Saturday, August 6, 2011


As an afterhought to jim's posts about the lack of strategic thinking in our civil government (i.e. the fairly clear evidence that if our political "leaders" were to be drafted less than a handful of them would have the mental horsepower to make a corporal competent enough to lead four privates to a whorehouse and issue instructions on the tasks, conditions, and standards expected of them once they got there) I thought I'd point you towards this interesting essay from John Robb. Here's his money graf:
" extreme concentration of wealth at the center of our market economy has led to a form of central planning. The concentration of wealth is now in so few hands and is so extreme in degree, that the combined liquid financial power of all of those not in this small group is inconsequential to determining the direction of the economy. As a result, we now have the equivalent of centralized planning in global marketplaces. A few thousand extremely wealthy people making decisions on the allocation of our collective wealth. The result was inevitable: gross misallocation across all facets of the private economy."
Gosplan, Comrade Koch?I don't always agree with Robb, but he may be on to something here. Certainly the mess we're making in our response to the Great Recession - with the experience of the original Great Depression right before out faces - suggests more than just incompetence. You'd almost have to suspect deliberate ignorance, arrogance, and ideological purity as culprits.

Although perhaps we really ARE that stupid. It's SO hard to tell...


  1. I suspect rather a combination of factors that did lead into a self-reinforcing mess.

    It began in the late 70's when the U.S. had an avoidable recession and avoidable monetary problems. Volcker settled that.

    Then came the 80's in which the U.S. lost against the Japanese in big chunks of the microelectronics sector. This was a critical loss because the U.S. needed success in this new business cycle in order to replace obsolete industries. Old manufacturing industries weren't exactly smart either; the automotive sector kept developing cars for what they considered U.S. taste. They neglected the more efficient, smaller car segments and lost even domestic market shares against Toyota and the like. Their big cars were no export hits either; GM sold in Europe almost exclusively Opel designs and Ford sold in Europe almost exclusively Ford Europe designs. Jeep was the only (niche) brand that succeeded with U.S. style models in Europe.
    Some arrogance and poor strategic management had become apparent.
    The foundation of wealth had developed cracks before the end of the Cold War.

    Then the 90's. The U.S. didn't get much peace dividend, didn't solve problems of its society that were solved in many developed countries for decades (100% health insurance, for example). Savings, capital investment and public infrastructure investments were lagging, public education was OECD-mediocre at best.

    2000's. An inept government, NAFTA, WTO rules, the rise of the PRC as the U.S.'s factory for easily shippable goods, misallocation of resources in wars/inflated health care sector/inflated military and great federal budget deficits coincided with a national "consume more to boost the economy" ideology.
    The end result was an even worse lag for private and public capital investments.

    The manufacturing base of 2007 had to be about a fifth larger than it was in order to justify the national goods consumption. Trade balance deficits were deeply ingrained, just as federal budget deficits.

    The shit did eventually hit the fan when the unstable financial sector began to struggle.

    Now there's the messy situation that the cures for short-term symptoms are contradicting the necessary cures for long-term illnesses.
    The economy is working well below capacity and needs a consumption boost in the short term, possible only with more household and public deficits.
    The economy needs on the other hand a huge increase in saving rate, private and public investment and a balancing of federal budget and of trade - in the long term.

    In other words; if different people propose different solutions then they are usually disagreeing about whether short or long term issues should be handled with priority.

    In the end, the U.S. has f###ed itself with decades of failure in manufacturing (product development) and with decades of deficits in private households, federal budgets and as a trading nation.


    Now a bit about Robb; he has imo no clue about economics. The wealth concentration is actually a factor that kept the savings rate from dropping even further. Billionnaires are filthy rich, but they can only consume a tiny part of their annual income or even total wealth. They end up pushing the savings rate up. A more equal income (re)distribution would have crashed the savings rate, leading to even less manufacturing in comparison to goods consumption.

    page 22
    3,387 bn $ private consumption of goods
    -587 bn $ net exports of goods and services
    Assuming that government consumption of goods is mostly of domestic origin: This means that an astonishing 17% of private goods consumption is not affordable (quite the same level as in 2007)!

  2. Shoot, Sven, that was a LOT of digging for that little BEA nugget. I'm suitably impressed.

    The sad fact of the matter is that all those columns of numbers turn my brain to goo. I'll take your word for it that 17% of private goods consumption isn't affordable although what I'll call the "truth from ground level" doesn't feel the same as 2007.

    Back in 2007 I used to walk around town in the morning with my wife watching the housing market percolating madly around us. It was a special kind of crazy that reached out and embraced nearly all Americans (and Brits, and Aussies, etc.) and it translated into an obviously unsustainable lifestyle that everybody else in town was embracing.

    The current period feels quite different. Americans are just coming out of their bomb shelters, slapping the dust off themselves and are busy congratulating themselves on having (mostly) survived. There are still a lot of financial corpses buried in the wreckage.

    There's been a modest increase in spending on big ticket items, mostly stuff that had worn out and needed to be replaced.

    I can see another storm coming this fall but am not sure if it will be as bad as 2007.

    On JRobb's article, I don't know if he's any good at economics but I suspect he's onto something regarding the extremely wealthy allocating (he'd say mis-allocating) resources to line their own pockets. It's what a lot of the wealthy reflexively do in both good times and bad. Such behavior is just more noticeable in the bad times.

  3. One of the critical factors you mention, Sven, is the "financialization" of the U.S. economy. One of the things that helped prevent a harder look at all those macroeconomic trends you discuss was that as manufacturing withered and trade deficits grew we shifted our "economic base" further into financial organizations and more of our GDP came from the sort of magic that ended up in CDS.

    And a huge part of that many of those Very Wealthy People are in the financial business. So I think Robb - for all that, as I said, I disagree with a lot of what he says - has a point; we were supposed to be such a "good" economy because of the freedom of our markets. All that economic "liberty" was supposed to result in a sort of business Auftragstaktik where the macro leaders - the government economists and the big corporations - would just point the way and all those nimble little companies would figure out how to make it happen.

    But we didn't - first with autos, then with semiconductors and electronics...and, again, I think it had as much to do with the people making decisions at the top as it did with the ability of the Japanese to innovate and the Chinese to work for $0.45/hr.

    Robb's point, and mine, are just that we like to - and our conservatives especially like to - pat ourselves on the back over how damn free and powerful a wealth creation engine our markets are, our businesses are...and yet, here we are...

    And right now I think the problem isn't nearly as much long- vs. short-term solutions as it is the problem that we have no idea at this point what replaces the financial/real estate/consumer spending bubble economy. There may be something there...but we have no clue what it looks like and no idea how to find our way to it in the medium-term. And in the short-term, well, our pal Dubya gave back all that budget surplus so when we needed it we were back in deficits again. Where the hell did all that lovely lolly go, again...oh, yeah - to the rich folks!


  4. A trained economist knows the important variables and can find them in documents full of tables in a minute.

    A trade balance deficit is among the most fundamental problems that an economy can have. All other problems are either about allocation, level or sustainability.

    The U.S. economy (even its manufacturing) is huge and thus 'great', but that's badly misleading. It is also sick at its core due to neglect of manufacturing and capital investment in relation to the people's output expectations.

    I bashed the "consumption drives the economy" ideology many times in conversations and written texts, it does not help. Only economists seem to get it when I point them at it.
    Yes, consumption drives the economy - but without enough capital investment it drives the economy into ruin.

    Now imagine the huge problems that several per cent GDP more capital investment would mean. Where to take that from? You cannot take it from the poor, for they live already with private household deficits. You cannot take it from the rich, for they already save almost all their income (savings ~ capital investment). Can you take it from the military? Even abolishing the military would not free up enough % GDP. Take it from the middle class? Have fun trying that as a politician.

    In the end, the U.S. needs to give up some of its myths and it needs to abolish many distortions (power asymmetry in favour of the financial sector, government-induced overallocation of resources into housing, corporate welfare).

    The hard truth is that goods consumption has to drop very much in order to increase capital investment and in order to balance trade. A real repair job for the economy would feel tougher than another 2008 crisis on top of this crisis.
    The trade balance deficit never disappeared even during the consumption crush of the crisis:
    August 2006 highest trade balance deficit month ever; $ 67.351 bn
    February 2009 lowest trade balance deficit month since; $ 27,034 bn
    May 2011 last known trade balance deficit of a month; $ 50,227 bn
    It bounced back up, so the long-term unsoundness is still obvious.

  5. FDChief-

    Nice post.

    In my view, it all comes down to basic political questions, which I have stated repeatedly, so nothing new there. But then it goes deeper than that as well, why are these blatantly obvious questions not addressed? Culturally and even intellectually we have lost the ability to understand what the questions are, submerged as we are in this radical expansion of the "individual" or rather "consumer" in our propaganda/marketing saturated culture to the expense of whatever remains of any communal feeling/motive for action. It's like the response I hear from folks back home about dealing with the current heat wave scorching the South, "try not to move much, try not to think much and stay in the A/C as often as you can." The usual response to discomfort is to crank up whatever can soothe you immediate environment (me!) and not think about the consequences, or what may be behind what's going on . . . absolutely avoid thinking, since that just makes you realize your own weak position and makes you feel bad, and nobody wants to feel bad.

  6. Sven: "A trained economist knows the important variables and can find them in documents full of tables in a minute."

    If you're a trained economist, you should speak up a bit more when untrained but enthusiastic amateurs like me yammer on. I like to think I usually get good enough results but I sure wouldn't mind some simple lessons to help me avoid obvious mistakes.

    "In the end, the U.S. needs to give up some of its myths"

    Yeah, that part we all get. The big question is how do we achieve the goal. As you already know, the guys here are not sanguine about the prospects for this happening any time soon without something that amounts to a coup. Do you see any hope on the horizon we've missed?

  7. (Five years studying economics at a West German university.)

    About dropping myths and accepting that reality is complicated:

    Krugman was under fire for being hypocritial because he opposed GWB budget deficits and calls for higher Obama budget deficits. People don't get that this behaviour is perfectly fine for a Keynesian economist. Different conditions - different reactions.
    That was already too complicated for the public.
    (Having said that, I am no Keynesian economist. Krugman strangely never tells the public that Keynesianism depends on one key multiplier variable being greater than 1, while econometric research is not conclusive about whether it's greater than 1!)

    I guess it's necessary to get rid of the dominance of the punditocracy in the U.S., and get actual experts onto the screen, even if they're boring.

    To me Southern Europe and the U.S. look like sick countries, about as sick as Russia. Their actual economic performance is very poor and that's being hidden with wealth from the past (U.S.), natural resources (Russia) and association with less sick countries.

    Germany has its minor sicknesses as well, but none that serious. What we don't get over here is that many of our national myths are fantasy as well and our last decade was (a) terrible for the lower income groups and (b) artificially successful due to an undervalued currency.
    Our federal politics are incompetent (we haven't had an economist as secretary of the economy in decades!) and right now driven by an unprincipled power-hungry chancellor who doesn't care about the economy 1/10th as much as about party politics.

  8. It seems to me John Robb is essentially talking about regulatory capture and rent-seeking. In that case I agree. It's no surprise that the highest growth sectors over the last decade (finance, construction and health care) rely on distortionary government policies to achieve that growth.

    I also agree with Sven about business investment. A compelling argument I've heard elsewhere is that the gains in the 1990's (non-bubble gains, that is, we were in a bubble for much of the 90's), were the result of a couple of decades of investment coming home to roost. We simply don't invest as much as we used to and our previous investments have already paid off leaving us with little prospect for renewed growth. Instead money is going into the finance sector, which is still much too big.

    You look at GM, for instance. For many years before it collapsed, GMAC was that corporation's most profitable arm and it kept the company afloat. In the mid 2000's, almost 90% of profits came from GMAC. That was no accident. GM could paper over and avoid long-overdue changes to it's manufacturing business thanks it owning what amounted to one of the world's biggest bank (at that time).

    So IMO what we need is more real business investment which is what will give us growth over the long-term.


    Germany seems to be in a precarious position to me. Leaving aside the problems of the Euro, Germany is dependent on exports in a few relatively narrow areas. There are a lot of countries hungry to take away that business (machine tools and such) - what happens to Germany when it's export are reduced through competition?

  9. First we'd lose the export surplus, which isn't much of a problem in macroeconomic terms as the surplus is a problem itself (and actually there's a law that obliges the government to do sth against the surplus!).

    Then we would probably lose more manufacturing, but our manufacturing is close to 30% GDP while the U.S.'s is close to 20% GDP.

    There's still a lot left that would need to rot away till we are in troubles comparable to the U.S.'s troubles. For example, we've lent much money to foreign countries (net), not borrowed from them (net).
    Furthermore, our population is shrinking by almost 1%, while the U.S. population grows by 15 p.a. - this means we need about 2% less growth p.a. (but unlike the US we add to the national capital stock!).

    I wrote this a few weeks ago, just for fun (and to keep the skills sharp):
    It's kinda related to the topic.

  10. One of the anemic things is that though America leads in manufacturing that "lead" is in food processing?

    That's where we have the lead?

    So, perhaps we're returning to what we were agrarian economy, with small manufacturing centers found near the coasts.

    But really, the failure that Sven is talking about is the one that's been proven over the past 30 years...hell of a time to prove it doesn't work, but this "fail" is known as "Trickle Down" which hasn't worked, doesn't work, but damn the Republicans somehow thinks it works...and for them, I seriously do believe it does works for their patrons. The rest of us? Not so much.

  11. Given the Arab spring and the protests in Israel I am gaining optimism about civil participation in politics.

    The oligarchs have a hard time competing against a mobilized and interconnected population. The internet really makes a difference.

  12. Not to keep beating this drum but...since it was the point of this post...Sven says "without enough capital investment it drives the economy into ruin" like it was common sense.

    And it is. Unless...

    You are a financier (or a finance type who ends up as CEO of a public manufacturing company). Then your constant concern is the company stock, and, specifically, how well that stock "performs". And if you are, then every dollar reinvesting in the company for things like R&D and capital improvements or workforce is a dollar NOT spent on dividends or sexy-looking mergers and acquisitions.

    So we come full-circle to the question of who's making these decisions. And the whole top-down versus broad-spectrum decision making. If the decision-making segments of the U.S. - the senior appointees in government agencies, the large-business execs, the punditocracy - are captured by the people for whom wealth is not a tool for creating more wealth but a short-term end in itself, well...

    For these people the current mindset isn't a "myth", it's their reality, it's what they want. So in a sense, Sven, you and Robb are making the same point; the way the system works right now is distorted, it's not functional for the "rest" of us...but it DOES work for the small coterie of oligarchs who are focused on the short-term profit-taking. And that, in turn, cripples the long-term prospects for continued profitability.

    But - and this is implied in the Robb piece - national prosperity is no longer so critical for this group. Their wealth has gotten them to a point where they can, in effect, "buy" a piece of their First World milieu pretty much anywhere in the world. America deteriorating? No problem - just move the maquiladoras to Honduras, the assembly plants to Indonesia and run the whole thing from a suite in Bahrain.

  13. Ael: If you notice, the "Arab Spring" is looking increasingly barren. There's no real evidence of a transfer of power in Egypt other than from the Mubaraks to other power figures in the Army and the economic elite. The protests in Israel are ABOUT the fact that the closed circle of hardline conservatives in government and the hardline rabbis in the settler community are using the tactics that have worked against the Palestinian Arabs against secular and leftist elements in Israeli society and those elements are losing.

    As mobilized as the populations may be they still lack the physical power and access to the levers of control that the elites have. I don't see these movements as game-changers anymore than the Tea Party is a real game changer...

  14. Since we've moved to talking about economics in general, here's a huge question that never seems to come up but seems to me to be genuinely significant.

    Our present Western economic model is based on infinite growth; the population grows, the economy grows, the population get the picture.

    But, first, no organism has ever successfully evaded limits on growth. There's GOT to be an endpoint somewhere, and you'd think that endpoint needs to be short of a place where humans have filled up pretty much everywhere not desert or pole.

    Sven mentions that Germany's population is contracting...but that Germany still exports more than it in that sense the German economy still depends on growth, just growth outside of Germany.

    But how does our present economic system work if we reach a steady-state population? Or does it? And if it doesn't...what acts as a check on human population - or worse, how do you make the Western economic paradigm serve to push us towards a non-expanding population? Can it ever?

  15. No, the Western economies don't depend on growth, especially not on growth of resource usage.
    European energy consumption and GDP de-coupled long ago (Americans rarely get this.)

    Some institutions are expecting growth and behave accordingly, but that doesn't mean that we really need growth.

    We also don't "depend" on a trade balance surplus. It's just what happened. The Euro created an undervalued currency for us and our moderate trade balance surplus grew a lot.
    A macroeconomist would never assume that a country needs a trade surplus, for the very nature of this surplus means that it's bleeding, not getting an infusion. A trade balance surplus equals a net capital export of the same size (save for the usually small transfers).
    This means we're losing capital because of our surplus. It's not a safe bet to assume that it'll ever get fully repaid.

  16. I dunno, all this talk from Sven about "getting the experts in" as in economists . . . has me wondering . . .

    We had Larry Summers in with Clinton and he pushed through a whole lot of "reforms" like the repeal of Glass-Steagall and no government regulation of derivatives. Bush had his bunch of economic experts as well, his tax cut plan was supported by various luminaries among Ivy League economists . . . then there's Greenspan and Bernanke.

    In fact most of those following the steps of Milton Friedman (who had started as a Keynesian btw) . . . which is probably the majority of economists, thought things were OK until the wheels flew off the wagon.

    So why trust the economists? Because they know all the jargon? Which is the same argument lawyers make.

    Econometrics? How can one reliably use mathematics to predict a social activity which is fundamentally based on trust?

    Historical materialism? I wonder if economics today, as it is studied and taught, does not fall into the same category as sociology, which is based however strangely on Marx's concept of historical materialism. Which would mean that the "economy" is measured in terms of its elements which are material, as in biology, chemistry, physics . . . as in the dubious assumption that the "economy" is an organism . . .

  17. Econometrics use datasets with great quantities of data - the laws of probability govern those. It's the only real scientific test for the Keynesian theory.
    You don't need to trust econometrics, but that basically downgrades Keynesianism from a theory (which has to be falsifiable) to a fairy tale for you.

    Humans can err, and so do experts. It's nevertheless a necessity that a minister of the economy does understand economic theory. Our ministers didn't and don't. In fact, they were moved into those offices due to party proportionality politics (no-one from their state had a major office yet), they had no prior noteworthy involvement in economic policy and they don't understand anything when an economics professor tells them about the marginal rate of elasticity of demand.
    These professional politicians may be able to represent their ministry - they cannot lead it, much less can they steer German economic policy into the right direction.
    We basically have navigators who don't know a compass.

    To empower ignorant, incompetent people is no solution for fallible experts.

  18. Great quantities of data? And who choses what to measure and what not? Also do these limited samples tell us anything useful?

    You mention Krugman, but who exactly is he advising? If what he is saying is so right, then why is nobody in the US government listening?

    Interest, that's the problem, and experts of course have their own . . .

  19. As long as they are human, yes. Do you believe that incompetents are systematically superior?

    Btw; I don't think that you understood what exactly I wrote.

  20. Sven-

    I understood it well enough. You're arguing that "experts" should make policy, and I'm saying that's the problem, they have.

    And maybe the basic problem has to do with the way they deal with the subject, the way they see the world (Weltanschauung). Maybe the economy shouldn't be left to "economists".

  21. Chief:
    Yes, the Arab Spring is going a bit threadbare, however, don't believe that power isn't changing. Pictures of Mubarak in a cage are the *last* thing that wannabe military dictators want to see. If it can happen to him, it can happen to them.

    Recall why the European powers freaked out over the French Revolution. Regicides are not to be tolerated. Furthermore, next month there *will* be a real election in Egypt (and the military are scrambling to cut a deal with the MB)

    Next, Israel had 300,000 - 400,000 people out in the streets yesterday (about a 5% per capita participation rate, equivalent to a 15,000,000 size protest in the USA) The political classes are stunned and trying to figure out what just happened.

    It has never been easier to organize and engage people in political activity. All you need is for them to perceive it as worth their while.

  22. To all,
    A few cmts. I'll start light, b/c we need some levity here.
    You mentioned a CPL and a whore house. So i didn't start this thread. It's always easy to blame a NCO.
    Well been there done that. Here's my story.
    We had a Major who wanted to hang with us Cpt's and go down to the local establishment. So before the event i went down and told them he had VD. Result-he couldn't get laid in a whorehouse. I think this is why he fucked me on my OER. What does this have to do with anything- not much, but i'm not an economist but i do know that i need cash to get it in a steam and cream. Steam jobs and blow baths are expensive. Break.Break.
    The problem with the cars is a matter of discussion in several recent books. This is laid on MBA's taking over and pushing out the Engineers.Something to think about.
    I also am always concerned about the flow of US $ overseas that never come home to benefit our economy. I understand the Marshall Plan, but IRQ & AFGH/LIBYA expenditures will never come home to roost. As a layman this is 1 of my concerns.
    I agree with your take.Unlike SO i never trust Economists b/c they usually are too much ensconced in the self made scenarios. There's plenty of proof on this. It's all rather to theoretic to me. I prefer fire and maneuver and an occasional trip to the whore house. This is verifiable.
    The Arab spring is as empty a vessel , and as leaky as Obomba's leadership. Both are paper tigers.I told you so on both subjects. I wonder if O could get laid in a whore house?
    Thanks for your cmts. I try to learn.

  23. "Krugman was under fire for being hypocritial because he opposed GWB budget deficits and calls for higher Obama budget deficits. People don't get that this behaviour is perfectly fine for a Keynesian economist. Different conditions - different reactions." Yeah, being a Keynsian means never having to say your're sorry (wrong). And, if someone calls b.s., well, they just ignant & not sophisticated?edjumacated enough to understand.


  25. Sven-

    Sorry if it came across as personal. It's more the question of the Weltanschauung I mentioned . . .

  26. SO: "Now a bit about Robb; he has imo no clue about economics. The wealth concentration is actually a factor that kept the savings rate from dropping even further. Billionnaires are filthy rich, but they can only consume a tiny part of their annual income or even total wealth. They end up pushing the savings rate up. A more equal income (re)distribution would have crashed the savings rate, leading to even less manufacturing in comparison to goods consumption."

    Except for what we've just seen, and what the original post was all about:

    An increasing portion of the effective power in a smaller proportion of people.

    That powerful tiny minority living in a world increasingly decoupled from the world the rest of us live in.

    Financialization - speculative bubbles and massive malinvestment, combined with massive rent-seeking.

    When I read comments by economists, I always look to see if (a) they understand the general pattern of the US economy over the past few decades and (b) the fact that we have a financial collapse unheard of since the Great Depression - one which would have led to a second Great Depression if not for the fact that key people understood how to keep the patient alive, if horribly injured.

  27. nonymous said...

    " Yeah, being a Keynsian means never having to say your're sorry (wrong). And, if someone calls b.s., well, they just ignant & not sophisticated?edjumacated enough to understand."

    You're demonstrating that you have no clue as to what you're talking about. Please go inform yourself. You can start by going back and seeing *what* Krugman was saying, *when* he was saying it, and *why* he was saying it. He was very clear about it, and re-explained himself quite a bit.