Economics: Republicans v Democrats

 

Why are Kansas and Texas doing so badly, and California so well?

Robert Reich: 

At the one end of the scale are Kansas and Texas, with among the nation’s lowest taxes, fewest regulations and lowest wages.

 At the other end is California, with among the nation’s highest taxes, especially on the wealthy; toughest regulations, particularly when it comes to the environment; most ambitious health care system, which insures more than 12 million poor Californians, in partnership with Medicaid; and high wages.

So, according to conservative doctrine, Kansas and Texas ought to be booming, and California ought to be in the pits.

Actually, it’s just the opposite.

For several years now, the rate of economic growth in Kansas has been the worst in the nation. Last year its economy actually shrank.

Texas hasn’t been doing all that much better. Its rate of job growth has been below the national average. The value of Texas exports has been dropping.

But what about so-called over-taxed, over-regulated, high-wage California?

California leads the nation in the rate of economic growth — more than twice the national average. If it were a separate nation, it would now be the sixth-largest economy in the world. Its population has surged to 39 million (up 5 percent since 2010).

Economics 101

Here is the situation:
1) There was a downward spiral, businesses were laying off so customers were not spending. This caused businesses to cut back more, which caused customers to cut back more, which caused businesses to cut back more. 

2) Expectation were also in a downward spiral because everyone saw what was happening so they cut back too. 

3) Deflation joined the party as businesses cut prices to try to get customers, so customers decided prices were going down and decided to wait before buying. 

4) Unemoployment caused people to ask for lower wages when they took a job, which put downward pressure on wages, so cutomers were cutting back even more, (go to 1) 

5) Etc., spiraling ever downward. 

In the past, society learned that the way to fix this is for government to step in and “stimulate” the economy by investing in things like infrastructure project, hiring people to fix roads etc., which stopped the spiral. In fact the Obama stimulus reversed the downward spiral. We were losing 800,000 jobs a month until the stimulus kicked in, then after a while we were gaining jobs again 

But then came the Wall Street-backed “austerians” demanding that government cut back instead of stimulate. Wall Street benefits from unemployment because the very wage drop means they pay less for the labor commodity. And they benefit from deflation because people with lots of money gain while people who owe money lose. And the “study” by Reinhart and Rogoff provided an intellectual justification for Wall Street’s demand.

And Paul Krugman:

Let’s start with what may be the most crucial thing to understand: the economy is not like an individual family. 

Families earn what they can, and spend as much as they think prudent; spending and earning opportunities are two different things. In the economy as a whole, however, income and spending are interdependent: my spending is your income, and your spending is my income. If both of us slash spending at the same time, both of our incomes will fall too. 

And that’s what happened after the financial crisis of 2008. Many people suddenly cut spending, either because they chose to or because their creditors forced them to; meanwhile, not many people were able or willing to spend more. The result was a plunge in incomes that also caused a plunge in employment, creating the depression that persists to this day. 

Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment. 

So what could we do to reduce unemployment? The answer is, this is a time for above-normal government spending, to sustain the economy until the private sector is willing to spend again. The crucial point is that under current conditions, the government is not, repeat not, in competition with the private sector. Government spending doesn’t divert resources away from private uses; it puts unemployed resources to work. Government borrowing doesn’t crowd out private investment; it mobilizes funds that would otherwise go unused. 

Now, just to be clear, this is not a case for more government spending and larger budget deficits under all circumstances — and the claim that people like me always want bigger deficits is just false. For the economy isn’t always like this — in fact, situations like the one we’re in are fairly rare. By all means let’s try to reduce deficits and bring down government indebtedness once normal conditions return and the economy is no longer depressed. But right now we’re still dealing with the aftermath of a once-in-three-generations financial crisis. This is no time for austerity.

Update: Ezra Klein says: The era of austerity is over (for now)

I don't think they'll understand the sarcasm...

*Fixed link. Thanks, Steve.

I shoulda stood in bed...

The President Surrenders

Hangover

Where The Mistakes Were Made

Shares fall as US debt-deal relief rally fizzles out

Anyone Who Thinks The Debt Deal Is A Victory For America Understands Neither Economics Nor Politics

How Abortion Caused the Debt Crisis

Debt deal agreed but may not save US AAA credit rating

The Four Big Problems With — And Four Silver Linings Around — The Debt Limit Deal

What we wish Obama had said

Fear sells

Wars, corporations, governments...

Do you understand economics? I mean big time, prewar, global capitalism. Do you get how it worked? I don’t, and anyone who says they do is full of shit. There are no rules, no scientific absolutes. You win, you lose, it’s a total crapshoot. The only rule that ever made sense to me I learned from a history, not an economics, professor at Wharton. “Fear,” he used to say, “fear is the most valuable commodity in the universe.” That blew me away. “Turn on the TV,” he’d say. “What are you seeing? People selling their products? No. People selling the fear of you having to live without their products.” Fuckin’ A, was he right. Fear of aging, fear of loneliness, fear of poverty, fear of failure. Fear is the most basic emotion we have. Fear is primal. Fear sells. That was my mantra. “Fear sells.”

Work to be done

Bob Herbert of the New York Times:

While the nation was suffering through the worst economy since the Depression, the Democrats wasted a year squabbling like unruly toddlers over health insurance legislation. No one in his or her right mind could have believed that a workable, efficient, cost-effective system could come out of the monstrously ugly plan that finally emerged from the Senate after long months of shady alliances, disgraceful back-room deals, outlandish payoffs and abject capitulation to the insurance companies and giant pharmaceutical outfits.

The public interest? Forget about it.

With the power elite consumed with its incessant, discordant fiddling over health care, the economic plight of ordinary Americans, from the middle class to the very poor, got pathetically short shrift. And there is no evidence, even now, that leaders of either party fully grasp the depth of the crisis, which began long before the official start of the Great Recession in December 2007.

Joseph Stiglitz: Why we have to change capitalism:

Even now, many deny the magnitude of the problems facing our market economy. Once we are over our current travails – and every recession does come to an end – they look forward to a resumption of robust growth. But a closer look at the US economy suggests that there are some deeper problems: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in "Old Europe".

It is said that a near-death experience forces one to re-evaluate priorities and values. The global economy has just had a near-death experience. The crisis exposed not only flaws in the prevailing economic model but also flaws in our society. Too many people had taken advantage of others. Almost every day has brought stories of bad behaviour by those in the financial sector – Ponzi schemes, insider trading, predatory lending, and a host of credit card schemes to extract as much from the hapless user as possible.

Dennis Kucinich:

WASHINGTON -- Rep. Dennis Kucinich (D-OH) on Wednesday said the Massachusetts election was a "wake up call" for Democrats and that his party had better change course or it could suffer devastating losses come November.

"People elected Democrats in 2008 to change the country's direction," he told Raw Story in a nearly hour-long interview.

"And the same entrenched interests that George Bush could not shake, this current White House is having great difficulty in shaking. One could suggest they might be more entrenched than ever."

Kucinich staunchly defended liberalism but alleged that Democrats are not behaving like liberals.

[snip]

Kucinich lamented Democrats' growing camaraderie with big moneyed interests, claiming it's hurting the party.

"You ask the banks to reform banking?" he said. "Put the insurance companies to reform insurance. Call in nuclear to reform energy policies? Are you kidding me?"

"These problems, lest we forget, did not start with Barack Obama," Kucinich said. "It was George Bush drove the economy over the cliff with a trillion dollar tax cut and a war based on lies, and an expanding trade deficit."

"And we can't do that by playing patty-cake with Wall Street, by caving into the demands of big banks, by playing footsie with insurance companies and by jumping in bed with the pharmaceutical industry.

"Americans are really skittish about the economy, and they have every right to be," he said. "This isn't a left-right argument; this isn't a liberal-conservative argument. This is about down or up."

"We have a really deep recession, and the only way to bring it back up is to have a massive jobs program," he said. "I don't see any evidence" that Obama's economic team is standing behind that.

Can we do it?

Update: Steven Colbert has the final word: Colbert on filibuster rules: ‘Democrats are pussies’

Wouldn't that be cool?

If Elizabeth Warren took a more active governmental position?:

ON THE day after Tuesday’s electoral loss, the Obama administration brought an unfamiliar face to the White House - Elizabeth Warren, the Harvard Law professor noted for her staunch advocacy on behalf the middle class and fierce criticism of the bank bailouts. Perhaps the administration will take a more aggressive approach to Wall Street, along the lines of what Warren wants. But for Democrats to truly take ownership of the economic crisis, Warren will need to play a more prominent role. Not just her ideas, but the force of her personality is needed.

[snip]

As chairwoman of the TARP Oversight Committee, she’s been responsible for examining the bank bailouts and the regulatory response. Warren has vocalized the concerns of many Americans - but not many politicians - who are outraged by the rampant greed that led to the crisis, and the refusal of Wall Street to take responsibility. “I think the problem has been all the way throughout this crisis, that the banks have been treated gently and everyone else has been treated really pretty tough,’’ said an exasperated Warren last fall, echoing what so many others - in both parties - have come to believe.

These people need someone of Warren’s stature. The timing is perfect: her term at TARP Oversight will come to an end in the spring of 2011, just as a Senate candidate would have to be ramping up. She’d have a base of support on the Internet as soon as she announces. Sure, a Warren campaign would provoke guffaws from the right: What does a Harvard professor really know about an economic crisis? Yet underneath the polished pedigree is a teenage bride from Oklahoma. She’s as much an everyday person as Scott Brown; she just happens to be a brilliant scholar as well. When she’s championing the middle class, she’s not doing so because it’s politically expedient, but because she feels connected to it in a way few politicians are. And she has the intellectual chops to convert that connection into dramatic policy change. Sadly, few politicians can say that, either.

John Stewart thinks so:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Elizabeth Warren
www.thedailyshow.com
Daily Show Full Episodes Political Humor Health Care Crisis

It's WTF Tuesday!

Soldier: Obama not U.S. born, can't send me to Afghanistan:

MACON — U.S. Army Maj. Stefan Frederick Cook is seeking a federal court order to stall and eventually prevent an upcoming deployment to Afghanistan.

In the 20-page document — filed July 8 with the United States District Court, Middle District of Georgia — Cook's California-based attorney, Orly Taitz, asks the court to consider granting his client's request based upon Cook's belief that President Barrack Obama is not a natural-born citizen of the United States and is therefore ineligible to serve as commander-in-chief of U.S Armed Forces.

Major Cook is very brave to bring attention to the fact that he wasn't paying attention in history class. Hawaii isn't part of the United States but one of those weird island nations filled with exotic natives and stuff, apparently.

Why didn't soldiers think of this excuse with Bush? "He wasn't elected but selected, so doesn't have the right to send me to his Neocon war of choice." That excuse would at least been based on the truth!
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That's a lot of fake brake repairs....

Rarely do stories generate the kind of consumer response that The Bee received after the state attorney general's office sued a Modesto businessman and his 22 Midas Automotive Service franchises.

The civil lawsuit, which seeks $222 million in penalties, claims the shops owned by Maurice "Mike" Irving Glad used false advertising and fraudulent business practices to sell consumers unnecessary parts and services. The case stems from a four-year investigation and 30 undercover sting operations.

For his part, Glad says he was the victim of overzealous enforcement by the state Bureau of Automotive Repair that was designed to deceive his mechanics. He defended his business practices and workers, vowing to fight the lawsuit aggressively.

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Chan Akya of The Asia Times digs a hole trying to explain why he took offense to Krugman's ... use of slang which makes his economic theories all wrong?

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Ya give a kid a credit card....

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Speaking of money, we'd like to see this corporation's uncooked books:

US bank Goldman Sachs reported a net profit of $3.44bn (£2.1bn) for April to June, beating analysts' forecasts.

Less volatility in stock markets, rises in global share prices and involvement in many firms' rights issues and takeovers had boosted profits, it said.

The bank said it had set aside $6.65bn for pay and bonuses in the quarter - an average of $226,000 per employee.

Goldman has recently paid off $10bn of government loans it had taken as part of a government bail-out programme.

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But lead is a natural substance... and makes you feel full!:

A new study by Consumer Lab found that many multivitamins contain potentially dangerous levels of lead, and many did not contain the vitamins and minerals their labels proclaim.

[snip]

Almost no vitamins were found to be free of lead, according to the Sacramento Bee (the study results are by subscription only). Indeed, lead-free may be an impossible goal because fruits and vegetables absorb lead from soil and water.

What's a person to do? Your best bet is to buy a well known brand and look for a stamp on the bottle from USP, NSF or Consumer Lab.com. Living in California helps, because our state is the only one to regulate vitamins. By California law, 15 percent of the vitamins evaluated ought to carry a warning label.

Congratulations, Mr. Krugman

STOCKHOLM, Sweden - Paul Krugman, the Princeton University scholar and New York Times columnist, won the Nobel prize in economics Monday for his analysis of how economies of scale can affect trade patterns and the location of economic activity.

Bush's Legacy: Economics 101

Krugman

Very helpful talk about the economic situation today. One fascinating conjecture he made: if home prices decline 30%, we may have easily 40% of homeowners (20 million) with negative equity. (They would owe more on their loans than the house is worth.)

Listening to him speak, I didn't have the feeling we need to stock up on dried beans and rice.... at least it's not 'fighting in the aisles time over the bags of lentils' time yet.

But stocking up never hurt anybody.

The damage the Bush administration has done to this country

Will last for generations.

Joseph E. Stiglitz of Vanity Fair:

When we look back someday at the catastrophe that was the Bush administration, we will think of many things: the tragedy of the Iraq war, the shame of Guantánamo and Abu Ghraib, the erosion of civil liberties. The damage done to the American economy does not make front-page headlines every day, but the repercussions will be felt beyond the lifetime of anyone reading this page.

[snip]

And it gets worse. After almost seven years of this president, the United States is less prepared than ever to face the future. We have not been educating enough engineers and scientists, people with the skills we will need to compete with China and India. We have not been investing in the kinds of basic research that made us the technological powerhouse of the late 20th century. And although the president now understands—or so he says—that we must begin to wean ourselves from oil and coal, we have on his watch become more deeply dependent on both.

Up to now, the conventional wisdom has been that Herbert Hoover, whose policies aggravated the Great Depression, is the odds-on claimant for the mantle “worst president” when it comes to stewardship of the American economy. Once Franklin Roosevelt assumed office and reversed Hoover’s policies, the country began to recover. The economic effects of Bush’s presidency are more insidious than those of Hoover, harder to reverse, and likely to be longer-lasting. There is no threat of America’s being displaced from its position as the world’s richest economy. But our grandchildren will still be living with, and struggling with, the economic consequences of Mr. Bush.

Gripping the rollercoaster handrails for all we're worth

Because this could be a hell of a drop.

Paul Krugman:

Yesterday, President Bush, showing off his M.B.A. vocabulary, similarly tried to reassure the markets. But Mr. Bush is, let’s say, a bit lacking in credibility. On the other hand, it’s not clear that anyone could do the trick: right now we’re suffering from a serious shortage of saviors. And that’s too bad, because we might need one.

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time — in particular, financial instruments backed by home mortgages — have shut down because there are no buyers.

This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.

The origins of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational as the dot-com mania. The housing bubble was only part of it; across the board, people began acting as if risk had disappeared.

Everyone knows now about the explosion in subprime loans, which allowed people without the usual financial qualifications to buy houses, and the eagerness with which investors bought securities backed by these loans. But investors also snapped up high-yield corporate debt, a k a junk bonds, driving the spread between junk bond yields and U.S. Treasuries down to record lows.

Then reality hit — not all at once, but in a series of blows. First, the housing bubble popped. Then subprime melted down. Then there was a surge in investor nervousness about junk bonds: two months ago the yield on corporate bonds rated B was only 2.45 percent higher than that on government bonds; now the spread is well over 4 percent.

Investors were rattled recently when the subprime meltdown caused the collapse of two hedge funds operated by Bear Stearns, the investment bank. Since then, markets have been manic-depressive, with triple-digit gains or losses in the Dow Jones industrial average — the rule rather than the exception for the past two weeks.

But yesterday’s announcement by BNP Paribas, a large French bank, that it was suspending the operations of three of its own funds was, if anything, the most ominous news yet. The suspension was necessary, the bank said, because of “the complete evaporation of liquidity in certain market segments” — that is, there are no buyers.

When liquidity dries up, as I said, it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C — and those who do have cash sit on it, because they don’t trust anyone else to repay a loan, which makes things even worse.

And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.

A post I did on the housing bubble a while back, and this video illustrate the point:

You can make statistics

Say whatever you want them to say. The Bush administration excels at this. So, apparently, does the Wall Street Journal:

Mark Thoma at Economist's View says:

The Wall Street Journal says Kevin Hassett has discovered the Laffer curve, but I think these data might say something else. Here's the picture from the editorial where they are making their usual plea for more tax cuts:

The blue line is supposed to be the Laffer curve, but this is far from compelling. Since it looks like all that's been done here is to draw a line through an outlier, Norway (an outlier that in other contexts we are told to ignore because it is an outlier, e.g. see below), and since this is clearly not the best fitting line to these data, here's another possibility:

More discussion at PZ Myers at Pharyngula, Sean at Cosmic Variance, and Brad DeLong.