Stop Me Before I Vote Again

Where to after capitalism?

Immanuel Wallerstein

"FIRST, how did we get to where we are today? Let's retrace our steps several decades backwards.

The period 1945 to 1970 saw the height of US power in the world system and also the moment of the most expansive economic upturn that the capitalist world economy had known.

So what are practical steps that we can and should take? I would put at the head of the list actions that can minimise the pain that arises from the breakdown of the existing system.

The second thing that we can do is engage in serious debate about the kind of world system we want, and the strategy of transition.

The third thing we can do is to construct alternative decommodified modes of production.

The gaunt Aunt Sadie of a gent diddling his second penis above, one Mark Thoma, has an aggregator-type econ-con web site I've frequented like a barfly for many many moons, with great profit.

Alas, now he's gone and taken up a second gig as a penny-a-word pundit over at CBS's money watch, and in no time at all, through a self-indulgent beaverish flood of pompous high-minded idiotically conventional postings worthy of Woodrow Wilson himself, Mark has shown a side I doubt even his own shaving mirror could stand.

Here's a recent specimen, on a topic that invariably zaps a real raw nerve in my neck: the independence of the Fed from our great and terrible Congress. In this piece of foolishness, a quote from Barney Frank to the effect that Fed regional presidents "too often vote in favor of higher interest rates", triggers this magisterial response from the brand-new bigfoot:

"That... sentence means he believes the Fed has favored low inflation over low unemployment as it has set interest rate policy. That may or may not be true, but do we really want members of the House setting interest rate policy or changing the structure of the Fed whenever they disagree? I don’t."

The House -- the only organ of American governement with any resemblance to a democratic institution -- setting interest rates? God forbid! Imagine if the people out there in their benighted millions, those ignorant TV-watching log-bumps, actually got a crack every two years at hiring or firing the folks that control the headwaters of our credit system?!?!

Mark is not alone, of course. There's a chorus out there bellowing the same sort of thing every day. Here's famed Princeton academe and former Fed board member, the bulb-like Alan Blinder....

... in the Washpost the other day:

"An independent monetary policy, designed and executed by the Federal Reserve, is one of the great and enduring achievements of the Progressive Era. It has enabled the long time-horizons of technocrats to triumph over the short-term perspectives of politicians, bringing us low inflation over the decades. Because of this, and because technocratic monetary policy seems to be more skillful than political monetary policy, the Fed's independence has been admired and imitated by country after country."

From Krugman's blog.

Put "liquidity trap" under it as a caption, and you'd have a great New Yorker cartoon... for any Reagan era issue prior to last year. Before that, no one -- since the darkest days of the great depression -- could have seen such a projection as anything but the vicious fantasy of a wild-eyed loon.

Remember this chap, Gauti B. Eggertsson?

Gyro here has cranked his model machine and concluded: Anything but a payroll tax cut! That would cause a rise in job supply and reduce money wages!

"Tax cuts can deepen a recession if the short-term nominal interest rate is zero."

Imagine a model that loathes tax cuts! What a weird new Kansas we're in, that can turn tax cuts -- the Reagan-era panacea -- into a "growth" disaster.

The payroll tax cut would defeat itself by causing a massive rise in "job seekers" (supply), and of course this could only reduce money wages for the select legion to get actually hired, given the a priori self-evident demand-side constraint on employment, eternally decreed from before all time and forever.

And hey, the blade cuts both ways: "a cut in capital taxes [also] deepens a recession because it encourages people to save instead of spend at a time when more spending is needed."

Paul Krugman has a crush on this guy... is he only interested in him for his results? Maybe so, since they "confirm" his own anti-tax-cut remedy for our slumpfest.

See, what does work in this model-train economy, we're told, is "Fiscal policies aimed directly at stimulating aggregate demand... These policies include... a temporary increase in government spending."

Great! Sez googoo Klug: more parks, more campus museums, more cultural infrstructure of all kinds; or "... tax cuts aimed directly at stimulating aggregate demand rather than aggregate supply."

Better "an investment tax credit or a cut in sales taxes." Ugh! Job creation and machine purchases as sold to us by Obama's Austen Ghoul's-bee, eh? Or uncle-sponsored "take an additional x% off", or cash for clunkers, or anything but money in people's pockets.

It's a calculation only an uber-nerd like Krug could fancy. My favorite part (this is the Krugster):

"The general point is that we’re really through the looking glass."

Oh, here's the paper's caveat:

"The results are specific to an environment in which the interest rate is close to zero, as observed in large parts of the world today. "

Here's Paul Krugman explaining a mystical concept, "core inflation":

"Some prices in the economy fluctuate all the time in the face of supply and demand; food and fuel are the obvious examples. Many prices, however, don’t fluctuate this way — they’re set by oligopolistic firms, or negotiated in long-term contracts, so they’re only revised at intervals ranging from months to years....

[B]ecause they aren’t revised very often, they’re set with future inflation in mind...

[W]e’d like to keep track of this sort of inflation inertia, both on the upside and on the downside — because just as embedded inflation is hard to get rid of, so is embedded deflation (ask the Japanese)."

"[O]nce expectations of, say, persistent 10 percent inflation have become “embedded” in the economy, it will take a major period of slack — years of high unemployment — to get that rate down."

Fortunately, we don't need a model of how the system works, nor even face the pain of adjustment -- not if we sieze power and superimpose a system our Gosplan can easily construct and enforce. Enter the Lerner-Vickrey-Colander solution.

Say we wanted to control the prices of the health sector -- maybe keep 'em on track with the overall movement of the price level.

Simple: you cap the markup over non-sector inputs for all sector firms, by creating a sector-wide markup warrant market.

This essentially limits depreciation charges, wages, salaries, as well as profits -- i.e. the same value that is taxed by a value added tax. The two would work well together in a whole-system application of markup caps (MUC) if, say, the corporate income tax (CIT) was modified into a value added tax (VAT).

Prolly firms would get issued a flow of warrant "credits". If a firm wants to increase mark up above warranted levels, the firm has buy the warrants with cash on the warrant market.

All this formally parallels the carbon warrant notions, of course -- I hope without the wild croaks of dismay from the pwog pond.

By the way, you could use a Pigou tax here too -- that was also devised in the roaring 70's by Weintraub et al. I favor the cap and trade mechanism because it sets the inflation rate, leaving the markup cost to the vagaries of the market, whereas the Pigou tax sets the mark up cost, leaving the ultimate inflation rate uncertain.

Health care, of course, is quite a different application than carbon, where I reluctantly prefer the Pigou tax method.

Either approach would be a lot better than being bondservants of the anarchy of corporate-administered pricing -- especially as we face.up ahead, looming at us through the windshield, the dark side of price-expectational inertia -- DEFLATION!

As Paul K puts it:

"what these measures show [i.e. various metrics of "core inflation"] is an ongoing process of disinflation that could, in not too long, turn into outright deflation"

Welcome the Institute for New Economic Thinking.

The advisory board is worth a look: what a criminal-looking bunch, every man jack of 'em wearing an expression that's either brittlely brazen or shifty-eyed and hang-dog. These are the motley Merlins that George Attaturk Soros has assembled to redesign the global economic system; and here is a quote from his highness, lord Soros, that serves as well as any might to seed the ground with dragon's teeth:

"The entire edifice of global financial markets has been erected on the false premise that markets can be left to their own devices, we must find a new paradigm to rebuild from the ground up."