The bipartisan, dysfunctional US economic policy

The USA has had a bipartisan economic policy for 20 or 30 years now.  It’s what some people call “neoliberalism.”

The basic idea is that prosperity depends on rich people investing in the economy, so that the key to prosperity is to allow rich people to accumulate money.

It is reducing upper-bracket tax rates, reducing government regulation and reducing government spending except on the military and police.

It is allowing manufacturing companies to become competitive by shifting production to low-wage countries, holding prices down by allowing cheap imports, and shrinking the social safety net to encourage people to take low-wage jobs.

It is giving financial institutions free rein to make risky investments, because free markets are important, and bailing them out when they fail, because large-scale financial failure would destabilize the economy.

It is not enforcing the antitrust laws because business consolidation supposedly promotes economic efficiency.

It is now than then enacting some benefit for working people, but never anything that threatens the incomes of the wealthy or the power of big corporations.

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The North American Free Trade Agreement is an example of neoliberal bipartisanship.  The idea for NAFTA originated in the Ronald Reagan administration, the George H.W. Bush administration negotiated it, but it took the Bill Clinton administration to get it approved.

NAFTA shifted the balance of power against organized labor.  Employers could credibly threaten to pick up and relocate in Mexico if workers didn’t give them what they wanted.

Another joker in NAFTA was the investor-state dispute resolution provision.  It gave foreign companies the right to ask for damages if a local, state or national government passed some law or regulation that reduced their profits.  The theory was that this was a trade barrier, the same as a tariff.  Investor-state disputes are decided not by courts, but by arbitrators.

The investor-state dispute resolution provision was a main reason why Congress declined to endorse President Obama’s proposed Trans-Pacific Partnership Agreement.  President Trump deserves credit for dropping the TPP.

The new U.S.-Canada-Mexico Agreement contains an investor-state dispute resolution provision.  However, unlike NAFTA,  it also contains labor and environmental standards and not just protections for companies.  If these turn out to be meaningful, President Trump and the present Congress will deserve a certain amount of credit.

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Bill Clinton was a good friend of the banking industry.  Early in his administration, Congress passed the Siegle-Neal Act, which eliminated restrictions on interstate banking.  Bank mergers followed in rapid succession.

He twice reappointed Alan Greenspan, advocate of banking deregulation, as chairman of the Federal Reserve Board.  He proposed and got repeal of the Glass-Steagall Act, which separated commercial banks, whose deposits were insured by the federal government, from investment banks, whose deposits could be risked in potentially high-profit investments.

His administration explicitly forbid regulation of derivatives, which are investments not backed by any tangible asset—essentially a form of gambling on the economy.  All these decisions set the stage for the Great Recession of 2007-2009.

How inequality is growing

This chart, from an article in the New York Times, shows the growth of inequality in the past 37 years.

The income growth that took place in 1980 benefited everyone, but primarily those at the bottom of the income scale.   That didn’t mean the rich became any less rich.  In fact, their gains measured in dollars rather than as a percentage probably were greater.   But a rising tide lifted all boats.

By 2004, things were just the opposition.  Most of the income growth that took place in that year was concentrated among the top income earners.

There is an interactive chart in the original article that shows the hockey stick pattern began in the 1980s, but really shot up beginning in the 2000s.

My theory is that the driving forces were (1) the Carter-Reagan era upper-bracket tax cuts, (2) the deregulation of the financial industry during the Clinton administration and (3) the refusal of the Obama-Holder administration to prosecute officers of financial firms “too big to fail.”

Deregulation created new ways you could to get rich in ways that didn’t create value for others.   Refusal to prosecute meant that you could get  rich dishonestly and keep what you had.

The Trump administration will not change this.   It is making things worse by advocating for eliminating what little financial regulation there is, and by granting tax relief that primarily benefits the upper brackets.

LINK

Our Broken Economy, In One Simple Chart, by David Leonhardt for the New York Times.

How Did They Get So Rich? by Matt Breunig for Jacobin.  [Added 8/10/2017]  Breunig shows that the great increase in the income of the wealthy came from ownership of capital.  They became so much richer because they were already rich.

Trump as a possible one-term President

I think there is a strong possibility that Donald Trump will be a one-term President—provided there are still free and fair elections in 2020.

I think that for the same reasons I thought Hillary Clinton might be a one-term President.  I believe there will be another recession, as serious as the last, during the next four years, and I think Trump will be even less able to cope with it than Clinton.

He campaigned as a populist champion of the common people against the elite.  But he spent his life among the elite, and his business history shows that he is only tough with those with less wealth and power than he has.

Trump kicks downward.  He  doesn’t punch upward.

His transition team is drawn from K street lobbyists.   His preference is to appoint from the private sector, not from government or academia.

His likely choice for Secretary of the Treasury is Steven Mnuchin, his campaign finance chairman.  Mnuchin is CEO of an investment firm called Dune Capital Management, but, according to POLITICO, he worked 17 years for Goldman Sachs, whose subprime mortgage manipulations were a big contributor to the last recession.

The problem is that, in a recession, what makes sense for a business owner doesn’t make sense for a President.  A business owner’s instinct in tough times is to cut back.  That is rational behavior for the individual, but cutting back means less money in circulation, less economic activity and a worse recession.

Goodhart’s law: on not going by the numbers

Charles Goodhart was an adviser to the Bank of England in 1975.  The advice he gave then has been summarized as Goodhart’s law, which has been summarized as follows:

All economic models break down when used for policy.

Charles Goodhart

His version

Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.’

Another short version

When a measure becomes a target, it ceases to be a good measure.

Defense Secretary Robert McNamara demanded a graph of numbers that would show whether or not the United States was winning in Vietnam.  Sure enough, the military responded with “body count” figures that showed the Viet Cong were all being killed many times over, but the United States lost the war.

I thought of Goodhart’s Law in connection with President Bush’s No Child Left Behind and President Obama’s Race to the Top programs.  Teachers and schools are judged on the basis of test results.  So the incentive is for teachers to improve, not learning, but the numbers by which learning supposedly is measured.  Dishonest teachers cheat.  Honest teachers have to take time away from teaching the material to teaching how to pass the test.

The aim is evidence-based policy.  The result is policy-based evidence.

As Cory Doctorow explained on Boing Boing:

Once you start measuring GDP as a way of gauging social welfare, people will start to figure out ways to make GDP go up without improving social welfare (say, by swapping dirty financial derivatives).  Once Google starts measuring inbound links as a way of evaluating the importance of web-pages, people will figure out how to increase the inbound links to unimportant pages (splogging, blogspam).  And once you measure fat or calorie content as a proxy for the healthfulness of food, manufacturers will figure out how to decrease fat and calories without making the food more healthful (reducing fat by adding sugar, reducing calories by adding poisonous artificial sweeteners).

The prime example of Goodhart’s Law in action is Soviet economic planning.  Factories were evaluated on the basis of measured output, irrespective of the usefulness of what was produced.  Machinery factories were actually judged on the total weight of the machinery they produced.  That is why there is no substitute for free markets and the workings of supply and demand.  But large corporations often operate like mini-Soviet Unions until reality catches up with them.

W. Edwards Deming, who was possibly the world’s greatest exponent of using statistics to improvement business performance, objected to judging either managers or workers based on numerical goals.  Understand and improve the process, and the numbers will improve, he said, but trying to improve the numbers without understanding the process is an exercise in futility.

Romney vs. Obama on the economy

On economic policy, American voters in November will be offered a choice between Mitt Romney, who is part of the problem, and Barack Obama, who is not part of the solution.

I’m not happy with President Obama, but Gov. Romney is no improvement.  Neither Obama nor Romney have realistic plans for unemployment or mortgage foreclosures.  Both regard the federal budget deficit as a higher priority problem.  But Obama at least has a realistic budget plan, and his record on federal spending is much more conservative than most of his admirers or detractors admit.  Romney proposes further tax cuts for upper-bracket taxpayers, which will make the problem worse.

Obama has not shown the least willingness to curb the irresponsible behavior of the financial elite which has brought on and prolonged the current economic recession.  Romney is part of that financial elite.

Both Obama and Romney regard Social Security and Medicare as “entitlements” which need to be cut back.  Obama repeatedly has offered up cuts in Social Security and Medicare as part of a grand bargain for balancing the budget.  Romney is an admirer of Rep. Paul Ryan of Wisconsin whose ultimate goal is to privatize Social Security and Medicare.

Romney scapegoats poor people, while Obama doesn’t talk about them at all.

President Obama’s economic policies follow in the footsteps of President Eisenhower and the first President Bush.  Governor Romney’s policies, based on his statements and his choice of advisers, would follow the second President Bush and the Tea Party movement.

If Obama and Romney were my only choices, and economic policy the only important issue, I would reluctantly vote for Obama.  But since I live in a state where third party candidates are on the  ballot, I will vote for Gary Johnson, the Libertarian candidate, or perhaps Jill Stein, the Green Party candidate.

Click on How Paul Ryan Captured the G.O.P. for a profile of Rep. Paul Ryan of Wisconsin, the architect of Republican economic policy, by Ryan Lizza in the New Yorker.

Click on Romney Tax Plan on Table, Debt Collapses Table for a report on a bipartisan analysis of Gov. Romney’s tax proposals.  Romney has not given specifics for an excellent reason.  It is mathematically impossible for him to deliver his proposed tax cuts for rich people and still balance the budget by closing loopholes.

Click on Obama spending binge never happened from MarketWatch and Who Is the Smallest Government Spender Since Eisenhower? Would You Believe It’s Barack Obama? from Forbes for President Obama’s record on government spending.  If I were a conservative Republican who believed that cutting government spending was the overriding issue, I probably would vote to re-elect the President.

Click on Obama’s Second Term Agenda: Cutting Social Security, Medicare and/or Medicaid for analysis by Matt Stoller of the Roosevelt Institute, based on the President’s proposals and appointments during his first term.

Click on U.S. poverty heads for highest level in 50 years for a Chicago Tribune article on a subject neither candidate talks about.  The nonsense about Barack Obama being the “food stamp” President reflects the fact that the deep economic recession has made huge numbers of people eligible for the program that was put in place in the 1970s.

Is the recession the fault of people like me?

Why hasn’t the government of the United States done more to end the recession?  According to an economist named Steve Randy Waldman, it is my fault—or rather the fault of people like me, old retired people who’ve saved their money and don’t want anything to happen that would affect the value of our savings.

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives. … …

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer.  Their overwhelming priority is to protect the purchasing power of incumbent creditors.  That’s it.  That’s everything.  All other considerations are secondary.  These preferences are reflected in what the polities do, how they behave.  They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary.  The same preferences are reflected in what the polities omit to do.  They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation.  They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation.  The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation.  The purchasing power of holders of nominal debt must not be put at risk.  That is the overriding preference, in context of which observed behavior is rational.

via interfluidity.

I don’t see it.  I am fortune enough to have savings, which I have invested conservatively, and I don’t think that either the federal government or Wall Street is acting in my financial interest.  If it were, I would be able to earn interest on my bank account or my money market fund.  No, the U.S. government, the German government and the international financial institutions are operating in the interests of the big banks and investment firms.  They are acting to preserve the value of their assets, not my savings.

True, many Tea Party members are in my economic class, and they are much more worried about inflation and government debt than they are about unemployment and public services.  But the Tea Party rank and file don’t run things.  The average Tea Party supporter is as opposed to the Wall Street bailouts as I am.

True, economic policy is tilted toward averting inflation, which isn’t a serious problem at present, rather than bringing down unemployment, which is.  I think that reflects the policies which serve the interests of financial institutions, whose priority is to maintain the value of currencies and financial assets, and over the interests of the producers of tangible goods and services, whose priority is to maintain the level economic activity.

I don’t think governments should intentionally adopt a policy of inflation, but I do think they need to recognize that inflation is not the main concern right now.  Right now continued recession, with the strong possibility of another financial markets crash, is a greater threat to my savings than inflation is.

Click on Depression is a choice for Steve Randy Waldman’s full comment.

Tom Ferguson on President Obama’s speech

China as number one

China, which has overtaken Japan as the world’s second-largest economy and Germany as the world’s largest exporter, is poised to overtake the United States as the world’s largest manufacturer, according to the Financial Times of London.

China has been a manufacturing and exporting powerhouse throughout most of its history, going back to ancient times when the Romans bought Chinese silks transported over the central Asian silk road.  The Chinese lost the preeminence only after the Industrial Revolution in England and, at that, it took the Opium Wars for the British to obtain a favorable balance of trade.

So, as the FT points out, the rise of China shouldn’t be surprising.  It is a giant both in area and population.  It has the resources to create a high-tech sector the size of Germany’s while maintaining a low-wage sector the size of India’s.

China’s progress could be a good thing for the United States, if we ourselves were not falling behind. We have more to gain from the prosperous China of today than the starving China of the 1950s and 1960s.  China could be as a good customer for our companies as it is for German and Japanese companies.

China has a lot of problems, which may cause its economy to falter or crash. I would not wish to live under the autocratic Chinese government. But the Chinese leaders get one important thing right.  They understand that the key to national power is a productive economy, and their priority is jobs, jobs, jobs.