Friday, July 19, 2013

Austerity Economics Is Triggering Unsustainable Economic Weakness

The news in today’s Washington Post that the middle class is barely keeping it’s head above water should come as no surprise to anyone paying attention. As the Post lead story (Middle Class Still Left Behind in U.S. Economic Recovery – Data Shows) notes:

“The economic recovery of summer 2013 is playing out in an all-too-familiar way for poor and middle-class Americans: Gas prices are up, growth is slowing, and there still aren’t nearly enough new jobs to employ the almost 12 million people seeking work.

An improving housing market and rising stock prices appear to have done little to increase the take-home pay of the typical U.S. worker. And while the economy continues to heal faster than that of almost any other Western nation, evidence remains strong that the recovery has done little to boost the fortunes of people in the vast economic middle.  The Labor Department reported this month that average earnings have barely grown faster than inflation over the past year. Data from spring show that median earnings — those of the worker smack in the middle of the middle class — have fallen 4 percent since the recession ended, after adjusting for inflation.”

Why is this? Basically, it’s because we have - or at least our political and media class have – accepted economic myths while allowing the government to become hamstrung by the GOP opposition via absurd filibuster rules. At the core of these myths is the mainline economists’ acceptance of the Pareto distribution,e .g.

Let's bear in mind also, that the same (Neoliberal) political class has "bet the farm" that Pareto optimality delivers more if spent on "wars" (actually overlong occupations that inflame overseas passions) and massive surveillance than domestic needs. So no wonder that our domestic infrastructure is cratering at a rate while too many remain mesmerized by the numbers (on assorted tube  'crawlers') for the DOW. Can we use this to define national insanity? Yes, I believe we can!

Another sign is the yen to cut Social Security and Medicare! But as a recent Bulletin of the National Committee to Preserve Social Security and Medicare has pointed out ('Debunking Media Myths'):

"Contrary to what you might read in the headlines or hear on the evening news, Social Security and Medicare are not to blame for our nation's fiscal woes or our deficit."

Indeed! It is the unending wars and domestic spy state amassing of precious tax dollars to spy on all of us that is contributing most to deficits and woes!  Another important point for the pointy-headed Pareto-ists:

""Without these vital programs our economy would be in even worse shape and millions more American families would face economic security".

How so? Because we are in a low aggregate demand environment - since the recession (which many, including  economist Thea Lee believe is still going on). In this environment cuts to social insurance programs mean lower spending by recipients and FOR them (e.g. via insurance to cover procedures from Medicare) hence demand is lowered, adding to the woes. What we need then is MORE spending, not less! Less austerity (and an end to the absurd sequester) not more! 

But the political class and its favorite economic tools (fools?) don't want to hear it. As one former Fed economist put it two years ago ('Economists Win Nobel for Focus on Real World', WSJ, Oct. 11, p. A3) in regard to making substantial cuts to “entitlements”:

"If you made a credible committment to do this now and the markets saw that, this theory would predict that you have a much more positive impact on the economy today".

But that is bollocks, and those are the words of a delusional guy who tacitly accepts the Pareto. In other words, as standard for Pareto optimality BS, we must sacrifice citizens' security for a generic market benefit, available only to the elites, mainly the 1%. Incredibly, these economic shysters actually believed a ramping up stock market (pumped by Bernanke’s cheap money crack) would also feed the middle class – unaware that most of them are(wisely) not exposed to the equity markets, especially after the disastrous 2008 collapse.

But they still echo the refrain: “Let them eat stocks!” (Or mutual funds) as opposed to actually paying real livable wages that trump phantom money that expands or diminishes on any given day. Meanwhile, if Medicare and Social Security benefits are cut this would be "Pareto efficient", reinforcing the old Pareto Parable that if a sheep and a wolf form a collective, it is always preferable for the wolf to eat the sheep for the "collective" to be maximally optimal. In like manner, it is always preferable that the economy give preference to the dollars of the wealthy because they are worth more than dollars simply given to the elderly out of “entitlements”. After all, the latter are merely getting economic largesse for breathing every day!

Epitomizing this sort of deranged thinking is Thomas Sargent, an Econ Nobel winner from two years ago- who along with Christopher Sims, poured bollocks on Keynesian stimulus from governments, which - let's face it - has seen a rash of attacks in the wake of the onset of the austerity virus. Sargent's "rational expectations" model posited negative "rational" reactions of people to events like the Fed loosening the money supply, "a conclusion at odds with the Keynesian model". For example, he claimed that people woould adjust their "wage demands" higher if the Fed increased the money supply (as it has recently been doing by buying back hundreds of billions of treasury securities, under 'quantitative easing'). Then, by increasing the wage demands unemployment will increase, rather than decrease.

But in truth, as the WaPo released stats show, this is nonsense. The true fact is even though the Fed has poured hundreds of billions into quantitative easing it hasn’t made a dent in wages, or unemployment. But it has increased inflation (never mind the Federal Reserve’s bogus index) and merely enriched the speculators. But that is what it intended to do. All this crap about helping the vast Middle to regain its footing via stock returns is just that, crap.

Sargent also argued that people will "make decisions now" based on how they rationally believe the government will deal with Social Security and Medicare. Thus, according to the Pareto Distribution basis, if government were to act for cuts now (including Obama’s proposed Chained CPI) then people might invest more in the stock market (for higher returns) instead of depending on government. But again, this is nonsense as the WaPo piece shows. Since “rising stock prices appear to have done little to increase the take-home pay of the typical U.S. worker.”

The reason is a dirty little secret amongst the political –economic elites: corporations are still sitting on over $1.7 trillion stash and not using it to enhance wages or increase jobs. Instead they are mostly practicing economic equity incest and buying back their own shares at odd intervals. Meanwhile, unemployed college grads waste away in their parents’ basements with no future economic prospects and unable to repay their monumental student loans. Thus, stock values aren't increasing because more people are purchasing the goods companies have in their inventory (they can't afford to with their meager wages) but because the stock prices are being artificially inflated, via Bernanke's 'crack' and corporate buy backs.  Those few middle classers into stocks and especially equities are in for a very rude awakening when the rubber meets the road. Likely next year after the Fed pulles the QE plug.

Sargent's own bias in his development of his mathematical models to support his rational expectations "theory" confirms his pro-Pareto bona fides. For example, in one of his theoretical models Sargent arrives at a set of "competitive equilibria": C = {(x,y)! x = h(y)}, such as shown on the accompanying graph where "welfare" is plotted vs. "tax rate". Entering into the basis for generation of such equilibria is what is called a "utility function" framed for example as: U(L, c,g) where L denotes "leisure", c is the rate of consumption, and g is the per capita government expenditure. From this, Sargent purports to obtain some parameter 'alpha' spanning a range in a limited set from 0 to 1/2.

At some point later then, one also will find the tax rate τ, enter. Thus, he claims a government will in general balance its budget if: g = τ (1 - L). Meanwhile, he poses "welfare" within the constraints of competitive equilibria as defined by:

W(τ) = L(τ) + log {alpha + (1 - τ) [1 = L(τ)]} + log (alpha + τ[1 - L(τ)}

He argues that a "benevolent government" chooses L = 0, c = g = ½

while a "dictatorial" outcome yields: W = 2 log (alpha + ½)

This is nonsense, given that any true benevolent government would never ever require a leisure L = 0! However, a dictatorial "slave camp" government, such as under Chairman Mao in the 1960s, would! So what the hell is he getting at? The graph shown sets it in perspective assuming an alpha = 0.3 or just past midway in the set {0, ½}. Thus, he argues that the "government problem in a "Nash equilibrium" is defined by a limiting maximum tax rate, max(τ) such that: L = log [alpha + (1 - τ)(1 - L)] + log (alpha + τ(1 - L)]

Then, if L < 1, the option is τ = 0.5  However, as the tax rate moves beyond this limit, the welfare crashes! Well, by that I mean it reaches a Nash equilibrium lowest value of around -1.2.

Stripping away all the math and balderdash, what do we have? Well, a curve that fits perfectly within Pareto Distribution parameters of Pareto optimality or efficiency! (Notice the line marked "unconstrained optimum, which is really an optimum for maximal Pareto effciency). What we are being warned against here, is the use of too many government expenditures or resources for the common good, whether in Medicare, Social Security or even unemployment insurance. Any time one seeks to maximize a putative welfare within these limits, one ends up in a crash pile. The welfare drops and so does everything else.

Beware then of all those who wish to stimulate the economy by too high a tax rate?

 Hmmmm....wonder then why our unemployment was lowest during the 1950s when the marginal tax rate was 91%.?  Oh, these latter day anti-Keynesians will argue it was the aftermath of the war production, the lack of global competitors or some such rot, anything to deny any consistent Keynesian approach. But they ignore how solid the economy was with relatively low unemployment as JFK regularly used deficit spending! (See e.g.  )

The conclusion the truly rational person must draw is both cynical and realistic: our political elites and their corporate media are using the Pareto narrative to protect massive military and surveillance spending as they wreck domestic security and infrastructure. In other words, these rats don't care about us little guys. They only care about propping up an "empire" and using that to justify minimal domestic security - REAL security!

To get a further handle on our misbegotten, military industrial complex fueled austerity economics check out Jeff Cohen's blog piece: "The Elephant in the Room: Militarism":

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