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Stimulating whose economy?

by Frank Schnittger Fri Nov 28th, 2008 at 07:57:20 AM EST

Cross posted from DKOS and Booman.  All recomendations appreciated.  

There seems to be a now near universal consensus ranging from the moderate left to the far right that world economies need to be "stimulated" by large scale state borrowing and expenditure to avoid a global economic meltdown.  The only issue in dispute seems to be where the stimulus moneys should go.  Should they go to - in order from Right to Left - :

  1. Buy toxic assets - thus restoring the banks who own them to solvency and then letting business go on more or less as as usual.  Taxpayers are sure to lose big time even if there is a recovery in asset values, and fraudulent banking practices will have been rewarded.

  2. Bail out banks in return for share capital.  This is generally done at inflated prices to help tide the banks over and avoid wiping out existing shareholders completely (to restore "confidence" to the market!) but at least there is some prospect of taxpayers getting some of their money back.

  3. Force mergers and acquisitions to "rescue" insolvent entities.  Problem is that this creates even bigger "too big to fail" entities which then require even bigger bail-outs - see Citigroups take-over of Wachovia which turns out to have been in better shape than Citigroup itself...

  4. Bail out "too big to fail" real economy entities like GM, Ford and Chrysler - without addressing the reasons those entities were failing in the first place - even in the good times.

The above solutions seem to be largely about trying to save Capitalism as we know it, keeping existing shareholders somewhat sweet and "confident in the markets", keeping existing managements in place, and doing nothing very much structural to prevent similar problems elsewhere or even re-emerging in the same place after the initial bail-out moneys have been expended.

Indeed if the ultimate refuge is to be "too big to fail", the logical solution is for corporations to engineer a series of mergers and acquisitions to ensure that the taxpayer can always be held to ransom.  So what are the alternatives?

Promoted by afew


The underlying problems are that assets were hugely over-inflated, those who have borrowed against those assets often cannot afford to pay the interest on those loans, and the resultant lack of confidence and liquidity in the markets is destroying the ability of the real economy to function.  Banks simply aren't lending in sufficient volumes, and consumer confidence is so low that even previously profitable firms are in big trouble.

So why not address these problems at source rather than filling the coffers of those who were so greedy and incompetent they could not even run a sustainable business in the good times?

So what are the elements of a more equitable and sustainable solution?

  1. Reduce interest rates (already happening) which improves the ability of borrowers to repay, reduces foreclosures, improves consumer confidence, and helps to restore some value to assets which have now probably bombed to below their longer term sustainable values.  This is also socially (and inter-generationally) more equitable as it reduced the tax those who don't have money have to pay to those that do.

  2. Invest in physical infrastructure (public transport, sustainable energy, communications) which can increase the longer term productive capacity of the economy and thus reduce the effective burden that paying interest on all the additional state debt will create.  In practice, almost no state actually repays its national debt - but it funds the additional interest of additional borrowing by increasing its productive capacity.  Thus (whatever Keynesians might say) it is preferable to invest in potentially productive assets rather than pay people to dig holes and fill them up again.

  3.  Invest in social infrastructure (schools, hospitals, social housing, medical benefits and social services) because this addresses many of the underlying problems at source - unemployment, lack of consumer confidence, lack of personal liquidity, a generally more risk averse culture, and the huge social inequalities created by free market capitalism untrammelled by appropriate regulation and social provision.

There is one fundamental insight which must be addressed in this debate and which is almost as invisible to the dominant narrative as the "invisible hand of the market" is to everyone else:  Long term, gross inequality of income and wealth is not only unjust, but hugely inefficient as well.

Money borrowed and spent in bail-outs to the rich accentuates the fundamental problems of the accumulation of capital in fewer and fewer hands as identified most famously by Marx.  Firstly, that wealth tends to be spent disproportionately on conspicuous consumption by the rich rather than productive investment in the real economy.  Secondly, there is only so much that even the super wealthy can consume, and so it is never sufficient to generate consumer demand sufficient to reflate a major economy as a whole - even with some "trickle down" effects.  Thirdly, the huge social tensions that result create an enormous need for expenditure on very expensive police services, legal industries, prison services and external wars designed to distract the populace from the more real problems closer to home.

On the other hand, money borrowed and spent on physical and social infrastructure creates jobs, increases consumer confidence, develops the productive capacity of the economy, reduces the costs associated with crime and gross social inequality, and creates a safer, happier, and more productive environment for all.

Thus if Obama is to spend huge amounts of money on a "stimulus package", he should focus it on delivering on his own electoral promises of middle class tax cuts, improved medical benefits, improved educational and social services, and investing in a more sustainable and productive infrastructure for the nation.  Much more of that money will also stay within the economy - creating "multiplier effects" of increased jobs, consumer confidence, and restabilising the housing market - than if the same money was spent on bailing out the ultra rich who simply got too greedy for their own good  - and who tend to move their assets abroad in any case.

It would be a long and painful road for Obama to travel.  Short term there would be some catastrophic collapses of "too big to fail" banking and industrial consortiums.  But those business models have failed even in the good times, and bailing out those businesses now would be throwing more (and scarcer) good money after bad.  In a few years those jobs will be replaced by more sustainable jobs in construction, renewable energy, education, healthcare, and social services.  Bad wars and an explosion in social unrest and criminality will be avoided. Well run businesses will prosper in a safer, fairer, and more stable environment where the boom and doom merchants of disaster capitalism have no place.

Obama has four years to turn the economy around.  Any time and resources he wastes on shoring up the Bush legacy is time and money he won't have for his own.  Continuity and confidence are important, but the most important thing is that he believes in the people who voted him into power.  They are not the ones who voted for the war in Iraq and who are now waging a war against their own people.  Short term movements in the Market are simply not Obama's problem.  His problem is whether the American people will have a viable and sustainable economy and more equitable society in four years time.

Display:
Very nice, Frank.  I think a key problem all politicians struggle with is the "in a few years" part.  The idea of moving from old bad economy model to new, good economy model is great.  New Labour (if I'm remembering correctly) thought they could move from an old, bad NHS to a new good NHS in three or so years, but the problems were more complex than expected and in particular the inter-relationships were more (there were simply more of them than ever expected), more varied, and etc...

Added to those extra complexities you get political interference at all levels as power relationships are re-negotiated.  No one wants to lose out, but some people will have to somehow--unless you wish to let people go unemployed on full salary for 3 years or so while offering them training etc....  I like that idea, but I'm not sure how it gets paid for.

Can you or anyone think of a company that has been successfully re-invented along your lines--I mean, rising wages, better products, less environmental negatives...  Whoever did that would be worth listening to.

(who's / whose)

Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Wed Nov 26th, 2008 at 09:47:16 AM EST
You don't need "management" to run a steady state operation - well very few administrators maybe.  

Management is all about re-inventing a company's products, services, production methods, organisational structure all the time.  I know of no long term successful company that hasn't done this on an ongoing basis, and those that don't or slow down get into trouble very quickly.  Very few markets, products, production technologies, admin systems, etc.  stay the same for any length of time and the pace of change is increasing.

There is a myth that management is about steady state, when in fact management only earns its corn when it changing things for the better - and this is the routine function of management, not the exception.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Nov 26th, 2008 at 10:14:02 AM EST
[ Parent ]
You are positing the change from dis-function to healthy function, which is more radical, I think, than constant micro-innovation as pondered, promoted, and overseen by workers (incl. managers.)  Maybe it's the longterm lack of that constant micro-innovation (or the misapplication of that micro-innnovation to unhealthy tasks) that has led to the current crisis--are there examples of large companies that have swung themselves through the proverbial 180 degrees?  I mean: workers' wages rise, the environmental footprint drops, the products improve.  Maybe one of the Japanese giants?  Someone wrote that IBM has managed to survive, but I don't know how it does on wages, environment and products.

Don't fight forces, use them R. Buckminster Fuller.
by rg (leopold dot lepster at google mail dot com) on Wed Nov 26th, 2008 at 10:45:31 AM EST
[ Parent ]
rg:
are there examples of large companies that have swung themselves through the proverbial 180 degrees

My old company, Guinness, did.  But I don't want to get too personal on this.  However the Total Quality Management (TQM) movement was all about this.  In my work I came across numerous examples but again I can't be too specific - but seriously, I'm surprised you should ask.  Companies are doing this all the time, and those that don't, don't survive.  This is part of my gripe with the public sector in Ireland - they have no concept of ongoing improvements in efficiency/productivity/value for money as the norm.

Computerisation/process redesign should be revolutionising all larger organisations.  If you can't do what you did last year faster, cheaper, better - and have created new ideas for new products/processes as well you simply shouldn't be in business.  You are simply a time serving placeholder and adding no value as manager whatsoever.  If that is the case you should get off your employees backs and let them do the job better without you.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Nov 26th, 2008 at 11:15:34 AM EST
[ Parent ]
If you can't do what you did last year faster, cheaper, better - and have created new ideas for new products/processes as well you simply shouldn't be in business.  You are simply a time serving placeholder and adding no value as manager whatsoever.  If that is the case you should get off your employees backs and let them do the job better without you.

That's a very fine principle, and one I can entirely applaud. But (and you knew there'd be a "but") at the same time it is arguably what's at the root of many problems with our management culture. If management is always supposed to make the organisation change for the better or be considered redundant, and if said management is flat out of ideas for how to do so, there'll be great pressure to simply make changes for the sake of making changes. That way the manager can hope to appear to be making improvements, and thus retain his job.

That's not how it's supposed to work, but managers are only human, after all.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 26th, 2008 at 02:33:45 PM EST
[ Parent ]
And when that became the dominant mode of managerial action in my organisation, I left.

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Nov 26th, 2008 at 03:08:34 PM EST
[ Parent ]
My sincere applause for that decision.

As an aside, I think this touches upon the previous discussion of management in the public sector - because from where I sit, it looks a lot like many public sector institutions don't have the mechanisms in place for booting the managers who oughta just stop wasting people's time and money. And, understandably, institutions will be more reluctant to embrace calls for a greater focus on management if they can't see a clear way to get rid of bad managers.

Kinda like the way easier firing promotes easier hiring, except that here it also applies to people with an MBA...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 26th, 2008 at 04:08:54 PM EST
[ Parent ]
Can you or anyone think of a company that has been successfully re-invented along your lines--I mean, rising wages, better products, less environmental negatives...  Whoever did that would be worth listening to.

There was a well documented story about Canon a few years back. They had sent off a segment of manufacturing to China to capture cost savings. Then a few years later (and a few years ago), they brought it back in-house. In the process, they discovered several new ways to incorporate manufacturing wisdom into the R&D process, quicker methods to get ideas to market and brought several other benefits, including many quarters of profits to the division.

I have spent a few minutes looking for this article but can't find it. I wish my memory was perfect enough to assert that it was in the camera and copier group, which is what I remember, and that the year was 2005. But I think this example fits the flow of your question and the spirit of the article, so didn't want to leave it out for lack of documentation...that getting good, well compensated jobs into the hands of the many is possible, even in a price sensitive consumer section of the economy.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Fri Nov 28th, 2008 at 02:39:47 PM EST
[ Parent ]
I agree with all you are saying, but I think one other thing is needed.

I think that the finance sector is jammed right now, leading to all kind of problems with letter of credits and so on. I also think that the foundation for their problems is that the finance companies has cross-lended and guaranteed each others lending so that no one can know what companies are solvent. This needs to be fixed and it needs to be fixed fast.

Approaches that might work include (a) regulating certain exotic instruments out of existence, (b) forcing insolvent credit institutions into the sort of bankrupcy where the healthy parts of the company continue in existance, (c) creating new and strongly regulated credit institutions (and thus letting the old ones fall without dragging fown the rest of the economy).

The bailout I suspect not to fix anything in the finance sector, but actually dragging out the process of clearing the market, thus causing more damage on the rest of the economy. And of course using up money that could be used for investments.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Fri Nov 28th, 2008 at 11:07:57 AM EST
Yea the thrust of my piece was that it is the real economy which needs to be helped - not fraudulent and corrupt banking model which adds little real value to the economy in the first place.

Ultimately what the old model has done is to outsource risk in such confusing ways, that no one knows who is exposed by how much, and the resulting loss of confidence and functionality leaves the taxpayer as the risk bearer of last resort.

If the banks stop fulfilling their role of guaranteeing loans to the productive economy, they lose their utility and the state is forced to step in instead.

It is said that war is too important to be left to the generals.  What is clear from this crisis is that the global system of finance, guarantees and settlement processes is too important to be left to private banks who game the system and profit by off loading opaque risk to others.

Increasingly businesses will have to rely less on debt finance and keep larger reserves of cash on their own balance sheets.  Banks will have to be bypassed more and more by the real economy.

This may result in some "BALANCE SHEET INEFFICIENCIES" but resilience, too, is an important characteristic of a successful business.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Nov 28th, 2008 at 11:50:39 AM EST
[ Parent ]
Charles Krauthammer - From Market Economy to Political Economy - washingtonpost.com
The ruling Democrats have a choice: Rescue this economy to return it to market control. Or use this crisis to seize the commanding heights of the economy for the greater social good. Note: The latter has already been tried. The results are filed under "History, ash heap of."

And as we all deregulated market control has been a resounding success?  They say the definition of madness is to continue to do the same thing and expect a different result.  I'm afraid it is you, Charles, who has just be dumped onto the ash heap of history.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Nov 28th, 2008 at 11:51:52 AM EST
You have to develop an ethos of social justice underlying our way of life and this includes the economy.

There hasnt been enough pain felt yet for the demands for social justice to be considered. You can't have social justice without ridding the system of the corrupt people and practices which not only created this mess but have allowed the society to fracture.

So Far; not one significant indictment and there hasnt been any constructive regulations being forced on the finance sector in exchange for the government pumping money inot the sector.

None of this will come to pass without eradicating the corruption which is at the heart of the business and government relationship.

Unfortunately much more pain will have to be felt before anything constructive will be done and the current solutions of stabilizing the finance sector and some stimulus package for the economy is folly because there is no impetus to change the ethos.

We are doomed until the country is no longer run by the same interests who have caused the problems.

by An American in London on Fri Nov 28th, 2008 at 01:14:10 PM EST
Its hard to see the market for large scale private debt, derivatives, CDOs etc. recovering any time soon.  Wall Street will become a lot less important in the US and World economies.  No one will buy exposure into that market without a lot more transparency.  The longer term cost may well be that the US loses its leadership of the financial world and the $ ceases to be the reserve currency.  Better regulated markets will have less difficulties attracting capital.  I expect to see Frankfurt growing in prominence at the expense of New York and London.

None of this addresses your issues re: social justice and ethics.  However it does show that their absence can be economically inefficient as well.

notes from no w here

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Nov 28th, 2008 at 01:44:20 PM EST
[ Parent ]
The only significant "progress" made on resolving the current crisis in the USA has been by all of those who reflexively label as "socialism" anything that concievabley might benefit or protect the interest of the taxpayer's regarding all of the liabilities they are assuming as part of the Paulson "bailout."  If they keep this up they will soon undo all of the effort that has been made over the last 90 years to stigmatize the word Socialism!"

The current crew doesn't want to change the existing system.  It has been too valuable for them.  This system was designed to most efficiently extract wealth from the less well off and transfer it to the very well off, so they assume any solution to systemic malfunctions should take the same course, which it has: i.e. give taxpayer money to the financial institutions that caused the problem.  As reason follows desire, it is probably impossible for Paulson to conceive of any solution that does not continue this process.  

If there is no such solution that will work, then try another such solution even if it is clear that it can't work.  At least it will get the money where it needs to go and that is the most important thing.  Only further damage can happen while these folks remain in charge.  As for the next administration, time will tell if they can bring themselves to do anything that will help.  Just following through on campaign promises would be a significant step forward.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Nov 28th, 2008 at 11:55:28 PM EST
[ Parent ]


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