Sunday, May 08, 2016

How We Arrived at Trump v Clinton

The recent London mayoral election, in which Zac Goldsmith lost to Sadiq Khan, reminded me of his father, Sir James Goldsmith, who fought against economic globalization in the early 1990s.  There's a famous debate between Goldsmith and Bill Clinton's economic advisor Laura Tyson which took place in 1994 on Charley Rose's interview show -- Goldsmith, Tyson, and Rose discuss expanding economic globalization.

As I see it, Goldsmith warned of the problems we faced and Trump versus Hillary Clinton follows from this discussion as night follows day.  Tyson presented the neoliberal Clintonian position that free trade is win-win, while Goldsmith warned that it would be win for the rich capitalists taking advantage of lower cost laber, while labor would lose due to third world competition.  Twenty-two years labor, Clinton, supported by Nobel prize winning economist Paul Krugman, represents the status quo in the dysfunctional society predicted by Goldsmith.

In site of several asset bubbles and one severe recession, the conventional wisdom today remains much the same as it was.  Obama has been working on two new "free trade treaties", the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.

The following graph shows real household income in the United States, a representative measure of economic well-being.  The General Agreement on Tariffs and Trade (GATT) was expanded in 1995, becoming the World Trade Organization.  Goldsmith warned that this expansion would result in a lose-lose situation for industrialized and less developed economies.  Since China joined the WTO in 2001, this measure of income has decreased significantly.

More reading on the subject:
Why Voters Will Stay Angry
A Progressive Logic of Trade

Tuesday, March 15, 2016

A Litany of Liberal Economic Confusion in the 21st Century

As a liberal, I've been of the opinion that the Republicans / conservatives have been wildly wrong in terms of the economy since the year 2000.  Only recently have I come to feel that the Democratic / liberal conventional wisdom has been similarly clueless (although not to the same degree). Here is a timeline of Democratic economic thinking in support of this observation.

Early 2000s:  Bush Tax Cuts and Wars 

Just as Democrats and centrist Republicans in 1980 predicted economic disaster due to Reagan's voodoo economics, the Democratics in the early 2000s were sure that Bush's Tax Cuts and profligate spending would cause a major economic dislocation.  As Paul Krugman put it in 2003:
There is now a huge structural gap — that is, a gap that won't go away even if the economy recovers — between U.S. spending and revenue. For the time being, borrowing can fill that gap. But eventually there must be either a large tax increase or major cuts in popular programs. If our political system can't bring itself to choose one alternative or the other — and so far the commander in chief refuses even to admit that we have a problem — we will eventually face a nasty financial crisis. 
The crisis won't come immediately. For a few years, America will still be able to borrow freely, simply because lenders assume that things will somehow work out. 
But at a certain point we'll have a Wile E. Coyote moment. For those not familiar with the Road Runner cartoons, Mr. Coyote had a habit of running off cliffs and taking several steps on thin air before noticing that there was nothing underneath his feet. Only then would he plunge. 
What will that plunge look like? It will certainly involve a sharp fall in the dollar and a sharp rise in interest rates. In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos. 
[Paul Krugman, New York Times, 10/14/2003 http://www.pkarchive.org/column/101403.html ]
That turned about to be 180° wrong as Krugman himself acknowledged in 2012:  
Fighting Fiscal Phantoms.  As I described here, that was a complete turnaround, without ever acknowledging he was wrong in the first place.  With Krugman as our economic guru, no wonder so many liberals are confused.

2008:  Housing Bubble Leads to Financial Crisis 

The leading Democrats, including Barack Obama and Hillary Clinton advisors, were clueless going into the great financial meltdown and recession of 2008.  Austan Goolsbee, who was to become Chairman of the Council of Economic Advisers under Obama, praised subprime housing loans in 2007:  ‘Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded.  Notice the scare quotes around the word irresponsible.   My neighborhood in Detroit was one of many devastated by extremely high levels of foreclosures and bank-owned, empty housing  Of course, the entire country was plunged into recession and saved from worse only by trillion dollar government bailouts to private financial institutions.

2009:  Stimulus Package

The fiscal stimulus passed in 2009 over the objection of almost all Republican Congresspersons.  The bill was scaled back considerably to get the support of a few Republicans needed to break  a filibuster in the Senate.  While this was the probably the best that the Democrats could have accomplished given the political landscape (short of the reconciliation tactic later used to pass ObamaCare), the Democratic leadership never made the case for a more adequate response.  Consequently, the Democrats were punished politically, suffering massive defeats in both houses of Congress in the 2010 midterm elections, and losing control of many state governments.

2013-2015:   Recovery?

As Obama's second term wore on, the leading liberal / Democratic economists began to proclaim recovery.  However, it soon had to be acknowledged that the "recovery" corresponded to one of the slowest periods of growth since World War II.  Moreover, the recovery was skewed to the wealthy, and wage stagnation has been a fact of life for the middle class.  Obama appointed Janet Yellen to take over as head of the Federal Reserve, giving Democrats even greater ownership of the economic status quo.  

The following chart (source David Stockman) shows how the Fed has consistently overestimated growth:

Thus, for example, the Fed in January 2011 was predicting 4% growth for 2013.  The actual growth, as shown in the Dec-13 row was 2.3% (since revised down again to 1.5%).  The same pattern occurs for every year in the table.

2015-2016:  Reduced Potential

The liberal / Democratic conventional wisdom has now come to grips with the fact that they've been continually over-optimistic.  The result has been to lower expectations as to what is possible.  This is shown in the diagram above in the "Long Run" column.  The long run growth potential of the economy was thought to be an annual rate of 2.7% in 2011 to a rate of 2.15% in 2015.  

Kevin Drum in 2012 claimed that 12 million new jobs is the minimum that should be expected over the next presidential term, and that even Romney would have no trouble hitting that.  Now that we're on pace for considerably less than that, he seems to be part of the new consensus that we're doing just fine, given our reduced potential.

Liberal Democrat at Bill McBride (at the popular Calculated Risk blog) says that 2% is the new 4%

This is nonsense, in my opinion.  Bernie Sanders' proposals would put a lot more disposable income into the hands of the lower and middle classses, and they would spend it, thus increasing growth.  Perhaps we could get annual growth back to the 5%+ of the voodoo-based Reagan era -- bouncing back from a severe recession, as we are now trying to do.

The Future

U.S. economic growth has slowed dramatically over the last 50 years:

12 04 28 10 Year
John Ross ]

The combination of dramatically slower growth and "ownership society" benefits does not bode well for the younger amongst us.  

Thursday, March 10, 2016

Untrustworthy Hillary

Hillary's bogus criticisms of Sanders undermine her credibility.  A few examples:
  • She claims that she supported the auto industry and Bernie didn't.  In fact, she was referring to TARP (a Wall Street bailout).
  • She claims that the Koch brothers support Sanders.
These claims don't pass the smell test.  I support Sanders because I like his policy proposals.  Hillary also impressed me by seeming to embrace similar proposals. but the longer this campaign goes on, the more I am noticing that she is, in fact, trying to trick us.  She is out of touch with reality if she thinks she can credibly outflank Bernie from the left.

There is a fundamental dishonesty at the heart of Hillary's campaign.  She is a centrist Democrat in the mold of Bill Clinton and Barack Obama, pretending to be anti-Wall Street.  She is in favor of working with sympathetic elements on Wall Street and in the business community.  Clinton and Obama have had some successes with this approach.  The Clinton and Sanders administrations have relied on Wall Street from Robert Rubin, Clinton's Secretary of the Treasury and former Goldman Sachs and Citigroup chair, to Jack Lew, the current Secretary of the Treasury, and former COO at Citigroup.   This is a legacy she could honestly run on, but she's attempting the opposite.

In my opinion, the financial deregulation that Robert Rubin engineered in the late 1990s was a really, really bad idea.  This fact is more or less universally acknowledged, but not something that the Clinton team has come to terms with.  Bernie's campaign is pressing this issue in a similar manner to the way the Trump campaign is pressing the folly of the Iraq War in Republican discourse.

For Hillary to run an honest campaign, she would have to promote her ties to Wall Street as an advantage, something the electorate does not agree with.  Or else, she would have to repudiate much of her legacy with the Clinton and Obama adminstrations which would undermine her Democratic base of support.  She's in a no-win situation.

Kevin Drum makes the point that Hillary has been subject to decades of abuse, and, perhaps as a result, is not very direct in communicating her stance on the issues.  But there are good reasons that straightforward communications do not come easily at this point in her career.  

Saturday, February 27, 2016

Bernie Sanders for the Economy, Part 2

Bernie Sanders for the Economy, Part 2

With regard to Democratic establishment economists who continue to say that Sanders' plans are unrealistic, I have three arguments in favor of Sanders:
  1. The Democratic economists have a poor track record in making economic predictions.
  2. Most of Sanders proposals have been succcessfully implemented in developed nations around the world. 
  3. Young people have good reason to support Sanders' economic proposals.

Democratic economists have a poor track record in making economic predictions.

  • Democrats in 1980 criticized Reaganomics as unrealistic because of "supply side economics" and consequent budget deficits.  Budget deficits have not been a problem since.  The real problem with Reaganomics was increasing income inequality, something the Democratic economic establishment missed at the time and continues to underplay.  
  • Paul Krugman became the foremost spokesman for Democratic economists, yet has been wildly off the mark with regard to the issue of government deficits.  See Paul Krugman in 2003 predicts the exact opposite of what has taken place seen then.  Krugman has since changed his position 180 degrees with regard to the dangers of too much government spending, but remains attached to the discredited theories which got him to the wrong position in the first place.
  • Austan Goolsbe in 2007 praised subprime housing loans, just as the subprime housing loan crisis was evolving into the deepest recession since the 1930s.
  • Mainstream economic forecasting around the world has been consistently overoptimistic about economic growth.  Inflation has consistently come in below expectations.  Yet Democratic economists continue to give the underlying economic models credibility.  
  • When forecasts have proven wrong, Democratic economists have responded by lowering estimates of what is potentially achievable.  As the Romers say,
    Even very generous estimates of the amount of slack still present in the American economy would not be enough to accommodate demand-driven growth of anything near what Friedman is estimating. As a result, inflation would soar and monetary policy would swing strongly to counteract them.
    Friedman predicts growth similar to that achieved during the Reagan Administration, and the Romers say this is impossible.

Most of Sanders proposals have been succcessfully implemented in developed nations around the world.

Health Care Financing:  It's widely known that every developed country has government mandated universal health care, with comparable or better results than the U.S., and at a fraction of the cost and administrative complexity.

Minimum Wage:  Sanders minimum wage proposal ($15/hour) is less than the actual minimum in other developed countries such as Australia.  

Higher Education:  College is much more heavily subsidized in other developed countries, and much more affordable.   For example, college is free in Germany.

Young people have good reason to support Sanders' economic proposals.

Middle class is much less affordable than it used to be.  Pensions are no longer guaranteed, health care involves much higher out-of-pocket payments, education is more expensive.  Overall, the trend is to get people in debt when they are young, and to let them spend their lives in that state.  We can do better than this, and have in the not too distant past, and most other countries do better today.

Read more »

Saturday, February 20, 2016

Bernie Sanders for the Economy

Status Quo Panic

As a supporter of Bernie Sanders, I was upset to hear, a few days ago, of a flurry of panicky articles by elite Democratic economists criticizing Bernie Sanders' ecconomic plans:

I have very much wanted to look into this and respond, and today I have a bit of time to do this.

I am overjoyed to see that one of my favorite economists, Jamie Galbraith, has already responded with an open response to the CEA Chairs.  And Galbraith's response is typically brilliant, with wit and wisdom.

Furthermore, I found that Kevin Drum has already recanted:
A severely critical letter from former CEA chairs ... roasted Friedman's study without doing any actual analysis of his forecasts... And it turns out that...Friedman isn't projecting anything wildly out of the ordinary after all... I set out to take another whack at these projections, and I didn't really get what I expected. [On Second Thought, Maybe Bernie Sanders' Growth Claims Aren't As Crazy As I Thought]
Kudos to Drum for following up and correcting the record.   Don't expect any such admission of premature judgment by Krugman, who is notorious for never acknowledging when he is wrong.

As for the substance of the Sanders economic debate, I'll just quote Galbraith:
So, let's first ask whether an economic growth rate, as projected, of 5.3 percent per year is, as you claim, “grandiose.” There are not many ambitious experiments in economic policy with which to compare it, so let's go back to the Reagan years. What was the actual average real growth rate in 1983, 1984, and 1985, following the enactment of the Reagan tax cuts in 1981? Just under 5.4 percent. That's a point of history, like it or not...
When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result...
Paul (Krugman) relies on you (the former CEA chairs) to impugn an economist with far less reach, whose work is far more careful, in point of fact, than your casual dismissal of it. He and you also imply that Professor Friedman did his work for an unprofessional motive. But let me point out, in case you missed it, that Professor Friedman is a political supporter of Secretary Clinton. His motives are, on the face of it, not political. 
Unfortunately, this episode fits a pattern of panicky status quo reaction to the Sanders phenomenon.  In addition, there have been Clinton attacks on Sanders for having temerity to criticize Obama at times over the past 8 years, and on caucus eve, Clinton’s allies warn Nevada Latinos to beware of Bernie Sanders.  

Larger Significance

I strongly believe, with regard to the economy,  that the Democratic status quo is better than the Republican alternative.  But the Democratic status quo is badly flawed, and it doesn't help the team to pretend otherwise.  Sanders' proposals are realistic in my opinion, and this becomes clearer the more one examines attacks such as the one described here.  

Read more »

Thursday, February 11, 2016

Loser Loop

Tuesday, February 02, 2016

One Plausible Scenario in which Trump Wins

I expect Trump to win the Republican nomination (he's got a HUGE lead), but until this morning had not seriously considered the possibility that he might win the presidency.  After all, polling shows him to be pretty much unelectable:
We’ve got an unpopular set of presidential candidates this year– Bernie Sanders is the only candidate in either party with a net-positive favorability rating — but Trump is the most unpopular of all. His favorability rating is 33 percent, as compared with an unfavorable rating of 58 percent, for a net rating of -25 percentage points. By comparison Hillary Clinton, whose favorability ratings are notoriously poor, has a 42 percent favorable rating against a 50 percent unfavorable rating, for a net of -8 points. [fivethirtyeight.com]
While the book I am currently reading may be affecting my judgment, it occurs to me that Trump's favorability, as an extreme outsider, could rise dramatically if the U.S. economy slump dramatically.  Suppose, for example, that Hillary wins the Dem nomination and then the economy crashes in the summer or fall, as it did before the 2008 election.  In that case Trump the extreme outsider looks much better against Hillary the veteran insider.

Where the book I'm reading (Railroading Economics) comes into play is in its description of the Great Depression.  I see a lot of similarities between the economy in the 1920's and that of the current U.S. / global economy. Here are a few:
  1. Increasing wealth inequality leading to more investment and less consumption (as a proportion of total income)
  2. Overinvestment leading to decreased returns on productive investment and increasing amounts of questionable financial investment.
    1. stock markets in bubble territory -- now at 89th percentile, comparable to 1929, 2000, and 2007, and propped up by loans financing stock buybacks.
    2. junk bonds of questionable value
  3. An establishment that considers a depression pretty much impossible, and tries to maintain prosperity with the power of positive thinking as opposed to realistic action.
As was the case in 2008 when the U.S. / world plunged into the Great Recession, the overwhelming majority of economists, business, and political leaders view a recession in 2016 as a remote possibility.  I have been putting my money against every mainstream economist and beating them all in recent years.  Please see:
The latest I've seen is that less than 5% of economists see a greater than 50% chance of recession over the next year.  [Financial Times survey of 51 economists]

In the late 1920s and early 1930s, there was a similar sanguinity regarding the possibility of the economy falling into depression.  The 1920s was an era of welfare capitalism, and the conventional wisdom was that a depression would not happen because corporate America wouldn't let it.  This is what I learned from reading Railroading Economics (linked above),
Hoover  believed that the provision of adequate information would suffice for enlightened business leaders to ward off business cycles. (page 165)
The Hoover administration became apostles of the...doctrine that high wages are a guarantee and an essential of prosperity.  At the beginning of the depression, Hoover pledged industry not to cut wages, and for a long time large-scale industry adhered to this pledge.
In today's economy, employers have been reluctant to lay off employees, despite the sluggish economy, shrinking profits, and soaring inventory levels (although this is not due to presidential jawboning).
During the Depression...the major welfare capitalists quickly realized that the collapse was overwhelming their ability to maintain their commitment to their expressed ideals...The welfare capitalists saw the momentum of the Depression build up.  In the face of these pressures, their attempts at carrying out the supposed mandate of welfare capitalism vanished.  By the fall of 1931 major corporate employers could no longer refrain from aggressively cutting wages.  When push came to shove, unrelenting market forces compelled major firms to renounce all pretenses to the ideals of welfare capitalism. [page 160]
Ultimately welfare capitalism was doomed to failure from the very beginning.  Business was incapable of overcoming the tendency of markets to careen out of control.  Once the Great Depression struck, people realized that the rhetoric of welfare capitalism was hollow.  Most people understood that they could not count on business to protect them from harsh market forces--a lesson that has continued to fade over the subsequent decades.  [page 168] 
Every morning when I watch Bloomberg TV, I am bombarded by optimistic businesspersons and commentators.   Mainstream Republicans and Democrats alike are certain that the economy is doing just fine.  As noted elsewhere in this blog, I believe the facts point otherwise.  And apparently, I am not alone.  Just as in the early 1930s, fascist and socialist politicians are popular as people crave an alternative to the status quo.

Railroading Economics explains that the welfare capitalism of the 1920s was an outgrowth of the successful combination of government and business in World War I, and that fascism had a somewhat similar perspective:
Welfare capitalism had the capacity to transform itself into fascism without too much difficulty.  It already contained a heavy measure of nationalism and racism.  It was more than willing to cede more power to the state, provided that the state would act in the interest of the welfare capitalists.  [page 164]
The similarities to the Republican party of recent years and the Trump phenomenon are clear.  If the economy does slip dramatically this year, then the prospects for the fascists and socialists will be dramatically improved.

I'm a big fan of Bernie Sanders and his brand of democratic socialism.  On the other hand, Trump is just the current incarnation of a strong fascist undercurrent running through the electorate.  The good news is that Sanders and his socialist platform are far more popular among today's youth.   We older Democrats would be wise to consider momentum for change.  As John Cassidy notes today in the New Yorker with reference to Bernie Sanders' overwhelming success amongst the younger voters in Iowa:
It is often easier to inspire people, particularly young people, with an uplifting theme than with a resumé. This, of course, was also the problem that Clinton faced in 2008, when Obama ran on a message of hope and the slogan “Yes, we can.” In recent weeks, the Clinton campaign’s response to the Sanders and his promises of ambitious policy actions has sometimes seemed to be “No, we can’t.” In Iowa, at least, that didn’t prove to be a winning message.
I don't actually think that this is fair to Clinton.  But I see Sanders' policy proposals as the more realistic response to the current precarious economic and political situation.  Clinton is offering more of the same, which is certainly better than a descent into fascism, but possibly insufficient to prevent that from happening.   If we avoid depression, Sanders will beat Trump handily given Trumps' limited support at present.  This is my opinion and receives support from polls such as the one referenced at the beginning of this post.  If the economy collapses, Sanders is our best bet to defeat the fascists as he presents a realistic and hopeful alternative to the status quo.