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Sky Dancing in a Man’s World

July 25, 2010

We come now to bury Supply Side Economics

Filed under: Team Obama,The Bonus Class,The Great Recession,The Media SUCKS,U.S. Economy,Voter Ignorance — dakinikat @ 8:36 pm
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I’ve been having a major hissy fit about the extraordinary bad policy measures proposed and undertaken by Republicans for sustaining tax cuts and deficits for as long as I can BERJAYAremember. The deal is, however, nobody likes it when you tell them they can’t have a free lunch when Ronnie Raygun repeated it ad infinitum. That is very much how the Republicans have achieved political victory since the Reagan years. Basically, they promise to cut taxes no matter what the circumstances and spend money on every military adventure and toy that comes down the pike and chock it up to preserving American exceptionalism. Ronald Reagan and Dubya Bush are responsible for the deficit today and the people that benefited from their tax cuts–and voted for them–should be asked to clean up the mess.

I was ever so pleased to read this article by FT’s Martin Wolf that recognizes ‘supply-side economics’ for what it is. It has nothing to do with a good economy and has everything to do with good politics. It’s a policy of promising and delivering everything and then screaming about the huge bill when a Democrat is in office. Every 8 years or so they do one huge Dine and Dash on the country. Wolf realizes this and basically calls Dubya’s tax cuts “massive, irresponsible, and unsustainable”. He also rightly calls the Reagan years for what they were. Reagan was a premier example of Keynesian policy. Ronald Reagan spent us out of the recession of the early 1980s. The only thing that was supply side about it was the high supply of bull shit rhetoric that went along with it. Some one needs to correct the message.

Ronald Reagan was the country’s premier Keynesian. Then Bill Clinton got into office and led us to a very long,very good business boom by doing what Keynes said to do during that time. You only deficit spend when the economy sucks. It had improved by the beginning of the 1990s. Bill Clinton was frugal. I can never forget the day that Dubya/Cheney looked at those surpluses they inherited and Cheney said, deficits don’t matter, Reagan showed us that. Then they immediately started two wars and gave away the Treasury to every corporation and rich person in the country. It’s damn ironic now that every Republican and Blue running Dawg thinks deficits matter. This is the time when we need them. We should’ve paid more attention to them like five years ago. But Cheney of no heart has brass balls and a spine. If only we had a Democrat in elected office with spine and balls.

Anyway, here’s Wolf’s nutshell description of supply side economics. It’s a good one.

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.

The political genius of this idea is evident. Supply-side economics transformed Republicans from a minority party into a majority party. It allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?

How did supply-side economics bring these benefits? First, it allowed conservatives to ignore deficits. They could argue that, whatever the impact of the tax cuts in the short run, they would bring the budget back into balance, in the longer run. Second, the theory gave an economic justification – the argument from incentives – for lowering taxes on politically important supporters. Finally, if deficits did not, in fact, disappear, conservatives could fall back on the “starve the beast” theory: deficits would create a fiscal crisis that would force the government to cut spending and even destroy the hated welfare state.

In short, Republicans chose one side of Keynesian economics–the side that uses government spending or tax cuts to spur an economy that should be used only during recessions–and applied it like the apple cider vinegar of economic policy. One spoonful of tax cuts fits all! Decades of data have shown economists that that is the farthest thing from truth, however, the political windbags of the right have managed to continue the charade that every one can have everything and not pay for it as long as we just cut taxes. (That is until a democratic president takes office). It’s like saying 1 + 1 = 4. Problem is that many people still buy that. It’s like thinking there were Dinosaurs in a literal Garden of Eden.

The truth is that tax cuts NEVER pay for themselves. Even one of Dubya’s advisors has said as much.

Indeed, Greg Mankiw, no less, chairman of the Council of Economic Advisers under George W. Bush, has responded to the view that broad-based tax cuts would pay for themselves, as follows: “I did not find such a claim credible, based on the available evidence. I never have, and I still don’t.” Indeed, he has referred to those who believe this as “charlatans and cranks”. Those are his words, not mine, though I agree. They apply, in force, to contemporary Republicans, alas,

Since the fiscal theory of supply-side economics did not work, the tax-cutting eras of Ronald Reagan and George H. Bush and again of George W. Bush saw very substantial rises in ratios of federal debt to gross domestic product. Under Reagan and the first Bush, the ratio of public debt to GDP went from 33 per cent to 64 per cent. It fell to 57 per cent under Bill Clinton. It then rose to 69 per cent under the second George Bush. Equally, tax cuts in the era of George W. Bush, wars and the economic crisis account for almost all the dire fiscal outlook for the next ten years (see the Center on Budget and Policy Priorities).

The Democratic leadership must get out ahead of this misleading set of facts and stories. It doesn’t help that they are also adding to the confusion by dissing the Clinton/Gore economic record. Indeed, if any of them would ever get around to reminding the public how good they had it in the 90s, the message would go far. I also remember the Reagan Years. My first house loan came with an interest rate of %16.7. Both my exhusband and I lost our first jobs out of college because of a bad economy. I lost my job at a huge S&L that went bankrupt. He lost his at the Federal Land Bank because of the bad ag economy. The Reagan period was not morning again in America and the Democrats need to step up the game to remind people of that.

Why is it that the Republicans so clearly and convincingly get people to buy the snake oil and the Democrats can event manage to agree on a coherent message? Of course, it would help if they’d stuff that dead racoon of a hairmet in Senator Ben Nelson’s mouth every time he goes rogue, but it would also help if they mentioned how everything was just fine during the Clinton years.

Here let me remind you. The unemployment rate hit a 30 year low in 1999. It was 4.2% and it was low for all groups including

BERJAYA

Find the good trend.

blacks, women and hispanics. (It was 7.3% when he took office). From 1993 to 1999, the economy added 20.4 million jobs. There were also increases in blue collar jobs like construction.

20.4 Million New Jobs Created Under the Clinton-Gore Administration. Since 1993, the economy has added 20.4 million new jobs. That’s the most jobs ever created under a single Administration – and more new jobs than Presidents Reagan and Bush created during their three terms. Under President Clinton, the economy has added an average of 245,000 jobs per month, the highest of any President on record. This compares to 52,000 per month under President Bush and 167,000 per month under President Reagan.

92 Percent — 18.8 Million — of the New Jobs Have Been Created in the Private Sector. Since President Clinton and Vice President Gore took office, the private sector of the economy has added 18.5 million new jobs. That is 92 percent of the 20.4 million new jobs – the highest percentage since Harry S. Truman was President and presiding over the post-World War II demobilization.

We had the fastest and the longest Real Wage growth in two decades. Inflation was the lowest it had been since the 1960s.

Under President Clinton, real wages are up 6.5 percent, after declining 4.3 percent during the Reagan and Bush years. Real wage growth in 1998 reached 2.6 percent — the largest increase since 1972.

Okay, so now, tell me. What policies were highly successful? Which policies lead us to peace and prosperity? Why aren’t we seeing the Democrats today try to reinvigorate the policies of Clinton/Gore instead of putting through legislation that comes from the Heritage Foundation? Why are they even dicking around the Republicans at this juncture?

The Obama apologists wonder why Obama–the greatest things since FDR?–is not getting due credit for all these massively huge bills that his congressional chorus line has passed. Well, it’s the economy stupid! First things should’ve been put first. We got a half assed stimulus bill the same way we now have assed financial reform and half assed health insurance reform. If he’d have put all of his political capital into solving the country’s economic problems (JOBS) first, he’d have had enough to run the gambit on the rest. And I would be willing to bet you we wouldn’t have to wonder why a bunch of half-baked Heritage Foundation plans got implemented under a Democratic presidency and majority.

What is so wrong with so many people that they can’t just point to the Clinton years and say, let’s just do that again? Of all things, why can’t the Democrats take and sell that message seriously?

July 12, 2010

The Hypocrisy of the Deficit Squawks

Filed under: The Great Recession,U.S. Economy — dakinikat @ 12:00 pm

I think the entire congress needs to spend the rest of its summer in a remedial economics course.BERJAYA If the sky is falling from the future size of the deficit, then why are we getting calls from the same folks to extend the Bush tax cuts to the rich? (This includes taxing things like dividends.) Why are they being deliberately inconsistent? It’s VooDoo economics again. The supply side Zombies will just not die. What’s worse is that some democrats are joining them.

My question is which is it boys? You can’t have it both ways. Is the source of all evil deficit or tax increases on the very rich? If the 80s and the naughts proved anything to us,it’s that lowering the tax rates on the rich does lead to a increase in the deficit and it does not stimulate the economy or investment as much as good old fashion government spending. It mostly leads to speculative asset bubbles that burst in every one’s face. Why does the middle and working class get the “let them eat cake” while the rich “get to have their cake and eat it to?” Where’s the economic theory and the common sense in that?

Top Republicans called on Democrats in Congress and the White House to extend all the tax cuts that are set to expire at the end of this year.

Sen. Judd Gregg (N.H.), the top Republican on the Senate Budget Committee, joined House Minority Whip Eric Cantor (R-Va.) in pushing for the extension of a series of taxes set to expire at the end of this year, including a series of cuts for households making more than $250,000 per year.

“If you want to do something to stimulate the economy, you could make clear that tax rates aren’t going to go up at the end of the year,” Gregg said during an appearance on CNBC. “If this administration really wants to stimulate, say they’re going to continue those tax rates — all those tax rates.”

The tax cuts on income and dividends that Republican Congresses had approved during the administration of President George W. Bush are set to expire at the end of 2010.

Senator Jon Kyl had to twist himself into a illogical pretzel to justify the position. I’ve always been amazed by the Republican ability to hold completely contradictory positions without having complete brain failure. For example, they demand the government be smaller and get out of peoples lives while wanting to control the domestic arrangements of GLBTs and women seeking reproductive health. That’s another one of those issues where the contradictions are painful to watch. Thinking you can lower the deficit while not taxing the people with the incomes and assets just boggles the mind. Don’t forget, that prescription also includes approving every military toy and adventure that comes across their desk save helping veterans.

Here’s a description of Kyl’s appearance on Fox from Ezra Klein.

“[Y]ou should never raise taxes in order to cut taxes,” Jon Kyl said on Fox News Sunday. “Surely Congress has the authority, and it would be right to — if we decide we want to cut taxes to spur the economy, not to have to raise taxes in order to offset those costs. You do need to offset the cost of increased spending, and that’s what Republicans object to. But you should never have to offset cost of a deliberate decision to reduce tax rates on Americans.”

What’s remarkable about Kyl’s position here is that it appears to be philosophical. “You should never have to offset cost of a deliberate decision to reduce tax rates on Americans,” he said. Never! This is much crazier than anything you hear from Democrats. Imagine if some Democrat — and a member of the Senate Democratic leadership, no less — said that as a matter of principle, spending should never be offset. He’d be laughed out of the room.

All of this comes about as the Democratic co-chair of Obama’s cat food commission calls the growth of the deficit a ‘cancer’. Why is it that congress seeks to balance the budget on the backs of those least able to pay for it and those who have benefited the least from the excessive spending?

Bowles said that unlike the current economic crisis, which was largely unforeseen before it hit in fall 2008, the coming fiscal calamity is staring the country in the face. “This one is as clear as a bell,” he said. “This debt is like a cancer.”

The commission leaders said that, at present, federal revenue is fully consumed by three programs: Social Security, Medicare and Medicaid. “The rest of the federal government, including fighting two wars, homeland security, education, art, culture, you name it, veterans — the whole rest of the discretionary budget is being financed by China and other countries,” Simpson said.

“We can’t grow our way out of this,” Bowles said. “We could have decades of double-digit growth and not grow our way out of this enormous debt problem. We can’t tax our way out. . . . The reality is we’ve got to do exactly what you all do every day as governors. We’ve got to cut spending or increase revenues or do some combination of that.”

Bowles pointed to steps taken recently by the new coalition government in Britain, which also faces an acute budgetary problem, as a guide to what the commission might use in its recommendations. That would mean about three-quarters of the deficit reduction would be accomplished through spending cuts, and the remainder with additional revenue.

Most Republicans in Congress are opposed to any tax increases, which has made the work of the commission far more difficult. Bowles and Simpson appealed for support to the governors, who have been forced by their states’ constitutions to balance their budgets with deep spending cuts and, in many cases, tax increases.

Americans faced similar budget issues after World War 2 and a lot of it was paid off by economic growth. However, growth seems elusive in the current environment. This is especially true because there has been no fundamental change in the systemic causes of the current financial crisis and deficit debacle. This policy choice we’re given now is ridiculous! Investment bankers who made bad bets get a blank check but we can’t extend unemployment insurance to the 2 million long term unemployed that just lost their benefits? Who is most likely to actually become a customer to businesses? Is it A, an unemployed person that needs to pay the rent and buy groceries or or B, Goldman Sachs that will take the cheap loan and game the market by arbitraging self-created paper?

Also, go back to the tax rates during that same booming period of post World War 2. Obviously, taxing the rich does not kill an economy. Here’s some examples of tax rates from the Eisenhower years.

The highest tax bracket on earned income today is 35%. During Ike’s administration, the highest tax bracket was 92% in 1953, and 91% thereafter [1]. Yes, taxes on the Rich were almost three times higher under the Republican Eisenhower compared to our current President, or compared to the Democratic administration of Bill Clinton!

Here’s the capital gains treatment for the Eisenhower period.

It is considered to be almost the gospel today that capital gains should be taxed at a far lower rate than earned income. Today the maximum capital gains tax rate is a whopping 15% on assets that have been held for at least a year since purchase. This is why the middle class, who are dependant on earned income, effectively pay taxes at a higher rate than do the wealthy.

In Ike’s day, capital gains were not treated differently from earned income, so the rich paid 91% tax on capital gains. From 91% to 15% – another reason why it’s good to be rich!

Note that in 1955, in the middle of Ike’s presidency, the typical (median) family paid less than 20% in all taxes [2]. By 2003, the total of all taxes paid by a typical family had more than doubled, to almost 40% of income.

So in Ike’s day, the rich paid a lot of taxes, the middle-class paid a little taxes, and somehow it all worked out.

Right now, there is a need for money to be given to the people who are mostly likely to spend it. State governments and poor to middle class people are the ones that come to mind. Banks are not lending out money. Businesses are sitting on money and not investing. They’ve got the lowest real interests rates possible now and they’re not expanding capital. Why would they if they have no customers walking through their doors?

Investors aren’t particularly happy with the market either. There appears to be a massive pay down of debt as a way of savings rather than money heading for the markets. Most of the market money is not coming from the individual investor. It’s coming from pension funds and such. That’s why Wall Street is so hungry for Social Security dollars. There’s very little new money coming into the market. They have nothing they can use to build new pyramid schemes asset bubbles. So where does stimulus come from if the government does not do it itself? It has to come from people that are most likely to be customers of business. Only the increase in customers will make a business expand its production. Either way, you have to get the money to the right people.

Here is a prelimary study out by Corsetti et al (May 2010) that empirically studies the impact of fiscal policy multipliers during financial crisis. (h/t to Paul Krugman) It basically reinforces the idea that fiscal stimulus in the right places is necessary to create a multiplying impact for federal dollars spent on sustaining the economy. Don’t try to read the analysis part, it’s extremely technical. Here’s the conclusion which is the part that policy makers need to understand. Corsetti is some one I follow a lot because of his work on exchange rates. There are some important findings for that. However, this last statement is germane to our conversation.

A second key finding relates to the marked increase in fiscal multipliers during times of financial crisis. On the one hand, this may be taken as evidence in support of fiscal stimulus during financial crises. On the other hand, our empirical results also suggest that many countries have historically cut back government spending during financial crises, presumably out of concern over debt sustainability. In this sense, a large conditional multiplier also provides a stark warning about the costs of financial turmoil, and an argument in favor of building up fiscal buffers in normal times so as to avoid fiscal retrenchment when it is most painful.

This is something that most economists that have a real feel for Keynes have being saying for years. Keynes didn’t recommend endlessly running budget deficits. He believed they were necessary during times of crisis. He recommended balanced budgets and surpluses during good times which is exactly what Bill Clinton’s administration did. He handed a surplus to Dubya Bush who immediately threw it away. A similar situation happened down here in Louisiana. The first year of the Jindal administration, Jindal was handed a surplus and a big rainy day fund. Rather than sitting on it, Jindal wanted to eliminate income taxes. This kind of behavior leads to future deficit problems.

Where are these deficit squawks when the government is running surpluses and in a good situation? Well, they generally throw caution to the wind and spend like crazy or rebate like crazy. You can’t do this and then turn around and complain about high deficits and demand tax cuts to the folks with wherewithal a few years later during recessions without sounding contradictory, crazy, and callous. But that’s the way with these Supply Side Zombies, they entice the middle class with the idea that they pay too much in taxes when the real motive is to stuff the pockets of the Bonus and the political donor class.

This financial crisis and the resulting deficit problems were not caused by the poor and working class. They are as much victims since they did not participate in the lavish incomes and tax cuts that came from the last asset bubbles fueled by low interest rates and low capital gains taxes. Why then, ask us to bear the burden of this sudden onset of restraint?

July 8, 2010

Where have all the Consumers Gone?

Filed under: The Bonus Class,The Great Recession,U.S. Economy — dakinikat @ 12:02 pm

We talk about this often. As a matter of fact, it was just yesterday we were talking about the failure of Reaganomics or so called BERJAYA“Trickle Down” economics. (More aptly called VooDoo economics by the first President George Bush.)

kc, on July 7, 2010 at 10:37 pm Said: Edit Comment

thanks–would it be accurate to say that trickle down doesn’t work well because the rich already have consumer goods so they could save it.??

Well, supposedly the residual goes into investments which go to create well paying jobs which the rest of us get. However, that link is weak link. Especially with so many corporations moving their capital investments out of the country or having major operations elsewhere. In order for it to create jobs, the money has to stay put in the community and there’s no guarantee it will. Also, a lot of profits these days are just arbitrage profits that create no value. If you don’t direct the dollars to long term investment the money can go anywhere.

Robert Reich has a great blog post up today that gives you some perspective on what happens to our consumption driven society when only the few rich people get the income gains. The income doesn’t go to driving the economy, it goes to driving asset bubbles and in the two cases he talks about, that leads to some pretty bad economics results. Reich says that “We’re in a Recession Because the Rich Are Raking in an Absurd Portion of Wealth: Our economy can’t thrive when the richest 1% get an ever larger share of the nation’s income and wealth, and everyone else’s share shrinks.”

The end of the Hoover years and the end of the Dubya years brought as big increases in income inequality. What was the result?

Each of America’s two biggest economic crashes occurred in the year immediately following these twin peaks—in 1929 and 2008. This is no mere coincidence. When most of the gains from economic growth go to a small sliver of Americans at the top, the rest don’t have enough purchasing power to buy what the economy is capable of producing. America’s median wage, adjusted for inflation, has barely budged for decades. Between 2000 and 2007 it actually dropped. Under these circumstances the only way the middle class can boost its purchasing power is to borrow, as it did with gusto. As housing prices rose, Americans turned their homes into ATMs. But such borrowing has its limits. When the debt bubble finally burst, vast numbers of people couldn’t pay their bills, and banks couldn’t collect.

You can’t have an economic machine driven by consumption and then turn the switch over to people who have so much money that all they do is speculate. It just doesn’t work. If you want long term real investment, then you have to ensure that the investment dollars are going to things of real value. A good example of something of real value is a factory that employs people that have to pay for houses, groceries, clothing and transportation. Every dollar of a well earned wage trickles outward to a community. Putting all your investment eggs into derivatives does nothing to support long term growth. Taking all the income from productivity coming from the people that work and giving it to people that just simply want to drop a few dimes in a stock that might go up like a BP oil gusher does not create customers for businesses. Customers are what businesses need to grow. No amount of tax cuts or cheap credit will expand a business that doesn’t see customers coming in the door. Also, there’s a real good chance a lot of these people–and the corporations in which they invest–offshore their wealth anyway so there’s no guarantee that it stimulates our economy. Although, if you check it out, you’ll see that the richest countries in the world are those small countries that are depositories and shelters of offshore funds. These are the little countries that banking and no taxes built like The Grand Caymans, Guernsey, Bermuda, etc.

Anyway, Robert Reich does a very good job pointing to how we let our government leaders recreate the environment of the 1920s and how by only a little finesse and a lot of liquidity by the Fed stopped us from going over the edge into another period where unemployment was 25% instead of 10%. What I worry about is that the current leaders seem to be recreating the second dip of the Great Depression also. Remember, the two BIG recessions since World War 2 happened when you’ve had people who sincerely believe in the Trickle Down hypothesis. It frightens me that we have a President who admires Ronald Reagan and has continued Dubya Bush Policies. (Here’s another great link to Brad DeLong’s Blog who has similar worries. The piece is called “These are NOT the Ones We have been waiting for”. No kidding!) If we do have a double-dip, it will be because of all this austerity nonsense. We really don’t need any more lessons from Voodoo Economics. We’ve had enough to traumatize several generations and put a lot of people into unemployment hiatus.

July 7, 2010

The Faces of Unemployment

Filed under: Economic Develpment,U.S. Economy — dakinikat @ 2:00 pm

BERJAYAOur economy is no longer producing jobs at a level that can sustain what we’ve considered a ‘normal’ rate of unemployment of around 5%. Our leaders seem incapable of understanding the dynamics of job creation and think that subsidizing businesses and lowering taxes any way they can on any form of business is going to create the trickle down effect. This was a disproved hypothesis decades ago. They mistake monopoly creation for being pro-free market. This has created some very persistent long term unemployment. It will also create a bigger federal deficit because these folks may not return to the job market and peak wages. This means lower tax revenues in the future. Some may also opt for social security at 62 putting them on the expense side of the deficit quicker than previous generations.

There is increasing attention in the press to the faces of unemployment and two such profiles are out there today. The WSJ journal BERJAYAlooks at the face of 50 somethings who have been unemployed or underemployed for nearly two years now. These folks are usually at the peak of the income earning years but instead have been dumped out to pasture unceremoniously early with no real safety nets. They are years away from being eligible for the retirement benefits and medicare their elder boomer brothers and sisters can collect. The 50-something generation–well educated and trained–is now the lost wages generation.

Extending unemployment benefits isn’t free, of course, and has the potential to keep unemployed workers out of jobs for longer. But it could also be preventing a “lost generation,” economists say. That generation is the crop of 50-somethings who might have worked for another decade. Their outlook isn’t bright.

Once older workers are laid off they take the longest to find new jobs. For workers 65 and up, it takes a median of 45.1 weeks to find a new gig. For those 55 to 64, 38.7 weeks. It takes a slightly shorter 30.4 weeks for those who are 45 to 54-years old.

Unemployment checks have the added benefit of helping these people feel like they’re still a part of the labor force. When the checks run out, and with few glimmers of hope in their job searches, they’re more likely to drop out of the labor force and turn to a program like disability.

And unlike a relatively short-term fling with jobless benefits, their attachment to disability is more likely to be permanent.

Facing equally dismal job prospects are the so-called Millennials. These are twenty-somethings that cannot find jobs that meet their credentials. The NYT profiled this group of jobless that can’t even get their feet on the bottom rung of corporate ladders these days. A more detailed look at the future prospects of this generation shows that they may not be better off than their grandparents or parents. EVER. This is from Catherine Rampell; also of the NYT.

There are a few forces behind these trends. One is that generally speaking, it’s harder to make it in today’s job market than it was a few decades ago if you don’t have at least a high school degree, since the expectations for what educational credentials workers should possess have risen. This is in part because the economy is less dependent on lower-skilled, manual-labor-intensive industries like manufacturing, and more reliant on industries that require formally credentialed education and training, like health care. Thus, in general, the earnings potential for the most educated has risen, and that for the least educated has fallen.

Economist Mark Thoma points to two interesting articles on the state of the jobs market. One is buy FED watcher Tim Duy called ” Why is the American Jobs Machine broken?”

Only one word describes the American labor market outcome of the last decade – abysmal. Not only is job growth well below trend, but the quality of jobs is in question. The jobs deficit is even more striking considering the supposed gains in productivity over the past 15 years. Job growth should not stagnate. Resources – including labor – released via higher productivity are supposed to be channeled into expanding sectors. Moreover, productivity growth is supposed to yield improved economic outcomes via higher real wages. Yet as spencer famously shows, labor’s share of output has been steadily decreasing since the early 1980s. This downward trend was interrupted by gains evident during the tech bubble of the mid-1990s. Apparently, only during that brief, shining moment of generational technological change did the productivity story work as we believe it should, at least since the early 1980′s.

The other relevant site is Yves  at Naked Capitalism who discusses a piece by Andy Grove–the former CEO of Intel– at Bloomberg. There’s a follow up link and discussion piece of that article by Rajiv Sethi. Sethi is another economist who blogs. There are quite a few of us out there these days, I guess because we’re all just panicked about what’s been going on the last 10 years and discussing it in a research article with other economists does not get anything real done in the way of public policy. Yves is definitely a modern day Cassandra with well rounded academic credentials as well as practitioner’s viewpoint to all things financial and economic. If any one deserves to be syndicated, it’s Yves. Every one is discussing the impact of all those old manufacturing jobs that have now gone elsewhere and left those folks without high school diplomas with no future. There’s really nothing out there comparable to what used to be good union jobs and blue collar jobs. Sethi, a microeconomist and Grove, an entrepreneur in an industry that thrives on innovation effectively argue that this loss of manufacturing industry will eventually impact our ability to innovate which is really been the prime driver of the U.S. economy since its inception as a mishmash of colonies.

BERJAYAThe Grove article is amazing and the discussion of it by the three economists and their readers is fascinating. It’s going to take some time to wallow through it all, but I highly recommend it. Grove believes that the myth of America to continually birth start ups is just that; a myth. It’s a myth birthed by and of course, followed like a religion (an equally implausible myth) by pro-Business politicians. I’m going to use the generic nomer ‘politicians now’, because it’s obviously it’s just not a Republican mental defect any more.

Here’s Groves hypothesis and it’s an earth-shattering and hopefully myth-shattering one. I have no idea why we tell ourselves these stories and believe in them to the point of blinding ourselves to reality and hope. But, there it is. The Groves article is a response to an article by Thomas Friedman. You can read that too if you’re into the new Horatio Alger story of the Reagan fairy tales.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.

Sethi, a practicing microeconomist, takes it back to a need for change in incentives; one of the major points in the Grove article. It’s also something I discussed in my last economics thread, Simple Truths. Sethi doesn’t want to embrace protectionist policy–nor does Yves– but he and Grove and Yves and then back to Thoma say that we need our policy makers to change the incentives. I agree with these greater minds.

Grove recognizes, of course, that companies will not unilaterally change course unless they face a different set of incentives, and that this will require a vigorous industrial policy:

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability — and stability — we may have taken for granted… Unemployment is corrosive. If what I’m suggesting sounds protectionist, so be it… If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

…

Update (7/4). In an email (posted with permission) Yves adds:

On the one hand, you are right, any move towards protectionism (or even permitted-within-WTO pushback against mercantilist trade partners) could very quickly get ugly. But the flip side is I wonder if we have a level of global integration that is inherently unstable (both for Rodrik trilemma reasons, international economic integration with insufficient government oversight creates political problems, plus the Reinhart/Rogoff finding that high levels of international capital flows are associated with financial crises). If so, we may have a short run (messiness of reconfiguration) v. long term (costs of really big financial crises) tradeoff.

So why do we give businesses incredible subsidies for doing these activities? Yes, it helps them. But, it does not help the U.S. economy or the American worker or for that matter, the American Taxpayer. Why not give businesses some subsidies if they keep the jobs here and some taxes if they take the jobs elsewhere? This is basically an industrial policy. It’s not a trade policy so it’s not a cry to revive something like Smoot Hawley. No sane economist would suggest setting off a trade war. However, changing the incentives to businesses that bail out on the US to achieve higher profits is something that people with policy responsibility need to take examine. At the very least, we need to stop giving them Federal business. After all, we should be pro-economic growth and development which has no bias towards any particular economic agent. It’s time to quit looking at everything that’s ‘pro-business’ as being good for the U.S. Economy because it is not. That includes putting the criminals in charge of crime scenes something that the Obama administration seems to specialize in.

July 4, 2010

Simple Truths

Filed under: Environmental Protection,Gulf Oil Spill,U.S. Economy,Voter Ignorance — dakinikat @ 1:14 pm
Tags: , , ,

BERJAYAOne of the useful things about theories and laws–in the sense of scientific method–is that they provide some very simple insight into the way things are. They are not based on wishful thinking or faith. Hypotheses grow up to be theories only with rigorous testing by many many great minds who consistently recreate similar truths in similar circumstances.

Once the theory becomes established, it can be used for many purposes and insights. In economics, we use these things for predictions and policy insights. We know that a given outcome will–with extremely high probability–recur given the same circumstances. There are laws of demand and supply. There are theories on elasticities of supply and demand given prices or income. We have a fairly good catalog of theories that we teach and we make doctoral students reprove over and over again so they too, can establish that insight and make predictions.

Established theories are basically things that are ‘no brainers’ in any field. One such set of theories in economics deals with taxes and subsidies. You tax something, you see less of that thing because it adds cost and dampens both supply and demand for the taxed thing. You subsidize it, you get more demand and more supply because it lowers the cost. As a matter of theory, when you really subsidize something, you generally end up warping the incentives for production and consumption of that good so badly that not only does that market become pretty dysfunctional, but it tends to spread to other markets because it transfers scarce resources–better put to other uses– from some markets to the subsidized market.

In some cases, we purposely warp a market with taxes for policy purposes. This is the case with so-called sin taxes. There is a reason that cigarettes are taxed to the point that the pricing point of a pack of cigarettes approaches the cost of a CD of music or a ticket to a movie. That’s because the government wants to discourage entry to the market to teen smokers. Prices (after tax) of cigarettes typically rival things teens do. These include going to movies or buying music. It forces the teen who might become a smoker into a choice and hopefully, a good one that includes not smoking. In this case, the disincentive is the policy choice. We often subsidize things too like public transportation or public education. This is because we’d see less of them and less public benefit if they were priced to the market or priced to the cost of producing the good. When you study microeconomics which is the study of individual choices within individual markets, you study externalities.

Generally speaking, a good policy will subsidize a good or service with positive externalities and tax a good or service with bad externalities. We usually call these “spill over” costs or benefits because the cost or the benefit of the activity spills over to the public. If a business can’t realize the benefit in terms of profit, the business won’t provide the service or good. If the business can pass the cost of an activity or service on to the public, it will.

Subsidies should only go to places where there are positive spillovers. Taxes should be applied to places where there are negative spillovers. It is not considered a good idea for taxpayers to subsidize harmful activities in economic theory. We have finally lowered our subsidies to the tobacco industry because it’s good policy. The taxpayer shouldn’t be incentivizing a public health issue that they will have to pay for on both ends. First, in the subsidy to the business, and second to the costs of tremendous health problems created by the users. People who benefit neither from growing tobacco, making cigarettes or smoking, shouldn’t be asked to pay all the spill over costs that come from that activity.

This is why subsidies to Oil Companies baffle many of us.

There’s a really good article today in the NYT on the billions of dollars provided by the U.S. Taxpayer to Oil Companies. My students will be reading this shortly, believe me, because it’s a great example of really bad public policy. Among the things that the article mentions is that the drilling rig, The Deepwater Horizon, “was flying the flag of the Marshall Islands. Registering there allowed the rig’s owner to significantly reduce its American taxes”. Transocean basically shopped corporate ownership to several countries to avoid tax liability. But wait, it gets worse.

At the same time, BP was reaping sizable tax benefits from leasing the rig. According to a letter sent in June to the Senate Finance Committee, the company used a tax break for the oil industry to write off 70 percent of the rent for Deepwater Horizon — a deduction of more than $225,000 a day since the lease began.

With federal officials now considering a new tax on petroleum production to pay for the cleanup, the industry is fighting the measure, warning that it will lead to job losses and higher gasoline prices, as well as an increased dependence on foreign oil.

But an examination of the American tax code indicates that oil production is among the most heavily subsidized businesses, with tax breaks available at virtually every stage of the exploration and extraction process.

According to the most recent study by the Congressional Budget Office, released in 2005, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry.

And for many small and midsize oil companies, the tax on capital investments is so low that it is more than eliminated by var-ious credits. These companies’ returns on those investments are often higher after taxes than before.

“The flow of revenues to oil companies is like the gusher at the bottom of the Gulf of Mexico: heavy and constant,” said Senator Robert Menendez, Democrat of New Jersey, who has worked alongside the Obama administration on a bill that would cut $20 billion in oil industry tax breaks over the next decade. “There is no reason for these corporations to shortchange the American taxpayer.”

Yes, that’s right. President Obama with his green agenda is working on a bill that CUTS $20 billlion in more tax breaks to this industry. But don’t get me started on their ethanol subsidies, it’s the same damned deal. Take food away from being used as food and use it as an additive to fossil fuels. This, too, is bad policy. (To read more on that you may want to check out this link at The Oregonian.)

THIS is what passes as “free market” capitalism these days. Tax payers pay in their tax bills for these horrendous subsidies, then they take it at the pumps too. (In the case of ethanol subsidies, we’ll also take it at the grocery store.) Republicans are much worse. They have no idea that what they are doing is not capitalism. It’s basically encouraging monopolies and monopoly profits as well as distorting resource markets.

Ethanol subsidies, oil drilling incentives, government insurance and loan guarantees for nuclear energy, natural gas subsidies: These proposals tend to have as many or more Republican advocates as Democratic advocates. Even worse, self-described free-market conservatives often rally for energy subsidies and claim it’s not a deviation from their principles.

Today, at the liberal environmentalist website Grist, blogger Dave Roberts takes to task Newt Gingrich. Roberts, with whom I often spar on the Interwebs, has a great (and depressing) argument and analysis of Gingrich’s defense of current energy subsidies and proposal for even more energy subsidies. This is the heart of the argument:

Gingrich and his acolyte defend these subsidies. Why? Says Gingrich, “a low-cost energy regime is essential to our country.”… Fossil-fuel subsidies don’t reduce costs, they shift costs. The burden is moved from energy companies to the public. The result is what we have today: energy that looks cheap because most of its costs are hidden from view.

Even during times of obscene profits (which are pretty much guaranteed by subsidies in a good where the market demand isn’t very sensitive to price changes), we still subsidize these business. Here’s the link to The Grist which basically outs Ginrich as being anything but a capitalist. This is more like the old mercantilism of the past where the king and queen choose a particular company to be blessed with a monopoly and give them some start up funds to go and rape a colony of its natural resources. Think East India Tea Company and the colonies here pre-Revolution. For years, our tax funds have gone to big oil, big finance, and big defense contractors. Lincoln warned of it. Eisenhower warned about it. Teddy Roosevelt and Sherman did something about.

So, here we are again with companies that feed at the public trough while behaving in a way that has nothing to do with public interest. This is no surprise to any economist. We know that the only things corporations are about are maximizing profits and minimizing costs any way they can. They’ll do it by abusing any resource they can, IF we let them get away with it. That’s why there is still slavery, pollution, strip mining, blood diamonds, and for all intents and purposes, wars in places that sit on oceans of oil.

Politicians are all about maximizing their chances of getting re-elected. If they can’t do that, then they maximize their wealth and their after politics career possibilities. This is where we come in. They will continue to do whatever they want to as long as our vote is no longer a check and balance on those behaviors. We have a responsibility to throw the bums out that do this to us.

So, carrots and sticks are important to economic theory and political theory. We know this. The problem is what are going to do about it?

July 2, 2010

Economic Fairy Tales and other Bed time stories

Filed under: Global Financial Crisis,The Great Recession — dakinikat @ 10:36 am
Tags: , , ,

BERJAYAOne of the things that grew out of the Reagan years was a set of myths. Primary among them were economic myths. The first one was that the country was overtaxed. The second was that there was no particular useful role for government. The third was a revival of our country’s Puritan ethos. None of these were particularly helpful and all of them were put to death–in short order–during the Clinton years by theory and empirics. Well, they were put to death by every one but those that rely on faith and ideology rather than theory and data. I see a revival of these myths in the signs of tea partiers. The tea party folks realize we’re losing our way of life. The problem is they are so angry they are looking to Reagan Fairy tales for answers. Republicans and Blue dawgs are playing those fears like magical harps. Fairy tales calm children’s fears, but they do not solve real problems.

A really good example of a stupid hypothesis in Reagan’s VooDoo economics that was soundly put to death by empirics was the Laffer curve.(That was the basis of the argument that we’re overtaxed.) However, I do know some one that has to rely on old articles to bring this ‘view point’ into his classroom. No matter how many ways I insist that it’s not our job to bring failed hypotheses to students he still keeps clapping for this very dead Tinkerbell. He wants to believe he’s over taxed no matter what the data says and I haven’t seen him for awhile but I have no doubt he’s participating in whatever passes for a tea party up in his rural part of Washington.

Paul Krugman’s hair is on fire about the Austerity Myth today. He’s not the only one. Here’s something from The Economist with the BERJAYAsame urgency on the international scale called the Austerity Alarm. These articles seem even more prescient given the news about unemployment today. The U.S. economy is not creating jobs. It’s still losing them in large numbers. The economy lost 125,000  jobs last month. The previous dips in the unemployment rate seem to have come from part time Census worker jobs. This one comes from people giving up so they’re not counted. I warned 1 1/2 years ago that the Porkulus bill was not concentrating spending on the right things and too full of useless tax cuts. Surprise! Surprise! Job creation remains elusive. Mortgage rates are at record lows and without bribes to first time buyers, the housing market–perhaps the most central element of the American Dream Fairy tale–looks like a lost market. So, the best our leaders can do in response to all of this is reheat policies that failed during the Hoover Administration.

As Krugman points out, the U.S. and nearly all the world’s economies remain in a deep recession, so why are all the leaders talking about austerity programs and acting like the big issue is that some imaginary set of investors will treat them like Greece if they act responsibly? Why are they repeating the policies that made the Great Depression worse to begin with and then the policies that turned the recovery of the mid thirties into a double dip depression?

Krugman suggests that it’s the power of the village that keeps churning out the myth. It’s not the village economists that embrace this fairy tale. It is our village idiots and unfortunately, they seem to be in charge of economic policy these days. This is not to deny that the U.S. has long term budget problems. Demographics are presenting serious problems to both Social Security and Medicare. Both need to be revamped to meet future commitments. Revamping, however, does not mean tearing down all the buildings in the village to stop one fire from spreading.

So the next time you hear serious-sounding people explaining the need for fiscal austerity, try to parse their argument. Almost surely, you’ll discover that what sounds like hardheaded realism actually rests on a foundation of fantasy, on the belief that invisible vigilantes will punish us if we’re bad and the confidence fairy will reward us if we’re good. And real-world policy — policy that will blight the lives of millions of working families — is being built on that foundation.

BERJAYASo Krugman is a liberal and of course, the argument against him is that all we liberals believe is that the our big daddy government will get us out of trouble. So, why is the same argument coming from The Economist whose subtitle to their op-ed piece reads “Both sides in the row over stimulus v austerity exaggerate, but the austerity lobby is the more dangerous”. They are hardly a bastion of liberal thinkers and they call the austerity hawkers dangerous.

The austerity fad is also distorting politicians’ priorities. Many European governments, for instance, are fixated on cutting their deficits, when they should also be trying harder to shake up their labour and product markets. A new analysis by the IMF suggests that fiscal austerity coupled with structural reforms would yield far higher growth than austerity alone. In America the new deficit-focused climate is preventing politicians from passing a temporary (and sensible) fiscal stimulus package without inducing them to tackle the sources of the country’s huge medium-term deficit by, for instance, reforming social security. The result probably won’t be another Hooveresque Depression. But it could be a recovery that is weaker and slower than it should have been.

(more…)

June 26, 2010

Playing Politics with the Spill

Filed under: Gulf Oil Spill — dakinikat @ 7:18 pm

The one thing that really made me mad during the response to Hurricane Katrina was the political games that were played so that national rage would be directed at a partisan target rather than at taking care of people hurt by the Hurricane and the resultant flooding when the levees failed.  It’s deja vu all over again now except Louisiana has a Republican Governor and a Democratic President trying to reflect the rage.  I thought perhaps Jindal was actually going to be the grown up in this situation, but I was wrong.  Nothing good will come of this, believe me.  Like I said, I saw this same dynamic after Katrina and it hurt every one.

We’re seeing  the Louisiana National Guard deployment as one of the volleyballs in the Oil Gusher response. The other is a series of funds made available by BP and the federal government. Once again, no one wants responsibility for the huge failed response so, it’s a battle of the memes now. Who is responsible the Feds or the SLGs?

The Baton Rouge Advocate points out this travesty by Jindal who is also being accused by Democratic Partisans of not deploying all the National Guard that he could. For some reason, no Republican Governors in the area has, but they’re not on AC 360 every night.  As I’ve mentioned before, Jindal is an ideological conservative who believes in starving the beast.  The cuts to higher education and health care have been horrible and arbitrary.  This one, however, has to do with money originating in places other than Louisiana tax payers.  Much like Donald Rumsfeld, Jindal would rather pay money the state receives for private contractors rather  than reimburse local governments that provide similar services.  He’s essentially told the parishes and towns to go beg money off of BP.  I don’t think the Governor should be helping BP divide and conquer.

Gov. Bobby Jindal unleashed his veto pen late Friday, nixing lawmakers’ attempt to direct $24.9 million to parishes and small towns affected by the oil leak.

In his veto message, Jindal said BP should pay the municipalities directly for the impact of the April 20 rig explosion in the Gulf of Mexico.

“The effect of this amendment would make Louisiana’s taxpayers, not BP, responsible for paying for state government’s response to the Deepwater Horizon oil spill,” the governor wrote in the line-item vetoes he released at about 8 p.m. Friday.

Left unnoted in Jindal’s veto message was the fact that the money legislators wanted to give to the municipalities comes from a fund fattened by a grant from BP. The Jindal administration wants state agencies to have use of the money.

“If it’s acceptable use for state government, then why isn’t acceptable for local governments?” said state Rep. Sam Jones, D-Franklin, who co-sponsored the amendment that would have diverted much of the BP money in the state’s Oil Spill Contingency Fund to help 11 coastal parishes and the towns of Lafitte and Grand Isle.

Jones said the money was help the local governments, which often have no credit line, needed to help respond to the loss of income by its residents and the damage to its environment.

“This is not the first time we as Cajuns have been told to go fend for yourselves,” Jones said.

“We’re good at giving our taxpayer dollars to privately owned companies from out-of-state, but we can’t help our own people with our money?” said state Rep. Joe Harrison, R-Napoleonville, who also co-sponsored the effort.

“Our people are in dire need of assistance and they’re not getting it,” he said.

Isn’t this similar to what the Feds are telling the states?  If you need money, go beg it off BP. We’re not even going to front you for it.

If you continue to read the list, you’ll see exactly what kinds of things Jindal thinks are expendable.   It’s not only money.  He’s vetoed a clause to allow parents of the developmentally disabled more input in decisions affecting their family members.  Get this for the rationale.

Rejected a request by parents for more input into their children’s transfer from centers for the developmentally disabled into community homes. Jindal said the heightened involvement would “hinder the efficient and effective transition of services.”

During Jindal’s reign of terror at the Health and Human Services department here in Louisiana for then Governor Bubba Foster, Jindal was well known for cutting funding to services for the disabled and elderly.  Many of these folks wound up on the street before the families were even notified.

You can read more about his budget cuts at WWLTV which has reprinted a local political pundit’s take from The Gambit. This op-ed talks about his cuts to education and all things cultural and art-related.

No doubt Jindal will say that he did not single out any of the arts and cultural organizations for elimination. He will maintain steadfastly he is simply trying to cut waste and fat out of state government.

If Jindal truly believes that arts and culture are waste or fat, he should say so. If not, he should not idly stand by and let them become collateral damage in his budget wars.

Otherwise, the next time you see Jindal railing against the feds and BP about the destruction of our culture, remember that he’s one of the biggest destroyers of all.

Jindal has repeatedly ignored the press who have asked him why he keeps asking for more Federal Resources while not activating the Guard levels he requested earlier.  I guess the Federal government is getting tired of Jindal’s endless rants on AC 360 and is now doing it’s on version of blame it on the people who are enduring the Gulf Gusher.  Bostonboomer found this earlier at the NY Times.  It’s Katrina all over again except there’s a bunch of parish presidents instead of one Mayor Nagin.

But a review of Louisiana’s prespill preparation suggests that the state may be open to the same criticisms that Mr. Jindal has leveled at BP and federal authorities.

The state has an oil spill coordinator’s office. Its staff shrank by half over the last decade, and the 17-year-old oil spill research and development program that is associated with the office had its annual $750,000 in financing cut last year. The coordinator is responsible for drawing up and signing off on spill contingency plans with the Coast Guard and a committee of federal, state and local officials.

Some of these plans are rife with omissions, including pages of blank charts that are supposed to detail available supplies of equipment like oil-skimming vessels. A draft action plan for a worst case is among many requirements in the southeast Louisiana proposal listed as “to be developed.”

State officials said that many of those gaps had been addressed but that the information had not yet been formally incorporated into the plan by the Coast Guard.

This seems to me another riff on the Obama leadership theme of it’s all Dubya’s fault.  Even Fox News has done a pretty good job of showing how the Gulf States are not employing the National Guard.  This information came from the networks interview with Secretary of Defense Robert Gates.

A Defense official told Fox News that governors are afraid that activating more troops would be politically harmful, charging taxpayers a high cost for duties that won’t keep troops busy. The skill sets these troops have don’t match the needs, the official said, and the governors aren’t about to pay soldiers to stand on the beaches waiting for oil to wash up.

Gates told “Fox News Sunday” that there isn’t more the Pentagon could be doing to help stop the spill or to prevent millions of gallons of oil from washing up on the Gulf Coast.

“We have offered whatever capabilities we have,” Gates said. “We don’t have the kinds of equipment or particular expertise.”

Gates said there is a standing offer for the authorization of up to 17,500 National Guard troops in Louisiana, Mississippi, Alabama and Florida, the four states that are most affected by the BP spill.

Gates authorized the troops under Title 32 status, which means all costs would be reimbursed by the federal government, which in turn is charging BP.

Of the 6,000 troops it is authorized to deploy, Louisiana has activated about 1,100 for aviation support, sandbagging and hazmat training for those who might come in contact with the oil.

Alabama has activated 450 of the 3,000 troops authorized. Troops in that state are helping local business owners and others file claims against BP.

Mississippi has activated 50 of its 6,000 authorized troops, and Florida has activated 30 of its 2,500 to conduct aviation support.

Spokesmen for the four states’ governors rejected the notion that politics is a factor in how many troops they activate.

Last week, Jindal released details of the state’s spending on the Oil Gusher. The money came from a $25 million dollar grant from BP as well as Federal money from the Oil Spill Liability Trust Fund. The majority of the money has gone to the Louisiana Department of Wildlife and Fisheries and the Attorney General. A smaller amount has gone to first responders and others.  It’s definitely stayed at the state level as far as I can tell.

I’m just concerned that since every one impacted by the Gusher and every one watching those of us impacted by the Gusher are pretty mad, that these shenanigans are going to continue.  So far, the face of the local government has been Plaquemines Parish President Billy Nungesser whos being saying almost as many bombastic things as Mayor Ray Nagin did after Katrina.

The last thing we need down here is a pissing contest between varying levels of government. We’ve got enough nasty stuff in our water as it is.  If I start seeing more hints that this is turning into a Jindal/Obama 2012 presidential fight, you’ll hear my screams from down here to what ever corner of the world that you inhabit.   I can’t take another repeat of the same crap that just about did us in after Katrina.

June 24, 2010

Ben Nelson and Republican Party own the double dip

Filed under: Global Financial Crisis,U.S. Economy — dakinikat @ 7:49 pm

BERJAYAIn an act that defies, history, logic, economics, and humanity, the Senate Dems once again were blocked by the Party of the Grinch. What a stand! After all, all who would want to increase the National Debt by 0.00043 percent ? Why do they take what they consider a ‘reasoned’ stand against the deficit only when it applies to the folks that will be forced to soup kitchens?

No Republicans voted yes, while Sen. Ben Nelson (D-Neb.), who had also rejected earlier versions of the legislation, voted no. Sen. Joe Lieberman (I-Conn.) voted yes after voting on previous procedural motions. Sens. Robert Byrd (D-W.Va.) and Lisa Murkowski (R-Alaska) were absent.

After the vote, Senate Majority Leader Harry Reid (D-Nev.) repeated comments he made earlier Thursday that the Senate will now move to a small-business bill. Reid said the unemployment benefits would not be added to that bill, but others have speculated that the provisions could still be attached to the small-business measure.

The failure to move the tax extenders package, which also would have renewed scores of individual and business tax breaks, illustrates the extent to which fears about the deficit are dominating the legislative process five months before a midterm election in which Democratic control of Congress will be on the line.

If only the Salvation Army went public, then I’d recommend you go long on them and maybe we’d be in the money for a change.

More Absentee Policymaking

Filed under: Global Financial Crisis,U.S. Economy — dakinikat @ 6:50 pm

There are so many policies running amok these days that it’s hard to keep track of them all. I’m switching my focus back to the

BERJAYA

I'll gladly pay you Tuesday for a Hamburger today

financial markets for a bit where Politico’s Ben White is chasing down the bites and pieces that will be part of the Financial Market Sausage. There’s a lot to read over there, but this stood out to me because it seems that there are a many policies going through Congress right now to take care of various crises and there’s a vacuum of executive leadership. (If you’d like to read where they stand, it’s on the White House Blog. That beats hearing it read off of a teleprompter as far as I’m concerned.)

Wall Street executives are complaining that the Obama administration has been largely absent from the financial reform conference process, failing to step up and push back on big issues such as the exact language on derivatives reform and the amendment from Sen. Susan Collins (R-Maine) on capital requirements.

The only thing that brings me a sigh of relief–coupled with a wtf–on this statement is that the complaints about the lackadaisical one are coming from “Wall Street” Executives. I would hope the pushback would come from people wanting the President to be more active in pushing a strategic agenda for Wall Street translucence and safety. As an example, Blanche Lincoln has been trying to ride derivatives reform to re-election. You think she’d like Presidential backing.

Several other things stood out. The discussion on Fannie and Freddie may lead to a liquidation authority. This is a huge deal. These behemoths were obviously mismanaged and misregulated. However, the concern now is with the ratings of the agencies’ debt which is a staple in nearly every ‘safe’ investment portfolio including banks. I’d hate to be any one stuck with one of their bonds should this language become law. I should mention that I’m still betting that parts of my pension plan and yours contain a number of them. This could tank the implicit guarantee from the FEDs on any of those quasi-agency bonds moving them all up a risk level or six.

Bank executives were panicking last night over a proposed fix to Title II of financial reform literally penciled in at the last minute. The fear is that that the proposed change to the orderly liquidation authority could leave banks on the hook for a possible wind-down of Fannie Mae and Freddie Mac that could cost as much as $400 billion. In the House counter-offer below, Fannie and Freddie are penciled in as falling under the definition of ‘financial company,’ meaning they could be resolved by the orderly liquidation process. This process is paid for by the sale of the failing company’s assets and/or through assessments on other financial companies, possibly putting the Street in line to pay for the liquidation of the troubled housing giants.

There are also some interesting tales concerning Dodd and MA Senator Scott Brown who seems to be seeking an exception to every rule. The NYT editorial page stepped in for stronger regulation. It also seemed to take a direct smack at Brown. As long as these things get traded on an exchange, they must be fairly standard, audited and watched by the Exchange, and meet Exchanges standards. This is essential as far as I’m concerned.

Exceptions to the rules in the Senate bill are narrowly drawn. Painstakingly negotiated and uniquely customized contracts would not need to be publicly traded, nor would derivatives deals that commercial businesses use to hedge legitimate risks. Any attempt by negotiators to expand the exceptions would be moving in a dangerously wrong direction.

Lawmakers also have to keep the definition of an “exchange” narrow. A transparent exchange is a trading facility in which many participants make bids and offers and everyone can see what prices were offered and paid. Proposed language from the House for the final bill would allow telephone deals to qualify as a proper trade, which is seriously wrongheaded.

Meanwhile, the housing market is showing signs of weakening. Since this is the major wealth item for most American Families, this will surely depress consumer confidence and buying plans. This also means continued problems for Fannie and Freddie assets and any one holding anything remotely related to mortgages.

“Housing is contributing absolutely zilch to economic growth,” said William Wheaton, an economics professor at the Massachusetts Institute of Technology in Cambridge, Massachusetts. “It’s not that people want houses to be expensive. They want the housing sector to start pulling up the economy as it has done after past recessions, and that’s not going to happen until prices rise.”

When that price gain happens, it will have to be substantial to make up for losses in home values, said Columbia’s Stiglitz.

“Even a 3 to 4 percent increase in value won’t help people who have seen their homes decline 20, or 30 or 50 percent,” Stiglitz said.

Bloomberg has a fairly good summary of what’s left standing in the Financial Overhaul Bill. (You would think the President would take some interest in this at this late stage of the game, but he appears to be off having hamburgers with Russian President Medvedev.) The House and the Senate are hammering out what will stand of the Volcker Rule, how to deal with swaps, and other extremely important measures. So far, the ban on proprietary trading by banks is holding.

On the Volcker measure, lawmakers were awaiting proposed changes to the Senate language that would ban U.S. banks from proprietary trading and bar them from investing in or sponsoring hedge funds and private-equity funds.

Dodd may propose incorporating aspects of a proposal from Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan. The two senators want to strengthen the language to eliminate what they consider wiggle room that could allow regulators to change or eliminate the ban later.

In addition, Dodd may offer to add Merkley-Levin language to curb conflicts of interest by preventing companies that underwrite asset-backed securities from placing bets against them. The proposal aims to address the fraudulent activity alleged in the Securities and Exchange Commission’s lawsuit against Goldman Sachs Group Inc. The SEC claims the bank created and sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them.

Now’s the time to push as much through as possible.

Oh, and more importantly, here’s Business Week’s report on the BIG Hamburger Summit.

Obama had a cheddar cheese burger with onions, lettuce, tomato and pickles, washed down with an iced tea. Medvedev selected a cheddar cheese burger with onions, jalapeno peppers and mushrooms. He ordered a Coca-Cola.

June 20, 2010

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Filed under: Uncategorized — dakinikat @ 9:14 am

The President and Vice President’s Golf Game Weekend …

BERJAYA


and BP CEO’s outing at a Yacht Race sponsored by JP Morgan  to see his 52 foot yacht “Bob” …

And a friendly reminder from Reuters:

Obama says will not rest until Gulf oil spill plugged

BERJAYA

Brought to you by one really pissed off Gulf Coast resident ….

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