Wednesday, October 27, 2010

Wall Street Off-World

A piece by one of my Capitalist Pals denounces High Frequency Trading as a form of insider trading, and calls for the government to "tax the hell out of it."  In addition to offering the pleasure of seeing a former investment banker going well beyond the Tobin Tax into HFT profit confiscation, this short piece offers a nice example of the total disconnect between Wall Street activities and those available to the rest of us.  20-30x leverage on funds borrowed at the fed window belongs to a small group of institutions. The huge money in U.S. society is being made by people who, institutionally speaking, have absolutely nothing to do with the overall economy - with the working world of everyone else. Marx's capitalists took a disproportionate share of the value created by labor in the industrial enterprises in which they invested.  The most lucrative financial transactions that our author describes are not actually capitalist anymore, but constitute a kind of bizarre toll or rent or tax on activities in which none of the rest of us even engage.

The equally bizarre and unpleasant wage effects are chronicled in David Cay Johnston's "Scary New Wage Data."  Employment is down ("The number of Americans with any wages in 2009 fell by more than 4.5 million compared with the previous year"), median wages are down 0.6%, and yet the people who earned more than $50 million per year saw their average wage increase "from $91.2 million in 2008 to an astonishing $518.8 million in 2009."   "These 74 people made as much as the 19 million lowest-paid people in America, who constitute one in every eight workers."

The growth of inequality is neofeudal,  and the psychological aberrations required to claim that people "earn" this kind of money belong to the shadow philosophies of authoritarian eras.

Sunday, October 24, 2010

Why Is Economic Policy so Dumb?

To understand what is going on in England, the U.S., and France, one has to get past the politicians' self-serving mythology that the popular majority is childishly refusing to face economic reality.

The French national daily Libération published a poll conducted October 14-15 that showed an incredible 79% in favor of the Sarkozy government reopening negotiations with the unions about raising the retirement age. (Sarkozy administration intends to raise the age for minimal retirement eligibility from 60 to 62, while also raising the age for full retirement benefits from 65 to 67.)   Nearly 2/3rds opposed Sarkozy's policy of "firmness" in refusing to negotiate, a policy which led to the passage of Sarkozy's changes "by force" on Friday night (by a vote of 177 to 153).  At the same time, only 43% supported the withdrawal of reforms, and only 36% favored its suspension and future resubmission.  In short, the majority does not in fact oppose change, even change that means a lower standard of living. But a 4/5s majority does opposed change imposed  by oligarchic decree. 

A hallmark of the French protests has been extraordinary participation of young people, who have  marched and shut down may high schools and unversities around the country.  What were the students’ doing out there with the middle-aged truckers and office workers?  Part of it was that the young want to retire older people so their jobs can be handed down in the normal manner - there was some self-interest (and economic rationality in the classic sense).  But like nearly all French people, the young oppose government by decree. They are also sick and tired of the general deterioration in the public sector that includes educational systems under constant, brainless pressure.  Victor Colombani, the president of the Union nationale Lycéenne (UNL), age 16, told Libération that high schools, the universities, public transport, the refineries, are all in the same mess.  The Sarkozy government, like most others in the West, is taking excellent care of its banks, major corporations, and high net worth individuals who dislike paying taxes, and doing as little as possible for everyone else.  French students marched about retirement because they don’t want what their elders are dishing out, which is a second-class deal for them.

One of the crucial facts of the post-2007 era is that market capitalism's social narrative now leads down instead of up.  The Reagan-Thatcher era, and its Giscard-Chiracian echo in France, promised wealth and health to regular people in exchange for abandoning the social democracy that had built their middle class societies and their own security within them.  When Thatcher sold Council housing to ordinary buyers, she was handing out public resources for the personal enrichment of les petits gens who had been given a decent life but never personal wealth by state-sponsored social development from the 1930s through the 1970s.  That would now change, in the Reagan-Thatcher narrative, as they borrowed against the rising value of their now-private home to buy a vacation condo in Spain, trips to Greece and Morocco on new low-cost nonunionized airlines, and grew their financial wealth through investment instruments like mutual funds that had barely existed in LBJ's Great Society.  But since 2007, Reagan and Thatcher's conservative (and centrist) descendants invoked market needs to continue to lower the standard of living of a majority already hammered by the loss of jobs, health insurance, and homes - nearly 3 million lost to foreclosure in the U.S. in 2009, and at least that many again in 2010.  We are looking at the ongoing shrinkage of the US middle class, typified by the continuing increase in home losses even during the "recovery" - up 25% from August 2009 to August of this year. Republicans are continuing to respond to asset deflation by wanting more cutting of taxes at the top.   Hello new dark pools of financial toxins, and ongoing non-punishment for banking fakery of various kinds.

Since they are now dishing out decline and decay, leaders in all three countries are struggling to muster approval ratings that stay above 33%, never mind achieving actual majority support.  Obama is still the strongest at 45%, though on a steady drift downward, according to Gallup.  Cameron's conservatives have a one-point vote advantage over Labour (at 41%) in a forced-choice party face-to-face that artificially inflates approval.  When people are asked about specific policies, he does worse. After he announced his massive cuts, Cameron's ratings fell 11% in one day;  Lord Browne's closely-aligned proposal to eliminate public funding for all non-science teaching in British universities got only 37% (still suprisingly high, since cheap higher ed is still the only reliable foundation of a majority middle-class society). France's Sarkozy fell below 30% for his  "firmness" in opposition to weeks of blockages and marches that brought millions of people into the streets. In California, Gov. Arnold Schwarzenegger held the state budget hostage -- furloughing tens of thousands of state workers and stopping payments to state vendors -- for 3 months late in order to force huge public pension concessions on top of his all-cuts budget policy, and earned himself record popularity lows - 23%, 17%, then 15% in mid September.

Major leaders are imposing economic policies that are frankly unpopular, and which don't actually work.   Dean Baker, Paul Krugman, Yves Smith, Simon Johnson - one can find a host of center-liberal economists denouncing the austerity "fad," as Krugman put it, as having "no basis in reality."  I used to liken Arnold Schwarzenegger to Herbert Hoover, but Hoover has now become the national metaphor for the death-trip financial policies the population is subjected to in Greece Spain, the U.K, the U.S., and elsewhere - or his Treasury Secretary Andrew "liquidate everything" Mellon, or the U.K's Snowden budget of 1931, which Krugman invokes.  And yet these leaders carry on - socialist governments in Greece and Spain alongside conservative governments in the U.K., Italy, Germany and France.

Why do leaders persist with these stupid, self-destructive economic policies? Here's my list, prompted in part by reading a good piece by the not-so-capitalist conservative political economist John Gray.
  1.  frozen market ideology.  Gray identifies two ideas ruling the Cameron-Clegg coalition.  First, government reduces freedom while market increase it ("Both Cameron and Clegg have insisted that moving away from state provision is not just a matter of saving money: the result, they say, will be services that are more responsive to personal choice.) Second and more importantly, "there is no standard of fairness independent of the market."  Bailing out banks while firing hundreds of thousands of state workers isn't what it seems to be at first -- running society for the benefit of the economic top 1% or 0.1% of it -- but means stabilizing the market forces that liberate people to create new value, rather than helping the public employees who impede it.  Ideology is never undermined simply by its surreal irrelevance to  economic outcomes past and present.
  2. Small elites in mass societies.  Gray observes, "As in the 18th-century elite politics analysed by Lewis Namier, British politics today is shaped by a handful of closely related people."   Political parties in the US, France, the UK, and most other Western democracies have become duocracies of center-left/center-right parties controlled by fairly small circles of people. Note the history of the Democrat party under Clinton or New Labour under Blair.  As modern societies have become larger and radically more diverse, their ruling groups have paradoxically become more self-regarding and self-contained.  (See Blair's accounts of his oddly isolating rituals of political reflection at the link above).
  3. The God that Failed.  Political leaders have a natural investment in believing that they have healed market capitalism, but it remains in crisis.  It continues to rest on government life support - nearly-free money for guaranteed loan spreads, fictional "mark-to-mythology" accounting on toxic instruments that pospones lossses, and endless forgiveness for the most basic corrupt errors like the failure to verify forceclosure documents that has called the whole mortgage industry into question in the US - if anyone in government cared to question, which in Obama's case it does not.  It is to be expected that in the midst of confusion, leaders cling to familiar ideas, even as they continue to fail.
  4. A Radioactive Media.  The major media routinely bombards any heterodoxic interpretation with fata doses of scorn when it mentions them at all.  The result is that novel accounts are defined in advance for the viewer as marginal, biased, and self-interested, the view of someone who has a particular ax to grind.  Even orthodox views that counter the conventional wisdom, like those of the NYU business school professor Nouriel Roubini before the crash, based on intelligent pro-market skepticism about the valuations of complex securities, were shunned until it was too late, and now identified with Roubini as an individual celebrity, a kind of novelty show.  Regular coverage remains captured by a combination of economic orthodoxy and panic politics. The latter is instanced by the apparent influence of the clearly incoherent and unstable rantings of Glenn Beck.   Much has been written about the tight  grip of the boardroom over major media, largely owned or controlled by billionaire friends of Nicholas Sarkozy in France and by Fortune 500 corporations in America, to say nothing of Rupert Murdoch's global empire, who likened  the Tories's 20% one-year cuts in government to adults administering medicine to children.  The main point here is that the flourishing of diverse opinions on the Internet does not counter the narrowness of the major media, for  the Internet is cast in the role of the permanent opposition, always outside looking in, an accumulation of minority voices easily branded in any given case as extreme. The media famously does not support the kind of public sphere that allows ruling opinions to be debated and changed.  Change is possible, and there is no shortage of good ideas, but in this system, change may be delayed indefinitely, and to the point where it comes too late - as for millions of owners of overpriced homes.
  5. Military Dominance.  During the Bush Jr. Administration, the War on Terror successfully replaced the Cold War as the justification for both continuous international intervention and unlimited military spending.  Military spending doubled in the U.S. in constant dollars in the 2000s.  The economist Joseph Stiglitz has revised his estimates of the costs of the Iraq and Afghanistan wars from $3 trillion to something like $4-6 trillion.  This spending on the control of perpetual threats is making social spending impossible, including the basic infrastructural renewal on which U.S. market capitalism in fact depends.  One of Obama's central failures has been his continuation of the instruments, the goals, and the spending that goes with the War on Terror. Under these irrational conditions, scial stagnation is the best case scenario. 
  6. Adherence to Minority Rule.  For me, this is the key ingredient of the whole paralytic system.  Reagan and Thatcher were appalled by the challenges to traditional rule posed by antiwar protests, civil rights movements, and the rise of visible cultural minorities be they punk rockers in Birmingham or Jamaician construction workers in East London.  They and their descendents have worked tirelessly to insure that the political majority would never again have the economic independence to support such widespread dissent. They noticed that many of the protesters came from prosperous families, were in good universities, and were forming alliances with the less fortunate, as with for example the college "Freedom Riders" who went to help Black churches and other groups with voting rights and desegregation in the US South. Ronald Reagan kicked off his 1980 presidential campaign in Philadelphia, Mississippi, the county seat near where three of these Northern civil rights workers -- one black, two white -- were murdered in 1964.  Reagan praised "states rights," which was a synonym not only for racial segregation but for minority rule. Desegregation ended this most famous version of minority rule. The Right has been working steadily to replace it ever since.  
  7. Upward Redistribution of Wealth.  The inequality boom has expressed minority rule on the level of economics.  There are numerous studies that show the same shift of wealth from bottom and middle to the top - especially the very top (0.1%, 0.01%). Wolff has one good paper, Saez, often working with Piketty, has another, and the Associated Press had a nice overview a while back.  A Pew-Brookings study in 2008 found that the wages of males are now about 12% lower than they were for their fathers a generation earlier, taking an obvious bite out of ordinary people's economic independence.  The Supreme Court decision taking limits off political spending has forged a direct short circuit between extraordinary wealth and political control. 
In short, the economic decline were are facing is a sign of ideological disarray in a political world controlled by conservative ideology for two generations, but it is also programmed within modern conservatism.  Cameron and Osborne inherent this from Reagan and Thatcher.  Governments have no idea how to stimulate innovation and growth.  That would require two things -- some kind of industrial policy if not actually state capitalism Chinese style (the model that did best during the crisis), and a redistribution of wealth back downward, in the name of efficiency, to the people who largely created it in the first place.

The slow impoverishing of the economic majority has been going on for thirty years, and it has become cultural common sense even for its victims.  It has now reached the turning point, a moment of acceleration in which a return to prosperity becomes increasingly difficult.  The only bright spot is that an increasing number of commentators are starting  to trace the unjust and also grotesquely inefficient boom in inequality to a deliberate strateg (e.g. James Kwak at the Baseline Scenario's  good recent entry on the 1970s. But given what I believe to be the profound ambivalence of political and business leaders towards mass prosperity, I see little in established opinion that will convince them to work consistently towards a broad-based recovery. Where is the great economic majority, demanding that politics serve majoritarian economic interests?

This is really too bad for Obama personally, since he hitched his fortunes to that Democratic assumption of the greater good, so often honored in the breach.  This is what Republicans are calling "socialist" in this fairly conservative pro-bank president: the very idea of mass benefit, one so broad as to only be possible through government-led development.

Obama's only chance to succeed is to give a major speech in the next two weeks.  The speech would have to take on the charge of socialism, and say yes, social democracy built our prosperous Western societies (along with much less savory forces), and now my opponents have come to take all that away from you.   He would have to point out that the Right  replaced prosperity rooted in general provision -- low fees in publicly-funded universities, for example -- with prosperity rooted in private property ownership -- that they replaced a grounding in government with a grounding in market-based exchange values. As a result, he would point out, asset inflation and personal debt have become the two pillars of middle-class living after broad improvement in wages ended, coincidentally enough, around 1980.  In addition, the ground rules of this prosperity are now controlled not by elected leaders but by an opaque labyrinth of banking and quasi-banking institutions, from mutual funds to mainline banks to hedge funds. Obama would have to say that even specialists know little about the condition of this system at any given moment, for its essential nature is to be proprietary, to hoard information, and to create losers in every transaction by selling at an advantage.  He would have to say that political leaders have no independence from this system, that his own failure to stimulate anything except banking has abundantly shown this.

Obama would have to make an updated class argument - and a plain argument for democracy-based intervention in the economy.  That is the sole means through which he can save the U.S. from a Republican 2010-12 that will accelerate the disaster, reach out to desperate Tea Partiers, and help people believe that their ideas about a better economic system might actually matter. It is the U.S.'s only chance for short-term public economic intelligence. 

But what, short of a sudden meltdown in the markets, would get Obama to do this?  What would get him to call out his own economic majority?