Soviet Union Style Historical Revisionism In GOP

This article reminds us how we got into the financial crisis and the Great Recession. One would think that this would loom large in our memory and that we would want to avoid a repeat of this disaster. That has not happened. The GOP has put this entire episode into its memory hole and its candidates for the presidency are telling us that we have to return to the same policies that produced the Great Recession. Conservatives used to criticize the old Soviet Union for historical revisionism. Apparently, they have taken some lessons from it. Since Reagan was elevated to sainthood by winning two terms, by telling us that government is the cause of all of our problems, they are sticking to that message. The financial crisis, the Great Recession and our slow recovery were caused by government. The best way to get out of our crisis is to do the things that caused it in the first place. We have to get government off of the back of the free market.

The amazing thing is that they get away with this. It would not be possible to revise history without a lot of help from their propaganda machine which reinforces their message. They also get help from "mainstream media" which feigns objectivity by pretending that their lies must get equal time in their coverage of the news.

15 Charts That Describe the New Gilded Age

There are 15 charts in this post (via Manan Shukla). They help to explain the despair that is being expressed by the Occupy Wall Street group and others.
The slides tell the story that has made the US rank #93 on the rankings of nations on the most commonly used measure of inequality. They also provide ammunition that counters the claims that the super rich pay most of the taxes. The answer is simple they have most of the income. If we taxed debt instead of income the bottom 90% would be paying most of the taxes.

The post that follows comes from an economist who is concerned about the social implications.

Everyone Benefits From Greater Equality

This article explains how the balance of power between markets and government has shifted over time in most areas of the world. This has led to the spread of inequality. The argument then turns to the reasons why everyone benefits from less inequality. The problems and approaches will differ by country and region.

One of the motivations for reducing inequality was to contain the spread of socialism and communism. The weakening of these threats has reduced the level of competition between economic systems. The lack of competition in world of ideas may be partially responsible for the excesses that we are seeing, particularly in anglo american economies. The excesses are destroying popular support for these economies which will reach a tipping point at some time.

Something Positive From A Republican Economist

This plan for dealing with the decline in home prices comes from a Republican economist. Its the best plan that I have seen thus far. It helps homeowners who are under water and unable to refinance their mortgages at the lower rates. It would keep many homes from going into foreclosure and help to stop the decline in real estate values. The loss of household wealth will also be staunched. This would help to restore spending and employment.

The plan will not be popular despite the impact that it would have on the economy and employment. It calls for government to fund some of the burden along with the banks that write down the principal. Those who are not underwater will resent those who get help, and some will not like to see the banks bailed out of another jam.

George Soros Explains Why This Is Not A Good Time To Recapitalize Banks

George Soros explains why it is not a good idea for Europe to recapitalize banks now. He thinks that it is not a good time for governments to put up funds to recapitalize banks when the added risk to governments is driving up their cost of debt. Furthermore it is not a good time for banks to recapitalize when their shares are selling below book value. This will give them an incentive to reduce their balance sheets by withdrawing credit lines and shrinking loan portfolios. That would be damaging to economic growth which is needed to service sovereign debt.

Soros suggests that it would be better to guarantee the bank debt first and to recapitalize the banks after the crisis has abated and government bonds prices and banks shares return to normal. He proposes a plan for doing this that does not require a renegotiation of the treaty.

Fools Rule The World And US Has No Monopoly On Fools

This post comments on David Cameron's boast that the low cost of borrowing in the UK is proof that his program of fiscal austerity is working. The implication is that investors are willing to purchase UK debt because they have confidence in the directions taken by his government. In other words, the "confidence fairy" is at work in the UK.

One can't blame a politician for putting a positive slant on economic data. After all, the unemployment data and GDP growth data are not supportive of his austerity plan. The public may find low interest rates encouraging, but they may not understand that the low interest rates have a more complex meaning. Investors will purchase government debt under two conditions: They trust that it will be paid back, and they don't anticipate inflation. The good news is that investors trust the UK will make good on its debt. The bad news is that investors do not fear inflation because prices are not likely to rise when unemployment is high and GDP growth is low as it is in the UK. This also explains why interest rates are low for US debt. The major difference in the market for government debt in the UK and the US, versus the market for Greek debt, is that investors do not believe that the Greek economy can generate sufficient tax revenue to service its debt.

The Essential Ideas Of Keynes, Via Robert Solow, That Apply to Recession

“what Keynes really meant.” I want to emphasize two of its themes, because they seem to be central to his place in the story of economic genius, and because they point directly to the reason why Keynesian economics, born in the 1930s, has become dramatically relevant again today. Back then, serious thinking about the general state of the economy was dominated by the notion that prices moved, market by market, to make supply equal to demand. Every act of production, anywhere, generates income and potential demand somewhere, and the price system would sort it all out so that supply and demand for every good would balance. Make no mistake: this is a very deep and valuable idea. Many excellent minds have worked to refine it. Much of the time it gives a good account of economic life. But Keynes saw that there would be occasions, in a complicated industrial capitalist economy, when this account of how things work would break down.

The breakdown might come merely because prices in some important markets are too inflexible to do their job adequately; that thought had already occurred to others. It seemed a little implausible that the Great Depression of the 1930s should be explicable along those lines. Or the reason might be more fundamental, and apparently less fixable. To take the most important example: we all know that families (and other institutions) set aside part of their incomes as saving. They do not buy any currently produced goods or services with that part. Something, then, has to replace that missing demand. There is in fact a natural counterpart: saving today presumably implies some intention to spend in the future, so the “missing” demand should come from real capital investment, the building of new productive capacity to satisfy that future spending. But Keynes pointed out that there is no market or other mechanism to express when that future spending will come or what form it will take. Perhaps God has not yet even decided. The prospect of uncertain demand at some unknown time may not be an adequately powerful incentive for businesses to make risky investments today. It is asking too much of the skittery capital market. Keynes was quite aware that occasionally a wave of unbridled optimism might actually be too powerful an incentive, but anyone in 1936 would take the opposite case to be more likely.

So a modern economy can find itself in a situation in which it is held back from full employment and prosperity not by its limited capacity to produce, but by a lack of willing buyers for what it could in fact produce. The result is unemployment and idle factories. Falling prices may not help, because falling prices mean falling incomes and still weaker demand, which is not an atmosphere likely to revive private investment. There are some forces tending to push the economy back to full utilization, but they may sometimes be too weak to do the job in a tolerable interval of time. But if the shortfall of aggregate private demand persists, the government can replace it through direct public spending, or can try to stimulate additional private spending through tax reduction or lower interest rates. (The recipe can be reversed if private demand is excessive, as in wartime.) This was Keynes’s case for conscious corrective fiscal and monetary policy. Its relevance for today should be obvious. It is a vulgar error to characterize Keynes as an advocate of “big government” and a chronic budget deficit. His goal was to stabilize the private economy at a generally prosperous level of activity.

A second characteristically Keynesian theme meshes very well with the first. In a complex economy, many business decisions have to be made in a fog of uncertainty. This is especially true of investment decisions, as already discussed: a lot of money has to be placed at risk today in an enterprise whose future success can only be guessed. (Much the same can be said of consumer purchases of expensive durable goods.) The standard practice is to focus on the uncertainty and think about it in terms of probabilities, which at least allow for an orderly analysis and orderly decision-making. Keynes preferred to focus on the fog. He thought that some of the important uncertainties were essentially incalculable. They would end up being dealt with in practice by a mixture of apprehensiveness, rules of thumb, herd behavior, and what he called “animal spirits.” The point of this distinction is not merely philosophical: it suggests that long-term investment behavior will sometimes be irregular, unstable, and given to doldrums and stampedes. Expectations can be volatile, and transmit their volatility widely. Passive or perverse policy can be dangerous to the economy’s health.