Why Liberals And Non-Rightists Lose The Deficit Hawk War

Striking how today’s Washington deficit and debt debates echo Continental arguments and policies in the 1920s and 1930s. As before, Malthusian linear extrapolation of today’s circumstances leads to a cataclysmic future. Ideology and epistemology fuel and derive sustenance from that apocalypse.

While E.J. Dionne is not often cited here in the bunker, he did sum up the Malthus Cheerleaders well:

The moment’s highest priority should be speeding economic growth and ending the waste, human and economic, left by the Great Recession. But you would never know this because the conversation in our nation’s capital is being held hostage by a ludicrous cycle of phony fiscal deadlines driven by a misplaced belief that the only thing we have to fear is the budget deficit.

A major reason Malthus walks among us again is so few American policy makers are economically literate. And shrink from basic maths. Economists aren’t much better. Consider how ideology as ‘free trade’ ignored mercantilist manipulation from Tokyo, Taipei, Singapore, Seoul and Beijing because ‘consumer welfare’ was the immutable barometer. (Lawyers, too – remember the Chicago School (law and economics) influenced decision that Japan couldn’t dump TVs in America because Japan was a capitalist country and firms don’t do unprofitable things).


Adding to difficulties? The federal budget’s opacity and arcana induces a particularly sudden coma. Only the most fanatical (masochistic) dive in. Thus, Paul Ryan’s outsized public presence. And David Walker’s. Who, you ask? A previously obscure U.S. Controller General, he launched his Comeback America Initiative to sound the alarm of budgetary doom without massive and immediate cuts. Omnipresent in D.C. and its Acela Mid Town adjunct, Walker comes perilously close to demanding an emergency government of national deficit reduction act. If you wonder where Joe Scarborough got his talking points (and Mika, too) look no further.

What Ryan and Walker (and les autres) provide are essentially crib sheets for how to sound informed while not really understanding the math, economics or actual budget mechanics. They dodge questions by barraging arcane factoids and posing existential act or die false binaries. They’s also spent years building to this moment. Even if their public notoriety seems overnight. It’s that trifecta – seeming expertise, simple solutions (draconian budget cuts) that people can analogize to their home cheque book, and relentless Malthus meme promotion.

There’re no corresponding figures promoting growth engaged across this full spectrum engagement. Who can and will feed the sound bite news entertainment machines. And walk the halls of Congress, lobbying with hard simplicities. Or taking years to build national grass roots movements.

Bruce Bartlett, for example, as a Republican budget and fiscal analyst long argued for spending restraints under Bush. And was fired for his troubles. He also understands that growth is the solution to debt and deficit constraints. Still, he’s an outlier in most Movement/Republican circles and by temperament and training more wonky than meme political. (Meant as a compliment, Bruce). Krugman has similar but even more profound limits. And so on.

To see E.J. Dionne above write a column is nice. Or the Daily Beast writing that E.J. Dionne wrote that column (albeit showing pretty shoddy understanding of macro-economics 101). This highlights our point. When columns are themselves noteworthy, it underscores the vacancy on the actual political playing field.

Are we wrong? Who’s the champion for a growth-led strategy?

Homeowners Thrown Under The Bus – What’s In Your Wallet?

Team Obama heralds today’s settlement among 5 banks, the feds and 49 states. $25 billion “to help hard working Americans”. Were that it so.

Under terms of the settlement, the five lenders won’t have to pay out the bulk of the $25 billion. Some $17 billion represents credits applied toward targets lenders have to modify some of the loans on their books. Some of those modifications would have happened anyway. Based on a complex formula, bankers will earn credits on a sliding scale depending on the type of modification. The least costly refinancing methods might earn a lender as little as a nickel on a dollar; the costliest would generate a dollar-for-dollar credit.

And so on. Our old friendly acquaintance Liz Warren observes she “hopes [the settlement] is the beginning, not the end” of efforts to hold banks accountable for their destructive duplicities. Fake sincerity is equally grating, whether from Obama’s toothy visage or Mitt’s coiffed animatronics.

The settlement marks another kind of accounting transfer labeled as a ‘payment’. Mostly, money is merely moved from account to another. In that scheme of faux payments, California wins big. “$18 billion” in “payments” out of the “$25 billion paid”.

The real beneficiaries — as we know — are in fact the banks, not American citizens. A few specific Americans will benefit from the settlement’s narrow targeting. But the banks pay out almost nothing.

The State AGs posture saying the real victory is that banks will run the foreclosure mills with less blatant disdain for maintaining mere pretenses. Appearances must be maintained – that’s our victory. Americans who were evicted by bank fraud within a specific window – Jan 1, 2008-Dec. 2011 – will receive. . . $1,500. But hey, banking executives obtain some protection for liability. Turn that frown upside down!

What Barry announced is actually what Mitt Romney has been promising – expedite foreclosures, clear them out, fix ’em up and sell/rent. Realtors are on board with that. The liquid class are too, expanding holdings, buying at the bottom. Banks can now begin clearing overhang, improve their balance sheets. All needed, we are told, to improve the economy and get lending going again.

Except, of course, banks have essentially free money (ours, in almost zero interest accounts) and from the fed. And lend it out at obscene multiples – forget about gouging us using our money with debit card fees. Moreover, the banks’ current balance sheets are almost wholly separate from corporate America’s refusal to invest or spend over $2 trillion in idle cash. So let’s stop lying to ourselves.

Americans are trapped in upside down mortgages to the tune of $750 billion. This settlement will not apply to more than 5% of that market malfunction. And contrary to what politicians say, the very (slight) incentives in the Settlement further encourage banks not to help those remaining trapped underwater, even (especially) if completely current.

Those Americans and others are left behind, drowned out by photo ops and press conferences. Their distress and its resolution will have far greater impact on (a) returning economic growth; (b) a vibrant (as opposed to moribund functional) real estate market; and (c) ultimately the banks’ own well being. How inconvenient of them.

No one here likely would argue that a functioning real estate market responding to true market signals isn’t essential for the economy. Healthy (but not predatory) banking still eludes us, too.

Because that, ladies and gentlemen, is just what went down – millions of Americans thrown under the bus for optics and the possibility — maybe — of helping bank balance sheets.

The Invisible Great Recession: Did It Ever Happen?

Years from now, will people really know we ever had a ‘Great Recession?’ How? Will those two words resonate a concrete sense of time and crisis? Or be just another meme football, drawing meaning from shadows cast by shifting contexts?

The Great Recession Is Not Happening, Move Along. Keep It Moving.

They can’t know because we today refuse to talk about the Great Recession in its granular reality. We’re a people compulsively determined to pretend it’s not happening.

Of course, there’s ‘talk’. Our lives every day are filled with tactical fluff. Snarky tweets. Cable news opinion – millionaire teleprompter readers solemnly reading economic numbers like a professional sports summary. The next Obama sound byte merges with the next Republican Debate in a vortex of detachment.

Ephemera. All of it flitting like lifespans of summer fireflies. Easily interchangeable by . . . Tebow, crashed cruise ships, whether Vanity Fair some magazine bleats is Zooey Deschanel ‘over’? And so on.

That is not how (healthy) societies memorialize and create legacies about one of the great catastrophes of the modern era, the Great Recession.

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The Fed Throws A Spit Ball

As the American Lost Decade(s) unfold, the Federal Reserve’s options to influence economic output dwindle. Today, the Fed confirmed the economic horizon will remain bleak. It also announced it would sell $400 billion of its near dated Treasuries and buy longer maturity ones. In a nut shell, Bernanke is trying to keep today’s free money and ‘bend’ the long term interest rates lower. The move (like earlier QE2) will have little impact in real economic output. The markets understandably aren’t impressed and fell on the grim forecast:

The Fed will replace some shorter-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession, confirming market speculation that policy makers were planning an “Operation Twist” similar to a program in 1961.

“Markets took note of the Fed’s downward revision of the economic outlook and upgrading of downside financial risks,” Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co. in Newport Beach, California, wrote in an e-mail. Pimco is the world’s largest bond-fund manager. “While Fed purchases can influence Treasury and mortgage valuations, it is limited in its ability to deliver economic outcomesz” . . .

The Fed also said today it will reinvest maturing housing debt into mortgage-backed securities instead of Treasuries. “The mortgage story is the most important part,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “This goes right to the source. This will create a wave of refinancings on the mortgage side.”

In short, the Fed’s move will not impact the real economy but might have some impact on artificial economic activity like re-financing, although that market segment is not infinitely elastic — i.e., many have already re-financed and now weigh the costs (aggravation as well as real) versus marginal benefit. Naked Capitalism also notes the flattening long term rate will undercut the basic business model of the banking system as a whole.

Why We’re In Deeper Trouble Than Even Justin Wolfers Thinks (Long)

Justin Wolfers offers sobering empirical analysis to support his 4 conclusions:

1. The slump began in late 2006. And indeed, we were hardly enjoying good times through early 2006.

2. It’s a big slump, and GDP per capita fell by over 7 percent.

3. We remain a long way below the previous peak.

4. It’s going to take a long while to return to where we were back in 2006. Most forecasters are expecting GDP to grow by around 3 percent, implying per-capita growth closer to two percent. At those rates, average incomes in 2013 will (finally!) be back around the levels of 2006.

He has some nice charts. Check ’em out.

Unfortunately, both he and the Fed think that the last few years are essentially cyclical — i.e., connected to and integrated with economic behavior and welfare/consumption before and to come. Things are grim to be sure, but we’ll get back (in 2013, go team). If only it were so.

We Are Not In A Normal Cyclical Downturn But A Structural Collapse

First, as you know Dear Reader, the Stiftung has argued for years that the American economy ceased generating real (as opposed to phantom, transient, financially engineered) income and per capita growth since the mid-1990s. Second, financial engineering hid this structural dysfunction from 1994-2011 by constantly generating bubbles to obscure the real underlying atrophy and decay.

Wolfers is optimistic about 2013 because his return data point, 2006, is actually itself a bubble popping high point. Don’t look down, it’s a long, long way to fall.

For the Stiftung, our economic narrative is thus: (a) the First Tech/Telecom Bubble (1994-2001); (b) the National Security Boom (2001-present); (c) Tax Cut -Redistribution (2001-present); (d) the Second Real Estate Bubble (2002-2007); and (e) the bailouts/USG and Fed subsidies (2008-present). Bernanke all but assured in recent appearances that money will continue to be free – as in close to zero % cost of borrowing. Under normal circumstances, if we were in a cyclical moment, the Fed would not only watch out for but want to see inflation. On cue, a Second Tech Bubble is getting ready for its close up.

We’re Not On The Same Economic Curve Anymore

Our predicament is not related to normative, linear macro-economic narratives. But because we collectively don’t realize that, the U.S. continues to make illusory and dangerously erroneous choices along an inflated baseline curve. Our real welfare curve is an order of magnitude smaller. It’s highly unlikely the U.S. will hit Wolfers’ mark in 2013 because there’s literally no there, there.

To be blunt, many of the jobs vaporized since 2008 are not coming back. Those few that do will be significantly reduced. People really haven’t internalized any of this yet.

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The American Bubble Machine’s Last Gurgles

Obama drops a sham budget the same day China officially overtakes Japan as the World’s second largest economy. The latter is pre-baked old news. That China will surpass the U.S. in a mere 10 years? Some might wonder why the delay?

Obama tactically is wise to play budget kabuki with Republicans now. They’re disorganized, fumbling votes. Tactical politics dictate only open with the first card. Make the Republicans get their act together before trying to make a deal. Shows he’s learned a little bit from the stimulus fiasco. Still, a small a game with small players. Neither offers a way out for America’s long term economic problems. The first step must be to wean the American addict off its bubble addiction.

Round And Round It Goes

Consider: Deng Xiaoping accelerated China’s economic reforms in and around 1980. The same time as America abandoned traditional capitalism for plutocratic crony casino gambling. The game started with the then new fax machine and spreadsheet technology. Together, Wall Street didn’t need to be Wall Street anymore. And a 28 year old could gin up arguments for ‘unlocking’ wealth by tearing down. Hence, the 1980s M&A/LBO bubble. We were friends with one of the real life players fictionally portrayed in Stone’s ‘Wall Street’. Stone was not that far off. When we got there some people really did spread out lines at 2:30 AM to make it through another 24 hours churning out mounds of mind numbing, mostly unread paper for a closing. This first bubble popped the same time as its sisters, the S&L boondoggle and the first real estate run up.

By the early to mid 1990s, the American economy started its long migration to the Pearl River Complex. Consulting companies like the current Accenture held huge conferences teaching how to out source to China. The structural damage all carefully camouflaged. Post Netscape IPO and tout le monde reached for the NASDAQ ring. Boom, fraud, the usual routine. ENRON, Ebbers at WorldCom, etc. We had a friend working with then-AT&T CEO Armstrong who was going crazy facing pressure to match WorldCom’s (faked) numbers.

They say Clinton’s America created 20 million new jobs. True. Many of them, however, based on illusions and sock puppets peddling dog food. We all know the dot com bubble popped. And the CLEC (competitive local exchange carrier) flame out. By 2001 America economically flat lined, albeit with a budget surplus.

Two bubbles quickly helped obscure the reality that the American economy no longer creates long term wealth and jobs. First came the fear/threat national security boom followed by the real estate/financial swindle. Net result? No net new jobs created. Underscore that — we are exactly back where we started. With one exception – unprecedented wealth concentration.

The Patient’s Flatlining! Get Those Paddles! Stat!

Obama may claim he’s creating new jobs. Or ‘making investments’. But the American economic structural atrophy is not and can not be tackled by a federal budget. Or Potemkin ‘retraining’ programs. We must first begin with hard truths. The American economy doesn’t create much real value. For us or for export. We need a comprehensive macro economic development vision to cure our bubble addiction. Executed across industry by industry, down each silo from component and subcomponents to final assembly, etc. With tax, tariff and budgets aligned accordingly. Not the reverse.

Obama’s budget is thus D.O.A. regardless of the Republican counter. Neither have a plan to stop the bubble addiction. Neither can afford to. It’d mean telling the American people they are indeed rodents in the spinning wheel, going nowhere.

Some Rightists share this concern. They argue America needs a return to ‘Hamiltonian’ policies. Helpful but insufficient. Quaint even. Hamilton’s ad hoc market interventions helped nurture burgeoning American comparative advantage. Japan, China, the Four Tigers – all gouged the heart out of the American ‘free trade’ tragedy of the commons. Corporate America was not only complicit but eager partners. Does anyone really think ‘Hamiltonian’ policies could have handled “>Japan’s original post-war wealth creation model copied by others? Or the current Chinese juggernaut? What’s precisely the American comparative advantage now?

A problem with junkies is they never admit they’ve a problem. So now comes another fake boom, the ‘social media’ economy. Overstated? Zynga is the company that makes games for Facebook. It’s now being valued at between $7-$9 billion. It was a mere $4 billion 10 months ago. Facebook is now valued higher than Amazon and tails only Google on the Web. Don’t forget Twitter. It’s a company that doesn’t have a real business model or a path to sustainable revenue. It’s average revenue per user (ARPU) is 28 cents. Now said to be ‘worth’ $8-$10 billion. Most likely as a part of Google, etc.

There’ll be economic spin offs from this newest bubble. There always is. Cheerful cable talking heads touting some index going up. The question few will ask is what’s any different from the other bubbles? Valuations suggest it’s the same old song. How long will the associated economic activity last? Where does the final ‘wealth’ end up? Or just the chimera of hope and change? You know where the Stiftung stands.

All of which is to say the looming budget fracas is relatively uninteresting. Cutting the deficit or ‘investing’ in education or even on random projects like high speed rail are beside the point. Without a comprehensive macro economic vision and actual politics to implement it, the budget ‘battle’ is like the old WWF. Which reduces 2012 down to Republican Light vs. Republican Right.

Oh joy.

Down To The Last Arrows

With a dysfunctional Duma and Administration, lonely eyes turn to Joe DiMaggio the Fed for economic hope. Krugman advises don’t expect much. We agree. It’s always a comfort to know the Fed sees the same color sky as the rest of us. Still, in practical terms, there’s not much it can do. The easiest course is play to market and consumer psychologies. Which is what this piece in the WaPo is all about. ‘There’s alot we can still do.’ Except there isn’t.

Fed leaders are weighing modest steps that could offer more support for economic activity at a time when their target for short-term interest rates is already near zero. They are still resistant to calls to pull out their big guns — massive infusions of cash, such as those undertaken during the depths of the financial crisis — but would reconsider if conditions worsen.

The main floated idea? It’s a recycle. Even before Bernanke became Fed Chairman, based on his study of Japan’s ‘Lost Decade’, he noted that the Fed could do more than drive short term rates to zero or historic lows re mortgages, etc. The Fed could venture into influencing long term and private debt. How? By ‘signaling’ markets its commitment to keep such rates ‘exceptionally low’ for an ‘extended period’. To be effective this language would require an implicit commitment to embark upon (most likely) a public asset (bond) repurchasing program. This ‘comfort letter’ would in turn stimulate economic activity.

Except that even here, the Fed’s hands are largely tied, despite assurances offered by, say, the President of the St Louis Federal Reserve Bank in the WaPo item. Krugman refers (ironically) to a Goldman analysis as a guesstimate: to achieve our current near zero short term rates would be the equivalent of the Fed embarking on $10 trillion in asset purchases. If the short-lived Fed 2008-2009 actual long term asset purchase program of around $2 trillion is perceived as unprecedented and ‘massive’? So we take Krugman’s point.

Obama’s folly of premature ‘bi-partisan’ surrender to ineffectual tax cut demands gutted the already inadequate stimulus package. The ‘Summer of Jobs’ comes home to roost. ‘Mission Accomplished’, indeed. Wither economic policy now with a radicalized demos? Disturbing data suggests Democrats in power have accomplished the once unthinkable — nudging Boomers generationally to embrace the irrational Rightists. Losing this demographic is more than just a partisan political body blow per supra.

We haven’t seen the generational preference data ourselves. We don’t dismiss it, however. David Winston, while a proud partisan, is deeply committed to the empirical. This from personal experience. We tend to give both his analysis as well as generalized glosses more credence than from others that come to mind.

Go team.

On Andy Grove, Mercantilist Schwerpunkts And Free Trade Kool Aid

If one is serious about re-industrializing the United States to create high wage manufacturing jobs, one probably should shun hapless pundits and other ideological purveyors. To be fair the braying comes from all sides: ‘Free Markets’ cant or the tiresome “What Would Hamilton Do Today”? As par for the course, the most visible ‘experts’ provided to us on the cable news wall often can’t read a spreadsheet, think EBITDA is a new social networking site, haven’t actually worked for an industrial company or consistently met a payroll.

Economic development requires a more serious mind. But then, one could say the same about war. And look at that.

Even more than killing dark people, a sustained development concept in Bubble-addicted America is particularly challenging. Americans expect to earn inflated income by performing essentially meaningless and frivolous output. Haven’t we essentially outsourced the wars, too?

Andy Grove laments the decline of the hi-tech industry’s domestic manufacturing. He’s right that it is essentially now a (temporary) branding and marketing channel for Asian manufacturers. “Made in China, Designed By Apple In California”. Our friend comment shared this link from Grove on point: Sadly, one has to ask: where precisely have you been for the last 30 years, Andy? (Let’s overlook the Intel billions invested in India, Malaysia and China along the way.)

Can Americans Even Have An Intelligent Policy On Re-Industrialization?

Americans we will assert seem generally uninterested in development matters, especially historical economic development. So it’s important to put forth first principles to frame a conversation. Say a president visits a failed state like Michigan. He declares ‘new manufacturing jobs in America’ [cue ritual applause] will come. But before that can happen, we should be clear on what’s the goal of American economic activity? To promote *consumer* welfare measured in the here and now? Or to develop a social and economic infrastructure that maximizes *societal* welfare in the medium to long term? An infrastructure to enable other economic and social expenditures (military, standard of living, life expectancy, etc.)?

The first is America 1960-2010; ‘consumer welfare’ is the metric. The second? Delayed consumption, lower standards of living and capital accumulation for the future. How one answers these questions determines divergent paths.

The Four Models

For statesmen or serious students of Great Power history (this excludes by definition march of trumpets Boys Life ‘history’ ala Victor Davis Hanson et. al.), there are 4 essential, successful modern development models: (a) the British until 1870s (the end of the mercantalist First Empire and commingling with ‘Wealth of Nations’ and ‘White Man’s Burden’ era); (b) the Germans from 1870-1914; (c) the American from 1880s-1960s; (d) the Soviets 1917-1970s; (e) Japan from 1945-1991; (f) the Four Tigers (copying Japan); and (g) China (1980s-today). The latter three are essentially variations on the Japanese dual economy mercantalist approach. (The BRICs are more notional, still in China’s shadow).

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Why Goldman Has Contempt For Obama And The Imperial City

Josh Marshall sums up why Goldman and Wall Street look at Obama and D.C. in general as mosquitos. It’s not about regulation or banking reform but the broader question of ‘who, whom.’ The City has always looked down on D.C. as uncouth, a rustic, non-cosmopolitan do-nothing. As Josh notes it’s about broader sociology; always has been. The latest round of Goldman bonuses just another signal for the hired help to remember who’s upstairs and who’s downstairs.

The City’s economy, however notional in the bubble years, is far more ‘tangible’ than the turgid federales and their politically hamstrung procedure. Sure, many on Wall Street may not understand their own ‘products’ (we loved hearing that for the first time when we were there years ago, along with the notion that mounds of documents were ‘technology’). But then *no one* in D.C. understands the federal economy, budget or even how to run a small business. The most famous and vociferous D.C. bloviators on cable re the ‘miracle’ of American enterprise wouldn’t know a revolving credit agreement from a post office mailbox lease. In the time it took Goldman to overinflate and then rape Greece Congress might have begun organizing a hearing on Athenian financial assistance.

Goldman and the rest intend to survive. Not only Obama but the eclipse of Wal-Mart America. Despite all the political posturing, Dodd’s feckless and weak ‘reform bill’ is almost entirely acceptable to the broader financial services industry. Dodd and Obama put the fear in no one — again, as Josh notes, recall when Goldman blew off meeting the president before. It’s one reason we tune out alot of the current posing on both sides. The congressional and Administration penny stock players in D.C. are like – to switch analogies – concierges who overstep their bounds and attempt familiarity while holding open the door.

D.C. long ago gained the reputation in the City as ‘rubes – we’ve established who you are, we are just haggling price’. So when the strumpets turned up with convenient cash in 2008 all well and good. A steady hand back from self-induced vertigo. Still hired help remains just that. Perhaps a little extra for them year-end for alacrity. In no way did a sociological paradigm change occur in the City, acknowledging D.C.’s primacy over the City’s cosmopolitan captains. AIG’s lock, stock and barrel ownership by the U.S. government really is a side issue – few on Wall Street ever understood AIG, find insurance dreadfully dull, and never liked AIG anyway. Greenberg’s legal travails elicit little sympathy at all.

Wall Street epitomizes the City’s condescension to the poorly paid government street walkers in D.C. But its soft presence permeates its arts, media, industry, cultural icons such as museums, etc. In a way, the U.S. Government may have been too successful in averting a major depression. Slightly humbled, barely chastened and unbowed, Wall Street (and the City) only flirted with real consequences (Lehman, Bear Stearns) of collapse unlike most of America. Isn’t the Dow back? This Goldman saga is a chapter in the ongoing tale of two cities. The book will not end with a character named Obama.