Limited government: Globally rejected and creates its own worst enemy

In the US there has a been a powerful, and increasing, swell in the limited government movement since 2008. However, in 2015 there was a counter reaction from the left: the rise of Bernie Sanders. Social media is buzzing about him, his campaign has raised large amounts of money, coming largely from lots of small donations, [1][2] and has drawn unexpectedly large crowds at his speaking events. In fact, over  a 3 month period earlier in the year Sanders fundraising fell just short of Hillary’s (26 million vs 28 million) shocking in itself, and more so that he’s achieved this with few fundraisers. [3] In just 4 hours after the first Democratic debate Sanders received $1.3 million in donations [4] and two days later that number was $3.2 million [5]

Over the last 3 months of 2015 Sanders raised $33 million, again just short of Clinton, bringing his total for the year to $73 million.[6] Over the year Sanders’ polling numbers jumped from 3% to over 30% as of Jan 10 standing at a highest yet 34% He currently leads Clinton in New Hampshire, and isn’t terribly far behind in Iowa.[7] He’s achieved all this despite the fact Clinton is the established candidate, and one of the most popular, powerful names in the Democratic Party… all while refusing to use a Super PAC, instead relying solely on individual donations. More important than fundraising and polls though, Sanders has influenced the party. He’s forced Hillary to the left on many issues and in her rhetoric. The first Democratic debate seemed dominated by his campaign, and Clinton was even asked to prove she’s a progressive. This is a drastic change from just 10 years ago, (more on this later).

It seems Bernie is the real deal.

Sanders has run a progressive campaign, advocating high taxes on wealth, taxes on financial transactions, breaking up the “too big to fail” banks, higher wages, creating jobs in the US, and stronger government support for the middle class, poor, elderly, workers rights in general, free public college and has been a fierce critic of inequality, wealth concentration and what he’s called a “rigged economy”. He’s also been a fervent supporter of environmental policies.

It’s not just Sanders though, there has been buzz around fellow progressive Elizabeth Warren, and inequality has become a major issue, seen in the Occupy Movement, 2012 election and Thomas Piketty’s bestselling “Capital in the 21st Century”. There has been open discussion of an unfair economy, even class warfare, much to the disdain of the right. There is an irony here: I think the limited government movement itself has helped create this environment, the very sentiments they loathe have been fueled by their movement. To understand why, a quick history lesson.

In the 19th and early 20th century there was laissez-faire (limited government) capitalism, and socialism. These were your only two options. So to oppose laissez-faire meant you had to support socialism. Laissez-faire (also known as liberal capitalism) was the dominant system for a long time, especially here in the US, though socialism always lingered and fought. Even in the US socialism was a force in the early 1900s. They often worked through the labor movement, but also won mayorships, local elections and Eugene V Debs won 6% of the vote in the 1912 Presidential election, running as a Socialist.

However, by the 1930s laissez-faire was under heavy attack from both sides: not just socialism, but communism, as well as fascism. Even in the US people turned to the government in an unprecedented manner, establishing what I’ll call moderate capitalism. While diverse, all these ideas shared some common ground: A rejection against laissez-faire.

As Hayek noted in his famous “Road to Serfdom” fascism was an outgrowth of socialism, and it was opposed to laissez-faire as well as communism. Mussolini was originally a socialist. Fascism featured central planning and government jawboned cartels. The Nazi Party was originally founded, under a different name, by a locksmith Anton Drexler who called for “socialism for the middle class” the small business owner, and was opposed to both liberal capitalism and communism.

In fact part of the reason fascism became so popular was because it branded itself a “third way” between wild, inefficient liberal capitalism, and barbaric communism. It also sought to put an end to class warfare, albeit in a diff way than socialism…unions and corporations were forced together into cooperation under the government. Different social classes and interests were given their role to play in, and share of, society under state cooperation. Both socialism and fascism wanted to end the social strife created by liberal capitalism, the former chose abolishing capitalism while the latter chose to organize society vertically, all people and sectors working together as parts in the whole machine…like a business or the military.

After WWII most of the developed world embraced moderate capitalism. There were variations, but they all shared some common features: Institutions to buffer people from the markets (unemployment, disability, social security), welfare, restrictions on the free markets, government investment in the country and more equitable distribution of wealth. It was widely agreed capitalism was the way to go, but we needed to “trim the excess” it can create, and give everyone at least some share of the pie.

So, be it socialism, communism, fascism, or moderate capitalism…most of the world rejected limited government. I’d say the best possible of those alternatives prevailed after WWII, but as time has gone on the world, and especially US, has been slowly drifting from this back to laissez-faire, the system that most of the world rejected.

A decent number of libertarians seem to understand this. Some have discussed a political spectrum ranging from less government to more, stating that many ideologies left and right are actually on the same “side” and all opposed to limited government. They are correct in this observation, but then choose the system they acknowledge has been widely opposed. This is due to ideological beliefs, which may blind them from historical observation: limited government capitalism produces extreme inequality, and with it social strife as well as concentrated political power. All of which has been repeating in the US. The middle class has shrunk and become poorer, and many feel the economy no longer works for them. That opportunity is becoming lesser, hard work means less, that social mobility is disappearing…that the system is becoming rigid and the government serves only the higher rungs of society. This sounds shockingly like Old Europe and is the very thing America was opposed to.

In the US both parties are accomplices. While the Democrats are more supportive of moderate capitalism, starting in the 90s they largely abandoned this and embraced limited government, more on this in another post. 10 years ago the goals of liberal Democrats were shockingly mild in terms of economics: A return to Clinton era taxes for top earners, a 4.6% increase, middle class tax cuts (or at least maintaining reduced tax rates) and some discussion of re working trade agreements, (which never happened and President Obama has in fact expanded them). The boldest plan was universal healthcare, though this was only vaguely discussed and when it was, did so timidly. As Paul Krugman said in 2006 “Even liberal economists and scholars at progressive think tanks tend to shy away from proposing a straightforward system of national health insurance. Instead, they propose fairly complex compromise plans. Typically, such plans try to achieve universal coverage by requiring everyone to buy health insurance, the way everyone is forced to buy car insurance, and deal with those who can’t afford to purchase insurance through a system of subsidies.”[8] This is exactly what we ended up getting with ACA (“Obamacare”).

This platform of mildly higher taxes on top, vague middle class benefit, discussion of jobs and universal healthcare is what more liberal candidates such as Howard Dean and Barack Obama ran on. What many on the right didn’t realize is how mild these demands were. It was unthinkable even in 2008 to suggest any higher taxes than Clinton era, job programs, significantly higher min wages, middle class wages, increasing social security and direct universal healthcare. To do so got you looked at like an insane person, and such things were advocated by the small, fringe group of progressive Democrats. Fast forward to 2016: The 3 Democratic candidates are vying to show who’s the most dedicated/successful progressive. There’s talk of a $15 minimum wage, boosting middle class wages, job programs, (Bernie is the most detailed calling for 13 million jobs to be created rebuilding the US infrastructure) and Sanders has called for greatly higher taxes on the wealthy. This all has shocked the right, but it didn’t just pop out of nowhere for no reason. It has been a response to both long and short run movements in the  right.

We have all forgotten that when no moderate alternative is present, people must turn to more radical options. This is what smart leaders like FDR and Otto von Bismarck understood, and that to keep socialism at bay you need to give up some to the masses. It was Bismarck, an aristocratic conservative who hated socialism, who implemented the first modern welfare state. The US pioneered moderate capitalism, which killed socialism as a legitimate idea here, because it worked. Socialism was unnecessary, we created a capitalist system that was able to boost the working class, provide opportunity and protection for the masses, ensured some amount of wealth turned over, and kept many people connected to the political process. The abandonment of this since the 80s, hastened since 2008, caused the economic and political conditions that fueled the left’s continual drift. It’s the result of economic stagnation for many, and lack of/frustration with current liberal options.

Its not a US thing either. The UK Labour Party has recently elected Jeremy Corbyn as their new leader in a massive victory, despite the fact he was considered a fringe candidate and that he would doom the party. Corbyn has advocated positions such as reversing austerity policies, re-nationalizing railroads and public utilities, and a “People’s Quantitative Easing” saying the Bank of England should print money to fund government projects. In Spain there has been the meteoric rise of Podemos, a populist left wing party. It was when researching Podemos for this blog post I found the first person to make the same observations I have. A Chantal Mouffe said “There is too much consensus and not enough dissent [in leftwing politics],” and that “To her, the rise of rightwing populists such as Marine Le Pen’s Front National in France or Nigel Farage’s Ukip in the UK is proof that the post-Thatcherite consensus – cemented by “third way” social democrats such as Tony Blair – has left a dangerous vacuum.”[9]

So the limited government movement, in trying to slowly dismantle government by calling everything socialism, is actually creating an environment more conductive to real socialism. It has helped fuel the ideas it wants to destroy. To those who want to take the US back to the laissez-faire days, I say prepare then to battle the same battles of the old days.

 

 

References/Sources

1: http://www.huffingtonpost.com/2015/07/02/bernie-sanders-fundraising_n_7715180.html

2: http://www.nytimes.com/politics/first-draft/2015/09/17/bernie-sanders-raises-1-million-off-attack-from-allies-of-hillary-clinton/

3: https://www.washingtonpost.com/news/the-fix/wp/2015/10/01/bernie-sanderss-26-million-cash-haul-is-a-major-problem-for-hillary-clinton/?tid=sm_fb

4: https://www.washingtonpost.com/news/post-politics/wp/2015/10/14/bernie-sanders-says-debate-performance-prompted-1-3-million-in-donations/

5: https://berniesanders.com/press-release/big-numbers-of-small-donors-fill-sanders-campaign-coffers/

6: http://www.cbsnews.com/news/bernie-sanders-hauls-in-33-million-in-fourth-quarter/

7: http://www.realclearpolitics.com/epolls/2016/president/us/2016_democratic_presidential_nomination-3824.html

8: http://www.nybooks.com/articles/2006/03/23/the-health-care-crisis-and-what-to-do-about-it/

9: http://www.theguardian.com/world/2015/mar/31/podemos-revolution-radical-academics-changed-european-politics

Martin Shkreli sums up what financialization has done to our country

Martin Shkreli, dubbed by many “The most hated man in America” got a taste of justice recently after he was arrested for securities fraud, and has been fired from his position of CEO at KaloBios. There has been widespread joy at this news, and rightfully so, but I have a somewhat different take on the whole situation.

Shkreli was a hedge fund manager who founded the company Turing Pharmaceuticals where he made headlines by raising the price of a drug, Daraprim, by over 5,000% That’s not an error, the price was jacked from $13.50 per pill to $750[1], an increase of 5,455% Daraprim is “the only approved drug for a life-saving parasitic infection called toxoplasmosis”[1] something that impacts many, especially those with AIDS and cancer. Shkreli drastically raised the price of a drug that many people simply have no choice but to buy, helped by the fact US drug market is extremely monopolistic, (more on this in another post) and faced no real competition for the drug. There is no other way to describe this besides price gouging.

This caused a national outrage, made worse by his defenses of his actions, and his remorseless, condescending, often immature and combative attitude. The best example of this being a tweet Shkreli posted saying, “And it seems the media immediately points a finger at me, so I point one back at ’em, but not the index of pinkie”[2] Not exactly the most becoming of responses.

He’s claimed his motives were altruistic and that actually he should’ve raised the price more. Despite whatever he may say about making drugs more available, R&D investment etc etc Shkreli has made it very clear in numerous public statements that maximizing profit has been, and is, his ultimate goal.

While his criticism has been near universal, and I’d say justified, there’s something I want to keep in mind about all this:

Despite the intense hatred he’s received for his price gouging, that is not what got him in legal trouble. He got in trouble for securities fraud.

It seems he looted $11 million from another drug company he was CEO of, Retrophin, to pay back investors in one of his hedge funds that lost money. It has been said “Shkreli essentially ran his companies like a Ponzi scheme, where he used each subsequent company to pay off the defrauded investors in the prior company”[3] Note: He was fired as CEO of Retrophin in 2014 after “the board concluded that Shkreli had committed stock-trading irregularities and other violations of securities rules.”[4]Now, this is wrong and he should be punished for it, but it was this and not the price gouging of a life saving drug, that landed him behind bars.

Basically: Despite all the public outcry, it wasn’t until he impacted rich people that he got in actual trouble.

 

Shkreli didn’t create this drug, or have anything to do with its creation. He simply bought the drug, jacked up the prices for his profit, (and to pay off his hedge fund) didn’t improve the drug or add any value. This whole situation sums up perfectly what financialization has done to our country. Now, there is obviously a role for finance to play in our economy, but it should be limited to that role. If left unrestrained and unregulated we end up with a finance class dominated by Martin Shkrelis…Looking to get their hands on everything to inflate the price for their profit, with no care or remorse.

Sound harsh? Remember our last housing bubble: banks making incredibly irresponsible loans, bundling said loans into deceptive packages to sell to investors, lenders pressuring appraisers to inflate housing prices and blacklisting those who refused to play ball. People were encouraged to treat houses as an investment. Buy a big one. Put everything you have into it. Put those additions on to boost its value more. Sell it in 30 years and retire a millionaire! Can’t afford it? Don’t worry! Housing prices will go up forever!

Sure, people got houses out of this…but how many couldn’t afford them and went into debt to do so? How many people defaulted, had to foreclose, saw their retirement get wiped out? Big finance didn’t care, they got their sales, their profits, hedge funds benefited, investors benefited from the booming stock market, the executives got their quarterly bonuses.

Remember the dot.com bubble: Investment banks threw money at hair brained, (often in the red), internet companies, inflated the price of their stocks using fraudulent techniques[5] and sold them to investors. Inevitably, most of these companies quickly went under, wiping out trillions of dollars of wealth in the stock market crash it brought, caused a recession, but the investment banks didn’t care. They made their killing with the massive IPOs they hyped up and sold, the execs got their quarterly bonuses.

The early 80’s deregulation fueled the Savings & Loan crisis, where many S&Ls took on unsound lending, investment strategies and fraud. This led to a housing bubble, as well as a boom for S&L owners, investors and sellers of junk bonds. The biggest name in all this, Charles Keating, ran his S&L over $100 million into the red with his debt based, reckless investments, sold to unsuspecting buyers. Seriously, a sales document from his company once noted “always remember the weak, meek and ignorant are always good targets.”[6]

Financial companies have speculated on oil prices, driving up the price of gas[7][8][9], speculated on food prices, driving up the price of food, (which, while difficult for developed countries, led to mass starvation and even political unrest in some poor countries)[10][11] and some even bet against their own assets!

Remember the bankers that insisted they still be allowed to receive large bonuses, and did, even as their company got bailed out? Stephen Schwarzman, with a net worth of $11 billion[12] said a proposal to raise taxes on hedge funds was comparable to Hitler invading Poland.[13]Mitt Romney’s bluntly stating he disregards nearly half the nation since, in his eyes, they are irresponsible, dependent and entitled? (A bloc of people that consists of many working poor and elderly). Romney’s close friend Ed Conard not only defended all the financial madness of our last bubble, but said that it’s actually good for the middle class…going so far as to claim Warren Buffet needs to “Quit taking a victory lap,” in regards to his charitable donations, since “That money was for the middle class.”[14]

These comments strike me as either cognitive dissonance, or delusional, given the shrinking and weakening of the middle class over the last several decades, despite increasingly pro wealthy/investment/finance politics of the era. This disconnect is exemplified by a crashed secret meeting of top bankers/finance/wall street people, which saw jokes made about seven figure bonuses and getting bailed out.[15] Jokes or not, a little disturbing to see this at a time when unemployment was 8.3%, most people saw falling wages and everyone left, right and center were livid about the bank bailouts. All this isn’t new either. Charles Keating not only refused to accept responsibility for his actions, but blamed the regulators for causing his companies trouble, said they had a personal vendetta against him, and resorted to paying off, (or is it contributing to?) five senators to stop the regulators.

It’s true this does not apply to every bank/investor/financial institution/finance person. In fact it doesn’t even apply to the majority of them. However, when you have a large, unregulated financial sector the worst rise to the top. Those who will seek predation over production, will go to any length to make a dollar without any regard to the consequences or remorse. Those who in fact seem to take a personally combative view of it all, a “me vs everyone else”, social darwinian view. People who blast others for being entitled and irresponsible while flying to the government on a private jet to ask for a bailout. People who say the government can’t spend a penny on the people, while tens of trillions have been spent on bailing out and propping up their companies.

So, Martin Shkreli isn’t an extreme outlier. He isn’t a rare exception. He actually sums up what financialization of the economy brings out in society. While we should be appalled by his actions, we shouldn’t be surprised.

 

 

References/Sources

1: http://www.huffingtonpost.com/entry/reviled-pharma-ceo-martin-shkreli-resigns_567445fee4b06fa6887d23f8

2: http://www.dailymail.co.uk/news/article-3243938/Ex-hedge-funder-32-hated-man-internet-defends-jacking-prices-AIDS-medication-5500.html

3:http://www.cnbc.com/2015/12/21/martin-shkreli-fired-as-ceo-of-kalobios-pharmaceuticals.html

4: http://www.bloomberg.com/bw/articles/2014-10-02/biotech-company-retrophin-fired-ceo-because-of-stock-irregularities

5: http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=3

6: http://articles.latimes.com/1990-09-19/business/fi-692_1_bond-sales-program

7: https://www.imf.org/external/pubs/ft/wp/2014/wp14218.pdf

8: http://www.peri.umass.edu/fileadmin/pdf/research_brief/PERI_AFR_Research_Brief_June20.pdf

9: http://www.nytimes.com/2012/04/11/opinion/ban-pure-speculators-of-oil-futures.html?_r=0

10: http://www.huffingtonpost.com/johann-hari/how-goldman-sachs-gambled_b_633436.html

11: http://science.time.com/2012/12/17/betting-on-hunger-is-financial-speculation-to-blame-for-high-food-prices/

12: http://www.forbes.com/profile/stephen-schwarzman/

13: http://fortune.com/2011/12/20/the-triumph-of-blackstone-on-wall-street/

14: http://www.nytimes.com/2012/05/06/magazine/romneys-former-bain-partner-makes-a-case-for-inequality.html?login=email&_r=3&pagewanted=all&&mtrref=undefined

15: http://nymag.com/daily/intelligencer/2014/02/i-crashed-a-wall-street-secret-society.html#

 

A Greek tragedy: Austerity, the Euro, and debt peonage

Last week ago a massive 24 hour strike was launched in Greece, halting ports, trains, flights and  schools. Several hospitals operated with minimal staff, lawyers cancelled trials and even journalists joined in, stopping on air news, websites and newspapers. [1][2] This is the second 24 hour strike Greece has had in under a month, both seeing tens of thousands taking to protest, some of them turning violent.

What’s going on?

The strikes and protests have been over the austerity measures the Greek government accepted earlier this year. This isn’t new, there have been strikes and protests happening in Greece for years now, all over the same issue. This has caused quite a backlash against the people of Greece. For years we’ve been hearing about how “They want the bailouts, but not the responsibility” how they are lazy, spoiled, and need work hard like the rest of Europe. During the last bailout/austerity discussion I saw comments about how Greece was trying to hold Europe hostage: threatening to leave the Euro, causing trouble for all, so they don’t have to pay what they owe.

These were not just internet comments, major news sources discussed how Greece was a “party” and analysis from mainstream media and academia was not much less harsh than what I said above. Greece was after all labeled one of the “PIGS” whose irresponsible behavior created all this mess, (along with Portugal, Italy (or Ireland) and Spain), and was the worst of them. The attitude towards Greece, from regular people to leaders at the top, could be summed up by this cartoon I once saw portraying the situation:

greece meme

While Greece is far from clean in this whole situation, I want to shed some light on the whole picture.With all the talk about Greece’s high public debt, and all the debt they owe to the Troika, (the European Commission, European Central Bank and IMF) I’d like to start with some other numbers.

Since 2008 Greece has seen: 63 consecutive months of economic contraction, GDP shrink by 33%, unemployment peaked at 28%, youth unemployment at over 60%, as of the third quarter 2014 25% of the unemployed have been so for at least four years, those who are working face lower wages, social security and pensions have been cut, and in 2013 44% of Greeks had an income below the poverty line. [3][4][5]

Many have simply left the country. Estimates say that since the great recession 160,000 – 200,000 college graduates have left Greece since the crisis hit. [6]

In my book this constitutes an economic and social tragedy. There is a bigger tragedy to all this however. It was forced upon Greece. This has not been simply an economic cycle. It has been the result of austerity. Austerity which was forced upon Greece in exchange for the bailout packages.

On the surface, this sounds OK. If someone is to be bailed out, it’s only right it comes with strings attached. Since the Euro is a community, Greece’s instability threatens all the others. Indeed, the whole basis for these bailouts have been for the stability of the Euro currency. So it’s only fair Greece has to accept some measures, since their poor behavior has forced the rest to bail out their mess. There are some issues with this however.

Austerity harms the economy, (more on this in another post). This makes it harder to pay the debts owed. One can see how can this can become a catch 22, and that’s precisely what happened. In 2010 there was intense discussion about the damage to the Euro if Greece was to default or even be forced to leave. This prompted the first bailout. In 2015 there was intense discussion about how Greece could not pay its debts, and what would happen if they were forced to leave the Euro. 5 years later, back in the exact same spot, and the result? Another, (the third now) bailout for Greece. The country now owes $352.7 billion to its creditors, 175% of its GDP. [7] I can’t imagine how this would be paid off, especially with austerity which will continue to weaken the Greek economy.

Could the debt ever be forgiven? Its creditors, spearheaded by Germany, have been vehemently opposed to even restructuring its debt obligation. As Nobel Prize winning economist Joe Stiglitz said, “Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shriveled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.”[8] A grim picture.

Cruel irony is Germany, which has consistently refused to back down and insists on austerity and repayment, (even as other countries and the IMF started to back down a bit)  should understand better than any the folly of imposing high debts on a country in depression….

In fact Germany had half of its debt forgiven, with the rest to be paid over 30 years, after WWII. This “clean slate” was the major force behind Germany’s post war economic miracle. [9] It was shocking to find this out, given Germany’s behavior today. Is it a failure to remember history, or just hypocrisy? Neither would surprise me.

Hypocrisy has abounded in this crisis. Before the recession Germany didn’t always meet the gov deficit/debt criteria of the Maastricht Treaty, while Spain, (one of the PIGS) did consistently. The “lazy Greeks” actually work the most hours in Europe.[10]

greece hours1

In fact, checking the OECD data revealed that Greece has consistently  worked the 3rd or 4th most hours of all developed countries![11] Germany, as well as the Netherlands, has pursued a policy of working less hours to spread work around, while chastising the lazy Greeks who work far more hours. Yes, Germany is greatly more productive than Greece, they do more with fewer hours, and I’ve seen comments along the lines of “It’s about working better not harder”. However, productivity is not really an individual effort but a national resource/efficiency issue. It’s best explained with, “Germans — armed with large and scaled-up firms, low corruption, state-of-the-art technologies, financing opportunities, and smart global supply chain management — get a lot more product out of each hour worked.”[12] Basically, due to overall nature of their states/economies, Greeks work a lot for less pay, while Germans can work less for more pay and thus are afforded leisure time, like vacationing on Greek beaches.

In the last round of bailout/austerity discussions Greece, especially finance minister Yanis Varoufakis, was aggressively called unrealistic, uncompromising and uncooperative, again by many but led by Germany. Greece, while unhappy, has adopted the harsh austerity measures, has been paying its debts. Yanis said he would pay as much of the debt as possible, but it’s simply too much to be all paid and thus can’t be. He spoke about continuing privatization, market reforms, said that austerity “is self defeating because debt rises as a result of a collapse of GDP” but that he would strive to avoid government deficits.[15] Makes sense to me, but the German led Troika refused to budge, leading some to wonder who were actually the unrealistic, uncompromising ones.

The government debt issue can’t be put solely on Greece. In 2001 Goldman Sachs used some creative finance to fudge the numbers of how high Greece’s debt really was. Sound familiar? Anyway…yes, the country took the easy way out, paying Goldman $793 million[13] to mask the issue, instead of actually addressing said issues, but Goldman was not innocent in all this. They were also irresponsible in agreeing to, (maybe even offering) this. It should be noted two important Greek officials involved with this deal, Petros Christodoulou and Lucas Papademos, were both former Goldman Sachs employees.[14]  Note: In the late 90s JP Morgan did a similar thing with Italy helping to mask the true scope of its debt as well.[13]

In fact, despite all the comments about how Greece, (and the other PIIGS) maybe shouldn’t have been let into the Euro, and how Greece wanted to reap the benefits but without the responsibility…it’s never discussed in the media that German and French banks sure had no problem tapping into the new markets of Greece and the other “PIIGS” taking advantage of the new low interest rates these countries saw. Much like the US crisis, this flood of credit was pushed with little regard. While I knew this through general knowledge, this article I found while doing research for this post beautifully showcases the scale of it. German and French banks lent over $1.1 trillion to the “PIIGS” and notes that while the Greek government “borrowed money for unwise projects” the bankers “pushed them to take money that they would never have been able to approved under normal circumstances.”[17] Responsibility in the creditor-debtor situation is a two way street.

This brings us to the next point. These bailouts that have launched so much vitriol at Greece have actually been a bailout of the creditors, not Greece. Out of a $7.8 billion stop gap disbursement, only $10 million went to Greece. The rest went to the ECB and IMF.[7] It’s been estimated that about 11% of all the bailout money has actually gone to Greece[16] while the rest “has gone to pay out private-sector creditors – including German and French banks.” as said by Joe Stiglitz.[8] These creditor bailouts have basically been passed onto the people of Greece to pay for, in the form of austerity, despite currently experiencing a second great depression.

This is why so many Greeks are angry. To add insult to injury, after the people of Greece voted Syriza into power on an anti austerity platform, and after a decisive “NO” vote by the people on whether to accept more austerity, Syriza accepted the austerity package. I checked numerous sources to see if Greece was given any compromise in return for this capitulation, and it seems the answer is no. Seems there is potential for some small debt relief, but if it happens probably not much, and the austerity wasn’t any less harsh than before.

Greece has been weakened, made poorer, and ceded its economic policy, and even much of its political power, to international banks, organizatons and increasingly Germany, seemingly tethered to them by their debt obligations. While much of the bailout money has gone to Greece’s creditors, including European Banks, the people have been forced to accept harsh austerity, basically paying these bailouts.The way I see it, Greece has been turned into a debt colony.

Hopefully this has shed more light on the Greek debt situation, especially the hypocrisy involved, economic damage done, and the political nature of it all. This has been a long post  so I’ll end it here, but in my next I’ll address what actually led us to the crisis, why the Euro has made it worse, real issues Greece must deal with and what would need to happen to resolve the issue long term.

 

 

References/Sources:

 

1: http://news.yahoo.com/greek-workers-walk-off-job-111705355.html

2: http://news.yahoo.com/greek-journalists-stage-walkout-ahead-121218040.html

3: http://www.tradingeconomics.com/greece/indicators

4: http://www.levyinstitute.org/pubs/rpr_may_15.pdf

5: http://www.bbc.com/news/world-europe-26917679

6: http://www.cnbc.com/2015/02/25/the-real-greek-tragedy-the-worlds-biggest-brain-drain.html

7: http://moneymorning.com/2015/03/25/how-much-does-greece-owe-4-charts-that-put-greek-debt-in-perspective/

8: http://www.theguardian.com/business/2015/jun/29/joseph-stiglitz-how-i-would-vote-in-the-greek-referendum

9: http://www.theguardian.com/commentisfree/2013/feb/27/greece-spain-helped-germany-recover

10: http://www.newstatesman.com/blogs/world-affairs/2012/05/exploding-myth-feckless-lazy-greeks

11: http://stats.oecd.org/Index.aspx?DataSetCode=ANHRS

12: http://www.theatlantic.com/business/archive/2012/05/why-does-the-laziest-country-in-europe-work-the-most/257792/

13: http://www.thenation.com/article/goldmans-greek-gambit/

14: http://www.independent.co.uk/news/business/analysis-and-features/what-price-the-new-democracy-goldman-sachs-conquers-europe-6264091.html

15: http://www.reuters.com/article/us-eurozone-greece-finmin-idUSKBN0N01DB20150409#Smjxqqk1VhIbuOHy.97

16: http://www.macropolis.gr/?i=portal.en.the-agora.2080

17: http://www.commondreams.org/views/2015/06/30/eurozone-profiteers-how-german-and-french-banks-helped-bankrupt-greece

 

2 weeks after Paris: How should civilized society defend itself?

This last Friday marked the 2nd week since the terrorist attack in Paris that killed 130 people, injured hundreds more, and shocked the world.

Terrorism is a complex, multifaceted issue that I hope to share my thoughts about over probably many posts. For now I just wanted to share my hope that international response, both foreign and domestic, is not overly reactionary.

I am not necessarily opposed to attacking the perpetrators of these disgusting acts, nor am I opposed to strengthening domestic security. In fact I always believed much of the money spent on Iraq could’ve been put to much better use here beefing up our security. However, we should not be overly zealous to go into war, nor should we turn away people, wall off our countries or cave to forces of xenophobia, racism and discrimination, (especially on religion).

For foreign policy, it’s best to say for now I feel there is a very cyclical nature to these acts. This barely scratches the surface of all there is too discuss, but I think it’s helpful to look at this chart recently put out by The Economist, noting global deaths from terrorism since 2000. Deaths from terrorism in Iraq were virtually non existent before 2003, then takes off and builds to 2007, tapering off afterwards. The global numbers follow this trend.

globalT

I find this quite intriguing, and it should be noted that while ISIS really took off in the aftermath of US withdrawal from Iraq, it existed, (with a different name) before 9/11 even happened, and conducted suicide attacks in Iraq as early as 2003. Despite the fact ISIS and Al Qaeda have a rivalous nature now, (what was an earlier form of) ISIS originally pledged allegiance to Al Qaeda.[1] Are both groups just separate arms of the same monster?

In the aftermath of the Paris attacks I saw comments about how we need to be angry not sad, and how this is a war on the West, or even civilization itself. That we must fight back, defend ourselves in this war. While I understand the knee jerk reaction, we, as civilized society, can’t proceed in such a manner. That is not what we’re supposed to do. The slow, often frustrating, rational and methodical methods we use were founded to hold down baser urges and to behave with thought and planning. To not behave based on anger, vengeance and impulse. It’s what makes a civilized society.

It also must be noted that terrorism wants a fight. They want to war with us. They believe we’re in a clash of civilizations. We should be very wary of potentially giving in to what they want.

This is also why we can’t abandon “Western ideals” on the home front. There have been a plethora of comments about how to proceed, including stopping all immigration and choosing refugees based on religion. I am not saying we can’t look into more stringent checks and security, including more international sharing of info, but stronger safeguards doesn’t mean closing off the borders. In fact, I feel if we are truly proud of our civilization we must uphold it, with even more support, when times are difficult.

This is why, difficult and painful as it may be, breaking the cycle, will probably have to be initiated by us. How? This can be discussed in a future time, but for now I simply say it will likely have to be us, civilized society, who starts the process of breaking the cycle, even if it’s not what feels right in the gut.

This is how civilization should defend itself.

 

 

References/Sources

1: http://www.vox.com/cards/things-about-isis-you-need-to-know/what-is-isis

http://www.economist.com/blogs/graphicdetail/2015/11/daily-chart-12

Starve the Beast: Still hungry after all these years

With the 2016 Presidential election primaries going on we’ve been hearing a lot of about how we need to cut government spending. Sometimes for ideological reasons, but often because we just can’t afford it anymore. The money isn’t there, the programs are unsustainable, the government debt is too high etc etc These lines are spoken by our Presidential candidates to our neighbors. I have no doubt most truly believe in fiscal responsibility and worry about the debt and sustainability of programs. These cuts may be painful, even unwanted, but something needs to be done.

The unfortunate truth is our current situation has been the result of a political strategy, a long term plan to force cuts to government programs that have long been targets of conservative ideologues. It’s called “Starve the Beast” and the goal is to rack up large deficits, using tax cuts, to justify the dismantling of government programs under the guise “There’s just no money”. Sound far fetched or conspiratorial? It’s not, and the proof is out there in the open.

The Cato Institute, a limited government think tank, has put out two reports criticizing starve the beast as ineffective policy[1][2]. Bruce Bartlett, a conservative historian, wrote an article in Forbes criticizing the policy, (who by the way said it’s a “completely bankrupt notion that belongs in the museum of discredited ideas, along with things like alchemy.”)[3] Clearly the strategy does exist. It’s not a modern tea party invention either.

Bartlett notes the first articulation of the idea came in 1978 by Alan Greenspan, (a stringent anti government devotee) who said to the Senate Finance Committee, “Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.” My emphasis added. This was quickly followed by support from conservative journalist George Will who said, “The focus of the fight to restrain government has shifted from limiting government spending to limiting government receipts,”and later Milton Friedman, (another fervent anti government adherent) chimed in with, “the only effective way to restrain government spending is by limiting government’s explicit tax revenue–just as a limited income is the only effective restraint on any individual’s or family’s spending.”[3]

In the 1980 Presidential debate Ronald Reagan said, “John tells us that first we’ve got to reduce spending before we can reduce taxes. Well, if you’ve got a kid that’s extravagant, you can lecture him all you want to about his extravagance. Or you can cut his allowance and achieve the same end much quicker.” [4]

So, starve the beast is very real and it’s not a new idea. Knowing this greatly aids understanding of Republican behavior since 1981, which is the next part of our story.

Reagan signed a large tax cut in ’81 but also greatly increased government spending, mainly defense spending. Cutting taxes and increasing spending, logic would dictate one result and sure enough under Reagan there were record deficits, a near tripling of the national debt[5] and our debt to GDP ratio rose from 30% to 50% As seen below this was not insignificant and started a longer upward climb.

reagendebt

 

I’ll address this more in another post, but it’s incorrect to place the blame on Congressional Democrats, and in fact Republican David Stockman, director of the Office of Management and Budget under Reagan, places much blame on the President himself, and said “That’s one of the mysteries of the time”[6] about why Reagan’s actions didn’t match his rhetoric.

Well, when you know about starve the beast it’s not a big mystery.

Then in 1990 a Democratic Congress passed PAYGO, which said all spending hikes/tax cuts must be offset with accompanying taxes hikes/spending cuts. Basically, maintain balanced budgets. In 1992 Bill Clinton ran on a platform of tackling the (Reagan) debt, and passed a budget that made cuts to spending, and increased taxes on the rich. Starting after 1990 the government budget leveled off and trended steadily towards upwards, going into surplus, the national debt leveled off, and it appeared we achieved fiscal restraint.

Enter George W Bush. After passing a $1.3 trillion tax cut by skirting PAYGO rules, in 2002 a Republican Congress let PAYGO expire, (they upheld it under Clinton) and then Bush with a Republican Congress passed more tax cuts, ramped up defense spending, passed a medicare expansion, made no cuts to domestic spending and in fact increased it.[7]

The result was obvious: Even larger record deficits, another huge swell in the national debt.

Fast forward to the 2009-2011 period. There was an incendiary outcry from conservatives/Republicans about how bad the government deficits/debt were and that we must reduce them. I heard this from lawmakers, the media, internet, classmates and friends. I was flabbergasted at the time. It was just under a Republican President and Congress that record deficits were racked up without a single peep, (except from Ron Paul) and never once was the question, “How will this be paid for?” asked. It’s of course no surprise why this happened: starve the beast.

Now the policy has reached it’s final stage: The push for massive cuts to government programs. There is no longer any pretense about it. In our last Presidential election, the Romney/Ryan platform, (which was Ryan’s “Path to Prosperity”) called for drastic cuts to medicare, medicaid and general gov spending. This is less draconian than his previous budget proposal “Roadmap for America” which called for massive cuts in medicare, medicaid, elimination of CHIP (health insurance for children in low income households) privatizing social security and an overall drop in spending to levels not seen since 1950.[8] A later Ryan proposal “cuts deep into spending on health care for the poor and some combination of education, infrastructure, research, public-safety, and low-income programs”and the article notes Ryan was “pushing these ideas in the late-’90s and early-2000s, too, when deficits were far less of a threat.”[9] Ryan, who is an Ayn Rand worshipper, clearly has an ideological motive, not budgetary.

Grover Norquist, a major influence on the Republican Party, has pushed since the 80s the policy of never ever supporting any tax increase. Norquist has famously stated his goal is to shrink government down to the size where it can be drowned in the bathtub, and that he wants the American we had “until Teddy Roosevelt, when the socialists took over.”[10] Yet again, clearly ideologically fueled.

These ideas are not new. It goes back to the New Deal which split the Republican Party: those who largely accepted the New Deal and those who didn’t. The former went on to dominate the party, winning the Presidential nomination every election from 1936-1976, except for 1964. The latter however was always there. Led first by Robert Taft the “Old Right” strove to halt the New Deal and ideally roll it back.  This carried on through Barry Goldwater, Reagan, the ’94 Republican Revolution, now Paul Ryan and the Tea Party. Goldwater brought military intervention, Reagan on brought social conservatism, each upsetting the previous wave, but all are united in a clear lineage of hoping to roll back government to before the New Deal.

While I have no doubt many pushers of tax cuts do believe it will boost the economy/is morally right, it can’t be denied that starve the beast has been a factor in pushing for them, especially from influential Republicans like Greenspan, Friedman, Reagan, Norquist, and Paul Ryan. It really is a brilliant strategy. 1: It makes cuts to government spending far more acceptable. Social Security has gone from the third rail of politics to mainstream debate, now that it’s “no longer affordable”. 2: It gives the Republicans an easier time governing. 3: It allows them to be the party of lower taxes, while saddling Democrats with the pain of “fixing” the mess and be labelled as tax hikers. 4: Tax cuts are always a popular notion, so it keeps the idea entrenched, especially when they favor the wealthy. 5: It draws in moderate, well meaning people who may not like it, but feel we need to get spending under control, and it may push more conservative, (but not extremely) farther than they may normally go.

So when you hear about how we need to cut programs, understand this budgetary situation was forced upon us, and has been driven by ideology. This isn’t saying we can’t ever touch government programs, just know the history that lead us here, and what motivated it. Democrats have been accomplices in all this. They passed PAYGO, spending cuts, accepted cuts to welfare, cuts on the wealthy in exchange for puny tax credits, budget sequestration and from the start of the Obama administration were eager to discuss a “grand bargain” and making changes to social security. It all stems from the belief of balanced budgets, and deficits as bad. While this post has addressed the politics behind deficits, in another post I’ll address the economics of deficits, and why we shouldn’t automatically hate them.

 

References/Sources:

1: http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2006/11/cj26n3-8.pdf

2: http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2009/11/cj29n3-7.pdf

3: http://www.forbes.com/2010/05/06/tax-cuts-republicans-starve-the-beast-columnists-bruce-bartlett.html

4: http://www.washingtonpost.com/wp-dyn/content/article/2006/05/07/AR2006050700924.html

5: https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo4.htm

6: https://reason.com/archives/2014/04/24/rand-paul-is-right-jimmy-carter-was-thri

7: https://www.cbo.gov/sites/default/files/111th-congress-2009-2010/reports/historicaltables_0.pdf

8: http://www.cbpp.org/research/the-ryan-budgets-radical-priorities

9: http://www.usnews.com/opinion/articles/2013/03/12/right-and-left-slams-paul-ryans-path-to-prosperity-budget

10: http://www.thenation.com/article/rolling-back-20th-century/

 

October ’15 Jobs Report: Good news, but recovery has just begun

The October 2015 jobs report has been released and there’s some good news.

Unemployment is down to 5%. 271,000 jobs were created that month with hiring happening “across the board”, more part time workers continue to find full time work, and wages which have been stagnant, if not falling, for most since 2009, were up in October and now are up 2.5% for the year. [1][2] This was a good report, and the slow but steady US recovery seems to be continuing. So much so, the Fed seems ready to start raising interest rates in December.

The Fed raises interest rates when they feel the economy is heating up, to keep inflation in check. Seems they plan to move gradually. John Williams of the San Francisco Fed says the moves would be early and gradual to avoid a “run up” of inflation, (that it’s better to move before inflation heats up), and if the economy weakens “We can stop raising rates” but also says “the economy is already near full employment”. [3] Clearly they feel the economy is getting to a strong point, but is the picture really so rosy?

As it’s been widely reported, a lot of the fall in unemployment since 2009 has come from people leaving the labor force. Let’s say there is a labor force of 100 people. 90 are employed, 10 are not. The unemployment rate is 10% Let’s say one of these unemployed people stops looking for a job, they are no longer “unemployed”. The labor force now has 99 people, with 90 working, 9 unemployed, leading to a new unemployment rate of 9.1% The number fell, despite no job creation.

Since 2008 the US labor force participation rate, (working age persons who are either working or looking for work) has fallen dramatically.

LFPR1

To get a bigger picture of how drastic the fall has been here’s the LFPR since 1948

LFPR2

We see here the fall in LFPR since the Great Recession has been massive. In fact as of October 2015 it stands at 62.4% the lowest number since 1977. More on this in another post, but for now I’ll just say despite the millions of jobs created since the crisis, millions have also left the labor force. This started to level off only in 2014.

What about inflation?

Though unemployment was down to 5% in October, inflation was just .2% and despite steadily falling unemployment through 2015 towards acceptable numbers, inflation has averaged .03% over the year so far. [4] However, do the rising wages mean inflation is coming soon?

The EPI put out this report noting 3.5 – 4% growth in nominal wages would be consistent with the Fed’s 2% inflation target, so until nominal wages are consistently rising in that 3.5 – 4% range, there’s not much inflation fear. We are nowhere near that range yet. [5]

EPI1

I wonder, given the drop in LFPR, if there is still a lot of “slack “in the labor market, so even if job growth became strong enough that more people started re entering the market, there’d still be plenty of people looking for jobs, more looking than are jobs available. If this is the case there’d be little inflationary pressure.

Is there reason to believe significant labor market slack exists?

Let’s look at the employment to population ratio.  “The employment-to-population ratio is the best measure of labor market conditions…”said Paul Ashworth, chief North American economist for Capital Economics, and “The ratio expresses more clearly how many people find working to be a ‘good or attractive deal,'” said Tyler Cowen, economist and director of the Mercatus Center at George Mason University.[6] Of course many working age people don’t want a job because they are in school, or retired. So let’s use the ratio for just ages 25-54. This will leave out college students, retirees, as well as those nearing retirement. This is a measure of the “prime” labor force. Here is the E-P Ratio, 25-54 since 2008. As we see there is still a lot missing since 2008, and is currently at a level not seen since 1986 (seen in the 2nd graph). I believe this shows significant slack exists in the labor market still.

25-54 LF

25-54 LF2

The Fed may think the recovery is nearing the point of heating up, or heading there soon, I’d say the recovery has actually just barely begun.

 

References/Sources

1: http://money.cnn.com/2015/11/06/news/economy/jobs-report-october/

2: http://www.bls.gov/news.release/archives/empsit_11062015.pdf

3: http://www.usatoday.com/story/money/markets/2015/11/10/san-francisco-federal-reserve-john-williams-interest-rates-economy/75538364/

4: http://www.usinflationcalculator.com/inflation/historical-inflation-rates/

5: http://www.epi.org/nominal-wage-tracker/

6: http://money.cnn.com/2012/10/18/news/economy/other-unemployment-rate/index.html

 

 

 

Welcome to “The World at Large”

Hello everyone!

My name is Brian and this is my blog, The World at Large.

This is going to be an economics focused blog, but will touch on various topics like politics, world events, history and anything else that comes to my mind…could be music to books. I will try to keep things economics related, or at least tinged, since that is the intent of this blog, but sometimes this may not be the case. I will strive to keep political “social issues” economics related, otherwise it won’t be here.

So, a few quick things to get this started.

I got the name when deciding I would shift from just a purely economics blog, to…well, the world at large. This reminded me of the Modest Mouse song, and it’s lyrics about drifting (“If the world’s at large why should I remain?”) made me think about the huge body of economic work out there, and how much of it is marginalized, forgotten about, unknown or ignored by mainstream economics. I hope to provide a fuller view of things.

So who am I? I have a Bachelor’s in Political Science, and have always had a casual interest in economics, which really took off in 2009 courtesy of the Great Recession. I was in college at the time and already far along with my major so never really gave economics a thought to pursue, outside of a few classes. So I read a lot on my own time, books and online. Nothing with reality really seemed to “sync up” with what I was taught and read, so began my journey.

My economic views (and thus to a decent extent political/governmental views) have covered both mainstream left and right, (Krugman to Friedman) Austrian, and now Post-Keynesian…this school of thought being what I feel is correct. This will be greatly expanded on over time.

I have taken several economics classes: Micro and Macro at the intermediate levels, labor economics, money & banking, trade as well as international political economy. I’d say I’m fairly well read in economics. I have read textbooks by Mankiw and Mishkin, articles by Krugman, works by Friedman, works by Austrians (Mises, Rothbard, Hayek) and numerous articles, blog posts and reports from libertarian institutes (Cato) to leftist (EPI, PERI, Levy) and in between. It’s amazing the universe of information available to us today thanks to the internet.

My favorite economists are:

Mainstream: Joe Stiglitz, Paul Krugman, Thomas Piketty, Robert Shiller

Non mainstream: L Randall Wray, Steve Keen, Robert Pollin, Dean Baker

Historical: J.M. Keynes, Irving Fisher, Hyman Minsky, Joan Robinson

Hope you enjoy!