Seriously, does this look like a recession to you? (image from CR.)
And 2001 was a depression too, it was just a very shallow depression.
As for Romer, head of the Council of Economic advisors for Obama, and sidelined for her entire tenure, it’s ’bout time she quit. It’s one thing to trade your soul and reputation for power and access. It’s another thing to trade your soul for powerlessness.
Really nothing worth saying about the job numbers. They were to be expected. Obama decided to save his TARP slush fund for his own reelection. Too bad for Congressional Dems, but hey, they were complicit.
Social Security Trustees report that social security will be able to make full payments until 2037(pdf). Tax receipts will dip below outlays before then, but this is precisely why the Social Security program has taken in more money than it needed, so that it could handle baby boomer retirement and increased life spans.
Any projection which goes out 27 years is so incredibly reliant on the embedded assumptions about growth, employment and lifespans that it amounts to a fiction. It is, at best, a guess.
Increase growth by just a little bit and the entire “problem” goes away. Get rid of the taxation cap so the rich are not capped in what they pay and the entire problem goes away. Assume higher employment, and the entire problem goes away. Assume a reduction in inequality, and the problem goes away.
The US has a number of problems which are at or near crisis, such as employment, inequality and healthcare costs, to name just a few. Social Security is not one of them. It isn’t even close, and politicians and billionaires like Pete Peterson who are trying to gin up a crisis should be ashamed of themselves.
If they want the US budget more in order they should look at health care, where single payer could cut costs by at least a third, and at the military, where real spending has doubled since the end of the Clinton administration.
Or they should work on increasing employment and increasing wages for ordinary people. That’s a crisis.
Instead of dealing with real problems, instead of tackling the medical industry or the military-industrial complex, instead of fixing the job situation, they want to steal money from old people.
Now that the President’s plan to help homeownevers, HAMP, has clearly proven to be a failure, let’s go back to how to do it correctly.
What the government should do instead is set up a Trust to buy mortgages at a discount, then reset them to 20, 30 or 50 year fixed mortgages with a reduced face amount. If the house is later sold, half of the increase goes to the government, so that taxpayers make a profit. The mortgage cannot be paid off before the end of its term so that financial scavengers cannot come around and, as they did over the last ten years, say “get rid of that mortgage, and take ours. It’s better. Honest!”, because we know that when they say better, they don’t mean better for the mortgage holder. The mortgage is attached to the property and is transfered to any new buyer. And the mortgage cannot be removed from the property, and any new mortgages attached to the property are junior to the government mortgage.
Now, when I first made this suggestion back in 2008, the banks would have been eager to sell. Right now they won’t, because they have record profits. So using this plan also requires a whip hand. If the banks won’t sell, then the Fed starts pushing back onto them the bad paper of theirs it is holding (which includes a pile of bad mortgages), or raises rates for the banks, or just threatens them with accounting changes which will force them to recognize their losses right now (there are plenty of losses that should be on the books.)
Or you could just pass a law forcing the banks to sell underwater mortgages, but let’s face facts, that isn’t happening in this Congress.
End results:
a) a floor is set for mortgage prices (the price should be based on what the long run price was in the area before the housing bubble.) This ends the confidence crisis in these securities (yes, there is still a confidence crisis, it’s just muted because the Fed, Freddie and Fannie are sitting on the toxic waste pile they took from banks), because there is now a market price—what the Trust will pay.
b) It helps homeowners stay in their homes.
c) It gets rid of overly complex mortgages and puts in their place a dead simple mortgage that anyone can understand.
d) It punishes lenders, which they deserve, for making loans they should never have made. On the other hand, they get more money than they probably could on the open market if the Feds weren’t keeping bad securities off the market.
e) While it does keep homeowners in their homes, it doesn’t let them off scot-free either. In exchange for a good mortgage they can service, they give up some of the future profits on sales in their houses.
f) The government will almost certainly make a long term profit on this. This is important, because it’s not fair for people who aren’t underwater on mortgages to spend hundreds of billions or trillions bailing out those who are without some expectation that in the end it won’t be more than just a transfer of wealth to them and to investors and banks.
If they do give the administration what it wants, then Wall Street and the Banks just got bailed out, no help goes to ordinary people and you get stuck with a trillion dollar bill. Taxpayers get all the toxic assets, but Wall Street, who paid themselves more in bonuses in 2007 then 80 million Americans got in raises, keeps the profits.
And that’s exactly what happened.
It would be beyond swell if Democrats got serious about actually helping homeowners in a way that’s good for the country and good for homeowners, rather than a placebo meant to look like action is being taken.
Obama Claims Right to not just assassinate American citizens without trial but to deny them the right to a lawyer
2010 August 3
Seriously, fuck Obama and fuck anyone who defends this shit. Oh, I know, if you’re even thinking of defending this, you’re a moral imbecile, but you should at least be able to understand that unless you’re in the top .1%, you, personally, will eventually have only the rights the least amongst us do.
The government should not (I won’t say “does not” because they do it anyway) have the right to punish anyone without a timely trial before their peers, the right to see the evidence against them and the right to face their accusers.
I will add what should be obvious: while much worse than the no-fly list, this is a linear extrapolation of the no fly list (and a cousin to the idea of plea bargaining virtually everything). Punishment without a trial. We will see whether murdering people without a trial is still a step too far for US courts.
This is what you NEED to understand. Go read it. It also underlies most of my economic thinking and writing. If you want to understand the underpinnings of what I write, this is fundamental.
Let me state the obvious, which we all know, one more time.
Obama intends to gut social security. Republicans failed, it requires Democrats. If Obama did not intend to gut social security he would not have set up the SS comission with the members it has.
Nancy Pelosi is onside with this (or she wouldn’t have forcefully scheduled a vote for the lame duck session.)
The Democrats most of us supported in 08 intend to gut Social Security.
Betrayal: the most bitter sauce.
But why shouldn’t they betray us? No matter what they do, most folks say “well, the Republicans are worse”. All it requires is that Democrats beat ordinary people with canes instead of chains.
They’re not the suckers.
Ricardo
In 1817 David Ricardo formalized the Law of Comparative Advantage. Since then it has stood the test of time as one of the very few laws that an Economist can point to and say, “this is indisputably true.” It’s because of this law that you can only rarely find an Economist who doesn’t believe in unrestricted free trade. But Ricardo added an important caveat when he discussed free trade and comparative advantage and it’s one that most modern economists seem to have forgotten…
Let’s quote straight from Ricardo:
In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. If the profits of capital employed in Yorkshire, should exceed those of capital employed in London, capital would speedily move from London to Yorkshire, and an equality of profits would be effected; but if in consequence of the diminished rate of production in the lands of England, from the increase of capital and population, wages should rise, and profits fall, it would not follow that capital and population would necessarily move from England to Holland, or Spain, or Russia, where profits might be higher.
This is the Achilles heal of comparative advantage – the flaw in the foundation of free trade that causes outsourcing woes. Those who say that the law of comparative advantage proves that free trade is good are absolutely right, but they’ve forgotten his caveat.
Because in Ricardo’s world it was true that capital was not particularly mobile. It is not true in our world and it wasn’t true in the Victorian world.
In a world where I can move my capital freely between locales, where I can also move my profits freely, and where I don’t have to live where my capital is working, there is no reason to invest in any productive activity in my home country – I can make more money elsewhere.
The higher surplus locale is going to get as much free capital as it can soak up and is available.
The logic behind this is simple.
Let’s say I have 1 million dollars to invest and I can invest it in two different locales. In one place I’ll get 5% return, in another 10% return. In both locales I can take my profit and do what I want with it, and I can live in either locale and in both places my money is secure from being seized by the government or destroyed by violence. Obviously I’m going to put my money into the place with the higher returns.
And when I get those profits, I’m going to sink any reinvestment into the place with the higher returns again. It’s a virtuous circle – if you’re the place with the higher returns and it ends when returns even out or there is no more excess capacity.
If the higher return country has no more investment opportunities that pay higher than the low return country, it makes no sense to invest in it. What matters here is the marginal rate of return – that is the return on the next dollar of my investment. In principle there ought to be diminishing returns – people snap up the good opportunities and over time the opportunities get worse and worse until returns equalize (this happens faster when currency values aren’t decided primarily by government intervention but it doesn’t always happen – even in the long term – when we’re all dead.
Profit is just how much surplus you’re receiving. Let’s say my workers are capable of producing $5 of goods for every hour they work and my costs are $3/hour for everything (property, taxes, capital costs and pay) – I’m making $2 an hour for every worker I have working for me.
If that’s country A and in country B the average worker produces $10 an hour, but my costs are $9 – my surplus is $1 – half of country A, even though my workers are more productive.
And that’s why US workers are more productive and people are shipping jobs to China and India. Costs in the US are higher for property, wages and taxation.
To stop the capital (and jobs) moving from Country B to Country A, you have to increase surplus. There are two ways to do that – you can reduce costs (most easily by cutting taxes or wages) or you can increase productivity. If the average worker produces one more dollar of goods while costs stays the same – and Country A’s worker’s productivity doesn’t increase, then you’re even.
Or Country A could increase wages, taxation or property costs and become less competitive.
In a world without mass capital flows there was another way. You could have lower capital costs. But having the Fed have lower capital costs than another country means little – borrow in the US, invest it where the ROI is higher.
More than that – money you can’t use is, well, useless. Let’s say you’re investing in a factory in China but you want to live in Europe or the US – and Europe and the US won’t let you use the money you have in China in their countries (or will only let a fraction back in) you’re not likely to invest in China, are you? In addition, money that can’t move is captive to political unrest and other such events – and that gives mature stable countries a big leg up. If moving money is hard or slow then you’d better be sure that where you have it is stable because if something goes wrong – kiss it goodbye.
A key problem right now is demand. Capital flows to low production cost, high surplus domiciles. But there’s only so much demand for goods and only a limited amount of growth in demand for goods. So you’ve got your profits and you have to figure out what to do with them. You can’t plow all of it back into productive investment, because you’d wind up with more productive capacity than there is ability to buy the goods. As a result the excess money has to go into nonproductive uses.
The money that does go into productive uses will go to the domiciles that produce the greatest surplus (profit). Many people have pointed out that the US hasn’t lost jobs to outsourcing – that’s only true in a technical sense. What has happened is that the new jobs have been mostly created overseas (in cases where they can be done overseas). Old jobs haven’t (mostly) been moved because of sunk capital costs. Once you’ve paid 10 million dollars to create a factory, spending another 10 million dollars to relocate the factory usually doesn’t make sense. But if you have to build a new factory anyway (either because you need more capacity or because the old factory would have to be replaced for some reason) then it makes sense to build it in the domicile with the higher surplus production. That’s exactly what we’ve seen over the last few years: China and India getting the new jobs in non protected sectors. It’s not rocket science, it’s just ROI (Return on Investment).
But, since you can’t put all the money back into production you’ve got to stick some of the money elsewhere. And what we have going is a nice reinforcing trend. Oldman had called it strip mining the US economy. The money is used to buy your customers’ assets or leant to your customers. In exchange they put up as collateral either the full faith of their government (we’ll see how good that is in a few years) or their assets – which in the current case means mortgage backed securities, bonds, and common shares in companies (which represent ownership of assets.) They then use that money to buy your goods and the cycle continues.
This vicious cycle (or virtuous if you’re the one getting rich and you get out in time) results in excess productive capacity, a slow decline in employment in the low surplus domicile and an increase in debt in the low surplus domicile. It also pushes costs in the low surplus domicile lower (meaning wages and taxation, primarily.)
In the meantime, if the developed world (and specifically the US) were to stop borrowing to buy – the entire engine would collapse. This is not a sustainable development – if the US was to buy only what it could afford based on its own exports then there would be an economic shockwave not just in the US but in China, India and other high surplus, low cost domiciles. And right now the dynamic is being funded by taking money out of the US and other high cost domiciles – which must ultimately end in a reduction of demand. If the low cost domiciles which have been getting the capital investment are not capable of soaking up the excess capacity when the US’s consumption comes in line with what the US can afford, then you will have a worldwide recession at the least – likely a depression.
Economics views systems as moving towards equilibrium. But it’s more useful to view systems as subject to multiple different tendencies. At any given time different tendencies may be stronger than other tendencies. What should be happening is that US costs should drop and developing country costs should rise. It is happening. It’s not happening very fast, and where they meet is going to be somewhere a lot south of the current US standard of living. In the meantime the dynamic is the US shipping its capital and its growth in productive capacity to lower cost, higher surplus domiciles. That will continue until the conditions for it end – and not before. The conditions which can end it are increased shipping costs (favouring more localized production), surplus production evening out, a political decision to discourage either trade or capital flows or an unwillingness or inability of either the US to borrow or its creditors to lend (the end of the housing bubble strikes directly at this). Until then capital will go to the higher returns and since the highest returns on production are mostly not in the US, capital that creates production jobs will flow disproportionately away from the US while asset bubbles form in the United States in order to pay for imports. (And the assets they have bought or allowed the US to borrow against are likely to crash in the final days of this system. A suckers game all around, but the only thing worse than playing is trying to stop playing.)
(Originally published years ago at BOP news, I put it back up here because this is what is at the heart of problems with globalization and why comparative advantage no longer works.)
The premise behind the US/ISAF strategy in Nato is that a surge of foreign fighters will be sufficient to impose sufficient costs on the Taliban and other anti-government groups that they will not effectively contest the expansion of both ISAF and Afghan government control of the Pashtun urban areas in the short run. In that short run, the Afghan army and national police grow greatly in size, competence and honesty so that residents of the Pashtun urban areas grant the government legitimacy and turn their backs on the Pashtun Taliban and other anti-government groups. After that the foreign forces draw down by a significant fraction of total forces and the greatly expanded and non-corrupt Afghan military and police forces are sufficient to maintain order and beat down on anti-government groups with only Western support instead of Western infantry looking for contact every day.
That is the theory. It has numerous problems in it that have been examined here and everywhere else in the COINtra blogosphere.
It also has a problem that Afghanistan is dirt poor and it can not afford to sustain a national security apparatus that is anywhere near big enough, well trained enough and well-equipped enough to work under US counterinsurgency doctrine. Spencer Ackerman at Wired points out (yet again) that the Taliban is paying competetive to slightly above market wages for its light infantry soldiers compared to the Afghan government. More importantly, his commenter Feral Jundi caught a great tidbit from a December 2009 Washington Post article on sustainability:
An Afghan soldier costs about $25,000 a year to train, equip and maintain,
Even at the recently upped pay scales, direct pay only accounts for 15% of the cost to keep a single Afghan soldier in the field for a year. It is the support infrastructure that is expensive, and that infrastructure is supposed to expand faster than direct personnel numbers are supposed to expand to support Obama’s strategy.
The problem is the nominal GDP per capita in Afghanistan is between $500 and $1,000 US dollars in 2009. So each soldier requires the entire output of twenty five to fifty average Afghans to support. By comparison, the baseline cost of a US soldier requires the entire output of slightly more than 2 Americans to sit in garrison in Texas, or twenty Americans to be deployed to Khandahar. And given the basic fact that the US tax system is both far more efficient and pervasive than the Afghan tax system, the number of tax payers required to support a much more expensive US soldier is far less than the number of Afghan taxpayers required to support an Afghan soldier.
The way that this problem has been worked around is for the rich ISAF nations, especially the US, to fund the vast majority of the costs of the Afghan National Army. And that is where we hit the legitimacy problem (again) as the army is only fielded by the largess of foreign interests and everyone knows that the Kabul government can’t fund or support such an army out of its own resources, or even a sufficiently powerful and loyal force to hold its own against other armed and competing factions that are able to self-fund effective forces in Afghanistan.
