Economic Inequality And Economics Theory-- Stiglitz To The Rescue

I used to be in the music business. Like in many businesses, there was always a tension between executives who put all their energy and resources into the current quarter and executives who felt a responsibility towards creating long-term (future) shareholder value. Bonuses-- which could be 6 or 7 figure amounts-- tended to be based on the short-term approach. That's, at least in part, why so many music companies have gone under.

Recently Business Insider ran a piece about Davos that deals with the problems around economic inequality, which stems, at least in part from 1970s stagnation, where chasing quarterly profits has resulted in a toxic short-termism. The piece is primarily about how Nobel Prize winner Joseph Stiglitz views this short-termism. Short version: "I want to emphasize that it was, in this period, not only activist shareholders but Milton Friedman," the late economist and fellow Nobel laureate, who was to blame for this prevailing ideology. "And he was wrong." Reporter Richard Feloni noted that "In his highly influential 1962 collection of essays, Capitalism and Freedom, Friedman proclaimed that in a free economy, 'there is one and only one social responsibility of business-- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.'"

We followed up with Stiglitz after the Davos panel, and he told us that Friedman's assertion "was not based on any economic theory." He then gave some background on the origins of this debate.

Friedman made his assertion as a natural extension of a defining passage in Adam Smith's definitive The Wealth of Nations from 1776, that of the "invisible hand." Smith wrote that an individual laboring in his own interest is "led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good."

Stiglitz pointed out that indeed the invisible hand's existence was "proven" in 1954 by the economists Kenneth J. Arrow and Gerard Debreu. Arrow and Debreu were able to show the existence of an equilibrium between supply and demand in a free, competitive economy-- but they also made clear that this could only exist if a given set of assumptions about the economy and consumer behavior were true.

And the latter part is essential, said Stiglitz.

"Then some of us, beginning in the late '60s, asked the question, 'Well what happens if those conditions aren't satisfied?'" he told Business Insider.

Stiglitz said that he and the economist Sandy Grossman investigated this question throughout the '70s. In 1980, they published a paper that declared that while market equilibrium can exist in theory, it was "impossible" for it to exist in a competitive economy in reality. Following this line of thinking, then, Friedman's argument falls apart. And therefore, existing solely to please shareholders will not-- as Friedman argued-- benefit other stakeholders, such as employees, consumers, and society as a whole.

Stiglitz respected Friedman (who died in 2006) for his work on consumption that won him a Nobel prize, he wrote in his 2012 book The Price of Inequality, but the two had several arguments about this idea of the free market. "I remember long discussions with him on the consequences of imperfect information or incomplete risk markets; my own work and that of numerous colleagues had shown that in these conditions, markets typically didn't work well. Friedman simply couldn't or wouldn't grasp these results."

Friedman's ideas, however, would take hold in the US for the next few decades.

When Stiglitz cites what he considers to be the problem of Friedman, he explained, he's using him as the figurehead for a movement that took advantage of the societal trends [Henry] Blodget mentioned. This movement was led by the Chicago school of economics, the free market ideology developed at the University of Chicago in the mid-20th century.

As Stiglitz sees it, Americans, particularly on the right, embraced the Chicago school's way of thinking because it appeared to be the efficient solution to stimulating a stagnant economy.

Within this free market ideology, pursuing short-term value is simultaneously a pursuit of long-term value. If you accept this, prioritizing short-term gains comes through the optimization of management and spending, which allows the company to grow, in turn supplying higher returns, more jobs and other benefits to society, and better products.

It is a rejection of a fundamental Keynesian belief, Stiglitz noted.

British economist John Maynard Keynes published his revolutionary book The General Theory of Employment, Interest and Money in 1936, in the wake of the Great Depression. In it, he differentiated between short-term and long-term value, and expressed his frustration with the way the American stock market encouraged public companies to prioritize short-term gains, better for the majority of contemporary investors, over long-term gains, better for society as a whole. The basic premise of the argument Keynes had with his peers is the same as the one today.

"The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future," Keynes warned.

More Americans in positions of power began gravitating toward the Chicago school's ideas in the '70s, and Friedman became an adviser to President Ronald Reagan.

Not only did Friedman have the ear of the leader of the free world, but the Chicago school's theories around lawmaking for the intended purpose of market efficiency also came to fruition.

In his 2015 book Rewriting the Rules of the American Economy, Stiglitz said that the normalization of shareholder primacy was solidified under the Reagan administration through changes to federal income tax law and securities law, including relaxed antitrust laws. This fostered the rise of activist investors.

"If all of this had led to more efficient and innovative corporations, that would have been one thing," Stiglitz wrote. "But in fact, the new 'activist' investors pushed for seats on boards and pressured management into policies that were viewed as more 'shareholder-friendly'-- meaning friendlier to short-term investors-- including increasing dividends and buyouts."

The Securities and Exchange Commission continued this trend through the early 1990s.

And while the increasingly linked nature of CEO pay and stock performance was ostensibly to keep CEOs accountable to their shareholders, Stiglitz argued, it instead materialized as "an incentive to manipulate stock prices by using company money to buy back shares in order to drive prices higher." That's how you got from the average ratio of CEO-to-median-level-employee pay from 20-to-1 in 1965 to 295-to-1 today.

For Stiglitz, the outrage isn't that individuals making that much is a moral outrage by itself, it's that it's happening at the expense of the entire economy.

Stiglitz told us that this decades-old debate about how to balance the creation of short-term and long-term value is recently gaining new life in the US because of the venomous class class tensions and ugly politics arising out of income inequality, and because people in positions of power are looking at the big picture and realizing that something has to change.

And regardless of the performance of the stock market this year, the economy overall is not doing too well, Stiglitz argued, when you look at it from the perspective of GDP growth.

"When we were growing at 4% we might have been able to grow even faster," he said. "But we took the 4% and enjoyed it. But when we're growing at 2-2.5%, and we had been growing at 3.5%, the natural question is, 'What's happened? Is there something wrong?'"

What we're seeing today is largely the result of the ideas championed by the likes of Friedman that seemed so promising to those in power in the '80s, Stiglitz argued. It's contributed greatly to this combination of inequality and low growth in America.

Stiglitz said that while CEOs aren't going to solve inequality on their own, the reason they exist in society is to grow the economy, and more are realizing they need to make changes.

It's why, for example, someone like BlackRock CEO Larry Fink, as the head of the largest asset manager in the world, has felt compelled to take a stand against short-termism. In a letter to CEOs this year, Fink announced that BlackRock will only do business with companies that have clearly defined long-term strategies that benefit in society in some way.

"Without a sense of purpose, no company, either public or private, can achieve its full potential," Fink wrote. "It will ultimately lose the license to operate from key stakeholders. It will succumb to short-term pressures to distribute earnings, and, in the process, sacrifice investments in employee development, innovation, and capital expenditures that are necessary for long-term growth. It will remain exposed to activist campaigns that articulate a clearer goal, even if that goal serves only the shortest and narrowest of objectives."

For Stiglitz, Fink's letter and similar declarations from large companies like Unilever aren't calls to feel good and congratulate each other, but are arising out of a sense of urgency. It's an urgency to shed the Friedman doctrine.

Sunday Night Movie-- Meet The 1%: The Story Of America's Plutocracy

Jamie Johnson, an heir to the Johnson & Johnson fortune made a documentary in 2006... and it's really engaging and well-done. The first of eight YouTubes of it is above and that one will allow you to find the other seven. These people Jamie talks with don't want to sound crass but they sure like that whole trickle-down theory they get their bought-and-paid-for shills like Paul Ryan and Eric Cantor to regurgitate for them.

It's worth watching this film, especially in light of the beginnings of an uprising against the dominance 1% that we're seeing today at the heart of the OccupyWallStreet movement. After he first did the film, the Wall Street Journal called Jamie The Rich Man's Michael Moore.

Brian McNally, the Johnson family's financial adviser, chastises Jamie on camera for his behavior.

"You're behaving like a little arrogant trustafarian," he tells him.

Milton Friedman, the famed economist, was equally impatient with Mr. Johnson's questioning. During his on-air interview-- among Mr. Friedman's last before he died-- he accuses Mr. Johnson of advocating socialism and abruptly ends their talk.

Mr. Johnson insists he's not opposed to wealth-- including his own. Wealth, he says, has given him a great education, freedom, chances to travel and, best of all, the resources to do films about wealth. He says that while his documentaries are profitable, they wouldn't pay for his lifestyle.

Yet with The One Percent, Mr. Johnson wanted to show how the rich have gone too far. Through interviews with economists, policy experts and environmentalists, Mr. Johnson argues that today's wealthy have become an increasingly isolated elite. He says rather than using their wealth for good, they have used it to restructure the economy, lower their taxes, cut social programs for the middle and lower classes, and amass ever more wealth.

Mr. Johnson says finding willing subjects for The One Percent was difficult, and not just because of his reputation. He sent out more than 100 letters to wealthy people asking for interviews and most said no or failed to reply. Even George Soros, the billionaire financier who often argues against inequality, refused.

"We have an aristocracy in this country that has convinced everybody else that they don't exist," Mr. Johnson says.

Rejections by his fellow elites won't be a problem for his next film, however. Says Mr. Johnson: "My next projects are fictional."

When you watch the part about Milton Friedman, remember how the reactionary mind defines "freedom." It's very proprietary and it's very much about their freedom, not our freedom, which could only impinge on theirs. And, yeah, the Steve Forbes part about the talent for greed, selfishness, nepotism and unrestrained acquisition is a perfect explanation of that kind of freedom; it's "a moral system." Did you read A Take Of Two Cities? Jamie's documentary is like an update-- you tear down all the basketball courts (and the school) and build a giant police station. Just remember... "you can't make an omelette without breaking an egg"-- and "the public will get what the public wants." Oh... and when you get to the part about Alfie and Pepe Fanjul, please keep in mind that these fellas have helped finance the political career of Debbie Wasserman Schultz.

And remember this too: the 1% believe-- or say they believe-- that God made them rich, just the way monarchs pushed all that claptrap about divine right. And taxes on inheritance, according to the 1%, are criminal and unethical. Right?



And this is Jamie. He did another really cool movie, Born Rich, which I also enjoyed and will try to show here at DWT Monday night. If you watched this one all the way through you surely saw Milton Friedman accuse Jamie of being a socialist, ripping off his mic and haughtily ending the interview, one of the last he granted before dying. David Korten doesn't name him specifically in this paragraph from Agenda For A New Economy but who else could he have meant?

[H]uman future is now in question and the cause can be traced, in part, to economic theories that serve the narrow interests of a few and result in devastating consequences for all.

Let's Hope The CIA Doesn't Have A Libyan Augusto Pinochet Waiting In The Wings

If you're getting sick of me harping on CIA atrocities (like in Iran and Guatemala) and comparing them to what's going down in Libya... just skip right over this admittedly disturbing post and go back to reading about what a psychopath Rick Perry is.

I'm getting sick of reading all the self-congratulatory tweets and posts about how we took out the dictator in Libya. You can leave me out of that "we," if you don't mind. When "we" were making the world safe from godless Communism in southeast Asia, I decided to leave the country rather than be part of that murderous "we." Sorry, but I'm not convinced-- at least not yet-- that this is that much different. Big country stomping on little country to get it's way-- and, in this case, its oil. Let's talk about Chile and what the U.S. did down there to protect "us." By now everyone knows how the arch war-criminals Nixon and Kissinger engineered the overthrow and execution of the President of Chile and the transformation of that country's robust democracy into a horrifying fascist dictatorship. But it didn't start with Nixon and Kissinger. Presidents and Secretaries of State come and go... the CIA and a foreign policy establishment is forever-- or has been since a fascist takeover in the late 1940s and early 1950s. Turning to Glen Yeadon's Nazi Hydra in America for some background...

The CIA began covert operations in Chile following the 1958 presidential election, in which Allende came within 3 percent of winning. The next presidential election was scheduled in 1964, and Washington was determined that an avowed socialist like Allende not win.

In 1961, the Kennedy administration set up an electoral committee composed of more than 100 top-level officials from the State Department, the CIA and the White House. A parallel committee was set up in the U.S. embassy in Chile. Committee operatives laid the groundwork for the election by establishing relationships with key political figures. After channeling funds to right-wing groups, the committee decided to back a centrist, Eduardo Frei of the Christian Democratic Party. The CIA underwrote more than half of the party's expenses in the 1964 election, spending an estimated $20 million. The amount is about equal to the money spent by John F. Kennedy ($9.7 million) and Richard Nixon ($10.1 million) together in the 1964 election. The CIA took the Chilean election seriously.

The CIA spent the money on a scare campaign, with images of Russian tanks and Cuban firing squads, with extra attention on women and religion because, traditionally, women in Chile are more religious. The CIA produced massive volumes of propaganda to fill the airwaves and the press. Besides buying the press piecemeal, the agency subsidized wire services, magazines and right-wing newspapers from 1953-70.

One of the assets the CIA employed in the 1964 election was Roger Vekemans, a Belgian Jesuit who founded a network of social action organizations. Vekemans admits to receiving $5 million from the CIA, as well as a like amount of aid. The results of the 1964 election were gratifying for the CIA. Frei won the election with a commanding margin of victory. The continued operations of the CIA network kept Allende and the socialists at bay throughout the 1960s. However, no amount of propaganda can cover the lack of needed reforms and social progress.

By 1970 Allende's popularity was high and his chances in the upcoming presidential election were good. His rising popularity did not go unnoticed by the Nixon White House, which increased anti-Allende spending by $300,000. The CIA continued to use its networks in Chile against Allende. Despite all efforts by the CIA and the Nixon White House, Allende won the Sept. 4 election.

On October 24, the Chilean Congress was due to confirm the winner, assuring Allende of the presidential office. This left the Nixon White House and the CIA with seven weeks to prevent him from taking office. Nixon met with Kissinger, CIA Director Richard Helms and Attorney General John Mitchell. The Committee of 40 received authorized funds to bribe Chilean congressmen to vote against Allende, but soon abandoned the effort as unfeasible. The Nixon administration concentrated on fermenting a military coup, which would cancel the congressional vote. The White House also made it clear that an assassination was not unwelcome.

The CIA and the Nixon administration launched a new propaganda campaign to impress on the military the danger of Allende taking office. Privately, military officers were threatened with a cut in aid if Allende were seated. During this seven-week period the CIA produced more than 700 articles, broadcasts and editorials in Europe and Latin America. Journalists in the pay of the CIA from at least 10 countries traveled to Chile for on-the-spot coverage. The propaganda came with the usual communist scare tactics-- fabricated stories that Allende would nationalize everything down to the small shops. The campaign was so intense that it affected the Chilean economy negatively, inducing a financial panic...

Meanwhile, the CIA was consulting actively with several military officers receptive to a coup. It was difficult due to apolitical attitudes and support for the constitution. The prime obstacle to a military coup was the Commander and Chief of the Chilean Army, Rene Schneider, who insisted on following the constitution. The coup attempt was a direct result of a plea for action by Donald Kendall, chairman of PepsiCo, in two phone calls to the company's former lawyer, President Richard Nixon.

With time running out before Allende was seated, the CIA distributed sterilized machine guns and ammunition to some of the conspirators on the morning of October 22. That same day, Schneider was mortally wounded in an attempted kidnapping. The CIA station in Santiago cabled headquarters that Schneider had been killed with CIA weapons. The assassination did not result in a coup; instead, military officers rallied around the flag and the constitution. Two days later, Allende was seated as president. The Nixon administration responded by cutting aid to Chile, including loans from the Export-Import Bank and the Inter-American Development Bank... In addition, holding what amounted to a veto, the United States denied all loans to Chile from the World Bank during 1971-73. The following U.S. banks [almost all fascist run outfits that had been ardent Hitler supporters very recently] canceled credit to Chile: Chase Manhattan, Chemical, First National City, Manufacturers Hanover and Morgan Guaranty. The CIA provided financial support to prolong strikes, and caused panic buying to further compound shortages. The CIA and the Nixon administration were determined to bring about a complete economic collapse and widespread public unrest to defeat the Allende government and prove socialism cannot work in the Western Hemisphere...

Large U.S. corporations also helped destabilize Chile in support of a coup to remove Allende. International Telephone and Telegraph (ITT) offered $1 million to Secretary of State Henry Kissinger. Officials denied the offer was accepted. However, former U.S. Ambassador to Chile Edward Korry has stated in recent interviews the offer was made by former CIA Director John McCone. McCone was a member of ITT's board at the time. The Nixon White House was well aware at the time that ITT was illegally channeling money to the Republican Party. Korry also stated that Anaconda Copper and other multinationals, under the aegis of David Rockefeller's Business Group for Latin America, gave $350,000 to the CIA to bribe members of Congress.

...On Sept 11. 1973. Allende's Administration ended in a violent coup. Allende was killed after an assault on the presidential palace, where he and a group of dedicated followers made a last stand. Within twelve hours, most of the people with Allende who had survived the military assault were executed.

...The Nixon administration immediately recognized the new regime and granted it $24 million in credit for wheat previously denied the Allende government. The resulting fascist regime of Augusto Pinochet was brutally repressive. Only 19 days after the coup, a briefing paper for Kissinger showed the death toll was 1,500, including 320 summarily executed. By mid-November, U.S. intelligence estimated 13,500 people had been arrested. Others were executed, disappeared or tortured, including two Americans killed in the mass executions at the national stadium... An estimated 50,000 died at the hands of Pinochet.

But the right wingers and the CIA hail Pinochet's rule of Chile as an economic miracle. For once in power he installed the boys from Chicago, a group of Chileans educated in economics at the University of Chicago. It may have been an economic miracle for the American corporations but it certainly wasn't for the average Chilean worker. As the Boys from Chicago promptly set about dismantling all social programs and destroying unions. The statistics of this so-called economic miracle are indeed bleak, as the GNP per capita fell from 1972 to 1982 by 6.4 percent. Presently Pinochet faces charges of murder in Spain if England will extradite him. But once again we see the model repeated, a legally elected reform minded government is overthrown to be replaced by a brutal right wing dictator, corporate America gets rich at the expense of the native population. In just Guatemala and Chile the body count from the CIA and their puppet regimes total over a quarter million... Does the reader have anymore questions over the fascist nature of our foreign policy as executed by the CIA?

And about that Libyan oil, which has NOTHING-- DO YOU HEAR ME? N.O.T.H.I.N.G.-- to do with the overthrown of the Qaddafi regime in the glorious name of democracy, the New York Times had a few salient facts that slipped through yesterday.

The fighting is not yet over in Tripoli, but the scramble to secure access to Libya’s oil wealth has already begun.

...Western nations-- especially the NATO countries that provided crucial air support to the rebels-- want to make sure their companies are in prime position to pump the Libyan crude.

...Colonel Qaddafi proved to be a problematic partner for international oil companies, frequently raising fees and taxes and making other demands. A new government with close ties to NATO may be an easier partner for Western nations to deal with. Some experts say that given a free hand, oil companies could find considerably more oil in Libya than they were able to locate under the restrictions placed by the Qaddafi government.

But, of course... to the victors, the spoils. Like everywhere in all ages. “We don’t have a problem with Western countries like Italians, French and U.K. companies,” Abdeljalil Mayouf, a spokesman for the Libyan rebel oil company Agoco, was quoted by Reuters as saying. “But we may have some political issues with Russia, China and Brazil.”

WaPo corporatist Steven Pearlstein is asking to be pilloried by fellow Villagers for "class warfare"

"Political candidates may not be talking about income inequality during this election, but it is the unspoken issue that underlies all the others. Without a sense of shared prosperity, there can be no prosperity. And given the realities of global capitalism, with its booms and busts and winner-take-all dynamic, that will require more government involvement in the economy, not less."

-- Washington Post financial columnist Steven Pearlstein, in Wednesday's "The costs of rising economic inequality"

by Ken

Maybe I'm doing him an injustice, but whenever I read Steven Pearlstein, he seems a safely predictable Village-corporatist stooge. Which is why Wednesday's column came as a shock.

He got off to kind of a shaky start: "Although much of the Republicans' 'Pledge to America' is given over to a discussion of economic issues, there is one topic that is never mentioned: the dramatic rise in income inequality." True enough, but immediately you have to wonder whether he's been paying attention to the last several decades' political discourse, all the more so when he continues, "As with global warming, Republicans seem to have decided that the best way to deal with this fundamental challenge is to deny it exists."

"Seem?" Republicans "seem" to have decided that the best way to deal with these fundamental challenges is to deny they exist? What would they have to do to persuade Mr. P that they're actually denying, as a matter of core principle, that such problems exist?

(1) With regard to global warming, how explicit do right-wingers have to be in their insistence that global warming doesn't exist, or at least isn't manmade, or hasn't been shown to pose any problem (and may even bring benefits like better beach weather and longer crop-growing seasons) for them to cross Mr. P's "seem to deny" threshhold? To put it another way, has anyone discovered any length to which the Republican climate-change deniers will not go to deny the reality?

(2) And with regard to economic inequality, has Mr. P truly noticed that anytime anyone so much as hints that it might be some sort of issue, the Right-Wing Noise Machine can be counted on to screech in unison:

"Class warfare!"

This is meant to end any discussion, and it almost invariably does, at least in the infotainment news media. In our beloved capital Village on the Potomac, there is truly no such thing as income inequality. Unless, of course, you're referring to the kind that really matters: the frustrating gap that keeps the merely rich out of the ranks of the super-rich. (There's also the gap that separates the super-rich from the obscenely rich, but that's even less discussed.)

Okay, so Steve is a little shaky about the politics of the subject. On the facts of income inequality, well, he's got some dandy ones.

If you asked Americans how much of the nation's pretax income goes to the top 10 percent of households, it is unlikely they would come anywhere close to 50 percent, which is where it was just before the bubble burst in 2007. That's according to groundbreaking research by economists Thomas Piketty, of the Paris School of Economics, and Emmanuel Saez, of the University of California at Berkeley, who last week won one of this year's MacArthur Foundation "genius" grants.

It wasn't always that way. From World War II until 1976, considered by many as the "golden years" for the U.S. economy, the top 10 percent of the population took home less than a third of the income generated by the private economy. But since then, according to Saez and Piketty, virtually all of the benefits of economic growth have gone to households that, in today's terms, earn more than $110,000 a year.

"By 2007," Mr. P points out, "the top 1 percent of households took home 23 percent of the national income after a 15-year run in which they captured more than half -- yes, you read that right, more than half -- of the country's economic growth."

He cites a number of "suspects," and offers the unsurprising conclusion that they're all to blame:

* Globalization ("in the form of increased flows of people, goods and capital across borders")

* Technological change ("which has skewed the demand for labor in favor of workers with higher education without a corresponding increase in the supply of such workers")

* "What economists call 'institutional' changes" -- "the decline of unions, industry deregulation and the increased power of financial markets over corporate behavior" ("Over time, more industries have developed the kind of superstar pay structures that were long associated with Hollywood and professional sports")

* And his "favorite culprit," "changing social norms" -- "around the issue of how much inequality is socially acceptable"

Mr. P sets out a good case for why this all matters:

There are moral and political reasons for caring about this dramatic skewing of income, which in the real world leads to a similar skewing of opportunity, social standing and political power. But there is also an important economic reason: Too much inequality, just like too little, appears to reduce global competitiveness and long-term growth, at least in developed countries like ours.

We know from recent experience, for example, that financial bubbles reduce equality by siphoning off a disproportionate share of national income to Wall Street's highly-paid bankers and traders. What may be less obvious, but not less important, is that the causality also works the other way: Too much inequality can lead to financial bubbles.

The liberal version of this argument comes from former Labor secretary Robert Reich in his new book, "Aftershock." Because so much of the nation's income is siphoned off to the super-rich, Reich says, a struggling middle class trying to maintain its standard of living had no choice but to take on more and more debt. I have some problem with the argument that the middle class had no choice, but it's certainly true that the middle class and the economy as a whole would be in better shape today if households weren't burdened with so much debt.

The more conservative version of this argument comes from University of Chicago economist Raghuram Rajan. In his new book, "Fault Lines," Rajan argues that in order to respond to the stagnant incomes of their constituents, politicians took a number of steps to keep the "American Dream" within reach, including subsidization of home mortgages and college loans. He might have added that politicians also were quick to cut taxes for the middle class even when it meant running up the national debt to pay for popular entitlement programs and government services.

Remember, Raghuram Rajan's argument is the more conservative one! And this from a card-carrying Chicago-school economist -- Chicago-school godfather Milton Friedman must be rolling in his grave.

SIDEBAR: WHAT WOULD UNCLE MILTIE
HAVE TO SAY ABOUT RAGHURAM?

But then, as The New Yorker's John Cassidy noted in his fascinating post-meltdown post mortem on the Chicago-school economists, which I wrote about in January (unfortunately, only an abstract was made available free online), Rajan was already a known heretic among his Chicago brethren in the run-up to the meltdown.

At a conference organized by the Fed in 2005, he said that deregulation, trading in complex financial products, and the proliferation of bonuses for traders had greatly increased the risk of a blowup. Senior Fed officials and other prominent economists dismissed his concerns. Lawrence Summers said that Rajan's critical tone supported "a wide variety of misguided policy impulses."

As I wrote in January, Rajan, who was chief economist of the International Monetary Fund from 2003 to 2006, calls what happened "a systemic breakdown" and insists that "we need to look more broadly at why it happened." In the book he was working on at the time, he argues "that the initial causes of the breakdown were stagnant wages and rising inequality," which created "an urgent demand for credit" among middle-class households "lagging behind the cost of living."

"Are you hearing this?" I wrote back then. "Once upon a time Uncle Miltie would have had you run out of Chicago for mouthing left-wing claptrap like this."

To return to Mr. Pearlstein, he points to "trillions of dollars being spent and invested" in "spectacularly unproductive" ways.

In recent decades, the rich have used their winnings to bid up the prices of artwork and fancy cars, the tuition at prestigious private schools and universities, the services of celebrity hairdressers and interior decorators, and real estate in fashionable enclaves from Park City to Park Avenue. And what wasn't misspent was largely misinvested in hedge funds and private equity vehicles that played a pivotal role in inflating a series of speculative financial bubbles, from the junk bond bubble of the '80s to the tech and telecom bubble of the '90s to the credit bubble of the past decade.

And he has an interesting argument concerning "the biggest problem with runaway inequality":

It undermines the unity of purpose necessary for any firm, or any nation, to thrive. People don't work hard, take risks and make sacrifices if they think the rewards will all flow to others. Conservative Republicans use this argument all the time in trying to justify lower tax rates for wealthy earners and investors, but they chose to ignore it when it comes to the incomes of everyone else. [Emphasis added.]

He insists there's a correlation between "polarization of income distribution in the United States" and "polarization of the political process":

Just as income inequality has eroded any sense that we are all in this together, it has also eroded the political consensus necessary for effective government. There can be no better proof of that proposition than the current election cycle, in which the last of the moderates are being driven from the political process and the most likely prospect is for years of ideological warfare and political gridlock.

I don't know where he gets the idea that moderates have been of much use in thinking about income inequality. If anything, you'd think the issue might be of more interest to all those folks in the famous middle now that the oligarchy of their financial betters has made them modest victims rather than, as before, beneficiaries of economic maldistribution. Still, it's hard to quarrel with his conclusion, which is the paragraph I've quoted at the top of this post. Here it is again:

Political candidates may not be talking about income inequality during this election, but it is the unspoken issue that underlies all the others. Without a sense of shared prosperity, there can be no prosperity. And given the realities of global capitalism, with its booms and busts and winner-take-all dynamic, that will require more government involvement in the economy, not less.

From a down-the-middle Villager like Mr. P, this sounds positively Marxist. You have to wonder how he will dare to show his face at Village cocktail parties.

His best hope is probably that the discussable (and, in policy terms, actionable) level of income inequality is likely to remain, at least for the foreseeable future, approximately where it was before he wrote this piece. Which is to say, out of bounds, on the ground of --

"Class warfare!"

#

Trapped in the meltdown (continued): As the Bush economic miracle plays out, we have deeper and wider cutbacks, and nonprofits in freefall

“When [Milton] Friedman’s Platonic ideas of free-market virtues are put into practice, they have too often generated a systemic orgy of competitive greed -- whose remedies, ironically, entail countermeasures of nationalization.”

-- Marshall Sahlins, University of Chicago emeritus professor of anthropology, quoted by John Lippert in a Bloomberg piece on the apparent collapse of "Chicago School" socioeconomics in its nest

by Ken

Am I the only one who's creeped out when Chimpy the Prez (you remember him, don't you?) emerges from his rathole and blithers about the non-existent "free market" and sneers sanctimoniously at "failed companies" that under normal circumstances should be allowed to fail? Is this the Twilight Zone, or what? George W. Bush pointing a finger at failed companies? Have we all taken leave of reality? This is a dunderhead whose history in business consisted of turning one company after another to a pile of shit. Anyone who would listen to anything he has to say about business or the economy should be in a straitjacket.

And so, given eight years at the helm -- and boy, do the people who voted for him have a lot to answer for -- of course he's done what he always does: turned everything around him to shit. With, true, the small exception of the family, friends, and cronies who piled up fortunes as immediate beneficiaries of his blithering incompetence. (In fairness, some of these must have been the same people who kept bailing Chimpy out of disaster after disaster through his so-called "business career," who may be presumed to have done so as an investment in the future, or rather their future.)

It still boggles my mind to think that so many people could have been so knuckle-draggingly stupid as to fall for a creature whose every cell screams out, "Fraud!" But more importantly, at least some of those people have to learn that the moronic bullshit he poured down their throats is in large measure the same bullshit that's been fobbed off on them for generations by "the business party."

Yessiree, what we needed to do was throw off all that awful regulation, which was holding business back and preventing us from achieving real prosperity. The reality, of course, was that all that regulation, by creating in some measure at least a sort of level playing field for business and providing for some of the basic needs of society, made possible both sustainable prosperity and a measure of civilization.

Business, of course, always wants the shackles removed. And when they get it, the result is always disaster, because there's no one to protect them from themselves. This time, with Cheney the war-maker (and war is always good for business) and regulation-stripper they bought themselves the pro-business government to end all pro-business governments. And naturally the result is economic catastrophe unprecedented since the Great Depression -- and we're still counting.

It's what doomed the McCranky campaign, though there are much better reasons why that campaign should have been routed. But in the end, it really had nothing to do with the lies and imbecilities Young Johnny was spewing. Voters just knew instinctively that the people in power had to be gotten out of power. It remains to be seen what happens once they discover that President Obama can't wave a magic wand and make everything OK. But will they look in the mirror, those people who voted for a lying simpleton not once but twice, and see the people who hate America so much that they twice voted for a man whose life's work was to destroy it?

Undoubtedly a lot of the people who voted to put Chimpy in the White House are now paying the price. After all, it's only the people who engineered his career and bankrolled his candidacy who made out like bandits from it. It would be nice to think that at least some of those people have come to understand what they did, in the hope that they won't be such easy prey the next time some huckster tells them what we really need is a government that's good for business. (There's some consolation in that at the academic level "the Chicago School" -- the slash-and-burn school of Friedmanite economic and social policy -- seems finally to have come into disrepute, as recorded in the Bloomberg piece quoted up top.)

And sad to say, we no longer have just one "business party." The lesson that Democrats like Rahm Emanuel have learned since the Dems were unceremoniously dumped out of power is that it's important to show those corporate wheelers and dealers that Democrats can be just as good friends as Republicans, maybe even better.

So now we survey the wreckage, as we wonder how much worse it's going to get. And how are we feeling the pain?

Here are some headlines pulled off the New York Times website which seem to speak for themselves:

* Home Sales in November Fell at Faster Pace Than Expected

* In Budget Crises, States Reluctantly Halt Road Projects

* As Economy Dips, Arrests for Shoplifiting Soar

The Washington Post, meanwhile, has a story that shouldn't surprise anyone, on the crisis facing charities and nonprofits generally, with a disastrous dropoff in giving. It begins:

For Charities, a Season of Need
With Donations in Free Fall, Groups Try to Capture Holiday Generosity

By William Wan and Brigid Schulte
Washington Post Staff Writers
Tuesday, December 23, 2008; B01

In the world of philanthropy, December is everything. It's the one month when people are at their most generous, when procrastinators rush to beat the year-end tax cutoff for donations, and when charities count on collecting as much as a third of their annual contributions.

This year, with rising unemployment and a tanking economy, donors have already informed at least one-quarter of nonprofits in the Washington that they will be giving less, according to the Center for Nonprofit Advancement. As a result, more than 40 percent of nonprofits plan to reduce programs or cut staff, and most are reevaluating the way they do business to weather the year ahead.

The piece surveys a number of D.C. charities and nonprofits that are scrambling desperately this month to make up for gigantic shortfalls in their operating budgets, without a great deal of success. However --

Earlier that day, in Northwest Washington, organizers of another kind of event were suffering the opposite problem: overwhelming interest.

Washington's top nonprofit leaders had called an emergency meeting downtown to try to figure out how to survive the economic crisis. It was supposed to be an intimate gathering of a few dozen leaders, but so many nonprofits registered that organizers had to create a waiting list. The meeting was dubbed "Nonprofit 911."

At times, the 500-person town hall meeting resembled tent revivals of old. There were prophecies of doom, messages of hope and testimonies from people struggling in hard times.

"If you think it's a storm, you just batten down the hatches and wait for it to pass," another said. "But this is more like climate change . . . like the coming of the ice age."

"As bad as this year has been," the Post writers write, "experts say, 2009 might be worse."

"No one knows what's going to happen, the kind of choices we're going to have to face," said Adam Tenner, director of Metro TeenAIDS. For weeks, anxiety over his group's finances has gnawed at him so much that his stomach started hurting.

"When the choice becomes which service we're going to cut, who we're going to stop helping," he said, "any choice is going to be a bad one."

The Post also has a piece that attempts an overview of the deepening recession:

Deeper Cuts, Widespread Pain
Few Industries Are Immune as Companies Shed Jobs in 'Serial' Downturn

By Annys Shin
Washington Post Staff Writer
Tuesday, December 23, 2008; D01

Recessions can be notoriously uneven. They can wreak havoc with the livelihood of factory workers but not that of bank tellers or nurses. Whole industries can see jobs washed away forever, while others hum along and even grow.

This time, however, the pain is more widespread, economists say, affecting the investment banker, the auto worker, the warehouse manager and the toy store clerk.

So far this year, companies have announced layoffs that affect more than 1 million jobs, according to job placement firm Challenger, Gray & Christmas. Bank of America, the Dow Chemical Co., Anheuser-Busch InBev, General Motors and Circuit City are among the growing number of companies that are letting people go.

Another key difference with past recessions has been the downturn's "serial nature," said Jerry Nickelsburg, an economist with the UCLA Anderson School of Management.

In other words, the recession has not affected industries and regions at once, but has rolled out in spurts.

Industries with some of the steepest job losses include construction, financial services, retail and manufacturing. The regional differences in job losses reflect how large a role those industries play in a given area's economy.

Among the states most immediately and devastatingly hit have been California, which was hardest-hit by the bursting of the housing bubble (we haven't talked about their impending state-government crisis -- I assume everyone has been tracking that story), and Michigan and the Midwest, Ground Zero for the domestic auto-industry collapse. Shin notes:

Many of those who have been or are about to be laid off will have to find a new line of work, several economists said, because they won't be able to go back to their old one.

The construction industry has shed 780,000 jobs since September 2006 according to the BLS, and it isn't likely to go back to bubble-like levels any time soon, experts said. Further, an anticipated decline in the construction of office buildings, apartments and shopping centers is likely to spur more layoffs in 2009.

Rebecca Blank, an economist at the Brookings Institution in Washington, said she expects manufacturing jobs to keep vanishing steadily from the U.S. economy, including in the auto industry. "It's been a downward trend since the late 1970s," she said. "They are not coming back by and large."

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