Monetary and Fiscal Policy

Basically the Fed prints money and gives it to the banks. It borrows from the private sector rather than taxing them outright. With the interest the private sector earns from government debt, it allocates new demand.

Lately the private sector hasn't been investing enough to maintain full employment and the jobs it creates are not as high paying as they once were, damaging aggregate demand further. The main focus of the corporate sector is profits and rent extraction.

The private sector doesn't allocate demand very well at all. Exhibit A is the housing bubble and financial crisis. Exhibit B is the low quality of jobs being created. Much better to tax and spend instead of borrow.

In the meantime, however conservatives need to be beaten into obscurity as they were in the 40s, 50s and 60s and the Rubinite neoliberals need to be purged from the Democrats.

In the meantime Fed policy can promote wage inflation. Government can borrow cheaply and invest as the euthanasia of the rentiers continues apace. The capitalists and liquidity specialists are their own gravediggers(TM).

In the meantime ultimately a social movement is needed. International and based on the labor movement and OWS, incorporating those "interest groups."

Kenyan Socialism

Kenyan Socialism is my grand unified theory on progressive macroeconomics and political economy. In my dreams I write an ebook on the subject.

What policies would we* Kenyan Socialists enact to help ameliorate economic conditions? One way to think of it is to consider what we don't want. In recent decades, gains during boom times have flown to the top whereas labor's hand is weakened and concessions extracted during recessions. We would reverse this.

We would focus on two areas. One, the bargaining power of workers. We want tight labor markets with labor sharing in productivity gains. (This happened in the late 90s) This means adequate counter-cyclical policy, like Federal aid to the states. Also, we advocate work-sharing during downturns, something Japan and Germany have done well. This means good currency policy. Ideally this would entail a World Trade Organization that would rule against trade surplus nations like China and Germany who export their unemployment and demand diminishing policies to other nations with large consumer markets like the United States. China does this by buying up large amounts of dollars in order to prop up its value against their own currencies. Or the US could act unilaterly instead of via the WTO.  Or Congress could enact policies to boost employment regardless of the currency manipulation of other countries.

Two, we focus on debt. We want an adequate amount of credit in the system so that NGDP growth is at sustainable trend levels. We want growth without runaway inflation. Obviously bubbles and unsustainable, overleveraged bad debt of the kind we saw in the previous decade should be regulated out of existence. This means a Consumer Financial Produciton Bureau on stereoids and a systemic regulator like the Federal Reserve which does its job. A healthy amount of level-headed credit in the system is good. Bubbles are not. So we are against tight money-cross of gold politics, but we are in favor of a regulated financial sector where banking is treated like a public utility.

Ideally we wouldn't need so much debt if the Federal government helped supply demand during downturns. And then during boom times the government would try to run surpluses as good Keynesians argue.

The Elite Sells Out (or bye, bye Noblesse Oblige)
Looking at the macroeconomy holistically we would note the insight that Steve Randy Waldman recently blogged about: that World War II hit the "reset" button on inequality of the preceding decades. Krugman has also suggested the parallel idea that something happens in political culture analogous to Minskys' views on credit/debt in the economy. At the Bretton Woods anniversary conference in response to a question from Martin Wolf, Larry Summers said that pre-Great Recession regulators had become complacent. People get complacent and lose sight as the good times continue. People forget the painful lessons of the past. The elite becomes increasingly insular and solipsistic as inequality increases. A vicious feedback loop occurs wherein inequality corrupts the political process with ever increasing amounts of money flowing towards proponents of policies which increase inequality. Maybe this is just the way it is with humanity in late capitalism: a variation on the Kondratiev wave. 

We Kenyan Socialists look back to the past. After the industrial revolution, "socialist" policies were enacted which helped get working-class men the vote, provided land reform and had government running key industries and investing in infrastructure like canals and in human capital with public education. Then you had the Gilded age and the Progressive Era with many worthwhile reforms like the creation of a central bank and regulation of trusts and corporations. Then there was the roaring 20s and Great Depression followed by the Social Democratic Post-War period and golden age of 50s-60s.

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* Myself and my one follower, an elderly pensioner in Halifax, Canada.

Fantasy, Modernism, and Capitalism

Tyrion: If I told you to murder, say, an infant girl still at her mother's breast. Would you do it, without question?

Bronn: Without question? No. I'd ask how much.

One of the things that first made the fantasy genre popular was that it became a new way for literature to battle back against modernism. It was a genre filled with good guys and bad guys, with the kinds of larger-than-life stories that were once the provenance of mythology and national epics. Game Of Thrones works best when it suggests the good guys aren’t all that good and the bad guys aren’t all that bad, then asks just what all of them are going to do about the truly awful elements in their midst, like the White Walkers, or King Joffrey, or the torture of smallfolk.

The second quote is from Todd VanDerWerff's Onion recap (for experts) of season 2/episode 4 "Garden of Bones."

What's attractive about the fantasy genre for me is that modernism entails capitalism and the cash nexus. The cash nexus dissolves bonds of social solidarity and value until you are left with nothing but price and cost. After the Cold War, welfare capitalism has given way to "greed is good" capitalism.  There is no (or not much) honor, chivalry, loyalty, integrity, or virtue which were once the the redeeming aspects of capitalism's predecessor Feudalism. (Although obviously not everyone was honorable back especially given material circumstances.) Also late capitalism entails consumerism, and wall-to-wall advertising (flashing billboards, telemarketers calling during dinner, spam and pop-up ads), environmental disaster, urban blight, and an economy dominated by the financial sector and speculation/gambling. The Fantasy genre is a respite from all of that. Perhaps it's escapist to harken back to a lost age, but the fantasy genre does hold up the good virtues even if like in Game of Thrones, it's a brutal time of war.

Capitalism is undeniably a giant progress in a number of areas. Feminism and notions of human rights arrived in late-capitalism and welfare capitalism had less of a stratified, class structure. One of the undeniable reactionary aspects of Feudalism is its authoritarian appeal to a rigid social structure where everyone knows their place. Also obviously capitalism has less starvation during winter. Westeros is chock full of prostitution and the suffering small people. Esteros is full of slaves and brutality. What is compelling about Game of Thrones is that it explores the dark side of Feudalism in a realistic manner and doesn't romanticize it.

But some of the admirable Feudal values have been lost to an extent. There is just the cash nexus. And it seems to be corrupting the political/public sphere in a corrosive feedback loop. Witness the housing bubble and economic crises and the Republican Party being taken over by frauds and fanatics. Free-market welfare capitalism has morphed into rent-seeking crony capitalism and socialism for the rich where slow growth, low inflation and high unemployment is a regressive tax on wages. Inequality increases as past progress is lost.

Ned Stark exemplified the redeeming values of Feudalism for me and hence the attraction of fantasy fiction.* For one even though he was the ruler in the north and a noble he was accountable to his  people. He performed his own executions and did his own dirty work so that power wouldn't corrupt him. (Or maybe it was more of a symbol of accountable rulership.) And Maester Luwin told Bran that a good lord needs to listen to his subjects. Ned Stark also expressed some sympathy for the low born butcher's boy to Varys last season, after Varys mentioned the unpleasantness on the Kingsroad. And he was against assassinating Daenyres Targaryen.

Ned Stark also had honor and integrity, which meant telling the truth. If he hadn't, Stannis and Renly wouldn't be challenging King Joffrey's claim to the throne. And the North wouldn't have rebelled. If he wasn't loyal to his friend he would have remained in the North and no doubt the Lannisters would have taken over.

As Robb tells Talisa, if there had not been a war, the realm would be subject to Joffrey's cruel and capricious rule. Maybe that would be better war. But the reign of Joffrey Baratheon could be a disaster also. He probably would have sparked a rebellion sooner or later just as the King Aerys did as he descended into madness.

And in the background you have the Red Comet, the return of magic, The Others, The Lord of Light, and Daenerys's dragons.

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* Was humanity hard-wired with morales and social solidarity? In Feudalism you had chivalry, loyalty and codes of honor. In welfare capitalism you had progress on a number of fronts of well being.

What I like about Game of Thrones is that there is a wide spectrum and variety of evil. Tywin Lannister may be bad, but he's more reasonable than his mad dog, the Mountain That Rides and The Tickler and Polliver. Tyrion is good but maneuvers within the system in the belly of the beast. On the good side I'd list the Nightswatch, Davos Seaworth, Brienne, Daenyres, Robb, Jorah Mormont, Brienne, Maester Luwin. Arya, and even Sansa saved Ser Dantos. Varys, Stannis and Renly are little complicated. Same with the Tyrells.

On the bad side, Arya's hit list (Joffrey, Cersei, Ilyn Payne, the Hound, Polliver, the Mountain) and Littlefinger, Pycelle, Craster, Walder Frey, Balon Greyjoy, Theon, Roose Bolton, the Tickler, Jaime, Ser Meryn Trant). Although I kind of like the Hound - "I ain't no ser" just as Brienne says "I'm no Lady" but he serves the wrong crowd.

Again I am taken back to the exchange between Roose Bolton and Rob Stark. When Robb objects to Roose employing torture, he replies that "the high road is pretty, but you can't march your army down it" and Robb replies that he doesn't want to give the Lannisters an excuse to hurt his sisters. Maybe that reasoning is partly why morality and codes of honor were developed in human societies.

Greg Mankiw hides the role of government in redistributing income upwards by Dean Baker

This is no doubt how Mitt Romney and other wealthy people would like the public to see the debate. However the reality is that the government has implemented a wide range of policies that have led to a massive upward redistribution of before tax income over the last three decades. These policies have affected every corner of the market economy.

I heard comedian Judah Friedlander talking on the radio about the entertainment industry and he made a very good point about those who succeed are usually good schmoozers. The context was he said that it's part of the reason why comedy films are bad these days in that people who rise to the top are often good schmoozers but not good film-makers, actors etc. He then said it's true in every industry and line of work and I agree. They are smart about schmoozing and work hard at schmoozing and then once installed have sort of an inefficent crony capitalism.

I watched Parks and Recreation but didn't watch the first run of 30 Rock because I had a crush on Tina Fey during her "Weekend Update" and Sarah Palin impersonation years and it's very, very weird and wrong to have a crush on a TV personality. So you shouldn't encourage it. Friedlaner is on 30 Rock and lately I've been watching the reruns which are addictive.

One of the tenets of "Kenyan Socialism" is that the U.S. is a schmoozocracy. The ruling elite would have you believe it's a meritocracy but it's not.

I See No Way to Read This from Greg Mankiw Other than as the Strongest Possible Endorsement of Obama and the Democrats by DeLong

Finally, Own-to-Rent by Jared Bernstein

Keynan Socialism is Progressive.

Simon Johnson on the Cato putsch:

"In historical terms, Professors Acemoglu and Robinson see the progressive era at the beginning of the 20th century, including the development of countervailing power for the government against powerful private business interests, as an essential part of what has gone right in the United States of America."

(via Thoma)

Full Employment: A Force Against Rising Inequality and Stagnant Incomes by Jared Bernstein

Full employment (i.e. tight labor markets) is one of the main policy goals of Kenyan Socialism.

Valar Morghulis

Kenyan Socialism has two mottos. Eppur Si Muove and Valar Morghulis (Old Valyrian for: "all men must die").

"Dornish law does not apply." Tyrion had been so ensnared in his own troubles that he'd never stopped to consider the succession. "My father will crown Tommen, count on that."

"He may indeed crown Tommen, here in King's Landing. Which is not to say that my brother may not crown Myrcella, down in Sunspear. Will your father make war on your niece on behalf of your nephew? Will your sister?" [Oberyn] gave a shrug. "Perhaps I should marry Queen Cersei after all, on the condition that she support her daughter over her son. Do you think she would?"

Never, Tyrion wanted to say, but the word caught in his throat.... "I don't know how my sister would choose, between Tommen and Myrcella," he admitted. "It makes no matter. My father will never give her that choice."

"Your father," said Prince Oberyn, "may not live forever."

Something about the way he said it made the hairs on the back of Tyrion's neck bristle. Suddenly he was mindful of Elia again, and all that Oberyn had said as they crossed the field of ash. He wants the head that spoke the words, not just the hand that swung the sword. "It is not wise to speak such treasons in the Red Keep, my prince. The little birds are listening."

"Let them. Is it treason to say a man is mortal? Valar morghulis was how they said it in Valyria of old. All men must die. And the Doom came and proved it true."

        George R.R. Martin -- A Storm of Swords

Should We Slow Efficiency Growth by Dean Baker

The NYT had a very good piece from Barry Schwartz, one of my former college professors, asking this question. The context is whether the Bain Capitals of the world should be allowed to downsize without any consideration for workers or the community.

The United States is the only wealthy country that allows companies to dump long-serving workers at will. It might be reasonable to require some amount of severance pay when they fire long-serving workers (e.g. 2 weeks per year of work). This would nor prevent downsizing where there are large efficiency gains, however it may prevent some cases where the gains are marginal.

Kenyan Socialism supports this policy proposal as something doable which we can work towards. Policies other wealthy nations employ can be good guideposts. Conservatives prefer not to make international comparisons.

Doable policy goals of Kenyan Socialism:

1. reclaim productivity from rent-seekers like the textbook cartel (via means like the new Apple Author app, etc.)
2. follow Germany's lead on worksharing. It probably helped with their budget deficit and helped to counteract the European Central Bank's tight monetary policy
3. Bank of Japan is targeting one percent inflation. The Fed recently stated that it is targeting two. Why not target higher inflation rates briefly or target trend line NGDP growth? According to rational criteria, Bernanke is wrong and current Fed policies are not working.
   

Unrealistic goals:

1. massive fiscal spending while Republicans control the House of Representatives
2. creation of workers paradise where people have lots of leisure time.

Ideally Kenyan Socialism would have policies that add to aggregate demand and close the output gap by more ways than just via the banking sector.

Employing the banking sector as the main way to add AD allows the financial sector to fight back politically against regulation and taxation.  This would help when interest rates are at the zero bound.

Kenyan Socialism would look at ways to head off asset bubbles rather than just by raising interest rates during times of deflationary pressures. 

Kenyan Socialism would look at ways to deal with global imbalances with Germany and China.

The financial crisis of 2008 didn't start with Lehman but rather started with the implosion of the subprime mortgage market. It was a mistake for regulators like Bernanke to think of it as contained. The bailed out Bear Stearns but let Lehman go unaware that there would be a bank run in the repo market.

Hopefully the Troika (European Commission, European Central Bank, and the International Monetary Fund) realizes that a disorderly Greek exit from the Euro could cause a panic.

Europe and the Crisis of the Welfare State by Yglesias

Kenyan Socialists support the welfare state.

Keynan Socialists believe economic bubbles are bad and should be avoided. Likewise, "obverse of bubbles" should be avoided via government intervention.

Keynan Socialists are Diamond-Dybig people and believe (shadow) banking systems are vulnerable to bank runs.

Kenyan Socialism supports a financial transaction tax.

Kenyan Socialism

My grand unified theory (GUT) of macroeconomics is hereby named Kenyan Socialism. It combines elements of Marx, Keynes, Fisher, Minsky, Hicks, Wicksell, Kindleberger, Bagehot, etc. Like its cousin Marxism, it attempts an accurate description of our macroeconomic situation. It describes how things work - what are the variables in the various equations - and what the problems are. By defining problems, one has entered the political realm for a problem entails a value judgement. The problem needs to be "fixed" so that a desirable end-state / trend or goal can be reached. Fixing a problem in the economy necessarily involves political analysis. What is the best way to get it done. Will there be compromise?

Regarding macro and its variables, KS is falsifible and subject to revision. It is supported by empirical studies and historical case studies.

Basically, we are in agreement with the Krugman/Thoma/DeLong axis.
As Krugman writes:

By contrast, the Krugman/Thoma/DeLong axis (I still like it!) is basically using standard macroeconomics, applied to a nonstandard situation. The Hicks/Keynes model — in which demand drives output in the short run, interest rates are determined by the tradeoff between liquidity and yield, and extreme negative shocks push you into a liquidity trap in which conventional monetary policy loses traction and deficits don’t crowd out private spending — has worked very well in this crisis, which is why we keep using it with a few twiddles (such as emphasizing the role of private debt).

The point is that at this point we’re not having a debate between opposing models; we’re having a conflict in which one side has a model that has been working, while the other side has prejudices, and makes stuff up to justify those prejudices.

The Immediate Problem or the Task At Hand

Kenyan Socialists (me) have entered into a popular front with market monetarists against the great Output Gap* menace. This is out of political necessity and may change once the gap is closed.

The reason Kenyan Socialists are against the output gap and wish to close it as soon as possible is that it entails high unemployment. This means a lot of misery right here, right now with all that follows from that,** and means that labor is in a weakened bargaining position. It means higher inequality levels in the future and a general "banana-republicization" of society as well as making the economy more instable and vulnerable to speculative bubbles. It's bad.

How did we arrive at this output gap and what can we do to fix it?

The output gap is a result of long-term trends and instabilities. It came to a head in 2008 when the government didn't bail out Lehman Brothers. There was a panic; the velocity of money slowed; and aggregate demand dropped. Many people were thrown out of work. Having learned from what happened during the Great Depression and other economic crises, the government stepped in substituted its aggregate demand for the demand that had vanished.

Here - on page 17 - Romer describes the dialogue she had with Geithner:

Secretary of the Treasury Timothy Geithner and I used to have a running back and forth on just this topic. He liked to say there is more fiscal stimulus in financial rescue than in the Recovery Act. By this he meant that healing the financial system could have a big impact on things like consumer spending and investment—the same things that fiscal stimulus was supposed to stimulate.

I used to come back with, there is more financial rescue in fiscal stimulus than in the Treasury’s Financial Stability Plan. By this I meant that by stopping the freefall in the economy, the Recovery Act greatly helped to heal the financial system. Turning the economy around helped to raise the value of banks’ capital and lower loan defaults—two things that greatly reduced the chance of further panics.

The truth is, both the Recovery Act and actions to stabilize the banks were important and helped to reinforce each other. But I think there is a good case to be made that the Recovery Act was even more important than fiscal stimulus usually is, because this time the financial system was in such a precarious state.

A KS would point out to Geithner that being overly solicitous of Wall Street is what got us into this mess. I would point out to the less focused OWS types that the economy needs banks and credit to run, at least it does as currently constituted.

In tandem with Bernanke they stabilized the economy and growth returned. Conservatives argued that all of the government action would cause inflation, but inflation never came. Conservatives said all of that government spending would invoke the bond vigilantes but they remained invisible and never arrived.

They stabilized the economy but did not create a "V" shaped recovery with catch up growth retuning us to trend level NGPD. Instead we are left with an "L" shaped recovery. Actually the Fed forecast that the output gap will be closed very gradually, but they have been wrong before. KS argues for government action to encourage a "V"-shaped recovery and close the gap more quickly seeing as the economy is vulnerable to shocks (see Europe for example) and long term unemployment damages the economy and society. And so we enter the realm of politics.

What is to be done?

Maybe it help to elucidate what Keynan Socialism - henceforth abbreviated as KS - is about by discussing what it is not.

KS does not embrace the theory of expansionary austerity. Expansionary  austerity as proposed by the David Cameron and others is the notion that a government can summon the confidence fairy*** by balancing its budget via fiscal austerity. According to this theory, a government that cuts spending will inspire confidence in the investing class and business community so that they will create jobs and grow the economy. Empirical evidence contradicts this theory which suggest its a manifestation of ideology.

Bernanke appears to be a devotee of Irving Fisher and sees the Fed's job as being to prevent a deflationary spiral to take hold and hence to be the Lender of Last Resort. The European Central Bank should follow his example.

But he does not see the urgency of encouraging catch up growth in contrast to his colleague Charlie Evans who wants the Fed to target 3 percent inflation and 7 percent unemployment. And so we get opportunistic disinflation with a weak labor market.  A weak labor market hurts demand and hurts workers' bargaining power. It makes it difficult for them to agitate for higher wages. Their compensation does not keep up with productivity growth, so where does the rest of the money go? To rents and capital or rather the top 1 percent.

So, to reiterate: the primary goal of KS is to manage the economy so that it grows at its trend rate NGDP. This means price stability and full employment. Conservatives will not argue outright against this goal. In fact a faction* of conservatives do support NGDP targeting and so support this goal. This heterodox group includes Ramesh Ponnuru of the National Review, Scott Summer, David Glaesner and other who are not wedded to the ideology of "hard" or "sound" money. They are not paranoid about inflation. This group may also include the economists at Goldman Sachs and JP Morgan who favor NGDP level targeting. I am not aware of their politics but would guess they are the socially liberal, fiscally conservative types. Since they are economists they may be less ideological they your average Wall Street denizen.

However some may argue for a lower NGDP trend rate like 3 percent whereas Kenyan Socialists would place it near 5 percent dependent on a number of economic variables like population growth rate and productivity. This could be argued once the gap is closed.

NGDP targeting by the Fed is not the only means to close the output gap. A more effective means would be Keynesian stimulus and fiscal policy. This would provide the most bang for the buck, but it is difficult to enact because of the dysfunctional politics of the United States. President Obama recently proposed a $450 jobs bill to lower unemployment and close the gap, but only the most ineffective parts of the plan were enacted into law by an obstructionist Republican Party who appears intent on wrecking so that their "anybody but Mitt" candidate can beat Obama. This is a policy of "destroy the town in order to save it."

KS believes fiscal action is the best way to close the output gap. In the previously linked speech, Romer discusses empirical studies which bear this theory out. Conservatives will favor tax cuts which are inefficient but may help with deleveraging.

Economic History

The 19th century was characterized by many booms and busts and great technological advancement. After World War I, the attempt by central banks to reinstate the gold standard helped start the Great Depression. The earlier countries went off the gold standard, the sooner they exited the Great Depression. Fiscal stimulus via rearmament for WWII was key in pulling countries out of the depression. Post-war inflation helped with deleveraging which led to the golden era of 1945-1973 where rising productivity combined with rising wages and income.

In around 1973, the U.S.'s competitors in Europe and Japan come online. Inflation from the Vietnam war deficits, oil shocks and easy money was brought to an end by Paul Volker. The 1980s until 2007 saw the Great Moderation, where monetary policy moderated booms and recessions. This came to an end in 2008.

Bubblenomics

Countercyclical polices


Inflation


Bernanke and delfationary spiral


Latin American debt crices, 1997 East Asian Finanical crisi, Greece-Argentina, original sin and Italy, Dutch Tulip bubble, South Sea bubble,

[1st pass - to be continued and to be tightened and cleaned up - a work in progress]

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** Fascism
*** coined by Krugman.