Republicans are Cracking Up

From the NY Times:

WASHINGTON — The House Republican leader on Sunday flatly rejected a short-term, bipartisan Senate measure to extend a payroll tax break and unemployment insurance, setting the stage for a bitter year-end Congressional collision and the potential loss of benefits for millions of Americans...The surprising setback threatened the holiday plans of lawmakers and President Obama, deeply embarrassed Republican leaders in both chambers and raised the specter of a Jan. 1 tax increase that economists have warned could set back the already fragile economic recovery...

Senator Mitch McConnell of Kentucky, the minority leader who, like scores of his colleagues, voted for the Senate-brokered agreement to extend the tax cut temporarily, retreated from the measure Sunday, throwing his support behind Mr. Boehner’s idea to come up with a yearlong extension, which was the original goal of Mr. Obama and Senate Democrats.

I'm pretty sure this is a sign that the Republicans are falling apart. Mittens will be probably be our next president, but that will be their last hurrah...

democratic Woes in the U.S. and Europe

Predictably, the Great Recession is taking its toll on democracy in the U.S. and Europe. I've recently read a couple of well written columns on this, and have a few thoughts to add in light of the Gingrich revival. Here is the short version:

1. Class war is on in the U.S.
   
2. Unpopular technocrats are running Europe.
   
3. The G.O.P. has been playing with fire for some time now and it's finally caught up with them.
   
4. The national and international politic mood has changed dramatically, and consequent political storms are headed our way.
   

We'll start with Frank Rich in The Class War Has Begun and in a follow up interview.

Just in time for election season, Obama has recovered his populist rhetoric (if not populism itself) and will say the right things about Wall Street, about that “frustration” out there, about the modest reforms of Dodd-Frank, and about millionaires who don’t pay their fair share of taxes. It’s not clear if anyone believes it, including him. Having been a bystander to history when the tea party harvested populist rage during the summer of 2009, he may have a tough time co-opting Occupy Wall Street now to plug the so-called enthusiasm gap in his base...

Despite all the chatter to the contrary, Obama is so far outdrawing all the GOP candidates combined in Wall Street contributions. His best hope is that that fact is blurred by Romney, the plutocrat from central casting...

Elections are supposed to resolve conflicts in a great democracy, but our next one will not. The elites will face off against the elites to a standoff, and the issues animating the class war in both parties won’t even be on the table.

The two powerful forces that extricated America from the Great Depression—the courageous leadership and reformist zeal of Roosevelt, the mobilization for World War II—are not on offer this time. Our class war will rage on without winners indefinitely, with all sides stewing in their own juices, until—when? No one knows. The reckoning with capitalism’s failures over the past three decades, both in America and the globe beyond, may well be on hold until the top one percent becomes persuaded that its own economic fate is tied to the other 99 percent’s. Which is to say things may have to get worse before they get better.

Though the Bonus Army was driven out of Washington in the similarly fraught election year of 1932, the newsreels they left behind turned out to be previews of coming attractions for the long decade still to come...

I wouldn't want to be an incumbent in either party (except, of course, in all those gerrymandered House districts — part of our democracy's problem). I am wary of predictions, but my guess is that there will be a political stalemate until one of the following: an unexpected speedy recovery on the jobs and housing fronts; an external existential threat to the country (see Depression and WWII); the emergence of a reformist populist leader with enormous public support. All unlikely at least in the near future; we may stew in our anger and this listless economy for quite some time.

And here's Paul Krugman from 12/11/2011 on Depression and Democracy:

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

Let’s talk, in particular, about what’s happening in Europe — not because all is well with America, but because the gravity of European political developments isn’t widely understood.

First of all, the crisis of the euro is killing the European dream. The shared currency, which was supposed to bind nations together, has instead created an atmosphere of bitter acrimony.

Specifically, demands for ever-harsher austerity, with no offsetting effort to foster growth, have done double damage. They have failed as economic policy, worsening unemployment without restoring confidence; a Europe-wide recession now looks likely even if the immediate threat of financial crisis is contained. And they have created immense anger, with many Europeans furious at what is perceived, fairly or unfairly (or actually a bit of both), as a heavy-handed exercise of German power.

Nobody familiar with Europe’s history can look at this resurgence of hostility without feeling a shiver. Yet there may be worse things happening.

Right-wing populists are on the rise from Austria, where the Freedom Party (whose leader used to have neo-Nazi connections) runs neck-and-neck in the polls with established parties, to Finland, where the anti-immigrant True Finns party had a strong electoral showing last April. And these are rich countries whose economies have held up fairly well. Matters look even more ominous in the poorer nations of Central and Eastern Europe.

Last month the European Bank for Reconstruction and Development documented a sharp drop in public support for democracy in the “new E.U.” countries, the nations that joined the European Union after the fall of the Berlin Wall. Not surprisingly, the loss of faith in democracy has been greatest in the countries that suffered the deepest economic slumps.

And in at least one nation, Hungary, democratic institutions are being undermined as we speak... this amounts to the re-establishment of authoritarian rule, under a paper-thin veneer of democracy, in the heart of Europe. And it’s a sample of what may happen much more widely if this depression continues...

The European Union missed the chance to head off the power grab at the start — in part because the new Constitution was rammed through while Hungary held the Union’s rotating presidency. It will be much harder to reverse the slide now. Yet Europe’s leaders had better try, or risk losing everything they stand for.

And they also need to rethink their failing economic policies. If they don’t, there will be more backsliding on democracy — and the breakup of the euro may be the least of their worries.

In the US, The Republicans have been playing with fire, and the old guard may be close to panic. Here's David Brooks last week in the NY Times on The Gingrich Tragedy:

As nearly everyone who has ever worked with Gingrich knows, he would severely damage conservatism and the Republican Party if nominated.

And here's former chief advisor (2000-2006) to President George W. Bush, Michael Gerson, in the Washington Post on Newt Gingrich’s lack of discipline:

As speaker of the House, he conducted an affair during the impeachment of a president for lying under oath about an affair. It helped undermine a movement Gingrich had helped to build.

And this indiscipline was not an aberration. It indicated an impulsiveness found elsewhere in his career. Gingrich has a history of making serious charges that turn out to be self-indictments — witness his recent attack on congressional advocates for Freddie Mac, despite having been one of its well-paid consultants. Gingrich’s language is often intemperate. He is seized by temporary enthusiasms. He combines absolute certainty in any given moment with continual reinvention over time.

Peggy Noonan in the Wall Street Journal -- Gingrich Is Inspiring—and Disturbing:

Former New Hampshire governor and George H.W. Bush chief of staff John Sununu told The Wall Street Journal this week: "Listen to just about anyone who worked alongside Gingrich and you will hear that he's inconsistent, erratic, untrustworthy and unprincipled." In a conference call Thursday, Jim Talent, who served with Mr. Gingrich in the House from 1993 through 1999, said, "He's not reliable as a leader." Sen. Tom Coburn, a member of the House class of 1994, called the former speaker's leadership "lacking," and according to a local press report, he told Oklahoma constituents last year that Mr. Gingrich was "the last person I'd vote for for president of the United States."

Who could predict the rise of a right wing demagogue in difficult economic times?

At any rate, here's (liberal) Nate Silver in the NY Times:

Republicans are dangerously close to having none of their candidates be acceptable to rank-and-file voters and the party establishment. It’s not clear what happens when this is the case; there is no good precedent for it. But since finding a nominee who is broadly acceptable to different party constituencies is the foremost goal of any party during its nomination process, it seems possible that Republicans might begin to look elsewhere...

One possibility — probably the most likely one — is that Mr. Gingrich wins South Carolina, wins Florida and holds on to win the Republican nomination.

But Mr. Gingrich might nevertheless be considered an unacceptable choice by much of the party establishment. That would put us in uncharted waters... a brokered convention is plausible...

Liberal John Cole sums things up nicely at Balloon Juice:

The thing to remember about the chaos ensuing in the GOP primaries, where each week a different candidate is the new new savior before publicly shitting the bed, is that this is all the fault of the Republican party itself. They allowed the party to create this alternate reality about, well, everything that happened the last decade. They are the ones who encouraged their party to believe that a center-left Democrat is actually an America hating socialists. They are the ones who made this mess, so when they are all horrified when each week a different candidate looks the fool by pandering to the base, remember, they are the ones who encouraged the base to think all this crazy shit.

Whew!

The mood of the country has shifted. The Republican base is no longer enamored of mega-rich establishment figures such as George W. Bush and Mitt Romney. They want red meat. The Occupy movement struck a chord with both the left and right, and the situation is Europe is as dire as it is here in the States.

Seen in the current light, Obama is a compelling figure for 2012 -- a centrist figure who might be able to hold things together. However, if Romney survives the Gingrich onslaught, which I believe he will given unanimous support for his candidacy by the GOP establishment, then we'll probably see the Republicans close ranks and successfully demonize Obama once more. The 2012 presidential election will then play out as elite vs elite as suggested by Rich. But the stage will be set for further disruption of the status quo by insurgents from the left and right, at home and abroad. Fasten your seatbelts...

Sample Blog Posting

I am with my friend Oumar at the Sierra Literacy Center demonstrating the blogging...

Here is a sample link to another blog posting.

Fundamental Issues and Symptoms

Many people are worried about the federal budget deficit, and these worries have widely been conflated with worries about our trade deficit. The result is widespread confusion, amongst our political and economic elite as well as the unwashed masses.

(As I write this, a gold commercial (with an end times subtext) is playing on MSNBC. Both right and left have been bullish on gold in recent years. This is symptomatic of the issues I am discussing.)

My take is that the currencies of industrially developed nations, including especially the United States, are grossly overvalued. This basic fact is driving everything else.

I lived in the Philippines from 1977-1979, and was figuratively clubbed over the head with the enormous disparity in the relative values of the U.S. dollar and the Philippine peso. One could live like a king in the Philippines on the income of a poverty-stricken American. Middle class Filipinos, of comparable intelligence with middle class Americans, would earn 1/10 the salary. No doubt there are logical historical explanations for such disparity, but going forward it's not surprising that there is a narrowing of the income gap, as globalization facilitates international diversification, outsourcing, and migration of labor and capital.

In an ideal free market world, the global economy would quickly adapt to globalization by lowering the value of the U.S. dollar. But of course, in the real world, there is economic friction (resistance to change). The U.S. dollar remains overvalued, in spite of an enormous trade deficit, as developing nations undervalue their currencies in the mercantilist tradition. The U.S. government enables the mercantilist policies of developing nations by running large fiscal deficits, which keeps U.S. consumption strong in the face of reduced private sector income.

The statistical manifestations of the scenes described above are large trade and budget deficits. The trade deficit is rightly seen to be endogenous. That is, the trade deficit is not the result of a single government policy. Rather, it is the market determined product of numerous factors, including the imbalance inherent in currency valuation.

By contrast, the fiscal budget deficit is seen as something that is directly under the control of the federal government. For wont of a more convenient target, the budget deficit is fingered as the culprit for the problems stemming from the initial imbalance in currency values. In the sense that the budget deficit enables the trade deficit, there is a germ of truth in this. But the preponderance of the truth lies in the fact that the former wage disparities are not sustainable in a global economy.

With respect to the current hysteria in the U.S. political zeitgeist, the emphasis on the fiscal deficit is clearly misplaced. The fiscal deficit is keeping our heads above water as our international competitiveness diminishes. Without a huge fiscal deficit, the U.S. economy would be in deep depression. Many argue that we should let that happen, so that the necessary adjustments will begin at once. I am sympathetic to that position, but also sympathetic to the plight of Americans who would be devasted by a deep depression.

An informed analysis would recognize that the fundamental problem with the U.S. economy is our overvalued currency, and would recognize that the budget deficit is a symptom rather than a cause of our misfortunes. Addressing the budget deficit will not cure the problem; rather it will cause more misery and then force us to address the root cause...

I Like Ed Schultz

The MSNBC prime time hosts are all winners, in my opinion. Uygur, O'Donnell, Maddow, Schultz and even Matthews are credible, in contrast to the conventional wisdom which likens them to Fox hacks...

And Still More

With regard to the Volcker recession in the early '80s, this was clearly a case where monetary policy did make a difference, albeit not one that we would want to repeat. Randall Wray puts this incident in perspective:

Milton Friedman played the biggest role in promoting the Fed as the all-powerful Wizard of Oz, spinning dials and controlling the money supply which then determines output and employment. However (according to Friedman), the Fed is not to be trusted, hence, should be constrained by a constant-rate-of-growth-of-money-supply rule. This was finally tried in the disastrous early 1980s great monetarist experiment run by Fed Chairman Paul Volcker (simultaneously attempted in Thatcher’s UK). I say disastrous because it wiped out half of our thrifts (home mortgage lenders-but not before helping to set off a wave of fraud that was the subject of Bill Black’s book). By the mid-1980s the Fed had given up money targets, and had also abandoned the Friedmanian myth that money and output are closely correlated-with money driving output.

In truth, central bank policy has always determined the overnight interbank lending rate (the fed funds rate in the US). Leaving to the side regulatory and supervisory power, that really is all the central bank does. There is no evidence that changing the overnight interest rate (within the usual range) has any significant or predictable impact on the economy. It truly is a Wizard of Oz-if one recalls that the Wizard behind the curtain actually had no power at all. What is unfortunate is that for a very long time policymakers believed that economic policy could be left to the “omnipotent” Fed-which means that the truly powerful fiscal policy has been neglected.

More on Monetary Policy

Here's why I say the conventional wisdom regarding monetary policy is absurd. We've had 30 years of loose monetary policy. The Fed Funds rate has decreased in fits and starts from 19% to 0%. During that same period, the rate of inflation has steadily declined. So after 30 years of loose monetary policy by the Fed, we have much lower inflation and much higher unemployment than we had to begin with! This is the exact opposite of what one would expect according to the conventional wisdom.

The simple explanation is that encouraging more private sector debt (by lowering interest rates, amongst other tools) when the economy is slumping is not the way to run an economy. While the increased borrowing will temporarily boost the economy, the more lasting effect is to increase private sector debt to unsustainable levels. This is obviously what has happened, aided and abetted by repeated bailouts of the private sector by the federal government.

Monetary Policy is a Joke

Recently, my favorite blogger (Kevin Drum) wrote what I consider to be his dumbest post in the 9 years I've been reading him. He claimed that the U.S. middle class has been "screwed" because of overly tight monetary policy. The Fed, he said, has ignored the full employment part of its mandate, in favor of fighting inflation.

This seems ludicrous to me. The main tool in the Fed's toolbox is setting interest rates. Drum's argument must be that the Fed has been keeping interest rates too high, thereby keeping the volume of loans too low and consequently failing to promote employment. A moment's reflection on the repeated bubbles we have experienced, most recently in housing, shows this to be absurd. The problem has been just the opposite of what Kevin said -- there have been unsustainably high levels of private debt. The U.S. has one of the lowest savings rates in the world as we learned to finance consumption with debt. After 25 years of increasingly loose monetary policy, the result has been the high unemployment that we have today.

The situation is equally absurd if we look at the short term effects of monetary policy. The Fed reduced interest rates aggressively beginning in August 2007. This had no discernible effect in boosting employment. In fact, unemployment soared in the face of this supposedly loose monetary policy. This is just one example of what I have noticed since I began paying attention to this sometime around 2004. Monetary policy, it seems to me, is a joke -- a sort of 21st century voodoo that generally serious people like Kevin Drum fall for...

Monetary Apologists

Not so long ago in the United States and Europe, basic religious facts were considered to be unknowable. Some still are unknowable in our day and age, but other religious assertions have become increasingly absurd over the years. For example, there is evidence that the age of the earth is billions of years, rather than the thousands of years that it would seem from a literal reading of the Bible. The facts surrounding the birth of Jesus are hard to swallow in light of historic facts such as that many of the myths are plainly recycled from other religions. Inconsistencies in the Biblical text are readily identifiable and easily communicated in modern times.

Still, for the last several hundred years, Christian apologists have tried to reconcile the absurdities. Generally liberal, the apologists tried to make sense of the changing intellectual landscape, while reassuring the powers that be and the people that believe in them that the old beliefs are still valid.

Paul Krugman is an apologist for the increasingly implausible monetary theories that we are governed by. Obviously, sovereign governments create money at will. Yet we pretend that governments borrow money from the private sector to finance their expenditures. The fact that this is untrue, in all but the most manipulated and superficial manner, cannot be acknowledged, because the nation sees this as a moral issue.

People see the workings of the macro-economy as fundamentally unknowable. Common sense dictates that government finances are just like the finances of a household or business. A moment's reflection will show this to be untrue, but we are unwilling to openly acknowledge something that may have morally deleterious consequences. If government deficits are okay, then nothing is true and the forces of hedonistic anarchy will have won.

The Mother of all Analogies

The Cheney Administration very publicly derided the CIA for not clearly identifying Saddam Hussein as having a massive WMD program, and thereby justifying the 2003 U.S. invasion of Iraq. It is well known that Cheney established his own intelligence office to bypass the old CIA and provide the intelligence that he wanted. Then, when it was evident that the logic for the Iraq invasion was based upon false claims of Saddam Hussein having a massive WMD program, the Cheney Administration blames the intelligence agencies!

Similarly, the Bush/Administration presided over a massive economic and financial collapse. Bush himself told Congress that a massive Wall Street bailout was necessary to prevent the collapse of the financial system. This was true. But then, after the financial system was saved by the government, the Republicans blamed the federal government for spending too much money, as if this was at the root of the massive problems that brought the economy to its knees.

The enormity of these lies boggles the mind, and indicates the depravity of our political system and indeed, since the lies have been swallowed to a significant degree by the conventional wisdom, of our nation itself...

Modern Monetary Theory Gains Popularity

Courtesy of Mike Norman, here are some recent articles about how the economy works (which doesn't correspond to conventional wisdom of the Democrats or Republicans):

• The Big Danger In Cutting The Deficit, John T. Harvey in Forbes
  
• Debt and Deficit in a Nutshell (9 minute YouTube video)
  
• Bill Mitchell in The Nation
  

Middle East Musings

I just finished reading a book about Hezbollah -- "A Privilege to Die: Inside Hezbollah's Legions and Their Endless War Against Israel", by Thanassis Cambanis. It's a fascinating account of Hezbollah's rise, the 2006 war with Israel, and the subsequent ascension of Hezbollah to dominance of Lebanon and leadership of an anti-western "axis of resistance" throughout the Arab & Islamic worlds. With Bill & Misty traversing the region, Joe Chahine reminding me of the intense Dearborn connection, and ongoing uprisings in Tunisia, Egypt, Libya, Yemen, Oman, and Bahrain, it's highly relevant. While extremely sympathetic, the book is an ultimately damning (perhaps excessively so) account of the principled, dedicated, and fanatical leaders (and followers) of the Shia axis of resistance.

The anti-western axis of resistance includes Hezbollah and their patrons in Iran and Syria, along with Muqtada al-Sadr in Iraq. Though a Shia movement, there are many Sunni sympathizers including Hamas. Opposed to the axis of resistance are the forces of accommodation led by Saudi Arabia. The accommodationist Sunni Arabs have been weakened by the recent revolutions including, especially, the ouster of Hosni Mubarak in Egypt. The Taliban and al-Qaeda are a third loosely-affiliated group on the fringe of current developments.

It remains to be seen what will happen as a result of the Egyptian revolution and the ongoing conflicts in Libya, Bahrain, and Yemen. There are two clear sides struggling for preeminence -- the Shia led axis of resistance and the Sunni led axis of accommodation. While the Iranian led axis of resistance is on the offensive with the fall of Mubarak, it is doubtful that the Saudis, with their enormous wealth, can be toppled. It is more likely that leadership of moderates will pass to more democratic regimes in Egypt, Qatar, and Jordan.

While openness will provide an opening for anti-western factions in the Sunni lands, it is likely that the economic might of the capitalist west will predominate. Sunni self-interest lies not in futile resistance, but rather in independent pursuit of modern technology and human rights. The best case scenario is that the axis of resistance is slowly marginalized as more liberal movements succeed. With prudent behavior by the western powers, the axis of resistance will crack when one of its members decides the west isn't so bad after all, and strikes a deal to open up and reap the rewards of modernity and liberalism. Iran is the most likely prospect in this regard, and its change of heart would likely spell the end of the axis of resistance.

Worst case scenarios include the following possibilities:

• A crushing of the axis of resistance by the overwhelming firepower of Israel and its U.S. ally. This might be similar to the crushing of Jewish resistance in the 132 CE revolt of Bar Kochba. As described in Wikipedia, "The Bar Kokhba revolt (132–136 CE) against the Roman Empire was the third major rebellion by the Jews of Judaea Province and the last of the Jewish-Roman Wars. Simon bar Kokhba, the commander of the revolt, was acclaimed as a Messiah, a heroic figure who could restore Israel...580,000 Jews were killed, and 50 fortified towns and 985 villages razed...Hadrian attempted to root out Judaism, which he saw as the cause of continuous rebellions...Modern historians have come to view the Bar-Kokhba Revolt as being of decisive historic importance. The massive destruction and loss of life occasioned by the revolt has led some scholars to date the beginning of the Jewish diaspora from this date...The disastrous end of the revolt also occasioned major changes in Jewish religious thought. Messianism was abstracted and spiritualized, and rabbinical political thought became deeply cautious and conservative."
  
• Another worst case scenario would be more of the same as we have experienced in recent years. Israel, with the backing of America, would continue to confiscate Palestinian land and mistreat Arabs in the region. The power and prestige of the axis of resistance would continue to grow as a result. Eventually, the axis of resistance could obtain weapons of mass destruction.
  

The middle case, which I would like to think of as the most likely case, is that the Saudis will be unable to continue their leadership position in the Islamic world. While western power will ensue that the oil fields are protected from radicals, the Saudi royalty will realize that their best prospects lie in relinquishing absolute power and retiring as wealthy international citizens (see Aga Khan). In combination with a more liberal Egypt and increasingly liberal regimes in Jordan, UAE, Libya, and perhaps Syria and Iran, the balance of power will tilt in favor of regimes that more legitimately represent their citizens.

Israel, faced with the prospect of an increasingly powerful, balanced, and coherent Arab periphery, will eventually make peace. Israel will retain deterrent military power, but move beyond the siege mentality and become a more mature and independent middle eastern democracy.

I admit that I'm engaged in wishful thinking here. My middle case sounds suspiciously like my best case. May it be so...

Mike Norman Says It Well

From Mike Norman --

But since global capacity exceeds the demand that the US and rest of the world can absorb, the world is faced with a demand shortage, which manifests as massive unemployment and underemployment, as well as sub-optimal economic performance resulting in massive foregone opportunity. The present approach is not working and cracks are widening in the foundation. The fact that the dollar is a source of controversy shows this. On one hand, China wants to export to the US, and on the other, fears dollar depreciation that would affect its savings in dollars.

The challenge is to increase effective demand in order to grow the global economy. Ideally, this would evolve from a democratic new world order based on interdependence in a way that is sustainable financially, economically, politically, socially, environmentally, and ecologically. For this to happen, a fresh approach to globalization based on a new vision of possibilities and a grand strategy for achieving this vision are required. This is the discussion that we need to be having now. Neoliberal austerity is leading to economic underperformance and social unrest.

Simple Economics

The government should, in general, increase the money supply over time to support the growing economy. The way it does this is by deficit spending. The alternative is that the private creates more money via loans, but this does not increase the net financial assets of the private sector, since all new money is then offset by new liabilities. Inevitably, private debt gets too high and there is a deflationary collapse, unless the government steps in with a bailout. Better to get the deficit spending up front, rather than bailing out those who made the biggest mistakes...

Economic Superstition

I've concluded that superstition reigns in our national economic discourse (as it did in religious discourse not so long ago, and still does in many places). Facts regarding how the monetary system works are subservient to superstition regarding deficits and debt, even in the speech and behavior of leaders such as Bernanke. We have basic assumptions which are faulty but taken for granted.

Zeitgeist Update

Are recent events in the Middle East and Wisconsin connected in any significant way? Jon Stewart says no. With all due respect to Mr. Stewart, I disagree. The connection is certainly remote and speculative, and may not be worth arguing about. So I'll start by examining what I see as a trend in the U.S. and look at that trend from a global perspective, and we'll end up reexamining the connection, or lack thereof, between the Middle East and Wisconsin.

The trend I see in the U.S. is the waning of the neo-liberal ownership society championed by U.S. presidents from Ronald Reagan to Bill Clinton to Barack Obama. Reagan famously defeated labor in the air traffic controllers strike of 1981. Wisconsin governor Scott Walker drew an analogy between his standoff with the Wisconsin unions and President Ronald Reagan's decision to fire striking air traffic controllers in 1981.

"This is our moment," he said. "This is our time to change the course of history."

But labor has been fighting back vigorously and seems to be energized by Governor Walker's attack. Regardless of the outcome of this battle, I think labor is on the upswing.

A previous defeat of the neo-liberal ownership society occurred during Bush-43's 2005 attempt to privatize portions of Social Security. That proved to be a major political turning point, as Democrats went out to capture Congress in 2006 and the presidency in 2008. Obama initially adopted the neo-liberal idea that we need to fix Social Security, but has recently backed off:

Obama administration officials are rejecting the idea of making major changes to Social Security as part of a debate over reining in the national debt, a stance that’s drawing protests from deficit-cutting advocates.White House Budget Director Jack Lew and Jason Furman, deputy director of President Barack Obama’s National Economic Council, both stressed this week that Social Security isn’t facing an immediate funding crisis and should be viewed separately from moves to reduce the federal budget deficit.

Most political observers interpreted the Republicans' massive victory in the 2010 elections as sign that the Reagan Revolution will resume, with the public demanding smaller government. Indeed, this is what the public is getting, as state and local governments are forced to cut back.

My feeling, as articulated in previous blog posts, is that the economy will slip back into recession and that Republicans will win the election in 2012. They will run into the same economic wall that Bush-43 hit and will fall on their faces again. At this point, the public will be ready for more progressive, labor-friendly leadership.

Thus, from my perspective, the battle in Wisconsin is laying more of the groundwork for a resurgence in labor power. While the battle is ultimately likely to go in favor of the Republicans in the narrow sense, the Republicans continue to take ownership of our failing economy.

And this mirrors much of what is happening on the international political-economic scene. Conservative Angela Merkel recently suffered big losses in Germany. Austerian conservatives have taken power in the United Kingdom, and the economy is heading downhill. Berlusconi in Italy is toast, and Sarkozy's popularity is at a record low in France.

What about the Middle East? There is little doubt that global economic conditions have played a big part in the recent uprisings. The vast majority of middle class wage earners have demanded more power. Entrenched political-economic monopolies are out, and labor is in, at least in terms of the popular zeitgeist.

So there does seem to be a commonality to the events of Wisconsin and the Middle East. In each area, an energized popular movement is at work. In Wisconsin, labor is repulsing an attack by the forces of Reaganomics. In the Middle East, popular movements have toppled existing economic power structures. To what extent is labor involved in the Middle Eastern uprisings? My guess is that labor is the prime ingredient. Certainly the uprisings have not been dominated by narrow factions. Human rights, including labor rights, have taken center stage.

Meanwhile, in Wisconsin, the backlash is not restricted to a narrow partisan group of self-centered workers. Protests are being held in all 50 states, and efforts to divide public workers (e.g. police and firefighter vs teachers) are meeting concerted resistance. GOP efforts to divide labor may not fair so well in the current economic environment. Which emotion will prevail: Anger directed at teachers because they get good benefits, or Anger directed at Republicans because their policies result in no good benefits for any workers? Already, several Republican governors have backed away from the position of the Wisconsin governor, while Democratic solidarity on this issue is impressive.

Stepping back, this looks like a second major setback for the neo-liberal ownership society advocates. The first was the defeat of Social Security privatization in 2005. When the smoke clears from the current battle, we are likely to see a significant shift leftward in the Democratic party and concomitant energizing of the base. Whether Obama is able to tap into this remains to be seen. Obama has spent the first two years of his administration burnishing his neo-liberal (Clintonian) credentials at the expense of his party's base. If and when the economic relapse that I forecast occurs, then the labor resurgence may be swamped by dissatisfaction with the status quo, and Republicans may get another chance to perform a full Mubarak...

Update: Here's more on the subject: Cairo in Wisconsin.
And a picture:

Quick Summary of Underlying Economic Forces

The current state of the U.S. economy is one of growing income disparity and high unemployment. The underlying forces responsible for this situation are:

• Globalization
  
• Reaganism (ownership society)
  

Globalization has put U.S. labor in competition with much lower cost labor around the world, resulting in higher profits, lower wages, and higher unemployment in the U.S. Government efforts to mitigate these harsh effects have been prevented by the small government philosophy which took hold under President Reagan.

The economy is increasingly unstable as the small government philosophy prohibits government action to address issues such as:

1. Financial regulation
   
2. Exorbitant health care costs
   
3. Energy dependence
   
4. Environmental safety
   
5. Unemployment
   
6. Stagnant wages
   
7. Inadequate social services and safety net
   
8. Chronically overpriced assets

Chronically overpriced assets result from the greater pool of investment funds that result from the higher profits enabled by globalization, lack of regulation, and tax policies that provide favorable treatment of investment income. Economic growth, however, is limited due to the stagnation of wage dependent consumption. So more money is available for investment, while there are less productive investment opportunities. As a result, there have been repeated asset bubbles (dotcom, housing, commodities), which ultimately collapse.

In recent years, the Republican party has been holding the economy hostage. They have successfully used brinkmanship to continue the Reaganist policies which reduce government power and stop the government from addressing issues such as those listed above. While Democrats had some limited success in passing health care reform and financial regulation, the Republicans won politically and are now in a stronger position to block government action on these and other issues.

Other countries, not hindered by the small government philosophy that plagues the U.S., have been better able to deal with national issues. Health care is the prime example, with the U.S. having the highest cost and least effective system of any developed nation. With regard to employment and economic growth, the nations of east Asia generally follow mercantilist national policies which have resulted in more manufacturing jobs and trade surpluses with the U.S. European countries have addressed their energy supply issues more effectively through high taxes on gasoline and greater commitment to alternative energy sources.

Prognosis for the Economy and Political Landscape

We'll see what happens with the economy and the 2012 presidential election.

With regard to the payroll tax cut, I like that, as I'm not worried about the deficit. Most people don't understand that the so-called national debt is not really debt, and won't have to be paid back with higher taxes. U.S. Treasury bonds are more similar to cash than to debt. Treasury bonds pay interest and cannot be directly used as currency, but they are the most liquid of investments and are readily convertible to currency. The Federal Reserve exchanges Treasuries for cash, and vice versa, all the time. That is not really printing money, since both Treasuries and reserves are money for all practical purposes. You may have heard of Quantitative Easing 2 (QE2) which is an ongoing program in which the Fed is buying $600 billion of relatively long term Treasury bonds using cash reserves created out of thin air. This is merely exchanging one form of money for another and is basically a nothing burger.

The reduction in the payroll tax (along with the other tax reductions) does increase the government deficit and the net savings in the private sector, since by accounting identity the government deficit equals the private sector surplus. This is generally a good thing when unemployment is high and the private sector needs a boost. Since we now have an unprecedented 25 million people underemployed, continuing government stimulus is desperately needed. Given the widespread misunderstanding of how the monetary system works, and the Republicans' successful use of deficit hysteria to subvert needed governmental action and thereby torpedo the Obama Administration, I fear that the Obama Administration's economic program will continue to fall short. We'll see.

Here's just one example of our current economic problems, from CNN Money.com --

Las Vegas home prices won't return to their pre-recession peak until after 2032; in Phoenix, the rebound will take until 2034; and Salinas, Calif., and Naples, Fla., won't come back until sometime around 2038...
For non-bubble markets, the damage was usually much less severe. Cities such as Pittsburgh, Syracuse and Rochester, N.Y., Clarksville, Tenn., and Spokane, Wash. will be back to their peaks within three years or so, Chen said.
Many of the larger, older metro areas that saw moderate or even fairly high home price appreciation during the boom years will recover faster than the bubble markets but slower than the steady-eddie ones.
Washington will return to peak by around 2025, Chen said. Boston and Chicago will recover by about 2019, and New York by 2021.

Houses are frequently used as collateral for loans. Thus, high housing values resulted in a tremendously increased money supply in recent years, and this money source is going into reverse as housing prices fall. The recent tax cuts, including the payroll tax cut, will not be large enough to counteract the contraction of the money supply resulting from the collapse of the housing market and the larger contraction in consumer credit.

On a more upbeat note, we all seem to agree that the Republicans are living on borrowed time, as they are obviously hypocritical and ineffective at governing. Whether Obama gets the upper hand in the next two years, or the Democrats are forced to dig deeper while enduring another Republican presidency, the eventual outcome will hopefully be a move back to the center, and restored sanity in the national discourse...

Are You Ready for Four More Gloomy Years?

Here's my forecast. It's gloomy for the short run (next four years), but more optimistic for the longer term. The list below starts with observations about the recent past and present, then moves into the future.

1. Rubinites are good guys.
   
   I'm referring to the followers of Robert Rubin, Treasury Secretary in the Clinton Administration. Clinton was very successful, thanks in part to Rubin and company. Larry Summers was another prominent Democratic economist in this era.
   
   Barack Obama has relied upon Rubinites to manage the economy thus far in his administration. Larry Summers was his chief economic adviser, before resigning recently. The most likely candidate to succeed Summers is Gene Sperling, who held the position of director of the National Economic Council during the Clinton Administration. Sperling is a good guy, but his experience and views seem to be in the Rubinite mold.
   
   The previous director of the Office of Management and Budget (OMB) in the Obama Administration, Peter Orszag, recently left the Obama team to become Vice Chairman of Global Banking at Citigroup. The new director of OMB is Jacob Lew. Lew previously served as managing director and chief operating officer of Citi Global Wealth Management and then Citi Alternative Investments (CAI). Did I mention that Robert Rubin worked at Citigroup, including a stint as Chairman, after leaving the Clinton Administration?
   
   Obama's newly appointed chief of staff, Bill Daley, served as U.S. Secretary of Commerce from 1997 to 2000 and is a lawyer and business executive. Currently, he is serving on the Executive Committee of J.P. Morgan Chase & Co.
   
   These are some of the good guys on Wall St. Other Wall Street players are rabid and greedy Republicans (but I repeat myself). The Rubinites are wealthy, but want to use their resources to level the playing field, not only within the U.S. but around the world. That may be an exaggeration, but there is no doubt that there is big difference between the Democrats and Republicans on Wall Street.


2. The Rubinites have been wrong on a couple of the most important economic issues of our time.
   
   
   
   1. They understate the role that the federal government should play in addressing our economic problems. They worry excessively about the federal budget deficit.
      
   2. They have clearly misjudged the harm that would be done to the American middle class by opening up our economy to competition from countries such as China. Their vision of a fully employed knowledge-based economy is proving illusory.
      
   3. They failed to recognize the housing and finance bubbles that were propping up the U.S. economy during the aughts. In fact, they were participants in the financial bubble, though certainly not among the worst offenders.
      
   
   
3. Obama is in trouble, because of his excessive reliance on the Rubinites. Under Obama's leadership, the Democrats suffered devasting defeats in the 2010 midterm elections.
   
4. The Republicans are in even worse trouble. The Republicans are even more reliant on erroneous economic philosophies, and are less flexible. The Republicans were thrashed in 2008 for good reason, but show no signs of having learned any lessons and are headed even further in the wrong direction. Republicans are even more wedded to the status quo than are Democrats, and the public is becoming increasingly dissatisfied with that status quo.
   
5. The economy remains sick and the stock market will relapse in 2012, if not before. Recent improvements are cosmetic. Economic stagnation in the aughts was masked by housing and finance bubbles. Those bubbles have popped and economic activity has fallen back considerably, with no replacment engines of economic growth in sight.
   
6. The presidential election of 2012 will result in a Pyrrhic victory for the Republicans. Obama will be hobbled by the same general dissatisfaction with the status quo that clobbered the Democrats in 2010. Many progressives will jump ship and support a primary challenge, or just refuse to work for Obama's reelection. The Republican nominee will also be dogged by populist opposition from within his own party. Huckabee will probably be the most popular Republican, but the GOP runs on money and a corporatist such as Romney will probably get the nomination and win the election.
   
7. The economy will slip into a depression as Republican policies leave tens of millions jobless, while deflation becomes entrenched.
   
8. By 2014, Democratic progressives will be ascendant, with the Rubinomics practiced by Obama thoroughly discredited.
   
9. Progressive Dems will rack up big victories in 2014 and 2016, and strong government policies will lead the nation out of depression in the latter teens...