I felt I must post this diary, though I am sorely pressed for time, and probably won’t be able to join much in whatever discussion there is. This is my attempt to register acknowledgement of Bonddad’s "good bye cruel world" diary, inspired by Paul Krugman’s article today asserting that the major problem paralyzing our national response to the health care crisis is the continued influence of Reaganism in economic policy thinking:
Quote from Krugman after the jump.
[NOTE about the title of this diary: I am not implying that Bonddad is stupid; I am simply playing on the famous James Carville statement, "It’s the economy, stupid."]
Krugman in the New York Times today:
Call me naïve, but I actually hoped that the failure of Reaganism in practice would kill it. It turns out, however, to be a zombie doctrine: even though it should be dead, it keeps on coming.
Let’s talk for a moment about why the age of Reagan should be over.
First of all, even before the current crisis Reaganomics had failed to deliver what it promised. Remember how lower taxes on high incomes and deregulation that unleashed the "magic of the marketplace" were supposed to lead to dramatically better outcomes for everyone? Well, it didn’t happen.
SNIP
There’s a lot to be said about the financial disaster of the last two years, but the short version is simple: politicians in the thrall of Reaganite ideology dismantled the New Deal regulations that had prevented banking crises for half a century, believing that financial markets could take care of themselves. The effect was to make the financial system vulnerable to a 1930s-style crisis — and the crisis came.
"We have always known that heedless self-interest was bad morals," said Franklin Delano Roosevelt in 1937. "We know now that it is bad economics." And last year we learned that lesson all over again.
When President-elect Obama announced his economics team, I tried to join in raising an outcry, especially over Larry Summers and Timothy Geithner (The Problem with Obama's Economics Team, Dec 09, 2008). I was not wrong – those who responded by insisting "give him time" or "Obama’s got it" were wrong, and we can thank them in large part for the terrible summer this has been for Democrats, with the increasing evidence that progressives are unhappy and even disillusioned with President Obama.
But I failed spectacularly by not including Rahm Emanuel, who made his fortune as an investment banker with Wasserstein Perella (now Dresdner Kleinwort), in the group of advisers who would be giving the President woefully bad economic advice. Krugman has another nice quote.
It is difficult to get a man to understand something," said Upton Sinclair, "when his salary" — or, I would add, his campaign contributions — "depend upon his not understanding it."
This is why it is going to be almost impossible to find anyone that can provide good economic advice among the ranks of those who have been "successful" at becoming rich in the past two or three decades. The system in which they succeeded is exactly the system hopelessly infected with systemic flaws that make the system a threat to the rest of us – whether that threat takes the form of financial insecurity, lack of health care, or environmental Armageddon. FDRs’ great triumph of saving capitalism from itself and creating a liberal order that lasted half a century was ensured by his bringing into his circle of trusted advisers a few people who had not become rich and successful in the system, such as Harry Hopkins, and Frances Perkins, both managers of welfare services from New York and Philadelphia, respectively. (See Frances Perkins - The Woman Behind FDR's New Deal)
This problem of elites being too fully invested in their previous structures of thinking is discussed as a primary cause of the collapse of previous civilizations by Jared Diamond. On Easter Island, elites continued to pour their society’s resources into building monuments that glorified themselves, rather than tackling the problems of deforestation and resource depletion that eventually annihilated all their people. The Norse leaders on Greenland clung to their racist views of native peoples, refusing to learn indigenous skills, the mastery of which would probably have averted the collapse and demise of the two Norse colonies on Greenland. In addition, Norse leaders on Greenland continued to waste the precious, limited cargo space of the bi-annual Norse ship voyages to and from mainland Europe on carrying imports and exports of elites’ luxury items, rather than more practical goods and items that might have helped the two colonies survive. The past few months’ Bonddad diaries about "we’re at the bottom; things will be turning around"? All they really amount to are sightings of an approaching Viking ship, and the attendant ordering of the peasants to gather up the stored whale baleen and narwhal tusks and ready them for shipment, making room in the storehouses for another load of useless trinkets and jewelry. In other words, business as usual.
We can no longer afford business as usual. New American Foundation economist Thomas Palley attacks the reigning economic ideology head on with his latest paper, America’s Exhausted Paradigm: Macroeconomic Causes of the Financial Crisis and Great Recession:
Most commentary has therefore focused on market failure in the housing and credit markets. But what if the house price bubble developed because the economy needed a bubble to ensure continued growth? In that case the real cause of the crisis would be the economy’s underlying macroeconomic structure. A focus on the housing and credit markets would miss that. [Emphasis mine.]
What Palley is attacking is a system of beliefs that govern our society’s management of and response to economic problems. For example, the prevailing wisdom among elites for the past three decades – which Bill Clinton, Rahm Emanual, and Larry Summers, and even Robert Reich fully bought into - has been that most problems in the economy are cost problems. Free trade was supposed to be a solution because competition with cheaper overseas labor (note nothing was said about the cost "benefits" of less exacting regulatory standards overseas) would increase the supply of low priced goods for American "consumers" as well as drive down high-priced labor. How many serious attacks on free trade do you see in the mainstream media, and especially among professional economists? Rather than questioning a keystone of the prevailing economic ideology, most discussions boil down urging more of the same austerity that created the long depression of 1979 until today in the first place: extract concessions from employees, slash benefits, curb pension "liabilities," and lower wages even further. The idiocy of this thinking should be glaring – in an economy that depends on consumer spending for over 70 percent of performance, how much sense does it make to hold down wages and earnings of consumers? But how many times have you seen this particular idiocy criticized in "serious" discussions by the "serious" people? I challenge you to find one column by David Broder that even mentions the idea.
In a presentation this past April to the Hyman Minsky conference of the The Levy Economics Institute of Bard College Joseph Stiglitz summarized his brutal evaluation of our government’s response thus far to the banking and financial crisis. (Reading it is one thing, but to get the full impact, you should listen to the audio. You can somehow hear the discomfort in the room.)
There are four criteria: rekindle lending—hasn’t happened; keep the cost low—not likely; address the long-run problems—we’re not doing anything about that (in fact, the most benefit goes to the banks that did the worst); and, finally, adhere to standards of good governance and transparency—what’s actually happened in this area is really a model of what should not be done. If I were chief economist of the World Bank and a developing country had done this, I would have recommended cutting off all lending to that country. "This is a banana republic" is what we would have said in private.
Stiglitz ended with a stinging criticism of the economics profession:
One would have thought that this powerful combination of theory and evidence might have dampened the enthusiasm for unfettered and under-regulated markets, but evidently it did not. I understand the unbridled enthusiasm of special interests that found the arguments for deregulation profit enhancing. I'm not so clear on what motivated so many economists.
Some have argued that risk is the price we have to pay for innovation, and America's financial markets have been extraordinarily innovative. However, financial markets did not create risk products that would have enabled individuals to manage the risk they faced: the simple risk of homeownership. Rather, the innovations consisted mostly of tax, regulatory, and accounting arbitrage. Their financial alchemy--converting F-rated toxic mortgages and financial products that could be held by fiduciaries--had a private, but not necessarily social, payoff.
Such repackaging, we know from the Modigliani-Miller theorem, should have a limited value. Meanwhile, many in the financial sector actually resisted innovations that would have made markets work better--innovations like GDP, inflation index bonds, Danish mortgage bonds, and better auctions of Treasury bills. The models that are predominating within macroeconomics, which assume representations with rational expectations, are particularly disturbing. These models have particular influence among central bankers. If I were giving my litany of criticisms of the central bankers, I would say they should have begun inflation targeting and with the models that they have, which are actually badly flawed.
What I find even more striking is that some economists still argue that this crisis has not shaken their belief in rational expectations. To me, the evidence of irrationality and intellectually inconsistency abounds--I can give dozens of examples. It's just astounding.
Even today, flawed thinking continues. We are encouraging mergers among the big banks that cause them to be even bigger. We talk about tight regulation of systemically significant institutions, failing to note that there can be systemic effects of correlated behavior on the part of institutions, even if each is not systemically significant.
Our financial system failed in its core mission, allocating capital and managing risk, with disastrous economic and social consequences--not just in misallocated capital in the past but also in the huge disparity between potential and actual GDP in the coming years, sums that almost surely will be in the trillions of dollars. Regrettably, flawed economic theories aided and abetted both those in the public sector and those in the private sector in pursuing policies that almost inevitably led to the current calamity. . . .
Former S&L crisis investigator William Black is even more blunt in a presentation to the Hammer Forum on June 11 of this year, The Great American Bank Robbery. When asked why President Obama is rescuing the banks and investment firms that caused the crises, Black replied (at the 38 minute mark into the program):
Because Obama’s primary economic advice comes from people who helped create the crises. And as long as you get your advice from people that don’t want to admit that they were wrong about essentially everything they did in their professional lives and that they have no useful skills, because all they know is stuff that was proved to be false. I mean, you’re just not going to get professors of economics who are sixty years old, stand up and say "I’m sorry, everything I taught, every policy I implemented was completely wrong, the economic theories I followed are completely wrong, and I have no useful knowledge, and I’m sorry." That’s just not going to happen. And if they did, why would anybody hire them for anything ever again? They have no useful skills.
Last wwek, Yves Smith featured this insightful commentary on her site, Naked Capitalism. It's interesting to read through the negative reactions to it as a clinical study of the bullshit people continue to believe in.
Why the Austrian, Keynesian, Marxist, Monetarist, and Neo-Liberal Economists Are All Wrong
The condition of the American economy is strikingly similar to the Soviet state economy of the last two decades of the 20th century. People are trying to sustain a system "as is" that is based on bad assumptions, unworkable constructions, conflicting objectives, and a flagging empire laced heavily with elitist fraud and corruption. The primary difference is that the US has a bigger gun and its hand is in more people's pockets with the dollar as the world's reserve currency. But the comparison seems to indicate that the economy must indeed fail first, before genuine change can begin, because the familiar ideology and practices must clearly fail before they can recede sufficiently to make room for new ways and reforms.
Robert Johnson, Director in the Economic Policy Initiative of the Roosevelt Institute, responding to Matt Taibbi's masterful expression of outrage over the series of crisis spawned by Goldman Sachs and the domination of the United States by what Taibbi calls "gangster economics," spelled out the details of how this social collapse is working today:
the scale of losses that the taxpayer has been forced to absorb, along with disappearing funds for future roads, bridges, healthcare, schools and a tax drag on wealth creation. It is into the void created by the tepid media coverage of this horrid and costly episode that Mr. Taibbi has screamed. . . .
The problem now is that the experts and leaders from finance have failed us miserably. They have let us down and we know it. We do not trust in the system. . . Even with losses and bailouts, we have to fight over bonus payments to those who feel entitled, despite the cost they have imposed on their stockholders and, more importantly, society.
. . . . The financial sector, and other large patronage donors, spend billions of dollars on lobbyists and campaign contributions. Politicians then run their expensive election marketing campaigns with the proceeds. And finally, the contributors buy downside loss protection from the politicians and their appointees.
Who provides that downside protection? You and me. The taxpayer. The body politic. We get used by this refracted process, and our system is mislabeled as a representative democracy. And, to add insult to injury, we are forced to endure the the horror of the awful marketing campaigns of politicians using the their payoff money to protect donors with our the tax base. The media is on the take, too, collecting advertising revenue from financial companies and from political campaigns. Far be it for them to step outside this circular flow of funds that impedes our political system from incorporating feedback from evidence of its own dysfunction.
We are amidst a crisis of political legitimacy.
It is a crisis of political legitimacy simply because we are coming to realize that our political process is unable to do the one thing it must do as a pre-condition for developing real solutions to the crises we face: cleanse itself of the massive corruption we politely call "influence peddling." A few weeks ago, in discussing E.J. Dionne's column about how the news media's reluctance to criticize and attack conservatives is blocking much needed discussion of more progressive policy options Paul Rosenberg wrote:
The only real problem here is the fundamental one: what works politically in Versailles has no relationship whatsoever to the real world. Politically acceptable health care reform will not actually reform health care, any more than a politically acceptable approach to global warming will actually save the planet. This has been seen repeatedly throughout history: Empires fall in large part precisely because of this-elites grow increasingly insular and out of touch until the whole thing falls apart. Obama has shown himself masterful at elite politics, he has, as dday points out, the best enemies he could possibly hope for. And he's equally adept at pleasing the masses. But the one thing he can't do is actually solve the problems America faces, because to do that he would actually have to stand for transformational change. And that is the very last thing that he has in mind.
We have massive crises confronting us, problems which threaten the very survival of our species. To solve these problems will require trillions of dollars and the combined and co-ordinated efforts of millions of experts, technicians, technologists, and their aides. The fact that our elites have no intention of leading such an effort is proven by their promulgation and acceptance of the idea that we are embarking upon a "jobless recovery." Jobless? When so much work needs to be done to ensure our survival as a human family? Franklin Roosevelt and Harry Hopings were able to put four million people to work over the winter of 1933-34 to avoid mass privation and starvation. That would be like putting nearly ten million people back to work today. It can be done – history tells us so.
Bonddad may accept that this is going to be a "jobless recovery." President Obama may accept that this is going to be a "jobless recovery." I most emphatically do not. You don’t have to either. In fact, your survival depends on your not accepting it. If the economic theories we accept today are incapable of directing the financial resources of our society to employing people to solve the problems we face, then the change we need, the change we can believe in, is to kill off those economic theories and its financial system.
Before their effects kill us off.