used to say that the only thing government could do competently is mail out checks.  Evidently it can’t even do that nowadays.

The best practical thing that could be done immediately is for the federal government to fully fund state unemployment insurance programs and Medicaid programs up to a reasonably generous cap.

For the long run, the country needs is a full employment program more than it needs a UBI.

See to it that every needful thing is done to prepare for pandemic and weather-related catastrophe.  See to it that every practical thing is done to mitigate greenhouse gas emissions.  See to it that every needful thing is done to safeguard the lives and health of children, the elderly and the sick.

Pay all the people who do the needful work a decent wage.

If all these things were done, UBI would become an unimportant side issue.  Whether these things are possible within our current economic and political structure is a question I don’t have a good answer for.

LINK

The False Promise of Universal Basic Income by Alyssa Battistoni for Dissent Magazine.  [Hat tip to Steve B.]

Senate prepares big giveaway to big business

March 23, 2020

The trillion-dollar coronavirus bailout package drawn up by Senate Republicans is a giveaway to big business that does little to avert the coming economic depression.

The main features are:

  • Treasury Secretary Steve Mnuchin gets to dole out $500 billion to corporations without revealing who got what for six months.
  • Businesses are not required to keep workers on their payrolls.
  • There are no meaningful oversight provisions to prevent waste, fraud and abuse.

Democrats won a minor concession—to extend unemployment benefits for four months instead of just three.  This is trivial.  So are the relief checks being mailed out—$3,000 checks for a family of four.

Now it’s true that essential businesses can’t be allowed to fail because of a crisis not of their own making.  I criticize Walmart’s business practices, but a lot of people depend on Walmart for the necessities of life.

 It’s not possible to shut down economic activity on a large scale and not risk another economic crash.

On the other hand, Walmart shouldn’t be allowed to use government handouts to crush and buy up individually-owned businesses that compete with us.

I admit I don’t have a complete idea of what to do.  One possibility is for the federal government to fund unemployment insurance and apply it to the self-employed and gig workers as well as workers already in the system.  Another would be to provide Medicare benefits to coronavirus patients—better still, Medicare for all.

If you’re an American, I recommend you follow the Naked Capitalism blog’s headline service to keep in touch with breaking developments.

Later.  The giveaway bill was stopped—for now.  Of course Senate Majority Leader Mitch McConnell is accusing the Democrats of indifference to Americans’ economic plight.

LINKS

Stop the Coronavirus Corporate Coup by Matt Stoller for BIG.

Bailout Shenanigans: Making 2008 Look Good? by Yves Smith for Naked Capitalism.

Protect People, Not Financial Ledgers by Ian Welsh.

How Democrats Can Fix Their COVID Response by Brian Beutler for Crooked Media.

At Least Five U.S. Senators, Briefed on Coronavirus, Sold Stocks Before Market Crash by Democracy Now!

The fading American dream

February 21, 2020

A team of researchers at Stanford University, led by an economist named Raj Chetty, took advantage of newly accessible data from the Internal Revenue Service and studied the ebb and flow of American wealth and income across the generations.

They concluded that 90 percent of children born in 1940 went on to earn more than their parents, but only 50 percent of children born in the 1980s did so.

That’s not because the U.S. economy stopped growing, although growth did slow, they wrote.   It is because more and more gains were captured by the ultra-rich.

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The true cost of living

February 20, 2020

An economist named Oren Cass has written an argument for something I’ve long suspected—that inflation is not measured correctly, and that statistics that show average income keeping up with inflation are bogus.

The chart above shows that a median male wage-earner in 1985 could pay for four basic family needs—housing, medical insurance, transportation and education—in 30 weeks of earnings.  By 2018, those expenses would take up 53 weeks of that family’s earnings.

Which, as Cass pointed out, is a problem, since there are only 52 weeks in a year.

But most published economic statistics indicate that typical workers’ inflation-adjusted earnings are increasing.

Case said that is because of how inflation is now calculated.

For example, he said, inflation-adjusted data says that the price of automobiles has not increased since the 1990s.   Obviously that isn’t true.  But the argument is that today’s cars have so many features that cards didn’t have 15 or 20 years ago that the higher price isn’t inflation—it’s the cost of quality.

It’s true that the 2018 Grand Caravan (price $26,300) has many features that the 1996 Grand Caravan ($17,900) did not have.  The problem, as Cass pointed out, is that if you don’t have that extra $8,400, you can’t go back to 1996 and buy the older model.

The same problem exists in housing and medical insurance.

It’s true that most families have two income earners, not just one.  But there was a time when one American breadwinner could bring in enough to support a family.

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Where the world gets its stuff

December 9, 2019

Click to enlarge.

Most countries of the world used to get more stuff from the United States than they did from China.  But now it’s the other way around.  Now most countries buy more stuff from China.

This map, which has been making the rounds of the Internet, appeared in the Financial Times—behind a paywall, unfortunately for me, because I don’t subscribe to the FT.

Many economists think the turning point was in 2001 when China joined the World Trade Organization, which included the world’s most advanced industrial nations.

China became entitled to “most favored nation” status, which means no trade barrier against a WTO member could be higher than a barrier against any other member.

I say China’s gains had to do with the effectiveness of China’s industrial policy, and the lack of any U.S. industrial policy.

China told foreign nations that if they wish to sell goods in China, they would have to locate manufacturing facilities in China.  Furthermore they would have to share their technological know-how with Chinese partners.  Then the Chinese would take their new knowledge, improve on it, and use it o compete with their former partners.

The U.S. government, under Bill Clinton, George W. Bush and Barack Obama, was content to let this happen.  American consumers benefitted from cheap imports, and stockholders in American companies shared the profits of offshoring.

Meanwhile the United States dissipated its wealth in waging pointless and inconclusive foreign wars, while China used its wealth to make itself stronger.

Unlike his predecessors, Donald Trump has correctly identified terms of trade with China as a problem.  He deserved credit for putting this issue on the table.

But his scattershot tariffs on Chinese goods do not solve the problem.  All they do is to create a market for goods from other low-wage countries.

The Chinese government successfully executed a long-range plan to build up its industrial strength, using subsidies but also building up the infrastructure and know-how of the nation as a whole.

The U.S. government has no plan.  It has been content to stand aside and allow financiers to hollow out U.S. manufacturing.  Tariffs aren’t an answer unless they are part of an overall strategy to rebuild.

The Chinese aren’t to blame for our problems.  Our leaders are to blame for our problems.  We are to blame for our leaders.

LINKS

The New China Syndrome: American business meets its new master by Barry C. Lynn for Harper’s magazine.

How Bill Clinton and American financiers armed China by Matt Stoller for BIG.

China Revolutionizes World Trade While Washington Dozes by Geoffrey Aronson for The American Conservative.

A history of interest rates through the ages

December 2, 2019

Double click to enlarge

What this chart shows is how government debt became a source of income, like ownership of land, and then how governments in recent years tried to use interest rates as a way to guide the economy.

The theory is that low interest rates generate cheap money, which stimulates the economy, but also leads to inflation, while high interest rates do the reverse.

The problem with the theory is that we in the USA and UK have been in a period of unprecedentedly low interest rates for years, but that this has neither stimulated productive investment nor led to runaway inflation.

Something’s wrong that isn’t being fixed by tweaking interest rates and the money supply.

LINK

The History of Interest Rates Over 670 Years by Nicolas LePan for Visual Capitalist.

The price of anything and the value of everything

November 23, 2019

Another piece of on-line fiction that I like.

The Cambist and Lord Iron: a Fairy Tale of Economics by Daniel Abraham for Lightspeed magazine

Abraham is co-holder of the pen name James S.A. Corey and co-author of The Expanse science fiction series,

Piketty on the merchant right and Brahmin left

September 24, 2019

The French economist Thomas PIketty is famous for his best-selling book, Capital in the 21st Century, which explained why inequality constantly increases.

Thomas Piketty

The explanation is the formula r>g.  It means that the rate of return on assets over time exceeds the rate of economic growth.  That means the wealthy get an ever-larger share of the economic pie until and unless something happens to destroy the value of their assets—war, revolution or a financial crash.

Piketty has just published a sequel, Capital and Ideology. in France.  It will be published in English translation next March.  Reviewers say it takes a more global view than the first book and advances more radical ideas for reducing inequality.

The part that’s getting the most attention is Piketty’s notion that politics in the USA, UK and France are polarized between a “Brahmin left,” representing the highly-educated, and a “merchant right,” representing great wealth—two elites who have more in common with each other than with the majority of working people..

Initially, left-wing parties represented poorly educated wage-earners, while right parties represented owners of capital and the professional classes.  Over time, left-wing parties helped children of wage-earners advance into the educated middle class, and their children supposedly became the liberal elites, whom Piketty calls the “Brahmin left.”

The Brahmin left occupy high positions in organizations—government, corporate, educational, “non-profit”— based on their educational credentials.  Their counterparts, the merchant right, have power based on their ownership of businesses and financial assets.

Both believe their power and position is based on merit.  Both embrace global competitiveness, immigration and dismantling of trade protections and the social safety net, which leave working people with lower wages and greater insecurity..

This has produced a nationalist backlash.  Americans elected Donald Trump as President, the British voted to exit the European Common Market and Marine le Pen’s National Rally has a substantial following among French voters.  What they have in common is opposition to globalization and immigration.

The nationalist backlash is not yet a serious threat to the financial elite.  But it has driven immigrants and racial minorities into the left-wing parties in all three countries.  By championing minority rights, the Brahmin left can convince themselves they are still on the side of the underdog.

Piketty thinks the “Brahmin left” and “merchant right” may merge, and true workers’ parties may emerge in opposition to them, as the original British Labor Party emerged in opposition to the Conservative and Liberal parties in the early 1900s.

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More about the Brahmin left and merchant right

September 24, 2019

Democrats in the U.S., the Labor Party in Britain and left-wing parties in France no longer primarily represent the interests of wage earners, according to Thomas Piketty, the famous French economist.

Instead they represent an educated elite, which he calls the Brahmin left, while the conservative parties represent a financial elite, which he calls the merchant right.

The educated elite are not an intellectual elite.  Having advanced college degrees don’t make you an intellectual any more than owning stocks and bonds makes you an entrepreneur.

I agree that there is less conflict of interest between the educated elite and the financial elite than there is between the two elites and the majority of wage-earners.

In a typical Fortune 500 corporation, the CEO, the board of directors and the institutional stockholders would be the merchant right.

Salaried middle management, the highly-paid consultants and most especially the human resources department would be the Brahmin left.  Their income would not come from financial assets, but from their rank in an organization, for which they would qualify by means of educational credentials.

The human resources department of an organization usually determines the organizational culture.  Typically HR people are big on diversity training and being LGBTQ allies because these things do not affect the wealth of stockholders or the power of top management.

American non-profit organizations such as universities and hospitals and also government agencies are adopting a  corporate model.

This means a well-paid top-heavy administrative overhead along with lower pay, higher demands and less security for those who do actual work.   Adjunct teachers, hospital nurses and letter carriers are treated just the same as factory workers.

Just to be clear, I’m in favor of sticking up for the rights of minorities, women and other groups that are targets of prejudice.  What’s wrong is using this as cover for lower wages, longer hours, expansion of contingent work and a fight against labor unions.

Such are my observations about American institutional life.  I don’t know how true these observations are true of institutions in Britain and France, or whether they are true at all, but I wouldn’t be surprised if they were.

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The hour of maximum danger for U.S. democracy

August 16, 2019

The hour of maximum danger for U.S. democracy, or what will be left of it, will be when other nations rebel against the power of the U.S. dollar.   That will be when the United States is most in danger of a would-be Hitler or Mussolini.

The power of the U.S. dollar is what gives Washington the means to be a great economic power despite huge trade deficits and a hollowing out of American manufacturing.  It provides the means to maintain the world’s most expensive military.

It gives Washington the means to wage economic warfare against nations such as Iran, Venezuela and Russia, and to force poor nations to sacrifice the well-being of their people to foreign creditors.

But the power of the U.S. dollar is a legacy of a past when the U.S. was the world’s leading industrial nation, leading creditor nation and leading exporting nation.   Now the dominance of the dollar rests on the fact no nation’s leaders are both brave enough, and lead a nation that is strong enough, to defy the dollar system.

Benjamin Carter Hett wrote in The Death of Democracy that many European nations turned to fascist and right-wing dictatorships as a result of military defeat, which discredited the established governments, and strong Communist and revolutionary movements, which caused the middle classes to look for protectors.

German democracy survived for a time, but was pushed over the brink by onset of the Great Depression, which the established government was unable to cope with.

The conditions will exist in the United States following the crash of the U.S. dollar.  The U.S. government will no longer be able to raise money by borrowing in foreign markets.  Lack of borrowing power will mean it no longer will be able to pay for a world-wide network of military bases.

At the same time, the military will have to pay more for imported electronics components, imported oil and other supplies, including uniforms.  The fall in value of the U.S. dollar will make U.S. manufacturing costs cheaper in relation other currencies, but it won’t be able to fix the lack of manufacturing capacity.  And it will make investment in new manufacturing capacity more expensive.

The sudden collapse of U.S. military power without a military defeat would open the way to a “stab in the back” myth, comparable to the one about Germany’s defeat in World War One.

The buying power of U.S. workers will fall and the prices of merchandise, so much of which is directly or indirectly dependent on foreign supply chains, will fall.  There will be a crash in the U.S. financial markets and real estate markets.  Many workers will strike.  Many citizens will turn to the streets in protest—probably very few that are explicitly Communist, but who knows?

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Elizabeth Warren on the next recession

July 23, 2019

Elizabeth Warren wrote a good article about how another recession is on the way, and it will be as bad as the previous one because U.S. policymakers didn’t learn the lessons of 2008.

The economic cycle of growth and recession seems to be inherent in a capitalist economy that uses financial markets.  There are many theories as to why this should be so.

Elizabeth Warren

But the 2008 recession was much worse than the ones that came before because the economic expansion was based on debt that could not be repaid.  I give myself credit for foreseeing this.

My foresight, however, was of little value because I could not foresee when the crash would come.   When it happened, it was as big a surprise to me as it was to everybody else I knew.

The problem of debt overhang has not been fixed.  Nobody has really tried—neither Presidents Obama and Trump, the Democratic and Republican leaders in Congress or the supposedly nonpartisan Federal Reserve Board.

Instead public policy has been concentrating on propping up the financial markets, mainly by holding down interest rates.  People with savings are forced into the risky financial markets if they want to keep their savings from being eroded by inflation.

Everything that made the 2008 recession so bad has been left in place

Now there is an inverted yield curve—that is, interest rates on short-term debt are higher than for long-term debt.

Usually rates on long-term debt are higher because of greater risk.  An invested yield curve is almost always a sign that investors think a recession is coming soon.

We need public policy of debt forgiveness for individuals, limits on corporate debt to what’s repayable and investment in the real economy, especially manufacturing.

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Capitalism without a working class

July 9, 2019

Karl Marx and other socialists believed that capitalism depended on exploitation of workers, and that workers could liberate themselves by taking control of the means of production.

But the driving force in capitalism today is to eliminate workers as much as possible.  Manufacturing jobs are being eliminated through automation.  Now service jobs are being eliminated through use of artificial intelligence.

The end result would be a capitalism without workers—just investment in capital goods such as robots and AIs.

I don’t say this would ever happen completely, and it wouldn’t happen any time soon, but this is the direction we’re heading.

Treating people as unnecessary, and telling them that they are unnecessary, is wrong and very dangerous.

Almost everyone has it in them to do something that is useful and beneficial to others.  An economic system should be set up to honor and encourage this.  Investing in machines rather than investing in people is a choice, not a law of nature.

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