Economic Inequality??

One can easily misrepresent or exaggerate reality with a few select statistics and come to conveniently chosen conclusions. This doesn’t really help the conversation.

The distribution of wealth and income has become a social, economic, and political problem in recent decades. And not only in the US. But the question is why and what to do about it.

First, we should notice the timeframe of the comparison: 1980 vs. 2014. During these years there has been a massive credit bubble with low to zero interest rates and low inflation, especially over the past 16 years. This has disproportionately rewarded asset holders and debt-driven consumption and the income shares in industries associated with that, like FIRE.

The cheap credit has also led to massive investments in technology and biotech, where income levels have far exceeded those in other industries. This is not necessarily a bad thing, especially for aggregate growth, but it does have distributional consequences for wealth and income. Globalization, through outsourcing, trade and labor migration, has also served to keep labor costs low in developed nations.

So, what to make of this? I would have differences with the suggestions of the author as stated here:

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation. 

First, the problem with the tax code is that it creates barriers for asset accumulation for those without assets. In other words, it favors the haves over the wannabes, even if the wannabes are more deserving. So we need to reduce those barriers. Not by making it harder to get rich, but by making it harder to stay rich and idle sitting on assets that have ballooned in value through no effort on the owners of those assets. Thus, we should look more toward wealth taxes as opposed to income or capital taxes. We should also make capital taxes more progressive so that the have-nots are not doomed to remain so. Have you seen your interest on savings lately?

Second, a better functioning education system is always a deserved policy priority, but it won’t fix this income distribution problem. The cost of education is becoming prohibitive and elitism is turning top universities, where costs are in the stratosphere, into branding agents rather than educating institutions. In other words, the Ivy League degree is more valuable as a signalling device than anything a student may or may not have learned there. Thus we are biasing favoritism over meritocracy.

Third, the focus on wages and organized labor is completely misguided.  Most workers in growth industries in the 21st century eschew labor unions in favor of equity participation and risk-taking entrepreneurship. Does that mean manufacturing labor has no future? Not at all. But it should be bargaining for equity in addition to a base wage. Competing solely on wages means workers are competing with the global supply of labor, which is a losing proposition for developed countries’ workers.

The inability of policymakers to see clearly how the world has changed and how ownership and control structures must adapt to the information economy leads them towards the rabbit hole of universal basic incomes, which fundamentally is a universal welfare program to support consumption. One thing we’ve learned over the past 60 years is that nobody wants welfare, but many become addicted to it. It’s not a solution or even a short-term fix.

Refer to the NYT website link to view the graphs…

Many Americans can’t remember anything other than an economy with skyrocketing inequality, in which living standards for most Americans are stagnating and the rich are pulling away. It feels inevitable.

But it’s not.

 

A well-known team of inequality researchers — Thomas Piketty, Emmanuel Saez and Gabriel Zucman — has been getting some attention recently for a chart it produced. It shows the change in income between 1980 and 2014 for every point on the distribution, and it neatly summarizes the recent soaring of inequality.

 

The line on the chart (which we have recreated as the red line above) resembles a classic hockey-stick graph. It’s mostly flat and close to zero, before spiking upward at the end. That spike shows that the very affluent, and only the very affluent, have received significant raises in recent decades.

 

This line captures the rise in inequality better than any other chart or simple summary that I’ve seen. So I went to the economists with a request: Could they produce versions of their chart for years before 1980, to capture the income trends following World War II. You are looking at the result here.

The message is straightforward. Only a few decades ago, the middle class and the poor weren’t just receiving healthy raises. Their take-home pay was rising even more rapidly, in percentage terms, than the pay of the rich.

 

The post-inflation, after-tax raises that were typical for the middle class during the pre-1980 period — about 2 percent a year — translate into rapid gains in living standards. At that rate, a household’s income almost doubles every 34 years. (The economists used 34-year windows to stay consistent with their original chart, which covered 1980 through 2014.)

 

In recent decades, by contrast, only very affluent families — those in roughly the top 1/40th of the income distribution — have received such large raises. Yes, the upper-middle class has done better than the middle class or the poor, but the huge gaps are between the super-rich and everyone else.

 

The basic problem is that most families used to receive something approaching their fair share of economic growth, and they don’t anymore.

 

It’s true that the country can’t magically return to the 1950s and 1960s (nor would we want to, all things considered). Economic growth was faster in those decades than we can reasonably expect today. Yet there is nothing natural about the distribution of today’s growth — the fact that our economic bounty flows overwhelmingly to a small share of the population.

 

Different policies could produce a different outcome. My list would start with a tax code that does less to favor the affluent, a better-functioning education system, more bargaining power for workers and less tolerance for corporate consolidation.

 

Remarkably, President Trump and the Republican leaders in Congress are trying to go in the other direction. They spent months trying to take away health insurance from millions of middle-class and poor families. Their initial tax-reform planswould reduce taxes for the rich much more than for everyone else. And they want to cut spending on schools, even though education is the single best way to improve middle-class living standards over the long term.

 

Most Americans would look at these charts and conclude that inequality is out of control. The president, on the other hand, seems to think that inequality isn’t big enough.

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Leviathan State

From the point of view of political economy and policy, this is the best and most relevant essay I’ve read in awhile. The Administrative State (or Deep State), no matter how much good it does, is antithetical to individual liberty, justice, and, I would argue, long-term economic and political security and stability. Be careful what you wish for with free health care or an imperial POTUS!

Reprinted from the WSJ:

The Tyranny of the Administrative State

Government by unelected experts isn’t all that different from the ‘royal prerogative’ of 17th-century England, argues constitutional scholar Philip Hamburger.

New York

What’s the greatest threat to liberty in America? Liberals rail at Donald Trump’s executive orders on immigration and his hostility toward the press, while conservatives vow to reverse Barack Obama’s regulatory assault on religion, education and business. Philip Hamburger says both sides are thinking too small.

Like the blind men in the fable who try to describe an elephant by feeling different parts of its body, they’re not perceiving the whole problem: the enormous rogue beast known as the administrative state.

Sometimes called the regulatory state or the deep state, it is a government within the government, run by the president and the dozens of federal agencies that assume powers once claimed only by kings. In place of royal decrees, they issue rules and send out “guidance” letters like the one from an Education Department official in 2011 that stripped college students of due process when accused of sexual misconduct.

Unelected bureaucrats not only write their own laws, they also interpret these laws and enforce them in their own courts with their own judges. All this is in blatant violation of the Constitution, says Mr. Hamburger, 60, a constitutional scholar and winner of the Manhattan Institute’s Hayek Prize last year for his scholarly 2014 book, “Is Administrative Law Unlawful?” (Spoiler alert: Yes.)

“Essentially, much of the Bill of Rights has been gutted,” he says, sitting in his office at Columbia Law School. “The government can choose to proceed against you in a trial in court with constitutional processes, or it can use an administrative proceeding where you don’t have the right to be heard by a real judge or a jury and you don’t have the full due process of law. Our fundamental procedural freedoms, which once were guarantees, have become mere options.” ​

In volume and complexity, the edicts from federal agencies exceed the laws passed by Congress by orders of magnitude. “The administrative state has become the government’s predominant mode of contact with citizens,” Mr. Hamburger says. “Ultimately this is not about the politics of left or right. Unlawful government power should worry everybody.”

Defenders of agencies like the Securities and Exchange Commission or the Environmental Protection Agency often describe them as the only practical way to regulate today’s complex world. The Founding Fathers, they argue, could not have imagined the challenges that face a large and technologically advanced society, so Congress and the judiciary have wisely delegated their duties by giving new powers to experts in executive-branch agencies.

Mr. Hamburger doesn’t buy it. In his view, not only is such delegation unconstitutional, it’s nothing new. The founders, far from being naive about the need for expert guidance, limited executive powers precisely because of the abuses of 17th-century kings like James I.

James, who reigned in England from 1603 through 1625, claimed that divinely granted “absolute power” authorized him to suspend laws enacted by Parliament or dispense with them for any favored person. Mr. Hamburger likens this royal “dispensing” power to modern agency “waivers,” like the ones from the Obama administration exempting McDonald’s and other corporations from complying with provisions of the Affordable Care Act.

James also made his own laws, bypassing Parliament and the courts by issuing proclamations and using his “royal prerogative” to establish commissions and tribunals. He exploited the infamous Star Chamber, a court that got its name from the gilded stars on its ceiling.

“The Hollywood version of the Star Chamber is a torture chamber where the walls were speckled with blood,” Mr. Hamburger says. “But torture was a very minor part of its business. It was very bureaucratic. Like modern administrative agencies, it commissioned expert reports, issued decrees and enforced them. It had regulations controlling the press, and it issued rules for urban development, environmental matters and various industries.”

James’s claims were rebuffed by England’s chief justice, Edward Coke, who in 1610 declared that the king “by his proclamation cannot create any offense which was not an offense before.” The king eventually dismissed Coke, and expansive royal powers continued to be exercised by James and his successor, Charles I. The angry backlash ultimately prompted Parliament to abolish the Star Chamber and helped provoke a civil war that ended with the beheading of Charles in 1649.

A subsequent king, James II, took the throne in 1685 and tried to reassert the prerogative power. But he was dethroned in the Glorious Revolution in 1688, which was followed by Parliament’s adoption of a bill of rights limiting the monarch and reasserting the primacy of Parliament and the courts. That history inspired the American Constitution’s limits on the executive branch, which James Madison explained as a protection against “the danger to liberty from the overgrown and all-grasping prerogative of an hereditary magistrate.”

“The framers of the Constitution were very clear about this,” Mr. Hamburger says, rummaging in a drawer for a pocket edition. He opens to the first page, featuring the Preamble and Article 1, which begins: “All legislative Powers herein granted shall be vested in a Congress.”

“That first word is crucial,” he says. “The very first substantive word of the Constitution is ‘all.’ That makes it an exclusive vesting of the legislative powers in an elected legislature. Congress cannot delegate the legislative powers to an agency, just as judges cannot delegate their power to an agency.”

Those restrictions on executive power have been disappearing since the late 19th century, starting with the creation of the Interstate Commerce Commission in 1887. Centralized power appealed to big business—railroads found commissioners easier to manipulate than legislators—as well as to American intellectuals who’d studied public policy at German universities. Unlike Britain, Germany had rejected constitutional restraints in favor of a Prussian model that gave administrative agencies the prerogative powers of the king.

Mr. Hamburger believes it’s no coincidence that the growth of America’s administrative state coincided with the addition to the electorate of Catholic immigrants, blacks and other minorities. WASP progressives like Woodrow Wilson considered these groups an obstacle to reform.

“The bulk of mankind is rigidly unphilosophical, and nowadays the bulk of mankind votes,” Wilson complained, noting in particular the difficulty of winning over the minds “of Irishmen, of Germans, of Negroes.” His solution was to push his agenda using federal agencies staffed by experts of his own caste—what Mr. Hamburger calls the “knowledge class.” Wilson was the only president ever to hold a doctorate.

“There’s been something of a bait and switch,” Mr. Hamburger says. “We talk about the importance of expanding voting rights, but behind the scenes there’s been a transfer of power from voters to members of the knowledge class. A large part of the knowledge class, Republicans as well as Democrats, went out of their way to make the administrative state work.”

Mr. Hamburger was born into the knowledge class. He grew up in a book-filled house near New Haven, Conn. His father was a Yale law professor and his mother a researcher in economics and intellectual history. During his father’s sabbaticals in London, Philip acquired a passion for 17th-century English history and spent long hours studying manuscripts at the British Museum. That’s where he learned about the royal prerogative.

He went to Princeton and then Yale Law School, where he avoided courses on administrative law, which struck him as “tedious beyond belief.” He became slightly more interested during a stint as a corporate lawyer specializing in taxes—he could see the sweeping powers wielded by the Internal Revenue Service—but the topic didn’t engage him until midway through his academic career.

While at the University of Chicago, he heard of a colleague’s inability to publish a research paper because the study had not been approved ahead of time by a federally mandated institutional review board. That sounded like an unconstitutional suppression of free speech, and it reminded Mr. Hamburger of those manuscripts at the British Museum.

Why the return of the royal prerogative? “The answer rests ultimately on human nature,” Mr. Hamburger writes in “The Administrative Threat,” a new short book aimed at a general readership. “Ever tempted to exert more power with less effort, rulers are rarely content to govern merely through the law.”

Instead, presidents govern by interpreting statutes in ways lawmakers never imagined. Barack Obama openly boasted of his intention to bypass Congress: “I’ve got a pen and I’ve got a phone.” Unable to persuade a Congress controlled by his own party to regulate carbon dioxide, Mr. Obama did it himself in 2009 by having the EPA declare it a pollutant covered by a decades-old law. (In 2007 the Supreme Court had affirmed the EPA’s authority to do so.)

Similarly, the Title IX legislation passed in 1972 was intended mainly to protect women in higher education from employment discrimination. Under Mr. Obama, Education Department bureaucrats used it to issue orders about bathrooms for transgender students at public schools and to mandate campus tribunals to adjudicate sexual misconduct—including “verbal misconduct,” or speech—that are in many ways less fair to the accused than the Star Chamber.

At this point, the idea of restraining the executive branch may seem quixotic, but Mr. Hamburger says there are practical ways to do so. One would be to make government officials financially accountable for their excesses, as they were in the 18th and 19th centuries, when they could be sued individually for damages. Today they’re protected thanks to “qualified immunity,” a doctrine Mr. Hamburger thinks should be narrowed.

“One does have to worry about frivolous lawsuits against government officers who have to make quick decisions in the field, like police officers,” he says. “But someone sitting behind a desk at the EPA or the SEC has plenty of time to consult lawyers before acting. There’s no reason to give them qualified immunity. They’ll be more careful not to exceed their constitutional authority if they have to weigh the risk of losing their own money.”

Another way of restraining agencies—one President Trump could adopt on his own—would be to require them to submit new rules to Congress for approval instead of imposing them by fiat. The president could also order at least some agencies to resolve disputes in regular courts instead of using administrative judges, who are departmental employees. Meanwhile, Congress could reclaim its legislative power by going through regulations, agency by agency, and deciding which ones to enact into law.

Mr. Hamburger’s chief hope for reform lies in the courts, which in earlier eras rebuffed the executive branch’s power grabs. Those rulings so frustrated both Theodore Roosevelt and Franklin D. Roosevelt that they threatened retaliation—such as FDR’s plan to pack the Supreme Court by expanding its size. Eventually judges surrendered and validated sweeping executive powers. Mr. Hamburger calls it “one of the most shameful episodes in the history of the federal judiciary.”

The Supreme Court capitulated further in decisions like Chevron v. Natural Resources Defense Council (1984), which requires judges to defer to any “reasonable interpretation” of an ambiguous statute by a federal agency. “Chevron deference should be called Chevron bias,” Mr. Hamburger says. “It requires judges to abandon due process and independent judgment. The courts have corrupted their processes by saying that when the government is a party in case, they will be systematically biased—they will favor the more powerful party.”

Mr. Hamburger sees a good chance that the high court will limit and eventually abandon the Chevron doctrine, and he expects other litigation giving the judiciary a chance to reassert its powers and protect constitutional rights. “Slowly, step by step, we can persuade judges to recognize the risks of what they’ve done so far and to grapple with this very dangerous type of power,” he says. The judiciary, like academia, has many liberals who have been sympathetic to the growth of executive power, but their perspective may be changing.

“Administrative power is like off-road driving,” Mr. Hamburger continues. “It’s exhilarating to operate off-road when you’re in the driver’s seat, but it’s a little unnerving for everyone else.”

He says he observed this effect during a recent conversation with a prominent legal scholar. The colleague, a longtime defender of administrative law, was discussing the topic shortly after Mr. Trump’s inauguration.

The colleague told Mr. Hamburger: “I am beginning to see the merit of your ideas.”

Blogger’s Note: I’m a member of the knowledge class and trust me, nobody really knows anything!

Book Review: Makers and Takers

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

Crown Business; 1st edition (May 17, 2016)

Ms. Foroohar does a fine job of journalistic reporting here. She identifies many of the failures of the current economic policy regime that has led to the dominance of the financial industry. She follows the logical progression of central bank credit policy to inflate the banking system, that in turn captures democratic politics and policymaking in a vicious cycle of anti-democratic cronyism.

However, her ability to follow the money and power is not matched by an ability to analyze the true cause and effect and thus misguides her proposed solutions. Typical of a journalistic narrative, she identifies certain “culprits” in this story: the bankers and policymakers who favor them. But the true cause of this failed paradigm of easy credit and debt is found in the central bank and monetary policy.

Since 1971 the Western democracies have operated under a global fiat currency regime, where the value of the currencies are based solely on the full faith and credit of the various governments. In the case of the US$, that represents the taxing power of our Federal government in D.C.

The unfortunate reality, based on polling the American people (and Europeans) on trust in government, is that trust in our governmental institutions has plunged from almost 80% in 1964 to less than 20% today. Our 2016 POTUS campaign reflects this deep mistrust in the status quo and the political direction of the country. For good reason. So, what is the value of a dollar if nobody trusts the government to defend it? How does one invest under that uncertainty? You don’t.

One would hope Ms. Foroohar would ask, how did we get here? The essential cause is cheap excess credit, as has been experienced in financial crises all through history. The collapse of Bretton Woods in 1971, when the US repudiated the dollar gold conversion, called the gold peg, has allowed central banks to fund excessive government spending on cheap credit – exploding our debt obligations to the tune of $19 trillion. There seems to be no end in sight as the Federal Reserve promises to write checks without end.

Why has this caused the complete financialization of the economy? Because real economic growth depends on technology and demographics and cannot keep up with 4-6% per year. So the excess credit goes into asset speculation, mostly currency, commodity, and securities trading. This explosion of trading has amped incentives to develop new financial technologies and instruments to trade. Thus, we have the explosion of derivatives trading, which essentially is trading on trading, ad infinitum. Thus, Wall Street finance has come to be dominated by trading and socialized risk-taking rather than investing and private risk management.

After 2001 the central bank decided housing as an asset class was ripe for a boom, and that’s what we got: a debt-fueled bubble that we’ve merely re-inflated since 2008. There is a fundamental value to a house, and in most regions we have far departed from it.

So much money floating through so few hands naturally ends up in the political arena to influence policy going forward. Thus, not only is democratic politics corrupted, but so are any legal regulatory restraints on banking and finance. The simplistic cure of “More regulation!” is belied by the ease with which the bureaucratic regulatory system is captured by powerful interests.

The true problem is the policy paradigm pushed by the consortium of central banks in Europe, Japan, China, and the US. (The Swiss have resisted, but not out of altruism for the poor savers of the world.) Until monetary/credit policy in the free world becomes tethered and disciplined by something more than the promises of politicians and central bankers, we will continue full-speed off the eventual cliff. But our financial masters see this eventuality as a great buying opportunity.

Statistical Fixations

Martin Feldstein is nowhere near as excitable as David Stockman on Fed manipulations (link to D.S.’s commentary), but they both end up at the same place: the enormous risks we are sowing with abnormal monetary policies. The economy is not nearly as healthy as the Fed would like, but pockets of the economy are bubbling up while other pockets are still deflating. There is a correlation relationship, probably causal.

The problem with “inflation targeting” is that bubble economics warps relative prices and so the correction must drive some prices down and others up. In other words, massive relative price corrections are called for. But inflation targeting targets the general price level as measured by biased sample statistics – so if the Fed is trying to prop up prices that previously bubbled up and need to decline, such as housing and stocks, they are pushing against a correction. The obvious problem has been these debt-driven asset prices, like stocks, government bonds, and real estate. In the meantime, we get no new investment that would increase labor demand.

The global economy needs to absorb the negative in order to spread the positive consequences of these easy central bank policies. The time is now because who knows what happens after the turmoil of the US POTUS election?

Ending the Fed’s Inflation Fixation

The focus is misplaced—and because it delays an overdue interest-rate rise, it is also dangerous.

By MARTIN FELDSTEIN
The Wall Street Journal, May 17, 2016 7:02 p.m. ET

The primary role of the Federal Reserve and other central banks should be to prevent high rates of inflation. The double-digit inflation rates of the late 1970s and early ’80s were a destructive and frightening experience that could have been avoided by better monetary policy in the previous decade. Fortunately, the Fed’s tighter monetary policy under Paul Volcker brought the inflation rate down and set the stage for a strong economic recovery during the Reagan years.

The Federal Reserve has two congressionally mandated policy goals: “full employment” and “price stability.” The current unemployment rate of 5% means that the economy is essentially at full employment, very close to the 4.8% unemployment rate that the members of the Fed’s Open Market Committee say is the lowest sustainable rate of unemployment.

For price stability, the Fed since 2012 has interpreted its mandate as a long-term inflation rate of 2%. Although it has achieved full employment, the Fed continues to maintain excessively low interest rates in order to move toward its inflation target. This has created substantial risks that could lead to another financial crisis and economic downturn.

The Fed did raise the federal-funds rate by 0.25 percentage points in December, but interest rates remain excessively low and are still driving investors and lenders to take unsound risks to reach for yield, leading to a serious mispricing of assets. The S&P 500 price-earnings ratio is more than 50% above its historic average. Commercial real estate is priced as if low bond yields will last forever. Banks and other lenders are lending to lower quality borrowers and making loans with fewer conditions.

When interest rates return to normal there will be substantial losses to investors, lenders and borrowers. The adverse impact on the overall economy could be very serious.
A fundamental problem with an explicit inflation target is the difficulty of knowing if it has been hit. The index of consumer prices that the Fed targets should in principle measure how much more it costs to buy goods and services that create the same value for consumers as the goods and services that they bought the year before. Estimating that cost would be an easy task for the national income statisticians if consumers bought the same things year after year. But the things that we buy are continually evolving, with improvements in quality and with the introduction of new goods and services. These changes imply that our dollars buy goods and services with greater value year after year.

Adjusting the price index for these changes is an impossibly difficult task. The methods used by the Bureau of Labor Statistics fail to capture the extent of quality improvements and don’t even try to capture the value created by new goods and services.

The true value of the national income is therefore rising faster than the official estimates of real gross domestic product and real incomes imply. For the same reason, the official measure of inflation overstates the increase in the true cost of the goods and services that consumers buy. If the official measure of inflation were 1%, the true cost of buying goods and services that create the same value to consumers may have actually declined. The true rate of inflation could be minus 1% or minus 3% or minus 5%. There is simply no way to know.

With a margin of error that large, it makes no sense to focus monetary policy on trying to hit a precise inflation target. The problem that consumers care about and that should be the subject of Fed policy is avoiding a return to the rapidly rising inflation that took measured inflation from less than 2% in 1965 to 5% in 1970 and to more than 12% in 1980.

Although we cannot know the true rate of inflation at any time, we can see if the measured inflation rate starts rising rapidly. If that happens, it would be a sign that true inflation is also rising because of excess demand in product and labor markets. That would be an indication that the Fed should be tightening monetary policy.

The situation today in which the official inflation rate is close to zero implies that the true inflation rate is now less than zero. Fortunately this doesn’t create the kind of deflation problem that would occur if households’ money incomes were falling. If that occurred, households would cut back on spending, leading to declines in overall demand and a possible downward spiral in prices and economic activity.

Not only are nominal wages and incomes not falling in the U.S. now, they are rising at about 2% a year. The negative true inflation rate means that true real incomes are rising more rapidly than the official statistics imply. [Sounds good, huh? Not quite. Read Stockman’s analysis.]

The Federal Reserve should now eliminate the explicit inflation target policy that it adopted less than five years ago. The Fed should instead emphasize its commitment to avoiding both high inflation and declining nominal wages. That would permit it to raise interest rates more rapidly today and to pursue a sounder monetary policy in the years ahead.

inflation-vs-employment

Share the Wealth?

The Third Way? No, the Only Way forward. It’s called peoples’ capitalism, the Ownership Society, employee ownership, inclusive capitalism, etc. (Ironic how Reich has embraced a concept introduced in national politics by George W. Bush.)
Reprinted from the Huff Post. Comment below…

The Third Way: Share-the-Gains Capitalism

by Robert Reich

Marissa Mayer tells us a lot about why Americans are so angry, and why anti-establishment fury has become the biggest single force in American politics today.

Mayer is CEO of Yahoo. Yahoo’s stock lost about a third of its value last year, as the company went from making $7.5 billion in 2014 to losing $4.4 billion in 2015. Yet Mayer raked in $36 million in compensation.

Even if Yahoo’s board fires her, her contract stipulates she gets $54.9 million in severance. The severance package was disclosed in a regulatory filing last Friday with the Securities and Exchange Commission.

In other words, Mayer can’t lose.

It’s another example of no-lose socialism for the rich — winning big regardless of what you do.

Why do Yahoo’s shareholders put up with it? Mostly because they don’t know about it.

Most of their shares are held by big pension funds, mutual funds, and insurance funds whose managers don’t want to rock the boat because they skim the cream regardless of what happens to Yahoo.

In other words, more no-lose socialism for the rich.

I don’t want to pick on Ms. Mayer or the managers of the funds that invest in Yahoo. They’re typical of the no-lose system in which America’s corporate and financial elite now operate.

But the rest of America works in a different system.

Theirs is cutthroat hyper-capitalism — in which wages are shrinking, median household income continues to drop, workers are fired without warning, two-thirds are living paycheck to paycheck, and employees are being classified as “independent contractors” without any labor protections at all.

Why is there no-lose socialism for the rich and cutthroat hyper-capitalism for everyone else?

Because the rules of the game — including labor laws, pension laws, corporate laws, and tax laws — have been crafted by those at the top, and the lawyers and lobbyists who work for them.

Does that mean we have to await Bernie Sanders’s “political revolution” (or, perish the thought, Donald Trump’s authoritarian populism) before any of this is likely to change?

Before we go to the barricades, you should know about another CEO named Hamdi Ulukaya, who’s developing a third model — neither no-lose socialism for the rich nor hyper-capitalism for everyone else.

Ulukaya is the Turkish-born founder and CEO of Chobani, the upstart Greek yogurt maker recently valued at as much as $5 billion.

Last Tuesday Ulukaya announced he’s giving all his 2,000 full-time workers shares of stock worth up to 10 percent of the privately held company’s value when it’s sold or goes public, based on each employee’s tenure and role at the company.

If the company ends up being valued at $3 billion, for example, the average employee payout could be $150,000. Some long-tenured employees will get more than $1 million.

Ulukaya’s announcement raised eyebrows all over corporate America. Many are viewing it as an act of charity (Forbes Magazine calls it one of “the most selfless corporate acts of the year”).

In reality, Mr. Ulukaya’s decision is just good business. Employees who are partners become even more dedicated to increasing a company’s value.

Which is why research shows that employee-owned companies — even those with workers holding only a minority stake — tend to out-perform the competition.

Mr. Ulukaya just increased the odds that Chobani will be valued at more than $5 billion when it’s sold or its shares of stock are available to the public. Which will make him, as well as his employees, far wealthier.

As Ulukaya wrote to his workers, the award isn’t a gift but “a mutual promise to work together with a shared purpose and responsibility.”

A handful of other companies are inching their way in a similar direction.

Apple decided last October it would award shares not just to executives or engineers but to hourly paid workers as well. Twitter CEO Jack Dorsey is giving a third of his Twitter stock (about 1 percent of the company) “to our employee equity pool to reinvest directly in our people.“

Employee stock ownership plans, which have been around for years, are lately seeing a bit of a comeback.

But the vast majority of American companies are still locked in the old hyper-capitalist model that views workers as costs to be cut rather than as partners to share in success.

That’s largely because Wall Street still looks unfavorably on such collaboration (remember, Chobani is still privately held).

The Street remains obsessed with short-term stock performance, and its analysts don’t believe hourly workers have much to contribute to the bottom line.

But they’re prepared to lavish unprecedented rewards on CEOs who don’t deserve squat.

Let them compare Yahoo with Chobani in a few years, and see which model works best.

If I were a betting man, I’d put my money on Greek yoghurt.

And I’d bet on a model of capitalism that’s neither no-lose socialism for the rich nor cruel hyper-capitalism for the rest, but share-the-gains capitalism for everyone.

 ——————
My comment:
Reich’s argument for inclusive “ownership” capital is certainly a welcome improvement over artificially raising labor costs through wage mandates or union restrictions. Kudos to Mr. Ulukaya, but a more widely adopted model can’t rely solely on enlightened capitalists. Mr. Reich glosses over the important issue of who bears the risks of capitalist enterprise before success. Sharing the gains unfortunately also means sharing the financial risks, or the direct relationship between human loss aversion and risk-taking enterprise collapses. In other words, nobody gets to receive gains without taking risks and nobody take risks without expected gains. If that truth escapes you, you’re probably not a casino gambler.
Mr. Ulukaya bore these risks and now wisely seeks to share the risks and rewards going forward. But these ownership rights should be negotiated by employees across the economy and can’t rely on the benevolence of successful entrepreneurs. Labor organizations could play a collective action role here on securing and enforcing ownership rights. The public sector also should address how economic risks can be better managed through a functioning private insurance market complemented by social insurance where private markets are incomplete.
The current desire to centralize risk and control in big government, big business, and big labor is sorely misguided and it would be helpful if both left and right could come together on that fact. Ideology be damned.
———-
I include this cartoon below for its comic irony. So many people reading this article mistake Reich’s argument for Bernie Sanders-style socialism when it is the exact opposite. It’s about extending capital ownership to labor, whereas socialism is about abolishing capital ownership in favor of some altruistic notion of communalism.
share-the-candy

Failed Paradigms

From The American Interest

The problems of a small state college point to the weakness at the heart of liberal society—a weakness that undermines the strength of our republic at home and endangers world peace. And neither political party has the answers.

Debate? What Debate?

I can’t imagine a more sophomoric attempt at moderating a Presidential primary debate than what occurred last night under the direction of CNBC. Apparently there was no clear winner as much as an overwhelmingly clear loser: CNBC. One wonders when the media elites will address the real challenges and issues the American polity faces. I won’t hold my breath.

The last fiscally responsible adult we had in public service in Washington was Paul Volcker, and he was a Democrat. And elites wonder why the average American is fed up with national politics. Kudos to Cruz.

David Stockman eviscerates the pathetic performance in his blog reposted below:

The Fed’s elephantine $4.5 trillion balance sheet represents the greatest fiscal fraud ever conceived.

The fact is, the monetary madness in the Eccles Building is destroying free market capitalism by systematically and massively falsifying the prices of financial assets, and fueling a relentless, debilitating accumulation of debt throughout the warp and woof of the American economy and the rest of the world; and it’s simultaneously extinguishing political democracy by deeply subsidizing our crushing $19 trillion national debt.

Yet not one of three moderators during the entire two hour period asked a question about the elephant in the room.

The Debate: GOP Candidates Elevated, CNBC Eviscerated

by  • October 29, 2015

Well now. We actually got our money’s worth last night.

Almost with out exception the GOP candidates conveyed a compelling message that the state is not our savior, while the CNBC moderators spent the night fumbling with fantasy football and inanities about which vitamin supplements Ben Carson has used or endorsed.

But this was about more than tone. The interaction between the candidates and the CNBC moderators revealed the yawning gap between the bubble world at the intersection of Washington and Wall Street and the hard scrabble reality of economic stagnation and political alienation on main street America.

Yes, the CNBC moderators engaged in a deplorable display of gotcha journalism punctuated by a snarky self-righteousness that was downright offensive. John Harwood is surely secretly on the payroll of the Democratic National Committee and it was more than obvious why Becky Quick excels at serving tea to blathering old fools like Warren Buffett.

So they deserved the Cruz missile that came flying at them mid-way through the debate.

At that point the Senator from Texas had had enough, especially from Carl Quintanilla. The latter has spend years on CNBC commentating about the “market”, but wouldn’t know honest capitalism is if slapped him upside the head, and has apparently never meet a Washington intervention that he didn’t cheer on as something to help the stock averages go higher:

Let me say something at the outset. The questions that have been asked so far in this debate illustrate why the American people don’t trust the media. This is not a cage match. And if you look at the questions—Donald Trump, are you a comic book villain? Ben Carson, can you do math?… Marco Rubio, why don’t you resign? Jeb Bush, why have your numbers fallen? How about talking about substantive issues?”

Nor did the Texas Senator let up:

“Carl, I’m not finished yet. The contrast with the Democratic debate, where every thought and question from the media was ‘Which of you is more handsome and wise?”

As one pundit put it afterwards, “given the grievous injuries inflicted on Team CNBC”  by Cruz and the rest of the candidates, the only thing left to do was “to shoot the wounded”.

Actually, there is rather more. Last night was billed as a debate on domestic issues and the economy and CNBC is the communications medium of record about the daily comings and goings of the US economy and the financial markets at its center. Yet not one of three moderators during the entire two hour period asked a question about the elephant in the room.

They had to bring in from the sidelines the intrepid Rick Santelli to even get the Federal Reserve on the table. Its almost as if the CNBC commentators work on the set of the Truman Show and have no clue that it’s all make believe.

In the alternative, call this condition Bubble Blindness. It’s a contagious ideological disease that afflicts the entire corridor from Wall Street to Washington, and CNBC is the infected host that propagates it.

The fact is, the monetary madness in the Eccles Building is destroying free market capitalism by systematically and massively falsifying the prices of financial assets, and fueling a relentless, debilitating accumulation of debt throughout the warp and woof of the American economy and the rest of the world; and it’s simultaneously extinguishing political democracy by deeply subsidizing our crushing $19 trillion national debt.

The GOP politicians appropriately sputtered last night about the bipartisan beltway scam rammed through the House yesterday by Johnny Lawnchair, but they were given no opportunity by their clueless moderators to explore exactly why this kind of taxpayer betrayal happens over and over.

Well, there is a simple answer. The Fed’s elephantine $4.5 trillion balance sheet represents the greatest fiscal fraud ever conceived. Last year it paid the Treasury approximately $100 billion in absolutely phony profits scalped from its massive trove of Treasury debt and quasi-government GSE paper.

That is, over time Uncle Sam has purchased $4.5 trillion worth of real economic resources——in the form of goods, services, salaries and transfer payments——from the US economy, which were paid for with IOUs. These obligations to be redeemed in equivalent goods and services were eventually purchased by the Fed, but with merely fiat credits it conjured out of thin air.

And then the monetary charlatans behind the curtain at the Fed send back to the US treasury the coupons earned on these airballs, causing the politicians to think the national debt is no problem; and that they can buy aircraft carriers and GS-15 salaries indefinitely while booking a “profit” on their borrowings.

Folks, this is just plain madness. Back 1989 when the real median household income first hit its current level of about $54,000, this entire monetization scam would have been considered beyond the pale by even the inhabitants of the Eccles Building, and most certainly by everyone else in Washington——from the US Treasury to the Congressional budget committees to the summer interns in the Rayburn Building.

But after 25 years of central bank induced financialization of the US economy, there has developed a cult of the stock market and a Wall Street regime of relentless financial gambling in the guise of “investment”. Consequently, the massive aritificial inflation of financial asset values is not even recognized by CNBC and its fellow travelers in the main stream financial press—to say nothing of the gleeful punters who inhabit the casino.

But here’s the thing. How did the real median household income stagnant at $54,000 while the real value of the S&P 500 soared by nearly 4X? market cap of US debt and equity issues soared from 200% to 540% of GDP, and now weigh in a $93 trillion?

Real Median Household Income Vs. Inflation Adjusted S&P 500 - Click to enlarge

Likewise, how did the aggregate “market cap” of US debt and business equity soar from 200% to 540% of GDP when main street living standards were not rising at all? Could it be that something rotten and deformed has been injected into the very financial bloodstream of American capitalism—-something which the CNBC cheerleaders dare not acknowledge or even allow conservative politicians to explore in a public forum?

Total Marketable Securities and GDP - Click to enlarge

Worse still, this entire Fed-driven regime of Bubble Finance has inculcated in the casino and its media megaphones the insidious notion that the arms and agencies of government exist for one purpose above all others. Namely, to do “whatever it takes” to keep the bubble inflated and the stock market averages rising—–preferably every single day the market is open.

There was no more dramatic demonstration of that proposition than after the Wall Street meltdown in September 2008 when the as yet un-house broken GOP had had the courage to vote down TARP.

But when they were dragged back into the House chambers by Goldman Sachs and its plenipotentiaries in the US Treasury, the message was unmistakable. On one side of the CNBC screen was the House electronic voting board and on the other side was the second-by-second path of the S&P 500.  And delivering the voice-over narrative were the same clowns who could not even mention the Fed last night. The US Congress not dare to vote down TARP again, they fulminated.

It obviously didn’t. Yet right then and there the conservative opposition was broken, and the present statist regime of Bubble Finance was off to the races.

During the coming decade the nation will be battered and shattered by a monumental fiscal crisis and the bankruptcy of the bogus “trust funds” which now pay out upwards of $2 trillion per year to 70 million citizens. At length, the bearers of pitchforks and torches descending on Washington will surely ask how this all happened.

But they will not need to look much beyond last night’s debate for the answers. The nation’s fiscal process has been literally shutdown by the Fed and the Wall Street gamblers and media cheerleaders who insouciantly and relentlessly demand of Washington that it do “whatever it takes” to keep the bubble inflated.

As a result, we have had the absurdity of 82 months of ZIRP and a orgy of public debt monetization that has driven the weighted average cost of the Federal debt to a mere 1.75%.  And when a few courageous remnants of fiscal sanity like Senators Cruz and Rand Paul have had the courage to resist still another increase in the public debt ceiling, they have been treated as pariahs by Wall Street and the kind of snarky financial media types on display last night.

The fact is, the President has clear constitutional powers to prioritize spending in the absence of an increase in the debt ceiling. That is, he can pay the interest on the debt, keep the Veterans hospitals open, send out the social security checks and prioritize any other category of spending that he chooses from the current inflow of tax revenues, and for as long as it takes to legislate an honest fiscal retrenchment.

Needless to say, that would create howls of pain from the Federal vendors who wouldn’t get paid, the state and local governments which would have to wait for their grant payments and the Federal employees who would be put on furlough.

But that is not the reason that Mitch McConnell and Johnny Lawnchair have capitulated every time a debt ceiling crisis has reached the boiling point. That kind of action-forcing circumstance was managed by Washington innumerable times in the pre-Bubble Finance world, including upwards of a dozen times during my time in the Reagan White House.

But back then no one thought that Wall Street would have a hissy fit if the government shutdown for a few days or if the fiscal gravy train was temporarily put on hold; nor did politicians much care if it did.

My goodness. Paul Volcker had taught Wall Street a thing or two about the requisites of financial discipline in any event.

No, what is different now is that the establishment GOP politicians are petrified of a stock market collapse, and have been brow-beaten into the false belief that a government shutdown will create severe political costs.

Baloney. Even the totally botched affair in October 2013 created no lasting damage—-as attested to by the GOP sweep in the 2014 elections.

At the end of the day, all the hyperventilation about the political costs of a government shutdown or the forced prioritization of spending in the absence of a debt ceiling increase is pure Wall Street propaganda; and its an untruth amplified and repeated endlessly, loudly and often hysterically by its financial media handmaidens.

At least last night some GOP politicians gave it back to them good and hard.

Maybe there is some hope for release from the destructive pall of Bubble Finance, after all.

What Is Inclusive Capitalism?

We can distill “inclusive capitalism” down to a single word that captures the concept in its fullest dimensions. That word is EQUITY.

There is a movement afoot called The Coalition for Inclusive Capitalism that counts Prince Charles, Pope Francis, Bill Clinton, and the world’s richest industrialist Carlos Slim among its supporters. Our first reaction to this news might be to ask, “What exactly is meant by the term Inclusive Capitalism?”

The Coalition provides this definition:

“Inclusive Capitalism provides that firms should account for themselves, not just on the bottom line, but on environmental, social, and governance (ESG) metrics… Every firm has a license to operate from the society in which it trades. This is both a legally and socially defined license… Firms must contribute proportionately to the societies in which they operate. Without fairly contributing, firms free-ride on services that other people have paid for. Firms that practice unsustainable activities, disrespect their stakeholders and the communities in which they operate will find their licenses threatened, first by the engaged consumer, then by government. Firms practicing Inclusive Capitalism will see their license strengthened.”

While laudable in its aspirations, operationalizing this value-laden definition poses a few questions and challenges.

First, this definition focuses on firm responsibility according to ESG sustainability metrics and firm performance. In fact, citing studies of corporate performance measures, the IC literature asserts that such practices deliver superior firm performance in terms of profit and market valuations. If true, then market competition should insure the widespread adoption of best practices with the gradual attrition of less profitable, less sustainable firm behavior. In other words, markets should provide sufficient correctives. If they do not, we probably need to question such assumptions that the market is functioning as expected, that it is complete, or that best practices across firms and industries are readily transparent.

Second, one can inadvertently blur the operational differences between public corporations and non-corporate, small business where ESG metrics are more difficult to discern or measure. Since much of capitalism’s innovation, job creation, and business expansion occurs at the small business level, we need to expand the idea of inclusion beyond corporate management practices and stakeholder governance.

Third, the search for an acceptable definition can also put different class segments of society at odds. The British Guardian has already described the Coalition’s efforts as a “Trojan Horse” cynically deployed to placate the public so that crony capitalism can thrive unscathed. Our definition then must not only articulate a vision and a direction, but also gain acceptance and buy-in from all segments of society. In other words, our definition must be “inclusive” in order to mediate conflicts among groups that appear to harbor diverging interests.

Finally, when we probe practitioners we find that different people have different ideas of what Inclusive Capitalism means, so we still lack a consistent and concise definition. Perhaps we can start by eliminating what it is not. It’s more than just corporate social responsibility (CSR) or ESG sustainability. It’s not defined by charity, philanthropy, or noblesse oblige. It’s more than “people-centered” and not really Robin Hood-style tax and redistribution, or even social welfare.

This is not to declaim or disparage these policies and activities, which in many cases yield positive social and economic results. The problem is that these policies are not really designed to be inclusive; rather they target compensation for past exclusion. In contrast, we should understand that inclusive capitalism seeks to reduce the need for such compensation. Thus, the motivating criterion is bottom-up empowerment, not top-down redirection. For example, inclusive capitalism is less about artificially raising wages, and more about creating the demand for and utilization of labor where a minimum or living wage becomes a moot issue.

With this objective, I believe we can distill “inclusive capitalism” down to a single word that captures the concept in its fullest dimensions. That word is EQUITY. Why equity? Because the multiple meanings and usage of the word “equity” expand the idea into every realm of a free society: political equity in terms of democratic participation, legal equity in terms of rights and accountability, moral equity in terms of justice, and economic equity in terms of capital ownership structures, control, risk, and reward. A free society that lacks any one of these dimensions of equity is in need of repair.

Economic Equity

Naturally, the focus of the term “inclusive capitalism” applies primarily to economic equity, begging the next question of how we define and understand economic equity. This can be problematic because a moral precept of equity as “fairness” is not definitive. In other words, What is economically fair? is a question that cannot really be answered objectively. In economic relations, equity implies a linkage between action and consequence; in finance we might refer to the direct link between risk and reward. In fact, the financial framework may offer the clearest insight into the logic of economic equity in capitalism.

Economic growth is a result of successful risk-taking and productive work. The rewards of success are, or should be, distributed accordingly. The simplest formulation asserts that capital takes the risks and labor does the work. The distributional outcomes of success or failure are then perceived as a protracted conflict between capital and labor over issues of equity. I would argue this conflict is misconstrued.

The linkage between risk and reward is inter-temporal. In other words, financial risks are assigned and taken before the enterprise is engaged: capital is borrowed and invested, suppliers are paid, and labor is contracted. The payment contracts reflect a complex web of legal relations and covenants that stipulate the assignment of liabilities and the seniority of claims over the product after it has been produced and, hopefully, sold. The liability risks of all participants are encoded in these contracts. After standard accounting practices measure the results, the returns to success or the losses of failure are distributed accordingly.

In starkest terms: In capitalism, she who takes the risk, gets the reward (or the loss). We can see the importance of residual claimancy over the profits of the enterprise. Under most corporate legal covenants, these profits accrue to “equity holders,” also referred to as shareholders or owners of firm assets. We should note the usage of that word “equity.”

Inclusive capitalism warrants “inclusion” in the profit-making enterprise of capitalism, which by legal necessity requires contractual claims on residual profits as well as the assumption of liabilities for loss. To control the financial risks associated with these liabilities, the corporate charter was deliberately designed to limit liability to the liquidation value of the firm’s assets.

Some correctly make the argument that wider stakeholders in capitalism (those without ownership claims) have rights that should be reflected in the governance of capitalist enterprise. An example might be a community downriver that suffers water contamination from a producer upstream. Economic externalities, such as environmental degradation, are important considerations for inclusion. Politically imposed regulation can be one means of asserting stakeholders’ interests, but the preferred strategy would be to assign stakeholder claims through the accepted legal structures of ownership and control. In other words, stakeholders should be represented as the voice of shareholders participating as owners in capitalist enterprise. In this way, stakeholders assert their interests and can also claim the material benefits of success, i.e., profits.

Thus, inclusive capitalism explicitly requires inclusion in the economic system as “capitalists,” as well as workers. This all can be as simple as being a passive shareholder. This begs the penultimate question of why, in a capitalist economy, we are not all striving to be capitalists? Alternatively, we might ask: Why is economic inclusion so elusive?

I believe this is where the discussion of inclusive capitalism gets interesting. The answers hinge on the risk-taking nature of capitalist enterprise juxtaposed against the risk-averse, loss-averse behavior dictated by our natural survival instinct. There is a selective bias among successful capitalists to perceive a natural order of things whereby some people are natural risk-taking innovators, while others are not. For them, this “natural order” explains the distribution of success in a capitalist society. The elitist bias can reveal itself in attitudes of paternalism and noblesse oblige.

This perspective is largely the product of a theoretical approach to the market economy where participants are grouped by function: producers vs. consumers; employers vs. workers; investors and borrowers vs. savers and lenders; innovators and wealth-creators vs. welfare dependents. When it comes to distributional outcomes, this is a limited analytical paradigm. Let us just consider the risk-takers. Innovators like Bill Gates, Steve Jobs, Jeff Bezos, or Google’s Page and Brin are perhaps one in a million. But each of these immensely successful individuals has been eager to share the risks and returns of their enterprise through the sale of equity in financial markets. The important lesson is not the fact that Gates may have a net worth of more than $30 billion, but that Microsoft (and Apple and Amazon) has enriched thousands of other stakeholders along the way. This is the key to inclusion and we should pay mind to how it is narrowing.

Though risk preferences and animal spirits do vary across the population, economic risk is ubiquitous and borne in some manner by all. As the capitalist risks loss of principal, the worker risks loss of income. The real question is whether the risk-bearers are receiving just compensation commensurate with those risks and whether the risk-takers are also accountable for losses. This is equity in the moral and economic sense of the word. A free society demands that the innocent not pay for the mistakes of the guilty and this applies in capitalist enterprise as well. (Our recent financial bail-outs appear to have violated this moral imperative.)

For inclusion to work, participants in capitalist enterprise must also be empowered to control and manage their risks. Inclusion and participation then becomes a question of enforceable property rights and gets us back to the legal conventions of assigning ownership rights and risks to tangible assets of the firm. In many situations, different stakeholders eschew the risks because they cannot control or manage them, so they pay to have someone else assume them (i.e., sign a labor contract for a lower risk-return profile). Overcoming these impediments to equity participation inherent to the governance issue is the main challenge of inclusion.

Unfortunately, we have many tax and regulatory policies, as well as financial practices and conventions, that contradict the goal of inclusion through equity. Access to credit, debt leverage, collateral requirements, capital and income taxes, conflicts of interest in governance, etc. work to the disadvantage of those who are thereby excluded from the financialization of the economy. A long laundry list of reforms can be offered in this respect, but that is beyond the purview of this effort, which is to first define what we mean by inclusive capitalism.

A more serious challenge is posed by an industrial global economy being transformed by the digital information age, globalization, and AI robotics. Production in the digital age is revealing itself as labor-saving, capital and skill intensive, with winner-take-all product and service markets. Some of the effects we observe are the rise of celebrity branding; the marginalization of wage labor as a distributional mechanism and mode of inclusion; and the explosive growth of wealth concentration enjoyed by those who feed off digital processes—companies like Amazon, Apple, Google, and Facebook. These trends present a dire challenge to the concept of equity and inclusion. It is a challenge that will require far deeper thinking and rethinking of the 21st century economy and how we conceive of a free society. Despite what politicians may promise, I would advise there is no going back.

Bernanke Spinning the Roulette Wheel

The central bank did its job. What about everyone else?

In today’s Wall St. Journal, former Fed Chairman Ben Bernanke offered up this generous performance review of his stint leading monetary policy after the financial crisis (appended below).

Bernanke assertions regarding unemployment and inflation are questionable on both fronts. First, misguided monetary policy has made a mess of full productive resource utilization. Fed policies such as ZIRP and QE4ever distort relative prices and lead to uncertainty of fundamental valuations over time. Thus, investment time horizons and commitments are shortened (who lends out 30 years now at a fixed rate of interest?). Second, the misallocation of resources leads to increased malinvestment (see housing), portending even more dislocations and corrections in the future. The Fed’s fantasies are further aided by distorted statistical measures like “core inflation” and unemployment. The labor participation rate is weak and weakening and the real growth rate is anemic – that is a true lasting drag on Americans’ well-being. All of this will eventually be borne out by empirical studies, proving the ineffectiveness of global central bank policy.

What the Fed has really accomplished is to let the politicians off the hook by accommodating their dereliction of duty over productive fiscal policy. If economic headline statistics had threatened re-election chances, maybe the executive and legislatures would have stopped playing petty power games and gotten down to the business of governing the nation. This is Washington D.C. at work.

How the Fed Saved the Economy

Full employment without inflation is in sight. The central bank did its job. What about everyone else?

By Ben S. Bernanke

Oct. 4, 2015

For the first time in nearly a decade, the Federal Reserve is considering raising its target interest rate, which would end a long period of near-zero rates. Like the cessation of large-scale asset purchases in October 2014, that action will be an important milestone in the unwinding of extraordinary monetary policies, adopted during my tenure as Fed chairman, to help the economy recover from a historic financial crisis. As such, it’s a good time to evaluate the results of those measures, and to consider where policy makers should go from here.

To begin, it’s essential to be clear on what monetary policy can and cannot achieve. Fed critics sometimes argue that you can’t “print your way to prosperity,” and I agree, at least on one level. The Fed has little or no control over long-term economic fundamentals—the skills of the workforce, the energy and vision of entrepreneurs, and the pace at which new technologies are developed and adapted for commercial use.

What the Fed can do is two things: First, by mitigating recessions, monetary policy can try to ensure that the economy makes full use of its resources, especially the workforce. High unemployment is a tragedy for the jobless, but it is also costly for taxpayers, investors and anyone interested in the health of the economy. Second, by keeping inflation low and stable, the Fed can help the market-based system function better and make it easier for people to plan for the future. Considering the economic risks posed by deflation, as well as the probability that interest rates will approach zero when inflation is very low, the Fed sets an inflation target of 2%, similar to that of most other central banks around the world.

How has monetary policy scored on these two criteria? Reasonable people can disagree on whether the economy is at full employment. The 5.1% headline unemployment rate would suggest that the labor market is close to normal. Other indicators—the relatively low labor-force participation rate, the apparent lack of wage pressures, for example—indicate that there is some distance left to go.

But there is no doubt that the jobs situation is today far healthier than it was a few years ago. That improvement (as measured by the unemployment rate) has been quicker than expected by most economists, both inside and outside the Fed.

On the inflation front, various measures suggest that underlying inflation is around 1.5%. That is somewhat below the 2% target, a situation the Fed needs to remedy. But if there is a problem with inflation, it isn’t the one expected by the Fed’s critics, who repeatedly predicted that the Fed’s policies would lead to high inflation (if not hyperinflation), a collapsing dollar and surging commodity prices. None of that has happened.

It is instructive to compare recent U.S. economic performance with that of Europe, a major industrialized economy of similar size. There are many differences between the U.S. and Europe, but a critical one is that Europe’s economic orthodoxy has until recently largely blocked the use of monetary or fiscal policy to aid recovery. Economic philosophy, not feasibility, is the constraint: Greece might have limited options, but Germany and several other countries don’t. And the European Central Bank has broader monetary powers than the Fed does.

Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis is a big reason that eurozone output is today about 0.8% below its pre-crisis peak. In contrast, the output of the U.S. economy is 8.9% above the earlier peak—an enormous difference in performance. In November 2010, when the Fed undertook its second round of quantitative easing, German Finance Minister Wolfgang Schäuble reportedly called the action “clueless.” At the time, the unemployment rates in Europe and the U.S. were 10.2% and 9.4%, respectively. Today the U.S. jobless rate is close to 5%, while the European rate has risen to 10.9%.

Six years after the Fed, the ECB has begun an aggressive program of quantitative easing, and European fiscal policy has become less restrictive. Given those policy shifts, it isn’t surprising that the European outlook appears to be improving, though it will take years to recover the growth lost over the past few years. Meanwhile, the United Kingdom is enjoying a solid recovery, in large part because the Bank of England pursued monetary policies similar to the Fed’s in both timing and relative magnitude.

It is encouraging to see that the U.S. economy is approaching full employment with low inflation, the goals for which the Fed has been striving. That certainly doesn’t mean all is well. Jobs are being created, but overall growth is modest, reflecting subpar gains in productivity and slow labor-force growth, among other factors. The benefits of growth aren’t shared equally, and as a result many Americans have seen little improvement in living standards. These, unfortunately, aren’t problems that the Fed has the power to alleviate. [Does Mr. Bernanke really think Fed policies have had a benign effect on these trends?]

With full employment in sight, further economic growth will have to come from the supply side, primarily from increases in productivity. That means that the Fed will continue to do what it can, but monetary policy can no longer be the only game in town. Fiscal-policy makers in Congress need to step up. As a country, we need to do more to improve worker skills, foster capital investment and support research and development. Monetary policy can accomplish a lot, but, as I often said as Fed chairman, it is no panacea. New efforts both inside and outside government will be essential to sustaining U.S. growth.

Bernanke prayer

Money For Nothing?

TowerofPower

…there is now a nagging fear that credibility in central bankers is being lost. Investors, it seems, are losing confidence in the Fed.

You think? I believe the definition of insanity is to keep doing the same thing over and over and expecting a different result. It seems to me the Fed has sidelined itself and the future path of the economy will be determined by markets, and it won’t all be good. As Stockman says (see second article below), the global economy in many respects is at peak debt, thus the global private and public sectors are both struggling to de-leverage. The only borrowers are national governments and those speculating in asset markets.

Thus, the Fed’s efforts to boost inflation to 2% have been for naught and merely goosed asset markets and resource misallocation. For the global economy to re-balance from peak debt requires debts to be written down, something that occurs with bankruptcy accompanied by price deflation. Forestalling instead of managing these corrections only means a larger correction at some point in the future.

On another note, our experience is confirming the weakness of Friedman’s monetarism. Inflation is not purely a monetary phenomenon – more important, it is a behavioral one based on demographics and the perceived level of uncertainty and risk regarding the future of the economy and policy distortions.

Markets reflect the collective intelligence of humans; they’re not all stupid.

Why Wall Street’s Stimulus Junkies Weren’t Thrilled by the Fed’s Rate Decision

By Anthony Mirhaydari
It wasn’t supposed to be like this.

In a massively hyped Federal Reserve policy announcement Thursday — one that threatened to end the nearly seven-year experiment with interest rates near 0 percent and usher in the first rate hike since 2006 — Chair Janet Yellen and her cohorts gave Wall Street exactly what they wanted: No change, in line with futures market odds.

And yet stocks drifted lower, even as the action in the currency and commodities market was as expected, with the dollar falling hard and gold up 0.8 percent. Why?

Cutting to the quick: Investors, it seems, are losing confidence in the Fed.

While the Wall Street stimulus junkies should’ve been happy with the continuation of the status quo, there is now a nagging fear that credibility in central bankers is being lost — something that RBS’ Head of Macro Credit Research Alberto Gallo took to Twitter this afternoon to reiterate.

Moreover, the Summary of Economic Projections by Fed officials revealed that, at the median, policymakers now only expect a single rate hike by the end of 2015. The futures market is now pricing in a 49 percent chance of a hike at the December meeting (although Yellen noted that the October meeting was “live” and could result in a hike should markets and economic data improve).

But the kicker — the one that pushed large-cap stocks lower into the closing bell — was the appearance of a negative interest rate projection by a Fed policymaker on the newly released “dot plot.” Someone, it seems, expects federal funds policy rate to be in negative territory at the end of 2016. Four officials don’t expect any hikes this year at all.

Not only does this undermine confidence in the state of the economy, but it calls into question the efficacy of the Fed’s ultra-easy monetary policy stance that has been in place, to varying degrees, since 2008. Moving forward, it will be critical for the bulls to recover from Thursday’s intra-day selloff. The day’s action resulted in a very negative “shooting star” technical pattern that signals buying exhaustion and often precedes pullbacks.

In their statement, Federal Open Market Committee members fingered recent global economic weakness and financial market turbulence as giving reason to believe that inflation would take longer to return to their 2 percent target. So the new dot plot shows the median rate projection for the end of 2015 falling to 0.375 percent from 0.625 percent as of June; to 1.375 percent for 2016 vs. 1.625 percent before; and 2.625 percent for 2017 from 2.875 percent. The long-term neutral rate declined to 3.5 percent from 3.75 percent, signifying ongoing structural problems in the economy holding down its potential growth rate.

But a tree should be judged by the fruit it produces. In this case, median household incomes are stagnating despite all the Fed has already done, including three bond-buying programs and the “Operation Twist” maturity extension program. With corporate profits rolling over and global growth stagnating, people are wondering: Is this all the Fed and its central banking counterparts can do? Fresh threats, such as another possible debt ceiling showdown on Capitol Hill this autumn and an election in Greece, are approaching.

As for what comes next, Societe Generale Chief U.S. Economist Aneta Markowska suggests a replay of the late 2013 experience surrounding the beginning of the end of the QE3 bond-buying program: “Our scenario is reminiscent of 2013 when the ‘taper tantrum’ spooked the Fed in September, a government shutdown spooked the Committee in October, and the fog finally lifted by December when the taper was finally announced.”

If the Fed left rates unchanged, there were some new wrinkles in its statement. In explaining their decision, Fed officials elevated issues like global economic growth and the dollar’s valuation seemingly above its traditional mandate regarding labor market health. J.P. Morgan Chief U.S. Economist Michael Feroli believes investors shouldn’t read too much into the new factors being cited. In a paraphrase of the infamous rant by former Arizona Cardinals coach Dennis Green: Yellen is a dove. She is who we thought she was. And until higher inflation becomes a clear and present problem, this continual moving of the goalposts for Fed rate hikes — deferring until more data comes in — looks set to continue.

But that may no longer be enough to keep stocks happy.

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Yellen-cheap-money

David Stockman is not a fan of the Fed. In fact he claims that the Fed is on a “jihad” against retirees and savers.

The former Reagan budget director and author of “The Great Deformation: The Corruption of Capitalism in America” visited Yahoo Finance ahead of the Fed announcement to discuss his predictions and the potential impact of today’s interest rate decision. “80 months of zero interest rates is downright crazy and it hasn’t helped the Main Street economy because we’re at peak debt,” he says.

Businesses in the U.S. are $12 trillion in debt. That’s $2 trillion more than before the crisis, but “all of it has gone into financial engineering—stock buybacks, mergers and acquisitions and so forth,” according to Stockman. “The jig is up; [the Fed] needs to get on with the business of allowing interest rates to find some normalized level.”

While Stockman believes that the Fed should absolutely raise rates today, he isn’t so sure that they will (Note: they did not). But even if they do, he says they’ll muddle the effect by saying “‘one and done’ or ‘we’re going to sit back and watch this thing unfold for the next two or three months.’”

This all fuels an inflationary bubble on Wall Street, according to Stockman. “This massive money printing we’ve had has never gotten out of the canyons of Wall Street. It’s sitting there as excess reserves.”

According to Stockman, the weakness of the U.S. economy has been due to a lack of investment over the past 15 years and inflated labor costs in America that can’t compete on a global scale. “Simply printing more money and keeping interest rates at zero do not help that problem.”

Zero interest policies, says Stockman, are leading to the global economic turmoil we are currently experiencing. “In the last 15 years China took its debt from $2 trillion to $28 trillion… it’s a house of cards with an enormous overcapacity and enormous speculation and gambling that is beginning to roll over,” he says. “It’s just the leading edge of a global deflation that I think is underway as a consequence of all this excess credit growth that we’ve had.”

If the Fed raises rates and doesn’t mince words there’s going to be a long-running market correction, says Stockman. If the Fed doesn’t raise rates there will be a short-term relief rally but eventually the markets will lose confidence in the central bank bubble and we’ll be in store for a “huge correction.”

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