Monday, May 23, 2011

Today's links

1--DeLong: The Economic Outlook as of May 2011, Economist's View

Excerpt: But the biggest problem generated by this right now is that Washington DC's focus on the Dingbat Kabuki theater of the long-run fiscal stability of America is keeping it from taking any effective steps to use government to boost employment and output now. And things aren't helped by the fact that the way the rescue of the banking system was carried out convinced a lot of people that stimulus policies exist to enrich the top 1% of Americans at the expense of everybody else.

This means that our hopes for economic recovery right now rest not on any government boost to aggregate demand--whether through fiscal, monetary, or banking policy--but rather on the natural equilibrium-restoring full-employment achieving market forces of the economy, especially in the labor market.

And so we are in trouble: right now there are no signs that the economy is crawling up back to anything like full employment on its own. ... The economy will grow, but we won’t close the gap between actual and potential output. We will not for a long time to come get back to the 62 to 64% of the adult population having jobs that we thought was normal back in the decades of the 2000.

And that is the depressing overall macroeconomic picture. I wish I could paint a better one....

2--Government Deficits: The Good, the Bad, and the Ugly, Mark Thoma, CBS Moneywatch

Excerpt: The Good

The first thing to recognize is that deficits are not always bad. When the economy goes into recession, deficit spending through tax cuts or the purchase of goods and services by the government can stop the downward spiral and help to turn the economy back around. Thus, deficits can help us to stabilize the economy. In addition, as the economy improves due to the deficit spending the outlook for businesses also improves, and this can lead to increased investment, an effect known as crowding in. Deficits also allow us to purchase infrastructure and spread the bills across time similar to the way households finance the purchase of a car or house, or the way local governments finance schools with bond issues. This allows us to purchase infrastructure that we might not be able to afford if it had to be financed all at once (this can also force future generations who benefit from the spending to share the construction costs). Finally, deficits can be used to finance wars, but whether this is a good or a bad depends upon your view of whether the war is just. So let’s turn to the bad next.

The Bad

The main worry about deficits is crowding out. Crowding in was just described – it occurs when deficits cause output to go up and business confidence is increased. Crowding out comes about when deficit spending raises interest rates. There is a limited amount of funds available for investment, and when government competes with the private sector for a share of these funds to finance its deficit spending, it drives the cost of these funds – interest rates – higher.

3--The IMF after DSK, Mark Weisbrot, The Guardian

Excerpt: To be fair, some changes at the fund during the tenure of Strauss-Kahn were significant. For the first time ever, during the world recession of 2009, the IMF made available some $283bn-worth of reserves for all member countries, with no policy conditions attached. The fund also made some limited credit available without conditions, though only to a few countries. The biggest changes were in the research department, where there was tolerance for more open debate. For example, there were IMF papers that endorsed the use of capital controls by developing countries under some circumstances, and questioning whether central banks were unnecessarily slowing growth with inflation targets that may be too low.

But as can be seen from what is happening in the peripheral Eurozone countries, the IMF is still playing its traditional role of applying the medieval economic medicine of "bleeding the patient". To be fair to both Strauss-Kahn and the fund, neither the managing director nor anyone else at the IMF is ultimately in sole charge of policy, especially with respect to countries that are important to the people who really run the institution. The IMF is run by its governors and executive directors, of whom the overwhelmingly dominant authorities are the US treasury department, which includes heavy representation from Goldman Sachs, and, secondarily, the European powers.

Until decision-making at the IMF undergoes a dramatic change, we can expect only very small changes in IMF policy. This can be seen most clearly in the current case of Greece: Strauss-Kahn was aware that the fiscal tightening ordered by the European authorities and the IMF was preventing Greece from getting out of recession; but while he pushed for "softer" conditions, he was powerless to change the lending conditions from punishment to actual help. That's ultimately because the European authorities (European Commission and European Central Bank), not the IMF, are calling the shots – although Strauss-Kahn encountered plenty of resistance within the fund itself, too.

4-- Needed: Plain Talk About the Dollar, Christina Romer, New York Times via Economist's View

Excerpt: At a recent news conference, Ben S. Bernanke ... was asked about the falling dollar. He parried the question, saying that the Treasury secretary was the government’s spokesman on the exchange rate — and, of course, that the United States favors a strong dollar....

Strangely, every politician seems to understand that [in the current situation] it would be desirable for the dollar to weaken against ... the Chinese renminbi. ... The United States would export more and grow faster... But in the very next breath, the same members of Congress shout about the importance of a strong dollar. If a decline in its value relative to the renminbi would be beneficial, a fall relative to the currency of many countries would help even more...

To say this openly risks being branded not just an extremist but possibly un-American. Perhaps it is time for a more adult conversation....

5--Bush Tax Cuts, Wars Major Drivers of Projected Government Debt, CBPP Exconomist's View

Excerpt: As we’ve noted, my colleagues Kathy Ruffing and Jim Horney have updated CBPP’s analysis showing that the economic downturn, President Bush’s tax cuts, and the wars in Afghanistan and Iraq explain virtually the entire federal budget deficit over the next ten years. So, what about the public debt, which is basically the sum of annual budget deficits, minus annual surpluses, over the nation’s entire history?

The complementary chart, below, shows that the Bush-era tax cuts and the Iraq and Afghanistan wars — including their associated interest costs — account for almost half of the projected public debt in 2019 (measured as a share of the economy) if we continue current policies. (see chart

simply letting the Bush tax cuts expire on schedule (or paying for any portions that policymakers decide to extend) would stabilize the debt-to-GDP ratio for the next decade. While we’d have to do much more to keep the debt stable over the longer run, that would be a huge accomplishment.)

6--Why a Bad Job Market is Good News for Some, The Streetlight blog

Excerpt: Mark Thoma reminds us of the striking gap that has opened up between the productivity of labor and the compensation paid to labor. The problem, in a nutshell, is this picture (see chart)

Whereas classic labor market theory suggests that when workers become more productive firms should bid up the price of labor by a similar amount, that has clearly not happened over the past 25 years or so. Over the past 10 years, for example, average labor productivity in the US has increased by about 30%, but average labor compensation has only grown by about 11%, meaning that roughly one-thirds of the gains in labor productivity went to workers and the other two-thirds went to the companies that employ them....

I had previously been thinking about the resistance from Republicans to further stimulus purely in terms of politics; they don't want Democrats to do well in 2012, and therefore are happy with a weak recovery. But there's a good financial reason for the owners of capital (who tend to support Republicans) to prefer the weak recovery, too: the weak labor market ensures that firms will be able to keep the majority of productivity gains for themselves.

On the bright side, this means that the policy prescription is really quite simple: jobs, jobs, jobs.

7--Charlatans and cranks, Paul Krugman, New York Times

Excerpt: Digby suggests that it’s a kind of Mission Accomplished phenomenon:

I think we’re seeing the decadence and delusion of the end stages of a successful political movement. They pretty much fulfilled the corporate wish list. The only things they haven’t accomplished are the looney wingnut agenda items, which until now they’ve managed to keep at arms length, only giving little bits when necessary to keep the rubes on board. Maybe they just have nothing left to do.

Maybe. But my take is that the hermetic nature of movement conservatism — its loyalty tests, its closed intellectual world where you get all your alleged facts from Fox News and the Heritage Foundation, the “wingnut welfare” that ensures that defeated politicians always have a cushy job waiting at a think tank somewhere, always made it vulnerable to this kind of spin into policy craziness. The Bush debacle undermined the control once exercised by the establishment, which tried to keep up the appearance of reasonableness; and now people like Pawlenty and Romney need to sound crazy even if they (possibly) aren’t.

The 2010 election may, in retrospect, turn out to have been a disaster for the GOP: it empowered the extremists, leading them to believe that they could go the whole way and keep winning elections. I guess we’ll see.

8--Origins of the Crisis, Fake and Real, Paul Krugman, New York Times

Excerpt: The paper from which this figure is taken, by David Min, makes it clear that Fannie-Freddie loans were much less risky than those originated in the private sector — and in particular that “private-label” mortgage-backed securities, which were essentially unregulated, were vastly riskier than anything the government was promoting.

The whole “the government did it” claim is, in short, based on deeply misleading numbers — and it’s hard to read this story without believing that these numbers were deliberately constructed to mislead.

9--"There is Something Very Wrong with This Picture", Dani Rodrik, Economist's View

Excerpt: Policymakers need to focus on job creation much more than they are, but as this graph shows creating more jobs is only part of the solution to the problems that middle and lower class households have been experiencing. We also need to ensure that income is equitably shared, and the paper outlines the steps needed to move in this direction:

The broken link between productivity and wage growth reflects changes in markets, policies, and their enforcement, institutions, and organizational norms and practices that have been evolving for a long time (circa 1980). Given this history, it is clear that the solutions will also need to be multiple and systemic and sustained for a long time. They also will need to match the features of the contemporary economy. The prior Social Compact was well-suited to a production-based economy in which wage increases in manufacturing set the norm for other parts of the economy.

Today, manufacturing can no longer play this catalytic role. Instead, norms and institutions need to support an innovation-knowledge based economy. We outline below a potential combination of actions suited to this task. If the list seems formidable, recall that we are now facing a situation where the economy has stopped working for something between one-half and two-thirds of all American workers.

Many of us have been calling for a New New Deal. I've done so many times over the last several years and I'm far from alone. Unfortunately, there's very little evidence that this is anywhere near the top of the political agenda. So long as those with wealth and power get theirs (and keep filling campaign coffers), it's hard to see that changing.

10--Complicity at the Bush SEC, Naked Capitalism

Excerpt: The damage to investors wasn’t simply that NovaStar shares were overvalued in the secondary market (they went from over $30 at their peak to below $0.50). The company was able to do more damage via floating new shares during the time frame in which Cohodes was trying to get the SEC to take action.

The remarkable bit is not that the SEC ignored him. Lower level staff appeared to take his charges seriously. But it appears the more senior officials were more interested in finding excuses to do nothing than do their jobs and take the matter seriously. From the book:

Mr. Cohodes reckons that over roughly four years, he conducted hundreds of phone calls with the S.E.C. about NovaStar. Each time, he would walk them through his points. Sometimes, a higher-up would get on the phone and contend that while NovaStar’s practices were indeed aggressive, the company did not appear to be breaking the law. NovaStar’s selective disclosures — it was quick to report good news but failed to own up to problems on many occasions — seemed to be infractions that the S.E.C. should have dealt with. But its investigation went nowhere….

NovaStar’s shares collapsed, wiping out roughly $1 billion in market value from the peak of the stock price. Despite the implosion, between 2003 and 2008, [founders] Mr. [Scott] Anderson and Mr. [Lance] Hartman each made about $8 million in salary, bonuses and stock grants.

Neither man was ever sued by the S.E.C. or any other regulator. As is its custom, the S.E.C. declined to comment on the NovaStar inquiry or the agency’s discussions with short-sellers. But documents supplied by the S.E.C. under the Freedom of Information Act show the extensive communications between Mr. Cohodes and the agency. Ms. Miller, still at the S.E.C., declined to comment.

Even though the public has become accustomed to complacent regulators, the fact that staff interest in the NovaStar case appears to have been stymied at higher levels signals how deep the rot at the SEC is. And with coddling of banksters now the order of the day in Washington, there’s no reason to expect any meaningful change.

11--How drug profits saved capitalism, James Petras, Global Research

Excerpt: Mexico ’s descent into this inferno has been engineered by the leading US financial and political institutions, each supporting ‘one side or the other’ in the bloody “total war” which spares no one, no place and no moment in time. While the Pentagon arms the Mexican government and the US Drug Enforcement Agency enforces the “military solution”, the biggest US banks receive, launder and transfer hundreds of billions of dollars to the drug lords’ accounts, who then buy modern arms, pay private armies of assassins and corrupt untold numbers of political and law enforcement officials on both sides of the border.

Mexico’s Descent in the Inferno

Everyday scores, if not hundreds, of corpses – appear in streets and or are found in unmarked graves; dozens are murdered in their homes, cars, public transport, offices and even hospitals; known and unknown victims in the hundreds are kidnapped and disappear; school children, parents, teachers, doctors and businesspeople are seized in broad daylight and held for ransom or murdered in retaliation. Thousands of migrant workers are kidnapped, robbed, ransomed, murdered and evidence is emerging that some are sold into the illegal ‘organ trade’. The police are barricaded in their commissaries; the military, if and when it arrives, takes out its frustration on entire cities, shooting more civilians than cartel soldiers. Everyday life revolves around surviving the daily death toll; threats are everywhere, the armed gangs and military patrols fire and kill with virtual impunity. People live in fear and anger.

The Free Trade Agreement: The Sparks that lit the Inferno....In the new millennium, popular movements and a new electoral hope arose: Andres Manuel Lopez Obrador (AMLO). By 2006 a vast peaceful electoral movement promised substantial social and economic reforms to ‘integrate millions of disaffected youth’. In the parallel economy, the drug cartels were expanding and benefiting from the misery of millions of workers and peasants marginalized by the Mexican elite, who had plundered the public treasury, speculated in real estate, robbed the oil industry and created enormous privatized monopolies in the communication and banking sectors.

In 2006, millions of Mexican voters were once again denied their electoral victory: The last best hope for a peaceful transformation was dashed. Backed by the US Administration, Felipe Calderon stole the election and proceeded to launch the “War on Drug Traffickers” strategy dictated by Washington...

Cross border gun sales grew exponentially .The US “market” for Mexican manufactured goods and agricultural products shrank, further widening the pool for cartel recruits while the supply of high powered weapons increased. White House gun and drug policies strengthened both sides in this maniacal murderous cycle: The US government armed the Calderon regime and the American gun manufacturers sold guns to the cartels through both legal and underground arms sales. Steady or increasing demand for drugs in the US – and the grotesque profits derived from trafficking and sales--- remained the primary driving force behind the tidal wave of violence and societal disintegration in Mexico .

Drug profits, in the most basic sense, are secured through the ability of the cartels to launder and transfer billions of dollars through the US banking system. The scale and scope of the US banking-drug cartel alliance surpasses any other economic activity of the US private banking system. According to US Justice Department records, one bank alone, Wachovia Bank (now owned by Wells Fargo), laundered $378.3 billion dollars between May 1, 2004 and May 31, 2007 (The Guardian, May 11, 2011). Every major bank in the US has served as an active financial partner of the murderous drug cartels – including Bank of America, Citibank, and JP Morgan, as well as overseas banks operating out of New York , Miami and Los Angeles, as well as London...

The Drug Traffickers, the Banks and the White House

If the major US banks are the financial engines which allow the billion dollar drug empires to operate, the White House, the US Congress and the law enforcement agencies are the basic protectors of these banks. Despite the deep and pervasive involvement of the major banks in laundering hundreds of billions of dollars in illicit funds, the “court settlements” pursued by US prosecutors have led to no jail time for the bankers. One court’s settlement amounted to a fine of $50 million dollars, less than 0.5% of one of the banks (the Wachovia/Wells Fargo bank) $12.3 billion profits for 2009 (The Guardian, May 11, 2011). Despite the death of tens of thousands of Mexican civilians, US executive branch directed the DEA, the federal prosecutors and judges to impose such a laughable ‘punishment’ on Wachovia for its illegal services to the drug cartels. The most prominent economic officials of the Bush and Obama regimes, including Summers, Paulson, Geithner, Greenspan, Bernacke et al, are all long term associates, advisers and members of the leading financial houses and banks implicated in laundering the billions of drug profits.

Laundering drug money is one of the most lucrative sources of profit for Wall Street; the banks charge hefty commissions on the transfer of drug profits, which they then lend to borrowing institutions at interest rates far above what – if any – they pay to drug trafficker depositors. Awash in sanitized drug profits, these US titans of the finance world can easily buy their own elected officials to perpetuate the system.

Even more important and less obvious is the role of drug money in the recent financial meltdown, especially during its most critical first few weeks.

According to the head of United Nation’s Office on Drugs and Crime, Antonio Maria Costa, “In many instances, drug money (was)… currently the only liquid investment capital…. In the second half of 2008, liquidity was the banking system’s main problem and hence liquid capital became an important factor…interbank loans were funded by money that originated from drug trade and other illegal activities… (there were) signs that some banks were rescued in that way.” (Reuters, January 25,2009. US edition). Capital flows from the drug billionaires were key to floating Wachovia and other leading banks. In a word: the drug billionaires saved the capitalist financial system from collapse!....


By the end of the first decade of the 21st century, it has become clear that capital accumulation, at least in North America, is intimately linked to generalized violence and drug trafficking. Because capital accumulation is dependent on financial capital, and the latter is dependent on the industry profits from the multi-hundred-billion dollar drug trade, the entire ensemble is embedded in the ‘total war’ over drug profits. In times of deep crises the very survival of the US financial system – and through it, the world banking system – is linked to the liquidity of the drug “industry”.

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