May 03

A Lost Decade or Ten . . . .

This past Wednesday, Larry Summers and Paul Krugman both spoke at different events and both warned of a lost economic decade–or decades–in the United States. While I am loathed to accept anything spewing from the frothy mouth of Larry Summers, he was uncharacteristically cogent in his remarks. Mr. Krugman continued–much to his credit–to pound the drum for decreased austerity, increased stimulus, and more proactive programs to spur employment. Mr. Krugman is widely regarded as championing policies that hang precariously the fringe of mainstream economic thinking, while Mr. Summers has long been a technocratic proponent of free markets.

“For the first time in 75 years, we are experiencing a protracted recession due to a lack of demand,” Summers said during a speech to the Center for Global Development in Washington. “It’s now been about five years since the recession began and it appears the stagnation will be with us for another long interval.”

“There is not enough demand,” Krugman said during an appearance at the Economic Policy Institute, where he gave a talk to promote his new book, End This Depression Now. “We focused a lot – too much – on the financial sector’s problems. Yet that is long since gone and we still don’t have a steady recovery. That tells us the crisis was far more about household debt.”

Summers chose to focus on fixes to income inequality through progressive taxation as medicine for the demand problems in the United States, while Krugman focused on retracing the cuts in government spending at the federal and state level in order to increase expendable income, employment, and certainty. Both men are correct. Summers is correct in that if the United States is to allow the tax system to remedy income inequality rather than to implement tight regulation and limits on executive pay and compensation, then individual–namely wealthy individuals–and corporate tax revenues must necessarily increase. He also points out, falsely I believe, that much of the job losses caused by technological innovation in the manufacturing sector are to blame for much of the income inequality, and that nothing can be done to reverse that trend. Krugman is correct in that it was wholly irresponsible to react to a short term protraction in government revenues by slashing millions of public sector jobs. By failing to recapitalize state and municipal coffers, the federal government has exacerbated the huge demand problem and contracted government tax revenues. Krugman also points out that the long slog of short term fixes to the tax code and stop-gap measures on infrastructure funding have created an uncertain contracting environment for federal and state agencies, leading to the cancellation and procrastination of major improvement and repair projects. In doing so, the government has further dragged down consumer spending, employment, and government revenues. Continue reading

Apr 26

Bill Clinton Part II – Starring Barack Obama

Obama and ClintonWe all remember the wonderful carefree days of the Clinton Administration, notably the second lame-duck term during which much was accomplished, for good and for bad. The economy was growing, unemployment was low, and the stock market performed swimmingly. Congress impeached the President, but most of the balding white men involved in the Broadway production secretly played intern with their Bill Clinton action figures. President Clinton did not embroil us in some meaningless conflict murdering innocent civilians and upending an entire civilization for no good reason. Instead, although late and saturated with poor political and policy decisions, he brought an end to the bloody and disturbing conflict in former Yugoslavia.  With this and other foreign policy successes and a humming economy, it was peaches and cream in the United States. At least we thought it was.

What was overlooked  at the time was the legislative unraveling of significant and efficacious financial regulation that took place in the final years of the Clinton Presidency. Following a decade of banking deregulation, Glass-Steagall was demolished by the Gramm–Leach–Bliley Act, the depression era law that had kept banks and investment houses separate entities, and ensured that bank deposits were not ultra-leveraged and gambled with on risky Frankensteinesque financial products cooked up by some MIT graduate using complicated algorithms. The benign sounding and exceptionally complex Commodity Futures Modernization Act of 2000 also passed and was signed into law by President Clinton. The law ensured that over-the-counter derivatives, you know, those adorable little weapons of mass financial destruction that helped fuel the financial crisis and sank AIG into bankruptcy, would not be regulated by the SEC or the CFTC, or by anyone else for that matter. Each of these laws was boosted by Republican lawmakers, specifically Senator Phil Gramm, and his financial backers. Unfortunately, the economic and financial markets advisers that held Clinton’s ear signed on to the right wing plan willingly as well.

Times were great, and after more than a decade of lesser financial regulation, the conventional wisdom was that more regulatory downsizing would ultimately juice the system to yet new highs, lifting all ships and dominating the world’s financial system. Nothing could go wrong, well, at least that’s what President Clinton’s advisers counseled, notably Larry Summers, Alan Greenspan, Arthur Levitt, and William J. Rainer. Each man an imbecile in his own unique way. The first signs that the The Commodity Futures Modernization Act was a flop came not one year later when Enron Corporation crashed due to the collapse of unregulated single-stock futures and over-the-counter energy futures given the stamp of approval by the act. Continue reading