Two items in today’s news. The first is that the Comptroller of the City of Milwaukee proposed the privatization of Milwaukee Waterworks, the public utility that provides drinking water to the citizens of the city. Note: I am currently in the city doing research in the American Geographical Society Library at the University of Wisconsin, Milwaukee. The second piece of news is that General Motors is closer to bankruptcy as the company was unable to reach a deal with its bondholders to swap debt for equity. The federal government, unwilling to let the company sink into oblivion, will continue to prop it up. The federal government will end up owning almost 70 percent of the famous company.
Two very different government trends. On the one hand local government, loaded with debt, responds by selling assets, cutting budgets and laying off workers. On the other hand federal government, also loaded with debt, prints more money, spends money and makes major investments through the stimulus package.
The country is experiencing two very different policy responses to the economic crisis simultaneously. At the local and state level we are in the world promoted by the conservative economists--cut deficits and reduce spending. At the federal level we have a return to Keynesianism--never mind the deficit for the moment, just spend the damn money. So while I receive a tax credit from the feds, the State of Maryland cuts my wages.
It is proper to try a variety of policy responses to a major economic crisis. But should we be pursuing such contradictory aims? We are now in the confusing world of market economics doctrine at the local and state levels with Keynesian spending at the federal level. When we get out of the crisis, proponents of both policies will accept credit and assign blame to the other. The Keynesians will say that the recovery was hampered by the actions of state and local governments while the Republican right will point to the rash spending of the feds.
In an ideal world where thought experiments do not have social consequences, we could designate a few states to try the right wing policy and not accept any federal stimulus. In the real world, the governor of South Carolina, earlier this year in a bid to burnish his credentials for a Presidential run, initially refused any federal stimulus money. He was voted down by popular feeling that rightly put welfare before ideology.
The root of the paradox is the federal structure that is much lauded across the land but clearly has its limitations, nowhere more acutely than in the present crisis where one level spends while the other cuts. We have competing economic polices, and because we will be unable to fully test just one, the doctrines will remain untested. This competition will remain even after one worked and the other one didn’t. Since we are employing both at the same time, we will never really be sure which one works the best.
Wednesday, May 27, 2009
Monday, May 18, 2009
Five Lessons From The Economic Crisis
The economic crisis, as many have said, is too good an opportunity to waste. But what can we learn? Here are five things:
1. The financial services sector is bloated and inefficient. The market will correct some of the issues, such as those rating agencies more concerned with maintaining good relations with institutions than with adequate and risk assessment. Trust has been broken between many of the firms and institutions and will only be reestablished with better business practices in the market place. Now that everyone perceives the many under-assessed risk and over-promoted gains, returning back to the status quo is impossible. So self-reform will occur in the market.
2. Self-interest amongst financial institutions should ensure major changes, yet the sector is incapable of true self-regulation. They simply do not understand what’s best. They do not even know what’s right, what’s sound or in some cases what’s legal. So we now know that formal regulation is needed, necessary and long overdue.
3. The current systems of regulation are inadequate. The failure to identify the fraudulent Madoff enterprises despite many warnings and red flags indicate that the SEC basically failed. We need not only new regulations but also a new regulatory order with less cozy relations between the players and the regulators.
4. Economic deregulation as the dominant ideology has been dealt a deathblow--at least until the current interventionist mode is delegitimized. There have been three dominant economic ideologies in the US. At the beginning of the twentieth century, laissez faire capitalism held sway until the Great Depression rendered its underpinnings of limited government obsolete. The New Deal and Keynesian economics inaugurated a more interventionist government and mixed economy system. The stagflation of the 1970s forced a reassessment, and the election of Thatcher in UK and Reagan in the US reflected the political rise of a deregulated, minimal state. Opinion shifted to the right so that even New Labour and the Democrats boasted of cutting income taxes and of reducing the size of government. The latest economic crises have swept away the assumption that unfettered markets lead to untarnished growth. We are now at the beginnings of a new fourth era, one in which government has a larger and more central role in terms of both direct fiscal intervention and of greater regulation.
5. Our sense of time is affected. To live in period of sustained long-term economic growth makes it easy to believe in timely progress towards bigger and better and brighter things. All the pension funds, for example, are based on the assumption that investments will always just grow and grow. That linear sense of an upward trajectory is being replaced by a more circular sense of repeating cycles: our present condition is compared and contrasted with the Great Depression. Yet whether or not we are repeating or avoiding history is moot. What is not moot is that our confidence in a steadily increasing curve of growth and expansion is shattered. The future is now, but it is not the optimistic future we have been led to believe.
1. The financial services sector is bloated and inefficient. The market will correct some of the issues, such as those rating agencies more concerned with maintaining good relations with institutions than with adequate and risk assessment. Trust has been broken between many of the firms and institutions and will only be reestablished with better business practices in the market place. Now that everyone perceives the many under-assessed risk and over-promoted gains, returning back to the status quo is impossible. So self-reform will occur in the market.
2. Self-interest amongst financial institutions should ensure major changes, yet the sector is incapable of true self-regulation. They simply do not understand what’s best. They do not even know what’s right, what’s sound or in some cases what’s legal. So we now know that formal regulation is needed, necessary and long overdue.
3. The current systems of regulation are inadequate. The failure to identify the fraudulent Madoff enterprises despite many warnings and red flags indicate that the SEC basically failed. We need not only new regulations but also a new regulatory order with less cozy relations between the players and the regulators.
4. Economic deregulation as the dominant ideology has been dealt a deathblow--at least until the current interventionist mode is delegitimized. There have been three dominant economic ideologies in the US. At the beginning of the twentieth century, laissez faire capitalism held sway until the Great Depression rendered its underpinnings of limited government obsolete. The New Deal and Keynesian economics inaugurated a more interventionist government and mixed economy system. The stagflation of the 1970s forced a reassessment, and the election of Thatcher in UK and Reagan in the US reflected the political rise of a deregulated, minimal state. Opinion shifted to the right so that even New Labour and the Democrats boasted of cutting income taxes and of reducing the size of government. The latest economic crises have swept away the assumption that unfettered markets lead to untarnished growth. We are now at the beginnings of a new fourth era, one in which government has a larger and more central role in terms of both direct fiscal intervention and of greater regulation.
5. Our sense of time is affected. To live in period of sustained long-term economic growth makes it easy to believe in timely progress towards bigger and better and brighter things. All the pension funds, for example, are based on the assumption that investments will always just grow and grow. That linear sense of an upward trajectory is being replaced by a more circular sense of repeating cycles: our present condition is compared and contrasted with the Great Depression. Yet whether or not we are repeating or avoiding history is moot. What is not moot is that our confidence in a steadily increasing curve of growth and expansion is shattered. The future is now, but it is not the optimistic future we have been led to believe.
Sunday, May 10, 2009
The Myth of A Meritocracy
A recent “Letter from Washington” in The New Yorker profiles Obama’s Director of the Office of Management and Budget, Peter Orszag. Mostly a ponderous piece describing fairly Byzantine policy machinations, it does reiterate nevertheless a common assumption about Orszag’s rise to power. Pronounced throughout is the conviction that this climb is the result of sheer brilliance, just one more reflection of the US as meritocracy.
In the opening section of The New Yorker piece, Orszag's resume is listed: Exeter, Princeton, London School of Economics, Clinton White House. This article promotes this rather recognizable track as extraordinary, a feat of great intellectual achievement. Born and raised in Britain I take a different tack. I see Orszag as yet another privileged person following a well-connected circuit. Neither The New Yorker or indeed the many articles on the new Budget Director think it worthy to note that Exeter is a very elite school where fees are now almost $40,000 a year for boarders and a feeder school for top universities in the US. Neither does the article mention that Orszag’s father Steven Orszag was a professor at Princeton, yes the same Princeton that Orzag the son attended. So, if I get this right, this guy attends an incredibly expensive private school, goes on to an incredibly expensive elite private university where his Dad is a professor, and then uses his many connections to hustle up the Democratic hierarchy. This is not to say that Orszag is neither bright nor hardworking. There are lots of people with his background that do not end up as Budget Director. But there are also lots of hard working and bright people who do not end up as Budget Director.
What all the recent pieces on Orszag seem to share is an assumption of meritocracy: that where you get to in the US is through hard work and smarts. The unspoken contrast is with the old Europe with its supposed entrenched class and hierarchy where merit is not rewarded. In fact, as many recent studies attest, social mobility is not any greater in the US than in Western Europe. Now there are enough “outlier” narratives in the US--and of high profile outliers at that--take the cases of Clinton and Obama, for example, that tell of meteoric rises. These narratives feed the illusion that we live in a pure meritocracy. In fact the US is only mildly meritocratic. The best way to ensure success and wealth, in the US as in most countries, is to be born to successful and wealthy parents. And as long ago as 1956 C. Wright Mills reminded us of the dominating influence of what he called “the power elite”.
Wright’s ultimate conclusion of a permanent power elite was never popular in the US; it does not jibe with the ideology of an aspirational society or the bedrock of individualism that assumes we are where we are in the society because of our own efforts. Sadly, we are where we are largely through the accident of birth and fate. We are not prisoners of our life circumstances, but neither are we freed from them. Success does have a recipe: brilliance and hard work are the dough but the yeast that raises the dough is the added mix of being born to wealth and privilege with advantageous family connections.
In the opening section of The New Yorker piece, Orszag's resume is listed: Exeter, Princeton, London School of Economics, Clinton White House. This article promotes this rather recognizable track as extraordinary, a feat of great intellectual achievement. Born and raised in Britain I take a different tack. I see Orszag as yet another privileged person following a well-connected circuit. Neither The New Yorker or indeed the many articles on the new Budget Director think it worthy to note that Exeter is a very elite school where fees are now almost $40,000 a year for boarders and a feeder school for top universities in the US. Neither does the article mention that Orszag’s father Steven Orszag was a professor at Princeton, yes the same Princeton that Orzag the son attended. So, if I get this right, this guy attends an incredibly expensive private school, goes on to an incredibly expensive elite private university where his Dad is a professor, and then uses his many connections to hustle up the Democratic hierarchy. This is not to say that Orszag is neither bright nor hardworking. There are lots of people with his background that do not end up as Budget Director. But there are also lots of hard working and bright people who do not end up as Budget Director.
What all the recent pieces on Orszag seem to share is an assumption of meritocracy: that where you get to in the US is through hard work and smarts. The unspoken contrast is with the old Europe with its supposed entrenched class and hierarchy where merit is not rewarded. In fact, as many recent studies attest, social mobility is not any greater in the US than in Western Europe. Now there are enough “outlier” narratives in the US--and of high profile outliers at that--take the cases of Clinton and Obama, for example, that tell of meteoric rises. These narratives feed the illusion that we live in a pure meritocracy. In fact the US is only mildly meritocratic. The best way to ensure success and wealth, in the US as in most countries, is to be born to successful and wealthy parents. And as long ago as 1956 C. Wright Mills reminded us of the dominating influence of what he called “the power elite”.
Wright’s ultimate conclusion of a permanent power elite was never popular in the US; it does not jibe with the ideology of an aspirational society or the bedrock of individualism that assumes we are where we are in the society because of our own efforts. Sadly, we are where we are largely through the accident of birth and fate. We are not prisoners of our life circumstances, but neither are we freed from them. Success does have a recipe: brilliance and hard work are the dough but the yeast that raises the dough is the added mix of being born to wealth and privilege with advantageous family connections.
Friday, May 1, 2009
We are not all to blame
There is an article in today’s Washington Post by the columnist Michael Kinsley. Under the title "Where This Buck Stops", he tackles the torture issue. Under the guise of a critical thinking piece, 'I am not a mere journalist more a deep thinker' kind of piece, he ends up with the conclusion that "If you’re going to punish people for condoning torture, you’d better include the American citizenry itself”. We, the American people, it seems, are the real culprits. I must have had a hand in those torture memos from the Justice Department. Funny, I cannot remember doing that.
This is a recurring theme in sloppy op-ed pieces. They slide from specific issues--torture, the subprime fiasco, the financial meltdown--to the general conclusion that the real fault lies with us all. Baloney. This spurious argument, all the worse for pretending it is a profound analysis rather than a tired old argument, is wrong in two respects. First, we are not all responsible. We did not all write memos justifying torture, we did not all ok risky mortgages or all gamble shareholders savings in dubious enterprises. We are not equal actors in these dramas. There are specific people responsible for specific things and to make the ‘we are all to blame’ argument’ is to reassign blame from those responsible to the general public. Second, it rests on the mistaken assumption that since we are citizens of the country we have an equal part in making decisions. Citizens do not have the same degree of economic power and political access. The ‘we are all to blame argument’ works to make us believe that we all have equal shares, equal responsibility and hence equal culpability when things go wrong. No. Let’s have less blather parading as profound criticism and a sharper focus on who did what. That way we get a much better sense of the distribution of power and a more accurate understanding of the distribution of responsibility.
This is a recurring theme in sloppy op-ed pieces. They slide from specific issues--torture, the subprime fiasco, the financial meltdown--to the general conclusion that the real fault lies with us all. Baloney. This spurious argument, all the worse for pretending it is a profound analysis rather than a tired old argument, is wrong in two respects. First, we are not all responsible. We did not all write memos justifying torture, we did not all ok risky mortgages or all gamble shareholders savings in dubious enterprises. We are not equal actors in these dramas. There are specific people responsible for specific things and to make the ‘we are all to blame’ argument’ is to reassign blame from those responsible to the general public. Second, it rests on the mistaken assumption that since we are citizens of the country we have an equal part in making decisions. Citizens do not have the same degree of economic power and political access. The ‘we are all to blame argument’ works to make us believe that we all have equal shares, equal responsibility and hence equal culpability when things go wrong. No. Let’s have less blather parading as profound criticism and a sharper focus on who did what. That way we get a much better sense of the distribution of power and a more accurate understanding of the distribution of responsibility.
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