Entries by Skeptic (576)


How the Luckiest Generation lived the American Dream

I'm just back from my 50th class reunion at The College of Wooster where I was invited to summarize in ten minutes how we experienced the economy during our lives. I showed graphs of key statistics in PowerPoint about jobs, incomes, upward mobility, and effects on longevity.  A fundamental conclusion was, "No job, no income, no American Dream, premature death."  The most common comment I got was to the effect of, "I'd seen these bits of information before, but never all pulled together like this." There were numerous requests for copies, but since not a lot of retired septuagenarians have PowerPoint, I've converted the presentation to a narrated movie and posted it on YouTube.  Click the icon to view it. (If the YouTube icon doesn't show in your email or RSS update, you may have to click through to this Realitybase post to see it.)

This is a revised version of the video; the original version is here.  If you have PowerPoint you can download this narrated presentation in .PPT [revised 3/14/12 to add missing captions to one slide] and see the links to data sources.


American youth: Digitally skilled and unemployable.

According to conventional wisdom, technological advances and globalization mean that jobs are disappearing for people with outmoded skills and that new jobs are being created that require new skills. Americans whose jobs are offshored should retrain for the jobs of today and tomorrow. America will fall behind in the global competition without better and universal education to teach the skills necessary for the modern jobs that are being created in America.

Specifically, it is often said that the internet has changed everything, and that being comfortable with the paperless, wireless, digital, global, online, lightning-fast, on-demand, information age is the key that unlocks the door to modern jobs. American youth are notoriously proficient in these skills, and those over 55 are notoriously lacking in these skills and resistant to acquiring them. It follows that as industrial age jobs are disappearing and information age jobs are being created, young workers will fit right in and older workers will be left in the unemployment lines. In fact, however, there has been a strong trend in the opposite direction.

The employment-population ratio for 16-24 year-olds started declining in 2000—just as we were all getting computerized and networked. Meanwhile the employment-population ratio for those 55 and older has been increasing since 1993. In the Great Recession, youth employment has been devastated and mature worker employment has hardly been affected at all. If these trends are being driven by skills, conventional wisdom must be wrong about what skills are needed and the importance of education. More likely, it hasn't been a skills story but one about the advantages of incumbency and the need of older workers to keep working as retirement benefits have declined.

And let's do remember this. American jobs were not moved to Chindia in the last decade because the Chindians have better skills. That happened—and is continuing to happen—because Chindian workers are cheaper. Full stop. We've been emphasizing education and skills development in America for decades, and there is nothing apparent in the current emphasis that seems likely to change our output of skilled workers. Nor does the historical record indicate it would contribute much to domestic job creation if we did have more skilled workers. Skilled Chindians will still be cheaper, and young Americans will still be living with their parents as long as that's true.


Which party will do a better job of leading America's retreat from greatness?

Usually when I mention David Brooks it's to disagree with him, but he got it just right in yesterday's NYT op ed, Pundit Under Protest. He is very concerned, as am I, that the 2012 elections will not be about what they should be about.  The electorate is appropriately worried about how to avert a national decline from greatness, but--

[T]he two parties contesting this election are unusually pathetic.  Their programs are unusually unimaginative. Their policies are unusually incommensurate to the problem at hand.

. . . .

The election is happening during a downturn in the economic cycle, but the core issue is the accumulation of deeper structural problems that this recession has exposed — unsustainable levels of debt, an inability to generate middle-class incomes, a dysfunctional political system, the steady growth of special-interest sinecures and the gradual loss of national vitality.

Both parties describe our problems as dire and unprecedented in our lifetimes.  Yet neither party proposes any substantial departures from the policies that got us into this mess.  They are both doubling down on defending the status quo and giving mere lip service to the idea that it would be nice if things would get better for ordinary Americans in spite of that.  There is not, for example, any Presidential candidate and scarcely any prominent Member of Congress who proposes a growth agenda like we had from 1933 until about 1970. If we were to do what is necessary to create full employment and even modestly rising real middle-class incomes, that by itself would solve almost all of our federal, state, local, and family fiscal problems. Remember how we had rising employment, rising real wages, and governmental budget surpluses in the last five years of the 20th Century?

It is somewhat of a mystery why no candidate or party has seized the unoccupied pro-growth political territory.  Surely it would be popular with a majority of voters.  The only explanation I can think of for the absence of this voice in the political fray is that it would necessarily propose significant policy changes that would be deeply unpopular with the sources of campaign funds. What's your explanation for the absence of a pro-growth political movement? 


Canada has lousy health care.

Many Americans are convinced the Canadian healthcare system is lousy because, it is understood, patients have long waits for appointments, are subject to "rationing" of procedures, and regularly travel to the US to get better, faster treatment. Via Paul Krugman, we see that the healthcare system in Canada is almost as bad as in the US—but it only costs half as much per person. The other nations surveyed, UK, The Netherlands, Australia, New Zealand, and Germany, all ranked higher and cost less than either the US or Canada, according to a 2010 survey by the Commonwealth Fund. From the report:


Most Read Realitybase Posts in May

Is this what ended the American Dream? The Democratic Party lost its focus on economic security and prosperity and became more concerned with a range of other liberal values. This post had 10 times as many reads in three days as the second most popular post did in a month.

The American Dream died in February 1973 With graphs from multiple sources showing stagnation of inflation-adjusted middle class incomes since the 1970s after strong and steady post-WWII growth

The Citigroup Plutonomy Memos With key quotations from documents that are being disappeared.

The Dysfunction and Corruption of Our Healthcare System, Its Damage to the National Economy and other Basic Healthcare Matters (Guest Post) Describing a system that is destroying the American business economy and our ability to compete globally, which violates fundamental insurance risk principles, and which has inherent conflicts of interest that prevent quality national health care delivery and cost efficiency, and proposing a solution.

The history of US per-capita petroleum consumption will surprise you.  A graph and other data show US per-capita consumption of petroleum is down substantially from the 1970s, has been very stable since 1983 because of CAFÉ standards, and has fluctuated only slightly with retail price changes.

Why we should pay no attention to the macroeconomists behind the scientific curtain. Too many modern economists are over-involved in their pseudoscientific models and are not held accountable when their advice fails in the real world.

Comparative Advantage—The Unicorn of Free Trade A collection of sources and analyses demonstrating that the assumptions of classic Ricardian theory rarely if ever align with real-world conditions. Views of this 2009 post tend to spike every exam season.

One chart refutes three myths about US foreign trade. About Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade.

Two hypotheses why US CEO pay is so high Charts show that in the US CEO pay is about double that in other advanced countries, implying either that there is a shortage of talent in the US, or that the US CEO pay market is broken.

The US trade deficit is tribute paid to foreigners. And it's big. Nobel laureates Paul Samuelson and Paul Krugman and other prominent economists including Dani Rodrik, Alan Blinder, Martin Wolf, Larry Summers, Joseph Stiglitz, Dean Baker, and even Alan Greenspan have said that the US middle class is net worse off as a result of persistent trade deficits averaging 3% of GDP.


Is this what ended the American Dream?

As often as I repeat and document (here, for example) the fact that real incomes for middle- and low-income Americans plateaued in February 1973 (and incomes for middle- and low-income families and households before the end of the 1970s), I’m still puzzled as to why that happened.  Rick Perlstein offers an explanation in today’s NYT

His narrative seems to be that in the 1970s, after the shellacking of George McGovern by Nixon in 1972 and the re-writing of the Democratic delegate selection process that gave Carter the nomination in 1976, liberalism in the Democratic Party changed its agenda.  It became less about the bread and butter issues of economic security and shared prosperity and more about civil rights, the environment, getting out of Vietnam, and honest and transparent government.  The Humphrey-Hawkins legislation in 1978, which nominally requires the Fed to keep both inflation and unemployment low, was so watered down that the Fed has never let itself be influenced in the slightest by the unemployment half of the mandate.  Humphrey-Hawkins, like Pickett’s Charge, marks the end of an era instead of a consolidation of gains. 

It has seemed to me unlikely that we would ever find a single event, policy change, or market shift that explains the persistent stagnation of real middle and low incomes starting in the 1970s.  If there had been such an occurrence, surely it would have become obvious by now, wouldn't it?  Still Perlstein’s explanation—that there was a great political realignment and all of the endless string of tactical defeats for America’s middle and lower class incomes flow from that—seems rather plausible to me. One reason it seems plausible is that it’s a fair description of my own attitudes as a life-long Democrat.  I was not friendly to labor unions but saw them as more powerful than they needed to be, corrupt, bigoted, and on the wrong side about Vietnam, the environment, and civil rights.  I was a “business Democrat,” then a wary DLC follower, a New Democrat, and even a supporter of Pete Peterson's Concord Coalition.  In short, I was a part of the wing of the Democratic Party that took over.  I regret now what we did to the rest of America. 

In addition to these changes in the Democratic Party, I would think that the August 1971 Powell Memo to the US Chamber of Commerce and how big business and conservatives reacted to that was also very important.  They organized a generations-long ideological fight using think tanks, media control, curriculum influence, campaign finance, etc., and the opposition was never organized and to a shocking degree didn’t notice there was a game on. 

What do you think blew up the American Dream? 


Electing the new IMF head may be a referendum on big banks.

Yves Smith has an interesting take on the maneuvering to name Dominque Strauss-Kahn's successor as head of the International Monetary Fund. Europeans are arguing that it makes special sense now to continue the tradition of having the IMF president be European because it appears the IMF's biggest near-term challenges are in Europe. However, the BRICs (Brazil, Russia, India and China) are making more than the usual amount of noise claiming it's their turn. Smith says that behind the scenes it's really about how diligent the IMF will be in promoting the interests of the biggest international banks:

Crudely speaking, the advanced economies are far more bank friendly than their “emerging” counterparts. China is actively hostile to neoclassical economics and unfettered capital markets. Efforts to make China safe for investment bankers have been rebuffed. India sailed though the global financial crisis relatively well by having capital controls and heavily regulated banks. Pretty much any country that has taken IMF medicine (such as the countries caught in the Asian crisis, like Indonesia, South Korea, and Thailand) also sees the IMF as an enforcer for major capital market firms and international banks. Japan, as a military protectorate of the US, has limited degrees of freedom. Even so, during the Asian crisis, it pushed for a bailout within the region (ie, outside the IMF) and that idea was quickly slapped down by the US.

I can't see much doubt about how this comes out.  Europe and the US together have enough voting power to impose their choice, and I can't see any possibility that Obama will go against Wall Street on this. Yves's post quotes from this Guardian article.

[ADDED at 10:55 a.m.]  Joseph Stilitz agrees in The Telegraph it's largely about the banks:

Behind the scenes there is a battle – between those who put the interests of the banks first and those who put the interests of the people first. Debt restructuring would affect the balance sheet of the banks. The longer restructuring is postponed, the more debt moves onto the books of the public, the more the banks are protected.

Stiglitz also says DSK made important strides in reforming the thinking inside the IMF and that it's important to maintain those departures from neoliberal economic doctrine.


We probably need better college graduates, but we certainly don't need more.

Ezra Klein continues his fine reporting on the economic effects of education here.  He's borrowed the following charts from Catherine Rampell at NYT. Some majors are less disastrous than others, but overall only 55.6% of grads under age 25 have jobs that require college degrees, and 22% are working in jobs that do not. (I don't know whether the other 22.4% includes graduate students or if they are all unemployed.)

College graduates in jobs for which they are overqualified in many cases have displaced qualified high school grads, whose unemployment rates are also soaring.  Further, having many more college graduates than there are degree-requiring jobs bids down the wages for those jobs.

A policy response is complicated. Obviously, at a national level we are wasting money to train up millions of young Americans who will get no substantial opportunity to use those skills. However, at an individual level the college credential--as distinguished from the skills--may help win the jobs competition with high school graduates. So, facilitating higher education for disadvantaged youth can be justified as giving them a better opportunity for even mediocre jobs. 


The difference between Obama and Republicans on free trade agreements

The difference is in the messaging to Americans who lose their jobs. Both the Obama Administration and Congressional Republicans want to enact three new free trade agreements that will offshore more American jobs. The Republicans want to enact the FTAs and say to the displaced workers, "Drop dead!" Obama wants to enact the FTAs and say to displaced workers, "Here's some federal money to get trained for jobs that already have a glut of applicants. Lotsa luck!"

As reported in Bloomberg Business Week:

The White House says it will not send Congress final legislation on three coveted free trade agreements unless lawmakers expand retraining assistance for American workers who lose their jobs because of foreign competition.

. . . .

The White House's insistence that the trade deals be linked to the TAA [Trade Adjustment Assistance] program comes as administration officials hold talks with Congress to finalize the agreements it reached with South Korea, Panama and Colombia. Republicans broadly support the pacts and Obama has said they are integral to his economic agenda.


Shale Gas Tutorial

The US Energy Information Agency has a fine, illustrated briefing on shale gas--how it differs from conventional natural gas, where it's found, how it's produced, what it's potential is. Most of us will find it very helpful in understanding the frequent news stories about shale gas.


If a deficit commission looked like America

The new California redistricting commission approved by voters in November 2008 requires a diverse membership reflective in certain ways of California's diversity.  Dave Johnson at Campaign for America's Future points out that neither the President's Simpson-Bowles Deficit Reduction Commission nor any other power center working on these issues has a membership that might be considered even slightly diverse. He shows us what an economically, educationally, occupationally, and linguistically representative commission would look like (emphasis his).


Why we should pay no attention to the macroeconomists behind that scientific curtain

Economist Peter Radford argues that much of modern macroeconomics is deliberately divorced from reality and does more harm than good in addressing current issues of political economy. For me, this evokes the Wizard of Oz.

There is an economist to defend any hair-brained policy proposal. Anything a politician cares to suggest can be given a well argued, and reasonable defense by a well respected and tenured professor from somewhere.

And when economists are hopelessly wrong? Are they fired? Are they pilloried and thrown out of their tenured positions to suffer the voluntary unemployment lines they condemn others to? Dean Baker has recently thrown a hissy fit over this. Of course not. Failed economists are a dime a dozen in our best schools. They are still teaching whatever they first thought. No amount of empirical data threatens their prestige. Why? Here’s the great scam: because economics is a self-contained, self-referential pursuit disconnected, very deliberately and carefully, from the dangers of having to be useful. It is thus immune from disproof. All that Popperian conjectures and refutations mumbo-jumbo is not applicable to economics. Economists have constructed their world so as not to have to be practical. Instead they are quasi-philosphers, quasi-mathemeticians, quasi-physicists, quasi-psychologists, and quasi-sociologists. By so being they can dodge between the bullets of practical questioning and never have to improve their art. Being quasi-everything is a great defense. You can confuse all the specialists and answer to no one. Except yourself.

These people should have the moral decency not to advance their theories as useful political policies, Radford says.

You’d think that, at the very least, they would stress test their advice. That they would check their theories against some evidence of their efficacy. That they would have the ethical decency to do no harm. Before, that is, and not after, they urge policies whose consequences, both intended and unintended, we all have to live through.

Radford says 19th Century economists began developing the cloak of pseudoscience (when science and respect for science were booming) to attempt to counter Marx's charge that they were merely mouthpieces for heartless and rapacious capitalism. 

No one doubts that the study of economies is a very serious and potentially socially valuable pursuit. Most of its great advances have been at times when there were big political and social upheavals and dangers that required insight into the way in which an economy works. A real one. Not a made up one. Early economists were intrigued and influenced by the processes and challenges of industrialization. Prior to that they had been embroiled in arguments over taxation and trade, both of which were contentious and relevant topics to the newly emerging nation states of the 1600 and 1700′s.

Then along came Marx, who thundered away at the disruptive issues of early capitalism and its satanic mills. His critique was sufficient to demand a right wing response, which came in the form of marginalism and Walrasian systemic thinking. Those advances were an attempt to make economics scientific and thus immune to the implied Marxist charge that the early theories were simply justifications for capitalist favoring policies.

That attempt to shift economics from being politically motivated towards being scientific, and thus cleansed of political taint, gathered momentum and led to even greater discord in the 1930′s and later. One part of economics wandered off into the supposed safety of the self referential community I mentioned above, content to manipulate ever more abstract models until it ended up with people like [Nobel laureate] Lucas openly calling his analysis utopian. The other channel was filled with people trying to engage a more “realistic” set of theories that recognized the vagaries and complexities of the world. But because those vagaries are intractable, or have been, to the tools economists inherited from their political economy origins, and because much of the subject’s key topics are still framed in 1800′s terminologies these realists have made less of an impression. They don’t appear as scientific. Their models are kluge-like and not filled with impressive mathematics. So the so-called scientists won. They invented “positive” economics, where theoretical discussions disdained empirical proof, and where math wizardry counted for more than connection with practical policy.

Which is why a recent poll of economics post-graduate students showed a belief that being good in math is more important to being a good economist, than knowing anything about the economy. Abstraction for abstraction’s sake is the watchword of modern mainstream economics.

Read the whole article in Real-World Economics Review Blog.


Executives inflate their own compensation with stock repurchase programs.

Exxon-Mobil and ConocoPhillips reported surging profits last quarter, and both used over half of net income to buy back their own stock in the open market.  No extraordinary dividends or bold new re-investment or acquisition programs. Center for American Progress, which has the figures here, points out that the effect—and probable intent—of such programs is to drive up share prices, which makes executive stock options more valuable. Warren Buffett explained and complained about this practice in the 2005 Berkshire Hathaway annual report (at 16).

Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay. The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement. Take, for instance, ten year, fixed-price options (and who wouldn’t?). If Fred Futile, CEO of Stagnant, Inc., receives a bundle of these – let’s say enough to give him an option on 1% of the company – his self-interest is clear: He should skip dividends entirely and instead use all of the company’s earnings to repurchase stock.

Let’s assume that under Fred’s leadership Stagnant lives up to its name. In each of the ten years after the option grant, it earns $1 billion on $10 billion of net worth, which initially comes to $10 per share on the 100 million shares then outstanding. Fred eschews dividends and regularly uses all earnings to repurchase shares. If the stock constantly sells at ten times earnings per share, it will have appreciated 158% by the end of the option period. That’s because repurchases would reduce the number of shares to 38.7 million by that time, and earnings per share would thereby increase to $25.80. Simply by withholding earnings from owners, Fred gets very rich, making a cool $158 million, despite the business itself improving not at all. Astonishingly, Fred could have made more than $100 million if Stagnant’s earnings had declined by 20% during the ten-year period.

Fred can also get a splendid result for himself by paying no dividends and deploying the earnings he withholds from shareholders into a variety of disappointing projects and acquisitions. Even if these initiatives deliver a paltry 5% return, Fred will still make a bundle. Specifically – with Stagnant’s p/e ratio remaining unchanged at ten – Fred’s option will deliver him $63 million. Meanwhile, his shareholders will wonder what happened to the “alignment of interests” that was supposed to occur when Fred was issued options.

A “normal” dividend policy, of course – one-third of earnings paid out, for example – produces less extreme results but still can provide lush rewards for managers who achieve nothing.

CEOs understand this math and know that every dime paid out in dividends reduces the value of all outstanding options. I’ve never, however, seen this manager-owner conflict referenced in proxy materials that request approval of a fixed-priced option plan. Though CEOs invariably preach internally that capital comes at a cost, they somehow forget to tell shareholders that fixed-price options give them capital that is free.

It doesn’t have to be this way: It’s child’s play for a board to design options that give effect to the automatic build-up in value that occurs when earnings are retained. But – surprise, surprise – options of that kind are almost never issued. Indeed, the very thought of options with strike prices that are adjusted for retained earnings seems foreign to compensation “experts,” who are nevertheless encyclopedic about every management-friendly plan that exists. (“Whose bread I eat, his song I sing.”)

Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.



More on the moral basis for limiting immigration and not offshoring American jobs

In my first post on this subject, I wrote this:

It is moral to give preferences to in-groups over outsiders, nuclear family over extended family, family over other community members, members of one's religion, political party, union, or other organization over non-members, tested and loyal members over applicants and probationary members, etc.  Neither our civilization nor even our species can survive without cohesive groups whose members are loyal to and support each other to the partial or total exclusion of others.  The ability to form and maintain groups of composition, function, and commitment appropriate to life's difficulties, perils, and threats is fundamental. 

In a later post, I pointed to science suggesting there is a neurological cause—or at least a process—for unconsciously favoring in-group members, and other science suggesting a survival advantage to favoring in-groups in that natural selection may conserve and spread genes that are helpful to the group but not to individual group members.

Now, let's look at the other side of the argument and consider the implications: Let's suppose Americans do have a moral obligation to share with poverty-stricken or merely less-fortunate Chindians by enduring the joblessness and stagnant and declining wages that globalization causes in America. If that's true, must it not also be true that well-off Americans have on obligation to take less so that not-so-well-off Americans can have more? Both must be correct moral statements, or neither must be. There is no valid argument that low- and middle-income Americans have a moral duty to share with Chindians, but high-income Americans have no moral duty to share with low- and middle-income Americans, is there? And yet what has actually happened in America in recent decades, especially in the last ten years is that low- and middle-income Americans have shared with the Chindians and the high-income Americans have shared with nobody but have benefitted from a rising level of income inequality last seen in America in 1929.

And BTW, inequality in America is now higher than for any other long-term OECD member but Mexico and Turkey. From Catherine Rampell, Inequality Rising Across the Developed World.


Most Read Realitybase Posts in April

The Citigroup Plutonomy Memos With key quotations from documents that are being disappeared.

The Dysfunction and Corruption of Our Healthcare System, Its Damage to the National Economy and other Basic Healthcare Matters (Guest Post) Describing a system that is destroying the American business economy and our ability to compete globally, which violates fundamental insurance risk principles, and which has inherent conflicts of interest that prevent quality national health care delivery and cost efficiency, and proposing a solution.

The American Dream died in February 1973 With graphs from multiple sources showing stagnation of inflation-adjusted middle class incomes since the 1970s after strong and steady post-WWII growth

The history of US per-capita petroleum consumption will surprise you.  A graph and other data show US per-capita consumption of petroleum is down substantially from the 1970s, has been very stable since 1983 because of CAFÉ standards, and has fluctuated only slightly with retail price changes.

Two hypotheses why US CEO pay is so high Charts show that in the US CEO pay is about double that in other advanced countries, implying either that there is a shortage of talent in the US, or that the US CEO pay market is broken.

State of the Union, Part 2—The Great Recession is far worse than any other post-war recession, and there are big underlying long-term problems. Quotations from the President's vivid, dystopian description or our economic problems in his January 2010 address, supplemented with charts and data showing he did not overstate our problems.

US job creation has been declining since April 2000 and is now in freefall. Features a dramatic graph.

One chart refutes three myths about US foreign trade. About Smoot-Hawley, the post-WWII export "boom," and "self-balancing" trade.

What's the market alternative to this big government program? On a per-vehicle-mile-traveled basis, conventional command-and-control regulations have reduced deaths by 85%, tailpipe pollutants by 89%, and fuel consumption by 40%.

Comparative Advantage—The Unicorn of Free Trade A collection of sources and analyses demonstrating that the assumptions of classic Ricardian theory rarely if ever align with real-world conditions.


More on the disproportionate political power of the affluent

In Common Ground for Tea Partiers and Liberals, I suggested economic class distinctions are more important in elections and legislation than are ideologies.  I made the point again on Mark Thoma’s blog, The Rightward Shift in the Political Center of Gravity, and Apinak responded with a link to a 2005 paper by Princeton associate professor Martin Gilens, Inequality and Democratic Responsiveness.  Here are the abstract and part of the conclusion of the Gilens paper:

Abstract:  By allowing voters to choose among candidates with competing policy orientations and by providing incentives for incumbents to shape policy in direction the public desires, elections are thought to provide the foundation that links government policy to the preferences of the governed.  In this article I examine the extent to which the preference/policy link is biased toward the preferences of high-income Americans.  Using an original data set of almost two thousand survey questions on proposed policy changes between 1981 and 2002, I find a moderately strong relationship between what the public wants and what the government does, albeit with a strong bias toward the status quo.  But I also find that when Americans with different income levels differ in their policy preferences, actual policy outcomes strongly reflect the preferences of the most affluent but bear virtually no relationship to the preferences of the poor or middle-income Americans.  The vast discrepancy I find in government responsiveness to citizens with different incomes stands in stark contrast to the ideal of political equality that Americans hold dear.  Although perfect political equality is an unrealistic goal, representational biases of this magnitude call into question the very democratic character of our society.

. . . .


If government policy is uniquely responsive to the preferences of affluent Americans, as the evidence above suggests, by what mechanisms do the affluent exert their influence?  My data are not well suited to answering this question, and space constraints preclude even an adequate account of the possible mechanisms at work.  But the most obvious source of influence over policy that distinguishes high-income Americans is money and the willingness to donate to parties, candidates, and interest organizations.  For example, a study of donations to congressional candidates in 1996 finds that four-fifths of donors who gave $200 or more had incomes in the top 10 percent of all Americans. [Citation omitted.]  Since not only the propensity to donate but also the size of donations increase with income level, this figure understates—probably to a very large degree—the extent to which political donations come from the most affluent Americans. . . .

Here is another link to the Gilens paper.


Really simple macroeconomics: Why businesses, employees, and investors disagree on what to do about the economy, and why nobody wants to fix the trade deficit. 

Recently, I emailed to some friends this Mark Thoma post, "A New, Progressive Washington Consensus Remains a Feasible Goal" and got back an email asking what "aggregate demand" means. This was my reply (slightly edited), which upon reflection seems worth sharing with Realitybase readers because it helps explain why the various political factions line up behind different policies to address our economic stagnation.

Origin of the Aggregate Demand Term.  Typically, economics texts start with the concepts of "supply" (what quantity of an item sellers will offer at various prices) and "demand" (how much buyers will buy depending on price) and how the interplay of those two forces results in a market-clearing price and affects suppliers' plans for expanding/contracting capacity to supply such stuff in the future (shifting next season from corn to beans to cotton, etc.).  Building on this, the texts turn to macroeconomic issues—how zillions of those individual markets, plus tax systems, transfer payments, savings rates, the money supply/velocity, etc. work together to influence things like unemployment, inflation, and "business cycles" (economy-wide expansion or contraction of total economic activity).  In the macroeconomic context, texts use the term "aggregate demand" for the sum of all buyers' purchases of all goods and services in the US.  Notice that in the micro context, the discussion tends to be about "tendencies" and "preferences" and "curves" and "elasticity/inelasticity" of demand "functions," but in the macro context aggregate demand generally means what actually was purchased and sold last month or last year; so maybe "aggregate demand" is not the most felicitous or obvious term to describe the sum of all actual transactions, but there we are. 

Here's how "aggregate demand" fits into the current political economy debate in Washington.

GDP and Aggregate Income.  The official definition of Gross Domestic Product ("GDP") is that it equals Personal Consumption Expenditures + Business Investment (in such things as offices and factories) + Government Expenditures (consumption and investment but not transfer payments like unemployment insurance or Social Security) + Net Exports (unfortunately for the US a negative number for the last 30+ years).  Each of these four buckets of production can only be sustained if the customers (personal, business, government, and foreign) keep buying at the same levels—thus, maintaining their respective contributions to aggregate demand.  (The GDP calculation doesn't know or care whether the money spent to support aggregate demand is from current income or is borrowed, as much of it was in the housing bubble.)  Except for build-ups and draw-downs of inventories, aggregate demand must (as a matter of the applicable double-entry accounting identity and common sense) equal aggregate production and sales. It's the production and sales that give people/institutions incomes that allow them to contribute to aggregate demand by buying more goods and services.  So if aggregate demand declines, aggregate incomes must also decline in the same amount, which is the opposite of what most of us desire.  Of course, incomes tend to decline more and faster for the least powerful and often not at all for the most powerful, a cause of increasing inequality. 

Keynesian Stimulus of Aggregate Demand by Government Deficit Spending.  It has been observed that aggregate demand varies from time to time depending on how much money people have to spend (which is strongly influenced by unemployment, wage rates, and the availability and cost of credit), their degree of optimism or pessimism about the future ("animal spirits" in Keynes's phrase), and other factors.  The key Keynesian insight about the Great Depression was that really deep, prolonged reduction of economic activity is not necessarily self-correcting as had always been assumed (and is still assumed by right-wing economists and the former Washington Consensus).  He showed how aggregate demand can get stuck at a low equilibrium level and is hard to get started again—because employment and wages, on which 70% of aggregate demand depends, are stuck or keep spiraling downward—and pessimism reigns.  Keynes said government should kick-start economic activity into self-perpetuating growth by temporary deficit spending to replace the part of aggregate demand that went missing from the private and business sectors (foreign trade was not a big factor in those days).  Note that if government increases spending but keeps its budget balanced by increasing taxation, there is little or no stimulative effect because personal and/or business aggregate demand is further reduced approximately a dollar for each dollar of increase in aggregate government demand/outlays.  Therefore, an unavoidable consequence of deficit hawkishness is that it precludes the use of Keynesian stimulus and tends to drive GDP down instead of up.  So who wants to eliminate the possibility of Keynesian stimulus by keeping the federal budget in balance? Lenders do. They are deathly afraid of inflation because the debt securities they hold will immediately lose market value as interest rates climb, and if held to maturity the loans will be repaid with dollars that have less purchasing power (which tends to make it easier for debtors to repay).

Business Investment Aggregate Demand Stimulus.  Republicans and business/finance interests typically argue that we can stimulate aggregate demand (and jump start the economy) by encouraging an increase in Business Investment by lower corporate tax rates, paying subsidies, providing other benefits that add to business profits, and reducing tax rates for high-earners.  Whether the economy as a whole responds or not, these policies are mighty welcome to businesses and their top executives. Although theory provides some support for such actions, the problem is that in recent decades we've been doing a lot of that and the macroeconomic benefits have been very poor to non-existent.  Businesses have not been investing in plant and equipment in America at historic rates but have been paying bigger dividends, buying back their own stock, buying other companies, and building facilities abroad.  Even when Acme Industries does buy some new machine tools for its Cleveland plant, if they buy those machines from Germany, to that extent there is no increase in aggregate demand or US GDP.  Thus, in our highly globalized economy, some part, maybe a large part, of any increased Business Investment demand "leaks" offshore.   

Personal Consumption Expenditure Aggregate Demand Stimulus.  Labor- and consumer-oriented Democrats (and Keynes) say government gets the biggest, most immediate and strongest aggregate demand increase for its deficit-spending buck by putting money into the hands of poor and middle class people who will spend every dime of it immediately—thus quickly increasing aggregate demand in the consumer expenditure bucket.  Obviously, this is in the self-interest of the recipients even if it doesn't work for the economy as a whole.  When the US economy was largely self-contained, such boosts to aggregate demand created opportunities for domestic businesses and their employees to produce more and earn more.  Now, however, to a considerable degree increased aggregate consumer demand "leaks" to offshore factories and service centers and stimulates increased production and incomes in Chindia instead of here. 

Net Exports Are Killing Us.  The part of the GDP equation that is being largely neglected by politicians is Net Exports.  Obama has announced a goal of increasing exports by a certain implausible amount, but if imports increase by the same amount (as they probably will), there will be no improvement in Net Exports and no resulting improvement in GDP.  He's blowing smoke in our faces.  Further, as net offshoring of jobs continues, the wages and salaries associated with the lost jobs are pulled out of aggregate consumer demand domestically.  Similarly, businesses, pursuing cheaper labor and other cost advantages, are reducing their aggregate demand for new/expanded domestic plant and equipment in America and are investing instead in Chindia—adding to aggregate business demand and incomes there instead of here.  These effects and the "leakage" of remaining domestic consumer demand and business demand for imported capital goods create a continuing economic downdraft that is apparently stronger than the lift from any Keynesian countercyclical government deficit spending.  To my great frustration, we are arguing in Washington about how to get the economy back to the trend line and ignoring the fact that the trend line has been plunging downward for at least 11 years.  Deck chairs. Ice bergs. Arrrgh!  Why is this balance-of-trade ice berg being neglected in Washington—by Republicans and Democrats? I think it's because Wall Street, multinational corporations, and other powerful interests are profiting handsomely from the status quo, and both parties are heavily reliant on these interests to finance their election campaigns.


The King's Speech--American version

Jimmy Kimmel has the trailer. 




Hospitals kill six times more people than highways.

Yesterday the Obama Administration announced a program intended to reduce medical errors and accidents and save more than 60,000 lives over three years. The program will be funded by $1 billion authorized by the Affordable Care Act ("Obamacare") and is projected to reduce Medicare reimbursement costs by $50 billion over ten years, plus billions more savings for Medicaid and non-government expenditures. How could such a huge payout be possible?

The answer seems to be that deadly but readily fixable hospital practices are endemic. This PBS Newshour segment reports that 98,000 lives are lost each year in America as a result of medical errors and accidents in hospitals, according to a 1999 study. A study covering 2000-2002 estimated that the annual US death toll from hospital errors was 195,000. A November 2010 study estimated that hospital errors cause 180,000 deaths per year just among Medicare patients. To give these death rates context, "only" 32,708 people were killed in traffic accidents in 2010.

The death toll is just the tip of the ice berg; these same reports estimate that 33-40% of patients are the victims of some kind of hospital error that does them harm and increases costs. Perhaps that's the most shocking statistic of all. No wonder hospitals don't want to be held accountable for their negligence.


How Money Polarized Congress And Made It Dysfunctional

I've written here and here about the increasing and corrupting role of money in political campaigns and separately about increasing political polarization and deadlock in Congress. Thomas Ferguson links the two developments; he says it's how both parties have reacted to the tsunamis of campaign contributions that has caused the polarization and deadlock. He lays it out in this New Deal 2.0 interview by Lynn Parramore, How Political Money Drives Deadlock, where there are also links to his scholarly work on the subject.

In What does it mean that the US electorate is "center right?" Nothing, I posted some telling graphs and other data showing that public opinion did not shift noticeably from left to right, or away from the center and toward the extremes either, between 1972 and 2008. Basically, voters' opinions about politics show and have shown a Gaussian (normal) distribution with most voters near the center and not the extremes. This one from a 2008 Time Magazine poll is typical.

In stark contrast, I wrote The US Senate is dysfunctional because there are very few centrists, as is shown vividly in this graph posted there.

Ferguson connects these two phenomena by arguing that the leaderships of both parties in Congress have installed pay-to-play systems for themselves, committee chairs, and Members.

TF: In a word: money. Since the mid '70s, more and more political money has been moving right and center-right. To understand Congressional polarization, though, you have to focus sharply on the crucial moment, which was 1994. That was the second stage of the Reagan Revolution, when Republicans took over both houses of Congress. Notice the key political players then. You have Newt Gingrich, who was organizing the GOP push in the House; Phil Gramm, who headed Senate fund raising for the GOP; and Haley Barbour, who chaired the Republican National Committee. These people weren't 'bowling alone'. They were free market fundamentalists. They wanted to cut taxes, on high brackets especially. They wanted to push deregulation of the financial and telecommunications industries. They wanted to abolish things like the EPA and the Consumer Product Safety Commission and cut back the FDA, the FTC, and just about every other government regulatory agency. The one area where they liked Big Government was defense.

These anti-government, pro-corporate Republicans broke every record for raising political money. Look at Gingrich and his history in particular. When he started attacking the older Republican leaders in the House as timid and too willing to compromise, money came pouring in. Yes, they supported and allied with evangelical religious groups. But those were always secondary to the main objective, which was to deregulate the economy and roll back the New Deal in all its manifestations.

LP: How did the 1994 Republican victory affect Congress itself?

TF: When Gingrich won control of the House, he installed what amounted to a pay-to-play system internally, which forced individual representatives to compete to hold their positions on key committees and leadership posts by raising funds for the party. The effect on the House was far-reaching, because the seniority system was already pretty much dead as a result of reforms in the seventies. The movement to limit the terms of committee chairs also worked in this direction, because it meant that more posts were coming open on a regular basis. What happened was that the entire Congress became money-driven.

Positions on key committees, leadership posts — they were all being sold. The money collected then was poured into election campaigns, especially for so-called "open seats," in which no incumbents were running and in doubtful races. The vast spending and noisy campaigns heated up the political atmosphere in and out of Washington, as the media transmitted the messages.

The Democrats looked at the Republicans' pay-to-play system and basically decided to copy it. They did this instead of mobilizing their old mass constituencies. Today, as my paper documents, both parties are essentially posting prices for influential committee slots and leadership posts.

The Democrats' decision to emulate the Republicans and follow the money shifts the system's center of gravity to the right, as both parties frantically cultivate investor blocs. The result is the weird political world we live in. Behind the scenes, investor blocs and businesses maneuver for advantages in both parties. The system's center of gravity moves to the right, checked only by the diminishing influence of unions and other mass political groups that retain some resources and influence on the Democrats. You end up with two "money-driven" parties. The parties are not identical, but they have this in common: They cannot possibly campaign only on appeals to investor blocs, so each party reaches out to select public constituencies to scrape together enough votes to win elections, in a sea of public cynicism.

Polarized politics is money-driven politics and political parties are first of all bank accounts, whatever else they do. More precisely, the current polarization of the system is the direct result of the Republicans' attempt to roll back the New Deal and the way the Democrats responded. I regret to say I don't see much chance that it will abate any time soon. The Obama administration's failure to deliver "real change" has given the Republicans a new lease on life. Less than three years after the financial collapse, which handed the presidency and both houses of Congress to the Democrats on a platter, free market fundamentalism is back. Today Republicans look closer to rolling back the New Deal than they ever have. They are unlikely to see much reason to compromise; especially when the Obama administration, in the middle of trying to raise a billion dollars for the 2012 campaign, declines to press a strong defense of investments in people and regulation, not even financial regulation.