Sunday, February 19, 2017

India's war on cash: who and why

On 8 November 2016, the government of India announced its intent to demonetise large denomination currency. It is one of the most baffling economic actions taken by a government in recent memory, but a few weeks ago, the Indian news website Scroll carried an excellent three part series explaining what was going on and why. It seems some economic ideologues have joined forces with large financial institutions to force demonetisation on the citizens of India. What could go wrong? 

Note the role of Harvard economics high priest Kenneth Rogoff, the deficit scold whose April 2013 book warning that disaster inevitably resulted when a nation surpassed a specific ratio of debt to GDP, was found to contain computation errors.

Understanding demonetisation: The problem with the war on cash Force marching unprepared citizens towards a cashless utopia that has little space for the informal sector is callous and indefensible.

Part I: Understanding demonetisation: Why there’s a war on cash (and you are in the middle of it)

Part II: Understanding demonetisation: Who is behind the war on cash (and why)

Part III: Understanding demonetisation: The problem with the war on cash

Another Indian news source described the "bewildering pain and desperate hope" the real economy has been plunged into after two months of demonetization. The article includes timetable of demonetization in India.
Fast-moving consumer goods (FMCG) firms have reported lower sales, especially in rural areas. Some 90% of the FMCG market in India comprises small mom-and-pop stores, heavily reliant on cash sales. And 60% of small traders have already seen a drop in sales post-demonetisation, according to market research firm Nielsen.

In rural areas, where internet penetration is limited, cash is often the only mode of payment. People in the hinterlands have struggled to access cash—there are 7.8 bank branches per 100,000 persons in rural India—and this, in turn, has affected wage and loan disbursal in these areas.
I suspected that there would be very dramatic effects on the auto industry in India, but found that the effect was even more pronounced on the scooter industry, which sells some ten time more units than the auto industry does. Asia Times reported that "Most two-wheeler brands cost between the 50,000 rupees and 100,000 rupees (US$738-US$1,476) and cash plays a major role in the transactions. According to Credit Suisse, about 40% of purchases of two-wheelers are done in cash."

The largest maker of motorcycles, scooters and auto rickshaws in India is Hero MotoCorp, which saw its sales of scooters fall from 663,153 in October, to 479,856 in November. (Sales in November 2015 were 550,731 units.) A month later, The Economic Times reported the Hero's sales fell another 34% in December 2016, to 330,202 (compared to 499,665 units in December 2015). More recently, Hero MotoCorp sales were down 14% in January 2017.

Bajaj Auto suffered a sales drop of 12% in November last year, 237,757 (compared to 270,886 a year earlier). December sales were even worse, with a reported 225,529 being a 22 percent collapse from
289,003 vehicles in 2015. According to the India Times, January sales were 211,824 units in January 201, down 16 percent from 252,988 units in January 2016.

Meanwhile, India's homegrown automaker, Tata Motors, has reported that its profits have plummeted 96% after the cash ban.
So what could possibly be the reason for inflicting such immense pain on one's own country?  The answers are laid out in the Scroll 3-part series, excerpts of which follow:

The war on cash is being waged by four major groups. One, existing financial services providers such as banks and credit card companies. Two, technology companies, including start-ups, with financial services ambitions (known as Fintechs in current terminology). Three, governments. And four, Central banks. It is difficult to imagine a more powerful combination of forces.

It is not that they have the same objectives. In fact, they have different objectives that sometimes conflict. But their interests are complementary when it comes to driving cash out of existence.

....for banks, it costs money to count, manage, store and move cash. But the moment currency turns into digital bits, two opportunities present themselves – one, to charge tiny little fees on every single transaction and two, to create a data trail of income and expenditure of customers that would come in handy to sustain new services and business models.

Cash today forms only 22% to 68% of transactions by volume in advanced economies. Norway, Australia and Denmark lead the digital pack while Japan, Germany and South Korea are among those who still prefer cash to cashless, with the United States falling somewhere in between, with a figure of 49%. But the theoretical scaffolding and reasoning for eliminating cash altogether began being put together only after the financial crisis of 2008.

[As central banks responded to the financial crash of 2007-2008 and the ensuing economic crisis, they] "began to cut interest rates down to zero to stimulate investment and spending. But they found to their horror that zero or near-zero interest rates were not enough to get their economies humming again."

Interest rates are the single most powerful tool that Central banks have, to control inflation or stagnation. If the economy is heating up and inflation is going beyond the targeted rate, central banks raise interest rates thus cooling down investment and consumer spending. People save more and spend less, bringing down inflation and along with it, growth. But if the economy is stagnant and inflation is lower than targeted, with not enough investment or consumer demand, central banks reduce interest rates to stimulate demand. Economic theory suggests that pushing interest rates significantly below zero might have been necessary to pull many advanced economies out of the funk they have been in since 2008.

A negative interest rate means that if you keep Rs 100 with your bank for a year, instead of getting back, say Rs 105 including a 5% interest, you may get back only Rs 99.90 – the rest being taken as, say, 0.1% negative interest rate. The expectation is that negative interest rates will force banks, businesses and individuals to lend, invest or spend their money rather than keep it idle, because there’s a cost to keeping it idle.

Now this is great in theory, but there is a practical problem. Central banks can take interest rate as high as they want without limit, but they cannot take it into seriously negative territory for a simple reason: if it goes there, everyone would just take their cash out of the banks and keep it in safe deposit boxes. No spending happens, and the central bank objectives are not met. In other words, economists argue that there is an asymmetry in the way central banks can use interest rates. They have immense power to cool down an overheating economy, but only limited power to stimulate a stagnant economy by bringing down interest rates sufficiently.

The technical term economists use to describe this situation is Effective Lower Bound, or ELB – the negative interest rate below which people will just withdraw their money from banks. Since there is a convenience to keeping money in the bank, the ELB is usually not exactly zero, but a little below zero – say, - 0.5% or -1%. People don’t mind keeping their money in the bank if the negative interest rate is a minor annoyance, because there is a convenience to operating with a bank account and say, a debit card.

After the Great Recession, this is the situation that central banks found themselves in: operating close to ELB. And it is in this situation that some economists started pushing a new idea that sounded horrendous to many: eliminating cash altogether. If there is no cash, people cannot take their money out of banks, and central banks can take interest rates as much below zero as needed. In other words, eliminating cash will improve the ability of central banks to fight stagnation and improve growth.

There are two well-known economists who pushed forward the idea of eliminating cash initially: Willem Buiter, now Chief Economist at financial services behemoth Citigroup and Professor Kenneth Rogoff of Harvard University. (Buiter was a thesis advisor to current Reserve Bank of India Governor Urjit Patel, and they have authored many papers together.) Willem’s 2009 piece titled “Negative Nominal Interest Rates: Three Ways to Overcome the Zero Lower Bound

Rogoff presented his paper, “Costs and benefits to phasing out paper currency in 2014” at the National Bureau of Economic Research’s Macroeconomics Conference at Cambridge, Massachusetts,

Since these two men made their case, others have added their own powerful voices to the chorus, including former US Treasury Secretary Larry Summers (who was considered for appointment as the Federal Reserve Chairman) and Nobel Laureate Paul Krugman. Both Krugman and Summers argue that in the situation that advanced economies are faced with, there are only two choices: either have negative interest rates (along with its inescapable corollary, currency elimination), or tolerate much higher levels of inflation,

These ideas are gaining momentum. Denmark, for example, is predicting that it will eliminate cash by 2030. In Italy and France, it is illegal to make purchases exceeding 1,000 Euros in cash. In Spain the limit is 2,500 Euros. Last year, European Central Bank decided to stop printing and issuance of the 500 Euro note,

At a conference that was held in London on May 18, 2015 titled “Removing the Zero Lower Bound on Interest Rates”, Buiter and Rogoff were the keynote speakers, and other speakers represented the central banks of Switzerland, Europe, US, Denmark and Sweden, Soros Fund Management, insurance company Generali, Asset Management Company Brevan Howard and so on. So by 2015, the war had already been joined by many financial service behemoths who had begun to see the gains to be had from pushing currency out of the system. And by October 2015, the International Monetary Fund itself had released a paper titled “Breaking Through the Zero Lower Bound.”


There is also a belief that emerging markets are where new digital financial technologies will evolve, by leapfrogging the stages that the advanced economies had to go through.

....the Better than Cash Alliance in 2012, hosted at the United Nations in New York and funded by the United States Agency for International Development (commonly known as USAID), Bill and Melinda Gates Foundation, Citi Foundation, Ford Foundation, Mastercard, Omidyar Network and Visa Inc. The United Nation’s Capital Development Fund serves as the secretariat. In June 2015, the finance ministry put up a draft proposal on its website, recommending tax concessions to reduce the cost of credit, debit and online payments. In July 2015, 11 new payment bank licences were given out, including one for PayTM. In November 2015, a Memorandum of Understanding was signed between the Ministry of Finance and USAID – the same agency behind the Alliance – to start working on interoperable digital payment models to drive transactions that involve small businesses and low-income consumers.

On October 14, 2016, USAID, one of the founding partners of the Better Than Cash Alliance, announced the launch of a new initiative called Catalyst to drive cashless payments in India.

....a report on the great opportunity that digital finance presents in emerging economies, prepared by McKinsey and released just four months ago, in September. The report is prominently linked on the website of the Better Than Cash Alliance.

As more people obtain access to accounts and shift their savings from informal mechanisms, as much as $4.2 trillion in new deposits could flow into the financial system 

Yeah, right.

Scroll next gives us an amazing excerpt from the above mentioned  international "business consulting" firm McKinsey, which comes right out and admits the goal is to destroy small, independent "informal" producers and retailers, in order to give more "market share" to "formal" "high productivity, modern firms," i.e., multinational conglomerates run by the new world corporatist oligarchy:

....the kind of growth that will result from a forced move towards cashless is likely to be particularly weak on employment growth for a simple reason: The stated intention of the cashless push is to make it impossible for the informal sector to survive as it does today – even though it employs more than 70% of India’s labour.
“From an economic perspective, the informal economy imposes a high cost and significantly hinders growth. Many developing countries have a two-speed economy: a modern sector of healthy companies with high productivity (or output per unit of input), and an informal sector of subscale firms that drags down overall productivity and growth. Informal firms face perverse incentives and may avoid investments or growth that could increase their visibility to regulators and tax authorities. In Turkey, for instance, MGI has found that the productivity of formal companies is 2.5 times that of informal firms. The gap in productivity levels between formal and informal firms is similar in Brazil, India, Mexico, Russia, and elsewhere.
“The presence of informal firms also harms the economy by limiting the ability of high productivity, modern firms to gain market share, given the significant cost advantage informal firms enjoy by not paying taxes. MGI research has found that the cost advantage from tax avoidance ranges from 5 percent of the cost of goods sold in Mexico food retail to 25 percent in India’s apparel sector and to more than 100 percent in the case of Russian software. Formal companies also face additional costs and complexity in managing informal firms with outmoded technology in their supply chain. This dampens the healthy process of “creative destruction” in the economy in which the most productive companies take market share from less productive ones.”

Shashi Tharoor, a former UN under-secretary-general and former Indian Minister of State for Human Resource Development and Minister of State for External Affairs, is currently an MP for the Indian National Congress and Chairman of the Parliamentary Standing Committee on External Affairs, writes in Project Syndicate:

....the impact is not being felt equally by all. India’s wealthy, who are less reliant on cash and are more likely to hold credit cards, are relatively unaffected. The poor and the lower middle classes, however, rely on cash for their daily activities, and thus are the main victims of this supposedly “pro-poor” policy.

Small producers, lacking capital to stay afloat, are already shutting down. India’s huge number of daily wage workers can’t find employers with the cash to pay them. Local industries have suspended work for lack of money. The informal financial sector – which conducts 40% of India’s total lending, largely in rural areas – has all but collapsed.
India’s fishing industry, which depends on cash sales of freshly caught fish, is wrecked. Traders are losing perishable stocks. Farmers have been unloading produce below cost, because no one has the money to purchase it, and the winter crop could not be sown in time, because no one had cash for seeds. 

Perhaps the worst part is that these sacrifices are not likely to achieve the government’s stated goal. Not all black money is in cash, and not all cash is black money. Those who held large quantities of black money seem to have found creative ways to launder it, rather than destroying it to avoid attracting the taxman’s attention, as the government expected. As a result, most of the black money believed to have been in circulation has now flooded into banks, depriving the government of its expected dividend.
On top of all of this, the government’s plan does nothing to control the source of black money. It will not be long before old habits – under-invoicing, fake purchase orders and bills, reporting of non-existent transactions, and blatant bribery – generates a new store of black money. 

Modi has been discussing going even further, moving India to an entirely “cashless society.” Does he not know that more than 90% of financial transactions in India are conducted in cash, or that over 90% of retail outlets lack so much as a card reader? Is he unaware that over 85% of workers are paid in cash, and that more than half of the population is unbanked?  
Again, here are the links for the 3-part series in Scroll:

Understanding demonetisation: The problem with the war on cash Force marching unprepared citizens towards a cashless utopia that has little space for the informal sector is callous and indefensible.

Part I: Understanding demonetisation: Why there’s a war on cash (and you are in the middle of it)

Part II: Understanding demonetisation: Who is behind the war on cash (and why)

Part III: Understanding demonetisation: The problem with the war on cash

Monday, February 13, 2017

Mark Blyth refuses to let Democrats off the hook

Mark Blyth is a Scottish political scientist and a professor of international political economy at Brown Universit. Blyth first came to my attention when his prediction of Trump's electoral victory, and how it was tied to the vote for Brexit, was widely shared after the USA election. 

I very rarely urge people to watch an entire video. This is that rare one. Blyth is merciless in his critique of the Democratic Party's acceptance of neoliberalism, and absolutely refuses to let the Democrats escape their responsibility for Trump's being elected because of that acceptance of neoliberalism.

This was part of a panel discussion, Trending Globally: Politics and Policy, held by the Watson Institute on January 25, 2017.

Sunday, February 12, 2017

How the Dutch build a tunnel under a highway in one weekend


Once Wall Street and the City of London are forced back into their proper role of subservience to the rest of the economy, we are going to be doing a LOT of this kind of work. Think of building rail mass transit systems in Los Angeles and Mexico City and Cairo and Lagos and all other cities, with the same densities of route miles and stations as the systems in Paris, Moscow, and Tokyo.

Here is a nice list, for North America only, of Openings and Construction Starts Planned for 2017. This is probably around only one or two percent of what we will end up doing in the next half century.

Monday, February 6, 2017

Well, that was interesting—Trump takes on the establishment

When during his inaugural speech, Donald Trump came out swinging at the political / economic establishment that has created and enforced the neoliberal Washington Consensus for at least 35 years, one could almost hear the gasping and pearl-clutching in the formerly smug and self-satisfied salons where the rich go to celebrate their brilliance. Mostly, because he was attacking the very schemes that had enriched them.

And let's not forget that neoliberalism is also a theological belief system. One must block out a serious chunk of reality to come to the conclusion that the neoliberals have good ideas. And the best way to do that is worship at the "commandments" of free trade. The most faithful are given prizes, mislabeled Nobels, by the Swedish Central Bank. And in their further delusions, they call what they do "science." For this crowd, what Trump said was blasphemy—a good sign that he was boorish and ill-mannered. Claim you want to renegotiate NAFTA on the stump in some rust-belt ghost town is one thing. Actually promising to do the unthinkable on the Capital steps is a bridge too far (gasp, clutch).

The inaugural address quote below was taken from an interesting article on Populism and Trump. The definitions of populism are all over the map these days so it is best not get too strict about definitions (too Protestant!). Just so you know, my definition of Populism grew out of an effort to understand the implications of the Peoples Party of 1892. They were the first people to call themselves Populists so they pretty much define the historical origins of the movements that were spawned by the educational efforts of the People's Party (and ITS precursors.)
“What truly matters is not which party controls our government, but whether our government is controlled by the people. January 20th 2017, will be remembered as the day the people became the rulers of this nation again. The forgotten men and women of our country will be forgotten no longer. Everyone is listening to you now.

“…At the center of this movement is a crucial conviction: that a nation exists to serve its citizens. Americans want great schools for their children, safe neighborhoods for their families, and good jobs for themselves. These are the just and reasonable demands of a righteous public.

“But for too many of our citizens, a different reality exists: Mothers and children trapped in poverty in our inner cities; rusted-out factories scattered like tombstones across the landscape of our nation; an education system, flush with cash, but which leaves our young and beautiful students deprived of knowledge; and the crime and gangs and drugs that have stolen too many lives and robbed our country of so much unrealized potential.

“This American carnage stops right here and stops right now. We are one nation – and their pain is our pain. Their dreams are our dreams; and their success will be our success. We share one heart, one home, and one glorious destiny. The oath of office I take today is an oath of allegiance to all Americans.

“For many decades, we’ve enriched foreign industry at the expense of American industry; subsidized the armies of other countries while allowing for the very sad depletion of our military. We’ve defended other nation’s borders while refusing to defend our own. And spent trillions of dollars overseas while America’s infrastructure has fallen into disrepair and decay.

“We’ve made other countries rich while the wealth, strength, and confidence of our country has disappeared over the horizon. 

“One by one, the factories shuttered and left our shores, with not even a thought about the millions upon millions of American workers left behind. The wealth of our middle class has been ripped from their homes and then redistributed across the entire world.
President Trump

You are 70 years old. You have an amazingly beautiful wife. Your kids seem capable of taking over the family business. You have a tricked-out 757-200 so you'll never fly coach again. Your meals are prepared by award-winning chefs. And while your digs are WAY too garish for my taste, they are very nice and probably well-built—and you have more than one.

So why in god's name do you want to spend your declining years picking fights with the establishment? Why do you want to get into pissing matches with media monopolies? Why do you want to take down the cultural insanity represented by mindless Russia-bashing? I mean, do the math—figure out how much money has been spent to demonize USSR / Russia over the years and decide if any cultural meme is more deeply embedded. You had trouble selling steak—selling the idea that we should be allies (again) with Russia will make that problem seem trivial. Anyway, you get the idea. This is a life considerably more hazardous and uncomfortable than being a wealthy property developer with a trophy wife.

Yes I know—silly questions. The country was founded by revolutionaries who in many cases were extremely successful. Jefferson had nice digs (Monticello), Washington was a very successful property speculator, Franklin was a rich celebrity writer / scientist / inventor who spent a lot of his energy chasing women, etc. They also had more comfortable things to do than to pledge "their lives, their fortunes, and their sacred honor" (final sentence of the Declaration of Independence) to a revolution that most certainly meant death if they failed. So history does hold examples of people who risk a lot for ideas.

And who knows, maybe your motivations are not exactly lofty. Perhaps it is something merely annoying like the fact that USA airports don't seem so nice compared to well, almost anywhere else in the world. Not only does your airplane not get petted properly, but its just plain embarrassing to folks who believe the USA should be good at things—especially things associated with aviation. Or maybe it's just a need for attention. But it's who you are so lets work with that.

The other night, I saw a brief interview with Melania. She claimed that 10-year-old son Barron liked to build things, then take them apart so he could build something else. She called him "little Donald" because of that. I got pretty excited. I know kids like Barron exist because I was clearly one of them myself. Finished projects rarely lasted more than a week because the whole point of construction sets is construction (well, duh!) So if you want to keep playing, you must simply move on to the next project. And if indeed you are like that yourself, you possess an important quality that this nation desperately needs.

So from one compulsive builder to another, I think we should discuss how you could end up on Mount Rushmore.

The MOST pressing problem facing humanity is climate change. Yeah I know you have called it a hoax. But you have also made some more enlightened comments that have been caught on tape. Besides, we all saw how well you got along with Elon Musk and he is arguably the most articulate spokesman out there when it comes climate change. Perhaps you liked him so much because he is also a serious builder.

Climate change is an interesting problem. It's a problem defined by what Musk deems his intellectual lodestar—physics first principles. Climate change is a fact whether anyone believes it to be true or not because it conforms to the laws of physics first principles. But those who seemingly cannot understand physics first principles do not understand the nature of the problem so resort to pseudo-religious responses. Think about it. They have meetings. They pass laws mandating better outcomes. They try to raise our awareness of the serious nature of the problem in the hope that their rah-rah speeches will inspire their listeners to change. And the CO2 levels climb.

There are a lot of ways that humans produce CO2 but far and away the most important is our all-time favorite invention—fire. Yes there are frivolous uses for fire—example, a 757-200 with only one important passenger. But by far, the biggest uses of fire are for heating our homes, growing and preparing our food, commuting to work, etc. We live in a world that was designed and built to run on fire. And because of climate change, this world can no longer exist. The world's infrastructure is, with a few exceptions, obsolete. Hopelessly obsolete.

Replacing the global fire-based economy with a renewable-energy economy will be, by FAR, the greatest building project in human history. And anyone who can pull this of will be remembered as the greatest builder in history. Mostly, it must be a builder who isn't afraid of big numbers. So think about this one—the serious people who have tried to assemble an honest bid for this project seem to believe it will cost $100 TRILLION spread over 30+ years. So that's the price tag for actually Making America Great Again.

Just a reminder, $1 trillion spent on salaries will create 20 million $50,000 / year jobs for one year. You think that creating that many jobs for people who would love to build the new and improved America will satisfy your supporters? I do.

So we have a BIG problem that can only be solved by builders with vision and imagination. The planet is awash in people who would love to be part of some global-scaled project that makes their world a better place—many are unemployed and most of the ones with jobs are underemployed. So we have projects that clearly need doing and people who want to do them. So what's the hold-up? That's easy. We cannot seem to figure out where the $3-4 Trillion a year will come from.

And here is where your expertise is really needed. Anyone who has ever financed a big real estate project has dealt with the moneychangers. After watching them create almost unlimited amounts of money to finance such utterly useless ventures as mortgage-backed securities in the run-up to the crash of 2007-8, it must be blazingly obvious that there should never be a shortage of money because the ability to create it is infinite.

So what is needed is for the moneychangers to get on board with the biggest project in human history. Get the big hedge funds guys, the TBTF bankers, the Fed, and whoever else is relevant in one room and say "I am going to need at least $3 Trillion per year to Rebuild America. It is your job to ensure that the money is there when we need it. If you cannot do this job, I will institute plan B—take the ability to create money away from you and return it to where the Constitution explicitly claims that power should reside—with the Treasury Department of the US government. You can play or watch—it's up to you.

And hey, if you fold in the great climate-change question into the bigger project of rebuilding the nation's infrastructure, you don't even have to take a public stand on the issue. I think the questions you really want to ask your self are these: Do I want to go down in history as the greatest builder of all time? or; Do I want to be known as the builder who when faced with the largest development opportunity in human history, chose to take a pass because upscale hotels and golf courses are much more your speed?

The ball's in your court, Mr. President. Do you want to remembered as a great man or as one of history's sad jokes? You may be some ways from sinless perfection, but you are gifted in the very skills most necessary to build a better future. That's close enough. In fact, there are deeply religious people who believe you are an answer to their prayers.

Sunday, January 29, 2017

Government should “vindicate the oppressed, and restrain and punish the oppressor…”

What can be more appropriate than posting an old sermon on a Sunday? The sermon below was delivered to commemorate the new 1780 Constitution of the Commonwealth of Massachusetts, one of the achievements of John Adams of which he was most proud.

The sermon was delivered by Congregational Minister Samuel Cooper, pastor of the Brattle Street Church in Boston. Congregants of this church included some of the most influential people of the American Revolution, such as John Hancock, Samuel Adams, Joseph Warren, and John Adams.

Reverend Cooper was also a co-founder of the American Academy of Arts and Sciences. The creation of the American republic was a culmination of the Enlightenment in both politics and science, and it was so manifestly self-evident that government should actively support and promote science and the arts that there was no debate about the issue in the founding era. (See, for example, my July 2014 story, The Higgs boson and purpose of a republic.) The attacks on science by our present day Republicans and conservatives would have shocked and horrified the parishioners listening to Rev. Cooper in 1780. It is especially distressing to consider certain evangelical denominations today and how they have rejected science and reason and embraced instead a "literal interpretation of the Bible" that is dangerously manichean. Rather than delight in the works of the Creator, they have chosen to wallow terror-stricken in the dark of myth and superstition.

Indeed, a major reason I decided to post these long excerpts from Cooper’s sermon is because it stands as a stinging rebuke to Republicans, conservatives and libertarians of today. The emphasis added in bold are mine. I think it important at this time, with a unpopularly elected narcissist in full control of the executive, and conservative ideologues in control of the legislature, to insist that a government, any government, is supposed to “vindicate the oppressed, and restrain and punish the oppressor….”

Tuesday, January 24, 2017

Why Republican Tax Cuts Always Cause A Financial Crash

One of the centerpieces of Trump’s economic plan is to, once again, try the Republican experiment of cutting taxes. Now, I know it is hard to argue against cutting taxes, but Democrats have really dropped the ball by not pointing out the amazing historical fact that every single time the Republicans have cut taxes, a financial crash and economic depression followed within a few years. This time, Trump wants a trillion dollar increase in spending on infrastructure that will boost the economy. But increased infrastructure spending will probably not make this experiment work better, because it does not address the microeconomic factors which cumulatively cause Republican tax cuts to create macroeconomic disasters.

There have been three grand multi-year national experiments with Republican / conservative tax cutting over the past century. All three experiments resulted in the average American becoming poorer, the real (industrial) economy in tatters, and spectacular financial crashes.

Tax Cut Experiment Number 1

In 1921, President Warren G. Harding proposed ending the wartime excess profits tax which had been imposed during World War I. When Harding died during a speaking tour in California in August 1923, Calvin Coolidge became President, so it was Coolidge who actually signed into law the Revenue Act of 1924, which lowered personal income tax rates on the highest incomes from 73 percent to 46 percent.

Two years later, the Revenue Act of 1926 law further reduced inheritance and personal income taxes; eliminated  many excise imposts (luxury or nuisance taxes); and ended public access to federal income tax returns. The tax rate on the highest incomes was reduced to 25 percent.

The result was a speculative frenzy in the stock markets, especially the application of structured leverage in what were called at the time "investment trusts." In September 1929, this edifice of false prosperity began to wobble, and finally crashed spectacularly in October 1929.

Coolidge did not seek re-nomination in 1928. Faced with a wildly gyrating stock market, a worsening collapse in farm incomes, and faltering industrial orders, the new Republican President, Herbert Hoover, responded with more tax cuts.  Personal income tax on income under $4,000 was cut by two thirds; personal income tax on income over $4,000 was cut in half. The tax rate on corporations was cut by a full percentage point.

How did the economy respond to these tax cuts? It sunk further and faster into the First Great Depression.

Tax Cut Experiment Number 2

In 1981, Ronald Reagan reduced the top marginal income tax rate, which affects the very wealthy, from 70% to 50%. In 1986, Reagan convinced Congress to reduced the top tax rate yet again, to 28%. Contrary to the Reagan /  Republican / conservative argument that the tax cuts would pay for themselves by boosting economic activity, the budget deficit and federal debt exploded. Federal government debt grew from 33.3% of GDP in 1980 to 51.9% at the end of 1988.

Reagan's tax cuts failed to revive American industry, which was also being hammered by the Reagan /  Republican / conservative blind faith in free trade. A number of American industries actually disappeared. By the end of Reagan’s presidency, the American textile, apparel, and footwear making industries had been reduced to less than one tenth the size and sales they had  just two decades earlier. During Reagan’s tenure, the U.S. lost its trade surplus in consumer electronics, and began to also lose its advantage in industrial electronics.

Meanwhile, the average American family began working more hours to maintain its standard of living. The phenomena of latch-key kids took hold as mothers sought jobs to help keep their family afloat. Wikipedia notes that the number of Americans below the poverty level increased from 29.272 million in 1980 to 31.745 million in 1988, increasingly slightly as a percentage of total population, from 12.95% in 1980 to 13.0% in 1988. The number of people in poverty under the age of 18 increased from 11.543 million in 1980 (18.3% of all child population) to 12.455 (19.5%) in 1988.

The most important industry of all, the machine tool industry—which is needed to make all other production equipment—slipped into a death spiral from which it has never really recovered. At the beginning of the 1980s, the ten largest machine tool makers in the world were all American. By 1997, only one of the top ten was, and it was ranked seventh by sales. In 2009, China became the world’s largest producer of machine tools.

In industry after industry, under Reagan, the U.S. lost its world lead: steel, auto, printing equipment, construction equipment, farm equipment, power generating equipment. Only the aerospace industry, the key component of the American empire’s military-industrial complex, managed to maintain its world lead.

Oh, and the banking and financial sector? In October 1987, the worst stock market crash since the First Great Depression shook Wall Street.

Sunday, January 22, 2017

Rex Tugwell of FDR's Brain Trust: The New Deal in Retrospect

Rexford Guy Tugwell (1891-1979) was an economist and one of the most important and innovative members of President Franklin D. Roosevelt's first Brain-Trust. Tugwell studied economics at the Wharton School of the University of Pennsylvania under Simon Patten, at the time one of the leading economists in the USA and one of the last great economists to emphasize the difference between productive economic activity, and economic rent seeking. Patten was a founder of the American Economics Association.

This was decades before Wharton was infested by neoliberalism and became an MBA mill.

This account by Tugwell provides an excellent short history of the pre-war Roosevelt administration. I greatly wish I had been aware of it nine years ago, in time to have posted it during Obama's first campaign. It would have served as a signpost to an alternative to neoliberalism, which Obama unfortunately followed steadily as he moved from one accommodation with Wall Street to the next. In addition to my reading of countless articles these past 8 years, I have read Obama’s two autobiographies, Plouffe’s book, and the biographies by Halperin and Heilemann, Remnick, and Alter, and the excellent book detailing the influence of Wall Street by Suskind, Confidence Men: Wall Street, Washington, and the Education of a President. One thing that strikes me is that neither Obama, nor Plouffe, nor anyone else close to Obama, ever spoke of Franklin Roosevelt and the New Deal as if they were actually familiar with them or wished to emulate FDR. I suspect they have never studied Roosevelt and the New Deal, at least not with the goal of learning how to govern as well and as dynamically as FDR did. Obama and his team certainly never discussed the heroic measures Roosevelt and Harry Hopkins took to get millions of people a paying job so they wouldn’t starve in the winter of 1933-34.

Suskind’s book is excellent for seeing Obama and his advisors in relation to the financial crash. They were complete dolts: never saw it coming, and had no idea why it had happened. (And it is an outright lie to argue no one saw it coming; there were many economists, including Dean Baker, Gerald Epstein, Michael Hudson, Thomas Palley, and Nouriel Roubini, who rejected the neoliberal infatuation with big banks and finance and were fully aware of reality.) According to Suskind's account, Obama knew far more than the people around him, but only because he had become friends with Robert Wolf of UBS, and Wolf was giving Obama detailed accounts of what was happening in the financial markets. Otherwise, Obama would have been as surprised and lost as everyone else.

And I would also point to the stark contrast between Roosevelt's Brain-Trustcomprised of men such as Hopkins, Tugwell, and Marriner Eccles, who truly were able to "think outside the box"and the sly but slack-minded devotees of neoliberalism Obama surrounded himself with. Who did Obama select as his advisers? "Getting Timothy Geithner and former Treasury secretary Larry Summers working in harness is Obama's single biggest post-election victory," E.J. Dionne wrote in the Washington Post three weeks after the November 2008 election. It does not even require the perspective of a few years to see that the difference was neoliberalism and the acceptance of it by Obama's team; all the people who warned—as early as the first half of 2008that Obama was picking an economics team philosophically and intellectually incapable of steering the nation to safety away from the status quo, based their warnings on the Obamians' devotion to neoliberalism. Naomi Klein began her June 2008 warning with this telling quote from Obama himself: "Look. I am a pro-growth, free-market guy. I love the market."

In contrast to Obama's complete devotion to the status quo of neoliberal economics, Tugwell links Roosevelt directly to the progressive economic populism of "Ignatius Donnelley, Pitchfork Ben Tillman, Tom Watson, Sockless Jerry Simpson and Mary Elizabeth Lease Farmers’ Alliance, the Grangers, and the Populists in the Midwest and the South." Tugwell also identifies the key difference between Roosevelt and the preceding Republicans who had steered the country into the Depression: the belief that the "federal government had a direct responsibility to the people for their welfare." The rejection of this belief is why political rule by Republicans always results in financial crashes and  economic disaster.

Monday, January 16, 2017

The new economics of solar power

My partner in life likes to watch the British costume dramas that are so popular on PBS. Not that long ago, she started watching a 6-part mini-series called Wolf Hall. This is another retelling of the rise of Henry VIII, only this time through the eyes of Thomas Cromwell—who is usually cast as a petty schemer in this sordid tale. I am not certain why the Brits are so fascinated by the story of the founder of the Church of England who was in fact, a serial killer. But they are. So this vile little tale has been made into so many films and television specials that to make another version, they needed a new angle. So Cromwell as a good guy was their gimmick of choice.

In this market, the over-the-air high-definition broadcasts by PBS have easily the best pictures available—just short of blu-ray in fact. So when partner began to rave about the picture quality of Wolf Hall, I became curious enough to watch a couple of episodes. The great advantage of the latest video gear is its ability to capture high-quality shots in low light—something that was being employed to full advantage. And the makers of Wolf Hall have not missed a trick and they do it so well, it looks effortless instead of the product of years of perfecting highly sensitive light capture. The interior shots look realistically dark and foreboding without any noticeable noise or loss of detail.

After drooling over the amazing photography for awhile, I soon snapped back to the reality that I was watching, once again, the ugly story of Henry VIII and Cromwell. The photographic reality only enhanced the shallow, vain, arrogant, and violent stupidity of the British upper classes. But while I was fuming about wasting some more of my remaining life on earth on the story of these truly vile creatures, I noticed something that almost inspired hope. The high video quality also showed some seriously fine details of that era's buildings.

So the lesson of the evening was that even though politicians and the members of the upper classes may be relentlessly stupid and boring people, the Producers of Henry VIII's day could make things that can still take your breath away. And the reason this gives me hope is that even though we elected a climate-change denier as President this late in the game, it probably won't matter. And the reason it won't matter is because solving climate change is a Producer Class assignment and as we can see, the Producers are still making miracles happen. Elon Musk has now demonstrated that electric cars can be objectively better than any fossil-fueled IC vehicle, and soon it will be obvious that solar is the low-cost energy option. Turns out you don't have to be concerned for mother earth, or lobby for new carbon taxes, or have your awareness raised. All you need to be is cheap. And that most of us can master. What follows is a Bloomberg account of the new economics of solar power.

Monday, January 9, 2017

On the cultural aspects of religious practice

Last Monday, I finally got to see the Martin Luther / Reformation exhibit that is currently on display at the Minneapolis Institute of Art.  We had tickets a few weeks back but we rescheduled due to weather concerns—something that just happens in Minnesota. In the meantime, the book describing the importance of the collection had arrived and I made a stab at reading it. There were few surprises as I have been seriously pursuing the question, since the 1980s, of how the various state (Lutheran) churches of the Nordic countries influenced their uniquely progressive political and social development. The motor for this passion is self-discovery—as the son of a Lutheran clergyman who was also an agrarian progressive, I was taking on two targets simultaneously. Besides, the question IS interesting—how and why did the Nordic nations become models of enlightened social and political organization? This question is especially interesting since the starting cultural / religious position was Viking.

The short answer is that for the most part, the state churches stayed out of the way. Lutherans never persecuted science—in fact, the reason Descartes died in Sweden is because he was offered shelter from religious persecution. When Sweden decided to get out of the war-making business in 1814, the Church of Sweden quite quickly fell into line. The Church was a supporter when Sweden decided to create their welfare state—although by the 1930s, the influence of the church was mainly confined to rural areas where the clergy taught the principles of petty piety.

But there were parts of Dr. Martin's cultural uprising that provided a solid base for social expansion. The most notable was his insistence that believers should be able to read and understand their sacred documents. In honor of the 500 anniversary of Protestantism, the Germans have recently published a new edition of Luther's translation of the Bible. Apparently, the "improvement" of the latest version is the inclusion of more 16th-century text. (Fans of the King James Bible will understand.) It is almost impossible to overstate the social transformation that came to a culture when reading became an act of the new faith and debating the finer theological points a demonstration of one's serious intent. The highlight of the show at MIA was the Luther Bible with Cranach woodcut illustrations. This Bible first appeared in 1534 but the one on display is from 1541—87 years after the publication of the Gutenberg Bible (1454).  Not surprisingly, the Luther Bible is absolutely gorgeous viewed simply as a printing project—by Luther's time printing was pretty well understood.

The MIA show is something of an odd duck.  Lutherans have not normally junked up their churches with paintings and statuary. That sort of art was put aside from the very beginning. Trust me, Cranach the Elder may have made clever woodcuts for printing, but no one will ever confuse him with Michelangelo (who was working at the same time.) Lutheran Churches can be stunningly innovative, very modern, and often beautiful. (Some favorites include the Rock Church in Helsinki, the Gruntvig Church in Copenhagen, the Christ Chapel at Gustavus Adolphus College in St. Peter MN, and the Saarinen church in south Minneapolis.) If you follow the links, you will notice that most of these churches brag about their acoustics. Which leads to the subject of "Lutheran" art.

When the big churches of Northern Europe switched from Catholic to Protestant, the remodeling job followed a standard procedure. 1) Remove the painting and statuary, the stained glass windows, and bejeweled relics, 2) Paint the interiors white (mostly) because the new faithful would have to read during devout observances so bright interiors were important; 3) Build a fancy new pulpit because the sermon was now the centerpiece of the service; and 4) Install a gigantic pipe organ because music was now a highly approved practice of the faith. Luther himself wrote music. Besides, it's great fun to sing along to a big organ shaking the rafters.

The economic role of the pipe organ industry that sprouted in the wake of the Protestant Reformation cannot be overstated. The precision necessary to make those things work was phenomenal. Not surprisingly, any region that made pipe organs could easily understand the important parts of industrial technology. Other regions had other technological precursors of course, and the pipe organ shared the limelight with printing, but if the goal is precision manufacture, it's hard to beat pipe organs for a starting point.

If music and singing was Lutheran art form #1, printing was certainly #1A. Without printing, the Reformation was roughly as possible as without the internet. Printing runs second only to music because calling printing an art form is a bigger definition stretch. That said, most of the books on display at MIA were stunningly beautiful.

The third manifestation of Lutheran art didn't really surface until the 20th century. Scandinavian Modern was largely a social democratic movement that claimed everyone was entitled to have beautiful things. And that the best way to accomplish this goal was factories that mass-produced goods would hire artists to ensure that these goods were as beautiful as possible while still being inexpensive due to mass production. Beautiful things for everyday use. Luther would have so approved—he was very democratic. Industrial design may not have been a Lutheran invention, but Lutes seem to be especially good at it.

And of course, the highest flowering of Lutheran "art" are the successful societies. Any movement that starts with the sentence, "Out of love for the truth and the desire to bring it to light" should logically end with societies where corruption is almost unheard of. The top three countries in the Transparency International's corruption index are Denmark, Finland, and Sweden—countries that have been constitutionally Lutheran for centuries. Technological sophistication is utterly dependent on honesty measured in Ångstroms. Turns out honesty has measurable economic value. And the best form of honesty comes not from people who feel forced to be honest, it comes from people who have fallen in love with the truth—and the methods for finding truth.

I am happy I got to see the collection of early Lutheran artifacts at MIA. I am not sure an art museum is an appropriate venue for these items because of the frosty relationship Protestants had with art in general, but whatever. I still believe if you really want to see Lutheran art in all its glory, watch a Christmas concert from St. Olaf College (or Luther, or Concordia.) These things are run every year on PBS.

Of course, the real reason why any of this is still important is that the same value set (universal literacy, honesty, precision, and a love of beauty) that made the Lutheran nations so successful will be necessary to create the sustainable future. Not surprisingly, those nations already lead the way in implementing a Green agenda.

Saturday, January 7, 2017

Trump and the Art of the Strongman

The elites who run the Democratic Party in USA are making two grievous errors. 1) They are seizing on any number of external reasons for why they were routed in the November 2016 elections. Not just for the White House, but in the Senate, Congress, and at the state level. 2) They are constructing a false image of Donald Trump that insists Trump is an narcissistic bigot and is therefore incompetent. It is dangerous to suppose that narcissism and bigotry necessarily result in incompetence. So far, I would say that Trump has been brilliant and ruthless in telling people want they want to hear and appealing to the worst demons of their nature, in order to achieve his political goals. Ian Welsh has been attracting much criticism for his honest appraisal of Trump, and his warning to take Trump very, very seriously.

Democrats are especially going to find it difficult to respond to Trump effectively as Trump demonstrates the fallacy of many neo-liberal economic assumptions and policies, such as free trade.

Trump and the Art of the Strongman

by Ian Welsh
January 6, 2017

Sunday, January 1, 2017

HAWB – Creating America’s Amber Waves of Grain - How America Was Built

It wasn’t really the “captains of industry” like Henry Ford or Harvey Firestone or Bill Gates or Steve Jobs. And it certainly wasn’t the filthy rich financiers of Wall Street like J.P. Morgan or Walter Wriston or Jimmie Dimon. If you want to know the story of how America was built, look at the scientists and the engineers. Like the virtually unknown and forgotten researchers and agronomists of the United States Department of Agriculture. America’s amber waves of grain from sea to shining sea is the story of these government employees as much as anyone else’s.

From the 1840s to the 1930, US production of wheat more than tripled in productivity. This remarkable progress is usually attributed to the replacement of animal power by mechanized agricultural equipment: the thresher, the binder, steam and then gas tractors, and the combine.

But this is actually only half the story. The other half involves the patient and methodical search and breeding of wheat strains to meet two goals. First, to find cultivars of wheat more resistant to diseases and pests. Second, to expand the areas in which wheat could be grown by finding varieties better suited to the harsher climates and conditions of the Great Plains and Pacific Coast states.

This work was largely accomplished by scientists, agronomists, and breeders working in the laboratories and experimental farms of the United States Department of Agriculture and the various state universities which had been established by federal land grants. According to economists Alan L. Olmstead and Paul W. Rhode, “biological innovations roughly equal[ed] the importance of mechanical advances.” [1]

This history contradicts  the conservative mythology of brave private entrepreneurs triumphing over the deadening hand of government interference in the economy. The discussion and debates in the Constitutional Convention of May 1787 show that “the Founders fully intended to create a national government with broad and far-reaching powers to ensure that all economic activity was channeled and directed to national development and the promotion of the general welfare.”

The history of agriculture in America shows how mundane, practical politics is steered to achieve the explicit Constitutional mandate to promote the General Welfare:

May 1862: An Act of Congress creates the Department of Agriculture:
There shall be at the seat of government a Department of Agriculture, the general design and duties of which shall be to acquire and to diffuse among the people of the United States useful information on subjects connected with agriculture, rural development, aquaculture, and human nutrition, in the most general and comprehensive sense of those terms, and to procure, propagate, and distribute among the people new and valuable seeds and plants.
July 1862: The Morrill Land-Grant Act grants 30,000 acres of federal land to each state to fund the construction and  “endowment, support, and maintenance of at least one college where the leading object shall be, without excluding other scientific and classical studies and including military tactics, to teach such branches of learning as are related to agriculture and the mechanic arts….”

March 1887: The Hatch Act provides funding for the states to create and operate agricultural experiment stations for scientific agricultural research.

May 1914: The Smith–Lever Act of 1914 provides federal funding for each state to create a cooperative extension service, sending agents of the land-grant universities to every county of every state to disseminate and help apply the latest advances in agricultural science.

Sunday, December 25, 2016

Good tidings of great joy, which shall be to ALL people

Christmas as the divine reminder of the value of equality:

Luke 2:
[8] And there were in the same country shepherds abiding in the field, keeping watch over their flock by night. [9] And, lo, the angel of the Lord came upon them, and the glory of the Lord shone round about them: and they were sore afraid.
[10] And the angel said unto them, Fear not: for, behold, I bring you good tidings of great joy, which shall be to all people.
[11] For unto you is born this day in the city of David a Saviour, which is Christ the Lord.
[12] And this shall be a sign unto you; Ye shall find the babe wrapped in swaddling clothes, lying in a manger.
[13] And suddenly there was with the angel a multitude of the heavenly host praising God, and saying,
[14] Glory to God in the highest, and on earth peace, good will toward men.

So, when the Lord finally decides to make the big PR announcement, She doesn’t pitch it, like a Lexus or Mercedes commercial, to the people who can afford a big celebratory binge. She doesn’t announce it first to the three wise men who had been sent by rich kings able to give some of the most expensive gifts in the world. She has Her angels go and talk to the people on the lowest rung of the socio-economic ladder, some poor guys working outside at night.

This foundation story means that Christianity, no matter how much it would be corrupted (see, for example, Kevin M. Kruse, One Nation Under God: How Corporate America Invented Christian America, Basic Books, 2015) would be a religion that affirmed the value of all people, not just the leaders and elites. In fact, Christianity was first the religion of slaves in the Roman Empire. Two millennia later, when the world finally began to seriously attempt to eliminate slavery entirely, it was radical Christians who led the Abolitionist movements around the world.

Saturday, December 24, 2016

Revenge of the electric car

This documentary on the resurgence of the electric car is fascinating and extremely well done. The highlight of this doc is that it demonstrates the sort of person it takes to push a new idea into production.  It follows Robert Lutz at GM as he green-lights the Volt, Carlos Ghosn at Nissan as he bets significant company resources on the Leaf, and of course, Musk at Tesla.  The videographers are there at critical times such as when GM declares bankruptcy and Musk is down to his last $3 million (which is essentially zero in the car business.) It is must watching for anyone remotely interested in the complexities facing anyone interested in electrifying the transportation fleet. Spoiler alert—it will be a BIG job. And yes, it will only succeed if real Producers win the day.  In Detroit, Producers are called "car guys" and the Predators are called "bean counters." Lutz should know—he wrote the book.

It also covers the fallout of the financial meltdown of 2007-8—a pointed reminder that no matter how clever, car companies are in the economic hands of people who do nothing but manipulate money. Whether these manipulators are are honest or fraudulent is pretty much irrelevant because when they screw up, they can take some brilliant projects down with them.

A direct link to the Youtube page. This thing runs 90 minutes but yes, I have watched the whole thing.

Monday, December 19, 2016

Elon Musk rediscovers vertical integration

The 1980s introduced the era of "greenmail" and other forms of financial piracy.  It wasn't just the resulting destruction of essential national wealth that was so disturbing, it was the bizarre rationalizations for why this destruction did not matter. Those of us who argued for example, the economic value of tight manufacturing integration, were hopelessly overmatched. We were up against the simple argument that it was better to move production from somewhere it cost $60 / hour to a location where labor could be had for $10 a day. Against that reality, we could only offer intangibles. Unfortunately, these "intangibles" included the values and practices that that allowed our great-grandparents to build in extremely hostile environments (like Minnesota—it was -22°F / -30°C yesterday morning) while turning them into warm and comfortable habitats with lighting, abundant food, transportation systems, educational institutes, medicine, and the other requirements of life.

The pioneers who ventured out onto this bleak landscape were not exactly building something from nothing. Around here, they started out with excellent soils, abundant water supplies, trees that yielded superb lumber, and a large supply of rocks—most especially limestone. Even so, there were no instructions on how to turn these resources into the farms and villages of settled life. The tools needed to build and the skills to operate them were especially scarce.  And yet, the resulting artifacts of civilization were figured out—in many cases with unusual sophistication. All of this happened so recently that the evidence that some mighty builders had roamed this land can still be found by anyone remotely interested.  My childhood and youth was spent marveling at these accomplishments—my favorite question seemed to be, "Now how do you suppose they built that?"

What fascinated me most was the realization that almost everything I could see and touch had been created by people who had no "qualifications" to build them. There were no schools or books that taught aeronautical engineering to the Wright brothers or Glenn Curtiss, no instructions to guide Ford into making automobiles or Firestone into tires. These folks were self-taught simply because there were no other teachers available. The greatest inventions of human history were brought to us by unqualified amateurs. Because this was so nearly miraculous, the practices and work habits that allowed the utterly "unqualified" to pull off feats that most observes still consider magic became extremely important. These were the factors of production that the financial pirates so happily destroyed in their get-rich-quick schemes of the 1980s.

The act of producing electric cars in a world designed to produce internal-combustion vehicles powered by liquid fossil fuels is similar to the acts of pioneering and invention practiced by the those early industrial giants. The most charming proof of this now comes from Elon Musk who has recently discovered the same virtues of vertical integration that Henry Ford so massively demonstrated when he built his famous River Rouge factory in Dearborn Michigan. It turns out that many of the old ideas still work.

Monday, December 12, 2016

Institutional Inertia and electric cars

In theory, Institutional Inertia is completely understandable. Companies that have been in business for a few decades have developed a bunch of lovingly-held procedures and practices.  When you find something that reliably works, you tend to stick with it and use it in other applications. After all, there usually are other matters that don't work so well that can use the institutional inventiveness. Because it is the collection of reliable methods that form the core of Producer Class success, it isn't at all surprising that such ventures become technologically conservative over time. Institutional Inertia grows out of the same impulse that produces excellent goods.

Unfortunately, sometimes Institutional Inertia just gets in the way. Today we learn some more about the reluctance of the German automobile industry to get serious about building electric cars. The list of institutional reasons are as long as your arm. At the head of the pack is the mostly-admirable trait of the serious manufacturers that they know best as in "Why should we involve our customers in design decisions—after all, they pay us to know more about cars than they do. If we make the best product we can, they will buy it." These are people who are corporately trained to ignore outside influences.

So even though the German government wants the auto giants to change their ways and have offered to assist the project, and the Chinese have threatened to seriously alter their biggest market, the biggies are still in a "mom, do I hafta" mode when it comes to electric cars. It doesn't have to be that way, of course. After all, all the Germans already excel at the hard parts of automaking. In fact, this is a main element of their Institutional Inertia. In a chart below, we discover that on average, 12, 770 Euros go into providing the internal combustion drivetrain of every car—all parts made unnecessary in an electric car. These are parts that form the soul of the corporate identity—if you ever get a chance, ask a Mercedes engineer about their engines and transmissions.

Elon Musk knows that the important part of an electric car isn't the engine and transmission, it's the batteries.  That is why he is betting the ranch on his battery gigafactory in Nevada. But even though he is trying to produce 500 thousand cars a year, that number is still is tiny compared to the 80+ million internal combustion vehicles sold last year.

See also my report of DW's coverage of Germany and electric cars.

Thursday, December 8, 2016

Where to go—Frank on the Democrats

Tony noted a few posts back that we have not been especially enthusiastic about covering the election of 2016.  To which I plead guilty.
  • One of the things that most impressed / saddened me about this Presidential election is how amazingly trivial and irrelevant these things are. The old saying that "if elections actually changed anything, they would be illegal" seemed especially appropriate this time around. My favorite subject is climate change. Ms. Clinton promised some scolding and few dimes tossed at the problem while Trump actually claims to believe this is all a hoax. Good Lord—What a terrible choice.
  • I find the fact that the Clintons and their gang of thieves managed to steal the party of those who sacrificed a LOT to make it the Party of the People—and then sold it to Wall Street—to be utterly depressing.  My contempt for these crooks is absolutely total.
  • Trump probably did not really believe he was going to win. He had no party infrastructure or book of principles around which to organize.  So we really have no idea what kind of government he will form. He has 4000 policy jobs to fill and it is highly unlikely that he even knows 4000 people that interested in politics. Some appointments look pretty damn awful.  On the other hand, his appointment of Terry Branstad as ambassador to China looks inspired (Mike Mansfield or Walter Mondale as ambassadors to Japan, anyone?) It is probably good to wait and see what sort of government the man actually forms before passing judgement.
  • The Democratic Party I once knew was a party of ideas. Now we see that the party elites—the same people who managed to blow an easily winnable election—are now advising that we become a party of disruption and civil disobedience. Well screw that! We should be getting up every morning thinking about the agenda we would advance if we were in power. And if our ideas aren't a whole lot better than neoliberalism and neocolonialism, we should shut up and work hard until they are!

Sunday, December 4, 2016

The Republican Gospel of Enforced Virtue

One of the most disfiguring and crippling faults of modern American political economy is the result of American Christianity having been corrupted by prosperity generally and specific business interests in particular. Put simply: most so-called Christian denominations in the United States have turned their backs on the social gospel, and go to great lengths to avoid discomfiting queries into members' livelihoods as usurers, speculators, money exchangers, and other economic predators. It has gotten so bad, I dislike using the words "Christian" to refer to these people, and use "christianist" instead.

The most disturbing example of this is House Speaker Paul Ryan's devotion to the cruel economic thinking of Ayn Rand, which actually once caused Ryan to literally flee a young Catholic trying to give him a Bible while exhorting Ryan to pay more attention to the Gospel of Luke. Ryan claims he is a Catholic, so I harbor a fervent wish that the Pope will send him a message or two trying to instruct Ryan in the ways of actual Christian economic policies. And then threaten to excommunicate Ryan if Ryan persists in trying to shred what remains of the USA safety net in the forms of Social Security and Medicare.

Whatever legislation Ryan and Republicans try to pass, I hope Democrats in Congress try to tack on amendments requiring serious estimates of how many people will die as a result, and creating some means of imposing criminal liability on the authors and proponents of the legislation. After all, some of the Republicans' favorite mantra is that "you have to assume responsibility for your actions," and "there must be consequences."

I want to point out another dimension to the problem posed by the way Ryan and Republicans think. We have reached a point in human history where economic scarcity is not really a problem.  As early as the 1920s, Thorstein Veblen pointed out that businessmen regularly sabotage and limit industrial production to create artificial scarcity and maintain price and profit levels. Any standard economics textbook today defines economics as society deciding how to allocate scarce resources. So standard economics starts off on a wrong foot from the get go.

But our technology today allows us to produce everything we need to support and sustain human life with a fifth or less of our workforce. Now, further advances in robotics and automation are estimated to be displacing another half of the already employed workforce over the next couple decades. What are we going to do with all those unemployed and marginally employed people? I don't see how the beliefs of Paul Ryan and today's Republicans help us to even begin to address this problem.

And there are problems on the Democratic side, also. Big problems. But that's a post for another today. I will leave you with this link, if you want to read about how what Democrats think cripples them also: Poverty Doesn't Need Technology. It Needs Politics.

Thursday, December 1, 2016

The Cycle of Civilization And The Twilight of Neoliberalism

Jon and I don't have much to write about the election of Trump. (Though, I will pass on what I think is one of the funnier slaps at the President-elect: "Der Furor.") Basically, both Jon and I were disgusted and demoralized that the Democratic Party nominated Hillary Clinton, despite the clear evidence that she was a thorough-going neo-liberal in economic policies, and a closet neo-conservative in foreign and military policies. (Leading neo-conservatives, such as Robert Kagan, even came out openly endorsing Clinton rather than their party's nominee.)

Unlike Jon and I, Ian Welsh has been putting up a stream of excellent posts since the election. Welsh was one of the few voices on the left before the election trying to warn people to take Trump seriously. Unfortunately, a lot of people were so unhinged that they mistook Welsh's warnings about Trump, as Welsh actually supporting Trump. I hope this is not symptomatic of how the left and the Democratic Party are going to respond to the Trump regime over the coming years, but it is a slight hope without much real basis other than wishful thinking. So far, it seems that most of those who got steamrolled by Trump are going to cling to their ineffective Marxism, or identity politics, or deconstructionism, or whatever.

Monday, November 28, 2016

William Black on Krugman

The economists from UMKC are on a tear.  As well they should be.  They have been beavering away in almost total obscurity keeping the light of Institutionalism alive.  It's kind of a lonely pursuit but it has one overwhelming advantage—you are correct so much more often than the convention-wisdom economists (who are almost always wrong.) And the folks who got it so disasterously wrong in 2008 haven't altered their worldviews one iota so they are still disasterously wrong.

Today, we see Bill Black give Paul Krugman a royal smackdown. Krugman has a lot of fans so taking him on entails some risk.  But the fact remains that while Krugman is easily the most enlightened economist who is allowed to write for the New York Times, he is a thoroughly conventional thinker. And in his recent role as defender of Clintonism, he was forced to sound even more like a shill for Wall Street than normal. So Black is facing a high hanging curve ball here because Institutionalists live to take on anyone willing to embarrass themselves by spouting the neoliberal idiocies.

Even so, I am pretty sure that folks like Black and Hudson are NOT getting ahead of themselves. The neoliberals are shameless.  They do not change their POV just because they are wrong.  So I must assume that most of the time, the heterodox economists at UMKC must content themselves with celebrating their small victories at their small parties.

Friday, November 25, 2016

A Short Crash Course in American Political Economy

What is our system of government supposed to be? A republic. But a republic is so ill defined that even John Adams famously wrote "the word republic, as it is used, may signify anything, everything, or nothing."

According to historian Gordon Wood,
The sacrifice of individual interests to the greater good of the whole formed the essence of republicanism and comprehended for Americans the idealistic goal of their Revolution…. To eighteenth-century American and European radicals alike, living in a world of monarchies, it seemed only too obvious that the great deficiency of existing governments was precisely their sacrificing of the public good to the private greed of small ruling groups. [1]
Just as important: are there principles and policies of political economy that are supposed to distinguish a republic from other forms of government: monarchies, oligarchies, plutocracies, dictatorships, etc.?

Since it became clear that President Obama was unwilling to directly confront the power of Wall Street, I have read deeply trying to answer these questions for myself.

Contrary to what many on the left believe, the US Constitution is NOT solely designed to protect the rich. Our system of government definitely has been twisted to that end, but I do not believe that was the intent of Hamilton, the one Founder most responsible for laying the foundation of the USA economy. (And remember, Washington used Treasury Secretary Hamilton basically as a prime minister, and agreed with or acceded to literally all of Hamilton’s economic beliefs and policies. This was in no small part a function of their shared experience at the pinnacle of American military command during the Revolutionary War, when they both identified Britain’s major strategic advantage to be Britain’s ability to raise funds and float debt through its financial system.)

Culturally, the most important aspect of a republic is supposed to be equality, especially economic equality. This is of course contrary to the view that the government was set up solely to protect property and the accumulation thereof. It was not – at least, not by Hamilton.

Economic equality is basic to a republic because, the idea was, no person can be fully independent and be a good citizen if their livelihood depends to some extent or other on another person’s largess, benevolence, or tolerance. This was the basis of the fight between the Hamiltonians and the Jeffersonians. Jefferson believed that only farmers who owned their own land were independent enough to honestly exercise the duties of citizenship. Jefferson wanted to delay the advent of industrialization and subservient factory labor as long as possible. This is why Jefferson acceded to the Louisiana Purchase, which he would otherwise have opposed on the grounds that the federal government has no express power to acquire so vast territory. [2] With the Louisiana Purchase, yeoman squeezed out of the established eastern seaboard would be able to cross the mountains, and buy, steal, or somehow take the land of the native Americans and set themselves up as independent farmers, thus extending in both space and time Jefferson’s ideal agrarian republic.

Hamilton, by contrast, understood that the economy could not be frozen in time and remain entirely agrarian. Industrialization HAD to not only proceed, but be encouraged [3], for the USA to have any chance of resisting the intrigues and hostility of the European powers – which remained committed to eradicating the American experiment in self-government until the US Civil War. (France and Spain landed troops in Mexico and Caribbean at the beginning of the war; the Mexican republic was eliminated and Maximilian, younger brother of Austrian emperor Francis Joseph I, was installed as puppet emperor. The British government of Lord Palmerston was preparing to land troops in Canada in 1862, but was deterred by the pro-USA street fighting in London and elsewhere which was led by the British allies of Italian revolutionary Giuseppe Garibaldi.)

Hamilton’s great insight was that economic development depended entirely on improving the productive powers of labor. This meant the development of science and technology, and the spread of machinery to replace muscle power, both animal and human. The correct view of Hamilton must be precise: it was not that Hamilton sought to encourage and protect wealth, but to encourage and protect the CREATION of wealth. (Read Section II, Subsection 2, “As to an extension of the use of Machinery...” in Hamilton’s December 1791 Report to Congress on the Subject of Manufactures, if you want something to read today.)

This is where Marxist analysis fails catastrophically. Yes, much of economic history is that of elites accumulating wealth through exploitation, fraud, and violence. BUT: how was that wealth which is stolen created in the first place? Thorstein Veblen, and his discussions of industrial organization versus business organization, are far more useful in understanding the COMPLETE economic story, not just the exploitation side of it. I believe that once you understand this, you can understand why Elon Musk is much more useful to society than Peter Thiel. Musk and Thiel are both rich: should we therefore oppose and denigrate both because they are rich, and we dislike our system of government which has been mutated, diminished, and twisted so that it serves and protects the rich almost exclusively? No. I admire Musk because he has used his PayPal lode to create new wealth (which takes the corporate forms of Tesla, SpaceX, and Solar City), while Thiel has used his PayPal lode to fund libertarian ideas which are fundamentally hostile to what America is supposed to be. In Veblen’s analysis, Musk is an industrialist, while Thiel is merely a businessman.

In the nineteenth century, it was generally understood that the system established by Hamilton was in opposition to the “classical economics” of Adam Smith, David Ricardo, Thomas Malthus, and the other apologists for the death and destruction wrought on entire countries by the British East India Co. and the British empire. In the 1820s, Henry Clay coined the term “American system” to distinguish it from the British system. Michael Hudson has pointed out that in addition to these two systems of political economy, a third was developed in the nineteenth century: Marxism. [4]

It is easy to be confused by American history, because at the same time that the American System was being built and practiced, the British system was competing with it for control of the domestic economy and polity. To the extent that people today mistakenly believe that the American economy was founded on the ideas of Adam Smith (it most emphatically was not: Hamilton explicitly rejected the ideas of Smith) the British system is winning.  Michael Hudson has written at least two excellent overviews of this fight within the USA between the American and British systems. [5] For now, the simplified version is that the British system was dominant in the slave South, and fought for free trade in opposition to the American System’s protective tariffs.

After the Civil War, American railroads and industries were reorganized a number of times, placing them under ever greater control by bankers and financiers located in Boston, New York, and other large cities. This period of economic consolidation is typified by the creation of the "trusts.” In response, a number of populist political movements and parties arose in opposition: the Greenback Party, the Grange, the Farmers Alliances, the People’s Party, the Non-Partisan League, and the Democratic Farmer Labor Party of Minnesota. Note that the policies they fought for in the half century after the Civil War became the economic basis of Franklin Roosevelt’s New Deal. the Greenback Party, the Grange, the Farmers Alliances, the People’s Party, the Non-Partisan League, and the Democratic Farmer Labor Party of Minnesota. Because those were all populist—and the policies they fought for in the half century after the Civil War became the economic basis of Franklin Roosevelt’s New Deal.

Here’s a 4-minute video on the Greenback Party’s 1876 presidential candidate Peter Cooper (who founded Cooper Union in New York City), and the policies of the Greenbackers. Along the lines of the issue posed by Musk versus Thiel, note that Cooper was among the richest men in USA.