Archive for October, 2008|Monthly archive page
In The Confiscation of American Prosperity, I looked at the career of Martin Feldstein, until recently longtime director of the National Bureau of Economic Research, chief economic advisor during the Reagan administration, and inveterate foe of Social Security.
In the recent issue of the NBER digest, you can read a short discussion of Martin Feldstein’s “proof” that wages have kept pace with productivity.
In case you do not want to purchase the article, you can read an earlier version here
The result is a display of incredible virtuosity. By selecting the appropriate deflators [a measure of inflation], including benefits as part of wages, and comparing wages with National Income rather than the Gross Domestic Product, voila, Feldstein manages to get a relatively constant wage share of national income. Continue reading
I need to submit a proposal to a major publication tomorrow. I have had to rush it off. Any comments would be appreciated.
How is it that the American dream suddenly morphed into a nightmare? The subprime crisis is a symptom of something larger and far more dangerous. Even the meltdown of Wall Street is a symptom of something larger and even more threatening. Without extreme care, the intended cure is likely to make matters worse. Papering over a crisis, even with a trillion dollar bailout, may temporarily eliminate the symptoms, perhaps even making the economy look healthy again, but the underlying problems are almost certain to break out again in a more virulent form.
A rational response to the crisis requires recognizing the deeper, systemic dimensions of the problem. On the most superficial level, the public face of problem was a group of people buying houses they could not afford. This perspective is misleading, especially because many of the loans were to people who were already homeowners or small-time speculators who were looking to flip houses.
Like a Russian nesting doll, another face is below the surface: predatory lenders, who were pushing deceptive loans that could never be repaid. Pulling away these predatory lenders exposes a more complex presence: the great banking institutions now on the public dole. These supposedly respectable businesses, protective of their public face, do not allow their corporate names to be used by the predatory lenders, but they represent a very profitable component of their businesses. At the next levels, first a dysfunctional financial system appears and, then, something more abstract — a political movement fanatically committed to deregulation, which allowed the whole financial system to go haywire.
Recent scrutiny has exposed most of these actors, but even deeper forces have gone unnoticed. To get a handle of these forces requires looking back at the pattern of crisis and response over many decades. Since comparisons of the current crisis with the Great Depression have become commonplace, that period may be a good place to start.
The Depression of the 1930s had disastrous human consequences, but it made the economy stronger in the long run. In effect, the depression drew much of the poison from the system. It swept away outdated, inefficient, and obsolete businesses, plant, and equipment. Under extraordinary market pressure, business found ways to improve efficiency. Finally, the Depression wiped out a great deal of debt, while New Deal legislation allowed unions to lift wages. The World War II economy built up considerable wealth in the U.S. while the economies of international competitors were left in ruins. This constellation of forces left business and the public able to purchase goods and services once employment recovered.
Shortly after the war ended, the U.S. enjoyed what economists call the Golden Age, because of the extraordinary economic performance of the time. Business came to expect that the experience of the Depression had taught government how to make those good times last forever. Obviously, they did not.
By the late 1960s, falling profits created enormous dissatisfaction for business. Both business and the public tended to hold the Democrats responsible for the faltering economy. In the decades that followed, the Democrats managed to elect only two presidents, both of whom governed like traditional Republicans, while the Republicans became increasingly ruthless about promoting business interests. The underlying obsession of both parties was to resurrect the profitability of the Golden Age.
I will tell the story of the people and policies that set out to recreate the economic performance of the Golden Age. The reader will see how, instead of a Golden Age, they gave the world a jerry-rigged Gilded Age — one in which the gilding covered up an increasingly dilapidated economy. Profits still rose, approaching their pre-Depression peak, but their recovery marked deeper problems.
Normally, one would expect healthy profits to be a payoff from a productive economic structure, based on intelligent investments in plant, equipment, and a well-trained workforce. Instead, the improvement in profits reflected a combination of cheap labor (real hourly wages peaked in 1972), deregulation, low interest rates, and financial manipulation. The driving force of this new Gilded Age was credit rather than income for the majority of workers. Recurrent crises should have signaled the need for fundamental change. Instead, government and business chose to treat the symptoms.
The Wall Street Journal assembled a panel of the worst offenders of the financial meltdown. A reasonable person might expect some contrition after all the damage that they did. Instead, they are asking for more deregulation and tax breaks. Read it and weep!
Berman, Dennis K. 2008. “Street’s Demands May Stir Public Wrath.”
Goldman Sachs Group Inc.’s Lloyd Blankfein, J.P. Morgan Chase & Co.’s James Dimon, Blackstone Group LP’s Stephen Schwarzman, BlackRock Inc.’s Larry Fink and Silver Lake’s Glenn Hutchins assembled for a panel session at the New York Stock Exchange last week organized in part by The Wall Street Journal. “To the 75 Wall Street titans there nodding in agreement, the discussion must have seemed banal. But any outsider, from Washington or the dismissed realms of “flyover country,” would have been amazed at the goings-on.”
“While America buckles in for years of sacrifice, the five chiefs took a different approach. The group pulled straight from the what-government-can-do-for-you school of 2006, lobbying for Wall Street tax breaks, the repeal of Sarbanes-Oxley and against the distraction of class-action lawsuits.”
“Consider Blackstone’s Mr. Schwarzman, who took on a wounded look, saying that none of the people on the panel had done anything wrong. “I don’t see corruption in this room. … Every bad actor in this drama has washed away,” he said. “There’s no one left in place”.”
“Mr. Blankfein, meanwhile, shrugged off the idea that Wall Street could do much. The political system has gotten so tainted that “people like us may not lift their heads above the parapet to give ideas for fear that their heads may be shot off,” the Goldman CEO said.”
As if the bailout were not were not bad enough, the Wall Street Journal reports that the Treasury Department is, in effect, rewriting the tax code to give away what will easily be tens of billions of dollars.
On the opposite page, the paper reports that the Fannie and Freddie bailout is likely to cost the government considerably more than expected because of court suits charging, probably correctly, that management misled investors.
One can safely as that more will be discovered later.
Wal-Mart offers a valuable window into the current economic crisis. Before addressing the current crisis, let’s put Wal-Mart in perspective:
Wal-Mart is, at least in part, both a cause and a symptom of what went wrong in the economy, as well as a hint of what might be done to correct the problem.
Wal-Mart represented a logical business strategy to an economy in which real hourly wages have been stagnant for more than three decades. Wal-Mart presented the face of low prices (which were not in reality always lower than elsewhere). At the same time, Wal-Mart contributed to the low wage environment that made it such a successful business.
Besides paying low wages to its own workers (and sometimes not even paying all the wages that it owed), Wal-Mart helped to lower wages elsewhere. For example, grocery stores have put enormous pressure on their unionized workers because of competition from Wal-Mart’s nonunion operation. Admittedly, Wal-Mart displaced some small retailers that may have paid lower wages.
As is well known, part of Wal-Mart’s strategy was to rely on imports from countries that paid low wages. Competition from these imports both destroy jobs and limited wages from jobs that remained in the U.S.
According to a somewhat dated report, if Wal-Mart were a country, it would rank as China’s fifth-largest export market, ahead of Germany and Britain. Continue reading
David Shemano, who suggested the republishing of the sub-prime primer, sent this series of tables & graphs, giving a feel for the real estate crisis.
Capitalism presents many problems. One of the thorniest is the ability of capital to invade the structure of any attempt to reform it, turning it to destructive purposes. Economists often draw the moral from such outcomes that efforts to reform the market are destructive — evidence of what they call the law of unintended consequences.
The law of unintended consequences was one of the first discoveries of political economy. Usually, the purpose of invoking this principle was to demonstrate how the market worked to people’s benefit. The most famous example, of course, was Adam Smith’s invisible hand.
Finance is something altogether different, deliberately creating unintended consequences. Like the AIDS virus, finance can quickly adjust to almost any regulation. In addition, even the most well-intentioned regulation will have to pass muster with an army of lawyers, lobbyists, and political contributors before it can pass into law. Last-minute adjustments make it possible to insert little additions that make laws and regulations more favorable to capital.
I was talking with a friend from rural Pennsylvania last week. He said that he asked his sister about the election. She said something like, you know what evil back here think about Blacks, but they’re so fed up with the Republicans lying or years ….
Yesterday, I got a note from a very interesting student who took a number of my courses, including Marx. I guess that he had been in prison, judging from his tattoos. I believe that, in any case, he had a hard life. He was very ambitious and exceedingly polite. Every day he would come to class with three or four books that I mentioned in the last session. Continue reading
We just watched a documentary about Wild Man Larry Fischer, whom I used to know a bit in Berkeley in 1965. He used to come to our house on Thursday evenings, when we had open house. All sorts of characters used to come, including, for a while some other people from the Sexual Freedom League, although nothing sexual ever happened. Saul Landau filmed part of a documentary about Jerry Rubin one of the occasions, but he said he never finished the project because he was not very positive about Rubin.
Wild Man Larry Fischer never sang at our house. At the time, he billed himself as a human jukebox, playing music by slapping, hitting, and pushing various body parts. Neither I nor my roommates ever engaged in any serious conversation with him. Continue reading