Markets Aren’t Rational. India Shouldn’t Take Advice From Corporate Shills

Markets aren’t rational: the Indian rupee and other emerging market currencies are depreciating primarily b/c the US hinted it may increase interest rates. In India this has provided impetus to those who don’t like certain reforms to blame those reforms for the Rupee’s troubles. Horror of horrors, the India govt passed laws for:
- right to food (actually right to about 600 calories/day plus more for pregnant women and children)
- right to education
- right to work (guarantee of minimum 100 days paid employment to rural citizens
- property rights protection for small landholders (right not to have your property confiscated on the cheap by colluding politicians and developers).

The Indian govt has no foreign debt so it has no trouble paying its Rupee debt. It was big Indian corps that borrowed cheap in US dollars who are hurting because they have to pay back appreciated USD. They were warned to hedge risks. Many didnt. Now it’s convenient to blame “populism”. Much of this is a replay of what happened in the US, Europe and Canada, where for the most part it was the private sector that ran up unsustainable debt, banks collapsed and those debts were assumed by govts and that’s when govt debts increased significantly.

To be sure, emerging markets like India need to make additional reforms, but the reforms many are calling for are the types of “reforms” that put in place the long term conditions that lead to the financial crisis in the US, Canada and Europe. We havent fixed stuff on our end, but lots of think tank types are telling emerging markets to copy a failed economic model.

We Need Better Pundits: Andrew Coyne Advocates for High Unemployment and Wage Suppression

Andrew Coyne’s latest column  in the National Post: The silliest bit of punditry I’ve read all month: A little econ has a way of turning bad. Andrew Coyne has a typically incoherent #Cdnpoli punditpalooza column that’s well reflective of the poor level of econ analysis printed in Canada these days.  Based on his prior writing and TV appearances, Coyne appears to be in that camp that’s also worried about “high” govt debt levels and prefers fiscal austerity, in the face of all evidence to the contrary that all round austerity will lead to growth (lessons we learned from the Great Depression).
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Coyne’s really worried about the Inflation! Monster, but inflation’s averaged 1.5%/yr last 5 yrs here and in US, well under Central Bank targets and it’s been on a downward trend year over year. StatsCan just released its June 2013 figures that show that.
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He’s worried that central banks are printing too much money, but low interest rates do not equal money printing (QE money is sitting as reserves and is an asset swap, the money supply is growing at low rates). Coyne recognizes that govts and people are deleveraging, but doesnt understand that deleveraging = destroying money nor that the public and private sectors cannot simultaneously deleverage (one sector’s savings is the other’s income).
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Coyne doesn’t like monetary stimulus; his previous columns have asserted the economy is in good shape and so also is a proponent of fiscal austerity.  (I think our traditional level of gdp growth is no longer possible – for reasons not crucial to get into here – but for now I’m arguing this from the orthodox econ view that believes growth will return to or close to recent historic norms…) So where is growth supposed to come from?
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And on goes Coyne’s column. He believes central bankers have built up “precious” credibility over the last few decades, but also says the private sector doesn’t trust the central banks? What?
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Since effective unemployment is 14% (the broad U6 measure) and hence the economy is running well below potential people with Coyne’s views are advocating for high unemployment and wage suppression, for the continued track we’re on now whereby the economy creates mostly crappy temp or part-time, low wage jobs with less job security and fewer benefits.  He would disagree that this is what he’s advocating, but he doesnt ever provide a cogent explanation of where growth is supposed to come from.  Central Banks are keeping interest rates low to try to stimulate investment and spending because govts are on an austerity jihad, but central banks are having a tough time working on their own – businesses arent investing much and govts are trying to cut back at the same time as individuals, so we have a lack of aggregate demand: not enough spending and investment.  Monetary policy is not an effective tool alone, not in any reasonable time frame; are the unemployed and underemployed supposed to suffer for years?
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Finance Ministers think the private sector will drive growth.  Really? Individuals cannot spend much more as they are overleveraged; corp profits are at all time highs but they won’t spend and invest because there’s not enough demand to justify incremental investment. Wages are flat and govts are helping the corp sector hold wage growth back.
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So that leaves it to federal govts to provide direct fiscal stimulus, but we’ve got a bunch of ideologically driven Herbert Hoover’s repeating the mistakes of the 1930s.  Everyone can’t “tighten their belts” at the same time.  Fedgovt’s need to spend, and with interest rates at zero – inflation non-existent, that’s what the “market” is telling them to do.  But that’s not one lesson the austerity queen’s want to take from the market.

Three makes a trend: Canadian Leaders Lying About Causes of Economic Crisis

If three makes a trend then we in Canada are well on our way into the beginning of a whitewash of the causes of the global economic crisis.

It began last month with Prime Minister Harper and Finance Minister Flapperty.  It was followed a couple weeks ago by Peter Brown, founder of Canaccord Financial, Canada’s largest independent brokerage firm.  Then this weekend it was Globe and Mail columnist Gwyn Morgan, who is the former head of energy company Encana Corp., current Chairman of SNC Lavalin, and a Director of the Manning Centre for Building “Democracy”.  Both Mr. Brown and Mr. Morgan are also Directors of the Fraser Institute.

Mr. Harper, Flapperty (in speeches and public statements), Mr. Brown (in a missive directed at uniting the “free enterprise” coalition in BC and Mr. Morgan (in his Pravda column) have each conjured up sovereign fiscal crises and have seen fit to blame these “crises” on excessive “entitlement” spending.  I wrote a point-by-point response to Mr. Brown’s letter a few days ago.  What all four men have sought to do is conjure up the bogeyman of “socialist”, “overspending” Europe in an attempt to scare Canadians into supporting the right-wing neo-liberal policies they prefer to continue.  Their assertions are self-serving and misleading.

As I wrote in the response to Mr. Brown’s letter, the cause of the global economic crisis was reckless private sector lending, primarily for mortgages, by banks in the US, Europe and Canada (our housing bubble has yet to burst).  Sovereign (government) debt increased as a direct result of the bailouts of the financial sector and the stimulus required to prevent a deeper economic downturn and lower tax receipts as a result of crisis. The financial sector cannot escape blame – it was financiers who have pushed for decreasing regulation for years.  Seldom a week goes by without another revelation of some massive new fraud or financial crime – the LIBOR collusion, theft from custody accounts, rip-offs of corporate clients and Ponzi schemes.

There are no federal debt crises in Canada, the UK or the US, all of whom can borrow at 0% currently.  Countries that control and issue debt in their own currency cannot go bankrupt.  The reason some European governments are currently facing high interest rates and “debt crisis” is because the Eurozone has poorly designed mechanisms.  The European Central Bank, supported by European leaders, is unable or unwilling to act like a true central bank to its member states, so that individual Euro members are in the position of provinces or US states, who are also currency users, not issuers.

And by the way, there is no big increase in inflation on the way in Canada or the US or the UK, not according to our central banks themselves, nor the private bankers (they would be screaming the sky is falling if that were so) -we have big output gaps, and inflation is not a concern until demand recovers, at which point the central banks can reverse any monetary stimulus). The European bankers being firmly in control and having got and getting more bailouts, wish the ECB to apply austerity for average taxpayers; socialism for the elite and bankers, feudalism for the average citizen.  The Euro’s debt crisis is rather artificial.

Let’s also note that while Greece’s government was somewhat irresponsible prior to the crisis (being in the position of a currency issuer it should have acted within that constraint but didnt), the other “irresponsible” Euro countries were not quite that: Italy’s debt was decreasing, Spain was running a budget surplus and had lower debt than Germany.  The northern European countries, such as Germany, Sweden, Netherlands are doing fine; yet some of these places have bigger government spending than so-called lazy Club Med states.  It’s absurd….Cons have been recently been singing Germany’s praises as a competitive powerhouse, but they fail to note Germany’s public sector is about 25% bigger than Canada’s (and Germans also undertake “socialist”, hippy stuff like solar – a couple weeks ago 50% of Germany was running on solar).  Nuance has long not been a strong suit of Cons.

I also take issue with the characterization of social spending as “entitlements”.  Odd word, for something that all tax payers contribute to one way or another – through payroll taxes or sales taxes or excise taxes or income taxes.  This social spending is earned by workers.

But so it starts, the deflection and revisionist history of crisis.  Don’t get fooled by the call of crony capitalism.  They will come for your pensions and health care, just as they are doing in Europe.  They already came at us with a fake OAS crisis.  I want just one Con to show me Canada’s debt crisis.  When a borrowers in trouble they can’t borrow at negative real interest rates, can they?

Peter Brown is not shooting straight

Peter Brown, the founder of Canaccord Financial, ikon of British Columbia’s business community, recently issued a letter to the BC Conservative Party in which he urges BC’s so-called “free enterprise” coalition to unite in a bid to deny the left-of-centre a victory in the next provincial election.  

Mr. Brown’s letter warns that the world faces a dire economic crisis the likes of which we have not seen since the Great Depression – on this point he is correct.  However, Mr. Brown’s diagnosis of the causes of the economic crisis is inaccurate – it contains standard Republican & Harper/Flaherty talking points and an austerity meme that is discredited.  Mr. Brown’s letter is below (his words are in quotations and in bold), along with my comments (in italics):

“I have been in the investment business for over fifty years and founded Canaccord Financial, Canada’s largest independent investment dealer forty-four years ago. In addition, I serve on the Economic Advisory Council to the Federal Government, Chair the Fraser Institute am Vice Chair of the Investment Industry Association of Canada as well as sit on the Board of Governors for the Business Council of British Columbia. This variety of experiences gives me an exposure to the global, geopolitical and economic forces that are currently at play and they cause me to agree with the Governor of the Bank of England when he said in October, 2011 that “The world is facing the worst financial crisis since at least the 1930’s if not ever.” I believe it is generally true that there are more problems in more places with less leadership than anytime in my lifetime.”

- Mr. Brown has a stellar resume.  But let’s understand that he references the lofty titles and positions he holds in order to give more weight to the arguments he’s about to make in the following paragraphs.  Also note, three of Mr. Brown’s positions are with lobbying organizations for big business and big finance – the Investment Industry Association represents the 180 or so of Canada’s investment dealers/brokerage firms; the Business Council of BC represents 250 of BC’s largest businesses; the Fraser Institute purports to be a think tank but in reality it’s a neo-liberal lobbying arm for big business and the superwealthy (it’s not met a social program it doesnt want to dismantle, any tax break for big business and the elite are never sufficient).  Also note, the Economic Advisory Council to the Federal Government, which was established by Minister Flapperty in 2008, has a rotating membership dominated by big business and right wing interests.  

So now we understand who Mr. Brown represents – not small business and the average Joe.  I take him at his word that he cares deeply about BC and issued his letter out of concern for the direction of the province.

“The purpose of this letter is to suggest that we are in a very troubled global economic condition that is more serious and likely to be longer in duration than the normal relatively short term post war recessions and that will, in my opinion, impact on global growth, investment and job creation for some time to come. It is a time that responsible British Columbians need to get past their partisan beliefs to hopefully ensure that our politics don’t add another level of uncertainty in an uncertain and economically dangerous world.”

- Mr. Brown sets the tone of the letter by describing the dire global economic situation…fair enough; I agree we are confronting an economic situation more serious than most people realize.  

What Mr. Brown is about to do in his letter is follow what known as the right wing’s TINA argument (“there is no alternative”) to austerity.  In fact, there are alternatives, ones that are advocated by highly respected economists such as Paul Krugman, Steven Keen, Robert Reich, Joseph Stiglitz, Christina Romer, Brad Delong, Jim Stamford; these economists have made most of the right calls since before the crisis.  I’ll talk about those later, ones that do not ask the average Joe to pay for the bailout of the superwealthy.

Those calling for austerity policy keep getting proven wrong about how their policies will work out – they have been wrong about Greece, Spain, Portugal, Italy, Ireland, the UK, the Baltics, which they said were recovering or will recover via austerity, but all of whom are suffering deeply with many still in recession.  Each time the austerians are proven wrong, they try to point at some new country where austerity seems about to work.  Maybe they will point to Canada next.  

Those countries that did not listen to the austerians (Iceland), or where austerity has not yet kicked in as much (Canada, the US) are doing better. 

I very much like the clever rhetorical setup “responsible British Columbians will” do something, by which, we will come to understand later in the letter, means fall in line to support the right wing policies Mr. Brown prefers because, you know, this is no time for “irresponsible” left wing policies.  Nice framing.

“The media focus is rightly on the European Union which represents more than 25% of world GDP and 30% of consumption – about twice as large as China. Currently about half of the 17 European countries are in recession, the average unemployment rate is 11% and the GDP has fallen 0.4% from 2007 through 2012. Issues include sovereign debt crises, banking crises and a great deal of social instability, but Europe, while significant, is only part of the problem.”

-  more clever rhetorical setup; Mr. Brown sets up Europe as bogeyman; the right wing loves to assail “socialist” Europe as failed state – Flapperty and Harper have done this recently and it’s a common refrain of Republicans; it’s easy lumping certain “failed” states into the same bucket, but when the right wing characterizes “socialist” Europe as a failure they ignore the social democratic states that are doing well at the moment (most with higher government spending than us).  

Whose doing well?  According to The Economist, hardly a socialist publication, places like The Netherlands, Sweden, Germany, Finland, Denmark  have similar or lower unemployment, debt and deficits as Canada and are growing GDP as fast or faster.  They all rank highly in wealth, income, happiness and economic competitiveness, including “socialist” Germany (exceptionally, Germany is a bit of a darling at the moment among some on the right because Germans are “fiscally responsible” as they adhere to the right wing’s fetish for imposing austerity on ClubMed and other countries).  

Mr. Brown lumps together three items as if they are all causes of crisis – sovereign debt crises, banking crisis and social instability.  But only one of these is the underlying cause.  With the exception of Greece, the sovereign debt crisis was caused by irresponsible lending by the private sector banks and their bad business decisions, which led to the banks’ collapse and a bailout by national governments.  

The wealthy shareholders, bondholders & failed management teams were bailed out (aside from some pension and other worker money, most of the wealth, 80% or more, is owned by the elite, so this was a bailout of, by and for the elite).  This bailout and the deep recession the crisis caused lead to an increas in national government debt burdens.  Those higher debt burdens are now being used as an excuse to cut social programs that primarily benefit the average person.  

Those protests Mr. Brown lumps in as a cause of crisis are in truth a result of crisis – of unemployment, against austerity, against the notion that the average citizen should suffer so that the wealthy can be saved; Mr. Brown seems to pretend as if protest occurs spontaneously; no, protest occurs for a reason; it’s clear Mr. Brown wishes the protests would go away, and his way of framing the protests as cause of crisis is a clever way of suggesting to Canadians that they ought to quietly accept the policies he’s about to propose, like good little worker bees or, you know, we may end up like Europe or something.  

This is not capitalism.  It’s cronyism.  When bankers lend money they are supposed to be taking a risk; if they make bad loans they are supposed to suffer the consequences.  That hasn’t happened.  Nor have the elite mandarins who manage these banks been fired or prosecuted for misdeads (as week doens’t seem to go by without revelation of new fraud, cronyism or corruption in the financial services industry – the LIBOR scandal, misappropriation of custody accounts, fraud on clients, manipulation of commodity prices (latest, from this week), and on it goes.

We should note that setting up Europe as bogeyman is disingenuous for another reason: the global financial crisis emanated out of the Unites States of GWB (with a helping hand from Democrats, including Bill Clinton).  The US has lead the decades long neo-liberal push for deregulation of big business and finance; the housing bubble grew out of irresponsible sub-prime and other lending and shenanigans by the private banks; it’s not “socialist” Europe that failed, but neo-liberal economic policies that flowed from the US and infected regulatory systems in Europe, Canada and beyond (the set of neo-liberal policies is called the “Washington Consensus” for a reason).

“Developed world growth forecast for 2012 is 1.4% down from 3.2% in 2010 and the emerging economies will grow at a rate of 5.7% down from 7.5% in 2010. The US GDP is projected to grow less than 2% which will be the worst recovery of all post World War II recessions. The Canadian government has projected a 2.1% GDP growth which is weakening. Japan in the same 2007 – 2011 period suffered a decline in GDP of 3.5% aggravated by a natural disaster and now China is experiencing weaker growth as its manufacturing activity is slipping along with that of the U.S.”

- not many bones to pick here; slow or negative growth is a problem for all, but it scares the crap out of the finance and banking industries – with negative growth they will be left with more bad loans, and there will not likely be support for endless bailouts

“Many parts of the developed world have been on a borrowing binge to maintain unsustainable entitlements that now require the pain of deleveraging and austerity.”

- And, here we have it!, in which Mr. Brown deftly and gently transitions to putting the cause of crisis squarely on government spending.  First, we already noted that the sovereign debt crisis began with a bailout of the banks, but let’s expand on that:

The truth about government spending is that it’s been relatively flat in the range of 32% of GDP for the G7 countries since the 1970s according to the IMF.

Second, what government debt crisis? Currently the Government of Canada, the US federal government and the UK can all borrow money for 1%-2% for the long term; subtracting inflation means they can borrow money for free or negative real interest rates.  Shouldn’t interest rates be much higher if their is a real sovereign debt crisis? When you can borrow money for negative real interest, that’s a good time to spend and put people back to work.  That’s what the all-important “free market” is signally you to do.

It’s true, some Euro member governments currently have high interest rates on their debt, but the reason for that is because the European Central Bank refuses to act as a lender of last resort as the central banks of Canada, the US and UK are doing.  The key difference between the Euro area governments who have high rates and Canada, the US and the UK is that the former are currency users and the latter are currency issuers; the latter control their own currency and so long as they issue the currency in which they borrow they can never go bankrupt.  

The ECB could buy Italian, Spanish, Portuguese and Greek bonds and bring their rates down; instead it supports austerity; even without the ECB acting as a true central bank, Germany and some other Euro members are able to borrow at low rates that contradict the sovereign debt crisis meme.  

I will give Mr. Brown this – Canadian provinces are in a position similar to the Euro area member states; Canadian provinces are currency users, so they must operate under that constraint while the federal government does not.  But all this argues for is fiscal federalism (which Harper and Flapperty are dismantling; in Europe the austerians are demanding European fiscal federalism; it all goes to show it’s not about principle for these folks; it’s about whatever will benefit them in any given time and place).

Let’s consider British Columbia for a moment.  What’s happened over the past few years of government spending and debt?  Well, spending as a percentage of GDP is down and on the books debt as a percentage of GDP has also been decreasing (with the exception of the deficits since the financial crisis began) – I dont think I need to cite any sources; dont the BC Liberals brag about this?.  So it does not appear BC has runaway social spending; it’s just a permanent refrain of the right wing and a throw-away statement.  

Where BC’s debt has increased, significantly, as noted by many great BC based bloggers (Tsakumis, Northern Insights, David Schreck, and others) is in the kind of debt that’s off-books, like PPP (public private partnerships) debt and private power purchase agreements.  Yes, we have our own crony capitalists feeding at the government trough even as they demand austerity for everybody else.

Let’s also note that Canada’s federal government debt as a percentage of GDP was decreasing up until the financial crisis (to below 30%); so there does not appear to be any irresponsibility there either until the bailouts of the private financial sector, Mr. Brown’s sector, started.

Finally, let’s note that while Greece’s government had been acting fiscally irresponsible even before the crisis, Italy’s debt was decreasing and Spain was running a budget surplus and its debt was lower than Germany.  Even as it stands today, the consolidated “socialist” EU has about the same overall debt levels as Harper’s fiscally “responsible” Canada and the “Obama socialist” US whose surpluses were busted by GWB unpaid for wars and tax cuts benefiting primarily the wealthy inherited by and continued by Obama.

“This is accompanied with the unfortunate demographics of aging populations who tend to consume more government services as they live longer and, out of necessity, hold on to their jobs. The receding economies will cause relatively high unemployment over the intermediate term and unfair and unsustainable youth unemployment.”

- this is a hodge podge of confused statements.  True, developed economies have aging demographic profiles, which the right wing uses as an excuse for cutting “unaffordable” social programs; it’s here where the right wing conjures up big scary non-inflation adjusted numbers to frighten voters into supporting austerity.  We saw this with the fake OAS crisis, where Flapperty and his gang threw out a $100 billion figure as the 20 or 30 yrs hence cost of OAS.  

The truth of the matter is that OAS costs as a percentage of GDP will increase by about 0.75% by approx 2030, at which point they peak and thereafter decline, all this according to Kevin Page, the Parliamentary Budget Officer, and the government’s own actuarial report – the government pays a lot of money to a really smart math nerd to figure this stuff out, put it in a report, then let other math nerds check his work; but oh well, let’s goes with what Flapperty thinks.

We should also note that government expenditures are actually more driven not by the relative number of old folks, but by the dependency ratio, which measures the relative number of children and retired seniors relative to the working age population; the dependency ratio is projected to rise not nearly as much the number of seniors – so we will save a little on spending directed at children while spending a little more on seniors.

I find it curious that Mr. Brown laments that seniors consume more government services in the same breath as noting seniors will tend to work longer.  If seniors do on average end up increasing their working lives that will be a net benefit to the government’s fiscal position.  Beyond this, I cannot understand how the second sentence logically follows from the first, especially if, as Mr. Brown laments, more senior’s will be working.  More labour = more GDP, no? Or is it that these terrible seniors will be taking McDonald’s jobs away from youth? I cant make the link.

- Mr. Brown appears to be focused on supply side economic factors, mainly that the shrinking supply of labour due to an ageing work force will lead to slower growth (although that’s not clear from his seniors working more worry, as we just noted).  This is rather typical for neo-liberals, who brought you “trickle down” supply side economics, which a hack economist thought up on the back of a paper napkin that he handed to Dick Cheney in 1974 or so.  Yes, that Cheney.  Did you get a golden shower?

The fact of the matter is the economy is suffering from a lack of demand.  We have plenty of supply; corporations are sitting on decades long record levels of cash, corporate profits are at all time highs and we have surplus labour to boot.  What we lack is sufficient demand for our productive capacity – not enough buyers of stuff.  Consumers, who are currency users by the way, are strapped, especially in the UK, US and Canada, having runup debt during the last three decades to make up for a lack of wage growth.  Consumers are deleveraging, they are no longer buying stuff like they used to and so companies have excess capacity – they are laying workers off and/or not using their cash to expand because they can barely sell what they are making now.  In surveys of business only about 3% say its regulations holding up expansion plans; instead, they say there’s not enough sales to justify expansion.

-More tax cuts for corporations and the wealthy will not result in more growth.  Since Keynes and the Great Depression we have understood that when their is insufficient private sector demand, governments need to step in  to temporarily spend money and create demand.  In today’s context, more government spending, not austerity, is needed to restore economies, and over the medium term we need to rebalance GDP to provide workers wage increases, to restore the labour share of GDP back to the levels prior to the start of neo-liberal policies in the 1970s; if we dont do this, demand will be lacking for a very long time.

- what should be clear is that there is no such thing as a “job-creator”, non in the sense of an individual. Demand creates jobs. Then there are entrepreneurs, who bring great ideas to market.  My income is your sales; your expenses are my income.

“It would appear that a substantial issue going forward will be intergenerational fairness where we could pass to the next generation an economic opportunity that is substantially diminished from the one we inherited. I could develop the case that the next generation will have lower incomes, higher taxes, less services, higher rates of youth unemployment, significantly larger amounts of per capita government debt, higher cost of secondary education and lower pensions. The signs are there for the potential of higher levels of social unrest among the connected youth that rightly feel disadvantaged by their predecessors.”

- as I’ve noted, whether we have lower incomes is a matter of choice; governments can choose austerity and continue to favor business over labor, and that will continue the wage stagnation the average developed world worker has experienced for 30 yrs; it’s a matter of public policy, and we can change those policies to encourage unionization, to place workers on company boards as they do in Germany.  

-We can have higher taxes, but what of it? Northern European “socialist” economies are currently doing rather well and operating with higher tax levels than Canada, or the US or the UK.

- Higher taxes could easily be placed on the wealthy, with little negative impact on investment – optimal tax rates on the 1% are estimated to be as high as 70%-80%. During the 1950s and 1960s we operated with significantly higher tax rates on the wealthy and GDP per capita grew faster than it has during the last 30 yrs or so of neo-liberal policies favoring the elite. Nobody got rich on his won; pay it forward.

- So we have ways and means to pay for what is important to average citizens, whether it’s education or pensions; it’s a matter of choice of public policy.  What the elite would prefer is to financialize everything – most every dollar of an average person’s paycheck going towards the financial sector in the form of big mortgages, car loans, credit card debt, student loans.  If Mr. Brown wishes to avoid unrest, it’s doubtful that austerity will get us there; youth unrest is about the crony capitalism many of the elite have set up for themselves.

“There are so many other problems in so many parts of the world, with the potential to generate other crises and a steady stream of negative news going forward – for example: the instability of the Middle East, several important elections in the developed world, including the unfortunate socialist electoral results in France, the behavior of the casinos on Wall Street that have lost sight of the purpose of capital markets and risk management and the potential expiry of the Bush tax cuts which could impact the US economy by over 30% of the GDP. There are already forty-eight million Americans now collecting food stamps while social security and healthcare programs are massively underfunded and therefore uncertain.”

- ah yes, a moment of criticism directed at Mr. Brown’s and mine industry: Wall Street finance.  One would be lead to believe that casino/crony capitalism is a US Wall Street phenomenon.  It exists in Canada too, but our press is even worse at rooting it out than in the US.

We should note that Canadian banks required a direct bailout to the tune of about $100 billion during the financial crisis; in addition, Flapperty got CMHC to goose the housing bubble to keep the economy moving, to the tune of racking up CMHC guarantees of private banks to more than $500 billion, which is about 33% of GDP; in all CMHC’s operating history until the financial crisis it had racked up guarantees of $150 billion, so Flapperty and Harper tripled the exposure of taxpayers in the blink of an eye.  For those who are unfamiliar with CMHC, it is a federally owned crown corporation that guarantees mortgages; you the taxpayer are on the hook for any losses on that $500 billion in guarantees issued to Canadian banks; one might ask, if taxpayers are guaranteeing these mortgages, why are banks making any profit? Under real capitalism, you make money when you take risk.

- according to Mr. Brown the election of a “socialist” president by France, is equivalent to decades of repression in the Middle East and Wall Street’s Casino capitalism.  Last week the LIBOR scandal blew up, in which it was revealed that the big international banks have been for years rigging LIBOR interest rates, which are benchmark interest rates for trillions of dollars in borrowings, from mortgages, to municipal borrowings to borrowing by industrial companies that produce real stuff (as opposed to financial companies, which produce electrons on screens).  

We can’t seem to go a week without another revelation of massive fraud, scandal, corruption or cronyism emanating from Wall Street.  Be assured that if similar news isnt emanating from Toronto’s Bay Street or Howe Street it’s because the Canadian media is even more thoroughly in the tank for the elite, drunk, lazy or plain just doesn’t give a rat’s ass.  Fyi, we should note that France’s socialist president only wants to do a little less austerity.  Some socialist.

- the Bush tax cuts are responsible for the single largest deficit hole, or near, in the US federal budget. As we’ve noted, taxes on so-called “job creators” can increase significantly from current levels without impacting investment (taxes on the superwealthy were raised at the beginning of Bill Clinton’s presidency, which set the table for a decade of growth and balanced the budget).  As Mr. Brown later corrected, the GDP impact of the GWB taxes is 3%, not 30%.  Regardless, we dont have a tax problem or an investment/supply problem, we have a demand problem.

- Mr. Brown trots out an old right wing refrain that social security and health care are unfunded.  In fact, US social security has a fairly massive trust fund – it’s been collecting taxes from workers in excess of current payouts for many years; this means workers have prefunded their retirement; social security is well funded for a couple of decades, as US actuarial reports show same as OAS actuarial reports demonstrate the program’s soundness; the unfunding of health care argument is very misleading; we pay health care on a pay as you go basis; are we supposed to put away $200k when someone is born?; this right wing argument is the same as saying a company has not prefunded its future operating expenses – absurd.

- it’s true that lots of people in the US are on foodstamps, but this would not have to be the case if the US, and others, strived for policy that ensured workers received a fair share of GDP; in the three decades up until the 1970s average worker incomes increased in proportion to producitivity; since then, wages have not kept up with productivity, and according to several studies the median US worker is no better off, or worse off, than his equivalent from 40 yrs ago.  It’s neo-liberal policies that have directed an increasing share of GDP to business and a near all time low to workers.  That was a choice based on policy – policies against worker and for corporations. It can be reversed.

“There is a current smugness amongst Canadians who have come to believe that our banks and economic management are somehow superior – but the truth is, while we may be the tallest of the pygmies, we are in the process of building our own debt and fiscal crises in spite of more responsible federal fiscal management.”

- Canadians have indeed felt somewhat superior in the management of our financial sector and government compared to the US and Europe.  There are indeed ways that our regulatory system is better, but on balance we have not that many differences compared to the US.  

We also have too big too fail banks who have direct and implied government guarantees.  It’s doubtful the federal government would let a major Canadian bank fail, so we are in the same situation as the US – we have banks and bank management earning big money, backed by taxpayers.  It’s not really capitalism, is it?  Think about it, our banks same as US banks, run massive proprietary trading operations, under the implicit guarantee of the taxpayer that if shit hits the fan we will be there to bail them out.  About half of Canadian mortgages are guaranteed by taxpayers: zero risk.

Mr. Brown does not run a bank, but indeed he does benefit from the system.  It’s quite obvious the vast majority of what banks do is a utility type service – it should be heavily regulated, boring, standard work of lending that earns a meagre profit, with management teams paid like bureaucrats not mandarins.  The part of banking that is prop trading, investment banking, gambling, should have no place in financial institutions with implicit taxpayer guarantees.

- Mr. Brown again references our so-called “debt and fiscal” crises.  But as we’ve already noted, federal and BC provincial debt was decreasing prior to the fiscal crisis (excluding the crony debt arising from BC Liberal privatization schemes).  

I wonder whether Mr. Brown would really have supported the Canadian federal government not engaging in Keynsian fiscal stimulus as response to crisis?  I doubt it.  Mr. Brown knows as well as anyone that had governments not engaged in stimulus GDP would have contracted a hell of a lot more.  That’s what happened during the Great Depression and we learned from that experience.  In a moment of naked clarity, even Mitt Romney admitted so; he was promptly trashed by the arch right wing for not adhering to the standard GOP talking points.  

Notice that Mr. Brown doesn’t like the deficits arising from the economic crisis, but he also wants the GWB tax cuts for the wealthy to continue, so he in fact likes stimulus as long as its for rich folks; spending on regular folks is however bad.  That in a nutshell sums up today’s “free-enterprise” folks; just look at Romney, who has pledged support to the Paul Ryan budget proposal which will significantly lower income taxes on the wealthy, cut spending on unspecified programs for workers and blow a bigger whole in the deficit (this is what the independent Congressional Budget Office concludes); it’s hardly responsible, or as Paul Krugman puts it bluntly the Ryan plan is a complete con job.  B  ut todays Cons only want the illusion of being responsible.  Any debt we are building now is the result of the crisis, not of “entitlement” programs.  This is pure bait and switch.

“• The truth is the federal debt will grow from $457 billion in 2007 to $671 billion by 2016 as federal debt, as a percentage of GDP, has risen from 29% to close to 35%.”

- an increase of 6% of GDP appears fairly inconsequential in the face of the biggest economic crisis since the Great Depression.

“• Provincial debt will rise from $319 billion in 2007 to approximately $600 billion in 2016 with Ontario’s provincial debt, in the same period, increasing by over $150 billion as it doubles from $156 billion to $310 billion. Tragically Ontario’s financial condition impacts on the rest of Canada as it represents 46% of the Canadian economy.”

- yes, scary big numbers. Not really. The federal government could maintain stimulus or temporarily increase transfers to provinces at negative interest rates (bondholders are willing to pay the federal government to lend it money); this would put people back to work, grow the economy and decrease fiscal pressure on the provinces at virtually no cost to the federal debt ratio; we could fix our roads, bridges, water and sewer systems, and invest in public transit infra.

“• Program spending is up 60% in a decade from $130 billion and will reach $268 billion by 2016.”

- context fail. Im not gonna do Mr. Brown’s work for him.  Over what period did spending increase from this to that?  Again, our federal government can never go bankrupt as long as we issue our own currency.  The biggest lie the right wing pushes is that government should operate like households.  Well, households dont issue their own currency, so anyone that begins an argument by comparing govt to households, well, you are about to be econned.

“And that is not all . . . in the current year the combined federal and provincial deficits will be $41 billion which is shared equally between them but the provinces are faced with a greater problem as healthcare costs on average are going through 50% of the provincial budgets with the baby boomers not yet at their peak healthcare spending. In addition, our personal debt levels average at 150% of annual income, higher than both the U.S. and U.K., with B.C. being the highest in Canada.”

- more scary big numbers; but it should be noted that that the combined $41 billion in deficits are about 2.7% of GDP; so with even low GDP growth of 2% plus inflation of 2%, debt to GDP is decreasing.  It’s amazing when denominators grow faster than numerators.  Now just think about that for a moment, if the denominator (GDP) is growing faster than the numerator (the deficit), debt as a percentage of GDP is decreasing, which means a government can actually run a certain size deficit forever; government borrowing doesnt seem all that scary.  

Now consider the counterfactual idea…what if government ran sustained budget surplus for a really long time? A government budget surplus means the government would be buying financial assets out of the economy; if it did that for a long long time it would end up owning the entire private sector; if our governments ran a budget surplus of just $50 billion for 10 years they could own one tenth of the Canadian private sector; this is an accounting identity, not theory. So it seems government budget surpluses are also not great things, and in fact government budgeting is a rather more complex thing than household or company budgets and the refrains you here about how governments should run their budgets like you run your household or that governments need to operate like businesses are big fat canards.  It makes for nice sloganeering, though.

- personal debt levels are indeed high; yet the solution to that is not government austerity.  Canadian government policy needs to change so that average workers again share in the gains from productivity growth; also we need to stop creating housing bubbles (Flapperty, the guy decreased amortization period in recent weeks was the same genius that goosed the CMHC and increased amortization periods during the financial crisis so that the economy would recover and Con re-election chances would be strong).

- we indeed have a housing bubble, created by government policy; what else would happen with government pushing banks and banks having to take no risk on mortgages?

- I would further note that the federal and provincial governments have absolutely failed at reforming our healthcare systems; most European health systems that are universal have significantly lower costs than do we yet they get the same or better health care outcomes; it’s rather easy for provinces to engage in their usual nurse and doctor bashing, but instead why can’t we adopt best practices from other countries? It’s pathetically lazy for the feds to have unilaterally stated they will limit the growth of healthcare transfers to provinces at GDP growth plus inflation; they could have taken a pro-active role coordinating all governments to seek savings; if we sought out best practices we could save billions.

“Clearly Canada’s fiscal regime is unsustainable and needs to be addressed particularly at the provincial level which will require diligent fiscal management. Scott Baker of Stanford University recently commented on the U.S. economy. “Current levels of economic policy uncertainty are at extremely elevated levels compared to recent history.” “We find that an increase in economic policy uncertainty… foreshadows a decline in economic growth and employment.”

- and here the lie comes out.  Our fiscal sustainbility is clearly a matter of policy choice, as discussed above. Does anyone understand what the last sentence has to do with the first?  Regardless, the last sentence is absurd; it’s not policy uncertainty preventing corps from hiring; it’s lack of demand, which is from a lack of sufficient worker incomes.

“The American economy is receding as the rules are unclear and investors are facing too many uncertainties such as future tax policy, the cost of Obamacare, the impact of deficits and entitlements and unfunded programs and liabilities with many states and municipalities near bankruptcy. These uncertainties are compounding the unstable economic conditions with the result that the American economy is again drifting towards recession following an extremely weak recovery in spite of their unprecedented massive stimulus and many other governments in the developed world as well as China.”

- more strawman arguments.  On the day SCOTUS upheld Obamacare, the US stock market reacted with a shrug.  If indeed Obamacare was holding back investment, then on that day US stocks should have plunged. They didnt.  Or were the traders sleeping on the job that day too?

- it’s true many states and municipalities are struggling to pay their expenses, but this is the result of giving out tax breaks to big business, deferring expenses for fairly run of the mill government programs, crap like police, firefighting and education.

- please read the last sentence.  Does it flow? Hodge podge of throwaways.

“In B.C. investment decisions are starting to be deferred for fear that the change to a left of centre government would create similar uncertainties in respect to a very similar list of issues that is proving to be so detrimental to the U.S. economy. If the NDP were elected it would most likely be a two term government and the investors remember all too well the lost decade of the 90’s when our province was ranked 9th in Canada for economic growth. We all know that there is a direct link between investment and employment, particularly employment for our youth and we also need to consider the fact that all or part of the $35 billion of capital projects that are in various stages of planning in Northern B.C. could well be jeopardized.”

- I’m not sure what US policies Mr. Brown is referring to in the US which might be so detrimental to follow. What issues facing the US federal government are similar to the BC government? This business uncertainty and confidence meme put out by the right is getting very stretched.  One would think that if business is making all time high profits as a percent of GDP they should be very confident about investing; so, obviously, the business confidence thing has nothing to do with why business is not hiring or expanding fast enough to bring unemployment down to reasonable levels; as we stated already, business is not hiring due to lack of demand, period.

- Obama as socialist is another meme the right wing froths over.  It is far from having any truth to it; the fact of the matter is that even in the wake of the biggest economic crisis since the Great Depression the US private sector has added more jobs than at this point in GWB’s term.  US job growth does remain sluggish and much of that is because during Obama’s Presidency state and municipal governments have shrunk their payrolls (the US fedgov is about flat I believe); in contrast, under GWB their was a massive expansion of government workers.  

- we should also the US federal budget deficit is primarily caused by the GWB tax cuts for the wealthy and a collapse of federal revenues due to the economic crisis, plus unpaid for wars.  In fact, US federal tax collections are at their lowest level in about 60 years.  That hardly makes Obama a socialist.  FYI, under Obama taxes for the superwealthy are at the lowest point in 80 years.

- Lost BC decade?: ah yes, the BC right wing has gone on about this for quite some time, but how true is it? Not very much.

- the apparent $35 billion in capital projects assumed by Mr. Brown are a bit of a chimera.  These investments very much depend on expectations of future oil, gas and mineral prices.  

As anyone who has paid attention to the North American natural gas market knows, Henry Hub prices have collapsed due to a supply gut arising from rapid expansion of US shale gas reserves; prices will soon go up because the shale gas boom is ephemeral, but that also means large-scale development of BC shale gas is mighty problematic; it’s by no means assured.  

You should also know that if natural gas or oil is exported to Asia, there will be a closing of the gap between Asia energy prices and prices producers currently receive in North America; we will pay higher prices to the tune of billions of dollars per year; for eg., Asia natural gas prices are in the range of $15-$20 compared to about $2 in North America currently; even allowing for netback adjustments, comparable price at our export points for LNG would be in the range of $7-$8, about four times the price we currently pay for natural gas.  So BC, Canadian natural gas prices will face upward pressure (indeed….my BC Liberal MLA answered back and said the government`s internal estimates say BC natural gas prices will increase 10% with LNG exports, so they know, but I dont have much confidence in their math).  

Clearly the producers will do well by receiving high prices for energy sales to Asia and higher prices for domestic sales than they otherwise would receive; the benefits to British Columbians and Canadians are less clear.

- actually, there is no link between investment and employment; to be correct, there is a link between demand, investment and employment; nobody produces stuff they cant sell

- if the northern BC projects can only be profitable by the government giving them away, they probably shouldnt be produced; ie. if you cant pay fair resource royalties, why should we let you develop the resource?

“It is clear to me that in this uncertain world and with these economic conditions, we all ought to put petty partisan issues behind us to ensure we elect a stable free enterprise government. It is not the time for B.C. to take the risk of another failed experiment with the left by letting them back into power by way of a split of the centre right vote.”

- “it is clear to me that” we should further enoble BC’s kleptocracy?  While the NDP may not be much better…and we had better hold their feet to the fire…..it’s a bit of a stretch to assert that what we’ve had is a free enterprise government.  We in fact have had crony capitalism.

“It should be obvious that it is very important to keep the free enterprise forces in B.C. aligned under one political umbrella going into the next election as political fragmentation, in my view, will serve to aggravate the negative business community and investor reaction to a possible NDP win in 2013. Fragmentation of the centre-right will cause many people in the business world to attach a higher likelihood to the prospect that the NDP can last for more than a single term. It is critical that those on the centre-right remain committed, coherent and robust and that those who contribute to fragmentation of the centre right vote come to realize that they are an unintended political ally of the left. In the world we live in today fragmentation on the right could be a disastrous scenario for our province and its economic opportunities.”

- let’s be honest and admit there are few real free enterprise forces in BC politics.  The forces that claim this are actually crony capitalists that would like to continue to suck at the government teet.  There’s little doubt that many of them will manage to do so under an NDP government too. 

“The studies of the Fraser Institute show there is a measurable, positive correlation between free market approaches to public policy and certain outcomes that are economically and socially desirable. We owe the next generation the opportunities and jobs that can only be developed in a free enterprise environment.”

- the “studies” of the Fraser Institute show exactly jack squat.  The Fraser Institute is a libertarian lobby organization that never misses a chance to denigrate a government program or function; it claims to be a think tank, but a real think tank would not start from conclusions then work backwards to fill in the crib notes of analysis.  

The Fraser Institute has a has a long history of issueing shoddy, idealogically driven drivel.  It`s often quoted in BC`s mainstream press, which just goes to show how utterly lazy or dazed and confused our media is.  

The Fraser Institute should really not be quoted as an authority on anything but if the media is to do so it should preface the story with the following words in reference to Fraser: “this is what big business and really rich folks want you worker bees to do“.

What the evidence actually shows is that those governments that have a healthy respect for average workers, the common person, do better.  What the last few years have shown us is that markets fail, a lot, and, as economists, that is just where we advocate the state getting involved; markets fail in the provision of public goods, in monopoly, in externalities and more; governments screw up regulation, sometimes because regulatory agencies are captured by the industries they’re supposed to regulate; and this is far more common than reactionaries like the Fraser Insitute will acknowledge.

- On the whole, Mr. Brown’s missive is not accurate and is a-factual, ahistorical.  While he is a smart successful businessman there is little reason why any British Columbian ought listen to his suggestions.  

The bogeyman of taxes, debt and deficits is forever alive.  The truth is, the right wing together with the pretend left wing has been successful in, during the last 30 yrs, shifting tax burdens onto the middle and lower classes.  Overall taxes may not have changed much, but because the burden on the average person hasnt changed, or has increased, the average person experiences government as a big burden, and rightly so.  Just in terms of tax regulations, it’s become so complex and time-consuming to deal with the administrative costs that it’s a constant irritant to small business, who have fewer lawyers and accountants on hand than big business.  

The burden on the average person and small business can be decreased by having the rich and big business pay a fair share.  Look, as Elizabeth Warren said, nobody got rich on his own: if you started a business and made a billion dollars you used our roads, employed workers educated at the taxpayer’s expense, a legal system funded by government.   If you think otherwise, try making a buck in the ghettos of Somalia, or some other marauder state.  Taxes dont steal wealth from the elite.  It’s paying it forward.

You shouldn’t take my word for all this either.  There are lots of great BC bloggers out there and financial-economic bloggers.  I don’t nearly have as much experience as Mr. Brown.  But I am an accountant, worked on Wall Street for one of the largest hedge funds in the world for many years, started my own hedge fund that ended up closing at the height of the financial crisis (we didn’t get bailed out!) and now incubate early stage companies.  

People should understand that a business executive does not by default have any special expertise in running an economy, the two are rather very different animals.  Still, Mr. Brown is entitled to his opinion. And it’s a significant opinion, but only one among many who have valuable insight into the current economic situation.  I take exception to how Mr. Brown has framed the debate.  Sure I would like centre left forces to take power in the next BC election, yet I remain worried that they will let their own cronies run rampant, which is unfortunate because BC has for too long been in a state where thieves have had easy access to plunder our public assets.  

Poll: Which Story Should Vancouver Province Do on Stagnant Wages:

The Province Newspaper today posted a story it picked up from AP that indicated wages have been stagnant for the past year.  I had a twitter exchange with @TheProvince pointing out that wages for the average Joe have actually been stagnant for 30 years – average real income has increased just 10% and, since this average is skewed higher by including the top earners, this means median wage (the wage of the person in the middle of the population) has actually been flat, all figures adjusted for inflation.  Meanwhile, incomes for the 1% have increased 180% since the late 1970s, a triple!  See the following study from the Canadian Centre for Policy Alternatives, a think tank/research organization:

The Rise of Canada’s Richest 1%

But I’m asking you, the reader, to vote and indicate which story you would like to see The Province cover.  The short term story in The Province is typical of mainstream media, which increasingly seems to have no historical memory and which has few resources to undertake independent analysis. When the MM do undertake an analytical piece, they frequently turn to right wing “think tanks”, like the Fraser Institute, which is in reality a lobbying and propaganda organization for big business neo-liberal policies.  Please vote

 

The Peasants are Storming the Gate. Let Them Eat Cake?

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I decided to repost the following in light of recent events: Occupy Wall Street.  It was originally posted May 6, 2010 here.

The Global Financial Crisis brought about the single biggest one-time historical transfer of wealth to the financial sector from western taxpayers via the government. This wealth transfer was the culmination of a 30 year period during which the Elite 10% of society gained a near unprecedented share of the economic pie to the detriment of the vast majority because the rules of the economic game have increasingly tilted against the average person. The financial rescues may have been the final scene in an Act with a plotline of unmitigated greed, from the point of view of the average Joe. The system is at risk of disintegrating if it is not reset to reflect fair terms.

According to many measures, personal disposable income for the average Joe has essentially remained flat since the early 1970s and higher living standards were financed by the addition of more two-income households and the mirage of wealth that debt has provided over a 20 year cycle of decreasing interest rates. This joyride is over – interest rates can only go up from present levels and rising rates will pressure consumers.  Or, if rates remain low for a protracted time period it probably means the economy remains in tatters and consumers will remain under economic distress all the same. It is an untenable situation.

Debt loads across western nations vary between the share held as personal debt versus government debt, but it is clear that overall debt levels are high and unsustainable, while some countries are in worse circumstances than others.  We arrived at the present situation through a combination of individual choices and collective decisions at the ballot box, and so the entire citizenry shares responsibility.  However, the elite shared disproportionately in the spoils of economic activity during this period, consolidating its hold on wealth and income, while the median person racked up debt living beyond means.  Both benefited by governments’ rescue of the financial system, except the former remains flush and the latter has empty pockets.  The average person now wonders in bewilderment at how he got bushwhacked by the system.  Looking at the bewildering size of government debt loads he is also wondering whether promises made will be promises kept – the basic Social Compact.  There are doubts.  Witness Greece.

Every nation has an implied Social Compact between the élite and the average citizen, a sort of grand bargain between plebe and patrician.  In western countries, during the post WWII era the general understanding between the parties has been that the plebian classes receive a certain minimum social safety net covering health, education and retirement and a reasonable, fair opportunity to “get ahead in life” (substitute your local version of “life, liberty and the pursuit of happiness” theme).  In exchange, the citizenry acknowledges that the élite will have a disproportionate share of control over the levers of political and economic power.  The exchange ratio may vary from one country to another based on historical conditions, but the implied contract is there.  Except, the average citizen is waking up to the fact that while he wasn’t looking he got jacked.

Consider the statistics for the United States (borrowed from In These Times, with credit to “The Looting of America” by Les Leopold, which I noted indirectly from a Daily Kos post by Meteor Blades):

- in 1973 the richest 1% of Americans received 8% of national income; by 2006 it was 23%, the highest proportion since 1929; separately from the source cited below, the bottom 80% of American earned near 60% of income in 1972 but only about 37% in 2007;

- today the richest 1% earn as much as the bottom 50% combined;

- in 1970 the top 100 CEOs on average earned 45 times as much as the average worker; by 2006 that average CEO earned 1,723 times the average worker wage;

- in constant dollars, real wages slid from a 1973 peak of $746 per week to $612 per week in 2007, an 18% decrease – in essence wages completely unhinged from productivity growth (if wages had kept pace with productivity, an average worker today would earn $1,172 per week, or $60,892 annually compared to the actual current annual wage of $31,824, 91% difference;

- some will argue that non-wage income – worker benefits – has increased significantly to account for the difference; not so: total average compensation in 2007 was $25 per hour, a marginal increase from 1973 and fully $16 per hour below the $41 per hour level had total compensation kept pace with productivity growth;

- the average American made up for the relative declining income share by (1) compensating with the illusion provided by debt – the ratio of household debt to income increased from 55% to 127% and (2) working the longest hours in the world, adding second incomes from spouses and reducing leisure time;

- in aggregate U.S. economy-wide terms, this transfer in the balance of income has left average workers $3 trillion short (annually) in a $14 trillion economy.

Now consider the distribution of wealth (courtesy of Professor William Domhoff, Sociology Department, University of California):

Wealth Distribution

The above chart is a little hard to read as it did not transfer over clearly, but the notable parts are the top right sections labeled for the top 1% of Americans and the red sections for the bottom 80%.  The left chart – Net Worth, which includes personal residences indicates that in 2007 the top 1% control 35% compared to the bottom 80% which controls 15%.  Since house prices have fallen significantly since 2007, the right hand chart, which includes only financial wealth, is probably more relevant – it indicates the top 1% control 43% of financial wealth compared to 7% for the bottom 80%.  Contrary to the doctrine of “Ownership Society“, the average Joe has little at stake in the financial system.  (Note:  additional  statistics are available if anyone wishes to follow the link above).

Clearly the Social Compact is bust.  Three decades of public policy justified under the guise of improving economic competitiveness in the face of globalization progressively weakened worker bargaining power.  If that were not enough, workers have been asked to share the burden of rescuing a global financial system in which they have a tenuous stake and the elites hold the lion’s share.  Then further, with unmitigated gall a portion of the elite rewarded itself with grand bonuses  from real and mirage financial profits derived entirely from unprecedented government largesse in an array of direct cash injection sweetheart deals, cheap money, assumption of debts, guarantees, favorable public policy, and the re-enablement of accounting chicanery.

And while the average Joe is a co-conspirator in arriving at this penultimate financial mess in so far as his voting behavior assented to the irresponsible management of government, blame lies predominantly with those who control the levers of power.  The plebeians are the frustrated shareholders of a great company brought to the edge of bankruptcy by bad corporate governance and incompetent management foisted upon it by a cozy, insular Board of Directors, the patricians.  You do not have to be a Bolshevik to understand things this way, but merely shake your head of discredited extreme neo-liberal economic doctrine and the hypocritical bastardized manner in which it has been applied in practice and used to justify a stealth fight against the interests of the average person to the benefit of the élite.  Neo-liberalism in practice is nothing more than Corporatism – some of the dead standard bearers it claims – like Adam Smith – through the usurping of catchphrases such as laissez-faire and free hand of the market, would stand decidedly against Corporatist doctrine.  To find a way out of the current mess, policymakers are better advised to seek solutions not in the ahistorical neo-liberalism that functions as Corporatism today, but in the writings of much denigrated giants of economic thought such as Keynes and John Kenneth Galbraith, who brought historical context into their public policy analysis.

Now that the financial system appears to have been stabilized by massive government spending, the usual bobbleheads have trotted out as the “grown-ups” offering up the same bitter-pill advice Corporatists have been peddling for decades:  that government debt is massive, deficit are unsustainable and therefore  government spending on social programs must be cut significantly.  In short, that the Social Compact must be gutted and the plebeians must sacrifice yet more.  Enter stage right the armed black hat bond vigilantes, lining up behind the patricians opposite the facing crowd of plebeians.  Well, the show of force is not working on Greeks so far; a plebe must have shouted to his brethren, “let’s rush’em….they don’t have enough guns to shoot all of us.”

The advice of the deficit hawks is frustrating and wrong on so many levels.  They are not convincing because they do not have an answer for what happens next.  Take the example of Greece where massive government spending cuts are proposed.  A lot of economic analysts agree that the massive spending cuts are going to result in shrinking GDP and therefore cause debt/GDP to jump even higher, and that a formal default by Greece has only been postponed.  When formal default happens, will Greeks be asked for more cuts?  Where would this process end?  Does anyone believe that Greeks would accept another round of cuts in a couple of years without complete havoc in the political order?  These deficit hawks seem to believe that Greece might somehow grow its way out by deflating wages to become more competitive and exporting more.  The preposterous deficit hawk stance is laid bare when you acknowledge that Greece does not exist in a vacuüm – can western countries as a whole, which together with Japan constitute more than 50% of global GDP, massively shrink spending and all hope to somehow still grow their way out of debt?  Married with the deficit advice is an “understanding” about exchange rate adjustments.  At the advent of the financial crisis it was apparently the U.S. dollar that needed to depreciate.  As the crisis has now spread to Euro zone sovereigns, the deficit hawks say that Euro depreciation might help.  Japan’s debt situation is upside down and the Won has been strengthening, so does the Won need a significant depreciation?  And do they really expect China, and perhaps India or other developing countries, to shoulder the other side of the foreign exchange rate adjustment (and massive western spending cuts) without encountering significant economic trouble of their own?

Another reason the deficit hawks cannot be taken seriously is that they do not have an answer for how the average household in the most indebted western countries is to shoulder significant cuts in government spending and tax increases, which shall surly include a decrease in transfer payments, and still manage to pay down massive personal debt loads.  As stated above, government and household debt levels vary from one western country to another and some are in worse shape, but since economies are so connected, further problems in one country can spread quickly – contagion.  In the U.S. 25% of households are underwater on their mortgages!, and it is not at all clear that house prices may not fall further, even over shooting on the downside.  That’s a serf underclass, one that has increasing numbers of reasons to withdraw from the system.

In Canada in the mid 1990s we went through debt/deficit crisis management.  Since the 1970s the federal government had been significantly increasing spending financed by large deficits.  The early 1990s recession was a tipping point for government finances – the bond rating agencies were threatening the federal government’s Triple A credit.  I remember watching on TV news of a first ministers conference (a meeting called by the Prime Minister summoning the leaders of all ten provinces) in the depths of economic crisis.  They lined up in front of the cameras as a group and reassured the nation that recovery was imminent.  They had ashen looks on their faces and were not convincing.  A new Liberal Party government headed by Prime Minister Chretien brought on a decade of significant economic and spending restraint.  By 2000, Canada emerged in a significantly better position fiscally and government debt levels continued to decline through the last ten years.  But Canada took the deficit slaying pill in a wholly different world environment that does not have much in common with today.

I see today’s deficit hawks and smell fear, for even they seem not quite convinced that they have it figured out in the present circumstances.  Let’s call it like it is – the neo-liberal Corporatist deficit hawks have no comprehensive solution for a way out of our current troubles.  Foisting upon the economy discredited old policies is a sign of intellectual laziness and dishonesty.  Where the dishonesty comes in is that prior to the financial crisis government debt was very manageable in the sense that the crisis was not acute.  In the U.S., deficit hawks argued deceitfully that government debt was higher than it actually was – you often saw quoted federal debt figures in the $50 trillion or $75 trillion range counting “unfunded” liabilities such as Social Security; while they counted the present value of the obligations, they did not count the present value of the dedicated and general government tax receipts.  What’s more, prior to President Bush’s arrival in the White House trillions in surpluses were expected and could have paid down debt, but instead we ended up with tax cuts for elites and trillions in projected deficits by the time he exited, even before counting the impact of the GFC.  We saw few of today’s most ideological deficit hawks lambaste the failure to take the opportunity to recast the fiscal situation by paying down debt when the money was about to flood into government coffers.

The plan to tear up the Social Compact was decades in the making through deregulatory policies that reached beyond reason, the broad-based weakening of worker bargaining power and fundamental changes in tax systems against the interest of the average person.   The maroons who lead us here now ask the plebeians to cede yet more so that the patricians can continue feasting.  Why should and why would the average Joe agree to this?  And that’s just the point, the fear you smell from the élite is not just the stench of foul old square policy prescriptions that do not fit today’s round peg, but a sense that the peasants are restless and may take up pitchforks.

I believe many in positions of power understand that standard deficit hawk policy solutions may not work in present circumstances, that they may only result in postponing a reckoning, à la Greece.  But beyond that, we are not in a business as usual world even setting aside the GFC – I cannot take seriously the deficit hawk diatribe and accompanying Corporatist policy prescriptions because they are offered up completely ignorant of the challenge of Peak Oil – the potential collapse of oil supplies deems standard government and economic policy actions recipes for disaster.  Out of self-interest alone the élite ought to consider Peak Oil risk as part of the discussion.  Laying out the challenge of Peak Oil, under the worst case scenario where oil supply decreases are imminent, persistent and large, the world economy and financial system would quickly succumb to chaos and potential collapse.  Discussing a new Social Compact under this scenario is not worthwhile, as all bets would be off.

The moderate Peak Oil scenario for which we should prepare a plan is one where, if we are lucky, oil production plateaus around a peak for a few years before declining gradually, giving us time to transition to a post carbon economy.  It is a scenario under which we can face up to our energy challenge and emerge in a couple of decades with a renewed Social Compact.  Elites ignore the energy challenge at their own peril, because without a comprehensive and fair transition plan, the moderate Peak Oil scenario will evolve and incorporate elements of the worst case scenario.  In other words, the moderate scenario is an open possibility only if it is chosen, otherwise you are left with either (a) hoping that Peak Oil doesn’t happen or (b) letting Peak Oil takes its course and accept that the world will reorder itself after a period of chaos.  (For a glimpse at what such a world might look like, review the link Soviet and Cuban collapse Peak Oil collapse and this link discussing how Peak Oil could devolve into a hyperinflationary economic scenario).

Achieving an orderly transition to a post-carbon economy from the present starting point requires recognizing that most households, which are already financially overstretched, need to be bolstered for the transition period during which prices of basic necessities will be rising (gasoline, but also food, heating and other items) and unemployment remains high (or is even rising) as increasing oil prices cause businesses to contract.  This means that the vast majority of households (perhaps including the bottom four quintiles that include households that make up to about $90,000 per year in the U.S for example) may need tax relief and/or an increase in government transfers.  It also means that professional and executive/managerial workers will have to shoulder a higher tax burden, along with the élite and the corporate sector.  Besides tax changes, government policy needs to reverse the loss of worker bargaining power.

It will be argued that raising taxes on corporations and high income workers will cause them to flee to more inviting locales.  Good luck with that – in a Peak Oil world there will be significant social, economic and political instability most everywhere, more so in relatively poor countries that might otherwise be recipients of outsourcing from western countries, and they will have less means to offer the security of investment and everyday life that now appears inviting and assured.  Furthermore, as Jeffrey Rubin has argued, the end of the Age of Cheap Oil can be expected to bring about a period of de-globalization as rising goods transportation costs come to outweigh labor and other cost savings from locating production far afield.

In these circumstances, an increase in taxes of 5%-7.5% of GDP is entirely possible over a period of a few short years.  Coupled with spending restraints on discretionary programs and seeking out of efficiency gains in mandatory program spending could provide the resources necessary to bring budget deficits under control over a period of several years and also provide funds for investing in a post-carbon transition.  Every western country’s budget also has significant “off-budget” items where governments forego tax receipts or provide subsidies to individuals and businesses in the form of tax credits or deductions, such as the deduction for mortgage interest in the U.S. – these items will have to be reviewed and scaled back keeping in mind the overall goal of tilting back the tax burden away from average households but also improving tax efficiency.  These proposed tax changes/redistributions, amounting to about $1 trillion on the highest earners in the context of the U.S. are not crazy; according to the Economic Policy Institute, more than a third is accounted for by just reversing the tax policies introduced by the Bush administration; much of the rest represents a strong suggestion that the top income quintile contribute a big share of its 90% take of the approximate $3 trillion increase in household income during the Bush years – that’s correct, the top 20% of households received about 90% of the $3 trillion increase in market income during the past 10 years.  Appropriating 20% of that gain is not revolutionary thought.

Government deficits should generally not go to zero in a Peak Oil scenario, even though this does carry some risks – a portion of new revenues should be used to bring deficits down gradually to where debt levels can come down through economic growth (the end of growth is the risk) and inflation.  Besides investing in tilting the tax system towards the bottom quintiles, significant dollars – several hundred billion annually – need to be invested by the government in infrastructure, R&D and other programs that will facilitate the transition to a post-carbon economy.  Many of these programs will be job creators, directly by the government or in partnership with business, that hopefully counteract employment losses caused by rising oil prices.  There is plenty of low-hanging fruit – I won’t go into it here.  There are also other economic issues, like the impact of policy changes and Peak Oil on current account deficits and international money flows – I acknowledge those, but, again, this is not the post to deal with those items.

The neo-liberal Corporatists will scream bloody murder and view the suggestions here as pie in the sky socialism.  What are they doing besides sticking their heads in the sand?   I believe strongly that markets should be left free to operate relatively unfettered, in general, but government needs to act where there is market failure.  Government also needs to intervene in a capitalistic society to ensure that the system’s basic fairness does not get so out of whack that a small minority reaps all the gains, leaving the vast majority to wonder whether it ought instead to simply withdraw from the system.  Had we acknowledged the Peak Oil problem and the growing imbalances in our system early, we might have dealt with them through minor adjustments mostly relying on markets.  It’s too late for that.  The potential imminent onset of Peak Oil requires wide scale government intervention to quickly rebuild the economic and social system.  Extraordinary times call for extraordinary measures.

Note:  Thanks to Papicek from Daily Kos for his post Deficit Reduction I – Pushing Back on the Myth, which helped extend my thinking re: the bobbleheads.

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Jack Mintz Tax Myths are Myths

Title: "No, No! Not That Way" Locati...

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The highly respected economist Jack Mintz, University of Calgary, writes a piece in the National Post today “The Campaign’s Top Corporate Tax Myths” in reference to the ongoing corporate tax debate in Canada’s Election 41.  I have to take issue with Mr. Mintz’s assertions, at least partially.

The Canada election 41 narrative includes an ongoing debate how whether and how much increases or decreases in the federal corporate income tax rate would decrease or increase federal government tax receipts.  Given Mr. Mintz’s stature, I have a feeling the media will pick up on his article and, as they have been wont to do, accept these assertions as solid, without some independent research and checking.  And in my opinion there is plenty of research out there to question some aspects of Mr. Mintz’s mythbusting.

The simple truth of the matter is that neither economics or tax policy are sciences; they remain an art.  Economists who are well-trained can run all the statistical regressions they want until they are blue in the face, but in the real world economic and business decision-making are significantly more complex than any economic model can easily capture.  Just look at the GDP or federal deficit predictions going into and coming out of the recession – the models were behind the real economy.  Just last week the finance department reduced is previous projection of the deficit for this year.

So with that, let me raise some concerns with Mr. Mintz’s mythbusting:

Myth 1: Mr. Mintz asserts that corporate tax cuts increase investment.  I agree, in general.  But, he goes on to assert that increasing the federal corporate tax from 3% from 15% to 18% would decrease the capital stock by $50 billion over the next seven years, based on a study done by Mike Parsons for the years 200-2005.  First, the federal corporate income tax is at 16.5% now, and is scheduled to decrease to 15% next year, so it’s not a 3% increase (and companies had to expect that potentially the decrease would be put on pause until the feds eliminated the deficit, so they may not have factored it into their planning – I know that I haven’t done so for my clients).

Second the study by Mike Parsons for a 5 year period is not meaningful – it’s far too short a period and it involves only this one instance of corporate income tax changes, so I wouldn’t put significant credence into this study – I would want to look at multiple periods, multiple instances of tax changes and across multiple taxing jurisdictions and at various levels of changes in absolute and relative terms, and starting points).

Third, lowering corporate income taxes below personal income tax rates – as is the case for Canada now – causes some unincorporated businesses to incorporate, so this change needs to be considered in the effect when looking at the change in the capital base as a result of changes in the corporate income tax rate.  Here’s some work done on this topic in Europe at Erasmus University Rotterdam and Solvay Business School.  Basically, what we’re saying here is you’re just having some income move from one taxable bucket to another in the pursuit of lower tax rates.

Myth 2 – Mr. Mintz asserts that corporate taxes on large companies are paid not by the rich and powerful but by employees in the form of lower wages and customers in the form of higher prices.

I’ve got several issues with this assertion.  Starting with the second part about increases in taxes being filtered through to customers in the form of higher prices.  In theory, this is correct in a land of inelastic supply.  But in the age of intense competition from both domestic and international competitors – thanks to “free trade” – it’s doubtful that much of any corporate tax increase is going to filter through into higher prices.  If you don’t buy this argument, then you are saying, at least to some degree, that free trade has not been very beneficial, which calls into question another tenet of economic theory.

As for whether corporate income tax increases result in lower employee wages, well I have to question that as well.  Let’s look at it from the perspective of corporate income tax decreases: is there any evidence that the long term decrease in corporate income taxes has filtered through and provided higher wages to average employees?  From a practical standpoint, there are a few mouths in line who are going to get their hands on the tax cut cash ahead of employees, not least of which will be management (see the post “How Corporate Tax Cuts Really Work“), who will reward themselves with higher pay and more stock options.  Hasn’t that pretty much been the trend?  In any case, despite decreasing corporate taxes over decades, the average employee’s wages have been stagnant for thirty years.  Thirty years?  Yes.  Of course, this fact doesn’t get much play in our 24/7 news cycles, but it’s true.  See:  “The Peasants Are Storming The Gate: Let Them Eat Cake?” (This piece is focussed on the US, but the Canadian trend is similar).  The article looks at data going back more than thirty years to demonstrate that the vast majority of increase in GDP due to productivity has gone to the very wealthy, the top 10%, who have seen their incomes increase by an order of magnitude.

Myth 3 – Mr. Mintz asserts that an increase in corporate income taxes to 18% won’t raise an additional $6 billion in revenue.  May be, maybe not.  But given what I’ve said above, I don’t think this assertion can be made so easily.  I would also point out that Jim Stanford, Economist for the Canadian Autoworkers, asserts differently, so maybe this falls in between these two well regarded economists.

Myth 4 – I agree with Mr. Mintz, and any way this was of little consequence.

To summarize, I don’t wholeheartedly disagree with Mr. Mintz’s assertions, but I don’t think they should be accepted as gospel.  Too often, we and the media accept as fact economic assertions that fly out from right leaning economists, while discounting those of the left, and also give extraordinary credence to economic assertions by business lobby’s, right wing think tanks and large companies.  They don’t have all the answers, but they frequently do have conflicts of interest (although I’m not making this claim about Mr. Mintz).

There’s a couple final things to consider.  Frequently the types of economists and organizations named above seem to do narrow, static analyses to come up with self-serving or simplistic economic assertions.  We really have to learn that the real world is much more complicated.  It’s nice to have really low taxes.  But the thing is, after a decade of tax reductions in Canada, we’re actually not that highly taxed compared to peer countries.  In fact, our federal government is smaller than the US federal government.  Did you know that? And that’s even eliminating the effects of the financial crisis, which the US suffered from more.  Now, I also realize, being in business myself, it’s very nice to have low corporate taxes, maybe zero, but we also have to fund governments so they can build all the infrastructure that companies need to be competitive in today’s world – hard and soft infrastructure: roads, schools, bridges, and well educated employees.  If you lower taxes to the point where you’re skimping on this stuff, maybe even drawing down on this capital, you’re not going to be an attractive destination place for business in the future, at least not for the types of jobs Canadians want.

Finally, let’s not forget that we’ve just been through the single biggest financial crisis since the great depression.  The beneficiaries of the prior boom were the wealthy, while those who have suffered most are the lower and middle classes, while the wealthy have already recovered any losses they may have suffered.  So out of some justice, we should be seeking to build our social program base, not “starving the beast” of government, which takes its toll on the bottom 80% of citizens.  I don’t think Mr. Mintz was in any way advocating such – I think he was just helping to clarify the tax debate (which needs to be done).

If you read this, please consider tweeting it to media.  I’m fairly certain Mr. Mintz’s column in the National Post today is going to get a lot of play (at least between the overzealous coverage of the Royal wedding – Good Grief!).

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