Will 2012 See the End of Austerity Politics?

This is the key economic question for the new year. Especially now as jobs appear to be making a modest comeback with 170,000 added in November, according to BLS stats (though again, this is barely 20,000 above population replacement levels). Also, as Paul Krugman observed in his most recent piece ('The Triumph of Keynesian Economics') the correct economic dictum as uttered first by British economist John Maynard Keynes, is that you always apply measures of austerity during booms, and apply economic stimulus packages during slumps.

This has been borne out time after time. For example, FDR could have had the nation out of the Great Depression much earlier, but he succumbed to the rhetoric of the austerity hawks in his party and began putting in place austerity measures in 1937. Bad idea! It extended the depression's effects at least five more years - until war production (which provided a massive stimulus) finally did the trick.

The situation in this country was approaching another Great Depression in early 2009, when Obama and the Dems put through a stimulus bill that in all probability rescued us from the worst (which is why Mitch Romney's recent comment that Obama's reiteration of this amounted to an equivalent statement to "Let them eat cake!" disqualifies him as any serious candidate). However, it wasn't large enough to get the country fully back on track. Basically, that $897b stimulus was top heavy with unproductive tax cuts (one third of the package) when it ought to have been more food stamps and unemployment benefits. Tax cuts don't work to pump up an economy in doldrums, the other two do!

Only in retrospect - from the data released in 2010 (with the much lower GDP over the years 2008, -09 available), could it be seen that Obama's initial package was inadequate. Had he gone full tilt Keynesian, and doubled that package to $1.6 trillion with almost NO tax cuts (only 10% if that) we'd now be seeing less than 7% unemployment. Had the Bush tax cuts also been allowed to expire, the production process would have been such that the unemployment might have gone below 7% or even 6.5%. The reason is that moderately higher taxes spur higher productive capacity and employment, contrary to austerity thinking.

In fact, if anyone had seriously read The Financial Times report (9/15/11) on the Bush tax cuts, they'd have seen they are not at all a stimulus device but a hidden austerity device! The reason is that tax cuts deprive government of needed revenue at the point of support for its basic spending programs as well as other that would provide an additional stimulus. Because tax cuts limit government's coffers, and "starve the beast" - in the parlance of the tax cut cult- then their effects translate into other social -public spending areas such as Social Security and Medicare, driving cuts to those. But when those cuts are made, the people affected halt spending and an austerity dynamic becomes entrenched.

The Financial Times analysis of the Bush tax cuts bluntly noted:

"The 2000s- that is the period immediately following the Bush tax cuts – were the weakest decade in U.S. postwar history for real, non-residential capital investment. Not only were the 2000s by far the weakest period but the tax cuts did not even curtail the secular slowdown in the growth of business structures. Rather the slowdown accelerated to a full decline”

Once it is recognized and understood that any tax cuts (including the payroll tax cuts) are de-stimulative then it also is possible for people to grasp that extending them means extending an austerity dynamic inimical to escaping a prolonged economic slump. In other words, we've continued to be in this slump not only because of inadequate stimulus packages (in both frequency and magnitude) but also the lack of marginally higher tax rates! The original backers of the Bush tax cuts in 2001 understood this, which was why they had a built in sunset date for early 2011. They knew the nation could ill afford to keep them!

It follows from this, that the extension of any tax cuts will mean an extension of austerity. It will translate into continued demands for massive cuts to "entitlements" because the money will no longer be there (according to the austerity groupies) to pay for the "entitlements" and hence they will be causing massive "deficits".

So what gives? Clearly it serves the stealth interests of the elitist, Neoliberal capitalist Overclass to ram austerity down the throats of the people to divest them of ever more benefits and support, to thereby render their existence marginal unless they're working 24/7. If so working, then they can't meddle in or track political issues or events, and hence become ever more the expendable serfs of the same Overclass. Again, this harkens back to the Theory of the Elites, e.g.

http://brane-space.blogspot.com/2011/12/theory-of-political-elite-1.html

http://brane-space.blogspot.com/2011/12/theory-of-political-elite-2.html

History also helps for us to gain a critical perspective so we don't end up down the same path as the German Weimar Republic. Some key insights are derived by examining the events following March 30, 1930 and concerning then Chancellor Heinrich Brüning. This is based on a recounting in Ian Kershaw's excellent monograph, Hitler Hubris(1889-1936), which documents the history leading up to 1936 and Hitler's seizure of power-consolidation of the Nazi state.

First some background. Brüning was an austerity maven and learned this fell philosophy as a doctoral student at The London School of Economics - where it was promoted by "free-market Austrian school" whores like Friedrich von Hayek (one of the heroes of the modern Libertarian Right, and their Ayn Randian nattering nabobs).

As Kershaw notes (p. 324):

"By June (1930), Brüning was running into serious difficulties in his attempts to reduce public spending through emergency decrees"

Note here that under existing German laws for the Weimar Republic, if no majority could be achieved for financial reform in the Reichstag (which was the case ca. March, 1930), the Chancellor had the option of issuing an "emergency decree" and attempting to obtain a majority for that. If such presidential decrees even failed to gain a majority, then - under Article 48 - the President could dissolve the Reichstag (which necessitated new elections within 60 days)

Unfortunately for Brüning, on July 16, 1930 his financial reform bill aimed at a (deflationary) policy of massive public spending cuts was rejected by the Reichstag. He then resorted to an emergency decree to make the bill law, but when this was rejected by a majority- so he resorted to dissolution of Parliament by July 18, 1930.The dissolution provided the opening gambit for Hitler and his brown shirts, who beat up socialist and workers, trade union members to the delight of big Business.

Hitler totally exploited the weaknesses of the Weimar system, calling down his wrath on its failed promises of tax reduction, flawed financial management and failure to trim unemployment. In vague terms, and with the massive austerity still threatening terrified Germans, Hitler promised security - financial and personal- with the central idea of "national liberation through stength and unity".

The result of the election was a resounding success for Hitler and the Nazis with nearly two-fifths of all votes coming from the German middle classes (Kershaw, p. 334). The major paper, The Frankfurter Zeitung, called it the "bitterness election" and cast the middle classes as villains for being motivated by the desire to 'overturn the current political system'."

Not long after, Weimar austerity did strike as the World War I allies called in their war debts and credits and Brüning got the Reichstag to go along with huge spending cuts . After just two years of “austerity” measures, Germany’s economy had completely collapsed: unemployment doubled from 15 percent in 1930 to 30 percent in 1932, protests spread, and Brüning was finally forced out. After just two years of austerity, Germans were willing to be ruled by anyone or anything except for the kinds of democratic politicians that administered their “austerity” pain.

In Germany's 1932 elections, the Nazis and the Communists came out on top, and by early 1933, with Hitler solely in charge, Germany’s fledgling democracy was shut down for good.In the wake of this,von Hayek and fellow Austrian aristocrats were forced to flee from the fruits of their economic programs, then did a complete revision of history.

Once safely ensconced in England and America, funded by oligarch grants, von Mises and von Hayek pushed a revisionist history of the collapse of Weimar Germany. Rather than blaming their own deflationary austerity measures, they tagged "big-spending liberals" who were allegedly in charge of Germany’s last government.The Nazi Propaganda Minister Josef Goebbels, not willing to let a good piece of bullshit go to waste, incorporated this into propaganda posters for the elections of 1932 and 1933 (see attached), incredibly depicting Marxism (conflated with liberals) as being the "guardian angels of capitalists"! (This, at the exact same time big business was applauding the Nazi SA street thugs thumping and killing Marxists, communists and any ordinary workers demanding more assistance!)

Will history repeat this year, with the 2012 elections a rehashing of those in 1932 Germany?

We had all better hope not, and that means putting the austerity demons in our own country to rest and to shame by voting them out in the coming elections - mainly the Tea baggers ensconced in the House of Representatives. The same bunch who have nearly driven the nation off the cliff with their "showdown" over the debt ceiling increase last August.

Those who forget the past are doomed to repeat it!

Do These Guys Deserve a Nobel in Economics? Errr... NO!

Shown: The two anti-Keynesians just awarded a Nobel Prize in Economics, Chris Sims (left) and Thomas Sargent. If extended unemployment benefits are permanently killed, and Medicare and Social Security permanently cut -you can thank these two!

Most of the past two weeks has been inundated with tons of blather about the two most recent winners of the Nobel Prize in Economics. (Let us also bear in mind that Economics wasn't originally part of the Nobels, and only added much later.) These two: Christopher Sims and Thomas Sargent, have evidently received their award for pouring 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.

In one unabashed paean, 'A Nobel For Non-Keynesians' (WSJ, Oct. 11, p. A17), author David R. Henderson waxes wildly about the "contributions" of each of them, e.g. in respect of Sargent:

"Mr. Sargent was an early and important contributor to the 'rational expectations' revolution in macroeconomics, and area for which his collaborator Robert E. Lucas, won the Nobel Prize in 1995.."

Sargent's more mathematical "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, it's claimed that people will adjust their "wage demands" higher if the Fed increases 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.

Sargent also argues 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 (such as being bruited about by the supercommittee) then people might invest more in the stock market (for higher returns) instead of depending on government.

As one former Fed economist put it ('Economists Win Nobel for Focus on Real World', WSJ, Oct. 11, p. A3):

"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".

In other words, as standard for Pareto optimality BS, sacrifice citizens' security for a generic market benefit, available only to the elites, mainly the 1%. See, e.g.

http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto.html

Meanwhile, allowing Medicare and Social Security benefits remain as they are would be "Pareto inefficient", 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, e.g.

http://brane-space.blogspot.com/2011/06/modern-economics-its-evil-basis-pareto_13.html

Sargent's own bias in his development of his mathematical models to support his "theory" confirms this. 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 in itself 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.

Meanwhile, there is Sargent's fellow prize winner Chris Sims who (Henderson, WSJ, ibid.) :

"undercut the large scale Keynesian economics models and....found the traditional Keynesian methods just not good enough"


One of Sims' complaints in the same piece was the government extending unemployment benefits for another 99 weeks, which "filled him with dread".

Oh really? It must be nice to merely be filled with dread while sitting on one's duff in a nice comfy office in the halls of academia- ruminating on the rarefied realms of macroeconomics. And meanwhile, the unemployed whose homes are now near foreclosure, and whose hungry kids cry out for food before bedtime each night, experience REAL dread as they face another possible cutoff date!

Jeebus, these two make me want to cold cock someone! But maybe it's already been done in a kind of surreptitious manner, given that all their pseudo-sophisticated efforts and models may be for nought. As The Economist has noted, in their review of the new book Thinking Fast and Slow (by Daniel Kahneman), that species paraded as 'Homo Economicus' (Economic Man always invested maximally in the most rational choices) is largely a figment of economists' imaginations. Or to use The Economist's words:

"Mr. Kahneman, an Israeli-American psychologist, has delivered a full catalogue of the biases, shortcuts and cognitive illusions to which our species regularly succumbs. In so doing he makes it plain that Homo Economicus - the rational model of human behavior beloved of economists - is as fantastical as a unicorn."

And I already gave examples of this irrational propensity in a previous blog referencing Kahneman's work, e.g.

http://brane-space.blogspot.com/2011/10/rational-limits-of-human-brain.html

Now, the question for all who have been paying rapt attention is as follows:

How far, or to what extent, shall we trust a model based on "rational expectations" theory, when the subject (humans) don't evince rational economic behavior at all?

And if the answer to that question in any way suggests or evinces minimal ballast or credibility, then exactly what was that Nobel Prize in Econ worth?

Inquiring minds want to know! Especially before our congress critters proceed to use these models to shaft us even further -so the 1 percent can own us even more!

BWAAA! Wall Street Cries Over "Consumer De-Leveraging"!

The muted scream from the headline piece in today's Wall Street Journal was almost palpable: 'DEBTORS HOBBLE U.S. ECONOMY!" I mean, the temerity of these once-upon-a-time deadbeats! To actually take their finances into their own hands and start paying down all their debts and cutting up their credit cards! WHO the hell do they think they are! To hear the main organ of reactionary finance tell it, you'd think the nation was inundated with millions of financial "Osama bin Ladens"!

What are the "crimes" committed? Let's summarize 'em here from the same piece (p. A1):

"Since the financial crisis erupted, millions of Americans have ditched their credit cards, accelerated mortgage payments and cut off credit lines that during good times were used like a bottomless piggybank.....As a result, total household debt - through payment or default- fell by $1.1 trillion or 8.6% from mid-2008 through the first half of 2011, according to the Federal Reserve Bank of New York.....

The national belt-tightening, known as de-leveraging, comes as the U.S. struggles to fend off a double dip recession"

The piece then drifts into other assorted complaints to do with this struggle: consumers (you never once see the word citizens!) pay off their bills at the expense of spending on appliances, travel, and "a slew of other products and services". It's also observed that home sales, "the engine of past economic recoveries" remains depressed.

Well, no shit, Sherlock!

The Journal, the established "voice" of Wall Street, then whines that "de-leveraging should help the U.S. economy in the long run, putting households on a sounder footing...but there are short term dangers."

They then briefly delve into the "paradox of thrift" first observed by John Maynard Keynes during the Great Depression. To briefly summarize: "when everyone turns frugal, everyone suffers. Synchronized thrift slows the economy" - according to Keynes.

Well, hold strain there a sec! Keynes also asserted that the solution, or the way to prevent or delimit such synchronized thrift, is for there to be a least ONE spender of last resort. This means that in a low aggregate demand environment, if ordinary folk aren't spending, and businesses aren't then the government has to! But what do we have? A bunch of crazy austerity minded nitwits in control of the House, blocking any spending that would get this nation back on its feet -including Obama's $447b jobs bill.

It is also a myth to say, as the Journal implies, that "everyone" is pulling back! The true fact it that the upper one percent are not - not by any means! They are blowing their wads on yachts, Bentleys, trips to Caribbean villas for "rose wine wraps" and special foie de Gras gluttonous meals....and plowing the rest into blood diamonds, gold coins and furs.

The Journal doesn't mention this little aberration in the spending constellation, but they should. It is misleading to portray the issue as if EVERYONE is really closing their purse strings. The reason they don't or can't mention that 1% aberration is that it would prove once and for all that Karl Marx was correct in Das Kapital: That capitalism's engine eventually runs dry when the mass of consumers it depends on to spend themselves silly and into debt slavery, can no longer do so. At that point, inventories build up, sales are non-existent, and businesses close as capital is squeezed.

The aberration also highlights the gross income -wealth inquality in the country. Because on account of low or stagnant wages, the majority have had to borrow to compensate ...and simply put, they can no longer afford to go that route. (All apologies to the lender cited in the WSJ piece who said he can no longer sleep nights because his loan portfolio has shrunken by 25%" Awww, too bad!)

Meanwhile, the Journal instead choooses to castigate the 99% for not spending enough despite the fact they are the sector most hammered by the stagnant wages and downturn!

So why blame them when they "also closed 103 million credit card accounts while their credit card payments exceeded their purchases by $116 billion"

Isn't this the rational response given or dictated by "rational expectation theory" of that one Econ Nobel Prize winner, Thomas Sargent? Well, anyway, we will get into that next week.

For now, it's clear the Wall Street reactionaries don't have a clue. Indeed, they have even less than the ordinary debt-laden citizen trying his best to get the debt monkey off his back. To show this one need look no further than the op-ed page (A16) of today's WSJ and the nauseating pissing and moaning that we "shouldn't be leaving Iraq" and it will make Iran's day. Well, too fuckin' bad, bozos.

That unnecessary intervention has already cost over a 1$ trillion (not even factoring in all the medical costs of the 32,000 injured and 500,000 mentally traumatized), 5, 000 American dead, and 600,000 Iraqis killed. All for what? Didn't this country learn from Vietnam? Didn't it learn from the British and Russians, who also tried to teach those Iraqis a thing or two? The sad thing is, even as the Journal rakes American debtors -consumers over the coals for not holding up their end of the GDP, it can't see that the financial waste in Iraq far surpasses even what consumers have already deleveraged! Yet they want to add to it!

Well, maybe we ought to give them a break.

They aren't rocket scientists over there at the WSJ!