Thursday, August 2, 2012

Meta-thinking on political economy

Once in awhile it is good to have big thoughts on economics.  So without further ado, a small collection starting with the idea that if $21 Trillion are parked in offshore tax haven, it is almost assured that money is NOT financing any worthwhile activity in the real economy.

The Mega Rich Are Hiding At Least $21 Trillion In Offshore Tax Havens 

Sam Ro | Jul. 22, 2012

According to a new study published by the Tax Justice Network, the richest people in the world have at least $21 trillion and as much as $32 trillion sitting in offshore bank accounts to dodge taxes in their home countries.

According to London's Observer, which got early access to the report, the findings were based on data from the Bank of International Settlements, the International Monetary Fund, and private sector analysts.

From the Observer:

In total, 10 million individuals around the world hold assets offshore, according to Henry's analysis; but almost half of the minimum estimate of $21tn – $9.8tn – is owned by just 92,000 people. And that does not include the non-financial assets – art, yachts, mansions in Kensington – that many of the world's movers and shakers like to use as homes for their immense riches.
Assuming that super-rich investors earn a relatively modest 3% a year on their $21tn, taxing that vast wall of money at 30% would generate a very useful $189bn a year – more than rich economies spend on aid to the rest of the world.

The report includes the top 50 banks as measured by international client assets held, which is where you can find these assets.  more
So L. Randall Wray is also at U. Missouri K. C.  They are rapidly becoming the 1927 Yankees of progressive economics.  Here Wray makes the point that the real economy cannot be well managed by thieves.


Author: L. Randall Wray · July 23rd, 2012

As the Global Financial Crisis rumbles along in its fifth year, we read the latest revelations of bankster fraud, the LIBOR scandal. This follows the muni bond fixing scam detailed a couple of weeks ago, as well as the J.P. Morgan trading fiasco and the Corzine-MF Global collapse and any number of other scandals in recent months. In every case it was traders run amuck, fixing “markets” to make an easy buck at someone’s expense. In times like these, I always recall Robert Sherrill’s 1990 statement about the S&L crisis that “thievery is what unregulated capitalism is all about.”

After 1990 we removed what was left of financial regulations following the flurry of deregulation of the early 1980s that had freed the thrifts so that they could self-destruct. And we are shocked, SHOCKED!, that thieves took over the financial system.

Nay, they took over the whole economy and the political system lock, stock, and barrel. They didn’t just blow up finance, they oversaw the swiftest transfer of wealth to the very top the world has ever seen. They screwed workers out of their jobs, they screwed homeowners out of their houses, they screwed retirees out of their pensions, and they screwed municipalities out of their revenues and assets.

Financiers are forcing schools, parks, pools, fire departments, senior citizen centers, and libraries to shut down. They are forcing national governments to auction off their cultural heritage to the highest bidder. Everything must go in firesales at prices rigged by twenty-something traders at the biggest and most corrupt institutions the world has ever known.

And since they’ve bought the politicians, the policy-makers, and the courts, no one will stop it. Few will even discuss it, since most university administrations have similarly been bought off—in many cases, the universities are even headed by corporate “leaders”–and their professors are on Wall Street’s payrolls.

We’re screwed.

Bill Black joined our department in 2006. At UMKC (and the Levy Institute) we had long been discussing and analyzing the GFC that we knew was going to hit, using the approaches of Hyman Minsky and Wynne Godley. Bill insisted we were overlooking the most important factor, fraud. To be more specific, Bill called it control fraud, where top corporate management runs an institution as a weapon to loot shareholders and customers to the benefit of top management. Think Bob Rubin, Hank Paulson, Bernie Madoff, Jamie Dimon and Jon Corzine. Long before, I had come across Bill’s name when I wrote about the S&L scandal, and I had listed fraud as the second most important cause of that crisis. While I was open to his argument back in 2006, I could never have conceived of the scope of Wall Street’s depravity. It is all about fraud. As I’ve said, this crisis is like Shrek’s Onion, with fraud in every layer. There is, quite simply, no part of the financial system that is not riddled with fraud.

The fraud cannot be reduced much less eliminated. First, there are no regulators to stop it, and no prosecutors to punish it. But, far more importantly, fraud is the business model. Further, even if a financial institution tried to buck the trend it would fail. As Bill says, fraud is always the most profitable game in town. So Gresham’s Law dynamics ensure that fraud is the only game in town.

As Sherrill said, without regulation, capitalism is thievery. We stopped regulating the financial system, so thieves took over.

A century ago Veblen analyzed religion as the quintessential capitalist undertaking. It sells an inherently ephemeral product that cannot be quality tested. Most of the value of that product exists only in the minds of the purchasers, and most of that value cannot be realized until death. Dissatisfied customers cannot return the purchased wares to the undertakers who sold them—there is no explicit money back guarantee and in any event, most of the dissatisfied have already been undertaken. The value of the undertaker’s institution is similarly ephemeral, mostly determined by “goodwill”. Aside from a fancy building, very little in the way of productive facilities is actually required by the religious undertaker.

But modern finance has replaced religion as the supreme capitalistic undertaking. Again, it has no need for production facilities—a fancy building, a few Bloomberg screens, greasy snake-oil salesmen, and some rapacious traders is all that is required to separate widows and orphans from their lifesavings and homes. Religious institutions only want 10%; Wall Street currently gets 20% of all the nation’s output (and 40% of profits), but won’t stop until it gets everything. more
And then there is this gem.  Perhaps my favorite living economist discussing my favorite political economist's discussion of rents and America's favorite activity—real estate speculation.

Veblen’s Institutionalist Elaboration of Rent Theory

July 27, 2012 By Michael Hudson

Michael Hudson’s new book The Bubble and Beyond has just been released and can be purchased via here.

Speech given at the Veblen, Capitalism and Possibilities for a Rational Economic Order Conference, Istanbul, Turkey, June 6th, 2012

Simon Patten recalled in 1912 that his generation of American economists – most of whom studied in Germany in the 1870s – were taught that John Stuart Mill’s 1848 Principles of Political Economy was the high-water mark of classical thought. However, Mill’s reformist philosophy turned out to be “not a goal but a half-way house” toward the Progressive Era’s reforms. Mill was “a thinker becoming a socialist without seeing what the change really meant,” Patten concluded. “The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George.[1] But the classical approach to political economy continued to evolve, above all through Thorstein Veblen.

Like Marx and George, Veblen’s ideas threatened what he called the “vested interests.” What made his analysis so disturbing was what he retained from the past. Classical political economy had used the labor theory of value to isolate the elements of price that had no counterpart in necessary costs of production. Economic rent – the excess of price over this “real cost” – is unearned income. It is an overhead charge for access to land, minerals or other natural resources, bank credit or other basic needs that are monopolized.

This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering, speculation and debt leveraging. The perception that a rising proportion of income and wealth is an unearned “free lunch” formed the take-off point for Veblen to put real estate and financial scheming at the center of his analysis, at a time when mainstream economists were dropping these areas of concern.

Veblen’s exclusion from today’s curriculum is part of the reaction against classical political economy’s program of social reform. By the time he began to publish in the 1890s, academic economics was in the throes of a counter-revolution sponsored by large landholders, bankers and monopolists denying that there was any such thing as unearned income.[2] The new post-classical mainstream accepted existing property rights and privileges as a “given.” In contrast to Veblen’s argument that the economy was all about organizing predatory schemes, this approach culminated in Milton Friedman’s Chicago School defense the pro-rentier argument: “There is no such thing as a free lunch.”

This blunt denial rejected the preceding three centuries of classical value and price theory, along with its policy conclusions promoting taxation of land and other natural endowments, and financial reform. Dropped from view was rentier overhead in the form of predatory and unproductive forms of wealth seeking. The post-classical mainstream treats all income as “earned,” including that of rentiers. Lacking the classical concepts of unproductive labor, credit or investment, today’s textbooks describe income as a reward for one’s contribution to production, and wealth is being “saved up” as a result of someone’s productive investment effort, not as an unearned or predatory free lunch.

This shift in theory has shaped the seemingly empirical National Income and Product Accounts to indulge in a circular reasoning that treats recipients of rent and interest as providing a service, an economic contribution equal to whatever rentiers receive as “earnings.” There are no categories for unearned income or speculative asset-price gains.

Veblen described the largest sectors of the economy where quick fortunes were made as being all about organizing rent-seeking opportunities to obtain income without real cost. He viewed psychological utility as social in character. In contrast to food or other satiable bodily needs characterized by diminishing marginal utility – e.g., from eating food and becoming satiated – his concept of conspicuous consumption emphasized the insatiable drives to raise one’s social status.

The desire for consumer goods was characterized by fads for the most pricey goods as trophies of one’s wealth. The result was mercenary vulgarity. Wealthy Babbitts turning culture into a arena for shifting fashion to impress others. The largest factor defining status was the neighborhood where one’s home was located. Housing was not simply a basic living space “use value.” It established one’s position in society, duly enhanced by civic boosterism, public subsidy and infrastructure spending.

To deal with these issues and preserve the critique of rentier income, speculation and insider dealing, Veblen helped lead economics into the new discipline of sociology.

The central role of real estate

As the economy’s largest asset, real estate was the great popular arena in which to seek speculative gains. Nowhere was this more visible than in small towns, which Veblen found to have had “a greater part than any other in shaping public sentiment and giving character to American culture.” The country town was basically a project to puff up real estate prices.
Its name may be Spoon River or Gopher Prairie, or it may be Emporia or Centralia or Columbia. The pattern is substantially the same, and is repeated several thousand times with a faithful perfection which argues that there is no help for it …

The location of any given town has commonly been determined by collusion between ‘interested parties’ with a view to speculation in real estate, and it continues through its life-history (hitherto) to be managed as a real estate ‘proposition.’ Its municipal affairs, its civic pride, its community interest, converge upon its real-estate values, which are invariably of a speculative character, and which all its loyal citizens are intent on ‘booming’ and ‘boosting,’ – that is to say, lifting still farther off the level of actual ground-values as measured by the uses to which the ground is turned. Seldom do the current (speculative) values of the town’s real estate exceed the use-value of it by less than 100 per cent.; and never do they exceed the actual values by less than 200 per cent., as shown by the estimates of the tax assessor; nor do the loyal citizens ever cease their endeavours to lift the speculative values to something still farther out of touch with the material facts. A country town which does not answer to these specifications is ‘a dead one,’ one that has failed to ‘make good,’ and need not be counted with, except as a warning to the unwary ‘boomer.’[3]
Describing real estate as being “the great American game,” Veblen focused on how future prices were enhanced over present values by advertising and promotion. “Real estate is an enterprise in ‘futures,’ designed to get something for nothing from the unwary, of whom it is believed by experienced persons that ‘there is one born every minute.’” Farmers and other rural families from the surrounding lands look “forward to the time when the community’s advancing needs will enable them to realise on the inflated values of their real estate,” that is, find a sucker “to take them at their word and become their debtors in the amount which they say their real estate is worth.” The entire operation, from individual properties to the town as a whole, is “an enterprise in salesmanship,” with collusion being the rule.[4] more

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