The bankruptcy of economics

You could see this coming from miles away.  Increase the price for essentials without a corresponding increase in incomes and the money left over goes way down.  So now we have charts of the collapse of discretionary spending.

The Collapse In US Discretionary Spending

Cullen Roche, Pragmatic Capitalism | Jul. 7, 2011

The NY Fed blog has an excellent post breaking down the decline in consumer spending during this most recent recession. They highlight two rather mind blowing charts that show just how severe the decline in discretionary spending has been:

“The chart below shows how much real per capita (to account for differing rates of population growth over time) discretionary services expenditures fell from their previous peak—a zero value in this chart means that these expenditures were above their previous peak. The drop in discretionary services expenditures in the last recession was much more severe than in previous recessions: the nearly 7 percent fall from the peak is more than double the percentage decline in the early 1980s recession (the previous “champion” in this dimension).” more

And because the economy is so dependent on consumer spending, a collapse in spending will lead to unemployment--plus the death of thousands of small businesses.

Ladies And Gentlemen, We Have A Totally New Scariest Jobs Chart Ever

Joe Weisenthal | Jul. 8, 2011

For a long time we've been going with the same Scariest Jobs Chart Ever, which we ran this morning. It shows how bad this "recovery" has been compared to past ones.

It's really scary, but we're confident that we have a new winner. 

It shows the average duration of unemployment, and it's skyrocketing without any hint of slowing down.

Even though we're "creating jobs" each month, this would seem to point to a large, brewing, structural unemployment problem, with a significant chunk of the population permanently out of the workforce. Historically, we've never seen anything like this, and the fact that we only had one down-blip during the recovery is stunning. more

And we have a president who is utterly lost in the worlds of economic madness.

What Obama Wants

By PAUL KRUGMAN   Published: July 7, 2011

[snip]

But let’s be frank. It’s getting harder and harder to trust Mr. Obama’s motives in the budget fight, given the way his economic rhetoric has veered to the right. In fact, if all you did was listen to his speeches, you might conclude that he basically shares the G.O.P.’s diagnosis of what ails our economy and what should be done to fix it. And maybe that’s not a false impression; maybe it’s the simple truth.

One striking example of this rightward shift came in last weekend’s presidential address, in which Mr. Obama had this to say about the economics of the budget: “Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs.”

That’s three of the right’s favorite economic fallacies in just two sentences. No, the government shouldn’t budget the way families do; on the contrary, trying to balance the budget in times of economic distress is a recipe for deepening the slump. Spending cuts right now wouldn’t “put the economy on sounder footing.” They would reduce growth and raise unemployment. And last but not least, businesses aren’t holding back because they lack confidence in government policies; they’re holding back because they don’t have enough customers — a problem that would be made worse, not better, by short-term spending cuts. more

And to put the madness into context, James Fallows who learned his economics at roughly the same time as I points out that those of us who learned our economics in the 70s were as far removed from the Great Depression as Obama is from the 70s.

The Economic News

JAMES FALLOWS   JUL 8 2011

In the early 1970s, when I was studying economics in graduate school in England, the ruinous Great Depression was nearly 40 years in the past. One big focus of attention in our courses was how it could have happened. That is, what combination of moneyed interests, conventionally minded "thought leaders" in politics and the media, and destructive adherence to shibboleths like the Gold Standard and the moral evils of deficit spending allowed leaders in France, England, and America to turn a problem into a disaster. It was in exasperation at the needlessness of it all -- the folly of contractionary government policies even as businesses were failing because of too little demand -- that John Maynard Keynes had written The General Theory. Liaquat Ahamed recently re-told that story in hisjustly celebrated Lords of Finance. (For how the Chinese have absorbed this history in responding to the post-2008 slowdown, see this account.)

Those days of the 1970s are now nearly 40 years in the past. And this morning's jobs report makes me wonder whether, as a political system, we ever learn anything. Even this basic thing: That when tens of millions of people cannot find work because of an overall "failure of demand" -- not enough paychecks going to not enough people who can not make enough payments to create jobs for enough other people -- the main problem facing the nation is not "runaway government spending." Any more than it was when Herbert Hoover tightened up on spending as markets crashed, in the wave of folly that Keynes and Ahamed in their different ways chronicled. A lot has changed since the 1930s, and the 1970s. But not this basic principle. more

Actually there is one HUGE impediment to restarting the economy--the constraints on oil supplies.  There is a reason I call this blog "real economics."  When you think about it, debt in the form of reprogrammed computer chips should always be open for renegotiation.  However, the real debts we are running up with the planet are most definitely NOT up for renegotiation, ever.  EVER!

In Elegant Technology, I made a clear distinction between monetary and environmental debts. I considered the first trivial and the second essential. On page 171 I wrote,

Placing a monetary figure on any long range plan is usually futile. But at the risk of sounding frivolous, it should be recalled that this is only money. The only valid question concerning cost is whether a project is environmentally affordable—the very question that has not been asked for most of human history. In almost every respect, the sheer size of this project is not a fatal problem, it is its greatest asset. It must be remembered that the goal of industrial environmentalism is not merely to correct the industrial mistakes of the past, it is to be a form of economic stimulation.

So it is some pleasure that I saw a writer over at Dailykos make essentially the same argument.  I have some minor quibbles with the following but mostly I am delighted to see someone else understands the difference between the real and ideological reasons for the economic mess we find ourselves.

We have an Energy ceiling, not a Debt ceiling

by barath  SAT JUL 09, 2011

A good rule of thumb is that when there is consensus on an issue in Washington (or Wall Street), it's probably wrong.

There's a real consensus right now in Washington, even though it doesn't seem like it.

Where's the consensus? That the deficit and debt matters right now and needs cutting. By the above rule of thumb and as is well known to most readers of this site, this is a bad idea. Deficit reduction will not help reduce unemployment.

But what else? Here's what they say on the two sides of the debate (leaving out others like President Obama who are saying similar things):

Whatever cuts we need to make, we have to do so in a way that does not harm our economic growth.

-- Nancy Pelosi

If there is a proposal to increase revenues outside of the potential we can increase them for more economic growth...

-- Eric Cantor

The thing nobody mentions is that Pelosi and Cantor agree on one very fundamental goal:economic growth.

Once again by the rule of thumb, this is wrong. Why?

The economy can’t grow with oil prices this high, and they're not going to come down for a sustained period of time again (relative to purchasing power). This is a fundamental, geological limit, one that I wrote about in previous diaries -- Why we need optimistic pessimism: the End of Growth and Life After the End of Economic Growth.

Sec. Chu knows this – he used to give talks about it before he joined the administration. The Department of Energy put out a great study, the Hirsch Report, in 2005 that the Bush administration tried to squash because they didn’t like its findings.

Alternative energy, while important and absolutely worth pursuing, will not be able to solve the problem in time, as I discussed in Nine Pitfalls of Alternative Energy and Blindspots of the Green Energy Movement (I don't mean to link to a bunch of my previous diaries - I just don't want to bore anyone by repeating them. In summary, alternative energy can help, but it's a small part of the answer and won't make a difference in time. So it's not that we shouldn’t try, just that we need to understand the real physical limits we face.) more