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IMF economist: Crisis begins with inequality - An interview with Michael Kumhof

International Monetary Fund rescue packages are usually associated with "structural adjustment", privatisation and liberalisation. But IMF economist Michael Kumhof's recipe for avoiding crunches is increased equality

via www.eurozine.com

In the interview, Michael Kumhof states

According to former IMF chief economist Raghuram Rajan, politicians who saw the drop in [the majority's] income chose not to deal with the inequality but rather to make more money available. Thus, people could take out loans to maintain the consumption they were accustomed to. The banks were granted permission to lend more money and the liberalisation of the financial market made big loans possible.

On what finally triggered the collapse:

It was initially the huge debts among individuals and later states that caused the explosion. Personally, I withdrew all my money from the market in 2005. It wasn't hard to see what was happening. I have personal experience from lending at a bank. The financial sector doubled in the period before the crisis. The debt burden accelerated in the ten years preceding the crisis. Insufficient regulation was the triggering factor. But it's a mistake to focus on the straw that broke the camel's back. My view is that it is a phenomenon that spans a generation, rather than a single business cycle.

On austerity:

I think stimuli can do a lot of good as long as state revenues do not cause imbalances in the economy. We should be trying to bring more money into the public treasury to stimulate the economy rather than cutting costs 

 

Book Review: 'Power, Inc.' by David Rothkopf - Businessweek

 

Romesh Ratnesar summarizes David Rothkopf's new book, Power, Inc.: companies more than governments now rule the world. This is not without varying degrees of benefit among nation states and individuals. Certainly corporations adapt more adeptly and quickly than do governments to changing circumstances. Corporations are vital. But, the situation described in Power, Inc. is not without negative consequences, too, that various nations are addressing differently. (Photo: Kristine Church and the Engelbrekt statue, Main Square, Falun, Sweden, original home of Stora Kopparberg ("Great Copper Mountain," now Stora Enso, post-merger, and based in Finland.))

From the review:

Rothkopf’s lament is not that multinationals like Stora [arguably the oldest continuously operating corporation in the world] have grown so strong, but that the world’s governments have failed to keep pace. The most eye-popping sections of Power, Inc. detail how decolonization, globalization, and financial deregulation have subverted the prerogatives states have traditionally reserved for themselves—like controlling their own currencies, regulating companies operating inside their borders, and providing a basic safety net for their citizens. Rothkopf asserts that as many as 160 of the 192 United Nations member countries are little more than “semi-states,” a “faded version of what a state used to be or was supposed to be.” Meanwhile, the world’s richest country, the U.S., has allowed deep-pocketed, well-connected “supercitizens” to distort the political process in ways that undermine the public interest.

What can be done? Rothkopf argues that the financial crisis has precipitated a “reckoning” that is causing much of the world to abandon America’s laissez-faire approach to economic policy. He identifies various “competing capitalisms” that are “growing faster,” “competing more tenaciously,” and “combating inequality more effectively” than the U.S.; all of these alternatives also call for a more robust government role in the economy. Still, whether the successor to the American model comes from China or Sweden or Singapore, it’s difficult to see the balance of power tilting away from global corporations any time soon. Rothkopf asks former U.S. Treasury Secretary Robert Rubin whether, in the wake of the 2008 meltdown, large financial institutions should have been broken up. “Don’t you see?” Rubin replies. “Too big to fail isn’t a problem with the system. It is the system.”

via www.businessweek.com

Krugman v./+ The Economist, and the Muted Middle

When Krugman of the economic (and social) American left and The Economist of the economic British and European right are agreeing...it's wise to pay attention. 

They're agreeing on characteristics of both the European economic crisis and to an extent what actions should be taken by various nations, including the US, to best deal with respective national economic problems.

What they agree on are mostly facts--realities; yet, realities shockingly seldom heard in the US especially among commentators on the political right, both partisan Republicans and self-described libertarians.

(Image: cartoon of Adam Smith, Karl Marx, Friedrich Hayek, and John Keynes. Heaven forbid that even if they weren't all equallycorrect and incorrect, each thinker might each have been at least somewhatcorrect--and incorrect! Heaven forbid one of them mightn't have been 100% correct and the other three 100% wrong!)

Both Krugman and The Economist have recently pointed out that the European crisis is rooted as much or more in monetary policy than in fiscal irresponsibility evidenced by bloated welfare programs.

In terms of welfare programs' role, Krugman notes in "What Ails Europe?" that:

[I]n 1991, when Sweden was suffering from a banking crisis brought on by deregulation (sound familiar?), the Cato Institute published a triumphant report on how this proved the failure of the whole welfare state model.... Sweden, which still has a very generous welfare state, is currently a star performer, with economic growth faster than that of any other wealthy nation. 

So, welfare programs' generosity aren't hurting Sweden. But note that Sweden is not a Eurozone country, either. Perhaps it's the Eurozone itself that's the problem. (Wait for it. The Economist ends up saying as much!)

But, Krugman looks at Eurozone nations, too, not just Sweden:

Look at the 15 European nations currently using the euro (leaving Malta and Cyprus aside), and rank them by the percentage of G.D.P. they spent on social programs before the crisis. Do the troubled GIPSI nations (Greece, Ireland, Portugal, Spain, Italy) stand out for having unusually large welfare states? No, they don’t; only Italy was in the top five, and even so its welfare state was smaller than Germany’s.

The Economist in "A Very Short History of the Crisis" noted much the same recently:

Before the crisis the governments of both Ireland and Spain ran budget surpluses. Both meticulously kept within the limits for deficits and debts set down by the stability and growth pact—unlike Germany, which flouted the rules for four years from 2003 (and avoided punishment). Nor did Italy lurch into extravagance. (Emphasis mine.)

Krugman's summary of the European crisis is as follows, with The Economist's below that. Both note that large welfare bills are at least in part a result of the crisis.

Krugman:

By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects of the gold standard — defects that played a major role in causing and perpetuating the Great Depression.

More specifically, the creation of the euro fostered a false sense of security among private investors, unleashing huge, unsustainable flows of capital into nations all around Europe’s periphery. As a consequence of these inflows, costs and prices rose, manufacturing became uncompetitive, and nations that had roughly balanced trade in 1999 began running large trade deficits instead. Then the music stopped.

If the peripheral nations still had their own currencies, they could and would use devaluation to quickly restore competitiveness. But they don’t, which means that they are in for a long period of mass unemployment and slow, grinding deflation. Their debt crises are mainly a byproduct of this sad prospect, because depressed economies lead to budget deficits and deflation magnifies the burden of debt

The Economist:

Debt in [the GIPSI nations] has become a burden not because of government profligacy but because each enjoyed a decade of low interest rates and was then hit by the financial crisis. Easy credit fuelled debt in households and the financial sector. The European Central Bank oversaw a binge of cross-border lending. In the crisis unemployment and hardship have deepened, increasing the bill for welfare. Some countries, such as Ireland and Spain, have needed to find money to prop up their banks. These new expenses fell on the state just when tax receipts collapsed—catastrophically in countries that had seen a property boom

Krugman and The Economisteven share some degree of opposition to austerity as a way of addressing economies worsened by the 2088-2009 Great Recession, though Krugman is much more opposed. Also, he sees debt as a short-term necessary evil to be outweighed by the benefits of stimulus (i.e., government spending and tax relief) if the stimulus is sufficiently large, while The Economist is more fearful of debt and deficits.

Krugman's lack of alarm may be evidenced by statements like this:

[C]ountries that aren’t on the euro seem able to run large deficits and carry large debts without facing any crises. Britain and the United States can borrow long-term at interest rates of around 2 percent; Japan, which is far more deeply in debt than any country in Europe, Greece included, pays only 1 percent.

True, but a $15.5 trillion US debt? With interest it's more than $56.6 trillion! That's an astronomically staggering sum. Granted, the US GDP is $15.0 trillion, but can the US's GDP be expected to increase substantially anytime soon as a means of lowering the debt? Republicans say, yes, if taxes and regulations are cut. Output will increase and jobs and consumer spending will follow. Democrats say, yes, especially if government stimulus helps fuel new industries, increases the infrastructure the economy needs, and places money short-term in people's pockets--even the unemployed--so consumer demand doesn't devastatingly fall. To which Republicans have numerous counterpoints, to which Democrats have counter-counterpoints, etc.

It's an endless discussion, really.

An now to another point: it's an endless discussion that also is not going very well. I find the discussion to be most helpful when it's least ideological and partisan. But, that's dispiritingly rare these days.

I recently had the priviledge of joining Peter H. Schuck at a dinner at a friend's home. He's the author of Meditations of a Militant Moderate: Cool Views on Hot Topics. While the book focuses mostly on debates thriving in the first few years of this century, there's a basic principle at work in his analyses--articulated in various places in the book--that's relevant even more now than when the book was published, and it's a principle that I keep finding myself coming back to: the once not-so-shocking principle that many issues are complex, that there's inherent value in trying to understand others' perspectives, and that it's exceedingly rare that one side of in a debate is 100% right while all the other sides are 100% wrong.

This position seems to be one that fewer and fewer Americans hold--it particular, it's exactly the position not-held by commentators on Fox News and CNBC on one hand and MSNBC on the other.* Heaven forbid, some problems' solutions can't be summarized by a bumpersticker slogan. That goes for economics, too. When someone shouts (and it's increasingly frequently shouted) that you can't spend your way out of debt, it increasingly frequently strikes me as an overly narrow simplification of all things to be considered. I feel exactly the same way when someone else shouts that you also can't cut your way to growth. It's been refreshing in the past year when I've heard non-shouting types on TV say that cutting too much government spending too fast is dangerous and in the same breath say that debt is a serious problem. Guess what? These might not be mutually exclusive realities! (Gasp!) But the last word seems usually given on TV to someone insisting that one or the other economic viewpoint is totally wrong. I'm then inclined to remember that as strong as religious fundamentalism is, there's such a thing as epistemological fundamentalism, too: it's called being ideological, and it results in the politization of problem-solving, and it can make problems even harder to sort out.

See also:Keynes v. Hayek, a BBC Business news feature.

*This is the secondary reason why I mostly get my news from The PBS NewsHour and the BBC--the main reasons being the measured tone of the NewsHour and the BBC and the refusal of each to dumb-down content.

Union pensions in New York

From Crain's New York Business, January 30, 2012:

A recent report on city pensions noted that it would take an IRA of $825,000 to generate the same income a city teacher retiring at 62 would receive from his or her pension. A police officer retiring at 51 would need a $1.1 million IRA to generate the income equal to his or her pension.

Last week, the [New York City] comptroller issued a report stating that the median retirement assets of the state's urban residents who have IRAs or similar plans and are nearing retirement are $67,000.
.....
State and local governments' and school districts' pension costs are expected to grow to $2 billion in 2014....

Read more (subscription required).

 

 

Why The U.K. Doesn't Need The E.U. | Newgeography.com

To some, British Prime Minister David Cameron’s decision to demur from the new euro rescue plan has made the U.K. irrelevant on the world scene. Yet by moving away from the euro zone, Cameron did something more than reaffirm Britain’s opposition to a German-led Europe: He asserted Britain’s greater, historically grounded legacy as the center of the Anglophone world.
.....
The British are “cousins” to Americans, Canadians, Australians and New Zealanders in ways the French, Germans and Italians are not.
.....
Any close look at British interests and personal ties reflect the enduring nature of its tribal essence. London’s status as the world’s financial center — the critical reason for Cameron’s break with the E.U. — lies not primarily with Europe, but with its scattered former colonies. Britain is the world’s fourth largest investor and the top investor in the United States, which in turn serves as the U.K.’s biggest export market. The U.K. also plays an outsized role in South Africa, Singapore and India, where it is by far the largest European investor.

In this sense, the Anglosphere — including places like India — constitutes a kind of transnational family. Usually ignored or scoffed at by globe-trotting pundits and politicians who define the world by geographic proximity, these global linkages are more important than ever.

via www.newgeography.com

Documents of barbarism

"There is no document of civilization that is not at the same time a document of barbarism." - Walter Benjamin (1892-1940); Theses on the Philosophy of History, VII (1940).

The Economist's "A Very Short History of the Crisis" in Europe

Special report by Edward Carr, foreign editor,* The Economist.

(Spoilers: It's not all down to government profligacy. And Germany isn't blameless.)

Before the crisis the governments of both Ireland and Spain ran budget surpluses.

Both meticulously kept within the limits for deficits and debts set down by the stability and growth pact—unlike Germany, which flouted the rules for four years from 2003 (and avoided punishment). Nor did Italy lurch into extravagance.

Debt in these countries has become a burden not because of government profligacy but because each enjoyed a decade of low interest rates and was then hit by the financial crisis. Easy credit fuelled debt in households and the financial sector. The European Central Bank oversaw a binge of cross-border lending. In the crisis unemployment and hardship have deepened, increasing the bill for welfare. Some countries, such as Ireland and Spain, have needed to find money to prop up their banks. These new expenses fell on the state just when tax receipts collapsed—catastrophically in countries that had seen a property boom

At the same time interest rates surged. Before the crisis investors assumed no euro-zone government would default on its debt. However, as Peter Boone and Simon Johnson of the Peterson Institute in Washington, DC, explain, Germany then signalled that defaults could happen and that investors would have to bear a share of the losses—a reasonable demand, but a hard one to introduce in the middle of a crisis. Some investors asked to be rewarded for the extra risk and others, unwilling to start paying for credit research, just walked away. This set off a spiral of falling bond prices, weakening banks and slowing growth.

Even where troubled euro-zone countries had not been profligate, they have been running unsustainable current-account deficits. Low interest rates fuelled domestic spending and spurred inflation in wages and goods, which in turn made their exports more expensive and left imports relatively cheaper. But it was also because Germany was recycling the surpluses produced by its export machine, financing their consumption.

Germany’s economy is remarkable in many ways, but it was as unbalanced as the euro zone’s peripheral economies. In their determination to save, Germans seemed to forget that in the long run the point of exports is to pay for imports. They must now regret having invested their savings abroad in American subprime mortgages and Greek government debt.

*The Economist's economical editorial style can confuse. I suspect Carr's the editor for stories not relating to Britain, and it's not that he's an editor who's a foreigner.

Save the Middle Class Tax Cut - Facebook Timeline-optimized image

If you're a Facebook user who's switched over to Facebook's new Timeline view for your profile, you can use the image shown here as your Timeline "cover", the large banner-like image at the top of your Timeline.

Click on the image to enlarge it. Then right-click and Save the image to use it.

It reads:

If the Republicans don’t extend the payroll tax cut by January 1st, taxes for a typical American family will go up by $40 each paycheck. Write what $40 per check means to you. Visit WhiteHouse.gov. Or Tweet it:  #40dollars.

Priorities, Values: Plastic Surgery Is More Popular Than Ever - The Daily Beast

Between 2009 and 2010 the average US income fell 0.6% to $62,481, and Americans spent:

1.4% less on clothes
3.8% less on food
2.0% less on housing
7.0% less on entertainment, but
1.3% more on breast augmentation
5.1% more on lipo
8.1% more on eyelid surgery
24.4% more on butt lifts (yes, you read that percentage correctly).

Those increases are because the rich are spending, right? Yes they are, but not in the realm of cosmetic surgery like you might assume they do.... Of cosmetic-surgery patients, 33% make less than $30,000 a year and c. 70% make less than $60,000, according to a 2009 study.

via www.thedailybeast.com

(Image: Oscar-winner Jim Broadbent (as Dr. Jaffe) goes to work on Katherine Helmond (as Mrs. Ida Lowry) in Terry Gilliam's 1985 film, Brazil.)

Top 25 hedge fund managers earned more than all S&P 500 CEOs combined

From Tyler Cowen's "The Inequality That Matters," The American Interest, January-February issue:

For 2004, non-financial executives of publicly traded companies accounted for less than 6% of the top 0.01% income bracket. In that same year, the top 25 hedge fund managers combined appear to have earned more than all of the CEOs from the entire S&P 500. The number of Wall Street investors earning more than $100 million a year was nine times higher than the public company executives earning that amount. The authors [Tyler Cowen quoted] also relate that they shared their estimates with a former U.S. Secretary of the Treasury, one who also has a Wall Street background. He thought their estimates of earnings in the financial sector were, if anything, understated.