Friday, December 30, 2011

Getting More Bang for the Buck

The chart below, and it's from Moody's, a mainstream source, says what progressive economists have been saying all along. As the column on the right shows (It's that technical term called "bang for the buck"), progressive policy prescriptions are more effective than conservative ones. I do not know the methodological specifics, but the higher number indicates greater efficiency.

One example is "increased infrastructure spending," which has a score of 1.57. This was, and is, spending urged by progressives and by the Democratic Party in general. In comparison, conservatives, and certainly every Republican presidential candidate, argue for reduced corporate taxes (.32), that the Bush tax cuts should be permanent (.32), and that we should make dividend and capital gains tax cuts permanent (.37). It is not a coincidence that each of these items, despite demonstrated inefficiency, favor the rich. And wouldn't you know it, even a temporary increase in food stamps proves to be the single most efficient item on the entire list, a policy strongly supported by Democratic pols and strongly opposed by Republicans.

The chart does not say why the policies differ so much, and it certainly does not address why Republican pols ignore the evidence, but two observations are warranted.

The first of these is that from an economic perspective, policies that help the working and middle class are generally superior because it is they who prop up the economy, and that is because they work, pay taxes, and, very importantly, are the primary patrons of most businesses in America. They are the true job creators and they are the reason most businesses even exist. Most businesses will tell you that they don't need a tax break, or less regulation. What they need are more customers.

But this does not explain why Republicans so shamelessly shill for the rich, and why so many middle-class Republican voters are OK with this. The answers are mostly not found in economics, but in psychology. My premise is this: Educated progressives are in favor of evidence-based policies. Of course, some policies have not been effective, but those that are not get revised or abandoned. And don't get any ideas about how progressives keep flogging dead ideas like Keynesian stimulus packages; the chart above shows them to be effective. Progressives (mostly) follow the evidence, and base policies that they consider rational and empirically-grounded.

In contrast, true conservatives are not basing policies on economics (except perhaps the economics of personal enrichment), but on psychology. Issue after issue, conservatives are making moral arguments about what they think is right, not what is economically sound. Their positions are often less rational than they are visceral.  Call it the politics of personality. And do note that even ostensibly educated Republicans, such as the presidential candidates, cater to and sound like their conservative base: Their economic policy prescriptions are almost entirely lower taxes, lower regulations, and now that a Democratic is in the White House, lower spending. These are absurdly inadequate and inappropriate policies that are massively at odds with the evidence and expert opinion.

There is a growing body of literature on what motivates conservatives. I have touched on this previously, especially on the role of authoritarianism.  Here let me add two additional academic studies: one has been out for a few years, called The Political Brain: The Role of Emotion in Deciding the Fate of the Nation, by Drew Westin. The other just came out: The Reactionary Mind: Conservatism From Edmund Burke to Sarah Palin, by Corey Robin.

Read, learn, and arm your brain.  Your nation depends on you to make rational decisions.

Sunday, December 25, 2011

American Justice II

A Merry Christmas for one guy, a lump of coal for the other.
This is from the Dec 21, 2011 edition of Midweek, in a syndicated column called Weird News, by Chuck Shepherd. I have reproduced it verbatim.
Criminal Justice?: Daniel Vilca, 26, was ordered to prison for the rest of his life (without possibility of parole) following his conviction in Naples, Fla., for having pornographic photos of children on his computer. He had no previous criminal record nor was there any evidence of contact with children. The judge computed the sentence by multiplying a five-year term by 545 photos police found...A week earlier, a judge in Dayton, Ohio, sentenced former CEO Michael Peppel, 44, for defrauding his shareholders by overstating revenue in a company that went on to lose $298 million and cost 1,300 employees their jobs. Sentencing guidelines recommended an eight- to 10-year term, but federal judge Sandra Beckwith ordered Peppel to jail for seven days.
Peppel also received a $5 million fine, the levying of which seems to be the preferred approach when the wealthy are convicted. More on his story here.

The United States has an overtly class-based system of justice. It is the poor, the powerless, and the disadvantaged who are prosecuted in the first place, face high conviction rates, and serve disproportionately long jail sentences.

Thursday, December 22, 2011

"The Dumbest Idea in the World"

In a recent article in the online version of Forbes, Steve Denning writes intriguingly of the American corporate model and its penchant for short-term profit seeking. His views are something of a vindication for those, myself included, that have long felt the American management system is flawed. His basic premise is that in the mid 1970s US corporations began to shift their focus away from their products and processes, and towards catering to the short-term interests of investor.

Denning cites the work of Roger Martin in his new book, Fixing the Game. As Denning relates, 'Martin says that the trouble began in 1976 when finance professor Michael Jensen and Dean William Meckling of the Simon School of Business at the University of Rochester published a seemingly innocuous paper in the Journal of Financial Economics entitled “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.'"

In short, Martin says US corporations began a fateful and undue focus on the interests of investors in the 1970s. And that means, generally, the short-term interests of individuals and firms that are less interested in what a company makes, or how it makes it, and more interested in making money off the company's stock, preferably sooner than later. As a result, managers, especially CEOs, are motivated to turn in quick, impressive results, measured primarily by quarterly earnings. 

CEO compensation has become tied to the stock price, not product quality, and that is because they too are focused on the short-term. Boosted earnings will please the investor class, and also line the CEOs' pockets through stock options. They have less incentive to focus on a company's long-term health, the way a founder would, and more on making sure their stock options pay out. The ability to quickly increase "shareholder value" is thus the holy grail by which investors judge management.

Accordingly, both Steve Denning and Roger Martin argue that corporate America's dogma regarding the importance of shareholder value, e;g. making the investor class rich, is proving ruinous. Martin specifically identifies US business schools as culprits in promoting the primacy of shareholder value. Denning reminds us that none other than Jack Welch, legendary former head of GE, said the concern over maximizing shareholder value was "the dumbest idea in the world."

Now let me take a moment to remind readers what most business writers don't often explicitly acknowledge: business in America, especially big business, is predominately Republican. More to the point, management at major US corporations is conservative, often deeply so. The American corporate model is, or has become, a conservative model; labor should be cheap, regulations should be minimal, taxes are always too high, and business should be free to move cash and assets around, including overseas, as it sees fit. This model implicitly says that the sum and substance of capitalism is the microeconomic interests of the corporation and the investors to which it is supposed to owe its greatest allegiance: that allegiance must prevail over the broader interests of country, citizens, and communities. As it turns out, that includes just about everyone in the world except the investor class and their subset, upper management. It is business economics for the chronically selfish and short-sighted.

In other words, the interests of the 1% must prevail over the 99%. Anything less is socialism and an invitation to stagnation and decline. Real patriots must give the 1% all they want or you will jeopardize civilization. And if you have not noticed how much further to the right the Republican party--starting notably with Ronald Reagan--has helped both corporations and the investor class reap ever higher portions of economic output, then you are not paying attention. 

So it is grimly satisfying to see some business thinkers and leaders, and not just those on the Left, questioning the efficacy of a model that obscenely enriches the few while it provides decreasing benefits for most. 

Again, Steve Denning provides an example. He writes:
The new bottom line of business is customer delight. If a firm isn’t delighting its customers, the prospects of its long-term survival in today’s highly competitive low-growth economy aren’t promising. Fortunately, as a result of almost three decades of research by Fred Reichheld and his colleagues at Bain, we have a robust methodology for measuring customer delight. It’s the Net Promoter Score discussed in the second edition of The Ultimate Question 2.0 published in September 2011.
The parameter they developed, the Net Promoter Score, basically attempts to quantify (crucial for numbers-obsessed business schools) how well companies are winning and keeping satisfied customers.

What a novel thought; actually pleasing the customer with an eye towards long-term loyalty. This is beginning to sound almost progressive; worry about your products, and how you treat customers and workers, and the stock price will follow suit. Your allegiance should be to those who build and buy your products and services.

It's enough to give Ayn Rand a fit.

Friday, December 16, 2011

How They See Us

On Monday, 12/12 I wrote of at least one Republican who has finally decided to buck the tide and speak out against his party's lurch to the right, one that is both ridiculous, because proponents are twisting themselves into logical and factual contradictions, and dangerous, because they are opening the door to a fascist state.  

The European press has noticed the sum and substance of the Republican presidential candidates, leaving it both dismayed and amused. As Der Spiegel laments:
It's horrifying because these eight so-called, would-be candidates are eagerly ruining not only their own reputations and that of their party, the party of Lincoln lore. Worse: They're ruining the reputation of the United States...They lie. They cheat. They exaggerate. They bluster. They say one idiotic, ignorant, outrageous thing after another. They've shown such stark lack of knowledge -- political, economic, geographic, historical -- that they make George W. Bush look like Einstein and even cause their fellow Republicans to cringe.
The December 16 edition of The Week (print version), in an article entitled "The GOP makes a virtue of ignorance," summarizes European views. In addition to Der Spiegel, it references Lorraine Millot, of the Paris Liberation, who observes that the only Republican candidate who is relatively well-versed in diplomacy, John Huntsman, is also completely out of contention. This is not a coincidence. The others "careen to extreme positions that include starting new wars and abandoning old allies." Herman Cain tried to make a virtue of his ignorance of foreign affairs, which apparently sat well with millions of Republican voters. It was charges of adultery, not laughable ignorance of the world, that ended his campaign.

Max Hastings, of the London Daily Mail, notes that throughout much of red state America, you are viewed suspiciously as an elitist if you show interest in science or the world beyond America. "Say what you want about British politics, no MP of any party would dare to offer themselves as town dogcatcher while knowing as little about the world as the Republican presidential candidates...The American political system has seldom, if ever, looked so inadequate."

Finally, Matthew Norman of the London Independent predicts that Mitt Romney will eventually win the nomination even if he is "the slimiest, phoniest opportunist to run for president since...well, ever." And that is because Newt Gingrich is so widely despised.

We'll see about whether Romney does in fact prevail. But it is too early to count out Gingrich, though even he seems to be peaking, pretty much on the same timeline as the rest of them. Republican primary voters are the reddest of the red, but even they seem discomfited by this crowd.

Monday, December 12, 2011

Some Republicans Have Had Enough

Below is a video of former Bush speechwriter David Frum in an interview with Howard Kurtz of CNN. Frum is one of a small number of Republican operatives who are speaking out against their party's nuttiness and increasingly harsh and nonsensical policy prescriptions.

I welcome Frum's lonely effort to steer his party back to (relative) sanity and away from its asinine dance on the ideological precipice. Thoughtful Republicans have every right to be sickened by the buffoons getting all the attention in the presidential debates.

In the video, other media sources are labeled as "liberal." Frum says that Fox provided a welcome counterweight to that. This is an ironic statement coming from someone who worked at the Wall Street Journal, the official rag of the 1%. And does this mean that Fox is indeed a counterpoint to a media Fox mouthpieces laughably call left-wing? I thought it was "fair and balanced."

Fox CEO Roger Ailes himself has said the network has recently made a course correction away from the far right. This was, he says, a tactical decision in the wake of the Gabrielle Giffords shooting early in the year when Ailes told his anchors and pundits to "tone it down".  Is this not the same criticism that progressives have been making about Fox for years? That it is not a real news organization, but a fear monger for low-info voters and a Republican cheerleader? Thanks for making our point, Roger.

The other networks are not truly liberal, not just because they have Rachel Maddow and Ed Schultz at MSNBC. You do not get to claim a network is liberal just because it is less right-wing than Fox. The others, including MSNBC, are deeply mainstream and conventional.

I do not believe many viewers in America ever really see what the international community would consider leftist news commentary.

Thursday, December 8, 2011

Corruption Unabated

Here's a reminder of the fallout from Bush's decision to invade Iraq. In addition to massive loss of life and a country with its infrastructure destroyed, Americans (with help from Iraqis) are now plundering funds that were meant for rebuilding Iraq. As the video below explains, there is widespread waste and systemic fraud with almost no accountability.

And not much coverage by our mainstream media.

Not that there wasn't a publicized effort to uncover the problems. The Commission on Wartime Contracting had issued several reports that recognize the multitude of issues. Among other things, the commission reported $30 to $60 billion lost through waste and fraud.

It closed down earlier this year because congress defunded it. And while its website does offer some downloadable data to the public, Congress has decided that some key findings should be hidden from public purview until 2031.

As author Michael O'Brien says in the video, congress is protecting the perps. Representatives and senators alike know that too many fat cats, in and around congress, will be implicated. So they cannot let the public know what really has been happening in Iraq and who benefited. They do what governments always do when they feel threatened: keep evidence from view and lie.

Twenty years on ice should take care of any statute of limitations.

The video is from RT America, and I highly recommend its Youtube channel.

Tuesday, December 6, 2011

All the Money Rich Bankers Could Ever Want

I believe the desire to hold the Federal Reserve Bank accountable to the American people is a major issue that progressives and disaffected right-wing populists, e.g. tea-partiers, have in common. Many do not seem to be aware of this shared interest.

The following is from Alan Grayson, former congressman from Florida. I have reproduced it in its entirety. The original is here. Mr Grayson is campaigning to win back his seat in 2012.

        The Fed Bailouts: Money for Nothing
I think it’s fair to say that Congressman Ron Paul and I are the parents of the GAO’s audit of the Federal Reserve. And I say that knowing full well that Dr. Paul has somewhat complicated views regarding gay marriage.

Anyway, one of our love children is a massive 251-page GAO report technocratically entitled “Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance.” It is almost as weighty as that 13-lb. baby born in Germany last week, named Jihad. It also is the first independent audit of the Federal Reserve in the Fed’s 99-year history.

Feel free to take a look at it yourself, it’s right here. It documents Wall Street bailouts by the Fed that dwarf the $700 billion TARP, and everything else you’ve heard about.

I wouldn’t want anyone to think that I’m dramatizing or amplifying what this GAO report says, so I’m just going to list some of my favorite parts, by page number.

Page 131 – The total lending for the Fed’s “broad-based emergency programs” was $16,115,000,000,000. That’s right, more than $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received more than a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.

Pages 133 & 137 – Some of these “broad-based emergency program” loans were long-term, and some were short-term. But the “term-adjusted borrowing” was equivalent to a total of $1,139,000,000,000 more than one year. That’s more than $1 trillion out the door. Lending for these programs in fact peaked at more than $1 trillion.

Pages 135 & 196 – Sixty percent of the $738 billion “Commercial Paper Funding Facility” went to the subsidiaries of foreign banks. 36% of the $71 billion Term Asset-Backed Securities Loan Facility also went to subsidiaries of foreign banks.

Page 205 – Separate and apart from these “broad-based emergency program” loans were another $10,057,000,000,000 in “currency swaps.” In the “currency swaps,” the Fed handed dollars to foreign central banks, no strings attached, to fund bailouts in other countries. The Fed’s only “collateral” was a corresponding amount of foreign currency, which never left the Fed’s books (even to be deposited to earn interest), plus a promise to repay. But the Fed agreed to give back the foreign currency at the original exchange rate, even if the foreign currency appreciated in value during the period of the swap. These currency swaps and the “broad-based emergency program” loans, together, totaled more than $26 trillion. That’s almost $100,000 for every man, woman, and child in America. That’s an amount equal to more than seven years of federal spending -- on the military, Social Security, Medicare, Medicaid, interest on the debt, and everything else. And around twice American’s total GNP.

Page 201 – Here again, these “swaps” were of varying length, but on Dec. 4, 2008, there were $588,000,000,000 outstanding. That’s almost $2,000 for every American. All sent to foreign countries. That’s more than twenty times as much as our foreign aid budget.

Page 129 – In October 2008, the Fed gave $60,000,000,000 to the Swiss National Bank with the specific understanding that the money would be used to bail out UBS, a Swiss bank. Not an American bank. A Swiss bank.

Pages 3 & 4 – In addition to the “broad-based programs,” and in addition to the “currency swaps,” there have been hundreds of billions of dollars in Fed loans called “assistance to individual institutions.” This has included Bear Stearns, AIG, Citigroup, Bank of America, and “some primary dealers.” The Fed decided unilaterally who received this “assistance,” and who didn’t.

Pages 101 & 173 – You may have heard somewhere that these were riskless transactions, where the Fed always had enough collateral to avoid losses. Not true. The “Maiden Lane I” bailout fund was in the hole for almost two years.

Page 4 – You also may have heard somewhere that all this money was paid back. Not true. The GAO lists five Fed bailout programs that still have amounts outstanding, including $909,000,000,000 (just under a trillion dollars) for the Fed’s Agency Mortgage-Backed Securities Purchase Program alone. That’s almost $3,000 for every American.

Page 126 – In contemporaneous documents, the Fed apparently did not even take a stab at explaining why it helped some banks (like Goldman Sachs and Morgan Stanley) and not others. After the fact, the Fed referred vaguely to “strains in the financial markets,” “transitional credit,” and the Fed’s all-time favorite rationale for everything it does, “increasing liquidity.”

81 different places in the GAO report – The Fed applied nothing even resembling a consistent policy toward valuing the assets that it acquired. Sometimes it asked its counterparty to take a “haircut” (discount), sometimes it didn’t. Having read the whole report, I see no rhyme or reason to those decisions, with billions upon billions of dollars at stake.

Page 2 – As massive as these enumerated Fed bailouts were, there were yet more. The GAO did not even endeavor to analyze the Fed’s discount window lending, or its single-tranche term repurchase agreements.

Pages 13 & 14 – And the Fed wasn’t the only one bailing out Wall Street, of course. On top of what the Fed did, there was the $700,000,000,000 TARP program authorized by Congress (which I voted against). The Federal Deposit Insurance Corp. (FDIC) also provided a federal guarantee for $600,000,000,000 in bonds issued by Wall Street.

There is one thing that I’d like to add to this, which isn’t in the GAO’s report. All this is something new, very new. For the first 96 years of the Fed’s existence, the Fed’s primary market activities were to buy or sell U.S. Treasury bonds (to change the money supply), and to lend at the “discount window.” Neither of these activities permitted the Fed to play favorites. But the programs that the GAO audited are fundamentally different. They allowed the Fed to choose winners and losers.

So what does all this mean? Here are some short observations:

(1) In the case of TARP, at least The People’s representatives got a vote. In the case of the Fed’s bailouts, which were roughly 20 times as substantial, there was never any vote. Unelected functionaries, with all sorts of ties to Wall Street, handed out trillions of dollars to Wall Street. That’s now how a democracy should function, or even can function.

(2) The notion that this was all without risk, just because the Fed can keep printing money, is both laughable and cryable (if that were a word). Leaving aside the example of Germany’s hyperinflation in 1923, we have the more recent examples of Iceland (75% of GNP gone when the central bank took over three failed banks) and Ireland (100% of GNP gone when the central bank tried to rescue property firms).

(3) In the same way that American troops cannot act as police officers for the world, our central bank cannot act as piggy bank for the world. If the European Central Bank wants to bail out UBS, fine. But there is no reason why our money should be involved in that.

(4) For the Fed to pick and choose among aid recipients, and then pick and choose who takes a “haircut” and who doesn’t, is both corporate welfare and socialism. The Fed is a central bank, not a barber shop.

(5) The main, if not the sole, qualification for getting help from the Fed was to have lost huge amounts of money. The Fed bailouts rewarded failure, and penalized success. (If you don’t believe me, ask Jamie Dimon at JP Morgan.) The Fed helped the losers to squander and destroy even more capital.

(6) During all the time that the Fed was stuffing money into the pockets of failed banks, many Americans couldn’t borrow a dime for a home, a car, or anything else. If the Fed had extended $26 trillion in credit to the American people instead of Wall Street, would there be 24 million Americans today who can’t find a full-time job?

And here’s what bothers me most about all this: it can happen again. I’ve called the GAO report a bailout autopsy. But it’s an autopsy of the undead.


Alan Grayson

Sunday, December 4, 2011

Economists for Occupy Wall Street

A short video from economists who understand what #OWS is, and why it is protesting this country's unsustainable, rigged system.

Occupy Economics from Softbox on Vimeo.