New Keynesian Model Still Broken
Is the United States' economy stuck in a long-term slumping economic structure or is the economic struggle merely underscoring the futility of governments trying to make the economy move in a direction it desires against the fundamental laws of economic theory?
Two Brown University economists, Gauti Eggertsson and Neil Mehrotra, published a wordy analysis, "A Model of Secular Stagnation," on April 6 trying to explain the situation. They started with the following statement: "In this paper we propose a simple overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock which can create an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem are a drop in population growth and an increase in income inequality."
Before proceeding any further a comparison with this part of the opening statement and the buzzword/phrases being used by the political parties while prepping for the upcoming elections has to be implemented. It is not by happenstance the two dogmatic Brown professors chose words which the Administration has been using publicly. The use of the term 'income inequality' is despicable in the paper. It showed the bias these two economists used in evaluating data from a Keynesian standpoint. Anything valued against Keynes' theory leaves a lot of holes in free markets while enhancing governmental effects. (It was this contention that always put me at odds with the textbooks and the instructors in economic studies.)
The other phrase was "an oversupply of savings." Our government is eyeballing all savings--whether in pension plans or outright passbook savings--with a look a love-sick teen tosses in the direction of the current object of affection. But where the teen has some modicum of restraint from society, the government does not.
The purpose of the economists' research paper is the persistence of sluggish growth and high unemployment "despite the valiant policy efforts of the Federal Reserve." Again, my contention was any and all intervention by the public sector into a free market has to have disastrous results in the long-term. Our government has been actively involved in the free market since the inception of the progressive income tax in 1913. After 100 years of this experiment it should be obvious to anyone the situation is not improving. But not to idealists wedded to Keynesian models.
In several analyses of the paper, it was put out that another motivator for the research producing the paper was "an insufficient understanding of what causes such [economic] maladies and the noticeable lack of unanimity among policy makers and academics about how best to respond."
The problem, again, is the strict adherence to Keynesian theory. Keynes thought the way to solve individual man's problem was to put it in the hands of the government where everyone could contribute to solving that problem. Unfortunately no man is the same as his neighbor. We each view things differently, protect our resources differently and put a different value on every specific material or immaterial thing in our lives. How is government going to insure equal outcome with that kind of diversity?
A secondary problem arises when one strives for equal outcome despite the effort or type of effort each individual gives. Not all effort is rewarded equally, despite what government would have you believe with the progressive tax system. Some do get lucky and achieve dreams. The government wants each dream to have equal outcome.
One of the items used to show a root problem in Friday's Rant was food and housing prices. The government has 37 different food programs--none of which were examined in the paper. Yet food is increasingly out of reach cost-wise of the average American. Government, through its intended help programs, is artificially keeping the cost of food higher than if it had not interfered. The same is true in the housing market.
Yet over and over we hear campaigns address a problem that is caused, in large part, by government actions from the past with the promise of more government intervention. In the short term, Keynes was right as those 'solutions' seem to be easy solutions. In the long run they only 'create and exacerbate the problem' (to use Eggertsson's and Mehrotra's own words).
About the only real thing I could agree with in the economists' paper was the analysis of the Alvin Hansen message from 1938. As then-president of the American Economic Association, Hansen suggested the Great Depression might just be the start of a new era of ongoing unemployment and economic stagnation without any natural force towards full employment. His analysis was termed the "secular stagnation" hypothesis and the title of the new paper.
Hansen couldn't know World War II would delay his analysis. But since the recovery effort was officially ended in 1962, we have seen a gradual shift to Hansen's fear. Events of the past decade have added urgency to his warning. But government does not stand aside and reduce the impact of the effect, it gets mired down in 'unsustainable' activity which ultimately prolongs the misery for all. Obamacare is a boondoggle for which future generations will pay for dearly but also has the negative impact of reducing the demand for normal jobs at a time when living costs are demanding more such jobs be created.
In the final analysis of the paper, Eggertsson and Mehrotra construct another New Keynesian model which demonstrates why the normal self-correcting forces are too feeble to overcome the inertia of the recession. The factor the two refuse to analyze is how government action, the cornerstone of Keynesian theory, adds a smothering layer which prevents rigorous effort.
The paper draws the wrong conclusions. Until we have a government that reduces intrusion into daily life, until we have a government that turns a deaf ear to the inequality of the outcomes and concentrates on smoothing the path for majority, the world's populations will continue to suffer.
Except for the illusion of safety and civil structure, no government in the history of the world has stayed the course of its founding principles. For the sake of its own safety, every government has steadily stripped every member of its population the ability to decide for itself how to proceed through life. Each has collapsed under this burden.
What the authors missed was man's survival instinct cannot function when government reduces all to a lowest common denominator.
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man."--Thomas Jefferson
Data for today's Rant comes from the paper published by the two mentioned authors. A full copy can be reviewed by accessing Brown University, Department of Economics or by looking for the key words Secular stagnation, monetary policy or zero lower bound. All comments and suggestion to improve the Rant are appreciated--Mike
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FACTA And Base Item Inflation Ruin Economy
Peter Noonan, lead singer for Herman's Hermits, had a song in which he made no bones about repeating lyrics. He flatly stated in "Henry the VIII" "second verse same as the first." While the government won't admit it, that is happening to America's economic picture today because of inept policies and corrupt practices.
A recent Harvard study found more Americans are renting but fewer are able to afford it or housing of any kind.(1) There is no proof but the suspicion is the bailout provided by the Toxic Asset Relief Program (TARP) did not allow the market to find a true bottom but supported it at a level that basic market fundamentals couldn't sustain.
At almost the same time, IHS Global Insight economist Chris Christopher released an analysis of food prices which showed a sharp increase in basic food prices over the past two months.(2) Christopher's conclusion was "Living standards [of Americans] will continue to suffer as a larger percentage of household budgets are spent on grocery bills leaving less for discretionary spending." This at a time when Americans are finding the sticker shock from Obamacare is also making a large inroad into discretionary income potential.
These two items should be ringing alarm bells in government circles but aren't. The simple truth is there are no resources left to respond to these inside threats as previous government programs in the form of stimulus packages, fiat printing and juggling of interest rates has so bound the wiggle room of what used to pass for government in America as to leave it in the same boat.
The proof comes from a third report issued by former State Department official James George Jatras. Jatras, who also used to be a Senate staffer (personally I can find no humor in the inside trading of job positions for political favors in Washington), is now a media relations specialist (and there's the tie-in with a no-longer free press and the corruption that is Washington).
Jatras issued a comment for Forbes on the Foreign Account Tax Compliance Act (FACTA).(3) FACTA is the program the U.S. government is using to track down illicit, off-shore accounts to tax those miscreants to the fullest. FACTA, supposed to go into effect on July 1, is going to eliminate whatever goodwill the U.S. has in the world.
But Jatras' analysis bears watching.
He wrote, "Instead of singling out suspected tax evaders, FACTA requires all non-U.S. financial institutions in every country in the world to report data on all specified U.S. accounts to the IRS." Sounds simple but how is it to be enforced is the question that needs answering. Jatras filled that in as well with scary details that again bring to mind an enforced "bank holiday" a la Cyprus to raise the funds the government will need to survive in its current spending frenzy. "Simple: the U.S. has threatened economic sanctions. Non-U.S. institutions deemed 'recalcitrant' would be subjected to a 30% 'withholding penalty' from U.S.-sourced payments."
Now a point needs to be issued here. Cyprus bank deposits were subjected to a 30% haircut, obviously Jatras knows the current threat for non-compliance with FACTA also carries a 30% penalty. Can the Treasury Department be excluded from the investigation as to what actually happened to Cyprus any longer? This is more than coincidence.
But what is really damning is Jatras' next assertion. "There is no exception provided for interest payments on U.S. government securities." Simply put, the U.S. is preparing to use a flimsy 'non-compliance' excuse by a foreign, sovereign nation to default on its obligation to any entity that does not toe the line with its' otherwise unenforceable decree.
If that is not the basic definition of corrupt political practices on the world stage, then nothing is. Is it any wonder we grow more despised by the hour across the globe? Is it any wonder the War on Terror is failing miserably when we foster the hatred others already have for us?
The hard answer is the American government is already extorting as much as it can from a populace that is seeing its standard of living reduced because of inept policies. In order to make a shadow of an effort to balance the books this corrupt bureaucratic beast cooked up a wild scheme to go after "hidden assets" and to ensure compliance with an otherwise unenforceable law by de facto it recruited the governments of the institutions allegedly holding the assets and has threatened economic theft from them.
If the U.S. government did take this drastic step, hoping to force compliance in an area it has no jurisdiction over by defaulting on its sworn obligations, the markets the government bolstered for the last six years would collapse in the blink of an eye. The Lehman Brothers' failure in 2008 would be a bagatelle compared to what our government's reneging on legal debt would be. The flight to safety would triple or quadruple the Lehman effect within the markets. It would ruin our economic position not only for the short-term but for as far as the mind can encompass. It would be more disastrous for the U.S. economy than the defeat of the Armada was for Spain in 1588.
Americans can no longer afford housing, even with the government assistance programs in place. Americans cannot afford food, even with the various programs established. Americans are bracing for higher tax rates on diminishing disposable incomes. The country, however, could withstand these blows and remain a global power.
But a default on the national level, leaves America vulnerable--more vulnerable than it was in 1776 when it decided to tangle with the reigning world power of the time. Desperation will become the common American's reality.
Without food or shelter (even though you will have healthcare) Americans will not have safety even from family members. It will be a case of "I'm first and nobody is second." It will also bring Harry Reid's assertions to fruition. America will be overrun by "domestic terrorists" in the hunt for food.
Unfortunately, the people in our government who caused the mess by buying votes on the cuff will probably be the last to feel the effects of economic collapse. As long as they can remain in hiding inside the Beltway that is.
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man."--Thomas Jefferson
(1)--Moneynews, 4-16-2014, "Harvard Study: Rents No Longer Affordable for Most Americans"
(2)--USA Today, 4-16-2014, "Living Standards Will Suffer in Food Price Surge"
(3)--Forbes, 4-14-2014, "Tax Act May Force Partial US Debt Default"
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Unequal Law Application Killing U.S.
The gap between the law as applied to ordinary citizens and the appointed or elected officials in the United States has always been there. But lately it is growing in direct proportion to the size and scope of the bureaucracy supporting the officials. This gap is leading to an inevitable disdain of the rule of law.
When ordinary people see government people being treated differently and missing the impact of law that they face, they lose respect for the law. When ordinary people find themselves being charged with crimes that it is quite apparent the 'elite' avoid, they lose respect for the law. When ordinary people find the government selectively opts to enforce some laws while turning a blind eye to laws it doesn't like, they feel only a law they agree with should apply.
What the current situation in America boils down to is government insiders are avoiding prosecution for criminal acts and the public knows it.
Daily they see the government ignore some of its own laws--including those provisions of the Constitution that it doesn't like--yet convolute the law into a way it was never intended to be applied to excuse its own behavior. The public gets the weird sense it is on a road with a 55 MPH speed limit, the select few are travelling 75 yet the public is the driver picked for a speeding ticket when he is going 58 because the enforcer knows the penalty will be enacted.
Eric Holder's backlash at a Congressman for "not taking the contempt of Congress charge seriously" is a perfect demonstration. Try it, as an average person in testimony, and you'll wind up in a cozy jail cell for contempt of court. Eric Holder is still AG. That is a crime. The public knows it and contempt for Congress and a dismissal of the rule of law prevails.
Lois Lerner, a public official in charge of the most intimate, informative details of every individual that by law must be provided to her agency, has twice pled the Fifth in front of Congress.
Sorry, as a former government employee, we should never be allowed to take the Fifth on any question from other public officials about our job performance because we are "PUBLIC EMPLOYEES" if those individuals have a need to know. The public deserves to get the answers from public officials on how they are doing their job and how they are handling the responsibility of their job.
The mere fact our toothless Congress allowed her to take the Fifth and not immediately cancel all benefits, pay and pensions she had accumulated while then providing her with a jail cell is criminal of itself because it shows no concern or respect for Joe Public. The fact some in Congress applauded Lois for taking the Fifth is appalling and criminal to every individual who has faithfully served as a public employee. Yet if you fail to provide this cesspool of an agency with any information it desires, you will be harassed, persecuted, fined and jailed to the full extent of the law or beyond. That breaks the basic tenet this is a country of laws.
The BLM had a problem with Clive Bundy in Nevada. Both sides have an argument here. Similar in scope to the problem the Branch Davidians had back in 1993 at Waco. This time, independently armed Americans, exercising their 2nd Amendment rights, moved in to support Bundy. The public officials backed down from force but will now go through the court system to break Bundy. In a battle of wealth, nobody can win against an entity that can print its own fiat. The rule of law is broken in favor of government and against Joe Public. Ultimately however, government will also lose.
A good question comes from Arizona where the state government wrote an immigration law that totally supported the federal law on immigration. Because the current Administration depends on buying votes through minorities, Arizona's state right to clarify its border laws was trashed. That is contrary to the 10th Amendment. Then again the Administration will not trash state marriage or drug laws that are opposed to federal law.
Over and over again, particularly during the past two decades, the gap between the way Joe Public is treated and the manner in which the bureaucracy--at any higher level--is treated causes Joe Public to justify not adhering to those laws he doesn't care for as well.
When enough people decide to disregard the law, when there is enough squeezing by the government trying to hold onto power, the civility we have come to accept in public will be gone. Once it is, only outright warfare will ever re-establish it and there is no guarantee there either.
Once the system crumbles just a little the 'elites' will find out how warped their vision has become. They will be the first to adorn the light poles as the anger of a public seeking justice and no longer finding it will be contained no more. Joe Publics everywhere will forget their petty differences when they can focus on someone who should have known better, did know better and still shirked his or her duty.
The random shootings on Kansas City roads will become norm. Targeting police or firefighters or even the clerk checking in at the driver license bureau will become passé. Joe Public will take his anger out for a test drive. Rarely will he target the individuals or the entity responsible for his anger but he will get rid of it through violence.
To reset the standards, to reassure the 320 million Joe Publics this is still a country of laws, Congress must immediately impose the criminal charges against the Lois Lerner and Eric Holder types that it has available. It must reassert its authority over the casual rewriting of laws being done in the White House. It must take back the legislative authority given it by the Constitution.
For Congress to wait, even one day longer, will hasten the day when the entire government is deemed obsolete by the average person in the street.
As has been seen in other places, nature abhors a vacuum, especially a power vacuum. Americans have not experienced that since the country was being settled. There will be no sanctuary unless you side with the mob majority in the area. Uncontrolled violence is already a daily occurrence.
Government, by wielding the Constitutional power given it--even against members of its own political affiliation, is the only entity that can stop this disintegration of legal law. But it won't. It can't see past the end of its political nose. It craves a breakdown because it sees each breakdown as an opportunity to seize more power for itself. It is perpetrating the downward spiral, not fighting it.
Only when enough people have had enough of rampant anarchy will a cry for order be faintly heard. I doubt it will be heard above uproar of total civil disobedience against unjust tyranny from an unheeding elected government. And for that, I'll be first in line for contempt--or worse.
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man"--Thomas Jefferson
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Monetary Policies Threaten Economy
Two early news items Monday need connecting. The first was the announcement by Coldwater Creek, a women's clothing store, that it had filed for bankruptcy, will close all 365 stores and lay off its 6,000 employees by the end of May. The second report was the Producer Price Index (PPI) which showed prices recorded their largest increase in three years in March. Put the two items together and you have a recipe for disaster.
If Coldwater Creek's announcement had come in a vacuum, it would have been less noticeable but over the first few months of the year the impact of declining discretionary dollars in consumers' pockets cannot be denied by anyone. Coldwater joins the failed retailer ranks of Sbarro ( pizza chain), Ashley Stewart Holdings (another women's clothing chain), Dots LLC and Loehman's Inc. Dots and Loehman's permanently closed their doors while Sbarro and Ashley are seeking buyers.
In the Chapter 11 filing in Wilmington, DE, Coldwater listed assets of $278.5 million and liabilities of $361.3 million. Most of the assets are in the form of inventory value and most of the liabilities come from past-due bills on inventory. The filing leaves the company's shareholders with nothing for their shares.
On the flip side, the PPI--which excludes food and energy prices--rose .6% in March. The Labor Department report originally figured a .5% increase with a .1% loss in February but revised February's figure down another .1% which brought the March report to its current increase. In a reactionary chain, the dollar trimmed losses against the Japanese yen which will have more going to the cost of energy while lower prices for U.S. Treasury debt cut those gains.
This is the calculation that has been missing from Fed policy which has held interest rates at an artificially low level for three years in Operation Twist. By keeping interest levels in check, the Fed has also disavowed any inflation pressure which has allowed it to maintain its expansionary monetary policy to try and nurse the economy back to health. The failure to acknowledge declining discretionary dollars at the consumer level will unwind the economic engine even more.
The catch in the Fed policy was the funding never reached consumer pocketbooks but stopped at the financial sector. With Main Street gagging (a position the Rant has steadfastly held since the Obama Administration declared the recession over in June 2009) consumers are forced to make unwanted decisions with dwindling reserves. They had to decide whether to buy something new or put heat in the home and food on the table.
The necessities of living those demanded a cut in discretionary spending. The cuts equated to a rather sharp decline in retail traffic. This is why the tax-and-spend crowd is in trouble now. The economists' textbook example of requiring government intervention to stop a recession rather than a free market has distorted policy decisions. The Federal Reserve decisions made by Ben (BS) Bernanke are now being seen for the crippling mistake they had to be in the long run.
The result is the pill America will forced to swallow has just grown proportionally larger than if the government had gotten out of the way and let the market find its own level in housing, manufacturing and innovative development. Instead it propped up dysfunctional entities like Goldman Sachs, General Motors, AIG, Solyndra, etc.
Wall Street rejoiced but the rest of the country lingered in misery.
To demonstrate the disconnect between the financial sector and the rest of the country, Senior Economist at PNC Financial Services in Pittsburgh, Gus Faucher, had the nerve to opine, "It certainly does raise the question whether inflation is finally on the rise." What world is he living in? Inflationary pressures have been a constant on Main Street since the housing bubble popped and the Obama Administration began stealing at record rates from consumer pocketbooks.
The final irony is the assessment the food price increases come from the "drought in the West." This is attributed to global warming. But the severity of weather storms, which contributed to record snowfall in the Rocky Mountains and massive rainfalls in later summer, have been on the uptick. By falsely shifting blame on weather swings to carbon dioxide emissions, the government has been able to postpone looking in the mirror to determine how its policies have hampered the economic recovery.
Obamacare and other government intrusions into daily life of the "rich" store owners have pushed their costs higher at a time demand for on-shelf products was falling.
The wild gyrations in the stock markets recently are a sure indicator the surge Obama has ridden for nearly five years is about to get extremely risky. The drastic money tampering measures taken by the Fed and the stubborn clinging to socialistic views by Harry Reid, Obama and Nancy Pelosi have set the stage for another economic meltdown.
This time there are more distress signals from different parts of the world at almost every level than there were in 2007. Unfortunately, at a time America needs a strong government, it has less trust in its political leadership than at any time since the Watergate scandal. The government, by abuse and overreach of power, has wasted goodwill needlessly, goodwill it could now employ.
In the final assessment as the government staggers from crisis to crisis is American citizens no longer have the resources to withstand another financial shock. 'Recovering' from the last one has left them vulnerable to all sorts of nasty economic travails.
"I have sworn on the altar of God eternal hostility to every form of tyranny over the mind of man."--Thomas Jefferson
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