The Old and The New - Sale

By Richard Sale, author of Clinton’s Secret Wars

The old proverb that nothing is more novel than the old is an adage that refuses to age. We can see this in its most astonishing form in the latest GOP savaging of Obama’s economic plan.

At the time of the G-20 conference, when talk sprang up of the necessity of government spending cuts, only Paul Krugman seemed to have any knowledge of a past history that pointed to why this course was likely to fail, and Krugman’s protests gained singularity chiefly by being the only ones to exhibit any such knowledge.

 Unfortunately, there is nothing we are experiencing now that we did not experience before. We all know about the New Deal but that term is hardly accurate. There were in fact two New Deals, the first from 1933 to 1937, and the second from 1938 to 1940. It is the second that should interest us most.

The New Deal of 1933, headed by the National Recovery Administration, was a failure. Most of the government programs set up by FDR were based on the idea of recovery through scarcity. Public works and unemployment relief and other humane programs were subordinated to this idea. As for the NRA, it was a concept of Big Business and vested interests. It gave government sanction to establish production quotas (low production and high prices) but in return gave wage stipulations that improved the lot of the poorest workers. Behind the program lay the idea that recovery was to be had through monopolization, high prices, and low production. It retarded recovery and the economy improved only after the NRA was struck down in 1935 by the Supreme Court.

With the second New Deal, Roosevelt went sharply left. Except for the Agricultural Adjustment Administration, the New Deal was not recognizable. FDR did two critical things: he got passed the Wagner labor disputes bill and a new “wealth tax” to counter Huey Long’s populism – “every man a king,” and the rest of the “share the wealth” rubbish. But there now was a Labor Relations Board with a solid commitment to collective bargaining, and there was a strong law limiting holding companies, a main cause of the collapse.

Things began to move. From 1935-37, economic growth, propelled by huge government outlays, began a rapid gain – even levels of consumer spending had approached 1929 levels. Tragically, FDR’s advisors suddenly became afraid of a runaway boom similar to that of 1928-29. According to scholars like Rauch, Hofstadter, and Galbraith, even Roosevelt at the time was unaware of the degree to which government spending had fueled the recovery, plus FDR was anxious to have a rapprochement with Big Business. The GOP leadership said, as it always did, that “economies,” rather than “pump priming” (government outlays) would restore the country’s purchasing power, balance the budget and reduce the deficit.

Roosevelt gave a three-month trial to the plan. His advisors advocated restraints on spending, there was no further “pump priming” and relief and public works programs were cut – the rolls of the very important Works Progress Administration slashed by 50 percent.

The catastrophe was not long in coming. Production and employment fell rapidly. Consumer buying power shrank. Then, in a quick shift, central planning and pump priming were restored, public works and unemployment relief were restored, and the Treasury Department used $1.4 billion of its gold as collateral for bank loans in an attempt to free up credit. The economy slowly staggered back to its feet, but in the meantime the national income had declined, and only a world war offered a workable way out of the Depression.

But at least Roosevelt became committed to government spending as a necessary tool for American business expansion, contrary to the steady negative scoldings of the GOP. We have never gone back.

Of course, the GOP wishes we had. The shrill shrieks about relief, the deficit and the balance budget continue today, but what is not mentioned is that they have their root, not in the Tea Party, but in that great financial innovator President Herbert Hoover, who is never mentioned by today’s paid-by-the-piece pundits and wise men. Hoover met the economic crisis of his day with the same archaic platitudes, the same passion for inaction as the GOP today. His policies for recovery were all drastically wrong, but it is not the place here to go into them. What is important is Hoover’s moral outlook.

Hoover argued that relief for the unemployed would destroy initiative and the desire to work on the part of unemployed people. He labeled a Democratic program for farm relief “state socialism.” He asserted that any central planning led to slavery or fascism.

Unfortunately, Hoover’s grasp of the American economy and its realities seems slight. The causes of the Depression were many, not simply the Crash. By 1929, production had outrun consumer demand. Wages stayed flat and as costs of production fell, profits rose. Alas, money was being spent, not on wages, but on investment, however, soon investment fell behind profits and production began to falter.

The stern truth was that the economy was fundamentally unsound. Distribution of income was very poor. The rich were very rich. This meant economic health was dependant on a high level of investment and a high level of luxury consumer spending or both. The mania for profits had invited an infesting horde of fraudsters, con men, unscrupulous speculators. There was a “floodtide of corporate larceny,” says Galbraith.

Yet to Hoover, the American system (which he said, “is called capitalism by its enemies”) was a system without flaw. During the year of the crash and after, Hoover wanted to maintain production and wages, but Business refused to produce when there was no market for its products. A slave of ideology, Hoover despised the idea that all human beings were created equal as “claptrap left over from the French Revolution.” He also had no concept that the government should be a guardian of the welfare of all of the nation’s people. He spoke at a time when over 600,000 of the nation’s wealthiest families had more money than 16 million of its families at the bottom of the economic scale. Yet in 1934 Hoover declared there was “no serious maldistribution of wealth in America,” and that any attempts at relief for the poor would result in dictatorship and “destroy liberty.” Aid to the poor would only “impair the spiritual resources of the American people.” Any relief was the job of state and local governments. Never mind that they had no money.

For Hoover, the virtue of Big Business had no end. He called the governments of Coolidge, Harding and Andrew Mellon, the Coolidge cabinet official who liked to cheat on his taxes and who always advocated tax cuts for the rich, “the empire of fairness.” Millionaires were the finest blossoms of civilization’s vast garden. If the bulk of the people lived in near poverty, it was their fault, not their misfortune because they lacked the grit to succeed – for was not financial success simply a means that separated the strong from the weak?

It mattered little to Hoover that Business, not Government, was the first and most formidable form of dreaded “collectivism” in America, and that the government evolved only as a counter to business power.

Today’s GOP is laboring to move back to Ronald Reagan’s view that “the government is not the solution, the government is the problem.” Trust, fairness, mercy, charitable consideration, sympathy are once again signs of weakness, acting to hobble American spirit of innovation. To Reagan, public improvement would result if only the business community would be freed of such bothersome things as taxation, which, after all, was only a kind of theft. It was Business that carried the future with it, Business that counted, not silly mawkish sentimentalities about the little people. The strong produced strength, equality and justice were not its concerns. Under liberals, there had been much too much doting on the many. America’s future depended on the few.

Well, the Business Community has been freed from regulation, oversight and any vestiges of conscience, and what have been the results? No serious maldistribution of wealth? According to David Stockman, a Republican who in a recent op-ed accused the GOP of ruining the American economy, the top one percent of Americans received two-thirds of the national income while the bottom 50 percent received only 12 percent. He also said that the chief sector of job growth has not been in high tech but in employment at bars, nursing homes and the like.

Sound familiar? It should also be noted that consumer spending for last month was flat, according to recent announcements by the White House.

It appears that today we live in the worst of systems – risky private ventures backed by public funds, huge projects pushed ruthlessly by large conglomerates that are gambling in commodities, derivatives, speculation in stocks, bonds and the like – all backed by federal guarantees. And if things fall on their face, these entities can, as Stockman says, have access “to free money from the fed’s discount window to cover their bad bets.”

So when the most recent moans arise from the panicked GOP we can pause and lift our heads. For these are the same old moans, the same old lamenting cries illustrating the same stale, discarded myths of Hoover’s day. Except now everyone can sing along. We know the words.

Comments

[Sidney O. Smith III]

When it comes to economics, I recommend zanzibar.

[matt]

Thomas Frank in the WSJ (sorry, too late for a link, I'll supply it later...), recently wrote that the truly scary aspect of where we are these days is that the "top 1%" are increasingly de-coupling themselves from the rest of the American economy. They no longer NEED or DEPEND on the working classes to help them create wealth. (e.g. Henry Ford wanting workers to make enough $ to buy a car.) No these days the rich do it without the plebes...

[Redhand]

Great piece! My disgust with the likes of Mitch McConnell and John Boehner, political coelacanths whose survival is a "miracle," is matched only by my disappointment that our "brilliant" President lacks the guts to implement a Second New Deal that will really work.

[Got A Watch]

What is it with you people who worship Paul Krugman?

To me he is an incompetent, a stimulus junky cretin. And his economic policy prescriptions are totally delusional.

Color me Austerian. Massive Budget cuts are what is needed at this point, not more "deficit spending" that only flows to Banksters and their cronies.

Keynesianism and Friedmanite Monetarism are now totally disctedited as valid economic theories. They should be consigned to the dustbin of history, where they belong, along with every word Krugman ever wrote. His policy prescriptions have already been tried to extremes, and have failed - so of course, he will call for more. When is enough, enough? When total debt reaches 400% of GDP? 500%? 1,000%? More?

Someone asked if I read Krugman - I try, but after a few paragraphs I have to give it up in disgust. He is a poster child for the ivory-tower academic who has no relation to the real world. If I had to summarize him with one word, it would be - idiot.

The problem is too much spending and too much "Big Government", and the cure is (wait for it!): less spending, smaller Government and balanced Budgets.

It's so simple, Krugman can't begin to grasp it.

[Jose L. Campos]

In my view the country is in as good a shape as it can be. Were the American women to reproduce more, were American students to study harder the harder sciences, were the Americans in general less devoted to mechanical transportation and so on the shape of the country would be different but for now we are what we are. The society has been poisoned by the idea that Nature can be legislated away. We find constantly rights hidden in the Constitution. Rights that are mostly contra natura and the result is plain to see.

[jon]

The short, simple lesson is that Keynes is still right. When the economy is reeling and private business and individuals can't spend or invest, then the government is the only party left that can improve things.

Sharp austerity and budget cuts will only deepen a recession, as Hoover proved with the full support of financiers and classical economics. If government did nothing, the recession would eventually fade, but how much time and pain should be inflicted on those who did not cause the problem?

This has been a splendid opportunity for government to invest in things that society needs, and that private citizens and business are incapable of doing or loathe to perform. We appropriately provided infinite money to the financial sector to put a floor under the decline. And we have had cash for clunkers, the auto bailouts, and a fair amount of road and bridge repair.

But the country needs at least twice that investment still in order to get the economy back up to speed and unemployment down. And that investment should be in infrastructure, education, arts and cultural sectors, energy security, scientific research, and environmental protection. Those areas will provide the greatest return and employment boost for the dollar, and they will provide the country with resources and competitive advantages that will provide benefits for the next forty years. The costs will be readily amortized by the rebounding economy and the taxes of those that have jobs and profits.

But it looks like Congress has no appetite to actually solve our problems, And I doubt it will be any better after November.

[Fred]

"the cure is (wait for it!): less spending, smaller Government and balanced Budgets." Just was George W. Bush promised and failed to deliver. Guess all the Government spending in WWII really didn't end the depession or win the war.

[William R. Cumming]

How can the GOP criticize the President's economic program? How does the administration's program differ from the bailout strategy of the prior administration? How does it differ exactly? Not the recipients, the strategy? Or are one set of recipients more deserving than the others?

[peg]

re: matt's comment -- here's a link

“Do the Rich Even Need the Rest of America Anymore?”

http://www.nakedcapitalism.com/2010/08/do-the-rich-even-need-the-rest-of-america-anymore.html

[Robert]

Fred,

Government spending didn't really end the depression. A World War did. At the end of WW2, essentially *all* of the world's manufacturing capacity was destroyed, except for the USA's. Thus, it was relatively easy to achieve full employment after the war, helping Japan and Europe rebuild. You really aren't asking for another World War to end our current Depression, are you?

[VietnamVet]

My Grandfather, a Republican in good standing, hated FDR; for no other reasons than income taxes and unionization. But if you like boom and bust economic cycles, wealth and poverty, vote Republican. Forget the past (Bush or Hoover) and you’ll get the same thing, over and over again, in spades.

The simple fact is 70% of the American economy is consumer spending. If consumers can not spend because they are broke or are scared, the economy will shrink. Government spending is the only way to get new cash in consumer hands. The real problem with Obama’s economic program is that it is a continuation of the Bush Administration: Bail out Wall Street Bankers and the Military Industrial Complex.

Bombs are bursting over AfPak but the borrowed monies are not building new infrastructure in the USA or ending up in families’ pocketbooks. Not enough money is being spent where it will have compound effects that ripple through the economy. If the government builds a bridge not only is money spent on its design and workers, but also on building materials, and in the end a new bridge will save time, energy and lives; especially, if the bridge is for an electrified railroad.

[FB Ali]

In a recent article, Economic Recovery for the Few, Rick Wolff writes about the super-rich amongst us. Some extracts:

“ Capgemini and Merrill Lynch Wealth Management's World Wealth Report covers the two groups that interest them: High Net Worth Individuals (HNWIs) and Ultra-High Net Worth Individuals (Ultra-HNWIs). The first group counts all individuals with at least $1 million of "investible assets" in addition to the values of their primary residence, art works, collectibles, etc. The second group includes individuals with at least $30 million of such investible assets.

Their latest Report, covering the year 2009, finds 10 million HNWIs in the world that year: 3.1 million in North America, while Europe and Asia-Pacific each had 3.0 million. The rest of the world had a mere 0.9 million of the rich and richer.

The 10 million HNWIs -- in a global population of 6.8 billion in 2009 -- amounted to 0.14 per cent of the earth's people. Together, they owned a total of $39 trillion in "investible assets." To see what this means: in 2009, the US GDP (total output of goods and services) was $14.6 trillion. The combined GDPs of the world's 9 richest countries (US, Japan, China, Germany, France, UK, Italy, Russia, and Spain) totaled less in 2009 than the investible assets of the world's HNWIs...........

Only 1 per cent of all HNWIs were Ultra-HNWIs, but what a group that was and is. Ultra-HNWIs alone owned 35.5 per cent of the $39 trillion owned by all 10 million HNWIs”.

He proposes a way to solve the US’s budgetary deficit:

“Let's now concentrate on the HNWIs in just the US (including its Ultra-HNWIs). They numbered 2.9 million in 2009: well under 1 per cent of US citizens. Their investible assets totaled $12.09 trillion. For 2009, the total US budgetary deficit was $1.7 trillion. Had the US government levied an economic emergency tax of a modest 15 per cent on only the HNWI's investible assets, it could have erased its entire 2009 deficit. Over 99 per cent of US citizens would have been exempted from that tax.

The article is available at: http://mrzine.monthlyreview.org/2010/wolff290710.html.

[Carl O.]

First of all, nothing Obama is doing could even be remotely called anything like FDR's New Deal. if you'all recall your history, the first thing FDR did was take on the Wall Street banks that caused the crisis in the first place, with a little help from an Italian-American lawyer named Pecora. It was Pecora's famous inquiry that made the Glass-Steagall Act possible by exposing for all to see the criminality of those financier interests. Since Obama and the Democrats took over, we've gotten the opposite, a headlong rush to protect Wall Street (and the City of London, too, since institutions like AIG and Goldman Sachs have also been conduits for US bailout money to Europe). there will be no recovery until Wall Street is taken on once again and Glass Steagall is restored. For those of you who might still have some hope in Obama, he's opposed to the return of Glass Steagall, as are his henchmen, Geithner, Summers, Frank and Dodd.

[Grimgrin]

Got A Watch: You aren't exactly helping your credibility on the subject with that admission. I'd suggest again, you should read these columns where Krugman lays out the calculations he used to describe what the stimulus should be, and why it was going to fail.

http://www.nytimes.com/2009/01/09/opinion/09krugman.html?_r=1

http://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithmetic-wonkish-but-important/

I understand the red mist descends for you after a few paragraphs (I feel the same way about many of the NYT Editorial staff), but it's always worth criticizing someone's actual argument.

That said I'm interested and maybe I'm wrong that budget cuts would be a disaster, so please elaborate on these massive budget cuts.

What would you cut, by how much to balance the budget? I'm not asking for exact programs or departments, broad categories and rough percentages are fine.

[Jackie]

Since this addresses the Depression and Hoover, I didn't realize he was the US Food Administrator during WWI. He (Hoover) set the price for wheat, which helped to create the "dust bowl" because $2/bushel wheat meant more of the plains would be plowed up. That could be what spooked him about government help, although I'm not defending him.

[Got A Watch]

Look, austerity is no picnic in the park - that's why it's called austerity after all.

You can't call for 'stimulus' without looking at how and why we arrived at the present. America has been spending wildly beyond it's means for years - and under Bush and Obama the deficit spending has exploded to ridiculous levels. The capacity to spend on 'stimuli' has already been blown, like an inheritance in Vegas.

Krugman's "Stimulus Arithmetic" you linked to above (kind of dated, '09, really?) is just plain wrong - Market Ticker Blog has the math with realistic assumptions (based on Treasury etc statistics), and it bears little relation to Krugman's version.

Friday Aug 6 - "Reducing Krugman (And All Like Him) To Size" is one rebuttal, also Tue Aug 3 "How to Read the Real GDP Chart" and "Idiots on Parade in DC" put paid to vacuous assumptions (like K's) about stimulus and GDP.

We'll just have to agree to disagree - you think Krugman can fix the economy, I LOL at the idea.
Keynesianism has failed - and more spending won't prove that wrong right, no matter how much it is.

Besides that, even if the 'stimuli again' is trotted out today, I would fully expect none of it make beyond the pockets of Banksters, who would use it to drive stock and commodity markets up on a wave of speculative Government money - just like last year, in fact. TrimTabs (a market money-flow analysis) has stated that some $5 Trillion used to pump the markets in the last 16 months came from Government, as there was no other credible source of this capital.

You can take the pain and spread it out over decades, and end up nowhere better, just like Japan, model for zombification. Or you can cut the Budget, cut back Government spending, and make the accounts balance in a shorter period of time, and have a healthy economy emerge from the other side. It has been my personal experience that the 2nd option has more short term pain but leads to a far better outcome in the end. There are episodes in economic history that resemble both alternative paths, and there again the 2nd one proved to be the better choice.

As to which Depts to cut, all of them. Proportional to their size. Defense and 'Homeland Security' would be easy choices to save several Trillion in short order. I'd cut 75% there to start, and eliminate the subsidies to sugar, ethanol and oil industries. Reduce the 900 overseas bases to 200. Pull 100% of forces from Iran and Afghanistan. Cut Fed employee wages 5% and reduce benefits by 10%, freeze them for 5 years, lay off a lot of them. Etc, etc.

Finding things to cut amongst the bloat would be easy, if lobbies weren't fighting every step. Perhaps lobbying reform first - eliminate most forms of it altogether. It's only the political will is lacking, due to the excessive influence of lobbyists. I don't think there is a credible argument that the Federal Budget is not bloated to the sky with pork, is there?

[Fred]

Robert,

I was only pointing out that it was the government spending during the war that ended the depression. There was plenty of unemployment in the immediate post war period as well. The major infrastructure project - interstate highways - that gave the US suburbia didn't happen until the Eisenhower administration and took a number of years to complete. There's no comparable investment in the last couple of decades.

On the oft commented WallStreet corruption, here's a fine example of the approach of 'the more you lose, the more we make' deriviative snake oil sellers.
http://www.nytimes.com/2010/08/06/business/06denver.html?bl

How many local school boards are there getting ripped off just like this? I'd like to see the more municipalities take the approach of LA:
“If they are unwilling to renegotiate, then those financial institutions should be excluded from any future business with the City of Los Angeles,”

A nice municipality led boycott of the bailed banks that ripped them off would send the right message.

[LeaNder]

At the end of WW2, essentially *all* of the world's manufacturing capacity was destroyed, except for the USA's.

In every statement there is a little error ... (Henry Miller)

I have read quite a few arguments that the dismantling of German factories after 1945 in fact helped create the post-war boom. The new machines were better than the dismantled old ones but they also needed to be produced first.

As quite a few historians argue that the "saving policies" (cost-cutting policy) during the depression in Germany versus the American WPA approach (Works Progress Administration) made things worse ...

In memoriam Tony Judt:

http://www.nybooks.com/articles/archives/2010/apr/29/ill-fares-the-land/?page=2

[Adam L Silverman]

Got A Watch: I checked the link out, then I checked out the columns author. You can find the resume that he posted about his experience at the link below, but I would recommend that taking macro-economic advise from a Internet network specialist is probably not the way to go. Now I understand that you don't like Professor Krugman, but how about Professor Simon (fomerly with the IMF), Professor Delong, Professor Reich (both of the latter two worked for President Clinton, which was, if I recall the last time we had a balanced budget...), Professor Stiglitz perhaps, Mr. Ritholz? I can go on and on with a list of folks who actually have expertise in economics and while not necessarily in lock step contradict you and your single source. We also have the real world example of Ireland, which did, and is still doing, exactly what you're proposing - and all it's done is make matters worse!

Here's the link to Mr. Denninger's resume:
http://www.denninger.net/resume.html

[Ingolf]

It's all too easy to tangle up different things in this kind of discussion.

One can agree (as I do) with much of what Tony Judt wrote in that marvellous NYRB piece LeaNder linked to above and still disagree with the remedies offered by Krugman, DeLong et al. And disagreeing with them certainly doesn't mean agreeing with the Republicans, who long ago lost any credibility they might have had in regard to economic management (or indeed, as far as I can tell, anything else).

After almost thirty years of continuous deficits (with the exception of that brief boom inspired period of surpluses during the late Clinton administration), an unbiased observer should surely by now have developed a few doubts about their merits. It's not as if the US economy has lacked for stimulus in the last generation or so.

Most of our current economic problems stem from the long-term workings of an almost comically dysfunctional financial system.

Under the influence of partly right (but also disastrously mistaken) economic theories, it was progressively deregulated but still backstopped by a many explicit and implicit supports and guarantees as well as a growing conviction the authorities would always step in if things turned nasty.

And so it became a cancer, insatiable, self replicating, and immensely destructive (at the peak, the financial sector produced about 40% of total US corporate profits). It's certainly a long time since financial markets capably intermediated between genuine savings and needed investment. Instead, they generated vast amounts of essentially ex nihilo credit, much of it used for uneconomic ends and no small part by financial institutions themselves to speculate.

We're dealing with the aftermath of all this and likely will be for quite a while.

Trying to return things to the artificially hyped levels of the boom is not only most unlikely to work, it'll frustrate the private sector''s attempt to sort itself out after this long, almost hallucinogenic period. I can't see how there's any way to do this without pain. Households who overextended themselves have little choice but to repair their balance sheets and while they're trying to do that, consumption will be down. All the businesses that made bad decisions on the basis of that unsustainable credit induced demand will also have to go through the long and difficult process of either restructuring or writing off their investments.

Above all, debt needs to come down a long way before self sustaining, well balanced economic activity can resume. Not much progress so far, unfortunately. Excluding the financial sector itself (where outstanding debt is down by 12.5% since the end of 2008), the rapid growth in fresh government debt has far exceeded private sector reductions.

None of which is to say governments can't do some useful (indeed, critical) things.

Rather than perpetuating delusions, however, they should make sure the pain is shared much more fairly than it is now. I don't know that I'd go as far as the writer linked to by Brigadier Ali above, but I certainly think the more well off should shoulder most of the burden. Not only because they've been the main beneficiaries but also because any other course may well risk fracturing American society.

At the same time, government could focus on helping the necessary adjustment process instead of hindering it.

A good start would be to stop propping up the financial system Frankensteins and make sure creditors take their share of the pain instead of taxpayers. How can more sensible banks and financial institutions take over from the current discredited ones if the latter are perpetually propped up and therefore indirectly subsidised? Similar criteria apply throughout the economy but I have no doubt the most pervasive problems are on the financial side.

Truth is, we only arrived at this unhappy impasse because of a continual unwillingness over recent decades to accept short-term pain. Instead, radically asymmetrical monetary and fiscal policies were used to fend off periodic private sector attempts to regroup and restructure. As a result, the imbalances fed on each other and compounded until finally the burden was too heavy to bear.

From a political point of view, I guess it's understandable TPTB are trying to pull off the same trick again, but even if they do it would only set us up for an even bigger mess down the track.

P.S. Ireland is an unusual case. Its financial system went truly berserk and fostered a level of real estate speculation and overbuilding that almost defies belief (as an example, in 2007 Ireland was building half as many houses as Great Britain, which has 14 times the population).

It's trying to dig its way out from under this mess, but also unfortunately decided to effectively guarantee its whole bloated banking system. Given total bank assets in Ireland are about ten times GDP (as opposed to less than one in the US) this was, to put it mildly, a risky step.

If anyone's sufficiently interested, I did a piece recently entitled "The Perils of Partisan Commentary" which touches on Ireland's peculiar plight . It can be found at the site linked to my name.

[William R. Cumming]

Worshipping MAMMON the wealthy in the US and their Minions are investing largely outside the US. Any money they receive including past and future bailout money will leave US shores. Just look at the pass throughs to their foreign bank clients from the TARP and Treasury and FED bailouts. Just as many foreign governmental officials evade their own countries currency restrictions and invest in the US the wealthy in the US with no currency flow barriers are free to invest whereeve they think the tradeoffs between risk and reward are the best. So with FDI (Foreign Direct Investment) in US down and our capital essentially fleeing what can be expected of the US future? And the state and locals are short $3Trillion in their pension funds.

[Got A Watch]

Adam: what does his resume have to do with anything? Besides, I'll take real world experience operating a business over ivory tower dome head academics any day. I totally reject your curious notion that one has to be an "economics Professor" to discuss this issue.

Did you read the posts I linked to, or just get stuck on whether the writer is "qualified"? Are you some sort of tenure police? You seem to have some obsession with University Professors - I try to avoid them like the intellectual plague they are.

There is really no arguing with the math, as Karl lays it out (if you bother to read it): $5 worth and rising of "stimuli" to create $1 of new GDP = the total failure of "stimulus" in the real world to achieve any meaningful results. This is based on the Treasury's own statistics, and 20+ years of Japanese experience.

There was an article written recently by a one of those very same dome heads at the Federal Reserve about how only Phd's in economics are qualified to write about the economy. You must be in agreement. I am not.

There are about 15 University/Bank economists on the planet, out of some 16,000, who foresaw this financial crisis coming. That was from a study done by a University economist on why his brethren failed to recognize the reality in front of their faces. None of the names you list are among them (exception, see bewwo), and in fact the theories they espouse are in a large part responsible for it.

Simon Johnson (I think that's who you mean)and Stiglitz are about the only ones you refer to who have any credibility with me, I have often read his Blog 'Baseline Scenario'. Brad Delong, sorry, another stimulus junkie like Krugman who has no credibility.

I have hundreds of economic websites and Blogs bookmarked, I can provide more links to back up my assertions than you have time to read. But what is the point, when you will just say, "but they are not Professors!"?.

Obama's 'economic team' headed by Larry Summers and Tim Geithner are grossly incompetent, whose only concern is to make sure Wall St is bailed out forever by taxpayers - and that is one of the main reasons for Obama's plunging popularity - the people are not as stupid as the politicians think. Read about Larry Summers debacle managing Harvard's money, and tell me again about how much those Professors know.

You have your point of view, and I have mine, and they will likely never meet in agreement. I can refute every one of your arguments, but obviously, I am not qualified to have this debate by your standards, so there is no point.

[zanzibar]

The financial bind we are in today, IMO, is bi-partisan in nature and has built up over the past 30 years. Some of the greatest political and regulatory "innovations" that played an instrumental role in leading to the financial debacle of 2008 took place under the much promoted "economic growth" of the Clinton Administration and the economic stewardship of Rubin and Summers at Treasury and Alan Greenspan at the Fed. From the repeal of Glass-Steagal to the unfeterring of OTC derivatives to the creation of the TBTF Wall Street banks to the intellectual belief that a financial economy could replace a manufacturing economy.

The fundamental tenet of the past 30 years has been the increased financialization of our economy with increased rent seeking while stripping it of its productive economic base. This has been promoted by both parties as Wall Street money has permeated every corner of our politics and their personnel staff our regulatory agencies. In 1980 the financials represented 6% of the cap weighting of the S&P 500. By 2006 they represented a quarter of cap weighting and a third of earnings.

Two comparisons are brought up constantly - the 30s Depression and contemporary Japan. I would like to point out a few differences with our current situation.

Although the late 20s saw a massive credit inflation and growth in speculative finance the US was still a creditor nation. Additionally, much of the unsupportable debt was restructured in fact defaulted in the aftermath of the bursting of the credit bubble. By the time of our active involvement in WWII our balance sheet was mostly restored. Keynesian counter-cyclical spending could work since there was room for levering the government's balance sheet and Roosevelt devalued the dollar by 40% which was still linked to gold. Today, we are a debtor nation and our balance sheet looks more like Greece than Norway's.

Japan has been able to lever its governments balance sheet dramatically over the past 20 years as it boosted public spending primarily in infrastructure construction projects due to the fact that this massive growth in government borrowing has been domestically financed by the large savings of the Japanese people. Japan entered its crash in 1989. Their total credit market debt to GDP was about 387 percent. Today, twenty years later at nominal GDP flat, their total credit market debt to GDP is 530 percent. So, you have a situation where Japan did not restructure its banking system. Its banks to this day have not fully taken the losses they had to take twenty years ago. This is one of the similarities to our current situation as we have not done anything to resolve the insolvency of some of our largest financial institutions except to kick the can down the road through accounting shenanigans and taxpayer backstops. Fannie and Freddie are once again being used by our politicians (in this case the Democrats) to prop up a housing market instead of allowing it to clear.

Many folks worship at the altar of Keynes without recognizing that Keynes promoted counter-cyclicality in both cycles - generating savings during growth and spending during contractions. We have spent more than we generated during both booms and busts! We always seem to get caught up in dogmas and their technicalities without ever stepping back and using common sense. Richard Sale had a thread in Feb 2009 on Dead Dogmas of the Past where I expressed why dogmas are just a facade to promote private agendas.

Since Krugman has been a point of focus on this thread lets remember what he wrote in an Aug 2002 op-ed titled Dubya's Double Dip?.

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Now some would say that he wrote this tongue-in-cheek and he never promoted a housing bubble. Well, that message did not reach Greenspan, Bernanke, Dubya and all the regulators at the SEC, FDIC, FHA, OTC and CFTC. They in fact did go ahead and blow the largest credit bubble in US history - aided and abetted by Wall Street who clipped coupons on every dollar of debt that was raised and securitized. And of course by many ordinary Americans who believed that they had found a perpetual money machine in the limitless housing ATM.

From LTCM to the Asian Crisis to the Russian Debt Default to the TMT bubble we have promoted policies of asset inflation through easy money, low interest rates and malleable accounting rules. The consequence is that we never cleared the excesses of the previous reflation and the real wages of the median American worker has stagnated through all the economic "growth" from 2000-2007. As FB Ali pointed out on this thread and I noted on Sunset Bush Tax Cuts we have had the middle class squeezed. One of the problems in taxing the HNWI to cover this years $1.5 trillion deficit is how do we cover next year's deficit and the year after. According to the Obama Administration we should expect $1 trillion annual deficits over the next decade.

IMO, we will know we are making progress when we start to see policies that increase accounting transparency, capital formation and business capital investment. That means rewarding the prudent and penalizing the profligate. The first step in that is recognizing the losses in our banking system and apportioning those losses among shareholders, bond holders and taxpayers.

Now during the financial crisis of 2008 it was the same Paul McCulley and many of the same folks who fomented the reflation of the 2000s who were the most strident in their calls that the taxpayer should back stop all the private sector losses of Wall Street banks. Hank Paulson as CEO of Goldman Sachs used his political connections to get the SEC to remove balance sheet leverage restrictions on Wall Street and then turns around as Treasury Secretary to obligate future generations of American taxpayers to bailout the speculative losses of his own firm. I don't believe any of these people are dumb or idiots. They are very smart and know what is going on. So the question is who are they shilling for? I don't question Krugman's credentials, I question his motivation? And that goes for the entire cast including Greenspan, Bernanke, Rubin, Paulson, Summers and our politicians. If they were medical doctors they would have been sued and convicted of medical malpractice and permanently disbarred. And on the topic of "proper credentials" my experience in backing entrepreneurs are some of the best have been those that did not graduate from college. I think our slavish belief that Ivy League credentialed professors make the best economic stewards has been reflected in our dismal financial position currently. I would much rather we get away from ivory tower theorists to those that understand through real world experience the challenges in making a weekly payroll. But it also requires individuals and an institutional culture that places our country's interest before narrow private interests.

We can debate the right economic course but as an investor considering the massive scale of government interventions and their unpredictability we have to anticipate what our government and politicians will do. I suggest to those interested to review the data and charts in Reinhart & Rogoff's study of centuries of financial data. In my cynical view, we will continue to see the same failed reflationary policies but more perniciously increased monetization. At the current juncture I believe the single most important issue facing an investor is maintaining the purchasing power of one's hard earned capital. And this is particularly important for the middle class who are going to face the brunt of this self-inflicted financial debacle.

It is worth reading what Simon Johnson wrote in the Atlantic from his experience how emerging markets deal with financial crisis.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

[Adam L Silverman]

Got a Watch: Leaving your long list of ad hominems against members of occupations you don't like aside, let alone that you raised the credibility of the source(s) issue, but then got upset when I checked the bona fides of the single source you cited, lets actually just deal with the numbers. You argue Mr. Deninger's assessment that we've spent $5.00 to raise GDP $1.00. I thought I'd check the actual numbers. You'll find them on page five of this report that Mr. Mark Zandi, the Chief Economist for Moody's Analytics prepared for the US Senate:
http://finance.senate.gov/imo/media/doc/041410mztest.pdf

Now it is true that we have no real idea what might or might not have happened had we done nothing or done something different, as opposed to what we did do, but the effects of what we did do are pretty clear and it is not spending $5.00 to raise $1.00 of GDP.

[FB Ali]

Unlike Ingolf and Zanzibar, I am no expert in economics. Still, I can appreciate the validity of their analyses of why the US is in such a mess, and also see that most of the remedies they suggest make sense. However, it seems to me that, realistically, there is little likelihood of any of these remedies being adopted. The problem is not with individual A or B, nor with the policies of this government or party, or that. It is a systemic problem, which has deformed both economic and political structures and processes. At the risk of being shot down in flames, let me try to explain what I mean (unavoidably, in layman’s terms).

The unconstrained development of the free market economy resulted in the accumulation of huge pools of capital in the hands of individuals and companies (the usual checks imposed by organized labour, anti-monopoly legislation, social responsibility, etc seem to have been ineffective in the USA). These pools of capital, because of their large size, had no valid economic purpose (eg, investment, consumption), only the urge to grow. This resulted in the increased financialization of our economy that Zanzibar referred to, as well as the massive expansion of ‘artificial’ credit. These have caused the bubbles and crises that have plagued the economy in the recent past, including the present one.

These huge accumulations of capital, in order to grow, have also intruded into the political sphere, and have succeeded in ‘monetizing’ it, just as they did to the economic sphere. This enabled the holders of these capital pools not only to make money off the political process, but also to exert a great deal of influence over it (directly through payments, and indirectly through their ownership of the media). Thus, they are able to exercise a surprising degree of control over whatever government results from the process. This sets up a vicious cycle in which governments enable them to preserve and increase their capital, which they use to further control the (financialized) economy, and thus earn more to increase their hold over the political process.

A basic solution to this continuing economic crisis lies in ending the decoupling of the financial economy from the real economy. As an immediate measure, redirect some of these huge pools of capital into the real economy by taxing them. In the longer term, legislate constraints so that the only worthwhile use of this money would be in valid economic activity rather than flimflam wizardry. However, both of these measures require breaking the hold these capital pools have on the political process. Leaving the US, unfortunately, with a chicken-or-egg dilemma.