The Economy of Wishful Thinking?

We have been going around and around about the economy. We
have heard the supply-side economics (trickle-down) people and the Keynesian
people duking it out for years now. The trickle-down people say that the
government can never play a helpful role in a down economy and that the only
way up and out is low taxes and low spending. The Keynesians believe that
government can assist a poor economy and that some spending might help
stimulate production and demand. David A Stockman  wrote an op-ed in the New York Tmes last week and he told it in this way (a non-Keynesian
way) (I am paraphrasing): the Fed Chair Ben Bernanke has been pouring money
into the market every day and this approach is not new. It was a favorite of
Alan Greenspan. The dollar has been moved from a position where it was
completely backed by gold reserves to its present position where it is there
are no gold reserves. Those who like to make money do not put too fine a point
on how they make it or at whose expense. The market does make it clear that it
does not appreciate regulation and most attempts to enforce regulation are dismantled
as soon as it is possible to do so. (Glass-Steagall, Dodd -Franks)

I am not an economics major and I tend to get bogged down in
all the charts and graphs and math and jargon. But I do not put much faith in
trickle-down economics and I’m not sure we can expect a pure Keynesian approach
to work. I like it when economists say that the American economy is not in that
much trouble and I hope that they are correct. However, I do see this
particular economic dilemma as different from some in to past. Our factories
are not just temporarily off-line or otherwise engaged, many of them no longer
exist because they have moved elsewhere and many need far fewer workers than
they once did because of robotics. How can prosperity return if we don’t
produce anything? How will demand for goods return if we don’t earn anything?

The stock market has been surging and it seems like such a
healthy sign but how can it be surging when we are not producing anything or
buying anything? I also worry about false optimism in the market because my
pension is there and every time the market takes a hit so does my lifestyle.
Ben Bernanke says that he will keep throwing money at the market until the
economy recovers and unemployment is at or below 6%. Since all of this sounds a
bit like “the economics of wishful thinking”, it is probably a good idea to
listen to someone who is not so optimistic about what is going on, but who also
doesn’t just ape the Republican Party trickle-down, play to the rich,
economics.

So here more of what David A. Stockman wrote last week in
the New York Times in an article entitled:

State-Wrecked: The Corruption of
Capitalism in America

”David A. Stockman is a former
Republican
congressman from Michigan,
President
Ronald Reagan’s budget director
from
1981 to 1985 and the author, most recently, of
“The Great Deformation: The Corruption of Capitalism in America.””

[Now I am not claiming
that Mr. Stockman is right. After all I have a deep abiding distrust of
Republican supply-side economics. I just think we should at least consider the
fact that the economy may not be smooth-sailing for some time and that we
should watch out for what other economists will have to say about David
Stockman’s suggestions. If you want his technical argument the link for the
article will follow.]

Here is what Mr.
Stockman suggests that we should do:

The future is bleak. The greatest construction boom in
recorded history — China’s money dump on infrastructure over the last 15 years
— is slowing. Brazil, India, Russia, Turkey, South Africa and all the other
growing middle-income nations cannot make up for the shortfall in demand. The
American machinery of monetary and fiscal stimulus has reached its limits.
Japan is sinking into old-age bankruptcy and Europe into welfare-state
senescence. The new rulers enthroned in Beijing last year know that after two
decades of wild lending, speculation and building, even they will face a day of
reckoning, too.
THE state-wreck ahead is a far cry from the “Great Moderation” proclaimed in 2004 by Mr.
Bernanke, who predicted that prosperity would be everlasting because the Fed
had tamed the business cycle and, as late as March 2007,
testified that the impact of the subprime
meltdown “seems likely to be contained.” Instead of moderation, what’s at hand
is a Great Deformation, arising from a rogue central bank that has abetted the
Wall Street casino, crucified savers on a cross of zero interest rates and
fueled a global commodity bubble that erodes Main Street living standards
through rising food and energy prices — a form of inflation that the Fed
fecklessly disregards in calculating inflation.
These policies have brought America to an end-stage
metastasis. The way out would be so radical it can’t happen. It would
necessitate a sweeping divorce of the state and the market economy. It would
require a renunciation of crony capitalism and its first cousin: Keynesian
economics in all its forms. The state would need to get out of the business of
imperial hubris, economic uplift and social insurance and shift its focus to
managing and financing an effective, affordable, means-tested safety net.
All this would require drastic deflation of the realm
of politics and the abolition of incumbency itself, because the machinery of
the state and the machinery of re-election have become conterminous. Prying
them apart would entail sweeping constitutional surgery: amendments to give the
president and members of Congress a single six-year term, with no re-election;
providing 100 percent public financing for candidates; strictly limiting the
duration of campaigns (say, to eight weeks); and prohibiting, for life,
lobbying by anyone who has been on a legislative or executive payroll. It would
also require overturning Citizens United and mandating that Congress pass a
balanced budget, or face an automatic sequester of spending.
It would also require purging the corrosive
financialization that has turned the economy into a giant casino since the
1970s. This would mean putting the great Wall Street banks out in the cold to
compete as at-risk free enterprises, without access to cheap Fed loans or
deposit insurance. Banks would be able to take deposits and make commercial
loans, but be banned from trading, underwriting and money management in all its
forms.
It would require, finally, benching the Fed’s central
planners, and restoring the central bank’s original mission: to provide
liquidity in times of crisis but never to buy government debt or try to
micromanage the economy. Getting the Fed out of the financial markets is the
only way to put free markets and genuine wealth creation back into capitalism.
That, of course, will never happen because there are
trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks
to the latest housing market “recovery,” artificially propped up by the Fed’s
interest-rate repression. The United States is broke — fiscally, morally,
intellectually — and the Fed has incited a global currency war (Japan just
signed up, the Brazilians and Chinese are angry, and the German-dominated euro
zone is crumbling) that will soon overwhelm it. When the latest bubble pops,
there will be nothing to stop the collapse. If this sounds like advice to get
out of the markets and hide out in cash, it is.
 

Ouch! Now what we need is to have some responses to this
from Stockman’s colleagues in the field of economics. I can see why it would be
so impossible to follow this prescription. It is a toughie. But would it work
and is Stockman right or is he using “the economy of doom and gloom thinking”?
How would the ordinary American sort this all out? Does it matter, after all,
since this stuff will not happen? What if we are unable to get out of the
markets? When is the bubble likely to pop? Maybe the partiers in the 1920’s had
the right idea. Just eat, drink and be merry because we are unable to affect
the outcome anyway. I like “the economy of wishful thinking” much better than
“the economy of doom and gloom thinking.” Perhaps somehow we will pull it off,
and we will land on our feet, even if it is by the skin of our teeth. How’s
that for a few glib clichés? But clichés often represent real folk wisdom.
Discuss amongst yourselves.

This is the view from the cheap seats.

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