More intro - an economic diagnosis for today

[David G]

I introduced myself earlier on a 'say hi' thread... but the following is a fuller look at the background and bias/perspective I bring to the group --


An Economist Pontificates.

A friend offers the following –

At its best, conservatism as shown by a line of American conservatives from George Washington through Senator Taft embody the wondrous if boring virtue of rectitude. Unfortunately, this is a tough virtue to maintain, quickly becoming the judgmental hypocrisy we see in the recent crop of hateful talking heads who so devalue meaning that they demonize the word "liberal" and don't live up to any of the virtues found in the dictionary definition of conservative. They are not conservative in the positive sense but rather are only defenders of power and wealth.

I believe he's substantially correct. But what does that mean in terms of economics?

One of the long term patterns inherent in our system of market capitalism (combined with democratic elections) is an ongoing pendulum swing between the extremes of laissez-faire capitalism on one hand, and Scandinavian-style "market socialism" on the other.

Full disclosure: I'm non-doctrinaire, but tend to lean toward the progressive side. However, my undergraduate work was in economics w/graduate work in economic history & economic development.

To elaborate -- market capitalism is a very efficient system for fostering innovation, accumulating capital, and developing economies. This powerful engine is driven by a particular side of human nature: the ceaseless dynamo of human need and human greed. Don't think I'm condemning. I'm not. For the most part market capitalism does a great job of channeling this drive into productive avenues.

But capitalism also has some built-in issues. Some characterize it as the worst economic system we've ever invented... except for all the others.

The biggest issue? It requires careful regulation by civic-minded, even-handed, knowledgeable leaders. Because - if left unchecked - market capitalism has some built-in destructive tendencies. Historically, the continued accrual of more & more capital & power into fewer & fewer hands has led to an inefficient functioning of the economy.

More speculative bubbles. More oscillations. Eventual instability. One example is the Great Depression. Hoover was an absolute True Believer in the notion that "The business of America is business". He thought the rich getting richer and the poor getting poorer was good for the country. He was not the only one. The process began before him. He was just the Final Fool before the fall in that particular episode of the drama. A more recent example was the Bush Recession... which we are yet to fully recover from.

What followed the Great Depression was a rapid swing of the pendulum to the far end of the spectrum. Roosevelt instituted Social Security; Unemployment Insurance; WPA programs; and a bevy of other programs which were the antithesis of Hoover's approach. Socialism, all of it. Don't think I'm condemning. It worked, and it has a place in our society. We are a far more stable economy now - with these programs in place - than we were before.

I could go on and on with the variations, ramifications, and permutations of the pattern. Also about the dangers if the pendulum swings too far (we're close right now) toward laissez-faire (think Weimar Germany and Adolph Hitler). Instead, I'll sum up by saying it is not a case of "us vs. them".... of your particular ideology vs. mine. It is a case of recognizing where we are – right now - in the pendulum swing... and accepting whatever corrections are in order... even if that leads away from your particular ideological island.

Right now, as I mentioned, we've swung a good long way toward unchecked capitalism. It's time for a correction. Conservatives should not howl at the prospect. They should welcome it as a normal, desirable, adjustment (think "market correction" if it makes you feel better). Liberals should not think that the answer is to swing to the other end of the spectrum and stay there. That place has its own problems, dangers, and inefficiencies.

So - it's time for all of us to embrace a bit of "socialism" and step back a bit from the dog-eat-dog wing of capitalism. We will possibly over-correct (this system is a positive feedback loop, and they have that tendency). Then it will be time for all of us to embrace a little more market control. "To everything, Turn turn turn, There is a season, Turn turn turn..."



"When there is an accumulation of money and power into fewer and fewer hands, people with the mentality of gangsters come to the fore. Power tends to corrupt, and absolute power corrupts absolutely" -- Lord Acton <Keep in mind that he's British, and he said this in 1877. This is not the first time the pattern has played out>

 

[Lafayette]

... who so devalue meaning that they demonize the word "liberal" and don't live up to any of the virtues found in the dictionary definition of conservative.

If I am demonizing, then you are pontificating. You take the readers here to be all imbecilic?

There are some who see a red-herring for a red-herring - and blathering about the virtues of Liberal Ideology is just that, a red-herring. You are misleading the debate, and your post demonstrates your intention by sermonizing the virtues of Liberal Philosophy. Which is your right, no doubt, in a forum; but irrelevant without the reality of proof.

Instead of pomposity, come down to earth. It's much easier to see through the liberalist fog-of-supposition when you're on the ground.

And the fog-of-supposition to which I refer is the Blatant Income Disparity in an extremely rich nation that has no raison-d'être whatsoever. It is the simple outcome of the willful misadventure undertaken in the 1980s by hatcheting upper-income taxation to ridiculously low levels.

That gross-error must be corrected for the US to regain a semblance of being an fair and impartial nation ...
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[Lafayette]

And surely the Rabid Right must be unduly proud of this headline: Top 25 hedge fund managers earned $13bn in 2015 – more than some nations.

Speed kills ...
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[Lafayette]

THE 20 / 88 WEALTH SHARING RULE

This powerful engine is driven by a particular side of human nature: the ceaseless dynamo of human need and human greed. Don't think I'm condemning. I'm not. For the most part market capitalism does a great job of channeling this drive into productive avenues.

Mostly, for a highly select few who walk-away with massive millions - off to buy an island in the Caribbean.

Money is indeed an effective motivator of Human Effort, but it is not the only yardstick of benefit. Because, with the Unfair Taxation in the US the financial benefit in terms of Income goes only to a select minority of the population. It then gushes up to Wealth, where again insufficient taxation assures that it perpetuates down through the family's dynasty. (Like the monarchs of Europe before the American colonies went to war because of such a rip-off by English aristocracy.)

And for what eventual good, I might ask. A very distinct minority of only 20% of American families who own 89% of the Nation's Net Worth. (See the infographic results of Prof. Domhoff's research, here.

Or, perhaps Prof. Piketty's here that corroborates Domhoff's? Where Piketty's research demonstrates that the Top 0.1% of American households possess nearly as much as the "bottom" 90% of households. See that amazing fact graphically here: "Ratio of total national wealth to income"

POST SCRIPTUM

And, whilst we are at, boys-'n-girls, looking at the historical graphic, when do the red- and black-lines begin to converge in the 1980s because Upper-Income Taxation changed radically?

Who was PotUS then? Replicant Ronnie ...
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[David G]

If I am demonizing, then you are pontificating. You take the readers here to be all imbecilic?

There are some who see a red-herring for a red-herring - and blathering about the virtues of Liberal Ideology is just that, a red-herring. You are misleading the debate, and your post demonstrates your intention by sermonizing the virtues of Liberal Philosophy. Which is your right, no doubt, in a forum; but irrelevant without the reality of proof.

Instead of pomposity, come down to earth. It's much easier to see through the liberalist fog-of-supposition when you're on the ground.

And the fog-of-supposition to which I refer is the Blatant Income Disparity in an extremely rich nation that has no raison-d'être whatsoever. It is the simple outcome of the willful misadventure undertaken in the 1980s by hatcheting upper-income taxation to ridiculously low levels.

That gross-error must be corrected for the US to regain a semblance of being an fair and impartial nation ...
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I agree. I am pontificating. That's why I warned the readers by titling the little mini-essay "An Economist Pontificates". You see how that works? All imbecilic? No, that is not my impression so far. But clearly... there are some that fit that description.

 

[Lafayette]

PROGRESSIVISM

All imbecilic? No, that is not my impression so far. But clearly... there are some that fit that description.

There are more than a few, because Liberalism has been taken to an extreme by means of a purely Societal Phenomenon.

Extreme liberalism is part and parcel of America's "Cult of Personalities", which is typical of large nations where identity is submerged into the masses.

People try to distinguish themselves, and they think that amassing great wealth is the best way. They distinguish nothing but do get a lot of admiring attention.

After all, what better common denominator than money? Historically, the US missed the turning point from the 19th to the 20th century of Progressive Thinking. Teddy Roosevelt, of all people, conceived the Progressive Party as a vehicle for his political ambitions. He ran for PotUS in 2012 on a Progressive Platform and lost.

Had he won, we would not be having this conversation today.

PROGRESSIVE IDEALS

And lost with him were a great many Progressive Ideals of his day. For instance, female equality with men - which would wait almost another century to be cast both into both law and social custom.

Historically, the death of Progressivism in 1920 gave way to the prominence of Liberalism in America, which has had sway (despite Roosevelt II in the 1930s) for mostly all of the last century. Two devastating World Wars had people keep their attention to more pressing matter - like survival.

I like to think that the Liberal-chapter of American history is coming to a close in this new millennium. The abuse by Reagan of the Tax Code in the 1980s was its Death Knell. The Donald is one last tremor that will be soon pass after his personal cataclysm come next November.

POST SCRIPTUM

And maybe it wont happen. In which case, many Americans who live abroad because of the dire nature of what's happening stateside will simply continue doing so. You see, it's one thing to talk about Progressive Societies (perhaps even deprecating them out of ignorance) but quite another to actually live in one.

(The proof is in the progressive-pudding, as the saying goes ... ;^)
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[David G]

Lafayette - I was actually hoping that someone would come along and comment on your thoughts. Perhaps, I thought, a bit of triangulation might help me comprehend what he's going on about.

But it hasn't happened. I'm curious, but have no firm idea about what you're saying. Can you boil it down... and maybe sift out some of the excitement and hyperbole? Summarize, like you would to a friend?

 

[David G]

Lafayette - any interest in clarifying?

 

[TNAR]

This was dangerously close to TL/DR territory. But, the fact that you label yourself an economist with “graduate work” got me intrigued. Sue me.

First off, welcome to the dog and pony show. I have found that the moderators here are not nearly as quick as those you'll find elsewhere to ban those who disagree with them, yet do a pretty decent job of keeping people in line. Hope you enjoy yourself here.

… they demonize the word "liberal" and don't live up to any of the virtues found in the dictionary definition of conservative. They are not conservative in the positive sense but rather are only defenders of power and wealth.

I find it almost hypocritical that the finger gets pointed at conservatives while completely ignoring the bastardization of the term liberal. It would surprise me to learn you have never come across the phrase “classical liberal” in your studies. I would suggest that anyone labeling themselves as either conservative or liberal (in the modern sense) is nothing more than a defender of power and wealth.

One of the long term patterns inherent in our system of market capitalism … is an ongoing pendulum swing between the extremes of laissez-faire capitalism on one hand, and Scandinavian-style "market socialism" on the other.

I tend to find that virtually every reference to laissez-faire capitalism can be described as ignorant or deceitful. Considering that there has been nothing remotely resembling laissez-faire capitalism in the U.S. since the turn of the 20th century, one could hardly include it in an “ongoing pendulum swing.” What sort of "economic history" did you study? I believe the term you are looking for is cronyism.

The biggest issue? It requires careful regulation by civic-minded, even-handed, knowledgeable leaders. Because - if left unchecked - market capitalism has some built-in destructive tendencies. Historically, the continued accrual of more & more capital & power into fewer & fewer hands has led to an inefficient functioning of the economy.

Tada! This is cronyism at its finest.

Every Econ text – from intro to many advanced levels – spread this same tired line. If it wasn’t for the beneficence of government, those horrible businesses would be running the world killing everyone. (As if the private sector could ever do as efficient a job of executing millions of people as do governments!) Except, this flies in the face of all logic. A business operating within the confines of a voluntary market must satisfy the needs of consumers or it will most assuredly go under. Only with the support of government via legal coercion may a business treat its customers with contempt. True laissez-faire capitalism results in competition. Cronyism results in the consolidation of power and wealth.

The simple case study is the monopoly business. It is impossible to make the case for a monopoly or monopoly-like effect evolving from laissez-faire capitalism unless the goods produced are better than literally every other option available. Contrast this with the constant battle for opening markets to competition in our current environment, paying close attention to the centralization of influence (monopolization, if you will) in so many areas of the market.

In sum, I don't buy your "non-doctrinaire" claim. We're all friends here; let your true colors fly!

 

[David G]

TNAR - I'm a bit confused. Are you Lafayette? You have two different sign-ins here? Is that allowed?

 

[TNAR]

TNAR - I'm a bit confused. Are you Lafayette? You have two different sign-ins here? Is that allowed?

Nope. Don't know Lafayette.

 

[James972]

. One example is the Great Depression.

yes. an example of how the libsoviet Federal Reserve wrecked our economy. A liberal will be too illiterate to know that the economy then was controlled by big liberal govt. This is kindergarten level economics.

 

[Ahlevah]

More speculative bubbles. More oscillations. Eventual instability. One example is the Great Depression. Hoover was an absolute True Believer in the notion that "The business of America is business". He thought the rich getting richer and the poor getting poorer was good for the country. He was not the only one. The process began before him. He was just the Final Fool before the fall in that particular episode of the drama. A more recent example was the Bush Recession... which we are yet to fully recover from.

Bubbles are apolitical; they don't care who's president. They result when the real cost of capital falls below the expected real rate of return. If, for example, I'm only required to put 10% down on a piece of property and it's expected to rise 5% a year while I'm only paying 3.5% interest I'd be tempted to borrow every dollar I could lay my hands on. On a $100,000 property, I'd make 18.5% on my investment in the first year. It would only compound after that. And why can I borrow money at that rate? Capitalism? The "free market"? No! It's thanks to government manipulation! Mortgage rates tend to follow the 10-year Treasury, and we all know what the Fed's doing there--cheap money! Toss in the tax-deductible nature of mortgage interest and government-subsidized mortgage lending programs and insurance and you've got some necessary conditions to fuel a bubble.

And when the bubble pops, which it inevitably does, what does government do? It attempts to reflate it because insolvencies, unemployment, and bankruptcies are bad for business. The problem is bankruptcies or the closure of insolvent banks allow capital to be redeployed productively once again. A deeply-indebted company that's just hanging on can't reinvest in its business because it's too busy giving money to a "zombie" bank with a balance sheet loaded with foreclosed houses that it can't sell because they'd have to write off the losses and, well, then the bank would be insolvent and have to close its doors, too. Banks that are technically insolvent are risk-averse and don't tend to lend much. They can just borrow from the Fed for nothing and make money on the Treasury spread as they did in the years following the Great Recession (Banks Use $1.77 Trillion to Double Treasury Purchases - Bloomberg) while they wait for better times to unload their real estate inventory. Economic growth suffers as a result.

Really, the biggest problem with this economy is too much capital invested in too many encumbered, unproductive assets. Total credit market debt (all public and private debt in the U.S.) stood at a record $63 trillion at the end of last year, which is about $9 trillion more than when the Great Recession ended in 2009. And conditions are no better anywhere else (The $29 Trillion Corporate Debt Hangover That Could Spark a Recession - Bloomberg).

 

[James972]

Bubbles are apolitical; they don't care who's president. .

actually Republicans want a free market for money while Democrats since day one have wanted easy money.

 

[Lafayette]

Nope. Don't know Lafayette.

I do, and he is not me ...

 

[Lafayette]

STOOPID IS AS STOOPID DOES

Bubbles are apolitical; they don't care who's president. They result when the real cost of capital falls below the expected real rate of return.[/url]).

What makes you think that the is sole criteria?

Economic bubble, excerpt:

An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is trade in an asset at a price or price range that strongly deviates from the corresponding asset's intrinsic value.

Banks that are technically insolvent are risk-averse and don't tend to lend much. They can just borrow from the Fed for nothing and make money on the Treasury spread as they did in the years following the Great Recession (Banks Use $1.77 Trillion to Double Treasury Purchases - Bloomberg) while they wait for better times to unload their real estate inventory. Economic growth suffers as a result.

Indeed, that practice (called Quantitative Easing) makes the banks look better, because the Fed has assumed the Bad-Debt. But, as in the US and elsewhere (the EU), it effectively solves nothing. In a serious recession, the key to an exit is and always will be the consumer (you and me). Who is reluctant to spend when they think the recession will take their job away.

The only solution is the one originally suggested by JM Keynes in the early 1930s, called Stimulus Spending. It worked in 2010, when Obama employed it to spike a skyrocketing unemployment-rate at 10%.

But, it no longer worked because benighted Replicants in control of the HofR (from which issue all spending-bills) did not want to employ it to re-install consumer confidence after 2010.

"Stoopid is as stoopid does" (Forest Gump) ...
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[TNAR]

In a serious recession, the key to an exit is and always will be the consumer (you and me).

Consumption spending is the smallest portion of a market economy. The theory you recommend is largely responsible for the economic state we're in now.

 

[Ahlevah]

What makes you think that the is sole criteria?

Because I'm talking about bubbles driven by excessive borrowing, like the cheap credit we saw during the Roaring '20s that led to the Florida Land Bubble and the Stock Market Crash of 1929, the Japanese asset bubbles of the 1980s, the Dotcom Bubble, the real estate bubble the led the Great Recession, and so forth. Leverage is the engine that can massively amplify the size and resulting severity for an economy of a collapsing asset bubble. China is the latest country to discover that fact. Name ONE major asset bubble in recent memory that wasn't driven by leverage.

https://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

 

[Lafayette]

Leverage is the engine that can massively amplify the size and resulting severity for an economy of a collapsing asset bubble. China is the latest country to discover that fact. Name ONE major asset bubble in recent memory that wasn't driven by leverage.

And so? Cheap credit is cheap credit, the purpose of which is to stimulate Demand for goods/services. The opposite is also true. Not-cheap credit dampens Demand. (If this is what you mean by "leverage", then it is fairly common.

It is the first mechanism available to the Fed to control the economy when it is not behaving as the Fed thinks it should behave.

And yet you (seem to want to) blame it for economic recessions. The Great Recession bubble happened during a strong commercial prime loan-rate prior to the Great Recession (that busted in 2008 and took hold in 2009) looked like this:
2002,4.67
2003,4.12
2004,4.34
2005,6.19
2006,7.96
2007,8.05
2008,5.09
2009,3.25

From 2004 onward and until the "bust" in 2008 rates were fairly high and did not dampen Demand. The bubble continued until the SubPrime Mess came to light at that time.

Yes, bubbles can boom-'n-bust, but it takes more than cheap-money to do it. It takes a greedy willingness by consumers - regardless of the rates - to keep consuming. Which the above historical rates show.

Until Americans understood that, because of the Toxic Waste, when the fit-had-hit-the-shan, they kept borrowing merrily to make a quick-killing in the real-estate market. Frankly, we deserve what happened.

My Point: It is this naive willingness to get carried away by the idea of "Making a Quick MegaBuck" that will be at heart of all our ills for some time to come. This is "something new" in our national mentality, and it was brought about by the far-too-low upper-income tax rates that provided the incentive.

(Yes, I keep blaming this factor - but I cannot think of a better "prime reason" for both our Income Gluttony going on in the US, and its clear economic consequences.)

Once again (paraphrasing Santayana): Those who forget the lessons of history are compelled to repeat them.

Which is exactly what we did to provoke the Great Recession, cuz "everabudyz doin it" ...
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[Cyrylek]

market capitalism is a very efficient system for fostering innovation, accumulating capital, and developing economies. This powerful engine is driven by a particular side of human nature: the ceaseless dynamo of human need and human greed.

Uhm...excuse me Sir (I am addressing that economist-friend, of course) - but haven't you left out, like, the most important part? You know, that freedom of choice that capitalism gives people?

Hoover was an absolute True Believer in the notion that "The business of America is business".

Say WHAT?! Hoover?! The Progressive's Progressive? The guy who hiked income taxes to the sky, started a suicidal trade war Trump and Sanders would be proud of, the guy who was attacked by the FDR's (!) campaign as being way too socialist?

Sorry, but the economist-friend simply has no idea what he is talking about. Over and out.

 

[TNAR]

It takes a greedy willingness by consumers - regardless of the rates - to keep consuming. ... Until Americans understood that, because of the Toxic Waste, when the fit-had-hit-the-shan, they kept borrowing merrily to make a quick-killing in the real-estate market.

So let me get this straight. You think the Fed should force interest rates lower and employ easy money policies in order to encourage consumption spending, but it is "greedy" consumers who are to blame for the boom-bust cycle?

 

[Lafayette]

So let me get this straight. You think the Fed should force interest rates lower and employ easy money policies in order to encourage consumption spending, but it is "greedy" consumers who are to blame for the boom-bust cycle?

Intelligent questions are worth a response.

Try harder ...

 

[James972]

they kept borrowing merrily to make a quick-killing in the real-estate market. Frankly, we deserve what happened.

So why didn't they keep borrowing to make a killing in the soybean market?? Ans: because liberal Fed/Fan/Fred virtually guaranteed that the housing market would always go higher because they were always stimulating the housing market out of their complete ignorance.


"These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."-Barney Frank

 

[TNAR]

Intelligent questions are worth a response.

Try harder ...

Didn't think you'd be able to answer that one.

Sent from my SAMSUNG-SM-G870A using Tapatalk

 

[Ahlevah]

It is the first mechanism available to the Fed to control the economy when it is not behaving as the Fed thinks it should behave.

Like someone said, it is until it isn't. Right now you've got $10 trillion in debt in Europe and Japan at negative interest rates. The response so far seems to be that this is actually deflationary:

Some predict that negative rates — if passed on to ordinary bank customers — will cause businesses and the public to just stop using traditional savings. “I think the concern is that eventually people will just not put their money in the bank,” Goldstein says. “They will just store it. They will put it in the mattress.”

In ordinary times, savers use banks and other short-term cash vehicles even though inflation erodes savings’ value, because inflation will do its damage even if cash is stuffed in a mattress, Goldstein points out. But the effect of a negative rate can be avoided by using a mattress or some other strategy that does not involve a charge on savings, he adds.

Will Negative Interest Rates Stimulate Growth - or Backfire? - Knowledge@Wharton

From 2004 onward and until the "bust" in 2008 rates were fairly high and did not dampen Demand. The bubble continued until the SubPrime Mess came to light at that time.

The rates you listed weren't high relative to the return people were "earning" on real estate. From 2000 to 2005, home prices rose at an average rate of 11% per year. With leverage (the ratio of debt to equity) considered, borrowing was still a no-brainer, at least until prices began to drop.

https://www.federalreserve.gov/pubs/feds/2008/200859/200859pap.pdf