Keynes: Manage Capitalists Like Domestic Animals

After a tepid political response (overly accommodating to US capital’s corrosive sense of entitlement) and an initial partial recovery from the early 20th century Depression, the US slumped back into economic crisis. In this 1938 letter, Keynes advised FDR on how to more emphatically direct social wealth to the working class in order to get the US out of economic collapse. (David Cay Johnston calls this the ‘circulatory’ understanding of money–If social wealth, like blood, is blocked from getting to the working class, money pools up and rots the system.)

In this advice, Keynes urged FDR to have the confidence to understand and manage capitalists as a species of domestic animals.

There is indication in FDR’s response to Keynes that the capitalist US President understood US prosperity simply as a good in service of outcompeting communism–or at least non-Anglo-centric economies–around the globe. Again this is evidence that, for capitalists (obviously with human lifespans and thereby very time-delimited strategic horizons), economic decline is not perceived as a direct threat to their self-interest–so long as they maintain ownership of a society’s accumulated wealth. That is, capitalists appear to be systematically incapable of understanding economics beyond their own relative advantage. I think that economic inequality (produced by the normal, alienating functioning of capitalism) regularly produces this solipsistic capitalist conceptual error, ensuring economic crisis.

(Thanks to Doug Henwood for posting this link.)

Inequality, Economic Growth & Standards of Living

In this 2011 PERI paper by Thompson & Leight, “Searching for the Supposed Benefits of Higher Inquality,” the authors review the messy literature on the relationship between economic inequality and economic growth. They propose an alternative approach to this research stalemate.

If you are interested in charting the relationship between inequality and economic growth, urban & regional-level data is your best bet. Only in 2006 did Saez & Picketty pull together (fairly) reliable international comparative data on income inequality. See Saez‘s data and analysis on his Berkeley website.

Why are Leftists Today Econ Illiterate?

A response to Nick Srnicek’s Disorder of Things blog post “Has the Left Given up on Economics.” Basically, I agree with Srnicek: 1) There is too much economic illiteracy, 2) There is too little economic innovation, and 3) We need to organize. 

My two cents (argued below) is that we would do well to think about the challenge strategically, keeping in focus class’ impact on social networks and the legitimacy and spread of ideas.

Where have you gone Maynard Keynes? Our nation turns its lonely eyes to you.

Mrs. Robinson, Lemonheads version

It has been argued here that Marxian economics are stalled because Marxists have not done the work needed to capture the Left’s imagination, which is, according to the blog author, designing post-capitalist transitionary structures and “expanding the variables” in its economic models.(*1) I might support the author of that blog in exploring these projects (Again, I’m all for the proliferation of Marxist work, including packaging old wine in lovely, new, well-written bottles.), but I can’t agree that this (more writing, or adding variables and some tiny academic community’s jargon du jour) is all Leftists need to become political-econ literate. (Although if thinking so motivates you to hit the keyboard, good on you!)

Leftists are political-econ illiterate because 1) outside of social democratic countries, there is no union confederation that employs prominent Marxist economists and disseminates political-economic literacy, and 2) there is no social gravitational force making political-econ literacy a normal thing. For example, there’s no critical mass of political-econ literacy, and unlike earlier eras, there are no Leftist economists from capitalist backgrounds today. 

The Left will readily accept the first explanation without controversy, so I will do my best to elaborate here why I think the second point matters.

The Siren Call of The Fancies

The problem I see for the spread of Left political-economic literacy has partially to do with why Keynes is so influential. Keynes is influential not because he was the most imaginative lefty-liberal of the 20th century (though he was an iconoclast and brilliant), but because he was a very centrally-elite independent thinker. (And even then, Keynes’ most important ideas were not implemented in policy, and they were censored in the economics discipline.) Even Marxist  economist Paul Sweezy was revered and could influence government, develop his work, and support the development of Marxist economics partly because he was a super guy, and partly because he was a hegemonic elite male. 

Wait. Do not go fetal on me here. This is not a love song an identity critique.

(OK, Sweezy was a dick to Schumpeter’s wife in “The Future of Capitalism” 1946-47 debate, so it could be an identity critique, but it won’t.)

There are no radical, square-jawed, econ-literate, white-hero elites anymore. They were methodically wiped out by a campaign organized throughout the Anglosphere by conservative economists and their funders. What  we’ve got left are weak-jawed, middle class, econ-literate heroes,(*2) and that means that de facto they’ve got smaller influence networks. So small Srnicek fails (Really, we fail. I’m just being literary there, blaming it on Srnicek.) to notice a lot of them.

We have fantastic political-economic ideas right now and for a long time (including many from Eastern Europe and Scandinavia, etc. that have yet to be translated into English). But their spread is actively suppressed, first by the assault on unions–which can disseminate alternative ideas about how to run society, and second by the assault on non-neoclassical economists, the political economists. 

For one late example, just at the moment that the neoclassical econ emperor was fully exposed as naked and bereft (post-2007), the last dean here, with the support of mobilized conservative econometricians within the department, destroyed the nonorthodox base of this “N.A. Siberia” university’s holdout econ department and loaded the department up with econometricians and other economic servants of capitalist hegemony. Those marxist economists (eg. John Loxley) spent years strategizing, designing and implementing economic alternatives–including nascent social enterprise networks. They have a lot to contribute right now.

Left political-economy is not dead and it’s not irrelevant. Go into an anarchist bookstore (eg. Viva Mondragon in Winnipeg), and there are shelves and shelves of contemporary and historical books describing and proposing alternative economies. They’re just written by insufficiently-connected people. It’s not their individual fault they’re not Weber’s apocryphal charismatic prince.

Moreover, there are still some of us sociologists who (semi-)self-teach political-econ, as well as great non-neoclassical economists who’ve been forced out of economics, to hang their shop sign in sociology, geography and business departments. The Union for Radical Political Economics, for one, is full of them. Monthly Review folks are terribly proud of their political-econ analyzing record.

The problem right now is that while decent job markets have constricted with decades of neoliberal inequality initiatives–including the campaigns to wipe out working class institutional bases such as unions and social citizenship rights, at the same time, we’ve been assaulted by a concerted, coordinated, funded conservative campaign to ferret the non-conservatives out of the paid-ideas market.  Zombie econ and postmodernism are symptoms of that doxa chokehold, not failures we need to take responsibility for. They are the epistemologies over which elites still cast their heartening, radiant blessings.

To address the continuing political-econ literacy and innovation deficit, in and out of paid employment, knowing we have no shining elite knights to grant us courage through the long dark night, we need to be collectively committed to honing the work (that is, in a disciplined way, forgiving temporary missteps, forgoing ego indulgences, and pointing out fruitful paths), connecting to past thinkers, promoting, and celebrating the leftist political-economists who have managed to haul themselves through this hegemonic war period, rather than waiting for another Keynes.

We are not Blaine.

Elites aren’t any greater minds or men than non-elite intellectuals; they make mistakes and develop too; they just have head starts and better PRespecially in a high-inequality era. It’s not a deal breaker that non-elite intellectual contributions tend to have to occur later in life. But we need to make up for no PR–Because relentless exposure to oppositional framing can wear away at individuals’ and communities’ confidence and sense of purpose, undermining development and the adoption and diffusion of ideas. 

Advancing ideas broadly is very hard to do without the grease of money and the protective social networks money forges. But as MR’s John Foster reminded us (but hardly practiced) at UO, feminist successes came with promoting their own institutions and networks. Do we need another White Hope (White Emigration)? Why not recognize the special social challenge of a movement that valorizes and champions the working class within a capitalist milieu, and strive to husband socialist political economics to the very best of our social abilities?

(*2) This statement is tongue-in-cheek. Signals: 1) the context: I am saying that “middle” (working)-class intellectuals contribute good econ work that can be more widely distributed if such intellectuals recognize and strategically act upon the knowledge that they are working without the facilitative social status conveyed elites; and 2) I symmetrically apply the complementary “heroes” trope in this sentence to both left elite intellectuals and left middle class intellectuals. These two constructions should be able to indicate to a good-faith reader that I am not actually critical of working class people’s facial features. If this were a real publication instead of an obscure blog entry, I would probably get rid of it, but it’s not and the phrasing is intended to reinforce my point that working class people are not viewed with as much credit as elites are–a social phenomenon. However, I readily concede that as rhetoric, the tongue-in-cheek phrase’s (“weak chinned”) castrating qualities  probably outweigh its metaphorical utility. 

Further clarification:

Building Credit for Non-elite Political-economic Ideas

The point I was making above is that rather than getting frustrated with leftists for leftie social movements’ current lack of access to economic knowledge, we ought to recognize something sociological–that at this historical juncture there is a lack of political-economic leadership– both a lack of union leadership (due to the decimation of unions), and a deficit of critical mass or elites engaged with left political-economics (Compared to the early 20th century. Because of the lack of legitimate communist threat/alternative.), and because of deliberate conservative organizing as well as neoliberal drift, and this means that the spread of left political-economic ideas in the contemporary era is excessively constrained. Without critical mass or the (capitalist elite) leadership that can jumpstart it (example here), the motivation to economic literacy in the left is dampened.

We (Americans, Leftists, scholars) hate to think of ourselves as impressed with elite leadership; but it’s time to face it. We’re human. We’re social. We respond (not necessarily happily or healthily) to social status. Frankly, we are not living in an intelligence meritocracy, and as brilliant as they are, the contemporary editors of Monthly Review don’t have enough capitalist gravitas to impress even Leftists into becoming literate in political-economics. This is a social problem that can’t be beat by simply doodling a bit more upon a gigantic, diverse body of elaborate theory and observation.

Yes. This is quite a conundrum for the Left. It’s a strategic challenge to take seriously.

If we analyze the political-economics literacy deficit and strategize how to combat it, which I agree is important, I suggest what we need is some creative thinking about what to do about the smaller social networks, and especially-contested legitimacy accompanying good work by non-elite intellectuals. 

Screw it. Our work is good. And the only instance in which  a liberal or conservative is going to acknowledge that is for divide-and-conquer purposes. Fuck ’em. Hold up your head and don’t apologize for another Leftist’s work, even if apologizing is an oblique way to flatter your own doubtlessly-, comparatively-superior work, you easily-manipulated psychological weakling.

Discourse, communication is far from simple. Intention is difficult to discern without being able to grant people a certain amount of credit; the elite sense of entitlement and elite social networks help a lot with that. Does the Left have social strategy that can compensate for a lack of elite leadership?

Obviously, we need to organize working-class unions as a long-term strategy. As well, movements such as OWS can help develop the credit needed for sowing political economic ideas and literacy. 

My simple suggestion was that we ought to consider as well whether political-econ leftists could be better disciplined to support each other–to simulate the credit that people give over to elites, which allows ideas and influence to develop and spread. 

A war of position is going on around us. Capitalist conservatives, their conservative managers and hegemonists, and their multiple layers of publicly-funded police are one obvious bloc opposing Left community and ideas development. As well, capitalist conservatives’ ally, liberals (including North American unions, which are not by, of and for the working class) will continue to counter the non-elite credit conditions for the spread of political-economic literacy. 

A bit on their back foot right now, liberals will, for one, simply lie about the content of left or Marxist political economics. Brad DeLong does this. Today he claimed that because of the labor theory of value, Marx opposed Keynesian monetary policy. Yeah, um, WTF? For two, they may invoke Magical Rectitude, reasserting the traditional, elite-sanctioned, pomo de-valorization of political-economic literacy, which in the present case may be boiled down to, “This [Occupy movement] is trivial. Who cares how ‘white Americans’ (contemporary global elite code for ‘working class’) are faring? They’re a mob of assholes. Won’t someone please think of the [insert identity group].” 

The liberals’ Helen Lovejoy strategy

To foster the credit conditions needed to improve Left political-economic literacy, the Left needs to keep liberals on their back foot, by not engaging their opposition directly, but recognizing their identities and cultural contributions, while continuing to build and assert an inclusive working class praxis

The Left has to take a page out of Corey Robin’s analysis of conservatism, successful Occupy mobilizations, Marx’s “Communist Manifesto” model, and Barbara Ehrenreich’s Dancing in the Streets analysis, and create a privileged space for passion–writing with passion, speeches with passion, singing and dancing with passion–and figure out how to link it to economic literacy. Most (though not all) people who live in unequal societies are mobilized with passion. The sign that our own minds have become colonized and crippled by the opposition is when we’re incapable of expressing ourselves with passion. People read (masculine) passion as confidence, and we need confidence in our political economic literacy.

Have and build confidence in our capacity for solidarity. Have and build confidence in our capacity for political-economic literacy. Have and build confidence in our capacity to disrupt the system and, if not overcome it at this moment, at least modify its components.

(*1) The blogger appears to be a student of Alan Freeman and Radhika Desai. His post is interesting in that if you follow comments and links you will find out part of what Alan Freeman is up to intellectually, which I’ve personally found impossible to pry out of him in polite conversation; and you’ll find out that Radhika and Alan are part of an effort to publish a series (including their own writing as well as works by Marx, Keynes, & Perry Anderson) on “The Future World of Capitalism.” 

Actually, over the weeks, I’ve come to disagree a little bit with the “economics-ignorant Left” formulation of the problem. As Nancy Fraser discusses in “The Cunning of History,” 1970s anti-economism met neoliberalism and devolved into excessive mass disengagement with political economy. But that is not all. Economics promoted itself as a capital-serving profession by becoming proudly divorced from, contemptuous of, and unaccountable to Left constituencies and intellectual perspectives. It has been personally hardest on the Left economists, and they are due respect for their monk-like perseverance. For the Left it was a tragedy of separation and cloistering that cannot be resolved quickly with simple exhortations for everyone to submit to the economists. While I argue above for confidence, I think economists could stand to recognize that their oftentimes-prohibitive competitiveness and lack of cooperative humility extend from their deep socialization and  identity within a social-professional group that crippled its own critical capacity.

Well, I’m accustomed to the smooth ride. 
Or maybe I’m a dog that’s lost its bite.
I don’t expect to be treated like a fool no more. 
I don’t expect to sleep through the night.

Varoufakis: Today’s Economists Can’t Comprehend the Economy

“(The) Nobel Memorial Prize has been established for the wrong discipline: the discipline of economics, which, by design, subverts even the best intention to serve humanity” (Yanis Varoufakis, “They Don’t Make Them Like They Used To!“).

The Tragedy of Paul Samuelson

Paul Samuelson was “the man who brought Keynes to America by subsuming him under a formalist logic which effaced everything that Keynes had actually said.”

“Keynes’ greatest contribution was to alert us to a disarmingly simple truth: in a complex, financialized capitalist economy, it is impossible (rather than just hard) to derive, by analytical reasoning, the well defined mathematical expectations which one needs to “close” a macroeconomic model. Drop this insight, and you have lost all that matters in Keynes’ analysis of the Great Depression in particular and, more generally, of capitalism’s tendency to stumble and fall on its face.”

Samuelson contributed to economics in the 1940s (in Varoufakis’ words) the formalist approach:

1) Identify all the endogenous variables connected to the phenomenon at hand.
2) Minimize the number of exogenous variables that explain the endogenous variables.
3) Model the determination of the endogenous variables in the context of some constrained optimization problem, which enables the analyst to perform comparative static analysis by means of the calculus of variations (in the manner of 1930s thermodynamics).

Samuelson sold Keynsianism encased in economic formalism to a US elite audience “seeking truth in mathematics (as opposed to using mathematics as a mere tool).” This economic formalism “exuded the confidence that economics is reducible to ‘closed’ mathematical models which leave nothing (except preferences) for history, philosophy, or the rest of social sciences to explain; and (in Samuelson’s hands) was sufficiently ‘liberal’ to pass for a non-ideological, impartial manual successfully incorporating (something resembling) Keynes’ thought within its mathematics.”

Introduced by Nash, Debreu, and Arrow in 1950, economic formalism involved three moves consistent with Samuelson’s approach:

1) Set aside the engineering approach according to which mathematics is used in order to model some actually occurring dynamic.
2) Focus instead on general theorems that prove the existence of states of rest (or equilibria) on the basis of given axioms.
3) Treat the proven theorems as the uniquely legitimate source of economic wisdom.

“Surely against his own intentions, Samuelson helped formalism establish a beachhead from which, soon after, the final assault on logical, humanist political economics would be launched with deadly precision,” states Varoufakis, who explains why and how. To make his mathematical General Equilibrium model work, Samuelson had to deny what Keynes observed. Where Keynes said that in a recessionary environment, a fall in the wage (interest rate) will not boost employment (investment), Samuelson’s mathematical model asserted the opposite as an axiom: both investment and employment will rise, ceteris paribus, if wages and interest rates fall. “The moment the post-war miracle hit a bump (caused by falling profitability and by the USA’s slide into threatening twin deficits, courtesy of the Vietnam War and LBJ’s Great Society),” economic formalism ditched any relationship with Keynesian liberalism and went conservative.

“From that moment onwards, economics was dominated by the unbearable lightness of the euphemistically named “rational expectations” hypothesis, the risible “efficient market” hypothesis, and all their derivative drivel. What was remarkable, and exquisitely saddening, was how quickly Samuelson’s former disciples discarded the great man’s single most searing memory of his youth: that unfettered capitalism produces crises that economists must tame, rather than assume away,” explains Varoufakis.

In related news, Dean Baker offers a hilarious joke I recommend for the office water cooler: “How many economists does it take to see an $8 trillion housing bubble?
Berkeley economist J. Bradford DeLong was and likely still is a virulent anticommunist liberal. But he’s found some new sources of ire as of late. Perhaps the small virtue of the present age is to disaggregate the left-liberals from the right-liberals. Here’s DeLong’s piece on what he’s learned over the past 3 years. Hint: “Macroeconomics should be banned.”

Varoufakis on the Limits of Probability Mathematics, Conservative Orthodox Economics

“In a masterpiece entitled Science and Method, Henri Poincaré had warned back in 1914: ‘Probability is the opposite of certainty; it is thus what we are ignorant of, and consequently it would seem to be what we cannot calculate. . . . Among the phenomena whose causes we are ignorant of, we must distinguish between fortuitous phenomena, about which the calculation of probabilities will give us provisional information, and those that are not fortuitous, about which we can say nothing, so long as we have not determined the laws that govern them.’ In short, no one can possibly claim to know the chances of a financial crash while ignorant of its underlying causes.

How then did the economists convince the world, and the Nobel committee, that they could estimate the probabilities of events that their models assumed away not just as improbable but, in fact, as untheorizable? The answer lies more in the realm of rhetoric and psychology than in economics itself: they relabeled ignorance and marketed it successfully as a form of provisional knowledge. For instance, when unemployment seemed stuck at, say, 5%, and economists had no plausible explanation to offer, they called it “the natural rate of unemployment.” No need to explain it — it was “natural”! Or when they could not explain the deviations of human behavior from their predictions (e.g. in laboratory experiments), they (a) labeled such behavior “out-of-equilibrium strategies” and then (b) assumed that such behavior is random and “explainable” in the manner physicists describe white noise.

This thinly veiled form of intellectual fraud (i.e. the whole of what passes today as modern economic analysis) provided the “scientific” fig leaf behind which Wall Street tried to hide the truth about its “financial innovations.” The basic truth that Poincaré had exposed being willfully ignored, the three decades that led us to the Crash of 2008 coincided with the rise of a Holy Trinity that permeated all economic wisdom: the Efficient Market Hypothesis (EMH), the Rational Expectations Hypothesis (REH), and the so-called Real Business Cycle Theory (RBCT): impressively marketed theories whose mathematical complexity succeeded for too long in hiding their feebleness. Let’s take a glancing look at each one:

EMH: Financial markets contrive to ensure that current prices reveal all the privately known information that there is. In effect, no one can systematically make money by second-guessing the market. Some market players overreact to new information, others underreact. Thus, even when everyone errs, the market gets it “right.”

REH: No one should expect a theory of human action to predict well in the long run if it presupposes that humans systematically misunderstand that very theory. Sounds good, doesn’t it? A bullet between the eyes of patronizing social theorists who believe that they are closer to the truth about your behavior and mine than we are. Ay, there is the rub, for behind the façade of an anti-patronizing hypothesis lies a seriously insidious assumption: when people predict some economic variable (e.g. inflation, wheat prices, the price of some share), their errors are random — untheorizable, unpatterned, uncorrelated.

It only takes a moment’s reflection to see that anyone espousing EMH and REH cannot possibly expect recessions, let alone crises. Why? Because recessions are systematic events. However surprising when they hit, they unfold in a patterned manner, each of its phases being highly correlated with what preceded it. So, how does a believer in EMH-REH respond when her eyes and ears scream to her brain: Recession, Crash, Meltdown? The answer is: by turning to RBCT for a comforting explanation. So, here it is:

RBCT: Taking EMH and REH as its starting point, the theory portrays capitalism like a well-functioning Gaia. Left alone it will remain harmonious and never go into a spasm (like that of 2008). However, it may well be “attacked” by some “exogenous” shock (coming from a meddling government, a wayward Fed, heinous trades unions, Arab oil producers, aliens, etc.) to which it must respond and adapt. Like a benevolent Gaia responding to a large meteor crashing into it, capitalism reacts efficiently to exogenous shocks. It may take a while for the shockwaves to be absorbed, there may be many victims on the way but, nonetheless, the best way of handling the crisis is letting capitalism get on with it, without being subjected to new shocks administered by self-interested government officials and their fellow travelers who pretend to be standing up for the common good.

In a sense, each of the three hypotheses is a different incarnation of a touching faith that markets know best, both at times of tranquility and in periods of crisis. You and I may think that this is just madness, but it is a lot more than that. At the political level it is the rationale behind powerful forces ranging from the Tea Party to the Bundesbank, from the UK coalition government’s self-imposed austerity to the austerity imposed upon the Greek government by the IMF-Eurozone-ECB troika. This dangerous self-delusion is founded on a hidden analytical bond: each tentacle of the EMH-REH-RBCT nexus presupposes that for the price of every different type of financial asset there exists (what statisticians refer to as) a unique sufficient statistic. One that the market converges toward, albeit in a noisy manner. But, as Poincaré knew, it is pure folly to presume that such unique statistics exist without first having established the laws that govern the determination of prices. And since in capitalist societies these laws are radically indeterminate, the very foundation of the EMH-REH-RBCT nexus is rotten to the core.

Anyone who brings a fresh pair of eyes to the EMH-REH-RBCT nexus should arrive very quickly at the firm conclusion that it is a childish theory upon which to found an analysis of capitalism. And yet it condemned a whole generation of economists to thinking of the most complex, disintegrated, precariously balanced period in the history of capitalism, the 1971-2008 period, as the era of an equilibrium-bound Gaia gallantly and successfully working out of its system all externally induced non-economic shocks.”

Varoufakis, Yanis. 2010. “The Econobubble Revisited.” MRZine, October 26.

Varoufakis continues on to describe how this piss-poor “science” was widely marketed because it supported the US’s post-1970 political-economic strategy of expanding budget and trade deficits, and paying for them with capital inflows from the rest of the world (see also Dumenil & Levy).

Luckily for us, Varoufakis is on a roll…

On Oct 23, 2010, Varoufakis gave a great radio interview with Doug Henwood on the current unfolding of the capitalist crisis.

On Oct 17, 2010, Varoufakis published (with a nod to Marx & more recently, Zizek) “First as History, Then as Farce: The Euro Crisis Revisited,” at MRZine.

Todd Henderson’s Argument Against Taxing the Rich

A response to economist J. Bradford DeLong’s commentary on Chicago law professor Todd Henderson’s argument against taxing the rich. Henderson argued that even though he and his wife make between $250,000 and $450,000 per year (depending on how you count it), they have such high expenses that they cannot afford some further luxuries or to pay more taxes. The conservative Chicago law prof’s argument was not well received in the blogosphere, but it was very revealing.

To DeLong & JayC (who complained about low economic literacy and class anger in the blogosphere responses to Todd Henderson): I find these comments on DeLong’s blog, however, fairly interesting. Elsewhere, there’s a lot of unpolished working class anger (unpolished because there are insufficient labor institutions to cultivate them), because most people endure excessive top-down class warfare. As the social epidemiologists observe, we are not a species that can well tolerate (psychologically or physically) high inequality.

Many commentators here, who have fairly good grasps of economics, insightfully point out that society should not be expected to fail to pay for scheduled, needed collective goods and services just to accommodate Henderson’s impecunious choices to incur large debts, forego collective services, and accrue huge assets and savings, as befits a man who is setting his standards only upon those of super-wealthy administrators and capital managers. DeLong’s point that Henderson’s is the psychology of entitlement that accompanies increasing inequality is very germane. It is why increasing inequality begets demands for further increasing inequality, and it is part of why increasing inequality leads to declining happiness. It is why capitalist societies, dedicated as they are to concentrated accumulation, need countervailing forces, such as progressive taxation at the very minimum.

One thing that most (but not all) economically-savvy commentators are overlooking, or unfamiliar with, is that in the context of rapidly increasing inequality, we have had rapidly increasing asset prices in the Anglo-speaking countries. Commentator Maynard Handley’s point about positional goods is spot-on and deserves emphasis: If the rich are not adequately taxed, they will use their excessive discretionary income to push up the price of positional goods. Consider further that under the inequality-fueled rapid expansion of positional goods prices, multiple market goods and services that once worked passably as socially-desirable investments transform rapidly into multiple horrible albatrosses (eg. very expensive educations and houses). A rational economic action turns into an irrational decision as inequality soars around you. Most people cannot respond by changing course fast enough because they don’t have access to a framework to explain what’s happening.

It’s not only the fact that he only looks “up” in his lifestyle aspirations and in his sense of entitlement, but also that Henderson’s conservative economic paradigm could not prepare him for this problem (he was expecting instead to twirl, twirl, twirl toward freedom) that is why he is such a terrible money manager–that is why he doesn’t see that his freedom is constrained by the free market, so that he needs to be making a harder set of either-or choices with how he spends his money. His money management problems are real and are characteristic at some level or another of those of many Americans. In the midst of the heady market triumphalism, and the ideology that each American generation would by the hand of Almighty Capitalism see material progress, there was no way that most people could step into a quiet corner and rationally calculate how impossible paying multiple, de-socialized, inflated asset costs would become, for example (Though cheers to those outliers who did! It must feel good to have been an iconoclast). For the most part, though, we’re only human. Social, social humans.

Our problem right now is that it is far, far too facile for conservatives who are trapped in the inequality cost-spiral treadmill to press for policy that simply greases the treadmill they’re already slipping on–to demand low taxes and the evisceration of non-military public, collective goods and services that support and limit the costs of non-elites’ biological and cultural reproduction within capitalism (as for example public health care does in other affluent countries). For all but the top .01%, low taxation exacerbates and does not solve money management problems.

Phillips on the Revisions to the CPI

The Numbers Racket: Why The Economy Is Worse Than We Know
By Kevin Phillips
13 May 2008
Harper’s Magazine

(For charts see this blog page or this blog page. The article can be found at, but you might need a membership to see it.)

If Washington’s harping on weapons of mass destruction was essential to buoy public support for the invasion of Iraq, the use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is.

The corruption has tainted the very measures that most shape public perception of the economy-the monthly Consumer Price Index (CPI), which serves as the chief bellwether of inflation; the quarterly Gross Domestic Product (GDP), which tracks the U.S. economy’s overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circumstances-inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences too. An administration is helped when it can mouth banalities about price levels being “anchored” as food and energy costs begin to soar.

The truth, though it would not exactly set Americans free, would at least open a window to wider economic and political understanding. Readers should ask themselves how much angrier the electorate might be if the media, over the past five years, had been citing 8 percent unemployment (instead of 5 percent), 5 percent inflation (instead of 2 percent), and average annual growth in the 1 percent range (instead of the 3-4 percent range). We might ponder as well who profits from a low-growth U.S. economy hidden under statistical camouflage. Might it be Washington politicos and affluent elites, anxious to mislead voters, coddle the financial markets, and tamp down expensive cost-of-living increases for wages and pensions?

Let me stipulate: the deception arose gradually, at no stage stemming from any concerted or cynical scheme. There was no grand conspiracy, just accumulating opportunisms. As we will see, the political blame for the slow, piecemeal distortion is bipartisan-both Democratic and Republican administrations had a hand in the abetting of political dishonesty, reckless debt, and a casino-like financial sector. To see how, we must revisit forty years of economic and statistical dissembling.

Two Views of Consumer Inflation

Sources: John Williams,
U.S. Bureau of Labor


The story starts after the inauguration of John F. Kennedy in 1961, when high jobless numbers marred the image of Camelot-on-the-Potomac and the new administration appointed a committee to weigh changes. The result, implemented a few years later, was that out-of-work Americans who had stopped looking for jobs-even if this was because none could he found-were labeled “discouraged workers” and excluded from the ranks of the unemployed, where many, if not most, of them had been previously classified. Lyndon Johnson, for his part, was widely rumored to have personally scrutinized and sometimes tweaked Gross National Product numbers before their release; and by the 1969 fiscal year, Johnson had orchestrated a “unified budget” that combined Social Security with the rest of the federal outlays. This innovation allowed the surplus receipts in the former to mask the emerging deficit in the latter.

Richard Nixon, besides continuing the unified budget, developed his own taste for statistical improvement. He proposed albeit unsuccessfully-that the Labor Department, which prepared both seasonally adjusted and non-adjusted unemployment numbers, should just publish whichever number was lower. In a more consequential move, he asked his second Federal Reserve chairman, Arthur Burns, to develop what became an ultimately famous division between “core” inflation and headline inflation. It the Consumer Price Index was calculated by tracking a bundle of prices, so-called core inflation would simply exclude, because of “volatility,” categories that happened to he troublesome: at that time, food and energy. Core inflation could he spotlighted when the headline number was embarrassing, as it was in 1973 and 1974. (The economic commentator Barry Ritholtz has joked that core inflation is better called “inflation ex-inflation“-i.e., inflation after the inflation has been excluded.)

I n 1983, under the Reagan Administration, inflation was further finagled when the Bureau of Labor Statistics decided that housing, too, was overstating the Consumer Price Index; the BLS substituted an entirely different “Owner Equivalent Rent” measurement, based on what a homeowner might get for renting his or her house. This methodology, controversial at the time but still in place today, simply sidestepped what was happening in the real world of homeowner costs. Because low inflation encourages low interest rates, which in turn make it much easier to borrow money, the BLS’s decision no doubt encouraged, during the late 1980s, the large and often speculative expansion in private debt-much of which involved real estate, and some of which went spectacularly bad between 1989 and 1992 in the savings-and-loan, real estate, and junk-bond scandals. Also, on the unemployment front, as Austan Goolsbee pointed out in his New York Times op-ed, the Reagan Administration further trimmed the number by reclassifying members of the military as “employed” instead of outside the labor force.

The distortional inclinations of the next president, George H.W. Bush, came into focus in 1990, when Michael Boskin, the chairman of his Council of Economic Advisers, proposed to reorient U.S. economic statistics principally to reduce the measured rate of inflation. His stated grand ambition was to move the calculus away from old industrial-era methodologies toward the emerging services economy and the expanding retail and financial sectors. Skeptics, however, countered that the underlying goal, driven by worry over federal budget deficits, was to reduce the inflation rate in order to reduce federal payments-from interest on the national debt to cost-of-living outlays for government employees, retirees, and Social Security recipients.

It was left to the Clinton Administration to implement these convoluted CPI measurements, which were reiterated in 1996 through a commission headed by Boskin and promoted by Federal Reserve Chairman Alan Greenspan. The Clintonites also extended the Pollyanna Creep of the nation’s employment figures. Although expunged from the ranks of the unemployed, discouraged workers had nevertheless been counted in the larger workforce. But in 1994, the Bureau of Labor Statistics redefined the workforce to include only that small percentage of the discouraged who had been seeking work for less than a year. The longer-term discouraged-some 4 million U.S. adults-fell out of the main monthly tally. Some now call them the “hidden unemployed.” For its last four years, the Clinton Administration also thinned the monthly household economic sampling by one sixth, from 60,000 to 50,000, and a disproportionate number of the dropped households were in the inner cities; the reduced sample (and a new adjustment formula) is believed to have reduced black unemployment estimates and eased worsening poverty figures.

Despite the present Bush Administration’s overall penchant for manipulating data (e.g., Iraq, climate change), it has yet to match its predecessor in economic revisions. In 2002, the administration did, however, for two months fail to publish the Mass Layoff Statistics report, because of its embarrassing nature after the 2001 recession had supposedly ended; it introduced, that same year, an “experimental” new CPI calculation (the C-CPI-U), which shaved another 0.3 percent off the official CPI; and since 2006 it has stopped publishing the M-3 money supply numbers, which captured rising inflationary impetus from bank credit activity. In 2005, Bush proposed, but Congress shunned, a new, narrower historical wage basis for calculating future retiree Social Security benefits.

By late last year, the Gallup Poll reported that public faith in the federal government had sunk below even post-Watergate levels. Whether statistical deceit played any direct role is unclear, but it does seem that citizens have got the right general idea. After forty years of manipulation, more than a few measurements of the U.S. economy have been distorted beyond recognition.

What Does “Unemployment” Mean?

Source: US Bureau of Labor Statistics


Transparency is the hallmark of democracy, but we now find ourselves with economic statistics every bit as opaque-and as vulnerable to double-dealing-as a subprime CDO. Of the “big three” statistics, let us start with unemployment. Most of the people tired of looking for work, as mentioned above, are no longer counted in the workforce, though they do still show up in one of the auxiliary unemployment numbers. The BLS has six different regular jobless measurements-U-1, U-2, U-3 (the one routinely cited), U-4, U-5, and U-6. In January 2008, the U-4 to U-6 series produced unemployment numbers ranging from 5.2 percent to 9.0 percent, all above the “official” number. The series nearest to real-world conditions is, not surprisingly, the highest: U-6, which includes part-timers looking for full-time employment as well as other members of the “marginally attached,” a new catchall meaning those not looking for a job but who say they want one. Yet this does not even include the Americans who (as Austan Goolsbee puts it) have been “bought off the unemployment rolls” by government programs such as Social Security disability, whose recipients are classified as outside the labor force.

Second is the Gross Domestic Product, which in itself represents something of a fudge: federal economists used the Gross National Product until 1991, when rising U.S. international debt costs made the narrower GDP assessment more palatable. The GDP has been subject to many further fiddles, the most manipulatable of which are the adjustments made for the presumed starting up and ending of businesses (the “birth/death of businesses” equation) and the amounts that the Bureau of Economic Analysis “imputes” to nationwide personal income data (known as phantom income boosters, or imputations; for example, the imputed income from living in one’s own home, or the benefit one receives from a free checking account, or the value of employer-paid health-and-life-insurance premiums). During 2007, believe it or not, imputed income accounted for some 15 percent of GDP. John Williams, the economic statistician, is briskly contemptuous of GDP numbers over the past quarter century. “Upward growth biases built into GDP modeling since the early 1980s have rendered this important series nearly worthless,” he wrote in 2004. “[T]he recessions of 1990/1991 and 2001 were much longer and deeper than currently reported [and] lesser downturns in 1986 and 1995 were missed completely.”

Nothing, however, can match the tortured evolution of the third key number, the somewhat misnamed Consumer Price Index. Government economists themselves admit that the revisions during the Clinton years worked to reduce the current inflation figures by more than a percentage point, but the overall distortion has been considerably more severe. Just the 1983 manipulation, which substituted “owner equivalent rent” for home-ownership costs, served to understate or reduce inflation during the recent housing boom by 3 to 4 percentage points. Moreover, since the 1990s, the CPI has been subjected to three other adjustments, all downward and all dubious: product substitution (if flank steak gets too expensive, people are assumed to shift to hamburger, but nobody is assumed to move up to filet mignon), geometric weighting (goods and services in which costs are rising most rapidly get a lower weighting for a presumed reduction in consumption), and, most bizarrely, hedonic adjustment, an unusual computation by which additional quality is attributed to a product or service.

The hedonic adjustment, in particular, is as hard to estimate as it is to take seriously. (That it was launched during the tenure of the Oval Office’s preeminent hedonist, William Jefferson Clinton, only adds to the absurdity.) No small part of the condemnation must lie in the timing. If quality improvements are to be counted, that count should have begun in the 1950s and 1960s, when such products and services as air-conditioning, air travel, and automatic transmissions-and these are just the A’s!-improved consumer satisfaction to a comparable or greater degree than have more recent innovations. That the change was made only in the late Nineties shrieks of politics and opportunism, not integrity of measurement. Most of the time, hedonic adjustment is used to reduce the effective cost of goods, which in turn reduces the stated rate of inflation. Reversing the theory, however, the declining quality of goods or services should adjust effective prices and thereby add to inflation, but that side of the equation generally goes missing. “All in all,” Williams points out, “if you were to peel back changes that were made in the CPI going back to the Carter years, you’d see that the CPI would now be 3.5 percent to 4 percent higher”-meaning that, because of lost CPI increases, Social Security checks would be 70 percent greater than they currently are.

Furthermore, when discussing price pressure, government officials invariably bring up “core” inflation, which excludes precisely the two categories-food and energy-now verging on another 1970s-style price surge. This year we have already seen major U.S. food and grocery companies, among them Kellogg and Kraft, report sharp declines in earnings caused by rising grain and dairy prices. Central banks from Europe to Japan worry that the biggest inflation jumps in ten to fifteen years could get in the way of reducing interest rates to cope with weakening economies. Even the U.S. Labor Department acknowledged that in January, the price of imported goods had increased 13.7 percent compared with a year earlier, the biggest surge since record-keeping began in 1982. From Maine to Australia, from Alaska to the Middle East, a hydra-headed inflation is on the loose, unleashed by the many years of rapid growth in the supply of money from the world’s central banks (not least the U.S. Federal Reserve), as well as by massive public and private debt creation.


The real numbers, to most economically minded Americans, would be a face full of cold water. Based on the criteria in place a quarter century ago, today’s U.S. unemployment rate is somewhere between 9 percent and 12 percent; the inflation rate is as high as 7 or even 10 percent; economic growth since the recession of 2001 has been mediocre, despite a huge surge in the wealth and incomes of the superrich, and we are falling back into recession. If what we have been sold in recent years has been delusional “Pollyanna Creep,” what we really need today is a picture of our economy ex-distortion. For what it would reveal is a nation in deep difficulty not just domestically but globally.

Undermeasurement of inflation, in particular, hangs over our heads like a guillotine. To acknowledge it would send interest rates climbing, and thereby would endanger the viability of the massive buildup of public and private debt (from less than $11 trillion in 1987 to $49 trillion last year) that props up the American economy. Moreover, the rising cost of pensions, benefits, borrowing, and interest payments-all indexed or related to inflation-could join with the cost of financial bailouts to overwhelm the federal budget. As inflation and interest rates have been kept artificially suppressed, the United States has been indentured to its volatile financial sector, with its predilection for leverage and risky buccaneering.

Arguably, the unraveling has already begun. As Robert Hardaway, a professor at the University of Denver, pointed out last September, the subprime lending crisis “can be directly traced back to the [1983] BLS decision to exclude the price of housing from the CPI. . .With the illusion of low inflation inducing lenders to offer 6 percent loans, not only has speculation run rampant on the expectations of ever-rising home prices, but home buyers by the millions have been tricked into buying homes even though they only qualified for the teaser rates.” Were mainstream interest rates to jump into the 7 to 9 percent range-which could happen if inflation were to spur new concern-both Washington and Wall Street would be walking in quicksand. The make-believe economy of the past two decades, with its asset bubbles, massive borrowing, and rampant data distortion, would be in serious jeopardy. The U.S. dollar, off more than 40 percent against the euro since 2002, could slip down an even rockier slope.

The credit markets are fearful, and the financial markets are nervous. If gloom continues, our humbugged nation may truly regret losing sight of history, risk, and common sense.

Underconsumption: Motive Force of Capitalist History

“Sweezy”, Bob Pollin writes, “was the most powerful Marxist exponent of underconsumptionism since Rosa Luxemburg. Keynes himself later embraced this as his analysis of the 1930s depression.

Underconsumption is the tendency in capitalist economies for the capitalists to produce more things than the people can afford to buy.

(This capitalist problem could be solved) through more income equality, and more social control over investment spending. But capitalists don’t like that solution.

Therefore, as Sweezy and Baran argued in Monopoly Capital, (capitalists) come up with alternative means of getting buyers for the things monopolist firms decide to produce: they get the military to spend, they induce spending through advertising, and they ride the wave of epoch-making innovations like the automobile (which brought public highway construction and government subsidized construction of the suburbs).”

–Alexander Cockburn, 2004. “Understanding the World with Paul Sweezy,” CounterPunch, March 6/7.