July 23, 2016

Ministry of Plenty

Live Long and Prosper

On few matters over the centuries has
the human conscience been more amenable and
the human brain more resourceful
than in finding reasons why the rich and the fortunate
should live in comfortable coexistence with the poor.

(John Galbraith, The Affluent Society, 4th Ed, Penguin, 1984, p xxiv)

(Michael Kirk, President Trump, PBS Frontline, WGBH, 2017)

John Galbraith (1908–2006):
There are some economic lessons that are never learned.
One is the need for the most profound suspicion of innovation in matters concerning money and more generally the field of finance.
The thought persists that there must surely be some as yet undiscovered way of solving great social problems without pain, but the simple fact is that there is not.
Ingenious monetary and financial designs, without known exception, turn out to be, if not innocuous, then frauds on the public or, frequently, on their perpetrators themselves.
(p 99)

[The] pretension of economics that it is a science is firmly rooted in the need for an escape from blame for the inadequacies and injustices of the system with which the great classical tradition was concerned.
(p 125)

The most common qualification of the economic forecaster is not in knowing, but in not knowing that he does not know.
His greatest advantage is that all predictions, right or wrong, are soon forgotten. …
The modern economic system [survives] not because of the excellence of the work of those who forecast its future, but because of their supremely reliable commitment to error.
(p 4)

Thomas Robert Malthus [1766 – 1834], a British clergyman of aristocratic instinct … provided a powerful case against public or private charity and a greatly serviceable support to those who found it publicly convenient or personally economical to forgo help to the unfortunate. …
[Among] the many who sought to put the poverty of the poor on the shoulders of the poor — or remove it from those of the more affluent — none did so more completely than Malthus.
(A History of Economics, Penguin, 1987, pp 77 & 79)

When people are least sure they are often most dogmatic.
(The Great Crash 1929, Penguin, 1975, p 189)

John Locke (1632 – 1704):
The great and chief end of men uniting into commonwealths, and putting themselves under government, is the preservation of their property …
[Men] have agreed to a disproportionate and unequal possession of the earth …
[By] voluntary consent [they have] found out a way how a man may fairly possess more land than he can fairly use the product of, by receiving … the overplus of gold and silver, which may be hoarded up without injury to anyone.
(Second Treatise on Civil Government, 1689)

Heinrich Heine (1797 – 1856):
Money is the God of our time, and Rothschild is his prophet.
(March 1841)

Gary Becker (1930 – 2014):
All human behavior can be viewed as involving participants who:

  1. maximize their utility,
  2. form a stable set of preferences, and
  3. accumulate an optimal amount of information and other inputs in a variety of markets.

(Economic Approaches to Human Behavior, University of Chicago Press, 1976, p 14)

Alexander Hamilton (1756 – 1804):
Why has government been instituted at all?
Because the passions of men will not conform to the dictates of reason and justice without constraint.
(Federalist No 15 Papers, 17 September 1787)

Chuang Tzu:
What would become of business without a market of fools?
(4th century BCE)

P W Singer (1974):
For all the claims that “big government” can never match the private sector, [the Defence Advanced Research Projects Agency] is the ultimate rebuttal.
The Internet … e-mail, cell phones, computer graphics, weather satellites, fuel cells, lasers, night vision, and the Saturn V rockets [that first took man to the moon] all originated at DARPA. …
DARPA works by investing money in research ideas years before any other agency, university, or venture capitalists on Wall Street think they are fruitful enough to fund.
DARPA doesn’t focus on running its own secret labs, but instead spends 90% of its (official) budget of $3.1 billion on university and industry researchers …
(Wired for War, Penguin, 2009, p 140)

Niall Ferguson (1964):
The first era of financial globalization took at least a generation to achieve.
But it was blown apart in a matter of days.
And it would take more than two generations to repair the damage done by the guns of August 1914.
(The Ascent of Money, Penguin, 2008, p 304)

Andrew Carnegie (1835 – 1919):
  • Individualism,
  • Private Property,
  • the Law of Accumulation of Wealth, and
  • the Law of Competition
[are] the highest results of human experience [—] the best and most valuable of all that humanity has yet accomplished.

Peter Singer:
L Ron Hubbard [(1911 – 1986),] the founder of the Church of Scientology, once wrote that the quickest way to make a million in America is to start a new religion.
(How Are We to Live?, 1993, p 94)

Simone Campbell [Catholic Nun]:
[We were] doing business roundtables [with] some entrepreneur, CEO types. …
A report had just come out that that the average CEO … got $10 million in salary a year, and [that] they were going for $11 million.
I got to ask them:
Is it that you're not getting by on $10 million that you need $11 million?
I don't get it.
And this one guy said: …
Oh, no Sister Simone. …
It's not about the money. …
It's that we want to win.
And money just happens to be the current measure of winning.
(Krista Tippett, Becoming Wise, Corsair, 2016, p 129)

PBS Frontline:
There was a phrase — "ripping someone's face off" — that was used on the trading floor to describe when you sold something to a client who didn't understand it and you were able to extract a massive fee because they didn't understand it.
[This was seen as] a good thing because [you were] making more money for the bank.
[That] sort of spirit, of [acting against the best interests of] your client … took on significant life on Wall Street.
(Money, Power and Wall Street, 2012)

Kid Power Conference, Disney World:
Kids love advertising: it's a gift — it's something they want.
There's something to said … about getting there first, and about branding children and owning them in that way. …
In boy's advertising, it is an aggressive pattern [—] antisocial behavior in pursuit of a product is a good thing.

Alexis de Tocqueville (1805–1859):
The people may always be mentally divided into three distinct classes.
  • The first of these classes consists of the wealthy;
  • the second, of those who are in easy circumstances; and
  • the third is composed of those who have little or no property, and who subsist more especially by the work which they perform for the two superior orders.
(Democracy in America, 1835, Bantam, 2011, p 246)

William Sumner (1840 – 1910):
[Millionaires] are a product of natural selection … the naturally selected agents of society for certain work.
They get high wages and live in luxury, but the bargain is a good one for society.
(The Challenge of Facts and Other Essays, Albert Keller, Editor, Yale University Press, 1914, p 90)

John Quiggin [Professor of Economics, Queensland University]:
[In the 1970s, those economists] who wanted to restore the pre-Keynesian purity of classical macroeconomics … became known as the New Classical school.
Their key idea was what they called "rational expectations," which, in its strongest form, required all participants in an economy to have, in their minds, a complete and accurate model of that economy.
John Muth (1930 – 2005):
[Rational expectations are] those that agree with the predictions of the relevant economic model.
(p 94)

[New Classical economics] reproduces the classical conclusion:
  • that government intervention cannot improve macroeconomic performance and
  • that, in the absence of such intervention, the economy will rapidly adjust to economic shocks, returning quickly to its natural equilibrium position.
(p 96)

The top four hundred income earners [in the US] paid average tax rates below 20% in 2007, a fact symbolized by Warren Buffett's observation that he paid a lower rate of tax than his secretary.
(Zombie Economics, Princeton University Press, 2012, p 142)

Breakdown of the Top 1% by Income (2012)
Percentile% of Total Income% of Total Income Tax

The Anatomy of the One Percent

Adrian Dungan

For 2012, the [US Adjusted Gross Income (AGI)] threshold for:
  • [The] top 0.001% of tax returns [was] $62,068,187 or more [≈ $170,000 per day or 1700 times median income.]
    These taxpayers accounted for 2.4% of total AGI, and paid 3.3% of total income tax.
  • The top 0.01% of tax returns [was] $12,104,014 or more [≈ $33,000 per day or 330 times the median income.]
    These taxpayers accounted for 5.5% of total AGI, and paid 8.3% of total income tax.
  • [The top 0.1% of tax returns [was] $2,161,175 or more [≈ $6,000 per day or 60 times the median income.]
    These taxpayers accounted for 11% of total AGI, and paid 18.6% of total income tax.]
  • The top 1% of tax returns [was] $434,682 or more [≈ $1200 per day or 12 times median the income.]
    These taxpayers accounted for 21.9% of total AGI and paid 38.1% of total income tax.
  • [The] top 50% of all tax returns was $36,055 for the year [≈ $100 per day = median income.]
    These taxpayers accounted for 88.9% of total AGI and paid 97.2% of total income tax.

(Individual Income Tax Shares, 2012, IRS Statistics of Income Bulletin, Spring 2015)


  • This is equivalent to the wealthiest individual in a group of 100 being paid twice as much as the poorest 50 combined.
  • The richest 1/100,000 part of the population captures a 1/40 share of aggregate income.
  • Each of the richest 1 in 100,000 accrues the lifetime median income (~50 years) every 10 days.
  • Conversely, a person (and their descendents) on the median income would need to work for 17 centuries (or 34 working lifetimes) to earn as much as the richest 1 in 100,000 get in a single year.
  • By definition, half the population earn less than the median income.
  • In 2005, 40% the global population (2.6 billion people) were living on less than $2 per day.

Bertrand Russell (1872-1970)

[Private economic] power within a State … can influence
  • [the] law by corruption and
  • public opinion by propaganda.
It can put politicians under obligations which interfere with their freedom.
It can threaten to cause a financial crisis.
But there are very definite limits to what it can achieve. …

[Where] the issue is simple and public opinion is definite, the plutocracy is powerless …
[Where] public opinion is undecided, or baffled by the complexity of the issue, the plutocracy can secure a desired political result. …

[The plutocracy has hitherto] been unable to
  • introduce Asiatic labour in California or Australia, except in [the] early days in small numbers. …
  • destroy trade unionism …
  • avoid heavy taxation of the rich [or]
  • prevent socialist propaganda. …

[The trade unions, for their part,] have failed … to keep in power governments which they liked but which a majority of the nation distrusted.

[The] power of economic organisations to influence political decisions in a democracy is limited by public opinion, which, on many important issues, refuses to be swayed even by very intensive propaganda.
Democracy, where it exists, has more reality than many opponents of capitalism are willing to admit.

(Power: A New Social Analysis, 1938, pp 85-6, emphasis added)

Herbert Spencer (1820 – 1903)

I am simply carrying out the views of Mr Darwin in their applications to the human race …
Only those who do advance under [the pressure imposed by the system| eventually survive …
[These] must be the select of their generation.
(The Study of Sociology, 1882)

Partly by weeding out those of lowest development, and partly by subjecting those who remain to the never-ceasing discipline of experience, nature secures the growth of a race who shall both understand the conditions of existence, and be able to act up to them.
It is impossible in any degree to suspend this discipline.
(Social Statics, 1878)

The function of Liberalism in the past was that of putting a limit to the powers of kings.
The function of true Liberalism in the future will be that of putting a limit to the powers of Parliaments.
(The Man Versus the State, 1884)

John Galbraith (1908 – 2006)

[The] influence and power [of the modern business firm extends] to politicians, Presidents and the Pentagon. …
[This power] is much enjoyed, and its economic and political exercise can also be pleasingly remunerative.
Nothing serves it better than [an economic] theology that disguises its exercise. …
[Nonetheless,] the service that economists render to the disguise of power in their writing and teaching is more often the result of catatonic expression than of any deliberate or wilful motivation.
(p xv)

Inflation is an endemic tendency of the modern economy, which monetary policy attempts to control by high interest rates.
Given the persistent character of inflation, a reliance on monetary policy means that interest rates will be persistently high. …
And, since those who lend are likely to have more money than those who borrow or have nothing to lend, also a strikingly evident matter, the policy clearly favors those of established affluence.
From this comes the popularity of monetary policy in the financial world — its popularity with those who are or who speak for the affluent. …
[Unsurprisingly] those who urge an aggressive monetary policy are conveniently exempt from the unemployment and other misfortunes that it produces.
(p xxi)

[There] has been the shift in political power to the affluent.
This has led those so favored to try to contract out from the cost of those public services of primary importance to the poor — from the cost of public schools, police, public libraries, parks, public recreational facilities, public transportation.
Instead, through private purchase, the affluent provide these services for themselves in the form of private education, personal security guards, private recreational facilities and private transportation.
Deep moral indignation over the invasion of liberty by taxes coupled with grave complaints about the inefficiency of government have extensively supported this change.
(p xxiii)

A self-serving branch of moral philosophy has been devised to defend the right of the affluent to freedom of choice [while neglecting to mention] the way bad public services (like the absence of income itself) abridge the freedom of the poor.
(p xxiv)

The line which divides our area of wealth from our area of poverty is roughly that which divides privately produced and marketed goods and services from publicly rendered services.
[Our] wealth in privately produced goods is, to a marked degree, the cause of crisis in the supply of public services.
For we have failed to see the [the urgent need to] maintaining a balance between the two.
(p 190)

[For] Herbert Spencer and his American disciples in the last century, the Social Darwinists, poverty is the socially therapeutic tendency that eliminates the unfit.
[This secular] instinct for Social Darwinism still lurks in our time [accompanied by a] fundamentalist theology that holds that property is God's natural reward for the worthy.
The poor, meanwhile, have the comfort of knowing they … will pass [more] easily into the next world to enjoy, along with the meek, full compensation for the miseries of this existence.
The relevant and supporting texts and sermons are amply available from the religious broadcasters and the Moral Majority.
(p xxvi)

(The Affluent Society, 4th Ed, Penguin, 1984)

By showing that the rich were the naturally selected products of the Darwinian process, Herbert Spencer … relieved those so endowed of all sense of guilt and made them understand that they were, instead, the incarnation of their own biological excellence.
And he had also removed all feelings of obligation and concern as regards the poor.
However cruel their euthanasia, it served the higher purpose of human improvement as a whole.
(p 164)

In Europe the division between privilege and impoverishment was by classes; in the United States it was by individuals — the rich and self-reliant and below them the ragged fringe.
There could be a Darwinian selection of individuals, a Darwinian euthanasia of the fringe, but not so obviously of an entire class.
(p 165)

Spencer and his prophets were the supreme achievement in the defense of the great American rich in the years after the Civil War.
(p 166)

(A History of Economics, Penguin, 1987)

Ha Joon Chang (1963)

Reader in Political Economy and Development, Cambridge University

[Nineteenth century 'classical' liberals rejected] the conservative view that tradition and social hierarchy should have priority over individual rights.
[On the other hand, they] believed that not everyone was worthy of such rights.
They thought women lacked full mental faculties and thus did not deserve the right to vote.
They also insisted that poor people should not be given the right to vote, since they [feared that] the poor would vote in politicians who would [redistribute wealth. …]

[Twentieth century neo-liberals, by contrast,] do not oppose democracy [in principle.]
[In practice, however, many would be prepared where necessary to] sacrifice democracy [in the defense of] private property and the free market.

(Economics: The User's Guide: A Pelican Introduction, 2014, emphasis added)

Freedom Without Justice

Richard Tawney (1880 – 1962):
Freedom for the pike is death for the minnows.
(Equality, 3rd Ed, 1938)

It is not till it is discovered that high individual incomes will not purchase the mass of mankind immunity from cholera, typhus, and ignorance, still less secure them the positive advantages of educational opportunity and economic security, that slowly and reluctantly, amid prophecies of moral degeneration and economic disaster, society begins to make collective provision for needs no ordinary individual, even if he works overtime all his life, can provide himself.
(Equality, 4th Ed, Allen & Unwin, 1952, pp 134–5)

Isaiah Berlin (1909 – 1997):
[Total] liberty for wolves is death to [lambs.]
[Total] liberty of the powerful [and] the gifted, is not compatible with the rights to a decent existence of the weak and less gifted. …
Equality may demand the restraint of the liberty of those who wish to dominate … in order
  • to make room for social welfare,
  • to feed the hungry,
  • to clothe the naked,
  • to shelter the homeless,
  • to leave room for the liberty of others, [and]
  • to allow justice or fairness to exercised.
(The Pursuit of the Ideal, The Crooked Timber of Humanity: Chapters in the History of Ideas, 1990)

Thomas Jefferson (1743-1826):
Under pretence of governing, they have divided their nations into two classes:
  • wolves and
  • sheep.
Experience declares that Man is the only animal that devours its own kind.
For I can apply no milder term to the governments of Europe.
And to the general prey of the rich [upon] the poor.
(Letter to Colonel Edward Carrington, 16 January 1787)

Karl Popper (1902 – 1994):
[The] paradox of freedom, first discovered by Plato, … can be expressed by saying that unlimited freedom leads to its opposite, since without its protection and restriction by law, freedom must lead to a tyranny of the strong over the weak.
This paradox … was solved by Kant, who demanded that the freedom of each man should be restricted, but not beyond what is necessary to safeguard an equal degree of freedom for all.
(The Open Society and Its Enemies, 5th Ed, 1966, Routledge, pp 257-8)

Tony Benn (1925-2014):
[Real choice] depends on the freedom to choose, and if you're shackled with debt, you don't have the freedom to choose. …
[If] the poor in Britain or the United States turned out and voted for people who represented their interests, it would be a real democratic revolution. …
[There] are two ways in which people are controlled:
  • first of all, frighten people; and
  • secondly, demoralize them.
An educated, healthy and confident nation is harder to govern. …
The top 1% of the world's population own 80% of the world's wealth.
It's incredible that people put up with it.
But they're poor, they're demoralized, they're frightened.
And therefore they think: perhaps the safest thing to do is [just] to take orders and hope for the best.
(Michael Moore, Sicko, 2007)

Milton Friedman (1912–2006):
[The] Great Depression was not a failure of capitalism.
It was not a failure of the private market system …
It was a failure of government.
(Who Protects the Worker?, Free to Choose, Episode 8, PBS, 1980)

Unfortunately that failure did not end with the Great Depression.
Ever since, government has been attempting to fine-tune the economy.
In practice, just as during the Depression, far from promoting stability, the government itself has been the major single source of instability.
(Anatomy of a Crisis, Free to Choose, Episode 3, PBS, 1980)

George W Bush (1946):
We're faced with a prospect of a global meltdown. …
It's true this crisis includes failures
  • by lenders and borrowers, and
  • by financial firms and independent regulators,
but the crisis was not a failure of the free market system.
(The G20, Rear Vision, ABC Radio National, 2 November 2014)

Mark Blyth (1967)

[Milton Friedman] assumed that unemployment was voluntary and was not due to a deficiency [in the demand for labor.]
People [voluntarily trade off leisure against labor according to] the prevailing wage.
There is no [such thing as Keynesian] demand-deficient unemployment in Milton's world.
In other words, the 25% of Spaniards who are presently without work [have simply made a rational decision not to] work at the prevailing wage [— freely choosing, instead, to go] on vacation.
(p 153)

[By this logic, the Great Depression was] a giant, unexpected, and astonishingly long unpaid vacation for millions of people …
(p 159)

[Likewise, Joseph Schumpeter] argued that the Great Depression was neither great nor depressing.
Rather, it was just a particularly marked transitional period of technological and organizational change …
(p 129)

(Austerity, 2013)

Milton Friedman (1912 – 2006)

Swedish National Bank's Prize in Economic Sciences in Memory of Alfred Nobel (1976)

If you promote freedom … you will end up … with both
  • more freedom,
  • more prosperity, and
  • more equality. …
[But] if I were wrong, if freedom led to wider inequality, I would [still] prefer that to a world in which I got artificial equality at the expense of [natural] freedom.
[My] God … is freedom. …

For much of this century the British have tried, [and failed,] to use the law to impose equality …
The drive for equality [failed because it] goes against the most basic instinct of all human beings.
In the words of Adam Smith:
The uniform, constant, and uninterrupted effort of every man to better his condition; to improve his own lot and to make a better world for his children and his children's children. …
The growth of crude criminality in Britain … owes much to the drive for equality …
Who can doubt [that] the effect that the drive for equality has had on efficiency and productivity … is one of the main reasons why Britain has fallen so far behind … other countries in the improvement of the economic lot of the ordinary man over the past 30 years. …
If you ask, where in the world to people have the greatest opportunity for them and their children? … it's in places like the United States

The society that puts equality before freedom will end up with neither. …
[You] get greater equality of actual results by a system under which people are free to achieve unequal results. …
[In] this world, the greatest source of inequality has been special privileges granted by government. …
Everywhere, and at all times, economic progress has meant far more to the poor than to the rich.
Wherever progress has been achieved, it has relieved the poor from back-breaking toil …

The inheritance of talent is no different, from an ethical point of view, from the inheritance of other forms of property: of bonds, of stocks, of houses, or of factories — yet many people resent the one but not the other. …
(Created Equal, Episode 5)

[The] capitalist system … in the 19th century did a far better job of expressing … compassion than the governmental welfare programs are today.
The 19th century … was the period of the the greatest outpouring of … charitable activity the world has ever known.
And one of the things I hold against the welfare system most seriously, is that it has destroyed private charitable arrangements that are far more effective [in helping people] in disadvantaged situations.
(From Cradle to Grave, Episode 4)

The strongest argument for free enterprise is that it prevents anybody from having too much power …

I'm not in favor of no government intervention, I never have been. …
The question is, what kind of intervention?

I agree … that the more homogeneous a country, the less harm a government will do by intervening.
I don't believe it does positive good; I just simply believe it does less harm.

… I am in favor of the [antitrust] laws that make agreements and restraint of trade illegal.
[However, most] of the antitrust apparatus has promoted monopoly instead of hindered monopoly.
If you look are where there are monopolistic elements in the world … in almost every case [it] derives from a special grant by government.
And, therefore, the problem is not: how does government enforce competition, [but] how do you keep government from setting up monopolies? …
The responsibility [of government] is to set a system of laws … under which competition will flourish …

I don't know of any case, in history, in which monopolies have been able to maintain themselves for very long, without having government assistance directly come in on their side.
The trade union monopolies … would never have the kind of power they do now if it weren't for the special privileges which government has granted to them …
[Antitrust action by the government is really] pro-monopoly action — in the main.
(The Tyranny of Control, Episode 2)

[Some stimulus] measures may have been useful, and indeed needed during the depression years …
(Anatomy of a Crisis, Episode 3)

The people who get on welfare lose their … feeling of dignity. …

Suppose you were cruel, and simply took away [a recipient's] welfare overnight — cut it off — what would happen?
He would find a job.
What kind of job?
I don't know.
It might not be a very nice job. …
But at some wage, at some level of pay, there will always be job which he could get for himself.
It might be also that he would be driven to rely on some private charity; he might have to get soup kitchen help or the equivalent.
[I'm] not saying that that's desirable … but as a matter of actual fact as to what would happen, there is little doubt that he would find some way to earn a living. …

Nobody spends someone else's money as carefully as his own.
Nobody has the same dedication to achieving someone else's objectives that he displays when he pursues his own.
[Active labor market programs] have a insidious effect on the moral fibre of both the people who administer the programs and the people who are supposedly benefiting from it.
  • For the people who administer it, it instils in them a feeling of almost God-like power.
  • For the people who are supposedly benefiting, it instils a feeling of child-like dependence.
    Their capacity for personal decision making atrophies.
[These programs] tend to rot away the very fabric that holds a decent society together. …

[Government] money always corrupts …

The … least bad solution that I have ever been able to devise is … the negative income tax. …
[It's] a system [that] would have the effect of eliminating the separation of the society into
  • those who receive and
  • those who pay,
a separation that tends to destroy the whole social fabric. …

We have surrendered power to government.
Nobody has taken it from us.
Its our doing.
The results:
  • monumental government spending, much of it wasted;
  • little of it going to the people we would like to see helped;
  • burdensome taxes;
  • high inflation;
  • a welfare system under which neither those who receive help nor those who pay for it are satisfied.
Trying to do good with other people's money simply has not worked.
(From Cradle to Grave, Episode 4)

There is no place for government to prohibit consumers from buying products the effect of which will be to harm themselves.
There is [only] a place for government to protect third parties. …
There is a role for government in pollution. …
That is a case in which you are protecting third parties. …
There is a case for requiring brakes because that's to protect the person you might hit.
[But,] there's no case for requiring an airbag …
(Who Protects the Consumer?, Episode 7)

The people most discriminated against by a high minimum wage rate are people with low skills, which includes a disproportionate number of negros.
Indeed, I have long believed that the minimum wage rate is the most anti-negro piece of legislation on our statute books …

Unions have never accounted for one out of four or one out of five of American workers.
The American worker benefited not out of unions, he benefited in spite of unions. …
[In] so far as unions have played a role, they [have] protected some workers at the expense of others and [have] retarded the prosperity of this country. …
The plain fact is, that there is no evidence whatsoever, that either unions or minimum wages have made positive contributions to the prosperity of this country [as a whole.]
(Who Protects the Worker?, Episode 8)

(Free to Choose, PBS, 1980)

Consider a group of individuals who initially have equal endowments and who all agree voluntarily to enter a lottery with very unequal prizes.
The resultant inequality of income is surely required to permit the individuals in question to make the most of their initial equality.
Redistribution of the income after the event is equivalent to denying them the opportunity to enter the lottery. …
[By analogy, individuals] choose occupations, investments, and the like partly in accordance with their taste for uncertainty. …

[The] economic progress achieved in the capitalist societies has been accompanied by a drastic diminution in inequality. …

The methods that governments have used most widely to alter the distribution of income have been graduated income and inheritance taxation. …
My impression is that [the current high and highly graduated nominal tax rates (20-91%)] have had a relatively minor, though not negligible, effect in the direction of narrowing the [income] differences between the average position of groups of families …
[Though, if] present tax rates were made fully effective, the effect on incentives and the like might well be so serious as to cause a radical loss in the productivity of the society.
Tax avoidance may therefore have been essential for economic well-being. …

I find it hard, as a liberal, to see any justification for graduated taxation solely to redistribute income.
This seems a clear case of using coercion to take from some in order to give to others and thus to conflict head-on with individual freedom.

All things considered, the … tax structure that seems to me best is a flat-rate tax [eg 23.5% on total personal income (labor and capital); combined] with the abolition of the corporate income tax [coupled with a] requirement that corporations … attribute their income to stockholders …

[Such a flat rate] would yield a higher revenue because a larger amount of taxable income would be reported for three reasons:
  • there would be less incentive than now to adopt legal but costly schemes that reduce the amount of taxable income reported (so-called tax avoidance);
  • there would be less incentive to fail to report income that legally should be reported (tax evasion);
  • the removal of the disincentive effects of the present structure of rates would produce a more efficient use of present resources and a higher income. …

Much of the actual inequality derives from imperfections of the market.
Many of these have themselves been
  • created by government action or
  • could be removed by government action.
There is every reason to adjust the rules of the game so as to eliminate these sources of inequality.
For example, special monopoly privileges granted by government, tariffs, and other legal enactments benefiting particular groups, are a source of inequality.

(Capitalism and Freedom, 1962)

July 13, 2016

Tom Switzer

Blue Army: Persons of Interest

Dwight Eisenhower (1890 – 1969) [6 October 1952]:
Neither a wise man or a brave man lies down on the tracks of history to wait for the train of the future to run over him.
(Adriana Bosch, Eisenhower, PBS American Experience, WGBH, 1993)

Friedrich von Schiller (1759 – 1805):
Against stupidity
The Gods themselves
Contend in vain

Tom Switzer (1971):
[Malcolm Turnbull] needs a new model of governance that sidesteps an obstructionist and riff-raff Senate.
The side that picks the issues dominates the political debate, and the advantage lies with the Bully Pulpit if the Prime Minister will use it.
Why not call on the states to ditch the politically correct Safe Schools [anti-bullying] program?
Or encourage Muslim leaders to assimilate to Western cultural norms?
The culture-war list is endless, and it would resonate with what [John Howard] once called:
The decent conservative mainstream of Australia.
(PM must play the Right card, The Age, 11 July 2016, p 16)

The Wrong Side History

Tom Switzer:
I'm joined by [Nigel Lawson] the chairman of The Global Warming Policy Foundation
[Nigel, do] you think there will come a time when historians will look back at the past decade or so and say that this climate hysteria reached its peak and rational debate was at its most restricted and politicians at their most gullible?

Nigel Lawson:
Yes, I think that this will be seen … as one of these outbreaks of collective madness which happen from time to time …
(New climate deal faces hurdles, Between The Lines, ABC Radio National, 21 May 2015)

Tom Switzer:
[Patricia Adams is the author of a recent report from] The Global Warming Policy Foundation in London. …
[Patricia, there are those that] insist that climate change represents such a grave threat to humanity … that the world has no choice but to … end fossil fuels entirely.
Is history on their side?

Patricia Adams:
No, it's not on their side.
Countries that have developed in the last 200 to 300 years have done so because of the use of fossil fuels.
Fossil fuels have empowered our economies:
  • to raise standards of living, [and]
  • to provide jobs for people.
The key … is to use fossil fuels cleanly. …
And when I say cleanly, I mean to get rid of the emissions that come out of them that kill people …
CO2 is not a killer. …
I don't think CO2 is as dangerous as some of the other forms of energy.
It may be a problem, we have to keep a watch on it, but I don't think that it solves any problem by saying we've got to eliminate fossil fuels:
  • [firstly, it's not] going to happen … certainly not in [the] foreseeable future [and]
  • [secondly,] what about the alternatives that are being proposed?
    They also cause environmental problems …
[The Paris climate change agreement is just] a cash-grab … by the developing countries. …
(Is China really showing 'leadership' on tackling climate change?, Counterpoint, 31 October 2016)

Freeman Dyson [Academic Advisor, Global Warming Policy Foundation]:
[The problems caused by global warming] are being grossly exaggerated.
They take away money and attention from other problems that are much more urgent and important.
Poverty, infectious diseases, public education and public health.
Not to mention the preservation of living creatures on land and in the oceans.
(Commencement Address, University of Michigan, Winter 2005)

[The] environmental movement [has been] hijacked by a bunch of climate fanatics, who have captured the attention of the public with scare stories. …
China and India have a simple choice to make.
Either they get rich [by burning prodigious quantities of coal and causing] a major increase of atmospheric carbon dioxide, or they stay poor.
I hope they choose to get rich. …
The good news is that the main effect of carbon dioxide … on the planet is to make [it] greener, [by] feeding the growth of green plants of all kinds [and] increasing the fertility of farms and fields and forests.
(Misunderstandings, questionable beliefs mar Paris climate talks, Boston Globe, 3 December 2015)

Miranda Devine:
Environmentalism is the powerful new secular religion and politically correct scientists are its high priests …
It used to be men in purple robes who controlled us; soon it will be men in white lab coats.
The geeks shall inherit the earth.
(John Quiggan, Innovation: the test is yet to come, Inside Story, 10 December 2015)

Peter Van Onselen [Associate Professor in Politics and Government, Edith Cowan University; Contributing Editor, The Australian]:
[According to Miranda Devine, the Delcons (Delusional Conservatives) believe] the Liberals should lose the election.
[That] it's better for the Liberals to lose to Labor.
And there is a candle being held to the possibility of a Tony Abbott comeback. …
Andrew Bolt decided he was one …
Nick Cater from the Menzies Research Centre …
[Tom Switzer's] definitely a Delcon.
(Gambling on Turnbull, Late Night Live, ABC Radio National, 7 September 2016)

Against Public Broadcasting

Tom Switzer:
[Privatisation] would say to the ABC management:
You can put on as much Left wing ideological, tainted, journalism as you like — be frank about it — but just not at tax-payers expense. …
[And,] you'd be saving taxpayers up to more than million dollars every year …
Some programs, clearly, would not sell.
And others would continue to aggravate people like me.
But the point is, at least taxpayers would not be forced to pay for it. …

[Then] of course you've got this digital evolution … that's costing jobs … it's threatening the very viability of newspapers …
And let's be frank, when Rupert Murdoch goes, its highly unlikely that good quality flagship papers like the Australian will prevail.
In that environment, why should a tax-payer funded, free-to-the-consumer competitor, be allowed to expand on their turf?
There's something fundamentally unfair about that. …

My point is, that with the bias there and the changing media landscape, I don't think the ABC can be a public service broadcaster …

All things considered, the ABC News is more professional and it covers the big issues of the day in more detail than the commercial networks.
But my point is: [there's] a plethora of [digital] news and media [out there …]
[These] days, people … can read the New York Times or the Guardian newspaper online — we're well informed.
Do we need a publicly funded broadcaster to fill us in on those issues? …

[If, as the polls indicate, public broadcasting has 89% support in the community, why] would the marketplace let [such a] valuable franchise die?
If it were a commercially viable entity … how would privatising lead to diminishing the quality of it's product?

(Should the ABC be privatised?, Counterpoint, ABC Radio National, 10 June 2013)


Climate Hysteria

Against Public Broadcasting

Bring on the Culture Wars

In Trump We Trust

July 4, 2016

Mark Blyth

Green Army: Persons of Interest

(Terry Hillman, The Complete Idiot's Guide to Economics, Penguin, 2014, p 254)

John Galbraith (1908 – 2006):
The market will not go on [another] speculative rampage without some rationalization.
[And, needless to say,] during the next boom some newly rediscovered virtuosity of the free enterprise system will be cited. …
Among the first to accept these rationalizations will be some of those responsible for invoking the controls. …
They will say firmly that controls are not needed.
The newspapers, some of them, will agree and speak harshly of those who think action might be in order.
(p 206-7)

The Wall Street Journal [11 September 1929]:
[The] main body of stocks [continues] to display the characteristics of a major advance temporarily halted for technical readjustment.
(p 110)

Irving Fisher (1867 – 1947) [15 October 1929]:
Stock prices have reach what looks like a permanently high plateau. …
I expect to see the stock market a good deal higher than it is today within a few months.
[Irving lost between $8 and $10 million in net worth.]
(p 95)

Harvard Economic Society [10 November 1929]:
[A] severe depression like that of 1920-1 is outside the range of probability.
We are not facing protracted liquidation.
(The Great Crash 1929, Penguin, 1975, p 163)

Joseph Schumpeter (1883 – 1950)
[Recurrent] 'recessions' that are due to the disequilibrating impact of new products or methods. …
Economic progress, in capitalist society, means turmoil. …
[Capitalism's performance can, therefore, only be judged] over time, as it unfolds through decades and even centuries.
(Capitalism, Socialism and Democracy, 2nd Ed, 1942)

Robert Lucas (1937):
[The] central problem of depression-prevention has … for all practical purposes … been solved for many decades.
(Presidential Address, American Economic Association, 2003)

Gregory Clark (1957) [Professor of Economics, University of California, Davis]:
The debate about the bank bailout, and the stimulus package, has … been conducted in terms that would be quite familiar to economists in the 1920s and 1930s.
There has essentially been no advance in our knowledge in 80 years.
(Dismal scientists: how the crash is reshaping economics, The Atlantic, 16 February 2009)

George Megalogenis (1964):
[During the 1980's blue] collar workers had delivered their end of the bargain under the wages accord.
Yet their restraint in the boom, could not protect their jobs in the bust.
Ken Henry (1957) [Australian Treasury Secretary, 2001-2011]:
[More than half of the] people aged over 45 who lost their jobs in the early 1990's recession, [when unemployment peaked at 11.1%,] never worked a day again in their lives …
(Making Australia Great — Inside Our Longest Boom, Episode 2: Growing Pains, ABC Television, March 2015)

Joseph Stiglitz (1943):
In order to bail out the German banks [the Greeks have] had to accept [economic depression:
  • 25% unemployment (including 50% youth unemployment) and
  • a 25% decline in GDP. …]
(Stiglitz on Greece and climate change, RN Drive, 10 July 2015)

Niall Ferguson (1964):
[Subprime mortgage refinancing deals] allowed borrowers to treat their [over-priced] homes as cash machines, converting their existing equity into cash. …
Between 1997 and 2006, US consumers withdrew an estimated $9 trillion in cash from the equity in their homes.
(p 265)

The final cost of the Savings and Loans crisis between 1986 and 1995 was $153 billion (around 3% of GDP), of which taxpayers had to pay $124 billion, making it the most expensive financial crisis since the Depression.
(The Ascent of Money, 2008, Penguin, p 259)

William Crawford [Commissioner, California Department of Savings and Loans]:
The best way to rob a bank is to own one.
(Henry Pontell and Kitty Calavita, 'White-Collar Crime in the Savings and Loan Scandal', Annals of the American Academy of Political and Social Science, 525, January 1993, p 37)

Mark Blyth:
[The 2007 global financial crisis has cost,] once lost output is included, as much as $13 trillion and, on average, a 40-50% increase in the debt of states hit by the crisis. …
(p 45)

Lost output from 2008 through 2011 alone [averaged] nearly 8% of GDP across the major economies.
(p 46)

Since the 2008 crisis, [US banks] have awarded themselves $2.2 trillion in compensation.
(p 50, emphasis added)

[When] those at the bottom are expected to pay disproportionately for a problem created by those at the top, and when those at the top actively eschew any responsibility or that problem by blaming the state for their mistakes, not only will squeezing the bottom not produce enough revenue to fix things, it will produce an even more polarized … society in which the conditions for sustainable politics of dealing with more debt and less growth are undermined. …
In such an unequal and austere world, those who start at the bottom of the income distribution will stay at the bottom, and without [hope of advancement,] the only possible movement is a violent one.
(p 15)

[The] true price of saving the banks [may not] just the end of the euro, but the end of the European political project itself, which would be perhaps the ultimate tragedy for Europe.
(Austerity, p 92)

Freeman Dyson (1923):
The gap between technology and needs is wide and growing wider.
If technology continues along its present course, ignoring the [basic] needs of the poor and showering benefits upon the rich, the poor will sooner or later rebel against the tyranny of technology and turn to irrational and violent remedies.
(Imagined Worlds, Harvard University Press, 1998, p 201)

Alexis de Tocqueville (1805 – 1859):
Almost all the revolutions which have changed the aspect of nations have been made to consolidate, or to destroy, social inequality. …
Either the poor have attempted to plunder the rich, or the rich to enslave the poor.
(Democracy in America, 1835, Bantam, 2011, p 789)

Frederick Douglass (1818 – 1895):
  • Where justice is denied,
  • where poverty is enforced,
  • where ignorance prevails and
  • where any one class is made to feel that society is in an organized conspiracy to oppress, rob and degrade them:
neither persons nor property will be safe.

Karl Marx (1818 – 1883)
The ruling ideas of each age have ever been the ideas of its ruling class …
During its rule of scarce one hundred years, [capitalism] has created more massive and more colossal productive forces than have all preceding generations together. …
[It] has created enormous cities, has greatly increased the urban population as compared with the rural, and has thus rescued a considerable part of the population from the idiocy of rural life …
(Marx & Engels, The Communist Manifesto, 1848)

William Wood, 9 years old, was 7 years and 10 months when he began to work …
He came to work every day in the week at 6 am, and left off about 9 pm …
Mary Anne Walkley had worked without pause 26½ hours, together with sixty other girls, thirty of them in one room …
[She] died of apoplexy, but there is reason to fear that her death had been accelerated by overwork in an overcrowded workroom.
(Capital, Vol 1 Ch 8, 1867)

Terry Hillman:
In the eighteenth century, factory owners chained children to the machines.
They fought the government's attempt to [make the] shackling children illegal.
(The Complete Idiot's Guide to Economics, 2014, pp 20 & 23)

The Mills and Factory Act (1833):
  • No child workers under nine years of age.
  • Children of 9 to 13 years to work no more than 9 hours a day.
  • Children of 13 to 18 years to work no more than 12 hours a day.
  • Children are not to work at night.
  • Two hours of schooling each day for children.

Milton Friedman (1912 – 2006):
[The workers of 19th century Britain] were not exploited.
The studies that have been done recently have shown over and over again that the 19th century was a period in which the ordinary English worker experienced a very rapid and very substantial rise in his standard of life.
(The Tyranny of Control, Free to Choose, Episode 2, PBS, 1980)

Adam Smith (1723 – 1790)

The Wealth of Nations (1776)

[Wherever] there is property there is great inequality [consequently,] the acquisition of valuable and extensive property … necessarily requires the establishment of civil government. …

In spite of their natural selfishness and rapacity, though they mean only their own convenience, though the sole end which they propose from the labours of all the thousands whom they employ be the gratification of their own vain and insatiable desires, the rich divide with the poor the produce of all their improvements.
They are led by an invisible hand to make nearly the same distribution of the necessities of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus, without intending it, without knowing it, advance the interest of society, and afford means to the multiplication of the species. …

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.
We address ourselves, not to their humanity but to their self-love.
(Book 1, Chapter 2)

[The individual] is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. …
I have never known much good done by those who affected to trade for the public good.
It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
(Book 4, Chapter 2)

The man whose whole life is spent in performing a few simple operations … generally becomes as stupid and ignorant as it it is possible for a human creature to become.
The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment …
Of the great and extensive interests of his own country he is altogether incapable of judging …

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in conspiracy against the public, or in some contrivance to raise prices. …
It is impossible to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.
But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
(Book 1, Chapter 10, Part 2)

The proposal of any new law or regulation of commerce which comes from [the business elite] ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.
[For it] comes from an order of men,
  • whose interest is never exactly the same with that of the public,
  • who have generally an interest to deceive and even to oppress the public, and
  • who accordingly have, upon many occasions, both deceived and oppressed it.

The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
(Book 5, Chapter 2, Part 2, 1779)

The Theory of Moral Sentiments (1759)

[The illusion that the accumulation of possessions brings real satisfaction is the] deception which rouses and keeps in continual motion the industry of mankind. …

The great source of both the misery and disorders and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another …
Some of those situations may, no doubt, deserve to be preferred to others …
[But] none of them can deserve to be pursued with that passionate ardour which drives us
  • to violate the rules either
    • of prudence or
    • of justice; or
  • to corrupt the future tranquillity of our minds, either
    • by shame from the remembrance of our own folly, or
    • by remorse from the horror of our own injustice.

(Charles Ferguson, Inside Job, 2010)

Mark Blyth (1967)

  • Democracy is Asset Insurance for the Rich
  • Redistribution and Debt is Reinsurance for Democracy
  • Austerity is Anorexia for the Economy

The Liberal Antistatist Neuralgia

Can't live without the state

The problem is, when you allow markets do what markets do, they create incredible inequality. …
[So] you have to have a state that can police [those inequalities;] otherwise, the people who are on the bad end [of the income distribution are going to come] and burn your house down.

Can't live with it

So you have a problem right away, which is: the liberal distrust of the state.
[Since] any state powerful enough to defend your property rights might [itself] come after you — hence the second amendment

Don't want to pay for it

[Finally, any state strong enough to] defend your property rights, is going to be expensive …
Adam Smith [initially] comes out in [favor] of proportional taxation [but then] backs away from it because, of course, rich people would [end up paying] most of the taxes, and he's one of the rich people …
[So he] goes for a very modern solution, [one] which modern day Republicans are fond of: a consumption tax …

(Austerity: The history of a dangerous idea, Big Ideas, ABC Radio National, 14 May 2013)

[Democracy,] and the redistributions it makes possible, is a form of asset insurance for the rich, and yet, through austerity, we find that those with the most assets are skipping on the insurance payments.
(p 14)

[In Europe and in the United States} top marginal incomes are estimated to be no less than 20%age points below those that would maximize tax revenue to the government.

Peter Diamond of the Massachusetts Institute of Technology and Emanuel Saez of the University of California, Berkeley, [argue] that taxing the top 1% at [a marginal rate of] over 80% would raise, not lower, revenue. …
According to their calculations, raising the average income tax for the top income%ile to 43.5% from 22.4%, the level of 2007, would raise revenue by 3% of GDP. which is enough to close the US structural deficit while still leaving very high earners with more after-tax income than they would have had under Nixon.
(p 243)

[The] Tax Justice Network estimates that there is as much as 32 trillion dollars, which is over twice the entire US national debt, hidden away offshore not paying taxes …
(p 244)

A Fallacy of Composition
Adam Smith (1723 – 1790):
What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.
(The Wealth of Nations, Book 4, Chapter 2, 1776)
[What] is true of the parts … is not true of the [whole:] we cannot all be austere at once.
All that does is shrink the economy for everyone. …
[If everyone is saving (ie paying back debt) at the same time, then no one is spending; hence, no consumption to stimulate investment.
Likewise, every country cannot pursue export-led growth at the same time because there is no import demand to drive it.]
We cannot all cut our way to growth, just as we cannot all export without any concern for who is importing.
This fallacy of composition problem rather completely undermines the idea of austerity as growth enhancing. …

Austerity is a zombie economic idea because it has been disproven time and again, but it just keeps coming. …
[It] a dangerous idea for three reasons:
  • it doesn't work in practice,
  • it relies on the poor paying for the mistakes of the rich, and
  • it rests upon the absence of a rather large fallacy of composition that is all too present in the modern world.
(p 10)

No Bailouts

[We] may have impoverished a few million people to save an industry of dubious social utility that is now on its last legs. …

[Between] 1994 and 2007 Irish GDP grew much more rapidly than in the 1980s and 1990s.
During this boom period, when cheap money was abundant in global markets, Ireland's banking sector also grew rapidly, and on the back of the credit bubble grew a housing bubble.
When the bubble popped in 2008, the Irish government issued a blanket guarantee to its banks and soon after gave five and a half billion euros to three banks:
  • Anglo Irish bank,
  • Allied Irish Bank, and
  • Bank of Ireland.
Unfortunately, since the assets of these banks were little more than dead real-estate loans, this was just throwing good money after bad.
It kept the banks going [until January 2009] when Anglo-Irish was nationalized — at the same time that 2 billion euros in savings were chopped off the public budget.
[Eventually,] to stop the complete collapse of the economy, the government set up a bad bank, the National Asset Management Agency (NAMA), to take the toxic assets off the banks' books. …

Since then, over 70 billion euros have been injected into [the Irish] banking system [or almost €1,500 for every man, woman and child.]
Some 47 billion euros disappeared into Anglo-Irish alone, never to be seen again.
The cost of bailing out the banks amounts to 45% of GDP, and that figure does not include the cost of the NAMA program, which is over 70 billion euros.
(pp 234-5)

Irish debt to GDP was 32% in 2007.
Today it stands at 108.2% after three years of austerity. …
The Irish government, which has implemented 24 billion euros in cuts since 2008, plans another 8.3 billion in taxes and another 3.5 billion in cuts for 2013. …

[By contrast,] Iceland
  • let its banks go bankrupt,
  • devalued its currency,
  • put up capital controls, and
  • bolstered welfare measures. …
(p 237)

The [Icelandic] banks were to be allowed to go bankrupt and be taken into receivership.
Their debts were not socialized; instead bondholders and foreign creditors bore the brunt of adjustment.
(p 238)

Everyone tightened their belts as the cuts were accompanied by a shift to a more progressive tax code that included
  • substantial tax hikes for top earners and
  • measures to help low- and middle-income families. …

[In] 2011 growth returned at 3% [— compared to 0.71% in Ireland; and, by 2012 Iceland was] near the top of OECD growth performance.
With higher marginal rates of taxation, returning growth, capital control, and equal fiscal tightening, Iceland is on target to eliminate its budget deficit in 2014 and have a budget surplus of 5% in 2016.
[And, unlike in Ireland,] employment growth in Iceland has been strong.
Even at its height [9% in 2009,] unemployment in Iceland was lower than the European average …
Unemployment stands at just under 6% in October 2012 [— compared to 14.8% in Ireland.]
(p 239)

[Real] wages have been rising at a brisk pace.
This has helped reverse the trend of growing inequality witnessed between 1995 and 2007 … mostly because of the high incomes of top earners — a phenomenon seen in all highly financialized societies. …
Iceland not only survived letting its banks go bust, it became a healthier and more equal society in doing so.
(p 240)

Thank You For Your Sacrifice

To: The [Citizens of Portugal, Italy, Ireland, Greece and Spain]

From: [The Political Classes of Europe]

We have been telling you for the past four years that the reason you are out of work and that the next decade will be miserable is that states have spent too much.
So now we all need to be austere and return to something called "sustainable public finances."
It is, however, time to tell the truth.
The explosion of sovereign debt is a symptom, not a cause, of the crisis we find ourselves in today.

What actually happened was that the biggest banks in the core countries of Europe bought lots of sovereign debt from their periphery neighbors, the PIIGS.
This flooded the PIIGS with cheap money to buy core country products, hence the current account imbalances in the Eurozone that we hear so much about and the consequent loss of competitiveness in these periphery economies.
After all, why make a car to compete with BMW if the French will lend you the money to buy one?
This was all going well until the markets panicked over Greece and figured out via our "kick the can down the road" responses that the institutions we designed to run the EU couldn't deal with any of this.
The money greasing the wheels suddenly stopped, and our bond payments went through the roof.

The problem was that we had given up our money presses and independent exchange rates — our economic shock absorbers — to adopt the euro.
Meanwhile, the European Central Bank, the institution that was supposed to stabilize the system, turned out to be a bit of fake central bank.
It exercises no real lender-of-last-resort function.
It exists to fight an inflation that died in 1923, regardless of actual economic conditions.
Whereas the Fed and the Bank of England can accept whatever assets they want in exchange for however much cash they want to give out, the ECB is both constitutionally and intellectually limited in what it can accept.
  • It cannot monetize or mutualize debt,
  • it cannot bail out countries,
  • it cannot lend directly to banks in sufficient quantity.
It's really good at fighting inflation, but when there is a banking crisis, it's kind of useless.
It's been developing new powers bit-by-bit throughout the crisis to help us survive, but its capacities are still quite limited.
(p 88)

Now, add to this the fact that the European banking system as a whole is three times the size and nearly twice as levered up as the US banking system; accept that it is filled with crappy assets the ECB can't take off its books, and you can see we have a problem.
We have had over twenty summits and countless more meetings, promised each other fiscal treaties and bailout mechanisms, and even replaced a democratically elected government or two to solve this crisis, and yet have not managed to do so.
It's time to come clean about why we have not succeeded.
The short answer is, we can't fix it.
All we can do is kick the can down the road, which takes the form of you suffering a lost decade of growth and employment.

You see, the banks we bailed in 2008 caused us to take on a whole load of new sovereign debt to pay for their losses and ensure their solvency.
But the banks never really recovered, and in 2010 and 2011 they began to run out of money.
So the ECB had to act against its instincts and flood the banks with a billion euros of very cheap money, the [Long Term Refinancing Operations,] when European banks were no longer able to borrow money in the United States.
The money that the ECB gave the banks was used to buy some short-term government debt (to get our bond yields down a little), but most of it stayed at the ECB as catastrophe insurance rather than circulate into the real economy and help you get back to work.
After all, we are in the middle of a recession that is being turbocharged by austerity policies.
Who would borrow and invest in the midst of that mess?
The entire economy is in recession, people are paying back debts, and no one is borrowing.
This causes prices to fall, thus making the banks ever more impaired and the economy ever more sclerotic.
There is literally nothing we can do about this.
We need to keep the banks solvent or they collapse, and they are so big and interconnected that even one of them going down could blow up the whole system.
As awful as austerity is, it's nothing compared to a general collapse of the financial system, really.

  • we can't inflate and pass the cost on to savers,
  • we can't devalue and pass the cost on to foreigners, and
  • we can't default without killing ourselves …
[All we can do is] deflate, for as long as it takes to get the balance sheets of these banks into some kind of sustainable shape.
(p 89, emphasis added)

This is why we can't let anyone out of the euro.
If the Greeks, for example, left the euro we might be able to weather it, since most banks have managed to sell on their Greek assets.
But you can't sell on Italy.
There's too much of it.
The contagion risk would destroy everyone's banks.
So the only policy tool we have to stabilize the system is for everyone to deflate against Germany, which is a really hard thing to do even in the best of times.
It's horrible, but there it is.
Your unemployment will save the banks, and in the process save the sovereigns who cannot save the banks themselves, and thus save the euro.
We, the political classes of Europe, would like to thank you for your sacrifice.
(p 89)

Austerity and the Fall of France

Although [the Bank of France] was the fiscal agent for the French Treasury, it was also a private institution with 40,000 shareholders whose 200 largest shareholders, often called "the 200 families," determined both personnel and policy.
They paid the governor's (large) salary in return for the usual diet of gold, cuts, and budget balance, all of which benefited the rentier class at the expense of everyone else.
(p 201)

[During the interwar years] the Bank of France continually vetoed budget increases that would have allowed the French military to modernize, and even mobilize, to meet the German threat.
As a result, French defense spending between 1934 and 1938 was one-tenth that of Germany.
(p 203)

[The] French financial elites were so afraid of inflation, and were so determined to maintain the value of the franc, that they paralyzed the French military's ability to mobilize against Hitler.
(p 204)

(Austerity, 2013)

John Quiggin (1956)

Professor of Economics, Queensland University

An Epidemic of Laziness

[Real Business Cycle Theory interprets] fluctuations in aggregate demand and employment [as the] socially optimal equilibrium response to exogenous shocks such as:
  • changes in productivity,
  • the terms of trade, or
  • workers' preference for leisure.
(p 99)

[This analysis implies that,] at the outset was the Great Depression, [either:]
  • the state of scientific knowledge had suddenly gone backward by 30%, or …
  • workers throughout the world had suddenly succumbed to an epidemic of laziness …
(p 100)

(Zombie Economics, Princeton University Press, 2012)

Crisis? What Crisis?

The Efficient Markets Hypothesis implies that there can be no such thing as a bubble in the prices of assets such as stocks or houses.
(p 45)

The Efficient Markets Hypothesis, which enshrines the market price of assets as the summary of all relevant information, is inconsistent with any idea that managers should pursue the long-term interests of corporations, disregarding short-term fluctuations in share prices.
According to the Efficient Markets Hypothesis, the current share price is the best possible estimate of the long-term share price and therefore of the long-term value of the corporation to shareholders.

If the Efficient Markets Hypothesis is accepted, public investment decisions may be improved through the use of formal evaluation procedures like benefit-cost analysis, but the only really satisfactory solution is to turn [delivery of public services] over to the private sector. …
The Efficient Markets Hypothesis implies that governments can never outperform well-informed financial markets.
(p 49)

Privatization is bad for unions, which tend to be stronger and more effective in the public sector.
It is usually good for the incumbent senior managers of privatized firms, who move from being rather modestly paid public sector employees, constrained by bureaucratic rules and accountability, to doing much the same job but with greatly increased pay and privileges, and far fewer constraints.
(pp 185-6)

[In 2007 all] of the checks and balances in the system failed comprehensively.
The ratings agencies offered AAA ratings to assets that turned out to be worthless, on the basis of models that assumed that house prices could never fall. …
The entire ratings agency model, in which issuers pay for ratings, proved to be fundamentally unsound.
But, these very ratings were embedded in official systems of regulation.
Thanks to the Efficient Markets Hypothesis, crucial public policy decisions were, in effect, outsourced to for-profit firms that had a strong incentive to get the answers wrong.
(p 64)

The failure of the Efficient Markets Hypothesis does not imply the converse claim that governments will always do better.
Rather, the evidence suggests that markets will do
  • better than governments in planning investments in some cases (those where a good judgment of consumer demand is important, for example) and
  • worse in others (those requiring long-term planning, for example).
(p 76)

The experience of the twentieth century suggests that a mixed economy will outperform both
  • central planning and
  • laissez-faire.
(p 78)

The financial markets that were supposed to replace governments showed themselves incapable of managing their own businesses, let alone the world economy. …
[During the crisis everyone] in the financial sector was happy to be bailed out.
But of course, as soon as the crisis was over, they insisted that everything had been under control and that no rescue was necessary.
(p 225)

Throughout the [global financial] crisis, the economics profession carried on, for the most part, as if nothing had changed.
And now that the immediate crisis has passed, market liberals are trying to pretend … it never happened.
(p 231)

(Zombie Economics, Princeton University Press, 2012)

John Kenneth Galbraith (1908 – 2006)

The values of a society totally preoccupied with making money are not altogether reassuring.
(p 101)

[From June 1929,] free at last from all threat of government reaction or retribution, the market sailed off into the wild blue yonder. …
Never before or since have so many become so wondrously, so effortlessly, and so quickly rich. …
Perhaps it was worth being poor for a long time to be so rich for just a little while.
(p 68)

Those who employed rational, objective, and scientific methods … failed to foretell the crash.
(p 109)

Many things were wrong [in the lead up to the Great Depression,] but five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. …

  1. The bad distribution of income. …
  2. [The] 5% of the population with the highest incomes in that year received approximately one-third of all personal income.

(p 194)
  1. The bad corporate structure. …
(p 195)
  1. The bad banking structure. …
(p 196)
  1. The dubious state of the foreign balance. …
(p 197)
  1. The poor state of economic intelligence. …

  2. [The] economists and those who offered economic counsel in the late twenties and early thirties were almost uniquely perverse.
(p 199)
    In the months and years following the stock market crash, the burden of reputable economic advice was invariably on the side of measures that would make things worse. …

    The Democratic platform in 1932 called for … at least a 25% decrease in the cost of government.
(p 200, emphasis added)
    The fear of inflation reinforced the demand for the balanced budget [— flying in the face of] the most violent deflation in the nation's history.
(p 201)

The economic advisers of the day had both the unanimity and the authority to force the leaders of both parties to disavow all the available steps to check deflation and depression.
(p 202)

[The] chances for a recurrence of a speculative orgy are rather good.
No one can doubt that the American people remain susceptible to the speculative mood — to the conviction that enterprise can be attended by unlimited rewards in which they, individually, were meant to share.
A rising market can still bring the reality of riches.
This, in turn, can draw more and more people to participate.
The government preventatives and controls are ready.
In the hands of a determined government their efficacy cannot be doubted.

There are, however, a hundred reasons why a government will determine not to use them. …
Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune moment.
(p 206)

[Now,] as throughout history, financial capacity and political perspicacity are inversely correlated.
Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present.
So inaction will be advocated in the present even though it means deep trouble in the future.
Here, at least equally with communism, lies the threat to capitalism.
It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.

(The Great Crash 1929, Penguin, 1975, p 210)