Posts Tagged Economic
Stabilization Won’t Save Us
By NASSIM NICHOLAS TALEB
Published: December 23, 2012
THE fiscal cliff is not really a “cliff”; the entire country won’t fall into the ocean if we hit it. Some automatic tax cuts will expire; the government will be forced to cut some expenditures. The cliff is really just a red herring.
Likewise, any last-minute deal to avoid the spending cuts and tax increases scheduled to go into effect on Jan. 1 isn’t likely to save us from economic turmoil. It would merely let us continue the policy mistakes we’ve been making for years, allowing us only to temporarily stabilize the economy rather than address its deep, systemic failures.
Stabilization, of course, has long been the economic playbook of the United States government; it has kept interest rates low, shored up banks, purchased bad debts and printed money. But the effect is akin to treating metastatic cancer with painkillers. It has not only let deeper problems fester, but also aggravated inequality. Bankers have continued to get rich using taxpayer dollars as both fuel and backstop. And printing money tends to disproportionately benefit a certain class. The rise in asset prices made the superrich even richer, while the median family income has dropped.
Overstabilization also corrects problems that ought not to be corrected and renders the economy more fragile; and in a fragile economy, even small errors can lead to crises and plunge the entire system into chaos. That’s what happened in 2008. More than four years after that financial crisis began, nothing has been done to address its root causes.
Our goal instead should be an antifragile system — one in which mistakes don’t ricochet throughout the economy, but can instead be used to fuel growth. The key elements to such a system are decentralization of decision making and ensuring that all economic and political actors have some “skin in the game.”
Two of the biggest policy mistakes of the past decade resulted from centralized decision making. First, the Iraq war, in addition to its tragic outcomes, cost between 40 and 100 times the original estimates. The second was the 2008 crisis, which I believe resulted from an all-too-powerful Federal Reserve providing cheap money to stifle economic volatility; this, in turn, led to the accumulation of hidden risks in the economic system, which cascaded into a major blowup.
Just as we didn’t forecast these two mistakes and their impact, we’ll miss the next ones unless we confront our error-prone system. Fortunately, the solution can be bipartisan, pleasing both those who decry a large federal government and those who distrust the market.
First, in a decentralized system, errors are by nature smaller. Switzerland is one of the world’s wealthiest and most stable countries. It is also highly decentralized — with 26 cantons that are self-governing and make most of their own budgetary decisions. The absence of a central monopoly on taxation makes them compete for tax and bureaucratic efficiency. And if the Jura canton goes bankrupt, it will not destabilize the entire Swiss economy.
In decentralized systems, problems can be solved early and when they are small; stakeholders are also generally more willing to pay to solve local challenges (like fixing a bridge), which often affect them in a direct way. And when there are terrible failures in economic management — a bankrupt county, a state ill-prepared for its pension obligations — these do not necessarily bring the national economy to its knees. In fact, states and municipalities will learn from the mistakes of others, ultimately making the economy stronger.
It’s a myth that centralization and size bring “efficiency.” Centralized states are deficit-prone precisely because they tend to be gamed by lobbyists and large corporations, which increase their size in order to get the protection of bailouts. No large company should ever be bailed out; it creates a moral hazard.
Consider the difference between Silicon Valley entrepreneurs, who are taught to “fail early and often,” and large corporations that leech off governments and demand bailouts when they’re in trouble on the pretext that they are too big to fail. Entrepreneurs don’t ask for bailouts, and their failures do not destabilize the economy as a whole.
Second, there must be skin in the game across the board, so that nobody can inflict harm on others without first harming himself. Bankers got rich — and are still rich — from transferring risk to taxpayers (and we still haven’t seen clawbacks of executive pay at companies that were bailed out). Likewise, Washington bureaucrats haven’t been exposed to punishment for their errors, whereas officials at the municipal level often have to face the wrath of voters (and neighbors) who are affected by their mistakes.
If we want our economy not to be merely resilient, but to flourish, we must strive for antifragility. It is the difference between something that breaks severely after a policy error, and something that thrives from such mistakes. Since we cannot stop making mistakes and prediction errors, let us make sure their impact is limited and localized, and can in the long term help ensure our prosperity and growth.
- Bill Black: Kill the “Fiscal Cliff” Instead of the Economy ” naked capitalism (mbcalyn.com)
- It’s Not A “Fiscal Cliff” … It’s The Descent Into Lawlessness (shiftfrequency.com)
- Wonkbook: Fiscal cliff deal moves to the Senate (washingtonpost.com)
- Poll: Americans view economy as poor, split on future (mbcalyn.com)
- Fiscal Cliff: Democrats Fiddle While Nation Burns (frontpagemag.com)
- Obama Playing Chicken With Economic Disaster (townhall.com)
- Diving into the fiscal economic mess (sgtreport.com)
- It’s Not a “Fiscal Cliff” … It’s the Descent Into Lawlessness (12160.info)
- Chaos Is Good for You (slate.com)
- Weighing the Week Ahead: Decision Time? (oldprof.typepad.com)
Today’s right serves rich investors, not the industries that make this country run
Why is there no pro-business conservatism in America? At first the question might come as a surprise. After all, conservative thinkers and politicians pose as champions of the private sector.
But in reality, the economic agenda pushed by the American right benefits chiefly “rentiers” or investors — the minuscule number of individuals who are wealthy enough to live on streams of income from their investments. An alternative pro-business conservatism would find many points of agreement with the center and center-left — and would be strikingly different from today’s American right.
The prevailing economic theory of the American right is that economic growth is driven by investment; investment is driven by capital; and rich people own a disproportionate share of the capital. Therefore, cutting taxes on the rich will lead directly to more investment within the United States, which in turn will lead directly to more broadly shared economic growth in the United States. This supply-side, trickle-down theory provides the rationale for Paul Ryan’s plan to eliminate capital gains taxes completely.
The theory is flawed in many ways. To begin with, conservative trickle-down economics exaggerates the role of rich individuals in investment, much of which is funded by the retained earnings of companies. Trickle-down theory also ignores the importance of the pooled savings of non-rich Americans in 401Ks and employer pension plans.
An even greater problem with this theory lies in the assumption that increased after-tax income for the rich will be translated automatically into increased investment. The rich may not invest their money in productive enterprises at all. They may spend their money on what Thorstein Veblen called conspicuous consumption. They may hoard their money. Or they may invest it in enterprises that provide them with a steady return but contribute little or nothing to productivity growth — for example, casinos of the kind owned by conservative donor Sheldon Adelson.
There is another flaw in the conservative economic theory. In a global economy, there is no guarantee that rich investors will invest the money they save from tax cuts in productive enterprises in the United States. They may invest in factories in China or the energy sector in Brazil. In such cases, tax cuts for the American rich will spur investment in other countries but not the U.S. And even if investment-driven growth occurs inside U.S. borders, most or all of the gains from growth may go to the few, not the many, as in the last generation.
It is possible to imagine a pro-business conservatism in America that would be radically different from today’s pro-investor conservatism. Its emphasis would be not on further enriching rich individuals who invest all over the world, but on helping productive enterprises that hire Americans and produce goods and services in the U.S. Among productive enterprises, a hypothetical pro-business right would focus on firms in capital-intensive, high-technology industries with increasing returns to scale and global markets. These traded-sector industries contribute far more to productivity growth in the national economies in which they are embedded than the financial sector or most service sector industries.
Here are some of the issues on which a possible pro-business conservatism would differ from today’s pro-investor conservatism:
For half a century, industrial enterprises in America have suffered from rivalry with foreign companies or foreign subsidiaries of U.S. multinationals that are backed by foreign governments, particularly in Japan, South Korea, Taiwan and China. The devastation of American industry by foreign mercantilism need not be of concern to individual investors, as long as they can invest their millions or billions abroad. Nor does it bother multinational companies like Apple, which may be chartered in the U.S. but use production facilities in other countries as export platforms for the American consumer market. In contrast, a pro-business conservatism would call for defending American industries that are targeted for destruction or takeover by foreign governments and their “national champions.” Pro-business conservatives would not call unilateral appeasement of foreign state capitalism “free trade.”
Nowhere is the conflict of interest between rich global investors and American productive businesses more sharp than on the issue of exchange rates. Many American investors prefer a strong dollar, which helps them buy up foreign companies or other foreign assets. But a strong dollar hurts American companies in the traded sector. A pro-business right would favor a weak dollar that helps American exports or, better yet, a new system of exchange rate stabilization that prevented countries like China from crippling American industries by unilaterally devaluing their currencies.
If they existed in the United States, pro-business conservatives like the Rockefeller and McKinley Republicans of yesteryear would agree with President Obama that “you didn’t build that” by yourself. However hostile they were to unions or particular environmental regulations, pro-business conservatives would take it for granted that the American private sector depends on adequate public funding of the public goods of scientific R&D, which spawns new industries and transforms old ones, and state-of-the-art infrastructure, which lowers the cost of doing business. In contrast, investor-focused conservatives since Reagan have sought to slash government R&D budgets to fund further tax cuts for the rich. Today’s right tends to view infrastructure merely as a cash cow to be privatized, so that private shareholders can collect monopoly rents from the public every time somebody in America drives on a highway or pays an electric bill.
If there were pro-business conservatives in the United States, lowering income, capital gains and estate taxes on rich individuals would not be a priority for them. Instead, they would favor reducing or eliminating corporate income taxes. Corporate income taxes, which are passed on to individuals anyway, lead companies to minimize their tax payments by means of time-consuming and wasteful international tax arbitrage instead of making goods and services in the U.S. To make up for the lost revenue, a hypothetical pro-business right might favor broad-based, neutral taxes like a value-added tax. And authentic pro-business conservatives might even favor higher taxes on the rich, on the theory — alien to today’s American right — that what is good for rich Americans is not necessarily good for American business.
Because they hold so much of their wealth in financial assets that are not adjusted for inflation, the creditor elite in every modern country wants central banks to stamp out all forms of inflation other than asset inflation, no matter the consequences to economic growth or employment. But productive industries can benefit from moderate wage and price inflation, which can encourage investors to invest in productive companies rather than gamble in speculative assets like real estate or commodities. In addition, by burning away consumer debt more quickly, moderate inflation could produce a revival of private consumer spending sooner, to the benefit of productive businesses.
All firms in the important productive traded sector benefit from relative price stability in their inputs — energy and raw materials. It is against the interest of manufacturing enterprises and infrastructure industries like the airline industry to allow individual investors and their agents, like hedge funds, to speculate in industrial commodities like oil. But in recent decades America’s rich, looking for new assets on which they can gamble, have successfully lobbied Congress to dismantle limits on speculation in vital resources.
As individuals, American investors have no particular interest in adequate wages for the majority of Americans. Like Latin American oligarchs, elite Americans who live off global investments can retreat to gated communities in a system of class apartheid. The immiseration of the American people can provide the rentier elite with a buyer’s market in low-wage servants and private security guards. Productive businesses that depend on an American mass market, in contrast, recognize as Henry Ford did that workers are also consumers and that a domestic mass market for goods and services is sustained by adequate wages.
If a pro-business conservatism existed in the United States, as it did in earlier generations, bringing an end to the excessive financialization of the economy that occurred in the last generation would be a priority of the pro-business right, not just the center and left. Pro-business conservatives would denounce the wasteful misallocation of resources to the swollen FIRE sector (finance/insurance/real estate). And they would take it for granted that finance should be the helpful servant of productive industry, not its parasitic master.
Even if it opposed progressive policies on a number of issues, a conservative movement that put the interests of high-tech, globally competitive industrial enterprises at the center of its agenda would be substantially different from the conservatism of the Club for Growth, George W. Bush, Paul Ryan or Mitt Romney. The chief beneficiaries of today’s conservative economic policies are not the managers, workers and shareholders of productive enterprises inside American borders, but rather rich individuals in general, including trust-fund aristocrats who inherited their unearned wealth from their ancestors.
The absence of a pro-business right in America has created a vacuum that the center and center-left might fill. On issues like the importance of public investment in R&D and infrastructure, the regulation of the out-of-control financial industry, and the need for adequate wages to maintain adequate domestic demand, today’s Democrats tend to be better than today’s Republicans at protecting the legitimate long-term interests of American business.
But pro-business progressivism in the U.S. is hampered by the make-up of the center-left alliance. The natural allies and partners of moderate pro-business conservatives in building a productive economy are industrial labor unions. Organized labor in Japan and Germany has played an important part in the success of those industrial nations. But as America’s industrial workforce has decline in numbers, thanks to hostile corporate and government policy, offshoring and automation, American industrial unions have lost influence.
Most factions to the left of center have priorities other than strengthening America’s industrial base. Some Greens would rather eliminate entire industries from the U.S., like the mining of rare earths, rather than compromise environmental standards. Jeffersonian populists on the left think that bigness in business or banking is inherently evil. Radicals use “corporate” as an epithet and fantasize about building an industrial economy based on socialism or cooperatives. Most important, the powerful neoliberal wing of the Democratic Party, based on Wall Street, has a view of the economy that is practically indistinguishable from that of financial sector conservatives.
Will the pendulum swing back from the financialized economy toward the productive economy? Whether its vehicle turns out to be one party or another, or a new bipartisan consensus, a backlash against the investor-focused, finance-centered economic agenda of post-Reagan conservatives and many neoliberal Democrats in favor of a new agenda promoting productive enterprise within America’s borders is long overdue.
- Why aren’t conservatives pro-business? (salon.com)
- Paul Ryan’s Budget Extreme Version Of Ronald Reagan Economics (guardianlv.com)
- What Quantitative Easing Really Does (wealthwire.com)
- The Trickle-Down Hoax (americanthinker.com)
- Denying Entitlements To The Wealthy (catsnjammer64.wordpress.com)
- Thousands greet VP candidate Ryan in Raleigh (newsobserver.com)
- Top CEOs donate to Romney over Obama by 4-1 margin (firstread.msnbc.msn.com)
- Here’s The Real Problem With Mitt Romney’s Economic Plan: “Rich People” Don’t Create The Jobs (businessinsider.com)
- How Conservatism Lost Its Mind (theamericanconservative.com)
- Tuesday Reads: Learning about Paul Ryan (skydancingblog.com)
New York Times’ Adam Davidson Strikes Again, Tells Us to Ignore Downer Jobs Data and Trust the Confidence Fairy | Economy | AlterNet
New York Times’ Adam Davidson Strikes Again, Tells Us to Ignore Downer Jobs Data and Trust the Confidence Fairy
Davidson’s latest foray into “Stupid-nomics” is wildly out of touch with America’s massive jobs crisis.
June 24, 2012
While Adam Davidson’s current New York Times column, “How to Make Jobs Disappear” refrains from blatant advocacy of the interests of the 1%, his “Let Dr. Pangloss explain it” approach to economic news is still flattering to the established order. To the extent that anyone in the officialdom pays attention to his work, he’s holding up a rosy-colored mirror to their stewardship. And for the rest of us, his relentless “see, everything really is fine, now take your Soma” denies the reality of the hardships and stresses most ordinary Americans face.
It’s hitting the point where I’m getting such sharp, annoyed commentary about Davidson’s columns by e-mail that I have to work to read his columns with a fresh eye. From one correspondent:
Can we make Adam Davidson disappear? He seems to have carved out a special niche: Stupid-nomics. WTF is his point here? That Adam Davidson is an oh-so-reasonable-guy-who-just-wants-the-silly-competing-economic-theories-to-get-along so we can all feel good? That jobs would magically appear if we would just stop paying attention to them?
His articles seem to be an experiment how somebody with either innate or willful ignorance of macroeconomics — but a superficial curiosity coupled with a desire to preserve and not jeopardize his paycheck –would view economic questions. His assumptions –i.e. if Greece could just pay off those debts and sell some good stuff all would be well — are so wildly simplistic and wrong-headed that it’s hard to go on to the next sentence, because you know you’re heading down a path led by somebody who is blind. And you smack your head against the wall. Where is the aspirin?
If you haven’t encountered Davidson’s latest offering, he starts with the claim that the monthly nonfarm payrolls release has become a key (his breathlessness implies THE) indicator of economic performance, and is now driving hiring decisions. Davidson tells us this is terrible because actually knowing roughly how many jobs are being added when the results aren’t great frightens employers into not adding them and consumers into not spending.
Based on this sort of thing, it looks as if Davidson lives in some sort of weird alternative reality of as he styles himself, “econonerds” which I imagine consists of heavily of economics-oriented journalists and analysts. This crowd is in the business of having to be out, quickly, with a take on new information. But just because their business is to attribute meaning to various data releases doesn’t mean they have this sort of news has same impact in the wider world as it does in the media hothouse or with quick-trigger investors.
First, nonfarm payrolls aren’t a “one number to rule them all” release. They are prefigured by ADP employment report, published just prior to the Friday BLS report. Normally they tell more or less the same story. But the ADP reported less awful job creation for May (133,000 v. 69,000 for the NFP). And more worrisome, the report indicted the average number of hours worked fell a smidge. And there are other reports that give fairly current economic readings, such as retail sales. And for prospective indicators, there are releases like the Factory Orders Report and the forward looking sub-indices (such as new orders) in the various manufacturing indices. Thus, contra Davidson, the stock market (which is treated much more as a one-stop indicator of America’s financial prospects by the media than the monthly jobs release) rose since the last downer NFP, and cracked last week, ostensibly on other data showing that the economy wasn’t looking all that healthy.
The next leg of Davidson’s argument is even nuttier. Businesses aren’t hiring and consumers are being scared from spending as much by the big bad NPF release! That old NPF release is SOOO unreliable anyhow, wouldn’t it be better if we just ignored it and went out and shopped, and left this all to technocrats who’d be cool headed enough to look at longer term trends?
Reading this, one has to wonder if Davidson knows anyone in the real economy. Small business has long been the engine of job growth in the US. Large companies were shedding jobs even in the last expansion. It’s difficult to imagine that much of any small businesses caring about the monthly jobless numbers. They look at their drivers of revenues, which are always more specific. There are businesses that lead the economy, lag the economy, and are countercyclical (tailors being the classic example). Most see their demand track influenced by local/regional or industry-specific factors. And the same is true of most people. Either they feel somewhat insulated from the vagaries of the economy (they have a decent job security with a pretty solid employer, or operate a recession-resistant business, like a mortician, or are part of the 1%) or they are in a more precarious position (self employed, owner of a small business working for a small firm where their job or hours depend on how well the business does, or un or underemployed).Those who are less secure similarly have their willingness to spend influenced by personal considerations (level of cash and savings buffers, level of current and prospective earnings), not the latest Big Data Release.
Davidson is also saying, to the extent a business is in a field where national job gains are germane, that we should ignore information and cheerlead. He also implies that the reactions to adverse data releases are at least as pronounced as to good ones. That’s hogwash. First, psychologists have documented a bias in most people towards optimism, and that is very much enforced in the US (notice how many business and self help books stress the importance of being gung ho, and how “negativity” is an even worse pejorative than “liberal”?). Second, we have entire industries dedicated to cheerleading: equity fund managers and analysts (who are ex hedgies are structurally long and therefore need to be bullish most of the time), the PR industry, and increasingly, the Obama administration, which seems to believe the answer to every problem is better propaganda. Third, there actually might be real performance problems beyond the ability of the confidence fairly to solve. Davidson dismisses that with his “we’re not Greece” discussion. But this ignores the lasting impact of a global economic crisis and the continuing impact of private sector deleveraging, made worse by the bad policy decision to zombify the financial sector rather than restructure the bad debts and use aggressive fiscal stimulus to offset the resulting downdraft. That means ex a change in course is the best we are likely to get is a halting recovery.
Davidson does deviate from channeling Dr. Pangloss to imagine an even better world, one in which the lion and the lamb, or in this case, Keynes and Hayek, would settle their differences and make sense of all that noisy data. We’ll just leave aside that Hayek would be rolling in his grave to have the fact that he and Keynes had friendly discussions taken to mean he’d happily participate in a world where “major economic decisions” were made by “non-partisan technocrats”. Reader Mrs. G took on the “non-partisan” part of this history-mangling fantasy:
Hayek as a nonpartisan technocrat immune from a “breathless” media cycle?? How ignorant can this guy be about Hayek and partisanship? He really needs to Google “Hayek” and get a clue. Or maybe he’s paid not to.
I must confess I have a vested interest in debunking Davidson. Given his interest in changing mass psychology, I imagine I’d be included in reprogramming efforts to make sure there is plenty of happy thinking so we all get the prosperity we deserve if we do our duty and spend enough. And you might be too.
- My chat with Adam Davidson (lbo-news.com)
- Gas pains (scaypgrayce.wordpress.com)
- Seeing the world from another perspective (colleensharen.wordpress.com)
- Is Peace Possible? (wnyc.org)
- Are We In a Golden Age For Inventors? (InnovationToronto.com)
- Who Wants To Buy Honduras? | Adam Davidson | NYT | 08 May 2012 (nytimes.com)
- Panel Nerds: If You Haven’t Heard NPR’s Planet Money, It’s New To You (mediaite.com)
- Some People Don’t Always Try to Maximize Personal Profit, and the NY Times’ Adam Davidson Is ON IT! (mikethemadbiologist.com)
- India’s Super Rich Help Fuel Art Market (india.blogs.nytimes.com)