Tag Archives: economics

ForeclosureGate Could Force Bank Nationalization

t r u t h o u t | ForeclosureGate Could Force Bank Nationalization.

by: Ellen Brown, t r u t h o u t | News Analysis

(Photo: Joey Parsons / Flickr)

For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren’t too big to reorganize as federal institutions serving the public interest.

In January 2009, only a week into Obama’s presidency, David Sanger reported in The New York Times that nationalizing the banks was being discussed. Privately, the Obama economic team was conceding that more taxpayer money was going to be needed to shore up the banks. When asked whether nationalization was a good idea, House Speaker Nancy Pelosi replied:

“Well, whatever you want to call it…. If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.

“I’m not talking about total ownership,” she quickly cautioned – stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?'”

Noted Matthew Rothschild in a March 2009 editorial:

[T]hat’s the problem today. The word “nationalization” shuts off the debate. Never mind that Britain, facing the same crisis we are, just nationalized the Bank of Scotland. Never mind that Ronald Reagan himself considered such an option during a global banking crisis in the early 1980s.

Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt. The bank is put into receivership under the FDIC, which takes it over.

What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called “welfare for the rich.” The banks’ losses and risks have been socialized, but the profits have not. The bankers have been feasting on our dime without sharing the spread.

And that was before ForeclosureGate – the uncovering of massive fraud in the foreclosure process. Investors are now suing to put defective loans back on bank balance sheets. If they win, the banks will be hopelessly under water.

“The unraveling of the ‘foreclosure-gate‘ could mean banking crisis 2.0,” warned economist Dian Chu on October 21, 2010.

Banking Crisis 2.0 Means TARP II

The significance of ForeclosureGate is being downplayed in the media, but independent analysts warn that it could be the tsunami that takes the big players down.

John Lekas, senior portfolio manager of the Leader Short Term Bond Fund, said on “The Street” on November 2, 2010, that the banks will prevail in the lawsuits brought by investors. The paperwork issues, he said, are just “technical mumbo jumbo”; there is no way to unwind years of complex paperwork and securitizations.

But Yves Smith, writing in The New York Times on October 30, says it’s not that easy:

“The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable.

“Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee?”

Chris Whalen of Institutional Risk Analytics told Fox Business News on October 1 that the government needs to restructure the largest banks. “Restructuring” in this context means bankruptcy receivership. “You can’t prevent it,” said Whalen. “We’ve wasted two years, and haven’t restructured the top banks, but for Citi. Bank of America will need to be restructured; this isn’t about the documentation problem, this is because [of the high] cost of servicing the property.”

Profs. William Black and Randall Wray are calling for receivership for another reason – the industry has engaged in flagrant, widespread fraud. “There was fraud at every step in the home finance food chain,” they wrote in The Huffington Post on October 25:

“[T]he appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers’ incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.”

Players all down the line were able to game the system, suggesting there is something radically wrong not just with the players, but with the system itself. Would it be sufficient just to throw the culprits in jail? And which culprits? One reason there have been so few arrests to date is that “everyone was doing it.” Virtually the whole securitized mortgage industry might have to be put behind bars.

The Need for Permanent Reform

The Kanjorski amendment to the Banking Reform Bill passed in July allows federal regulators to preemptively break up large financial institutions that pose a threat to US financial or economic stability. In the financial crises of the 1930s and 1980s, the banks were purged of their toxic miscreations and delivered back to private owners, who proceeded to engage in the same sorts of chicanery all over again. It could be time to take the next logical step and nationalize not just the losses, but the banks themselves, and not just temporarily, but permanently.

The logic of that sort of reform was addressed by Willem Buiter, chief economist of Citigroup and formerly a member of the Bank of England’s Monetary Policy Committee, in The Financial Times following the bailout of AIG in September 2008. He wrote:

If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place?

Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the tax payer taking the risk and the losses?

If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer.

Even where private deposit insurance exists, this is only sufficient to handle bank runs on a subset of the banks in the system. Private banks collectively cannot self-insure against a generalised run on the banks. Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money. [Emphasis added.]

All money today except coins originates as a debt to a bank, and debts are just legal agreements to pay in the future. Legal agreements are properly overseen by the judiciary, a branch of government. Perhaps it is time to make banking a fourth branch of government.

That probably won’t happen any time soon, but in the meantime we can try a few experiments in public banking, beginning with the Bank of America, predicted to be the first of the behemoths to be put into receivership.

Leo Panitch, Canada Research Chair in comparative political economy at York University, wrote in The Globe and Mail in December 2009 that “there has long been a strong case for turning the banks into a public utility, given that they can’t exist in complex modern society without states guaranteeing their deposits and central banks constantly acting as lenders of last resort.”

Nationalization Is Looking Better

David Sanger wrote in The New York Times in January 2009:

Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff. “The nightmare scenarios are endless,” one of the administration’s senior officials said.

Today, that scenario is looking less like a nightmare and more like relief. Calls have been made for a national moratorium on foreclosures. If the banks were nationalized, the government could move to restructure the mortgages, perhaps at subsidized rates.

Lending money to ailing projects in cities and states is also sounding rather promising. Despite massive bailouts by the taxpayers and the Fed, the banks are still not lending to local governments, local businesses or consumers. Matthew Rothschild, writing in March 2009, quoted Robert Pollin, professor of economics at the University of Massachusetts at Amherst:

“Relative to a year ago, lending in the US economy is down an astonishing 90 percent. The government needs to take over the banks now, and force them to start lending.”

When the private sector fails, the public sector needs to step in. Under public ownership, wrote Nobel Prize winner Joseph Stiglitz in January 2009, “the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.”

For a model, Congress can look to the nation’s only state-owned bank, the Bank of North Dakota (BND). The 91-year-old BND has served its community well. As of March 2010, North Dakota was the only state boasting a budget surplus; it had the lowest default rate in the country; it had the lowest unemployment rate in the country; and it had received a 2009 dividend from the BND of $58.1 million, quite a large sum for a sparsely populated state.

For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.

Are we having another food crisis?

Are we having another food crisis? – environment – 28 October 2010 – New Scientist.

The world food price index is at its highest since 2008, when food prices rocketed and millions of people suffered. This year the crisis seems to be happening again. Prices for the staple grains that underpin the world’s food supply soared after forecasts for the US and Chinese maize harvests fell in October, Pakistan lost its wheat to floods, and crop losses to drought and wildfire led Russia to ban grain exports until 2011. Food prices have soared in India, Egypt and elsewhere and are being blamed for riots in Mozambique.

Are we having another food crisis? New Scientist investigates.

Is this another crisis like the one we had in 2008?

Not quite. Maximo Torero of the International Food Policy Research Institute (IFPRI) in Washington DC notes that oil, the real driver of food prices and of the 2008 crisis, is relatively cheap, at around $75 a barrel, not over $100 as it was in 2008.

In 2008, both immediate grain prices, and the prices offered for future grain purchases in commodities markets, climbed steadily for months, whereas now they are spiking and dipping more unpredictably, which economists call volatility.

“The market fundamentals – supply and demand – do not warrant the price increases we have seen,” says Torero. Not all harvests have been bad, and after 2008 countries rebuilt grain stocks. “There are enough stocks in the US alone to cover the expected losses in Russia.”

The food riots in Mozambique were not due to world grain prices, he says, but because Mozambique devalued its currency, making imported food more expensive.

So what has been happening this year?

Markets are responding nervously to incomplete information. First there was a series of shocks: Russia’s export ban, lower maize forecasts, then, days later, a US ruling to allow more bioethanol in fuel which seemed likely to further reduce the maize – the main source of bioethanol – available for food. Meanwhile there was no reliable information about grain stocks, which is strategic information that most countries keep secret.

The result was nervous bidding and sporadically surging prices in commodity markets. And that attracted the real problem: investors wielding gargantuan sums of speculative capital and hoping to make a killing. When speculation exacerbated the price crisis of 2008, Joachim von Braun of the University of Bonn, Germany, then head of IFPRI, predicted that it would continue causing problems. “We saw that one coming and it came,” he says. “Food markets have new design flaws, with their inter-linkages to financial markets.”

Volatility also makes it harder to solve the long-term, underlying problem – inadequate food production – by making farmers and banks reluctant to invest in improved agricultural technology as they are unsure of what returns they will get. “Investment in more production alone will not solve the problem,” says von Braun. As long as extreme speculation causes constant price bubbles and crashes, either farmers will not get good enough returns to continue investing in production, or consumers will not be able to afford the food.

“Without action to curb excessive speculation, we will see further increases in these volatilities,” he says.

What can we do?

This is where technology comes in. All the major producers already use remote sensing technology to watch each other’s fields. If countries would reveal just once what stocks they hold, says Torero, the satellite images can be used to calculate whether those stocks have risen or fallen, as growing conditions change. “All we need to know is the baseline,” he says. Reliable information about stocks could offset unwarranted jitters about crop failures, such as the ones that are contributing to the current market volatility.

Von Braun goes farther: he says there should be a global technical organisation that keeps track of world grain stocks and production, and which decides, using complex computerised models of world food markets, what range of grain prices are actually warranted by real supply and demand. Then if speculation starts to drive prices up out of this band, countries could intervene on markets, buying and selling just enough to counter speculative pressure. “This doesn’t stop speculation, just extreme speculation,” he says.

He thinks it would take a fund of $20-$30 billion to do the trick. In September the World Bank extended a $2 billion fund to respond to food price crises, but that is aimed at helping the poorest survive price spikes rather than intervening to stop them happening.

Even if we stop the volatility, don’t we still need to grow more food?

Yes. As well as stable markets we also need more research into increasing yields that will produce enough grain to sell, plus investment in getting research products into farmers’ hands, and the roads, markets and communications technology the farmers need to get it to market.

The more farmers are selling into the world market, says von Braun, the more stable it will be, as when one country falls short, another will have extra.

Five Zombie Economic Ideas That Refuse to Die – By John Quiggin | Foreign Policy

Five Zombie Economic Ideas That Refuse to Die – By John Quiggin | Foreign Policy.

This could be useful to the work you & Dave M. are doing?

The global financial crisis that began with the collapse of the U.S. subprime mortgage market in 2007 ended by revealing that most of the financial enterprises that had dominated the global economy for decades were speculative ventures that were, if not insolvent, at least not creditworthy.

Much the same can be said of many of the economic ideas that guided policymakers in the decades leading up to the crisis. Economists who based their analysis on these ideas contributed to the mistakes that caused the crisis, failed to predict it or even recognize it when it was happening, and had nothing useful to offer as a policy response. If one thing seemed certain, it was that the dominance of the financial sector, as well as of the ideas that gave it such a central role in the economy, was dead for good.

Three years later, however, the banks and insurance companies bailed out on such a massive scale by governments (and ultimately the citizens who must pay higher taxes for reduced services) have returned, in zombie form. The same reanimation process has taken place in the realm of ideas. Theories, factual claims, and policy proposals that seemed dead and buried in the wake of the crisis are now clawing their way through the soft earth, ready to wreak havoc once again.

Five of these zombie ideas seem worthy of particular attention and, if possible, final burial. Together they form a package that may be called “market liberalism,” or, more pejoratively “neoliberalism.” Market liberalism dominated public policy for more than three decades, from the 1970s to the global financial crisis. Even now, it dominates the thinking of the policymakers called on to respond to its failures. The five ideas are:

The Great Moderation: the idea that the period beginning in 1985 was one of unparalleled macroeconomic stability that could be expected to endure indefinitely.

Even when it was alive, this idea depended on some dubious statistical arguments and a willingness to ignore the crises that afflicted many developing economies in the 1990s. But the Great Moderation was too convenient to cavil at.

Of all the ideas I have tried to kill, this one seems most self-evidently refuted by the crisis. If double-digit unemployment rates and the deepest recession since the 1930s don’t constitute an end to moderation, what does? Yet academic advocates of the Great Moderation hypothesis, such as Olivier Coibion and Yuriy Gorodnichenko, have stuck to their guns, calling the financial crisis a “transitory volatility blip.”

More importantly, central banks and policymakers are planning a return to business as usual as soon as the crisis is past. Here, “business as usual” means the policy package of central bank independence, inflation targeting, and reliance on interest rate adjustments that have failed so spectacularly in the crisis. Speaking at a symposium for the 50th anniversary of the Reserve Bank of Australia this year, European Central Bank head Jean-Claude Trichet offered the following startlingly complacent analysis:

We are emerging from the uncharted waters navigated over the past few years. But as central bankers we are always faced with new episodes of turbulence in the economic and financial environment. While we grapple with how to deal with ever new challenges, we must not forget the fundamental tenets that we have learned over the past decades. Keeping inflation expectations anchored remains of paramount importance, under exceptional circumstances even more than in normal times. Our framework has been successful in this regard thus far.

The Efficient Markets Hypothesis: the idea that the prices generated by financial markets represent the best possible estimate of the value of any investment. (In the version most relevant to public policy, the efficient markets hypothesis states that it is impossible to outperform market valuations on the basis of any public information.)

Support for the efficient markets hypothesis has always relied more on its consistency with free market ideas in general than on clear empirical evidence.

The absurdities of the late 1990s dot-com bubble and bust ought to have killed the notion. But, given the financial sector’s explosive growth and massive profitability in the early 2000s, the hypothesis was too convenient to give up.

Some advocates developed elaborate theories to show that the billion-dollar values placed on companies delivering dog food over the Internet were actually rational. Others simply treated the dot-com bubble as the exception that proves the rule.

Either way, the lesson was the same: Governments should leave financial markets to work their magic without interference. That lesson was followed with undiminished faith until it came to the edge of destroying the global economy in late 2008.

Even now, however, when the efficient financial markets hypothesis should be discredited once and for all, and when few are willing to advocate it publicly, it lives on in zombie form. This is most evident in the attention paid to ratings agencies and bond markets in discussion of the “sovereign debt crisis” in Europe, despite the fact that it was the failure of these very institutions, as well as the speculative bubble they helped generate, that created the crisis in the first place.

Dynamic Stochastic General Equilibrium (DSGE): the idea that macroeconomic analysis should not be concerned with observable realities like booms and slumps, but with the theoretical consequences of optimizing behavior by perfectly rational (or almost perfectly rational) consumers, firms, and workers.

DSGE macro arose out of the breakdown of the economic synthesis that informed public policy in the decades after World War II, which combined Keynesian macroeconomics with neoclassical microeconomics. In the wake of the stagflation of the 1970s, critics of John Maynard Keynes like University of Chicago economist Robert Lucas argued that macroeconomic analysis of employment and inflation could only work if it were based on the same microeconomic foundations used to analyze individual markets and the way these markets interacted to produce a general equilibrium.

The result was a thing of intellectual beauty, compared by the IMF’s chief economist, Olivier Blanchard, to a haiku. By adding just the right twists to the model, it was possible to represent booms and recessions, at least on the modest scale that prevailed during the Great Moderation, and derive support for the monetary policy.

But when the crisis came, all this sophistication proved useless. It was not just that DSGE models failed to predict the crisis. They also contributed nothing to the discussion of policy responses, which has all been conducted with reference to simple Keynesian and classical models that can be described by the kinds of graphs found in introductory textbooks.

Economist Paul Krugman and others have written that the profession has mistaken beauty for truth. We need macroeconomic analysis that is more realistic, even if it is less rigorous. But the supertanker of an academic research agenda is hard to turn, and the DSGE approach has steamed on, unaffected by its failure in practice. Google Scholar lists 2,600 articles on DSGE macro published since 2009, and many more are on the way.

The Trickle-Down Hypothesis: the idea that policies that benefit the wealthy will ultimately help everybody.

Unlike some of the zombie ideas discussed here, trickle-down economics has long been with us. The term itself seems to have been coined by cowboy performer Will Rogers, who observed of U.S. President Herbert Hoover’s 1928 tax cuts: “The money was all appropriated for the top in the hopes that it would trickle down to the needy. Mr. Hoover … [didn’t] know that money trickled up.”

Trickle-down economics was conclusively refuted by the experience of the postwar economic golden age. During this “Great Compression,” massive reductions in inequality brought about by strong unions and progressive taxes coexisted with full employment and sustained economic growth.

Whatever the evidence, an idea as convenient to the rich and powerful as trickle-down economics can’t be kept down for long. As inequality grew in the 1980s, supply-siders and Chicago school economists promised that, sooner or later, everyone would benefit. This idea gained more support during the triumphalist years of the 1990s, when, for the only time since the breakdown of Keynesianism in the 1970s, the benefits of growth were widely spread, and when stock-market booms promised to make everyone rich.

The global financial crisis marks the end of an economic era and provides us with a position to survey how the benefits of economic growth have been shared since the 1970s. The answers are striking. Most of the benefits of U.S. economic growth went to those in the top percentile of the income distribution. By 2007, just one out of 100 Americans received nearly a quarter of all personal income, more than the bottom 50 percent of households put together.

The rising tide of wealth has conspicuously failed to lift all boats. Median household income has actually declined in the United States over the last decade and has been stagnant since the 1970s. Wages for males with a high school education have fallen substantially over the same period.

Whatever the facts, there will always be plenty of advocates for policies that favor the rich. Economics commentator Thomas Sowell provides a fine example, observing, “If mobility is defined as being free to move, then we can all have the same mobility, even if some end up moving faster than others and some of the others do not move at all.”

Translating to the real world, if we observe one set of children born into a wealthy family, with parents willing and able to provide high-quality schooling and “legacy” admission to the Ivy League universities they attended, and another whose parents struggle to put food on the table, we should not be concerned that members of the first group almost invariably do better. After all, some people from very disadvantaged backgrounds achieve success, and there was no law preventing the rest from doing so.

Contrary to the cherished beliefs of most Americans, the United States has less social mobility than any other developed country. As Ron Haskins and Isabel Sawhill of the Brookings Institution have shown, 42 percent of American men with fathers in the bottom fifth of the income distribution remain there as compared to: Denmark, 25 percent; Sweden, 26 percent; Finland, 28 percent; Norway, 28 percent; and Britain, 30 percent. The American Dream is fast becoming a myth.

Privatization: the idea that nearly any function now undertaken by government could be done better by private firms.

The boundaries between the private and public sectors have always shifted back and forth, but the general tendency since the late 19th century has been for the state’s role to expand, to correct the limitations and failures of market outcomes. Beginning with Prime Minister Margaret Thatcher’s government in 1980s Britain, there was a concerted global attempt to reverse this process. The theoretical basis for privatization rested on the efficient markets hypothesis, according to which private markets would always yield better investment decisions and more efficient operations than public-sector planners.

The political imperative derived from the “fiscal crisis of the state” that arose when the growing commitments of the welfare state ran into the end of the sustained economic growth on which it was premised. The crisis manifested itself in the “tax revolts” of the 1970s and 1980s, epitomized by California’s Proposition 13, the ultimate source of the state’s current crisis.

Even in its heyday, privatization failed to deliver on its promises. Public enterprises were sold at prices that failed to recompense governments for the loss of their earnings. Rather than introducing a new era of competition, privatization commonly replaced public monopolies with private monopolies, which have sought all kinds of regulatory arbitrage to maximize their profits. Australia’s Macquarie Bank, which specializes in such monopoly assets and is known as the “millionaires’ factory,” has shown particular skill in jacking up prices and charges in ways not anticipated by governments undertaking privatization.

Privatization failed even more spectacularly in the 21st century. A series of high-profile privatizations, including those of Air New Zealand and Railtrack in Britain, were reversed. Then, in the chaos of the global financial crisis, giants like General Motors and American International Group (AIG) sought the protection of government ownership.

Sensible proponents of the mixed economy have never argued that privatization should be opposed in all cases. As circumstances change, government involvement in some areas of the economy becomes more desirable, in others less so. But the idea that change should always be in the direction of greater private ownership deserves to be consigned to the graveyard of dead ideas.

Despite being spectacularly discredited by the global financial crisis, the ideas of market liberalism continue to guide the thinking of many, if not most, policymakers and commentators. In part, that is because these ideas are useful to rich and powerful interest groups. In part, it reflects the inherent tenacity of intellectual commitments.

Most importantly, though, the survival of these zombie ideas reflects the absence of a well-developed alternative. Economics must take new directions in the 21st century if we are to avoid a repetition of the recent crisis.

Most obviously, there needs to be a shift from rigor to relevance. The prevailing emphasis on mathematical and logical rigor has given economics an internal consistency that is missing in other social sciences. But there is little value in being consistently wrong.

Similarly, there needs to be a shift from efficiency to equity. Three decades in which market liberals have pushed policies based on ideas of efficiency and claims about the efficiency of financial markets have not produced much in the way of improved economic performance, but they have led to drastic increases in inequality, particularly in the English-speaking world. Economists need to return their attention to policies that will generate a more equitable distribution of income.

Finally, with the collapse of yet another economic “new era,” it is time for the economics profession to display more humility and less hubris. More than two centuries after Adam Smith, economists have to admit the force of Socrates’s observation that “The wisest man is he who knows that he knows nothing.”

Every crisis is an opportunity. The global financial crisis gives the economics profession the chance to bury the zombie ideas that led the world into crisis and to produce a more realistic, humble, and above all socially useful body of thought.

Republican Economics as Social Darwinism

t r u t h o u t | Robert Reich | Republican Economics as Social Darwinism.

Really good Op-Ed

by: Robert Reich  |  Robert Reich’s Blog | Op-Ed

John Boehner, the Republican House leader who will become Speaker if Democrats lose control of the House in the upcoming midterms, recently offered his solution to the current economic crisis: “Liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system. People will work harder, lead a more moral life.”

Actually, those weren’t Boehner’s words. They were uttered by Herbert Hoover’s treasury secretary, millionaire industrialist Andrew Mellon, after the Great Crash of 1929.

But they might as well have been Boehner’s because Hoover’s and Mellon’s means of purging the rottenness was by doing exactly what Boehner and his colleagues are now calling for: shrink government, cut the federal deficit, reduce the national debt, and balance the budget.

And we all know what happened after 1929, at least until FDR reversed course.

Boehner and other Republicans would even like to roll back the New Deal and get rid of Barack Obama’s smaller deal health-care law.

The issue isn’t just economic. We’re back to tough love. The basic idea is force people to live with the consequences of whatever happens to them.

In the late 19th century it was called Social Darwinism. Only the fittest should survive, and any effort to save the less fit will undermine the moral fiber of society.

Republicans have wanted to destroy Social Security since it was invented in 1935 by my predecessor as labor secretary, the great Frances Perkins. Remember George W. Bush’s proposal to privatize it? Had America agreed with him, millions of retirees would have been impoverished in 2008 when the stock market imploded.

Of course Republicans don’t talk openly about destroying Social Security, because it’s so popular. The new Republican “pledge” promises only to put it on a “fiscally responsible footing.” Translated: we’ll privatize it.

Look, I used to be a trustee of the Social Security trust fund. Believe me when I tell you Social Security is basically okay. It may need a little fine tuning but I guarantee you’ll receive your Social Security check by the time you retire even if that’s forty years from now.

Medicare, on the other hand, is a huge problem and its projected deficits are truly scary. But that’s partly because George W. Bush created a new drug benefit that’s hugely profitable for Big Pharma (something the Republican pledge conspicuously fails to address). The underlying problem, though, is health-care costs are soaring.

Repealing the new health-care legislation would cause health-care costs to rise even faster. In extending coverage, it allows 30 million Americans to get preventive care. Take it away and they’ll end up in far more expensive emergency rooms.

The new law could help control rising health costs. It calls for medical “exchange” that will give people valuable information about health costs and benefits. The public should know certain expensive procedures only pad the paychecks of specialists while driving up the costs of insurance policies that offer them.

Republicans also hate unemployment insurance. They’ve voted against every extension because, they say, it coddles the unemployed and keeps them from taking available jobs.

That’s absurd. There are still 5 job seekers for every job opening, and unemployment insurance in most states pays only a small fraction of the full-time wage.

Social insurance is fundamental to a civil society. It’s also good economics because it puts money in peoples’ pockets who then turn around and buy the things that others produce, thereby keeping those others in jobs.

We’ve fallen into the bad habit of calling these programs “entitlements,” which sounds morally suspect – as if a more responsible public wouldn’t depend on them. If the Great Recession has taught us anything, it should be that.anyone can take a fall through no fault of their own.

Finally, like Hoover and Mellon, Republicans want to cut the deficit and balance the budget at a time when a large portion of the workforce is idle.

This defies economic logic. When consumers aren’t spending, businesses aren’t investing and exports can’t possibly fill the gap, and when state governments are slashing their budgets, the federal government has to spend more. Otherwise, the Great Recession will turn into exactly what Hoover and Mellon ushered in – a seemingly endless Great Depression.

It’s also cruel. Cutting the deficit and balancing the budget any time soon will subject tens of millions of American families to unnecessary hardship and throw even more into poverty.

Herbert Hoover and Andrew Mellon thought their economic policies would purge the rottenness out of the system and lead to a more moral life. Instead, it purged morality out of the system and lead to a more rotten life for millions of Americans.

And that’s exactly what Republicans are offering yet again.

t r u t h o u t | Jim Boyce | Essentials of Smart Climate Policy

t r u t h o u t | Jim Boyce | Essentials of Smart Climate Policy.

some interesting proposals, including for reference for our stuff….

by: Jim Boyce  |  RealClimateEconomics.org

In one of the more memorable moments of the 2008 presidential campaign, candidate Barack Obama explained why he rejected John McCain’s call to postpone their September debate in Oxford, Mississippi, during the negotiations on the first financial bailout package. “It’s going to be part of the president’s job,” Obama declared, “to be able to deal with more than one thing at once.”

Something similar can be said about climate policy. A variety of proposals – for public investment, carbon pricing, regulatory standards – are cooking in Washington’s political stew. Sometimes the proponents of specific policies are tempted to oversell their merits, while dismissing other policies as unnecessary or even counterproductive. But if Congress and the Obama administration are going to get smart on climate change, part of their job is to deal with more than one policy at once.

Climate change cannot be reduced to single-issue politics. The challenge of weaning the United States from its dependence on fossil fuels that spew carbon into the Earth’s atmosphere is inseparable from the challenges of reviving our economy, generating decent jobs, and restoring our leadership in the international community.

Nor can climate change be treated effectively as a single-policy issue. Public investment is crucial, but it will not solve the problem alone. Ditto carbon pricing. Ditto regulatory standards. Each must be part of the solution, and each will enhance the effectiveness of the others. Choosing more than one thing from the toolkit is the essence of smart climate policy.

Public Investment

Today, with the economy in its deepest crisis since the Great Depression – at a time when banks aren’t lending, firms aren’t investing, consumers aren’t spending, and jobs are disappearing – a big program of public investment occupies the center of the political stage.

Public spending, unlike tax cuts, directly boosts demand for goods and services. And unlike private consumption, a sizeable fraction of which goes into buying imports, public spending can be targeted to spur demand for goods and services produced at home.

As critics are quick to point out, public spending can be wasteful in the sense of creating nothing of lasting value. The government can inject a short-run stimulus into the economy simply by paying people to dig holes in the ground and fill them up. If instead we pay people to build things of lasting value – that is, if we invest well and wisely – we can benefit twice, not only rebooting the economy in the short term but also strengthening the economy for the years ahead.

At this juncture in history, some of the most strategic public investments we can make are in energy efficiency and renewable energy. These investments are necessary, first and foremost, to insure our grandchildren against the threat of catastrophic climate change. These investments also will reduce our reliance on imported oil and the regimes that supply it. At the same time, they will curtail the many other damages inflicted by the extraction and burning of fossil fuels, from “mountaintop removal” in Appalachia to toxic air pollution in communities located near refineries and highways.

Dollar-for-dollar, investment in energy efficiency and renewable energy scores much higher in job creation than investment in fossil fuels. Every million dollars spent on retrofitting buildings generates 7 jobs directly, plus 11 more jobs indirectly through the purchases of supplies and consumption by the workers – 18 jobs in total. In mass transit and freight rail, the total is even higher: nearly 22 jobs per $1 million spending. The corresponding total in the coal industry is 9 jobs. In oil and gas it’s even less: fewer than 6 jobs per $1 million.

Public investments, and private investments “crowded in” by public investments, can not only spur net job growth, but also can target areas of the country where job creation is needed most – including areas that will ultimately experience losses of jobs in the fossil fuel industries as we move to the post-carbon economy of the future.

The green recovery program proposed by my colleagues at the Political Economy Research Institute (PERI) calls for public investment totaling $100 billion over two years in retrofitting buildings, mass transit and freight rail, a “smart” electrical grid, wind and solar power, next-generation biofuels, and loan guarantees to encourage more private investment in energy efficiency and renewables. The stimulus bill signed into law by President Obama contains similar provisions.

By definition, a stimulus program increases demand for goods and services, rather than simply reshuffling demand from one sector of the economy to another. Public investment in a stimulus package is not financed by taxes, or sales of carbon permits, or cuts in other public expenditures: it is financed by deficit spending, including both borrowing and Federal Reserve purchases of Treasury bills (or “printing money” in the language of the pre-electronic era).

In future years, once the economy recovers and stimulus spending draws down, we will need to find other ways to pay for ongoing public investments in the clean energy transition. One possibility is to reallocate the federal subsidies currently lavished upon the oil, coal, and natural gas industries – subsidies that amount to some $50 billion per year, according to an inventory by Doug Koplow of Earth Track, Inc. Whether Washington has the political stomach to end these handouts is an open question. But it makes no sense to subsidize with one hand the same activities that we are trying to phase out with the other.

Carbon Pricing

Putting a price on carbon is a second key element of smart climate policy. An underlying reason for our current situation is that we have treated the Earth’s limited capacity to absorb and recycle carbon emissions as if it was infinite. When useful things are in infinite supply, they’re free. When useful things are scarce, they have a price. To send the proper market signals to consumers and producers, we need to correct this mistake by putting a price on carbon emissions.

There are two ways to do so. The first is to levy a carbon tax (or euphemistically, a “carbon charge”), set as a fixed dollar amount per ton of carbon emissions. The quantity of emissions will vary depending on demand and the business cycle, but it will certainly be lower than in the absence of the tax.

The second way to price carbon is to put a cap on the total quantity of emissions, an objective most easily achieved by limiting the amount of carbon entering the economy in coal, oil, and natural gas. A fixed number of permits, their total quantity being set by the cap, are made available to the firms that extract fossil fuels at home or import them from abroad. The permits could be given away free or they could be auctioned at the price set by market demand.

No matter whether carbon permits are given away, auctioned, or distributed by some mix of the two methods, an inevitable effect of a cap (and likewise, of a carbon tax) is a rise in the price of gasoline, heating oil, natural gas, coal-fired electricity, and everything that uses fossil fuels in its production or distribution. In other words, the permit price (or tax) is “passed through” to the end-users. This is Economics 101: lower supply results in a higher price. These higher prices give firms and households a stronger incentive to invest in energy efficiency and alternative fuels.

The higher prices that come with carbon pricing are a cost to individual consumers but not a cost to the economy as a whole. The reason is that every dollar paid in higher prices winds up in someone else’s hands. In economic terminology, the result of carbon pricing is a “transfer,” not a “cost.” This raises the trillion-dollar question: Who gets the money?

The answer depends on the design of the policy. The money could go to energy corporations as windfall profit. It could go to the government as revenue from permit sales or taxes. It could be refunded to the public as equal payments to every woman, man and child in the country. Or it could be distributed via some combination of the three.

The windfall profit scenario is what happens if carbon permits are simply given away for free to corporations. Prices at the pump will rise regardless of whether permits are auctioned or given away – just as rents in housing markets are the same regardless of whether the owner paid for the house or inherited it. Under the give-away option, energy corporations “inherit” the new property rights created by carbon permits (the property in question being the carbon absorptive capacity of the planet). In effect, this option legitimizes the prior capture of this scarce resource by polluters.

The government revenue scenario is attractive to those seeking ways to fund new or existing government programs, including public investment in the clean energy transition. However, what the government will actually do with the money is always an open question – the answer to which will change with shifts in Washington’s political climate. Under this option, the new property rights belong to the government, which collects the rent.

The public refund scenario, sometimes called “cap and dividend,” is now attracting much attention in Congress and the media. Instead of be treated as government revenue, the money from permit auctions (or carbon taxes) is deposited into a stand-alone trust fund, akin to the Social Security trust fund, from which dividends are paid to the public (for example, in quarterly installments). The simplest way to do this is to issue “Carbon Trust Cards” that can be used like ATM cards to check individual balances and withdraw cash – a system that is already available for Social Security payments. Under this option, rights to the Earth’s capacity to absorb carbon belong equally to all.

In the latter two scenarios, there is no need for a “cap and trade” apparatus where carbon permits can be bought and sold in markets after they are issued. Carbon permits would be purchased at auction by the firms that want them. Like other familiar sorts of permits – building permits, parking permits, driver’s licenses – they would not have to be tradable. The need for tradable permits arises only if permits are given away free to corporations (based on their historic emissions or some other formula), leading to situations where some firms have more permits than they need, others have fewer, and trading is needed to get an efficient allocation. If the permits are instead auctioned, we get the same efficient outcome without the added cost of traders’ profit margins and without the risk of speculation and market manipulation.

Apart from the intuitive philosophical appeal of the premise that the gifts of Nature belong equally to all persons, a compelling political case can be made for the public refund option. Carbon pricing will be politically sustainable only if the higher fuel prices that result do not spark a furious backlash from a public already hard-pressed to make ends meet. While attending U.N. climate talks in Poznan, Poland, in December 2008, Wisconsin congressman James Sensenbrenner, the ranking Republican on the House Select Committee on Energy Independence and Global Warming, spelled out the political implications: “If people on the other side of the aisle want to push a doubling to tripling of electricity bills and $10 a gallon gas, I can guarantee you that the Republicans may very well be in the majority after the 2010 election.”

While $10/gallon gasoline is not imminent under any likely policy scenario, there can be little doubt that any serious effort to curtail fossil fuel consumption will mean higher prices for gasoline, heating oil, and coal-fired electricity. How much higher will depend on the tightness of the emissions cap; the state of the economy (in a recession the increase will be less than during a boom economy); and the extent to which complementary investments and regulatory policies reduce demand for fossil fuels. But unless and until the transition to a post-carbon economy is well underway, carbon pricing policies will surely translate into higher fuel prices.

There is one and only one way to avoid a public backlash against higher prices for gasoline, heating oil, and electricity: refund the money to the people. Equal per person refunds will completely offset the impact of higher fuel prices on the average household budget. At the same time, higher fuel prices will give everyone an incentive to economize on fuel consumption. Households with lower-than-average carbon footprints – including most low-income households, because they consume less of just about everything – come out ahead in monetary terms, not even counting the benefits of saving the planet. The only way I can imagine to make Americans happy about higher prices at the pump is to give them certain knowledge that those same prices mean more money in their pockets.

Smart Regulatory Standards

The third leg of smart climate policy, alongside public investment and carbon pricing, is regulatory standards. Before the recent financial meltdown, “regulation” was often treated as a dirty word in American politics. Today, it has been rehabilitated as it becomes more and more evident that without rules (a.k.a. regulations), the logic of self-interest can run amok, turning Adam Smith’s celebrated “invisible hand” into a colossal pickpocket.

To say that rules are necessary is not, of course, to say that all rules are good. As critics are quick to point out, some regulations are of questionable benefit, and some are pretty dumb. That is not an argument against regulation. It is an argument for smart regulatory standards.

Smart regulatory standards are an important part of smart climate policy for three reasons. First, “getting prices right” through permits or carbon taxes will not automatically ensure that the private sector makes all of the desirable and feasible investments in energy efficiency and renewables. The market works only when investors are smart enough to read the market-signal tea leaves. One thing we have learned from the history of the American automobile industry in recent decades is that some folks – including some very powerful market players – are remarkably obtuse. When myopia, inertia, ignorance, or just plain stupidity dim the power of price signals, we need to use the power of rules. Does anyone doubt today that Detroit would be in far better shape if the automakers had not subverted Congressional efforts to impose stricter fuel efficiency standards on vehicles?

Detroit’s performance is symptomatic of a more widespread phenomenon: market signals are not always sufficient to change behavior. Energy experts have long pointed out the paradoxical fact that there is much scope for energy-saving investments that would quickly pay for themselves, including building insulation and more efficient lighting, heating, air conditioning, and appliances. A December 2007 study by the consulting firm McKinsey & Co. found that substantial reductions in U.S. carbon emissions could be achieved at negative cost simply by taking advantage of existing opportunities at existing prices. If the magic of the market was all that was needed, these profitable options wouldn’t exist – they would already have been fully exploited.

Fuel efficiency standards for automobiles, energy efficiency standards for appliances, and “green” building codes are examples of regulatory standards that can kick in when market players fail to read the price signals.

The second reason we need smart regulatory standards is to take account of social benefits and costs that are not captured in the price signals of the marketplace. Even with carbon pricing, for example, wind and solar-generated electricity may not be competitive in many locations until their costs are brought down by further research and development and greater economies of scale in production. In the meantime, we can learn from European countries such as Germany and Spain, that have enacted rules that require utilities to buy power from small-scale generators at remunerative “feed-in tariff” prices.

Similarly, one way to boost private investment for renewables and energy efficiency is to channel bank lending towards green projects through asset-based reserve requirements, stipulating that a certain percentage of every bank’s loan portfolio should be channeled to such purposes. If 5% of private lending in the United States was channeled into green investments, this would amount to roughly $100 billion per year.

The third reason that regulatory standards must be part of the climate policy mix is that we need to curb not only carbon emissions but also other environmental damages caused by the fossil fuel industry. From the standpoint of climate change, all carbon dioxide emissions are equal; it doesn’t matter where they are reduced. From the standpoint of human health, however, it can matter a great deal. Some places – often communities with high percentages of minorities and low-income families – are severely affected by dirty air, contaminated water, and devastated landscapes that result from activities such as oil refining and coal mining. It makes economic sense as well as moral sense to target the carbon reductions to the locations where the “co-benefits” of these reductions are greatest. Smart regulatory standards on airborne particulate matter, toxic air and water pollution, and environmentally dreadful mining practices are a vital ingredient of smart climate policy.

The United States cannot solve the problem of global warming on its own, to be sure. Global problems require global solutions. But along with other industrialized countries, the U.S. has the capacity and responsibility to help developing countries shift to a low-carbon growth path. To become a credible leader in the global struggle against climate change, the U.S. must begin by implementing a smart climate policy at home.

James K. Boyce, University of Massachusetts, Amherst