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Morgenson Watch Continues

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I was recently reminded of the late Tanta (a/k/a Doris Dungey) of the Calculated Risk blog, who wrote the recurring “Morgenson Watch” for that site.

As soon as I saw the title of Gretchen Morgenson’s most recent article at the top of the Sunday link list at Real Clear Politics, I suspected there would be trouble:  “U.S. Has Binged.  Soon It’ll Be Time to Pay the Tab.”  After reading as far as the first sentence of the second paragraph, my concern was validated.  Here’s how the piece began:

SAY this about all the bickering over the federal debt ceiling:  at least people are talking openly about our nation’s growing debt load.  This $14.3 trillion issue is front and center – exactly where it should be.

Into the fray comes a thoughtful new paper by Joseph E. Gagnon, a senior fellow at the Peterson Institute for International Economics, which studies economic policy.

The Peterson Institute was formerly the Institute for International Economics, founded by C. Fred Bergsten.  It was subsequently taken over by the Peter G. Peterson Foundation, a foundation established and managed by Richard Nixon’s former Commerce Secretary (and co-founder of Blackstone Group), Pete Peterson.  The Peterson Institute is a “think tank” (i.e. propaganda mill) most recognized for its advocacy of “economic austerity” (which usually involves protecting the interests of the wealthy at the expense of the middle class and the impoverished).

Yves Smith of Naked Capitalism, is always quick to rebut the pronouncements of those economists, acting as “hired guns” to spread the gospel of the Peterson Institute.  Needless to say, once Gretchen Morgenson began to parrot the Peterson Institute dogma in her aforementioned article, Yves Smith didn’t hesitate to pounce:

I’m generally a Gretchen Morgenson fan, since she’s one of the few writers with a decent bully pulpit who regularly ferrets out misconduct in the corporate and finance arenas. But when she wanders off her regular terrain, the results are mixed, and her current piece is a prime example. She also sometimes pens articles based on a single source, which creates the risk of serving as a mouthpiece for a particular point of view.

(As an aside, a good example of this process has been Ms. Morgenson’s continuing fixation on “mortgage mania” as a cause of the financial crisis after having been upbraided by Barry Ritholtztwice – for “pushing the Fannie-Freddie CRA meme”.)

After pointing out Morgenson’s uncritical acceptance of the economic model used in the Peterson Institute report (by Gagnon and Hinterschweiger) Yves Smith directed our attention to the very large elephant in the room:  the proven fact that au-scare-ity doesn’t work in our post-financial crisis, anemic-growth milieu.  Ms. Smith focused on this aspect of the Peterson Institute report:

It also stunningly shows the howler of the Eurozone showing improvements in debt to GDP ratios as a result of the austerity programs being implemented. The examples of Latvia and Ireland have demonstrated that austerity measures have worsened debt to GDP ratios, dramatically in both cases, and the same deflationary dynamics look to be kicking in for Spain.

The article repeats the hoary cliche that deficit cuts must be made to “reassure the markets” as in appease the Bond Gods. Gee, how is that working out in Europe, the Peterson Institute’s obedient student?

Ms. Smith supported her argument with this report, which appeared in Bloomberg News on May 27:

European confidence in the economic outlook weakened for a third straight month in May as the region’s worsening debt crisis and surging commodity costs clouded growth prospects.

An index of executive and consumer sentiment in the 17- member euro region slipped to 105.5 from 106.1 in April, the European Commission in Brussels said today. Economists had forecast a drop to 105.7, the median of 27 estimates in a Bloomberg survey showed. The euro-area economy is showing signs of a slowdown as governments toughen austerity measures to lower budget gaps as investors grow increasingly concerned that Greece may default, while oil-driven inflation squeezes household incomes. European manufacturing growth slowed this month….

Be sure to read Yves Smith’s entire essay, which addressed the tired canard about those phantom “bond vigilantes”, etc.  Ms. Smith’s closing paragraph deserves repetition:

But the idea of government spending has become anathema in the US, despite plenty of targets (start with our crumbing infrastructure).  The banks got first dibs on the “fix the economy” money in the crisis, and continue to balk at measures that would shrink a bloated and highly leveraged banking sector down to a more reasonable size.  Evidence already shows the size of the banking sector is constraining growth, yet a full bore campaign is on to gut social spending out of a concern that sometime down the road the size of the government sector will serve as a drag on the economy.  In addition, the banksters need to preserve their ability to go back to the well the next time they crash the markets for fun and profit.  So the attack on deficits is financial services industry ideology, packaged to make it look like it’s good for the little guy. We have too many people who should know better like Morgenson enabling it.

The reader comments to Ms. Smith’s essay were quite interesting.  Many of the readers who have been outraged by Smith’s ongoing rebuttals to the Peterson Institute gospel and other Austerian dogma would do well to familiarize themselves with this bit of legalese:

EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104 Stat. 1388-623, provided that:  Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of – (1) the budget of the United States Government as submitted by the President, (2) the congressional budget, or (3) the Balanced Budget and Emergency Deficit Control Act of 1985.

I include myself among those who are “generally” Gretchen Morgenson fans.  Nevertheless, it has become obvious that with Tanta gone, the spirit of “Morgenson Watch” shall endure for as long as the frailties of being a New York Times pundit continue to manifest themselves.


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Unwanted Transparency

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Immediately after assuming office, President Obama promised to provide a greater degree of transparency from his administration:

Transparency and the rule of law will be the touchstones of this presidency.

Did you really believe that?  Do you remember Jane Mayer – author of that great book, The Dark Side, which exposed the controversial “enhanced interrogation techniques”?  Well, she just wrote an article for The New Yorker, discussing the Obama administration’s use of the Espionage Act of 1917 to press criminal charges in five alleged instances of national security leaks.  At the outset of the article, Ms. Mayer made this observation:

Gabriel Schoenfeld, a conservative political scientist at the Hudson Institute, who, in his book “Necessary Secrets” (2010), argues for more stringent protection of classified information, says, “Ironically, Obama has presided over the most draconian crackdown on leaks in our history – even more so than Nixon.”

Meanwhile, another sort of unwanted transparency is catching up with the Obama administration:  transparent motives.  Many commentators are finally facing-up to the reality that Obama never gave a damn about the unemployment crisis.  I have repeatedly emphasized that President Obama’s February, 2009 decision to “punt” on the economic stimulus program – by holding it at $862 billion and relying on the Federal Reserve to “play defense” with quantitative easing programs – was a mistake, similar in magnitude to that of allowing Bin Laden to escape at Tora Bora.  In his own “Tora Bora moment”, President Obama decided to rely on the advice of the very people who helped cause the financial crisis, by doing more for the zombie banks of Wall Street and less for Main Street – sparing the banks from temporary receivership (also referred to as “temporary nationalization”) while spending less on financial stimulus.  Obama ignored the 50 economists surveyed by Bloomberg News, who warned that an $800 billion stimulus package would be inadequate.

A recent interview with economist Tim Duy focused on the inadequacy of the Economic Recovery and Reinvestment Act of 2009:

What went wrong with stimulus?  Why does unemployment remain so high?

I don’t think anything “went wrong” with the stimulus, other than it simply wasn’t enough to fill the depth of the economic hole caused by the recession.  There was simply a lack of political willpower to fully acknowledge the depth of the problem and bring to bear the appropriate resources.  The result is an economy that is not bouncing back quickly enough to close the output gap and create sufficient job growth to drive the unemployment rate down lower at a faster pace.

Is the economy not weak enough to justify more stimulus?  Or do policy makers think that deficit spending is not able to generate more jobs?

Yes, the economy is weak enough to justify additional stimulus, and the persistently low rates of government debt should prove that current fears of deficit spending are unjustified.  Some policymakers appear to believe that a commitment to fiscal austerity will in fact generate more job growth, but this is nonsensical –  austerity would only aggravate the existing challenges (as it has in Greece).  There is currently no constraint that prevents more fiscal stimulus from being effective in promoting additional economic growth.  Longer run, yes, the US federal budget does need to be addressed, but letting growth stagnate now will only intensify that challenge in the future. Policymakers, however, appear enamoured with the idea that these challenges need to be addressed now, and this attitude poses another risk to the recovery.

I want to focus on what Professor Duy described as a “lack of willpower”.  That lack of willpower was rooted in a lack of authenticity.  President Obama was never concerned about what most of us would consider “economic recovery” – reducing unemployment to just below five percent.  Obama’s goal was to do just enough to avoid another Great Depression.  Once that goal was accomplished, it was time to move on to other things.  My cynicism on this subject was validated in a recent essay by Mark Provost for Truthout, entitled, “Why the Rich Love High Unemployment”.  In fact, Provost’s article was met with such widespread enthusiasm that it was republished in its entirety on the following websites:  Naked Capitalism, Angry Bear and The Economic Populist.  Here are some key points from the piece:

Obama’s advisers often congratulate themselves for avoiding another Great Depression – an assertion not amenable to serious analysis or debate.  A better way to evaluate their claims is to compare the US economy to other rich countries over the last few years.

On the basis of sustaining economic growth, the United States is doing better than nearly all advanced economies.

*   *   *

But when it comes to jobs, US policymakers fall short of their rosy self-evaluations.

*   *   *

The gap between economic growth and job creation reflects three separate but mutually reinforcing factors:  US corporate governance, Obama’s economic policies and the deregulation of US labor markets.

*   *   *

Obama’s lopsided recovery also reflects lopsided government intervention. Apart from all the talk about jobs, the Obama administration never supported a concrete employment plan.  The stimulus provided relief, but it was too small and did not focus on job creation.

The administration’s problem is not a question of economics, but a matter of values and priorities.

Mark Provost’s essay featured this infamous quote from a Washington Post article written by Steven Rattner (Obama’s “car czar” during 2009 – whose task force was overseen by “Turbo” Tim Geithner and Larry Summers):

Perversely, the nagging high jobless rate reflects two of the most promising attributes of the American economy:  its flexibility and its productivity.  Eliminating jobs – with all the wrenching human costs – raises productivity and, thereby, competitiveness (the president’s new favorite word).  In the long run, increasing productivity is the only route to superior competitiveness.

*   *   *

That kind of efficiency is perhaps our most precious economic asset.  However tempting it may be, we need to resist tinkering with the labor market.  Policy proposals aimed too directly at raising employment may well collaterally end up dragging on productivity. And weak productivity would exacerbate the downward pressure on wages that caused the last decade to be the first in our history in which wages (after adjustment for inflation) declined.

In other words, productivity is more important than those pesky “wrenching human costs”.  Too bad there just isn’t some kind of spray or ointment for those things!  This attitude exemplified what Chris Hedges discussed in his book, Death of the Liberal Class.  In a recent article for Truthdig, Chris Hedges emphasized how the liberal class “abandoned the human values that should have remained at the core of its activism”:

The liberal class, despite becoming an object of widespread public scorn, prefers the choreographed charade.  It will decry the wars in Iraq and Afghanistan or call for universal health care, but continue to defend and support a Democratic Party that has no intention of disrupting the corporate machine.  As long as the charade is played, the liberal class can hold itself up as the conscience of the nation without having to act.  It can maintain its privileged economic status.  It can continue to live in an imaginary world where democratic reform and responsible government exist.  It can pretend it has a voice and influence in the corridors of power.  But the uselessness and irrelevancy of the liberal class are not lost on the tens of millions of Americans who suffer the indignities of the corporate state.  And this is why liberals are rightly despised by the working class and the poor.

To repeat an important statement from Mark Provost’s essay:

The administration’s problem is not a question of economics, but a matter of values and priorities.

The unemployment crisis is destined to continue for several years – thanks to the administration’s abandonment of those human values discussed by Chris Hedges.


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