Gathering Clouds – Poverty, Banking, and Debt Limits « Real-World Economics Review Blog

Gathering Clouds – Poverty, Banking, and Debt Limits « Real-World Economics Review Blog

Peter Radford, over at the Real World Economics Review blog, encapsulates nicely my current criticism of Republicons:

"... we are fast approaching doomsday on the US budget negotiations. As you know there is a super secret and totally undemocratic committee studying ways to reduce the US federal budget. This committee consists of twelve members of Congress, six from each party. They have a target of $1.2 trillion in budget cuts to be spread over the next decade.  If they fail to come up with a program to reach that goal by November 23rd a series of automatic cuts come into play slashing away at the budget across the board.

The odds of an agreement coming from this group is close to zero. Although we hear constant rumblings of side deals and temporary fixes.

The problem – no prizes for guessing the answer on this – stems from Republican intransigence.

Oh what a shock.

The GOP has refused to countenance any tax increase as part of the deal. Not a single dollar of an increase. In their view the entire burden of reduction must come from spending. But not offense-defense spending. They are adamantly opposed to any cuts in our bloated offense defense budget. This presents them with a major quandary: the automatic cuts that will come into being if no agreement emerges from the secret committee includes a major cut in that hallowed offense defense budget. The idea of this draconian measure was to force the Republicans into being a tad more flexible over taxes.

So far it hasn’t worked.

Such is their attachment to low taxes for high income taxpayers that the GOP is actually contemplating allowing the automatic cuts to kick in. This is terrifying their own hawks. They imagine all sorts of terrible things happening if we cut so much as a dime from our offense defense budget. Imagine the fits that they are all throwing at the prospect of the 10% cut in offense defense spending in 2013 alone that the automatic cuts imply. Yes 10%. Followed by a further 10% over the next nine years. That’s a lot of plum jobs lost in a lot of Republican leaning Congressional districts.

Oh the dilemma.

In a sensible world – by which I mean one not infested with ideological sharks – the secret committee would be able to conjure up enough cuts mixed with tax increases to hit the target. We could allow the Bush tax increases to come into effect for the wealthiest taxpayers. We could impose a surcharge on higher incomes. There are all sorts of things we could do, most of which the voters tell pollsters they would accept, but which we cannot do because the Republicans have backed themselves, and thus all of us, into a corner.

So, at present anyway, this entire budget cutting effort, which was forced on us unnecessarily in the aftermath of the budget ceiling epic, looks as if it will fail.

America has rarely, if ever, sunk this low in its ability to mange itself."

Some Capital-Theoretic Fallacies of Austrian Economics:

Robert L. Vienneau

October 2007

This article demonstrates certain doctrines of the Austrian school of economics are untenable.

The focus is on certain aspects of capital theory undergirding Austrian Business Cycle theory.

Other criticisms of Austrian Business Cycle Theory from Cambridge-Italian economists are briefly surveyed.

This paper demonstrates an entrepreneur may simultaneously classify a capital good into several orders, as orders of goods are defined by Austrian economists. Hayekian triangles are defined. This paper demonstrates that the shape of a Hayekian triangle varies with the interest rate, even if real resources are not reallocated across stages of production. It is demonstrated, by means of an example, that no tendency need exist for entrepreneurs to respond to lower interest rates by reallocating resources from producing low order goods to producing higher order goods, or otherwise increasing the capital-intensity of the structure of production.

Conclusions:

This paper poses a challenge to advocates of ABCT (Austrian Business Cycle Theory) – to either recant their advocacy or to retell their story with correct capital theory. In such theory, no presumption exists that entrepreneurs will systematically direct more resources to producing higher order goods and away from lower order goods when the interest rate is lower.

Whether the details of the ABCT can be reformulated to withstand capital-theoretic critiques remains to be demonstrated.

 

And a full library of criticism of the Austrian School of economic thought can be found at the Critiques of Libertariansim site.

The full article is here.

Some Capital-Theoretic Fallacies of Austrian Economics

BLS: The Productivity-Compensation Gap

This study of the productivity-compensation gap, published by the US Bureau of Labor Statistics, is a non-partisan examination of how workers - and thus the American middle class - have been getting fucked for years.

Read it and weep.

For those less inclined to do the intellectual heavy-lifting, here's a summary from the windyanabasis blog [full text here]:

Compensation was rising above productivity in the first half of the post-war era; after the Volcker intervention, productivity took off whereas compensation stagnated.  There is no plausible theory of wages being equal to the marginal revenue product of labor that can be consistent with this data. It was government policy that drove wages above productivity in the first period, and government policy drove them below productivity in the second period.

To put things into perspective, between 1980 and 2011, output per hour worked increased by a factor of 1.8, but median real earnings were unchanged (they actually declined somewhat) and median household income increased by a factor of 1.13.  The latter due to more women joining the labor force, bolstering total household income.

Consumer expectations of median income growth (taken from the University of Michigan surveys), census bureau measurements of median income growth, and BLS measurements of median wages all show the stagnation, even as real GDP continued to grow.

But if consumers were aware of this income stagnation, why did they continue to purchase output at the current prices?

First, women’s participation allowed total the income of the majority of households to increase somewhat, and second the majority was effectively selling portions of their assets to the top 1%. This was justified because they believed that their remaining assets were appreciating in value sufficiently to maintain their target wealth levels.

To be clear, we are talking about housing, as most households hold an insignificant portion of bonds or equities. As women’s participation began to level out in the early 1990s, mortgage equity withdrawals began to increase, peaking at around 9% of disposable household income. Consumer credit and auto credit also increased, but the dominant source of demand was equity withdrawal.

When the house bubble burst there was no additional source of demand left. In order to increase demand now, the government must either supply it via deficit spending, or real compensation needs to approximately double in order to restore the balance between pay and productivity.  The problem with only using deficit spending is that the underlying wage issues are not addressed — so there is no end to the deficit spending.

Without a class-based interpretation, you will be looking for what accident went wrong in 2008 that we can fix to get “back on track”. A sudden rush of regulatory uncertainty! A liquidity crisis! A shortage of safe bonds! But a class-based interpretation of this crisis is that we are at the end-game of a 30 year period of unsustainable wage deterioration, and the specific triggers of the financial crisis were not the underlying cause. The underlying cause was  a three decade period of market failure in which one imbalance was hidden by another and then another. If the former interpretation is correct, then the provisioning of liquidity or more safe bonds will allow employment to get back to normal. If the latter interpretation is correct, then these interventions wont work. Employment will continue to stagnate and output will continue to be constrained by the level of deficit spending stimulus.

Only a long period of grinding deflation, combined with nominal wage rigidity, or a short period of massive redistribution and substantially higher median wages will allow the economy to continue to grow at its historical rate. Note that we do not require a higher total wage bill, but higher median wages, and lower superstar wages.

We need a new grand bargain, but unfortunately we are not allowed to talk about this bargain, economists do not want to model class conflicts, and the politicians do not want to discuss 30 years of wage stagnation.

It is a silent labor day.

When you're done crying, stand up and join the fight to restore the American Dream.

[Hint: Electing turd-polishers from the right who prescribe ever greater doses of conservative ['neo-liberal' for you Europeans] economic policy, notwithstanding the fact that their foundational theories are both provably wrong on their own terms and demonstrably contrary to the vast preponderoance of empirical evidence, is NOT the solution.]