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The wrecking society: economics today

from Dean Baker
There is an old story from the heyday of the Soviet Union. As part of their May Day celebrations they were parading their latest weapon systems down the street in front of the Kremlin. There was a long column of their newest tanks, followed by a row of tractors pulling missiles. Behind these weapons were four pick-up trucks carrying older men in business suits waving to the crowds.

Seeing this display, the Communist party boss turned to his defense secretary. He praised the tanks and missiles and then said that he didn’t understand the men in business suits. The defense secretary explained that these men were economists, and “their destructive capacity is incredible.”

People across the world now understand what the defense secretary meant. The amount of damage being inflicted on countries around the world by bad economic policy is astounding. As a result of unemployment or underemployment, millions of people are seeing their lives ruined. The current policies have led to trillions of dollars of lost output. From an economic standpoint this loss is every bit as devastating as if a building had been destroyed by tanks or bombs. And people have lost their lives, due to inadequate health care, food and shelter, or as a result of the depression associated with their grim economic fate.

If an enemy had inflicted this much damage on the United States, the countries of the European Union, or the countries elsewhere in the world that have been caught up in this downturn, millions of people would be lining up to enlist in the military, anxious to avenge this outrage. But, there is no external enemy to blame. The villains are the economists, still mostly men, in business suits.

The New York Times reported last month that formerly middle class workers in Spain are now picking through dumpsters looking for food. There are similar accounts from Greece. Both countries have unemployment rates hovering near 25 percent, with youth unemployment rates that are nearly twice as high.

And, the expectation is that things will only get worse. The latest projections from the IMF show the economies of both countries continuing to shrink through the rest of 2012 and for the whole of 2013. It is also important to remember that the IMF’s growth projections have consistently been overly optimistic.

There are similar stories across the eurozone and now also in the United Kingdom as that nation’s leaders have pursued economic policies that have thrown it back into recession. And of course the United States is also losing close to $1 trillion in output each year, with close to 23 million unemployed, underemployed or out of the workforce altogether because of poor job prospects.

The economists in policy positions are doing their best to convince the public that the economic catastrophe that they are living through is a natural disaster that is beyond human control. But that is what Vice President Biden would call “malarkey.” This is a disaster that is 100 percent human caused and is being perpetuated by bad policy.

The original collapse was the result of central bankers who were at best asleep at the wheel, or at worst complicit in the financial sectors’ wheeling and dealing, ignoring the risks that massive housing bubbles obviously posed to the economy. However the response to the downturn has made a bad situation far worse than necessary.

As the evidence keeps telling us, the basic story is about as simple as it gets. The housing bubbles were driving demand prior to the collapse both directly through building booms and indirectly from the consumption generated by bubble-generated housing equity. When the bubbles burst the construction booms went bust. And when the bubble generated housing equity vanished so did the consumption for which it provided a basis.

The basic economic problem in this context was finding a way to replace the lost demand. The right-wing politicians and their allied economists can repeat all the nonsense the like about promoting business confidence and tax breaks for job creators, but there is no remotely plausible story in which it would be possible to generate enough demand from investment to make up for the demand lost from the collapse of the bubbles.

from Dean Baker
This means that in the short-term the only way to make up the demand is from the government budget deficits. This is not even economic theory, it is simply accounting.

In the longer term, the shortfalls in demand will have to be made up from a rebalancing across countries. Countries with large trade deficits, like the United States, Greece and Spain will have to move toward more balanced trade. In the case of the United States this can only plausibly be done with a decline in the value of the dollar. In the case of the eurozone, there is no plausible alternative than to have the surplus countries, most importantly Germany, have more rapidly rising wages and prices in order to allow the deficit countries to regain competitiveness.

All of this is pretty straightforward, but the economists are instead steering the world toward more years of stagnation and rising unemployment and poverty. The human and social wreckage they have caused puts our enemies to shame.

from original website

  1. BC
    October 18, 2012 at 4:55 pm

    A lower US$ will not increase US exports the way Baker and others think without an increase in imports. Half of US “exports” are US firms sending capital equipment, trade credits, and ag products to their subsidiaries abroad, or that of other US supranational firms operating abroad.

    A lower US$ will just cause nominal commodities prices to rise further, cutting into profit margins from pass-through to business inputs.

    Moreover, despite a tripling of the price of crude oil since ’05, crude oil production and global crude exports per capita are contracting. The trend rate of real private US GDP per capita is negative since Peak Oil, and 0% since ’00-’01. The US cannot grow real GDP per capita and have oil at $80-$100 in order to permit profitable extraction of tar sands and Bakken.

    Historically, the 5- and 10-year trend rate of real GDP per capita does not grow with the constant-dollar price of crude oil above $30-$40.

    The US fiscal deficit will surpass 100% of federal receipts after Social Security and Medicare receipts during the next recession, fiscal cliff or not. Raise taxes or cut spending to balance the budget over 10-20 years and the economy contracts. Raise spending and taxes, and the economy contracts. Raise taxes and keep spending at 0% since ’10 and the economy contracts. The US is Japan is the PIIGS and UK.

    Finally, wealth and income concentration to the top 0.1-1% along with the peak Boomer demographic drag effects taking hold hereafter are factors coinciding with Peak Oil and the price of oil above $30-$40 to prelude growth of real GDP per capita, as during previous Long Wave Downwave Trough regimes in the 1780s-90s, 1930s-40s, 1890s, and 1930s-40s, and in Japan since the ’90s.

    Economists are price accountants instead of combining their accounting with biophysics and demographics to fully understand the factors affecting growth and decline.

    The central bank cannot print oil at a price we can afford to burn, investment, profits, jobs, or tax receipts. Banks cannot lend into existence debt-money to create these things when their balance sheets still have charge-offs and delinquencies of 6% of loans (average 2%), and their real net margins after charge-offs are negative.

    There are no textbook Keynesian, Monetarist, or supply-side prescriptions for the disease associated with demographic drag effects, Peak Oil, population overshoot, and fiscal insolvency. Debt and bank loans must by written down 40-50% to par with wages, which means equity and debt holders have to take the losses to reduce equity market cap and bank loans to GDP to the 25-30% level from 45-100%+ today.

    Try to inflate the debt away with 4-7% annualized price inflation for 10-15 years and you will destroy the purchasing power of after-tax wages of the bottom 90% of households in 4-5 years.

  2. October 18, 2012 at 6:02 pm

    Regarding rebalancing of trade:

    Too often economic discussions on the requirements for a good international payments system that will eliminate persistent trade and international payment imbalances have been limited to the question of the advantages and disadvantages of fixed vs. flexible exchange rates. US Treasury Secretary Geithner apparently believes if the Chinese would let the market decide the yuan-US dollar exchange rate, the problem of US running an unfavorable balance of trade would be resolved. This assumes that raising the yuan relative to the dollar will offset the cost advantage Chinese factories have in producing in sweatshop conditions without any occupational safety conditions, with child labor, and polluting the surrounding environment.
    If China was to build a factory in California and operate it the way it is operated in China, US laws that require treating labor and the environment in a civilized manner would prohibit this Chinese factory from selling its goods in America!
    In championing the argument for flexible exchange rates economists assume that the price elasticities of the demand for imports and exports will meet the Marshall-Lerner condition, at least in the long run. For example in a book co-authored by Ben Bernanke [1992, p. 50, emphasis added] it is stated that
    “[a] fall in the exchange rate tends to reduce net exports in the short run….After consumers and firms have had more time….the Marshall-Lerner condition is likely to hold and a fall in the exchange rate is likely to lead to an increase in net exports.”

    How “likely” is the applicability of the Marshall-Lerner condition to the situation is therefore important in deciding whether a policy of flexibility in the exchange rate has anything to recommend it even in the long run. The facts of experience since the end of the Second World War plus Keynes’s revolutionary liquidity analysis indicates that more is required then merely a devaluation, if a mechanism is to be designed to positively resolve otherwise persistent trade and international payments imbalances while simultaneously promoting global full employment, rapid economic growth, and a long-run stable international standard of value.
    Since the Second World War, the economies of the capitalist world has conducted experiments with the different types of exchange rate systems. For more than a quarter of a century (1947-1973) after the war, nations operated under the Bretton woods Agreement for a fixed, but adjustable, exchange rate system where, when necessary, nations could invoke widespread limitations on international financial movements (i.e., capital controls). Since 1973, the conventional wisdom of economists and politicians is that nations should liberalize all financial markets to permit unfettered international capital flows to operate under a more freely flexible exchange rate system.
    In contrast to this recent view of the desirability of liberalized markets , Keynes’s position at the Bretton Woods conference suggested an incompatibility thesis. Keynes argued that free trade, flexible exchange rates and free capital mobility across international borders will be incompatible with the economic goal of global full employment and rapid economic growth.
    Between 1947 and 1973 policy makers in their actions implicitly recognized Keynes’s ‘incompatibility thesis”. This period was a “golden age” era of sustained economic growth in both developed and developing countries. The free world’s economic performance in terms of both real growth rates per capita and price level stability during this 1947-1973 period of fixed, but adjustable, exchange rates was historically unprecedented . The disappointing post-1973 experience of persistent high rates of unemployment in many nations, bouts of inflationary pressure and slow growth in many OECD countries, plus debt-burdened growth and/or stagnation (and even falling real GNP per capita) in some developing countries and finally an international financial collapse contrasts sharply with the experience during the Bretton Woods period.
    The significantly superior performance of the free world’s economies during the 1947-1973 fixed exchange rate period compared to the earlier gold standard fixed rate period suggests that there must have been an additional condition besides exchange rate fixity that contributed to the unprecedented growth during the 1947-73 period. That additional condition, as Keynes explained in developing his “Keynes Plan” required that any creditor nation that runs persistent favorable trade payments must accept the major responsibility for resolving these trade imbalances. Conventional mainstream theory, on the other hand, argues that the nation running an unfavorable balance of trade must accept the major responsibility for resolving the problem, even though the trade surplus nation has the wherewithal readily available to resolve the problem..
    The Marshall Plan was an instance where the creditor nation adopted the responsibility that Keynes had suggested was required. The result was a golden age of economic growth for the USA and the member nations of OECD. When, in 1973, the U.S. withdrew from the Bretton Woods Agreement, the last vestiges of Keynes’s enlightened monetary approach were lost, apparently without regret or regard as to
    [a] why the Bretton Woods system had been developed in the first place and
    [b] how well it had helped the free world to recover from a devastating war which had destroyed much of the productive stock of capital in Europe and Asia.
    Under any traditional international free trade system, any nation that attempts to improve its economic growth performance by pursuing Keynes’s policies for increasing domestic effective demand via easy monetary and fiscal policies will almost immediately face an international payments problem. Expanding domestic aggregate demand will increase the demand for imports relative to the value of exports. When a nation’s imports persistently exceed its exports, the nation typically requires foreign loans to finance this import surplus that is encouraging increased economic growth in the trading partners’s export industries.

    How do we get the creditor nation to accept the onus of responsibility to resolve trade imbalances? In my book THE KEYNES SOLUTION:THE PATH TO GLOBAL ECONOMIC PROSPERITY I present a 21 century version of ther Keynes Plan — but one that doees not require a supranational central bank, ass Keynes’s 1944 plan required

  3. Bruce E. Woych
    October 18, 2012 at 9:14 pm

    Worth noting: http://www.globalresearch.ca/the-nobel-war-prize/5308582

    The Nobel War Prize

    By Julie Lévesque
    Global Research, October 17, 2012


  4. October 19, 2012 at 4:18 pm

    “We are the masters of legalized confusion”

    To me, the problem is pretty obvious. Economics can serve, as well as statistics, to defend one´s interests. The biggest danger comes when a good economist allies himself with good leader, as in the case of Argentina in the 1990s, when president Menem approved (by decree) Convertibility Law, prepared by Domingo Lavalla, his Minister of finance.

    The biggest problem of the economical theories is that they are just theories. They can´t apply on the human behavior, which is unpredictable. This is why we don´t need any old concepts and ideologies, but real problem solving, that would deal with the problems.

    For example US, it does not have the biggest problem in it´s tax system, because tax system is not something that is making you survive. It´s problem is bad education, bad health, foreclosures etc. The current presidential debates just show how distant those politicians really are from the problems of the common people. What conclusion would you make about US Immigration to Canada? Why would people go from the country with lower taxes to the country with higher taxes?

    Politicians use numbers just to promote their policies, they use economists to approve plans that were pre-prepared by the campaign donors.Yet we still discuss who would be better, instead of admitting this route leads to nowhere.

  5. BC
    October 20, 2012 at 2:10 pm

    We can’t replicate the conditions occurring during the Bretton Woods era following WW II to the 1970s. Europe and Japan were starting from having been bombed to ruin. The US averaged growth of crude oil production of 4-5%/year (3-4% per capita) from 1900 to 1970, at which point a plateau occurred until 1985 (production per capita declined 15%). Since 1985, US crude oil production per capita has fallen 50% (60% since 1985). Not coincidentally, US mfg. employment has fallen to the levels of the Great Depression, which occurred with financialization and militarization of the economy and more than $40 trillion added to total credit market debt owed ($127,000 per capita).

    Now the profile of peak global crude oil production is where the US was in the mid- to late 1970s, having fallen 10% per capita, despite the average price of crude tripling since 2005. The trend rate of US real GDP per capita since 2000-01 has decelerated from 2.1% to 0%.

    China has reached real GDP per capita at the level the US was in the late 1920s and Japan in the late 1960s. Japan’s growth from after WW II to the 1960s-70s occurred with the price of oil at nominal $3 and $10-$15 constant US$. China now faces a “middle-income trap” condition with the price of oil at $100. China and India are 40-80 years too late to the auto- and oil-based model of perpetual growth of population, resource extraction, consumption, and capital accumulation on a finite planet.

    The exergetic log-limit bond has been reached for the Oil Age growth paradigm. Growth of real GDP per capita is over, but few seem to realize it. Apart from “Degrowth” advocates, we have no neo-Keynesian, Monetarist, socialist, or supply-side textbook (un)economic theory to inform us about how to manage contraction of global real GDP per capita.

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