The irony of greed: The end game for Neoliberalism?

The global economy is in the toilet and the Boomers’ representatives are chanting: “flush, flush, flush.”  Me? I am eating cigarettes and wine while admiring the remarkable consistency in the myopia of all of it.

In the name of fiscal prudence the whole of the advanced capitalist zone is in engaged in austerity budgeting and calls for more of the same.  Even Martin Wolf, in his otherwise insightful column in the FT online today, felt the need to tap his hat and nod in the direction of the genteelism of supply.  Exhibit A, the conclusion to his incisive intervention:

Reconsidering fiscal policy is not all that is needed. Monetary policy still has an important role. So, too, do supply-side reforms, particularly changes in taxation that promote investment. So, not least, does global rebalancing. Yet now, in a world of excess saving, the last thing we need is for creditworthy governments to slash their borrowings.

As is widely acknowledged, monetary policy has little outside of conciliatory role to play at this time.  In so far as the CBs should not make the mistake of tightening policy as the ECB and the BoC did.  But apart from the role of spoiler there really is not much left for the CBs to do.  The problem is squarely fiscal.  As Wolf himself went to pains to argue.  Why then the conclusion given that further tax reductions are not only going to make the fiscal positions of governments worse they will also likely have the same effect as lowering interest rates at this time:  Nadda, ziltch, rien, nothing?  The problem is that Wolf has to tip his hat to conventional wisdom.  If not; he has no hope of bending the ears of policy makers.  Oh well, that is his plight not mine.

Here, given none are listening we may speak frankly.  The world economy is in the toilet because free trade, tax cuts, deregulation and above all the liberalization of finance over the last thirty years let loose a Tsunami of forces both economic and political.  The liberalization of finance and production allowed for the national gutting and then global whipsawing of labour.  As the profiteers profited and retired workers slept while the assets they had built were being systematically stripped and the fortunes being amassed were then turned to the seedy business (although a time honoured practice if one cares to actually read Smith) of buying off the government–and it must be stressed the intelligentsia too–broadly understood.

We now have the perfect storm.  A generation of public and private sector functionaries has been trained to believe that the market can do no wrong and the government no good.  As a corollary is of course the proposition that monetary and regressive tax policy is everything.

The irony, of course, is that any credible account of the present crisis would have to admit that we are here because free trade, tax cuts, deregulation, the flexibilization of labour markets  and above all the liberalization of finance brought us here.  How odd it is then that we should be treated to more of  the same as the cure for what ails us.

A rotting fruit that does not give vent to its own demand?

Given we seem to be stuck in fairly heady economic times it seems worthwhile to me to put out another post on the subject of employment, labour force growth and unemployment. In this post I am going to revisit the question of labour supply and demand and then take a closer look at the related issues of structural unemployment and the rotting skills (hysteresis) and dependency thesis  that has gained so much popularity in policy circles since mid 90s.

In a former post I mentioned the surge in labour supply during the 70s and 80s yet the graph I produced was a little underwhelming because it took a look at the underlying demographic growth of potential labour supply and not actual labour supply.  So this time I have have subtracted total labour force growth from total employment growth. Again, a positive reading indicates demand growth is outstripping supply growth and thus a decrease in the unemployment rate.  The inverse is that a negative reading says labour supply growth is greater than labour demand growth and thus leads to an increase in the unemployment rate. Here is the graph:

This is fairly sobering stuff.  The jobs boom of the 60s gave way to the deluge in the labour supply of 70s from which the employment market not to mention the welfare state has never fully recovered.  All that talk in the 90s about the need to reform UI/EI was not really about workers gaming the system it was about a welfare state that could not and would not provide the kind of insurance necessary to cover an over 70 % participation rate in which workers were more likely to be unemployed.  The graph below shows just how ugly it can get.

Clearly the deluge in the labour supply 70s had profound impact on long term unemployment which amounted not to an institutionally determined behavioural switch in workers propensity to work but rather a structural shift in the labour supply curve sans an equally profound shift in the demand curve for labour.  We know for example that for two decades, from the late 70s to late 90s, that real wages were stagnant indicating a loss in the bargaining power of Canadian workers. Yet despite the loss in wage bargaining traction, demand for labour was not forthcoming until the dot com and later housing booms of the late 90s and 2000s.  At the end of the day it was the bubble economies which finally, and fictitiously managed to work through the supply boom of the 70s.

If there is any doubt that demand for labour is the most important determinant of structural unemployment rates we need only look south to our American cousins.  In the graph below I have plotted US long term unemployment rates along side the Canadian rates.

Despite or because of higher US productivity during the 2000s the US had already begun to move towards higher levels of structural unemployment than Canada during the early 2000s something not seen since the mid 70s.  Clearly the severity of the last recession in US accounts for most of the difference in long term unemployment rates.  I have not seen any research which argues that the US has a significantly more generous unemployment insurance system than Canada.

The popular myth promulgated throughout 90s was that structural rates were high because they were high.  In the literature this is called hysteresis.  The basic idea is that the longer  a worker is unemployed the less employable they become because their skills degrade like a piece of fresh fruit on the kitchen table.  The hysteresis argument was used in turn to argue for more restricted access to EI and lower benefits to encourage workers to get back to work before their skills rotted.  This all had the air populist plausibility particularly when combined with the trend toward increasingly individualistic explanations for collective social problems in the social sciences especially economics.  But whatever the strange brew of populist folk wisdom–that workers prefer the dole to working–and academic fads the problem is, as the graph above demonstrates, high structural unemployment and hysteresis seem to magically disappear when there is strong demand for labour.  And that demand, as the graph above also suggests, is determined by the general health of the macro economy and has nothing particularly to do with the supply characteristics of labour.

To put a fine point on the argument what needs to be demanded of the purveyors of the hysteresis hypothesis is just what reversed the rotting of workers’ skills that magically made them employable after 1991-92.  Was there a steady increase in the funding of retraining programs for example?  And what about the US what was going on after 2001 did the Skills of US labour all of sudden just start rotting?

The alternative narrative to the rotting skills / lazy labour thesis is that the 70s was a period of structural realignment in which secular period of decreased GDP per capita growth set in matched by a deluge of labour supply.  The 80s and 90s were thus periods of adjustment to this new reality.  The UK the US and Canada were early supply side reformers which consciously sought to re-enforce the punitive logic of capitalist labour markets in order to assure price stability (tame inflation) and break workers bargaining power.  In other words, neoliberal macro-policy, despite protestations to the contrary, had nothing much to with solving the problem of long term and high structural rates of unemployment.  It was a feature not a glitch that the solution to that problem would have to wait until the supply side reforms delivered up their magic via a tsunami of consumer credit and control fraud serving up a ponzi economy that could approach something close to what could be called full employment.

As this report from the BLS (p.23 A-12) demonstrates long term structural unemployment has gotten worse in the US not better since 2009.  Most sober economists will concede that this has everything to do with the health of the US economy.  But it will not be long before the rotting skills thesis is floated into the stream of policy discourse as a cover for the fact that like with the financial sector the solution is to kick the problem down the road and blame the victims along the way.

*Note that Stats Can defines long term unemployment as 1 year + whereas the BLS defines it as 27 months weeks +.  By using 6 months + which conforms to the format of the data reported by the OECD I have more less deployed the BLS definition.

Extend and pretend

It is bad when the most pertinent of commentaries gets no response. What is ironic here is that at the micro level banks are telling their public stop pretending we are not extending even though they face near zero costs or in the case of the US negative costs.

You leave out an important scenario: in a zero interest rate environment, no bank is bad. This is why otherwise insolvent banks like Bank of America or Citi can stay solvent. It doesn’t matter the proportion of non-performing loans on the asset side as long as its cost of funds is minimal. Banks are thus engaged in a race with time to capture a positive return to recapitalize before interest rates rise.

Posted by: Guillaume | November 08, 2010 at 10:48 PM

Yep extend and pretend. That is the future but it is not as yet the present.

The United States gets Sid Hatfield back: Sheriff tells banks to FO

I do not know how many of you have been following the criminality in the foreclosure sector south of the line but I have for several months via the blog Naked Capitalism which has been doing intense coverage for some time.

This story broke on CNBC

CHICAGO – Two of the largest U.S. mortgage servicers have said they will resume home foreclosures, but a big-city sheriff has news for them: he won’t enforce their foreclosure evictions.

The sheriff for Cook County, Illinois, which includes the city of Chicago, said on Tuesday he will not enforce foreclosure evictions for Bank of America Corp, JPMorgan Chase and Co. and GMAC Mortgage/Ally Financial until they prove those foreclosures were handled “properly and legally.”

Bank of America, the largest U.S. mortgage servicer, and GMAC, on Monday both announced rollbacks from their foreclosure moratoriums.

The announcement by Cook County Sheriff Thomas Dart comes after weeks of damaging accusations of shoddy paperwork that may have caused some people to be illegally evicted from their homes.

“I can’t possibly be expected to evict people from their homes when the banks themselves can’t say for sure everything was done properly,” Dart said in the statement.

“I need some kind of assurance that we aren’t evicting families based on fraudulent behavior by the banks. Until that happens, I can’t in good conscience keep carrying out evictions involving these banks,” he added.

This is a massive development. You know it is bad, beyond bad stinks in fact to the high heavens when the local sheriff tells the big boys to fuck-off. It made me think of Sid Hatfield and the Matewan Massacre.

This could indeed be the turning point.

My Dad, Me and Paul Krugman

So I calls my pops this evening (well evening for me and afternoon for him) and we get to chatting about politics in general and specifically about economic policy. Being originally from the US and being a well read individual he routinely reads Paul’s op eds in the New York times.

I stopped calling my dad for awhile because the cell phone long distance rates were high and we always wasted 30 minutes on Krugman. To be honest Krugman pisses me off more than he pisses me on (if that makes any sense) and the notion that I should spend 60 cents a minute talking about the man every time I called my dad is untenable (18$!!). And there was no way out of it because my dad also subscribes to the New York Review of our Friends Books. Incidentally, and on that last point, for a couple of Christmases my dad bought me a subscription to the NYRB in which I was to be grateful for a constant drip of Paul’s POV. When I finally got a job one of the first things I told my dad is please do not buy me another sub to the NYRB I have departmental funds and can buy a sub. I did not.

Nonetheless because of Paul’s gig with the NYT I am constantly preparing for another go around, at 60 cents a minute, on the greatness and weakness of Paul Krugman. Don’t get me wrong Paul seems cool enough and he would have fit right in around the family dinner table with his toxic brand of optimism and cynically naive take on the world.

Tonight was interesting in the above regards. I called my dad and inevitably the conversation turned to Krugman. Actually I initiated it and I think it started with the mild preface WINTHFHISGOWTFDBPK. I thought it was a harsh but fair opening position to take. My dad demanded WITFHRUTA? I responded how long can he lean on the same saw: they won’t listen to me, they won’t hire me, I have no voice, I am peripheral to the conversation. To which I continued if he would just ask the question why.

Then my pops responds but he has and it is a disgrace. It is a though he thinks that people in positions of power are just suckers or slaves to conventional wisdom.

Like a …you fill in the simile. Precisely I says. It is like a conversation with an old school Marxist who rebuffs every question about a query over the dis-juncture between the revolutionary interests of the working class and their actual choices with a demure to false conciousness.

My dad responds it is like PK thinks there is no material reason for the elites to think as they do, they are merely sheep being herded by conventional wisdom.

Then the conversation then broke into some esoteric conversation over fallacies of composition and rationality at the level of the individual owner of capital and the consequences of deriving policy there from. Which is PK’s point. Save for the incredibly obvious point that what the individual capitalist now knows (those that count in national accounts) is that the state will, when necessary, rob from the relatively poor to backstop the rich so they really do not have to care about aggregation errors.

My dad is a smart guy!

Krugman looses it and losses it bad: Maybe economics is a morality play

Krugman is precisely what is wrong with American progressives. He thinks after spending a life watching while nobody left of him was left standing; that after mission accomplished, he would be benighted. The reality is that he has been rendered superfluous. The War is over kid and you were used like a peon.

Like Stiglitz, Paul reminds of a good reform liberal who, after coming back from the crusades, realizes that the war he thought he was fighting was not the war he was actually fighting. That hit home for Stiglitz circa his tour at the world bank. Old Joe has never really recovered. Something opened his eyes at the world bank and suddenly almost all the little tightly written mechanical equations he ever employed seemed to evaporate into thin air.

Earth to planet Paul there is a reason Larry gets the plumbs. Hint: and it is not because he is a better economist than you. Larry understands something your naiveté never will. Economic laws are made by Humans (for Larry men) the rest is commentary. Larry does not speak truth to power so much as he cloisters it in shiny white garb serving up technocratic, but nonetheless, ideological resources ready to hand for power. If Larry gets annoyed sometimes maybe it is not because of principle, maybe it is because he thinks the powers he serves are too deft to their own interests. And that really was the conceit of Keynes.

You behave as you believe: public policy is for the betterment of human kind. Here is what is going to happen Paul; 8-10 years from now you will be proven right and nobody will care. Whatever the configuration of economic and political forces at that time will be they will not give one shit about your sage like prevision.

In short, you will be equally as superfluous as you are now. Here is a clue Paul. Keynes, your hero, was in a very interesting milieu with socialists and communists to his ascendant left and self serving, myopic, reactionary forces to his right. Keynes could under these conditions position himself in the centre: You can’t. Your left flank has long since been burnt.

Sorry my dear comrade you are now the indefensible poll-bearer of the left. So please stop Kvetching and pony-up.

Apostle Paul writes:

The point is that it would have been much better if the Depression had been ended with massive spending on useful things, on roads and railroads and schools and parks. But the political consensus for spending on a sufficient scale never materialized; we needed Hitler and Hirohito instead.

Gee Paul and why might that be? Why might capitalists prefer fascism and war to useful things? The answer to that question is where the morality play of economics leaves-off and objective political economy begins.

Austrian Gold Bugs behind the TeaParty?

An article in the Financial Times makes the link between the right-wing Tea party movement and a classic pump-and-dump scheme being run by a group of gold sellers. Basically the scam works like this. The gold sellers provide funding for key Tea Party spokespersons and in return they (the spokespeople) push the line that massive inflation and massive currency devaluations are looming and thus their supporters ought to buy gold to protect themselves.

The twist on the classic pump and dump is that the gold sellers, as the article in the FT seems to indicate, are not just looking to hype the price of gold but are also selling denuded gold products (how very gold standard of them). Now if they are selling gold products which they bought a lower prices then they win three times and some of those “profits” get recycled back to the Tea Party movement. There is just too much irony here.

As Krugman might want to point out this is going to be another area where the right is wrong and all those poor dupes that listen to them are going to be materially worse-off. Suckers are as suckers do…I suppose.

A Tail of Two Cities: FIRE and Manufacturing in the US

A question came up on another blog about the changing structure of the US economy. The graph below quits just before the “great moderation” ended. What you are looking at is the changing share of selected sectors of the US economy in total value added. What is interesting and I do not think a coincidence is that manufacturing saw a 12% decrease or (50% of its original share) in VA, while FIRE (finance, insurance, real estate and BS) increased its share by 12% to 33% of total VA. The other interesting thing to note is that while 1980 would seem to be the switch point the trend was already cast in the die which fits with the stylised facts that we have about evolution of the financialization of the US economy.

Click on graph for a crisper image.

The open question is what if anything is the link between the rise of Wall Street and the decline of main street?