Prescient economics

From Plutocrats, by Chrystia Freeland:

Marx understood the dangers of a capitalist Serrata—indeed he was counting on it. “The capitalist system carries within itself the seeds of its own destruction,” he famously argued. Marx predicted that the rising capitalist class, like the shortsighted Venetian elite, would overreach itself and create a system that so effectively consolidated its supremacy that it would eventually choke off economic growth and become politically unsustainable.

percent change in real gdp

A Saab and a voice

The Seattle Times features a story on one of my long-time radio favorites, Jim Wilke. He’s been “doing” jazz for about 30 years now, but I first heard him “doing” classical music on KING-FM shortly after my family moved here from California.

But, you know, it really doesn’t matter what Wilke is “doing”; I could derive as much satisfaction on hearing him read from the dictionary. What a voice.

As for the car allusion, I happened to see Wilke in Seattle many, many years ago as he was stepping out of his Saab, a vehicle that I, too, owned. It was, you remember, geared to smart people, which hardly explains my fascination, but surely captures Wilke.

At any rate, a good read, especially if you like jazz. I liked this excerpt in particular:

“I have a lot of listeners who are musicians. They tell me: ‘I listened to you driving home from a gig.’ I have sort of a role in getting musicians home safely. I don’t play sleepy music,” says Wilke.

A tale of two theories [u]

I heartedly commend this article in the New York Times. It’s about an American academic economist who’s thrust into British policymaking. It’s even more about what’s going on in the U.K. under the policies adopted by PM David Cameron and Chancellor of the Exchequer George Osborne.

Simply put, Cameron and Osborne won election in large part because they promised to return the economy to a sound footing. They would accomplish this by massively cutting federal spending and firing public-sector workers. They even promised as much.

But they were wrong.

Unfortunately, they are doubling down, arguing that their austerity measures must be extended along with the accompanying pain and suffering.

Cameron and his chief financial-policy minister, Osborne, say they have only deepened their commitment to austerity. Osborne recently announced that while he had hoped austerity could end by 2015, it now looks as if the policy will continue until at least 2018. That is, if the Tories are in power. Recent opinion polls show that after years in a dead heat, the Labour Party now has a solid lead in popularity, though elections are more than two years away.

The two competing theories, the article suggests, are between those who follow Keynes and those who follow Hayek, with some Milton Friedman and other freshwater economists thrown in. Adam Posen, the American advisor who accepted a position on the British counterpart to our Federal Reserve, is decidedly Keynesian. He argued in vain for expansionary policies. He was outvoted 8-1; the majority favoring austerity. While he may have lost the battles, he’s likely to win the war.

Posen arrived in London after the acute panic of the financial crisis had given way to the long slog we’re still in. At that point, policy makers around the world were given the task of assessing the damage and devising a plan that would best position the economy to function at normal levels. The United States had already responded with a roughly $800 billion stimulus package. In the spring of 2010, British voters went in another direction. They elected Prime Minister David Cameron, who had promised to reset the economy by severely cutting government spending, which would lead to significant public-sector layoffs. The economy’s only chance to return to long-term growth, Cameron argued, would be a painful, but brief, period of austerity. By shrinking the size of an inefficient government, Cameron explained, the budget would be balanced by 2015 and the private sector could lead the economy to full recovery.

Today these two approaches offer a crucial case study and perhaps a breakthrough in an age-old economic argument of austerity versus stimulus. In the past few years, the United States has experienced a steep downturn followed by a steady (though horrendously slow) upturn. The U.S. unemployment rate, which shot up to 10 percent at the end of 2009 from 4.4 percent in mid-2007, has now dropped steadily to 7.7 percent. It might be a frustrating pace, but it’s enough to persuade most economists that a recovery is under way.

The British economy, however, is profoundly stuck. Between fall 2007 and summer 2009, its unemployment rate jumped to 7.9 percent, from 5.2 percent. Yet in the three and a half years since — even despite the stimulus provided by this summer’s Olympic Games — the number has hovered around 7.9. The overall level of economic activity, real G.D.P., is still below where it was five years ago, too. Historically, it’s almost unimaginable for a major economy to be poorer than it was half a decade ago. (By comparison, the United States has a real G.D.P. that is around a half-trillion dollars more than it was in 2007.) Yet austerity’s advocates continue to argue, as Cameron has, that Britain’s economic stagnation shows that the government is still crowding out private-sector investment. This, they say, is proof that austerity is even more essential than was first realized. Once the debts have been paid off and the euro zone solves its political problems, the thinking goes, the British economy will bounce back quickly.

At any rate, if you find yourself in a bar arguing with an austerian, give your opponent a copy of this article.

UPDATE (Dec. 20, 2012):

Here’s a chart comparing the change in real GDP since 2007 between the U.S. and the U.K.:

change in real gdp uk and us since 2007

But by all means, worry about the deficit

Amidst all the furore over the fiscal cliff and budget deficits we tend to lose sight of how large a toll the Great Recession inflicted on the Rest of Us. The unemployment rate threatens to stay high above post-WWII averages. Millions of Americans struggle on a fraction of what they used to make. The New York Times brings the suffering home, focusing in this article on the plight of a young Seattleite.

Duane Taylor was studying the humanities in community college and living in his own place when he lost his job in a round of layoffs. Then he found, and lost, a second job. And a third.

Now, with what he calls “lowered standards” and a tenuous new position at a Jack in the Box restaurant, Mr. Taylor, 24, does not make enough to rent an apartment or share one. He sleeps on a mat in a homeless shelter, except when his sister lets him crash on her couch.

“At any time I could lose my job, my security,” said Mr. Taylor, explaining how he was always the last hired and the first fired. “I’d like to be able to support myself. That’s my only goal.”

Conservatives like Mitt Romney relish blaming Mr. Taylor and his cohorts for lacking the values necessary to become less reliant on “the government,” which, Romney intoned, is paid for by successful rich people. Mr. Taylor is a “moocher,” undeserving of assistance and, certainly, our sympathy.

Yet, clearly Mr. Taylor is trying—desperately so. After all, he says, his only goal is “to be able to support myself.”

I just read somewhere that a survey of the major newspapers reveals that articles on the debt and deficit outnumbered articles on joblessness by over four to one. Those headlines matter, because we intellectually defenseless Americans draw our opinions from them. If the papers are all about the federal governments fiscal imbalance, then that’s the problem, by gosh.

Those with a conscience, consider:

In Washington, Lance Fuller, a 26-year-old with a degree in journalism, spent the end of last month packing up a one-bedroom apartment he can no longer afford after being laid off. Mr. Fuller said he had been unable to keep a job for more than eight months since graduating from the University of Florida in 2010.

“Thankfully, I have a girlfriend who is willing to let me stay with her until I get back on my feet again,” said Mr. Fuller, who writes a blog, Voices of a Lost Generation. “It’s really hard for people in my generation not to feel completely defeated by this economy.”

Housing

Economist Dean Baker, who had identified an expanding housing bubble that would eventually burst, has taken to distinguishing “serious” members of his profession from those who don’t get it by whether or not they either understood that there was a soon-to-burst bubble or appreciated the effects of its collapse. And what a housing bubble it was.

The folks at Calculated Risk offer this chart showing starts and completions of single-family housing units over time:

StartsCompletionsSingleNov2012

We’ll note that beginning at the end of Bush I’s term there was a long and steady increase in both starts and completions that peaked in the 2006-2007 period. Then the bubble burst—big time. Baker estimates the value of the collapse at $8 trillion.

We’ll also note that the recovery, such as it is, has been extremely modest, with housing activity being just a fourth of its peak levels. The recent uptick may not last, however, as the prevailing view among economists is for protracted doldrums: economic growth around two percent per year and the unemployment rate at nearly eight percent.

Fun and games await just a bit ahead.

Speaking of guns

The Washington Post gives us a run down on the gun industry and Americans’ propensity to buy more weapons following massacres. One of the more interesting takeaways is that people evidently lust after the particular weapon or weapons used in the latest slaughter. Thus, the Bushmaster AR-15, Adam Lanza’s rifle of choice, registered a huge uptick in sales.

Here’s another tidbit. Those of you familiar with, say, ink-jet printers know that manufacturers make their money on the “consumables,” which, in the case of printers, are the toners. For firearms, ammo fits the category. Consider this:

Here’s how one gun lobbyist put it: “You make a product for $300, and somebody could buy this revolver and, by the time they are 80, they’ll have fired $10,000 worth of ammunition through it.”

I’ve got to believe that the upper managers and shareholders of gun and ammunition companies just love it when the loonies lay waste to dozens of people at a time, children included, of course.

Oh, and lest you get any ideas about reining in the munitions madness, you might want to take a look at this chart, included in the Post article:

2010-expenditures-by-gunissue-nonprofits_50365ef8c7c2d_w587