The American Bear


Krugman: Death of a Fairy Tale

Now, claims that only austerity can pacify bond markets have proved every bit as wrong as claims that the confidence fairy will bring prosperity. Almost three years have passed since The Wall Street Journal breathlessly warned that the attack of the bond vigilantes on U.S. debt had begun; not only have borrowing costs remained low, they’ve actually fallen by half. Japan has faced dire warnings about its debt for more than a decade; as of this week, it could borrow long term at an interest rate of less than 1 percent.

And serious analysts now argue that fiscal austerity in a depressed economy is probably self-defeating: by shrinking the economy and hurting long-term revenue, austerity probably makes the debt outlook worse rather than better.

But while the confidence fairy appears to be well and truly buried, deficit scare stories remain popular. Indeed, defenders of British policies dismiss any call for a rethinking of these policies, despite their evident failure to deliver, on the grounds that any relaxation of austerity would cause borrowing costs to soar.

So we’re now living in a world of zombie economic policies — policies that should have been killed by the evidence that all of their premises are wrong, but which keep shambling along nonetheless. And it’s anyone’s guess when this reign of error will end.

(Source: sarahlee310)

Recovered Economic History – “Everyone But an Idiot Knows That The Lower Classes Must Be Kept Poor, or They Will Never Be Industrious” | Yasha Levine

[Despite] what you might have learned, the transition to a capitalistic society did not happen naturally or smoothly. See, English peasants didn’t want to give up their rural communal lifestyle, leave their land and go work for below-subsistence wages in shitty, dangerous factories being set up by a new, rich class of landowning capitalists. And for good reason, too. Using Adam Smith’s own estimates of factory wages being paid at the time in Scotland, a factory-peasant would have to toil for more than three days to buy a pair of commercially produced shoes. Or they could make their own traditional brogues using their own leather in a matter of hours, and spend the rest of the time getting wasted on ale. It’s really not much of a choice, is it?

But in order for capitalism to work, capitalists needed a pool of cheap, surplus labor. So what to do? Call in the National Guard!

Faced with a peasantry that didn’t feel like playing the role of slave, philosophers, economists, politicians, moralists and leading business figures began advocating for government action. Over time, they enacted a series of laws and measures designed to push peasants out of the old and into the new by destroying their traditional means of self-support.

“The brutal acts associated with the process of stripping the majority of the people of the means of producing for themselves might seem far removed from the laissez-faire reputation of classical political economy,” writes [economic historian, Michael] Perelman [in his book, The Invention of Capitalism]. “In reality, the dispossession of the majority of small-scale producers and the construction of laissez-faire are closely connected, so much so that Marx, or at least his translators, labeled this expropriation of the masses as ‘primitive accumulation.’”

Read whole

(h/t azspot)

Finance as Wealth Transfer Mechanism: An Interview with James Galbraith | naked capitalism (2)

Philip Pilkington: I’m pretty sure that mainstream macroeconomics doesn’t pay much attention to income distribution, but it seems probable that income distribution would have important macroeconomic effects. Do you think that income distribution has macroeconomic effects? If so, what do you think are the most important?

James Galbraith: The evidence is pretty clear that a very bad income distribution leads to economic instability; that is to panic, slump and collapse. The reason is that the bad distribution emerges from growth driven too much by private credit: from too much debt taken on by the middle and lower strata, ending in crisis. That is what we observed in the US stock market euphoria that peaked in 1929. That is what we observed in the housing finance disaster that peaked in 2007.

But one can also say that the reverse is true: the income distribution is driven by macroeconomic forces.

The act of extending credit – a macroeconomic force – generates fees and capital gains and other incomes that accrue, largely, to the top strata. You can see this very plainly in US data, but also in most other countries we’ve looked at, from Brazil to China. In sectoral data, it shows up in the fact that rising inequality is closely associated with relative gains by the financial sector.

One of things Inequality and Instability shows is that there is a common pattern in the movement of inequality around the world. A very clear pattern. It isn’t just an American phenomenon. That suggests that there must be a common global force behind it. And that would have to be a macroeconomic force, by definition.

I’m hoping to get this point across to economists, as well as to the wider public. It should have an effect on how they conduct research into inequality, dislodging them from their fixations on such matters as education and training and even immigration and trade. Such local and country-specific forces cannot be working in such a powerful common way, all across the globe, as we observe.

Leading active members of today’s economics profession … have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen… . No one loses face, in this club, for having been wrong. No one is dis-invited from presenting papers at later annual meetings. And still less is anyone from the outside invited in. James K. Galbraith

Marx at 193 | John Lanchester (3)

There are many hundreds of pages on this subject in Marx, and many tens of thousands in commentaries and analyses of his work, so my summary of his views is of necessity cartoonishly compressed and simple. Marx’s model works like this: competition pressures will always force down the cost of labour, so that workers are employed for the minimum price, always paid just enough to keep themselves going, and no more. The employer then sells the commodity not for what it cost to make, but for the best price he can get: a price which in turn is subject to competition pressures, and therefore will always tend over time to go down. In the meantime, however, there is a gap between what the labourer sells his labour for, and the price the employer gets for the commodity, and that difference is the money which accumulates to the employer and which Marx called surplus value. In Marx’s judgment surplus value is the entire basis of capitalism: all value in capitalism is the surplus value created by labour. That’s what makes up the cost of the thing; as Marx put it, ‘price is the money-name of the labour objectified in a commodity.’ And in examining that question he creates a model which allows us to see deeply into the structure of the world, and see the labour hidden in the things all around us. He makes labour legible in objects and relationships.

The theory of surplus value also explains, for Marx, why capitalism has an inherent tendency towards crisis. The employer, just like the employee, has competition pressures, and the price of the things he’s selling will always tend to be forced down by new entrants to the market. His way of getting round this will usually be to employ machines to make the workers more productive. He’ll try to get more out of them by employing fewer of them to make more stuff. But in trying to increase the efficiency of production, he might well destroy value, often by making too many goods at not enough profit, which leads to a surplus of competing goods which leads to a crash in the market which leads to massive destruction of capital which leads to the start of another cycle. It’s an elegant aspect of Marx’s thinking that the surplus theory of value leads directly and explicitly to the prediction that capitalism will always have cycles of crisis, of boom and bust.

Marx at 193 | John Lanchester (2)

Marx saw the two fundamental poles of economic, and social and political, life as labour and nature. He didn’t see these two things as static; he used the metaphor of a metabolism to describe the way our labour shapes the world and we in turn are shaped by the world we have made. So the two poles of labour and nature don’t stay fixed. But what Marx doesn’t allow for is the fact that nature’s resources are finite. He knows that there is no such thing as nature unshaped by our assumptions, but he doesn’t share our contemporary awareness that nature can run out. This is the kind of thing which is sometimes called ironic, but is closer to tragedy, and at its heart is the fact that the productive, expansionist, resource-consuming power of capitalism is so great that it is not sustainable at a planetary level. The whole world wants to have a First World bourgeois lifestyle, and the whole world can see what that looks like by glancing at a television set, but the world can’t have it, because we will burn through its resources before we get there. Capitalism’s greatest crisis is upon us, and it is predicated on the unavoidable fact that nature is finite.


Of Total Income Increase in 2010…
Steven Rattner, a Wall Street executive and New York Times Op-Ed contributor, writes:

In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.
Still more astonishing was the extent to which the super rich got rich faster than the merely rich. In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.
The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.

Steven Rattner, The New York Times. The Rich Get Even Richer.


Of Total Income Increase in 2010…

Steven Rattner, a Wall Street executive and New York Times Op-Ed contributor, writes:

In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.

Still more astonishing was the extent to which the super rich got rich faster than the merely rich. In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.

The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.

Steven Rattner, The New York Times. The Rich Get Even Richer.

(via nickturse)

Global Warming Close to Becoming Irreversible

The world is close to reaching tipping points that will make it irreversibly hotter, making this decade critical in efforts to contain global warming, scientists warned on Monday.

Scientific estimates differ but the world’s temperature looks set to rise by six degrees Celsius by 2100 if greenhouse gas emissions are allowed to rise uncontrollably.

As emissions grow, scientists say the world is close to reaching thresholds beyond which the effects on the global climate will be irreversible, such as the melting of polar ice sheets and loss of rainforests.

“This is the critical decade. If we don’t get the curves turned around this decade we will cross those lines,” said Will Steffen, executive director of the Australian National University’s climate change institute, speaking at a conference in London.

Despite this sense of urgency, a new global climate treaty forcing the world’s biggest polluters, such as the United States and China, to curb emissions will only be agreed on by 2015 - to enter into force in 2020.

(Source: sigma-x)

Neoliberalism is a significant disruptive force that dominates policy, politics, and culture to the detriment of the masses but to the advantage of the select few, unwittingly, maybe not, enabling concentration of wealth and power to breed totalitarian nation-states. This seemingly natural progression of neoliberalism’s political and economic influence results in an increase of concentration of fewer people celebrating at the same parties, diminishing societal, political, and cultural values to something comparable to driblet performances at Disneyland. The Neoliberal Hoax

Graph of the Day: President Obama, Fiscal Conservative?


A graph that purports to establish Bill Clinton and Barack Obama as the two most fiscally conservative presidents in modern history has been making its way through the blogosphere, after first originating on Century Foundation Fellow Mark Thoma’s Economist’s View blog. Thoma’s submitter explains: 

Seeing the Krugman commentary comparing real government spending under Obama and Reagan made me curious about what it looks like if you express it in per capita terms?  In particular, how does the Obama period compare with other presidencies in terms of penury/austerity versus spendthriftness?


Ranking since Johnson (starting in 1968), and using the first-quarter comparisons, and calculating growth under Obama through 2011Q4, Clinton is the most austere, followed by Obama.  The most spendthrift are (1) Nixon-Ford, (2) Reagan, and (3) Bush II.

So, the story one frequently hears on the right about the massive expansion of government spending under Obama—and liberal profligacy in general—just doesn’t hold up to the facts. Still, there’s been some pushback from commenters wondering about the role of inflation, or whether the story changes when you divide government spending into separate categories for national defense and human resources (employment and social services, Medicare, Social Security, veterans benefits, et cetera). So here is my own version of the graph, which shows annualized growth in government spending on national defense and human resources througout the last seven presidencies, from Q1 to Q1. All of the data is from the Office of Management and Budget historical tables

Annualized growth in govt spending

And here is annualized real growth in government spending (adjusted using a composite deflator):

Annualized growth in real govt spending

No matter how you choose to look at it, the story remains essentially the same. In both graphs, Clinton and Obama stand out as the relative fiscal conservatives next to their spendthrift Republican peers. You can state whatever objections or counterfactuals you like—Reagan was fighting the Cold War, Clinton benefited from a peace dividend, Obama inherited a recession—but, as The Atlantic’s Derek Thompson points out, ”the bottom line is that it is really, truly time for the myth about Big Spender Obama to die.”

UPDATE: Thanks to Mark Thoma and Brad DeLong for retweeting my post, which helped it make the front page of Reuter’s counterparties blog.

(Source:, via benjaminlandy)

Why Some Countries Go Bust

By his own admission, Daron Acemoglu is a slightly pudgy and fairly nerdy guy with an unpronounceable last name. But when I mentioned that I was interviewing him to two econ buffs, they each gasped and said, “I love Daron Acemoglu,” as if I were talking about Keith Richards. The Turkish M.I.T. professor — who, right now, is about as hot as economists get — acquired his renown for serious advances in answering the single most important question in his profession, the same one that compelled Adam Smith to write “The Wealth of Nations”: why are some countries rich while others are poor?

Over the centuries, proposed answers have varied greatly. Smith declared that the difference between wealth and poverty resulted from the relative freedom of the markets; Thomas Malthus said poverty comes from overpopulation; and John Maynard Keynes claimed it was a byproduct of a lack of technocrats. (Of course, everyone knows that politicians love listening to wonky bureaucrats!) Jeffrey Sachs, one of the world’s most famous economists, asserts that poor soil, lack of navigable rivers and tropical diseases are, in part, to blame. Others point to culture, geography, climate, colonization and military might. The list goes on.

But through a series of legendary — and somewhat controversial — academic papers published over the past decade, Acemoglu has persuasively challenged many of the previous theories. (If poverty were primarily the result of geography, say, or an unfortunate history, how can we account for the successes of Botswana, Costa Rica or Thailand?) Now, in their new book, “Why Nations Fail,” Acemoglu and his collaborator, James Robinson, argue that the wealth of a country is most closely correlated with the degree to which the average person shares in the overall growth of its economy. It’s an idea that was first raised by Smith but was then largely ignored for centuries as economics became focused on theoretical models of ideal economies rather than the not-at-all-ideal problems of real nations.

Consider Acemoglu’s idea from the perspective of a poor farmer. In parts of modern sub-Saharan Africa, as was true in medieval Europe or the antebellum South, the people who work the fields lack any incentive to improve their yield because any surplus is taken by the wealthy elite. This mind-set changes only when farmers are given strong property rights and discover that they can profit from extra production. In 1978, China began allowing farmers to benefit from any surplus they produced. The decision, most economists agree, helped spark the country’s astounding growth.

According to Acemoglu’s thesis, when a nation’s institutions prevent the poor from profiting from their work, no amount of disease eradication, good economic advice or foreign aid seems to help. I observed this firsthand when I visited a group of Haitian mango farmers a few years ago. Each farmer had no more than one or two mango trees, even though their land lay along a river that could irrigate their fields and support hundreds of trees. So why didn’t they install irrigation pipes? Were they ignorant, indifferent? In fact, they were quite savvy and lived in a region teeming with well-intended foreign-aid programs. But these farmers also knew that nobody in their village had clear title to the land they farmed. If they suddenly grew a few hundred mango trees, it was likely that a well-connected member of the elite would show up and claim their land and its spoils. What was the point?

(Source: azspot)

Central bank intervention is akin to the end of natural selection, with an all powerful being coming down to earth to save the dodos by force feeding it the flesh of other creatures. Moral hazard created by constant bailouts in the form of liquidity and inflation have created a universe where there is no benefit to being small and nimble because being the larger and more lumbering made you more appealing and justified of a bailout by an incompetent almighty. We now live on a planet where only a dozen or so gargantuan creatures reside. The incompetent creator lives in fear that these colossus may breakdown and bring about the end the world, forgetting that the lowly muskrat may just evolve into something greater if they were saved from the maw of such heinous creations. In the meantime, the blood and sweat of critters unloved by the almighty continue to be grind up to feed the behemoths, who grow more sickly by the day. Perhaps there is something to biodiversity after all, perhaps a being that cannot interpret and foresee a chaotic universe is not omnipotent after all. Michael Lewis in response to Roger Lowenstein’s defense of Ben Bernanke (not sure if it’s the Michael Lewis). (via bostonreview)



Dutch disease (the resource curse) is one hell of an affliction for any political economy, but the affect is clearly exacerbated when resource extraction begins booming in regions where autocrats and plutocracies are in charge.

Two prime examples of this are the Middle Eastern Gulf States and the West African oil exporters.

One might think that socio-economic situations cannot possibly deteriorate with the discovery of exploitable oil—after all, this means that foreign capital that wouldn’t come in now makes its way into the region’s economy, right? But that mistake lies in the assumption that this capital influx will be put to use outside of a) the oil sector, and b)the autocrats who run the region’s economy.

As one can see from the Gulf States, the influx of oil has had scant impact on the ability of the regional economies to diversify and grow. Saudi Arabia’s biggest import, after oil, is dates. Petro-dollars are used to cushion the ultra-extravagant lifestyles of the al-Saud family, bribe the major clerical sects of the country to continue preaching to the masses, and buy out any democratic movement.

In the Western African regions, the situation is even worse. Take Nigeria for example: the discovery of oil and the rapid influx of foreign investment has empowered the local plutocrats, resulting in a state that derives over 90% of its revenue from oil rents—leaving no incentive for the state to put any investment toward civilian domestic sectors or public works programs. Furthermore, the haphazard extraction policies of multinational corporations like Royal Dutch Shell lead to the decimation of local subsistence economies like agriculture and fishing—resulting in a huge influx of unskilled labor into the regional labor market, which is all the better for those with access to capital.

With the stagnation of any kind of investment into non-oil sectors of the economy, the masses of the country sit idle, attempting to maintain their standard of living with no additional help, powerless as the influx of foreign capital slowly but steadily raises prices, and plunging millions of people each year into poverty by simple attrition. In 1970, 36% of the population—19 million—lived on less than a dollar a day. Thirty years and $400 billion in oil revenue later, this statistic stood at 70%—over 90 million people. Oil has not been good for the Nigerian people.

Such is the nature of petro-states: they put control of billions in foreign capital in the hands of Western-backed dictators and plutocracies, allowing these regimes to ensure their own stability while increasing their ability to exploit the people they rule over.