Hammering Home the Message of the Great Recession

It is hard to believe, but most people still don't understand what caused the Great Recession and many are advocating policies now that would simply prolong the suffering of the Great Recession. Here is a bit from a NY Time op-ed by Paul Krugman that walks us -- yet again -- through the facts. Hopefully this time people will listen:

The economic news has been better lately. New claims for unemployment insurance are down; business and consumer surveys suggest solid growth. We’re still near the bottom of a very deep hole, but at least we’re climbing.

It’s too bad that so many people, mainly on the political right, want to send us sliding right back down again.

Before we get to that, let’s talk about why economic recovery has been so long in coming.

Some economists expected a rapid bounce-back once we were past the acute phase of the financial crisis — what I think of as the oh-God-we’re-all-gonna-die period — which lasted roughly from September 2008 to March 2009. But that was never in the cards. The bubble economy of the Bush years left many Americans with too much debt; once the bubble burst, consumers were forced to cut back, and it was inevitably going to take them time to repair their finances. And business investment was bound to be depressed, too. Why add to capacity when consumer demand is weak and you aren’t using the factories and office buildings you have?

The only way we could have avoided a prolonged slump would have been for government spending to take up the slack. But that didn’t happen: growth in total government spending actually slowed after the recession hit, as an underpowered federal stimulus was swamped by cuts at the state and local level.

There is much more. Go read the original article. The tragic fact is that Krugman is a smart guy -- won a Nobel prize -- yet nobody in any administration listens to him. Instead Obama has put the very people who caused the economic mess back in charge. Why? Because they paid him good money. The Wall Street crowd has bought and paid for Obama just like the bought and paid for Bush, Clinton, the previous Bush, Reagan, Carter, Ford, Nixon, etc., etc. It is a very long story of corrupt politics.

Krugman has the right diagnosis of the problem and very clearly sees the threat posed by the Republicans and their "voodoo economics":

The clear and present danger to recovery, however, comes from politics — specifically, the demand from House Republicans that the government immediately slash spending on infant nutrition, disease control, clean water and more. Quite aside from their negative long-run consequences, these cuts would lead, directly and indirectly, to the elimination of hundreds of thousands of jobs — and this could short-circuit the virtuous circle of rising incomes and improving finances.

Of course, Republicans believe, or at least pretend to believe, that the direct job-destroying effects of their proposals would be more than offset by a rise in business confidence. As I like to put it, they believe that the Confidence Fairy will make everything all right.

Here is the tragedy of Republican economic nostrums:

Over the next few weeks, House Republicans will try to blackmail the Obama administration into accepting their proposed spending cuts, using the threat of a government shutdown. They’ll claim that those cuts would be good for America in both the short term and the long term.

But the truth is exactly the reverse: Republicans have managed to come up with spending cuts that would do double duty, both undermining America’s future and threatening to abort a nascent economic recovery.

It is amusing to watch other countries and civilizations walk the plank following a madman leader or in devotion to a crazed philosophy, but it is tragic to see the world around you distorted and crashing because the very people around you fall prey to idiotic economic "theories" and the corrupt and cynical manipulations of rich people more interested in their own pocketbook than the health of the overall society. Tragic.

Relevant to this topic is a January article in the UK's Guardian newspaper by Dean Baker. Here's the key bit:

Three months ago, I noted that the United States might benefit from the pain being suffered by the citizens of the United Kingdom. The reason was the new coalition government's commitment to prosperity through austerity. As predicted, this looks very much like a path to pain and stagnation, not healthy growth.

That's bad news for the citizens of the United Kingdom. They will be forced to suffer through years of unnecessarily high unemployment. They will also have to endure cutbacks in support for important public services like healthcare and education.

But the pain for the people in England could provide a useful example for the United States. After failing to see the $8tn housing bubble that wrecked the US economy, the austerity crew in the United States has been newly emboldened by the hugely partisan media that desperately want to eviscerate the country's bedrock social programmes: social security and Medicare.

The elite media and the politicians whom they promote would love to see the United States follow the austerity path of the UK's new government. However, if this path takes the UK into dangerous economic waters, it could provide a powerful warning to the public in the United States before we make the same mistake.

The British economy looks like it is doing its part. The fourth-quarter GDP report showing that the economy went into reverse and shrank at a 2.0% annual rate is exactly the sort of warning that many of us here were expecting. Weather-related factors may have slowed growth some, but you would have to do some serious violence to the data to paint a positive picture. Of course, the austerity in the UK is just beginning. There will likely be much worse pain to come, with a real possibility that the country will experience a double-dip recession, or at least a prolonged period of stagnation.

While the UK seems to be doing its part, the key question is whether anyone in the United States is prepared to take the lesson.

US House Prices: A Rollercoaster

The funny thing about those overpaid "financial engineers" of Wall Street: they built "risk models" to support their securitization of mortgages without bothering to actually gather any data. They extrapolated a brief 10 period run-up in prices into a story of eternal ever-rising house prices and therefore could justify giving out NINJA loans on the basis of renegotiating the mortgage every few years to extract more "value" out of the house as cash in the pocket of a generation turned into speculators. Here's the result:

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From an article in the Christian Science Monitor:

Some years back, Yale Professor Robert Shiller produced a long-run nominal home price index for the U.S. by fusing together data that had been gathered from a number of historical archives.

Shiller then adjusted the index for inflation revealing the very interesting fact that, in real terms, prices for U.S. homes changed very little over the span from 1890 to the mid-1990s.

This might come as a surprise to many since recent “common sense” notions held that homes were always a great investment carrying the implication that they must typically increase in value yet, the reality is that over the long run home prices must stay in-line with changes in the level of income (the source generally used to fund the home cost) or else typical households would not be capable of making a purchase.

Now as we are well aware, real home prices began to swell in the late 1990s reaching a peak in 2006 after having increased by over 80% nationally and even much more in some of the more frothy markets representing a massive and abrupt deviation from the long-run norm.

Since 2006 home prices have continually declined yet the current level is still significantly elevated over the level that had been typical for the 100 years prior to the bubble.

It is hard to believe but Wall Street pays these "financial engineers" salaries in the multiple hundreds of thousands (I'm guessing that with their "bonus" thrown in I would think they average around $400,000 a year and the real "hotshots" earned well over a million a year) and these "smartest guys in the room" didn't bother to do the research to find historical house prices and build models even remotely connected with reality. Instead they busily laid the foundations for the Great Recession and patted themselves on the back about their genius. Now everybody -- but them and their overpaid bosses in the Wall Street banks -- are paying the price for their egregious "smarts".

The tragedy is that nobody has been punished for this horror story. Consequently there is no inhibition to re-creating this same story in yet another bubble. Why would you bother to get a gun and rob the corner store when you can pocket millions and destroy an economy and walk away scot-free?

Singing All the Way to the Poorhouse

Merle Hazard is back with another "hit". A rendition of Simon & Garfunkel's "Feeling Groovy" updated to capture the Great Recession...



Nothing quite as sweet as singing one's way to the poorhouse...

Krugman on Wisconsin and the Republican Overreach

Here is a short post by Paul Krugman on his NY Times blog:

The Mandate Thing

A quick note on polling and voting: as more and more polls come out showing that the public does not, in fact, hate public workers and their unions, there’s been a stock answer — namely, that the real poll took place in November, so who cares what a thousand or so people say now.

Aside from the fact that this reveals a complete failure to understand the statistics of polling, what it really gets wrong is what the election represented. Voters were not, in fact, asked to vote on what Republican governors like Scott Walker are now trying to do; in a real sense what we’re seeing is a case of bait and switch.

And here again, I find myself flashing back to the Bush years. In 2004 Bush won a national election by posing as America’s defender against gay married terrorists; as soon as the election was done, he declared that this gave him a mandate to … privatize Social Security. Not so much, it turned out.

Of course none of this will stop Walker nor the Republicans. They are hired gunslingers for the ultra-rich like governor Walker's buddy David Koch. The hired hands don't quit until their bosses tell them to.

History in a Nutshell

If you look at the emergency of democracy in ancient Greece it was a fight against an entrenched aristocracy. That's exactly how modern democracies emerged. And ancient Greece's history is filled with tales of how aristocrats conspired and oligarchies or tyrants seized power back from democrats. The modern history of democracy mirrors this as well.

So here's a lesson in democracy in a nutshell:



History doesn't repeat itself, but it does rhyme. Wisconsin is our looking glass to peer into the tumult of ancient Greece. Will the people win, or will the oligarchical Republicans, the representatives of aristocratic wealth, win?

Amy Chua

I enjoyed the interview that Charlie Rose has with Amy Chua regarding her very misunderstood book Battle Hymn of the Tiger Mother. She was very clear that the book was not "how to do" but meant to be humourous and a memoir. Her opinions about child rearing struck me as rock solid, i.e. hold high expectations for your kids, but be willing to recognize that their personality may conflict with your wishes as a parent and the parent needs to adjust while still holding high expectations.

From a McLeans review of the book:

The book is peppered with funny, self- excoriating scenes of Chua’s extreme mothering. Chua acknowledges she has had doubts, but she never goes so far as to denounce Chinese parenting. “The results speak for themselves,” she says a few times. Her oldest daughter Sophia played piano at Carnegie Hall, while Lulu won a prodigy award for playing the violin. When Lulu finally breaks rank, the rebellion is a satisfying, American-style tantrum. Full sympathy goes to Jed, the Jewish husband, who tries to dial down his wife’s intensity.

By heaping scorn on Western parenting, Chua will raise ire and polarize readers. At her most pointed, Chua says, “Western parents . . . try to persuade themselves that they’re not disappointed about how their kids turned out” (page 50). In reaction, some readers will call her a heartless drill sergeant. Others will want her to raise their kids.

In the interview with Charlie Rose she makes clear she isn't really for the strict Chinese mothering. She wants "strict traditional" and kept pointing out that the "founding fathers of America" were raised in a strict traditional upbringing. The permissive style of raising kids is only roughly 30 years old. She makes clear she wants a blend of traditional with a tempered, caring style of upbringing. She even points out in the Charlie Rose interview that she rebelled from the "strict Chinese" style of upraising just as he daughter Lulu. So she gets it. The book is self-deprecating. Readers need to ease up and enjoy the irony and the self-mocking tone.

Cognitive Bias

From the British Medical Journal, an article entitled "How Cognitive Biases Affect Our Interpretation of Political Messages":

A recent study from the United States randomly allocated one of four versions of an authoritative news story about diabetes to people who had declared different political allegiances.3 Each story was identical except for how they described the cause of diabetes. One said nothing about the cause (the control), whereas the three others cited genes, individual lifestyle choices, and social determinants. They were then asked whether they agreed with two statements on the reason people get diabetes, one specifying social determinants and the other genes. Democrats were most likely to agree that social determinants were a cause, regardless of which version they read. Independents reading the version where social determinants were the cause were more likely to agree with this explanation than those who read the control story, but the social determinants version had no effect on Republicans’ views. Each group was then asked about collective actions to tackle diabetes, such as restrictions on junk food. Democrats reading the social determinants version were significantly more likely than controls to support action but Republicans were less so.

I find the above relevant because just last night I saw a poll on the US TV channel MSNBC that said that most Americans call themselves “conservatives” but 87% think that taxes should be raised on millionaires, 77% thought public servants should have the right to collective bargaining, etc. In other words, by wide margins they take “liberal” views that are left of even most of the Democratic party representatives in Congress. But they keep electing Republicans and Democrats are terrified of taking populist or liberal stands on political issues.

Wow... believe one thing but vote another way. And not even notice the dissonance between what you believe and the messages you show loyalty to. That sums up the Tea Party and a lot of other political "activists" in the US. It is tragic because it means their politics ends up disappointing them and they can't figure out what went wrong! Tragic.

Learn more about cognitive biases at Wikipedia.