naked capitalism

By George Washington of Washington’s Blog.

Financial insider and commentator Yves Smith wrote an essay last week entitled “MSM Reporting as Propaganda” arguing that the government has been using propaganda to make people think that things are getting better, no one is angry, and – therefore – no one should get upset:

The message, quite overtly, is: if you are pissed, you are in a minority. The country has moved on. Things are getting better, get with the program…

Per the social psychology research, this “you are in a minority, you are wrong” message DOES dissuade a lot of people. It is remarkably poisonous. And it discourages people from taking concrete action.

Is Smith right? And even if she is, isn’t “propaganda” too strong a word?

Think Positive

Sure, William K. Black – professor of economics and law, and the senior regulator during the S & L crisis – says that that the government’s entire strategy now – as during the S&L crisis – is to cover up how bad things are (”the entire strategy is to keep people from getting the facts”).

Admittedly, 7 out of the 8 giant, money center banks went bankrupt in the 1980’s during the “Latin American Crisis”, and the government’s response was to cover up their insolvency.

It’s true that Business Week wrote on May 23, 2006:

President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad authority, in the name of national security, to excuse publicly traded companies from their usual accounting and securities-disclosure obligations.

I can’t deny that the Tarp Inspector General said that Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not.

Okay, the government and Wall Street have traditionally tried to dispense happy talk when there is an economic crash, and Arianna Huffington recently pointed out:

And I’ll give you that a recent Pew Research Center study on the coverage of the crisis found that the media has largely parroted what the White House and Wall Street were saying.

But that’s not propaganda . . . its just positive thinking, right?

The Other Guy

And the whole word propaganda is a Nazi, communist kind of thing which has no place in the same sentence as America. Right?

Granted, famed Watergate reporter Carl Bernstein says the CIA has already bought and paid for many successful journalists.

And sure, the New York Times discusses in a matter-of-fact way the use of mainstream writers by the CIA to spread messages.

True, a 4-part BBC documentary called the “Century of the Self” shows that an American – Freud’s nephew, Edward Bernays – created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques (but the BBC isn’t American, so it doesn’t count).

True, the Independent discusses allegations of American propaganda (but that’s a British paper, doesn’t count).

And (ho hum) one of the premier writers on journalism says the U.S. has used widespread propaganda.

And (are we still talking about this?) an expert on propaganda testified under oath during trial that the CIA employs THOUSANDS of reporters and OWNS its own media organizations (the expert has an impressive background).

And (I can’t believe we’re still talking about this) while the U.S. government has repeatedly claimed that it was launching propaganda programs solely at foreign enemies, it has actually used them against American citizens. For example:

• In 2002, the Pentagon announced that it was considering spreading false propaganda in the foreign press. However, the military has spread propaganda within the U.S. in an operation so aggressive that one participant, a military analyst, called it “psyops on steroids“

• Raw Story confirmed yesterday the use of propaganda on Americans

• The U.S. government long ago announced its intention to “fight the net”.

• As revealed by an official Pentagon report signed by Rumsfeld called “Information Operations Roadmap”:

The roadmap [contains an] acknowledgement that information put out as part of the military’s psychological operations, or Psyops, is finding its way onto the computer and television screens of ordinary Americans.”Information intended for foreign audiences, including public diplomacy and Psyops, is increasingly consumed by our domestic audience,” it reads.

“Psyops messages will often be replayed by the news media for much larger audiences, including the American public,” it goes on.***

“Strategy should be based on the premise that the Department [of Defense] will ‘fight the net’ as it would an enemy weapons system”.

And (when’s the next episode of American Idol on?) CENTCOM announced in 2008 that a team of employees would be “[engaging] bloggers who are posting inaccurate or untrue information, as well as bloggers who are posting incomplete information.”

And (who do you think will win the playoffs?) the Air Force is also engaging bloggers. Indeed, an Air Force spokesman said:

“We obviously have many more concerns regarding cyberspace than a typical Social Media user,” Capt. Faggard says. “I am concerned with how insurgents or potential enemies can use Social Media to their advantage. It’s our role to provide a clear and accurate, completely truthful and transparent picture for any audience.”

And (did you see that crazy photo?) it is well known that certain governments use software to automatically vote stories questioning their interests down and to send letters favorable to their view to politicians and media (see – as just one example – this, this, this, this and this). The U.S. government is very large and well-funded, and could substantially influence voting on social news sites with very little effort, if it wished.

The Bottom Line

Yeah yeah, people say this or that, whatever, I’m too busy to think about it.

Even if true, propaganda is too strong a word for attempts to convince people that important issues are boring, that no one else is angry about them, and that everything is normal.

Perhaps “herding the wayward sheep” would be better . . .

By George Washington of Washington’s Blog.

In 2000, America was described as the sole remaining superpower – or even the world’s “hyperpower”. Now we’re in real trouble (at the very least, you have to admit that we’re losing power and wealth in comparison with China).

How did it happen so fast?

As everyone knows, the war in Iraq – which will end up costing $3-5 trillion dollars – was launched based upon false justifications. Indeed, the government apparently planned both the Afghanistan war (see this and this) and the Iraq war before 9/11.

And the financial system collapsed last year due to looting and fraud.

How Empires Fall

But Paul Farrel provides a bigger-picture analysis, quoting Jared Diamond and Marc Faber.

Diamond’s book ’s, Collapse: How Societies Choose to Fail or Succeed, studies the collapse of civilizations throughout history, and finds:

Civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power…

One of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions

And PhD economist Faber states:

How [am I] so sure about this final collapse?

Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent … overspends … costly wars … wealth inequity and social tensions increase; and society enters a secular decline.

[Quoting 18th century Scottish historian Alexander Fraser Tytler:] The average life span of the world’s greatest civilizations has been 200 years progressing from “bondage to spiritual faith … to great courage … to liberty … to abundance … to selfishness … to complacency … to apathy … to dependence and … back into bondage”

[Where is America in the cycle?] It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical “society cycle.” … The U.S. is somewhere between the phase where it moves “from complacency to apathy” and “from apathy to dependence.”

In other words, America’s rapid fall is not really that novel after all.

How Consumers, Politicians and Wall Street All Contributed to the Fall

On the individual level, people became “fat and happy”, the abundance led to selfishness (”greed is good”), and then complacency, and then apathy.

Indeed, if you think back about tv and radio ads over the last couple of decades, you can trace the tone of voice of the characters from Gordon Gecko-like, to complacent, to apathetic and know-nothing.

On the political level, there was no courage in the White House or Congress “to practice long-term thinking, and to make bold, courageous, anticipatory decisions”. Of course, the bucket loads of donations from Wall Street didn’t hurt, but there was also a religion of deregulation promoted by Greenspan, Rubin, Gensler and others which preached that the economy was self-stabilizing and self-sustaining. This type of false ideology only can spread during times of abundance and complacency, when an empire is at its peak and people can fool themselves into thinking “the empire has always been prosperous, we’ve solved all of the problems, and we will always prosper” (incidentally, this type of false thinking was also common in the 1920’s, when government and financial leaders said that the “modern banking system” – overseen by the Federal Reserve – had destroyed instability once and for all).

And as for Wall Street, the best possible time to pillage is when your victim is at the peak of wealth. With America in a huge bubble phase of wealth and power, the Wall Street looters sucked out vast sums through fraudulent subprime loans, derivatives and securitization schemes, Ponzi schemes and high frequency trading and dark pools and all of the rest.

Like the mugger who waits until his victim has made a withdrawal from the ATM, the white collar criminals pounced when America’s economy was booming (at least on paper).

Given that the people were in a contented stupor of consumption, and the politicians were flush with cash and feel-good platitudes, the job of the criminals became easier.

A study of the crash of the Roman – or almost any other – empire would show something very similar.

Ed Harrison has an excellent post over on his Credit Writedowns blog, following up and elaborating on his “Greed is Not Good” post here yesterday.

To whet your appetite, here it the beginning of “More on greed, regulation, Lehman and the financial industry“:

In one of my latest posts I said “greed is not good.” Quite frankly, I looked at this statement as self-evident in the wake of an economic catastrophe where greed was a defining element. Yet, a remarkable number of people commented in defense of greed; they seem to believe greed is a good thing. So, I would like to clarify a few things about greed in the context of the recent financial crisis and prudent regulation of the financial industry.

Greed is not good

Greed is defined as:

A selfish and excessive desire for more of something (as money) than is needed (Merriam Webster)

An excessive desire to acquire or possess more than what one needs or deserves, especially with respect to material wealth (Free Online Dictionary)

The selfish desire for or pursuit of money, wealth, food, or other possessions, especially when this denies the same goods to others. It is generally considered a vice, and is one of the seven deadly sins in Catholicism. (People who do not view unconstrained acquisitiveness as a vice will generally use a word other than greed, which has strong negative connotations.) (The Free Dictionary)

The obsession with accumulating material goods (Access-Jesus)

Do you notice the commonalities in all these definitions? Excessive, selfish, more than what one needs or deserves, unconstrained, obsessive. You can make the non-judgmental argument as I did that greed is neither good nor bad. But, in what twisted world view is any of this good? Greed is not ambition or hunger or drive. Greed is by definition excessive and unconstrained, and, thus, leads to unstable and suboptimal outcomes. Greed is not good.

Ed discusses how the free market ideology is a religion and serves to maintain the power of kleptocrats and why regulation is the least bad of the options available to deal with the concentrations of power that are inherent features of a stratified society. His post continues here.

By Marshall Auerback, an investment strategist who writes for the New Deal 2.0.

A history of failed attempts to introduce universal health insurance has left us with a system in which the government pays directly or indirectly for more than half of the nation’s health care, but the actual delivery both of insurance and of care is undertaken by a crazy quilt of private insurers, for-profit hospitals, and other players who add cost without adding value. A Canadian-style single-payer system, in which the government directly provides insurance, would almost surely be both cheaper and more effective than what we now have. And we could do even better if we learned from “integrated” systems, like the Veterans Administration, that directly provide some health care as well as medical insurance.

Yet Obama is not prepared to grasp the nettle. His speech was even weaker than the spin preceding the joint address to Congress suggested. I thought the Obama people were lowering expectations with a view toward a big positive surprise and they managed to go even lower than the bar they set. He took caricatured positions on single payer in order to create a false “centrist” option. The President has basically has reduced the public option to a marginal welfare style program for 5% of the population, rather than seeing it as a way to break the monopoly of the private health insurance companies, thereby helping to reduce costs. He’s basically forcing everybody into a private health insurance run program

The bad news is that Washington currently seems incapable of accepting what the evidence on health care says. The Obama Admininstration remains under the influence of the health insurance and pharmaceutical industry lobbyists, and is captive to a free-market ideology that is wholly inappropriate to health care issues. As a result, it seems determined to pursue policies that will increase the fragmentation of our system and swell the ranks of the uninsured.

We need affordable health care, not health insurance. Just look what is happening in MA. It’s not solving the problem at all, because there was no mechanism introduced to REDUCE HEALTH INSURANCE COSTS. Physicians for a National Health Program’s (PNHP) study of the Massachusetts model found that the state’s 2006 reforms, instead of reducing costs, have been more expensive than expected. The budget overruns have forced the state to siphon about $150 million from safety-net providers such as public hospitals and community clinics:

“We are facing a health-care crisis in this country because private insurers are driving up costs with unnecessary overhead, bloated executive salaries and an unquenchable quest for profits – all at the expense of American consumers,” said Dr. Sidney Wolfe, director of Public Citizen’s Health Research Group. “Massachusetts’ failed attempt at reform is little more than a repeat of experiments that haven’t worked in other states. To repeat that model on a national scale would be nothing short of Einstein’s definition of insanity.” (http://www.pnhp.org/news/2009/february/massachusetts_is_no_.php )

Yet Massachusetts seems to be the implicit model. Despite the obvious popularity of Medicare, there was no serious discussion of expanding it as a possible public health care option (as we had suggested earlier http://www.newdeal20.org/?p=4220) and there was no attempt to use the public option as a means of expanding choice and competition if a worker was unhappy with the health care program offered by his employer.

The Clinton health care version at least tried to deal with the issue of portability, so that health care did not get tied in directly to employment (a highly germane consideration in a time of double digit unemployment and mounting economic insecurity). There is no hint of that in the Obama plan. If anything, it represented a retrograde step from what was on offer in last year’s campaign via the Clinton or Edwards health care proposals. Most advanced countries have dealt with the defects of private health insurance in a straightforward way, by making health insurance a government service. Through Medicare, the United States has in effect done the same thing for its seniors. We get the status quo The paucity of imagination of the proposals themselves were completely at variance with the President’s soaring rhetoric, something which is unfortunately becoming a recurrent theme of the entire Obama Presidency.

By George Washington of Washington’s Blog.

Unemployment is disastrous on both the individual and societal level.

Individuals who look for work but can’t find it are miserable.  Indeed, most people who lose their job are unprepared for their circumstances.[1]

On the national level, high unemployment is both cause and effect concerning other problems with the economy. As we’ll see below, high unemployment results from a weak economy and – in turn – weakens the economy.

Until the causes of, and solutions to, high levels of unemployment are understood, we will not be able to solve the problem.

How High is Unemployment?

Before we can even start looking at causes or solutions, we have to understand what the current level of unemployment really is, and what the trends portend for the future.

Let’s use America as an example. With the largest economy in the world, it has often been said that “when America sneezes, the rest of the world catches cold”. And much of the rest of the world has adopted the “Washington Consensus” – America’s neoliberal view of economics.[2] Moreover, the rest of the world has been infected by many types of “toxic assets” invented in America, such as credit default swap derivatives[3], as well as Wall Street style banking strategies. So I will use the United States has a case example, but will also touch on global trends.

Official figures put unemployment in the United States somewhere between 9 and 10 percent. But the official figures use a very different measure for unemployment than was used during the Great Depression and for many decades afterwards.

Specifically, the official unemployment reports of the Department of Labor’s Bureau of Labor Statistics (BLS) provide conventional “U-3″ figures and various alternative measures including “U-6″. [4]

For example, as of December 2008, U-3 unemployment was 7.2 percent, while U-6 was 13.5 percent. [5]

U-6 is actually more accurate, because it includes those who would like full-time work, but can only find part-time work, or have given up looking for work altogether.

As can be seen by the December 2008 figures, U-6 unemployment rate can almost double the more commonly-cited U-3 figures.

But those in the know argue that the real rate is actually even higher than the U-6 figures.

For example, Paul Craig Roberts [6] – former Assistant Secretary of the Treasury and former editor of the Wall Street Journal – and economist John Williams both said in December 2008 that – if the unemployment rate was calculated as it was during the Great Depression – the December 2008 unemployment figure would actually have been 17.5%.

Williams says [7] that unemployment figures for July 2009 rose to 20.6% [8].

According to an article [9] summarizing the projections of former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff and University of Maryland Economics Professor Carmen Reinhart, U-6 unemployment could rise to 22% within the next 4 years or so.

As the New York Times pointed out in July[10] :

Include [those who have given up looking for a job and those part-time workers who want to be working full time] — as the Labor Department does when calculating its broadest measure of the job market — and the rate reached 23.5 percent in Oregon this spring, according to a New York Times analysis of state-by-state data. It was 21.5 percent in both Michigan and Rhode Island and 20.3 percent in California. In Tennessee, Nevada and several other states that have relied heavily on manufacturing or housing, the rate was just under 20 percent this spring and may have since surpassed it.

Indeed, the chief of the Atlanta Federal Reserve Bank -Dennis Lockhart – said in August 2009:

If one considers the people who would like a job but have stopped looking — so-called discouraged workers — and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4 percent to 16 percent. [11]

Former Labor Secretary Robert Rubin notes:

Over the past three months annual wage growth has plummeted to just 0.7%. At the same time, furloughs — requiring workers to take unpaid vacations — are on the rise: recent surveys show 17% of companies imposing them. [12]

Temporary employment is still falling as well. [13]

And economist David Rosenberg points out:

65% of companies are still in the process of cutting their staff loads…

The Bureau of Labor Statistics also publishes a number from the Household survey that is comparable to the nonfarm survey (dubbed the population and payroll-adjusted Household number), and on this basis, employment sank — brace yourself — by over 1 million, which is unprecedented…[14]

In addition to the failure of official BLS unemployment figures to take into account discouraged and underemployed workers, many analysts argue that BLS’ “Birth-Death Model” severely understates unemployment during recessions. [15]

Many people – including economists and financial reporters – say that unemployment is much lower than it was during the Great Depression. What they mean when they say that is that current U-3 figures in America are under 10%, while unemployment hit 25% during the Great Depression.

But most people forget that the worst unemployment numbers during the Great Depression did not occur until years after the initial 1929 crash . Specifically, unemployment did not hit 25% until at least 3 years after the start of the Depression.[16]

As of this writing (2009), we are only a year into the current economic crisis. Therefore, we have at least 2 more years to go until we hit the same period that unemployment peaked during the Great Depression.

Indeed, former Secretary of Labor Robert Reich wrote in April that the unemployment figures show that we are already in a depression.[17]

And Chris Tilly – director of the Institute for Research on Labor and Employment at UCLA – points out that some populations, such as African-Americans and high school dropouts, have been hit much harder than other populations, and that these groups are already experiencing depression-level unemployment.[18]

Assuming that Williams, Roberts or Lockhart’s calculations of unemployment are correct (using the same methods of measuring unemployment as were used during the Great Depression), and depending on when we deem the current crisis to have commenced, then – as shown by the following charts – unemployment percentages may actually be worse than they were during a comparable period in the Great Depression:

[19 and 20]

[21]

We also know that, in terms of total numbers of unemployment people (as opposed to percentages), more people will be unemployed than during the Great Depression. [22]

What Are the Unemployment Trends?

If unemployment is anywhere near as bad as during a comparable period during the Great Depression, the obvious question is where the trends are heading.

It is well known among economists that unemployment is a “lagging” indicator. [23] In other words, there is a lag time. When the economy hits a rough patch, the economic weakness will not show up in the unemployment numbers until several months or years later.

For example, as Europe’s largest bank – RBS – warns:

Even if the economy starts to turn up the headwinds will be formidable,” [the company's CEO] warned. “The green shoots are short in duration and you need to be cautious about interpreting them. Even if growth returns, unemployment will rise for some time afterwards …[24]

Because of the lag time between conditions in the economy and unemployment, we have to ask the following two questions in order to forecast future unemployment trends:

1) How bad were conditions in 2008 and early 2009?

and

2) What will economic conditions be like in the future?

How Bad Did It Get?

Unfortunately, many experts – including the following people – have said that the economic crisis which started in 2008 could be worse than the Great Depression:

• Federal Reserve chairman Ben Bernanke said on July 26, 2009:
  

  A lot of things happened, a lot came together, [and] created probably the worst financial crisis, certainly since the Great Depression and possibly even including the Great Depression. [25]

• Economics professors Barry Eichengreen and and Kevin H. O’Rourke said that world-wide conditions are worse than during a comparable period during the Great Depression [26] (updated in June 2009 [27])

• Investment advisor, risk expert and bestselling author Nassim Nicholas Taleb said that the current crisis could be “vastly worse” than the Great Depression [28]

• Former Fed Chairman Paul Volcker believes the current crisis may be even worse than the Depression [29]

• Nobel prize winning economist Joseph Stiglitz said “this is worse than the Great Depression” [30]

• Economics scholar and former Federal Reserve Governor Frederick Mishkin said that conditions were worse than during the Depression [31]

• Well-known PhD economist PhD Economist Marc Faber believes this could be far worse than the Great Depression[32]

• Former Goldman Sachs chairman John Whitehead thinks that the current slump is worse than the Depression [33]

• Morgan Stanley’s UK equity strategist Graham Secker predicts economic collapse worse than the Great Depression [34]

• Former chief credit officer at Fannie Mae Edward J. Pinto said in January 2009 that the current housing crisis was worse than the Depression, and that current efforts to rescue the mortgage industry are less successful than those used during the 1930s. [35]

• Billionaire investor George Soros said in February 2009 that the current economic turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union. [36]

What Will Economic Conditions Be Like In the Future?

As of this writing, the fact that unemployment will substantially increase is quite controversial. Most people still assume that the benefits of the government’s policies will soon kick in, the economy will recover, and then jobs will recover soon afterwards.

In order to accurately determine how bad general economic conditions – and thus unemployment – might be in the future, it is necessary to look at a variety of trends, including residential real estate, commercial real estate, toxic assets held by banks, loan loss rates, consumer spending, age demographics, the decline in manufacturing, and destruction of credit.

Residential Real Estate

Citigroup is projecting that unemployment in Spain will rise from its current 17.9% to 22% next year. [37]

Spain’s unemployment is largely driven by the bursting of its housing bubble. [38]

Housing bubbles are now bursting in China [39], France [40], Spain [41], Ireland [42], the United Kingdom [43], Eastern Europe [44], and many other regions. [45]

(And unemployment in Japan is apparently at the highest level since the government began collecting the data in 1953, a year after the U.S. military occupation ended.)[46]

Unfortunately, while the peak in subprime mortgages is behind us, many analysts say that Alt-A mortgage defaults have not yet occurred (as of this writing), but will not peak until 2010.[47]

Indeed, the crash in real estate and rising unemployment together form a negative feedback loop. As McClatchy notes, foreclosures rise as jobs and income drop. [48]

Former chief IMF economist Simon Johnson notes that a vicious cycle also exists between unemployment and property foreclosures:

Unemployment is always a lagging indicator, and given the record low number of average hours worked, it will turn around especially slowly this time. Until then, people will continue to lose their jobs and wages will remain flat, and any small rebound in housing prices is unlikely to help more than a few people refinance their way out of unaffordable mortgages. So unless the other part of the equation – monthly payments – changes, the number of foreclosures should just continue to rise.[49]

Indeed, the Washington Post notes:

The country’s growing unemployment is overtaking subprime mortgages as the main driver of foreclosures, according to bankers and economists, threatening to send even higher the number of borrowers who will lose their homes and making the foreclosure crisis far more complicated to unwind. [50]

Commercial Real Estate

Moreover, a crash in commercial real estate is now picking up speed. Unlike the subprime mortgage meltdown – which affected mainly the biggest banks – the commercial meltdown will apparently affect a huge number of small to medium-sized banks. [51]

On August 11, 2009, the Congressional Oversight Panel on the bailouts issued a report saying that small and medium sized banks are especially vulnerable, the report will say, in part they hold greater numbers of commercial real estate loans, “which pose a potential threat of high defaults.” [52]

That could spell real trouble for employment by small businesses since (1) smaller institutions are disproportionately responsible for providing credit to small businesses [53], (2) credit is essential for many small businesses, (3) commercial real estate is crashing even faster than residential [54], and (4) industry experts forecast that the commercial real estate market won’t bottom out for three more years.[55]

Indeed, largely because of the commercial real estate crash, the FDIC expects 500 banks to fail in the coming months. [56]

Unfortunately, the crash in commercial real estate is occurring world-wide. [57]

Toxic Assets

The Congressional Oversight Panel report also says that banks remain threatened by billions of dollars of bad loans on their balance sheets, more could fail if the economy worsens, and that – if unemployment rises sharply or the commercial real estate market collapses – the banking system could again crash:

The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix…

Financial stability remains at risk if the underlying problem of toxic assets remains unresolved.[58]

As Reuters notes:

The chairman of the congressional oversight panel, Elizabeth Warren, said no one even knows the value of the toxic assets still on banks’ books…”No one has a good handle how much is out there,” Warren said. “Here we are 10 months into this crisis…and we can’t tell you what the dollar value is.”[59]

Loan Loss Rates

Loan loss rates in could also be worse than the Great Depression, at least in the United States. Specifically, during the depths of the Great Depression, the loss rate which banks suffered on their loans climbed as high as 3.4% (it is normally well under 2.0%).[60]

Last month, banking analyst Mike Mayo predicted that loan loss rates could go as high as 5.5%, which is substantially higher than during the 1930s.[61]

But the Federal Reserve’s more adverse scenario for the stress tests – which everyone knows is too rosy concerning most of its assumptions – predicts a loan loss rate of 9.1%, nearly three times higher than during the 1930s.[62]

As US News and World Report wrote in May 2009:

For most of the past 50 years, the loss rate on all bank loans has stayed well under 2 percent. The Fed estimates that over the next two years the loss rate could reach 9.1 percent. You know all those historical comparisons that end with “the worst since the Great Depression”? Well, 9.1 percent would be EVEN WORSE than during the 1930s. Still looking forward to a soft landing or a quick recovery?[63]

Consumer Spending

Consumer spending accounts for the vast majority of the economy in the United States. The figure commonly cited is that consumer spending accounts for 70% of U.S. Gross Domestic Product. [64]. (Consumer spending has been a lower percentage of GDP in most other countries. [65])

But the economic crisis is driving consumer spending downward. Economist David Rosenberg [66] says that consumers have undergone a generational shift in spending habits, and will be frugal for a long time to come.[67]

The head of Collective Brands, Matthew Rubel, states:

Consumer spending as a percentage of GDP has moved down, will probably continue to move down through the end of year, and then normalize as we get into somewhere in early-to-mid next year, from our point of view.[68]

The chief economist of IHS Global Insight, Nariman Behravesh, says consumer spending will decline to 65 percent of GDP:

With individuals more focused on saving than spending, Behravesh said retail consumer spending as a percentage of GDP is likely to fall from 70 percent to 65 percent. “It will take a while, maybe 10 years,” he said. “Correspondingly other countries are going to have to shift in the opposite direction to rely more on their own consumers rather than the U.S. consumers.”[69]

Jason DeSena Trennert, Chief Investment Strategist for Strategas Research Partners, says:

Consumer spending as a percentage of GDP is going to go in one direction for a long time — lower.[70]

Time points out :

Economist Stephen Roach, chairman of Morgan Stanley Asia, says that “there is good reason to believe the capitulation of the American consumer has only just begun.” U.S. consumer spending as a percentage of GDP reached 72% in 2007, well above the pre-bubble norm of 67%. Using that as a gauge, Roach says that only 20% of the potential retrenchment of spending has taken place, even after the dramatic decline at the end of 2008. “The imbalance that contributed to the crisis — overconsumption and excessive savings — cannot continue,” says Ajay Chhibber, director of the Asia bureau at the United Nations Development Program in New York City. “The model where you stimulate and [then] go back to the old days is gone.”[71]

The Wall Street Journal notes:

“Economists also see an upturn in U.S. household saving as the beginning of a prolonged period of thrift…..”[72]

Demographics

Financial analysts who have studied U.S. demographics – like Harry Dent and Claus Vogt – point out that the U.S. population is aging:

United States Population Pyramid for 2010

United States Population Pyramid for 2020

United States Population Pyramid for 2050

[73]

Vogt argues that an aging population within a given nation is correlated with a decline in that country’s economy. [74]. Certainly, a population with less working-age people and more dependent elderly people will experience a drag on its economy.

Dent argues that one of the main drivers of a country’s economic growth is the number of people in the country who are in their peak spending years.

For example, Dent says that in the U.S., 45-54 year olds are the biggest spenders, because that is when – on average – they are paying for their kids’ college, paying mortgage on the biggest house they will own during their life, etc. Dent argues that the American economy will tend to grow when the number of 45-54 year olds grows, and to shrink when it shrinks.

As the charts above show, the number of 45-54 year olds in the U.S. will shrink considerably in the year ahead.

Decline in Manufacturing

As everyone knows, the manufacturing has shrunk in the United States and the service sector has grown. Even in a manufacturing center such as Detroit, manufacturing jobs have been declining for decades:

[75]

Indeed, according to professor of economics Dr. Mark J. Perry, manufacturing jobs have dropped to their lowest level since 1941, and are now below 9% of the workforce for the first time. [76]

Wayne State University’s Center for Urban Studies argues:

For each job lost in the manufacturing industry, more spinoff jobs are lost than would be in other sectors. Each manufacturing job helps support a larger number of other jobs than do most other sectors. [77]

That means that the ongoing reduction in manufacturing jobs will adversely affect unemployment for the foreseeable future.

Destruction of Credit

The amount of credit outstanding has been reduced by trillions of dollars in the past year.

For example, the amount of consumer credit outstanding has plummeted:

Banks have become tight-fisted about lending, and this will probably not change any time soon. As the New York Times wrote in an article from October 2008 entitled “Banks Are Likely to Hold Tight to Bailout Money”:

“Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?

John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.

‘We will have the opportunity to redeploy that,’ Mr. Thain said of the new capital on a telephone call with analysts. ‘But at least for the next quarter, it’s just going to be a cushion.’

***

Lenders have been pulling back on credit lines for businesses, mortgages, home equity loans and credit card offers, and analysts said that trend was unlikely to be reversed by the government’s money.

Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month [said] ‘My expectation is it’s quarters off, not months off, before you see that capital being put to work.’ ”[78]

And another New York Times article included the following quote:

“It doesn’t matter how much Hank Paulson gives us,” said an influential senior official at a big bank that received money from the government, “no one is going to lend a nickel until the economy turns.” The official added: “Who are we going to lend money to?” before repeating an old saw about banking: “Only people who don’t need it.”[79]

Reading between the lines, the bank officials are saying that they will not lend freely until the economic crisis is over.

As WLMLab Bank Loan Performance points out, outstanding loans in the United States have dropped $110 billion dollars quarter-over-quarter. [80]

McClatchy notes:

Over the course of 2008, the nation’s five largest banks reduced their consumer loans by 79 percent, real estate loans by 66 percent and commercial loans by 19 percent, according to FDIC data. A wide range of credit measures, including recent FDIC data, show that lending remains depressed.[81]

Indeed, total seasonally adjusted consumer debt fell $21.55 billion, or at a 10.4% annual rate, in July 2009 alone. credit-card debt fell $6.11 billion, or 8.5%, to $905.58 billion. This is the record 11th straight monthly drop in credit card debt. Non-revolving credit, such as auto loans, personal loans and student loans fell a record $15.44 billion or 11.7% to $1.57 trillion [82]

In addition, the securitization market has largely collapsed, which in turn has destroyed a large proportion of the world’s credit. As noted in an article in the Washington Times:

“Before last fall’s financial crisis, banks provided only $8 trillion of the roughly $25 trillion in loans outstanding in the United States, while traditional bond markets provided another $7 trillion, according to the Federal Reserve. The largest share of the borrowed funds – $10 trillion – came from securitized loan markets that barely existed two decades ago. . . .

Mr. Regalia [chief economist at the U.S. Chamber of Commerce] said … 70 percent of the system isn’t there anymore,’ he said.”[83]

The reason that seventy percent of the system “isn’t there anymore” is because the traditional bond markets and securitized loan markets (part of the “shadow banking system”) have dried up. As the Washington Times article notes:

“Congress’ demand that banks fill in for collapsed securities markets poses a dilemma for the banks, not only because most do not have the capacity to ramp up to such large-scale lending quickly. The securitized loan markets provided an essential part of the machinery that enabled banks to lend in the first place. By selling most of their portfolios of mortgages, business and consumer loans to investors, banks in the past freed up money to make new loans. . . .

“The market for pooled subprime loans, known as collateralized debt obligations (CDOs), collapsed at the end of 2007 and, by most accounts, will never come back. Because of the surging defaults on subprime and other exotic mortgages, investors have shied away from buying the loans, forcing banks and Wall Street firms to hold them on their books and take the losses.”

Senior economic adviser for UBS Investment Bank, George Magnus, confirms:

The restoration of normal credit creation should not be expected, until the economy has adjusted to the disappearance of shadow bank credit, and until banks have created the capacity to resume lending to creditworthy borrowers. This is still about capital adequacy, where better signs of organic capital creation are welcome. More importantly now though, it is about poor asset quality, especially as defaults and loan losses rise into 2010 from already elevated levels.[84]

And McClatchy writes:

The foundation of U.S. credit expansion for the past 20 years is in ruin. Since the 1980s, banks haven’t kept loans on their balance sheets; instead, they sold them into a secondary market, where they were pooled for sale to investors as securities. The process, called securitization, fueled a rapid expansion of credit to consumers and businesses. By passing their loans on to investors, banks were freed to lend more.

Today, securitization is all but dead. Investors have little appetite for risky securities. Few buyers want a security based on pools of mortgages, car loans, student loans and the like.

“The basis of revival of the system along the line of what previously existed doesn’t exist. The foundation that was supposed to be there for the revival (of the economy) . . . got washed away,” [economist James K.] Galbraith said.

Unless and until securitization rebounds, it will be hard for banks to resume robust lending because they’re stuck with loans on their books.[85]

Not only has the supply of credit been destroyed, but the demand for many types of loans – such as commercial real estate loans – is also drying up.[86]

So there is simply much less credit flowing through the economic system than there was prior to 2007.

The New Normal – Lower Economic Activity

As chief economist for the International Monetary Fund, Olivier Blanchard, said:

This recession has been so destructive that “we may not go back to the old growth path … potential output may be lower than it was before the crisis.” [87]

All of the above trends force many economists to conclude that economic activity as a whole will be lower for many, many years. In other words, they say that “The New Normal” will be a much lower level for the economy.

Pimco CEO Mohamed El-Erian says elevated unemployment and record wealth destruction will keep growth at 2 percent or less for years. [88]

As Bloomberg writes:

The New Normal theory predicts that the recession will leave unemployment, forecast to reach 10 percent for the first time since 1983 early next year, higher for years. [89]

Indeed, the “overhang” of inventory [90]- that is, the inventory of unsold goods – in everything from housing [91 and 92] to cars [93] to consumer electronics [94] means that the newly reduced consumer demand is meeting up with very high levels of supply. This is a recipe for unemployment.

Many economists also point out that the length of time people are remaining unemployed is skyrocketing. As the Washington Post notes:

Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed. That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won’t be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure. [95]

The following chart from the St. Louis Federal Reserve Bank shows that people are staying unemployed much longer than they have in any previous economic downturn since 1950:

[96]

As David Rosenberg writes:

The number of people not on temporary layoff surged 220,000 in August and the level continues to reach new highs, now at 8.1 million. This accounts for 53.9% of the unemployed — again a record high — and this is a proxy for permanent job loss, in other words, these jobs are not coming back. Against that backdrop, the number of people who have been looking for a job for at least six months with no success rose a further half-percent in August, to stand at 5 million — the long-term unemployed now represent a record 33% of the total pool of joblessness. [97]

[98: for graphical updates on the state of the economy, see charts from the Cleveland Federal Reserve Bank posted at http://www.clevelandfed.org/research/data/updates/index.cfm?DCS.nav=Local]

Another Trend: Increased Productivity Means Less Jobs

All of the aforementioned economic trends point to lower levels of job creation, and thus higher unemployment.

In addition, the chief economist for MarketWatch, Distinguished Scholar of Economics at Dowling College (Irwin Kellner) points out that worker productivity is rising, and that increased worker productivity means less new people will be hired. [99]

Other Theories Regarding the Causes of Unemployment

The main cause of unemployment today is the economic crisis. For example, a report from the the National Industrial Conference Board pointed out in 1922 stated the obvious: depressions increase unemployment. [100]

The report also points out that seasonal variations, “immigration and tariff policies and international relationship” can affect unemployment figures. [101]

In fact, economists from different schools of thought ascribe different causes to unemployment. For example:

Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and services in the economy (cyclical unemployment). Others point to structural problems, inefficiencies, inherent in labour markets (structural unemployment). Classical or neoclassical economics tends to reject these explanations, and focuses more on rigidities imposed on the labor market from the outside, such as minimum wage laws, taxes, and other regulations that may discourage the hiring of workers (classical unemployment). Yet others see unemployment as largely due to voluntary choices by the unemployed (frictional unemployment). Alternatively, some blame unemployment on disruptive technologies or Globalisation.

[102 and 103]

For example, many Americans believe that globalization has increased unemployment because “American jobs” have moved abroad. Certainly, the American government has encouraged multinational corporations based in the U.S. to move jobs overseas. But quick fixes may lead to new problems. For example, a new American protectionism could stifle trade, further weakening the American economy.

Similarly, some economists believe that inflation decreases unemployment. However, that is only true where the workers drastically underestimate the extent to which higher prices are decreasing the real value of their wages. Indeed, as the Cato Institute notes:

This reduction in unemployment cannot occur unless workers systematically underestimate the inflation rate. When workers are aware of the inflation rate and, for example, have their pay adjusted according to the cost of living, they will interpret wages properly and not be misled into thinking that a normal wage offer is a relatively high wage offer.

Rather than merely failing to decrease unemployment, inflation may actually increase the unemployment rate. Frequent concomitants of inflation, such as high interest rates and volatility and uncertainty in the financial and product markets, increase the risks inherent in business operations and thereby discourage the expansion of firms and the creation of jobs. [104]

Therefore, many “quick fixes” for unemployment may actually do more harm than good.

Isn’t the Government Helping to Reduce Unemployment?

The government has committed to give trillions to the financial industry. President Obama’s stimulus bill was $787 billion, which is less than a tenth of the money pledged to the banks and the financial system. [105]

Of the $787 billion, little more than perhaps 10% has been spent as of this writing. [106]

The Government Accountability Office says that the $787 billion stimulus package is not being used for stimulus. [107] Instead, the states are in such dire financial straights that the stimulus money is instead being used to “cushion” state budgets, prevent teacher layoffs, make more Medicaid payments and head off other fiscal problems. So even the money which is actually earmarked to help the states stimulate their economies is not being used for that purpose.

Indeed, much of the $787 billion was earmarked pork [108], not for anything which could actually stimulate the economy. [109]

Mark Zandi – chief economist for Moody’s – has calculated which stimulus programs give the most bang for the buck in terms of the economy:

[110]

But very little of the stimulus funds are actually going to high-value stimulus projects.

Indeed, as the Los Angeles Times points out:

Critics say the [stimulus money reaching California] is being used for projects that would have been built anyway, instead of on ways to change how Californians live. Case in point: Army latrines, not high-speed rail.

***
Critics say those aren’t the types of projects with lasting effects on the economy.

“Whether it’s talking about building a new [military] hospital or bachelor’s quarters, there isn’t that return on investment that you’d find on something that increases efficiency like a road or transit project,” said Ellis of Taxpayers for Common Sense.

Job creation is another question. A recent survey by the Associated General Contractors of America found that slightly more than one-third of the companies awarded stimulus projects planned to hire new employees. But about one-third of the companies that weren’t awarded stimulus projects also planned to hire new employees.

“While the construction portion of the stimulus is having an impact, it is far from delivering its full promise and potential,” said Stephen E. Sandherr, chief executive of the contractors group.

It’s unclear how many jobs will be created through the Defense Department projects. Most of the construction jobs are awarded through multiple award contracts, in which the department guarantees a minimum amount of business to certain contractors, and lets only those contractors bid on projects.

That means many of the contractors working on stimulus projects already have been busy at work on government projects.even the stimulus money which is being spent [111]

David Rosenberg writes:

Our advice to the Obama team would be to create and nurture a fiscal backdrop that tackles this jobs crisis with some permanent solutions rather than recurring populist short-term fiscal goodies that are only inducing households to add to their burdensome debt loads with no long-term multiplier impacts. The problem is not that we have an insufficient number of vehicles on the road or homes on the market; the problem is that we have insufficient labour demand.[112]

Donald W. Riegle Jr. – former chair of the Senate Banking Committee from 1989 to 1994 – wrote (along with the former CEO of AT&T Broadband and the international president of the United Steelworkers union):

It’s almost as if the administration is opting for a rose-colored-glasses PR strategy rather than taking a hard-nose look at actual consumer and employment figures and their trends, and modifying its economic policies accordingly.[113]

How Much Unemployment Do We Want?

On the one end of the spectrum, Article 23 of the United Nations’ Universal Declaration of Human Rights declares:

Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.[114]

In other words, the U.N. says that there should be essentially no unemployment for those who wish to work.

On the other end of the spectrum, some people – who make a lot of money during periods where the condition lead to high levels of unemployment – are comfortable with unemployment percentages reaching those in the Great Depression.

Societies should decide for themselves what level of unemployment they consider acceptable, and then demand policies which will accomplish that goal to the greatest extent possible. As discussed above, there are many factors which affect employment levels, and so solutions are complicated.

However, without an open and visible public policy debate about the issue, unemployment levels will either remain second order affects of policy choices concerning other elements of the economy, or will be decided behind closed doors by decision-makers who may or may not have the best public interest in mind.

Public Funding

As the above facts show, unemployment is a very serious problem in the United states, and world-wide. The policy responses of the U.S. and other Western governments has not been working. As discussed above, there is no simple solution.

Senator Riegle recommends a 4-part prescription, including:

Ensure that loans and credit facilities are readily available to the nation’s small and medium size businesses and manufacturers.

Many of the top economists argue that we need to break up the giant banks which are insolvent in order to save the economy.[115] Fortune[116], BusinessWeek[117] and Federal Reserve governor Daniel K. Tarullo[118] have pointed out that breaking up the largest, insolvent banks would allow more competition from small to mid-size banks, and that such banks may actually make more loans to small businesses. More loans to small businesses would lead to more employment by those many small businesses.

In addition, the U.S. has largely been financing job creation for ten years. Specifically, as the chief economist for BusinessWeek, Michael Mandel, points out, public spending has accounted for virtually all new job creation in the past 1o years:

Private sector job growth was almost non-existent over the past ten years. Take a look at this horrifying chart:

Between May 1999 and May 2009, employment in the private sector sector only rose by 1.1%, by far the lowest 10-year increase in the post-depression period.

It’s impossible to overstate how bad this is. Basically speaking, the private sector job machine has almost completely stalled over the past ten years. Take a look at this chart:

Over the past 10 years, the private sector has generated roughly 1.1 million additional jobs, or about 100K per year. The public sector created about 2.4 million jobs.

But even that gives the private sector too much credit. Remember that the private sector includes health care, social assistance, and education, all areas which receive a lot of government support.

***

Most of the industries which had positive job growth over the past ten years were in the HealthEdGov sector. In fact, financial job growth was nearly nonexistent once we take out the health insurers.

Let me finish with a final chart.

Without a decade of growing government support from rising health and education spending and soaring budget deficits, the labor market would have been flat on its back. [119]

Raw Story argues that the U.S. is building a largely military economy:

The use of the military-industrial complex as a quick, if dubious, way of jump-starting the economy is nothing new, but what is amazing is the divergence between the military economy and the civilian economy, as shown by this New York Times chart.

In the past nine years, non-industrial production in the US has declined by some 19 percent. It took about four years for manufacturing to return to levels seen before the 2001 recession — and all those gains were wiped out in the current recession.

By contrast, military manufacturing is now 123 percent greater than it was in 2000 — it has more than doubled while the rest of the manufacturing sector has been shrinking…

It’s important to note the trajectory — the military economy is nearly three times as large, proportionally to the rest of the economy, as it was at the beginning of the Bush administration. And it is the only manufacturing sector showing any growth. Extrapolate that trend, and what do you get?

The change in leadership in Washington does not appear to be abating that trend…[120]

So most of the job creation has been by the public sector. But because the job creation has been financed with loans from China and private banks, trillions in unnecessary interest charges have been incurred by the U.S.

Former Washington Post editor and author of one of the leading books on the Federal Reserve, William Greider, points out that governments actually have the power to create money and credit themselves, instead of borrowing it at interest from private banks:

If Congress chooses to take charge of its constitutional duty, it could similarly use greenback currency created by the Federal Reserve as a legitimate channel for financing important public projects–like sorely needed improvements to the nation’s infrastructure. Obviously, this has to be done carefully and responsibly, limited to normal expansion of the money supply and used only for projects that truly benefit the entire nation (lest it lead to inflation)…

This approach speaks to the contradiction House Speaker Pelosi pointed out when she asked why the Fed has limitless money to spend however it sees fit. Instead of borrowing the money to pay for the new rail system, the government financing would draw on the public’s money-creation process–just as Lincoln did and Bernanke is now doing.[121]

By creating the credit itself – instead of borrowing from private banks and foreign nations – the American government could finance the creation of new jobs without incurring huge interest charges owed to the private banks and foreign countries which lent America the money. In other words, the U.S. government would itself create the new credit, just as Lincoln did to finance the civil war.

By financing new projects with credit created by the government itself, America might be able to pick itself up by its bootstraps and put its people back to work.

The same may be true for other countries as well.

Submitted by Edward Harrison of Credit Writedowns.

I have had pretty much no computer access where I am so I apologize for not getting into the debate in the comments from my last post on healthcare.  I wrote this article as an update to that post.  The opinions here reflect only my view and have no reflection whatsoever on how Yves perceives the situation on healthcare.

Yesterday I wrote a healthcare polemic which was mostly designed to discuss the politics of healthcare for the President. The essence of my argument was that Barack Obama has not shown enough willingness to fight for specific policies he espoused on the campaign trail. In a poor economic environment, this weakens him politically, as is being made clear on the issue of health insurance reform.  I hope my language was sufficiently over-the-top to get my point across.

Today, I want to talk more about the substance of the debate. I have to say upfront that when it comes to the actual policies of healthcare, I am probably more conservative than Democrats are but I do believe serious reform is necessary today.

Let me offer some upfront tactical points. Then I will couch the debate in terms of the social-psychological backdrop and how the Obama strategy fails to address it before offering a strategy of my own. At the end, I have a number of links to good posts on the issue from both conservatives and liberals.

The wrong tactics

If you recall, Hillary Clinton outlined her early 1990s health care initiative in excruciating wonkish detail only to have her political enemies use this detail to pick her plan apart. Hillarycare was torpedoed because opponents of her initiative had a lot of ammunition with which to work. Team Obama seems to be fighting this same battle. They are employing a strategy in which cost reduction was the initial selling point of his reform platform. Moreover, Obama and his administration offer little in upfront detail about actual healthcare goals in order to prevent a recurrence of 1994.

But, this is not 1994.  And reducing system-wide costs that trickle down to individuals is not  a selling point that engenders any visceral or emotional response from  voters. Furthermore, I have been dismayed, as have many in America, that Congress and the President seem to have concocted plans for reform before taking the debate over healthcare to the public to inform themselves as to what we want. The draft legislation came first and then the town hall debates.  In fact, these debates never would have occurred had the President had his way with a vote before Congress’ summer recess. This seems very high-handed. Why didn’t we have town hall meetings followed by drafted legislation?

The social psychology of economic depression

We are in a deep economic contraction and people are afraid. What Americans want is economic security, not cost reduction.  Obama must offer a healthcare plan that provides increased economic security to the majority of Americans if he wants greater public support. 

Most people in America are satisfied with their health insurance and their health care.  As they see it, no change is necessary there. Telling people the healthcare system in France, Britain or Canada is just as good as ours and we should switch to their model is a losing proposition.

On the other hand, Americans do feel a general sense of economic insecurity. The unemployment rate and foreclosure rates have risen astronomically. Meanwhile, houses, the main asset for most Americans, have declined in value tremendously, as have stocks. Americans are poorer both in terms of income coming in the door and wealth on their balance sheet. No wonder, the word depression is used to describe a major economic downturn.

And there is an increasing sense of anxiety about paying large out-of-pocket expenses despite having insurance. Here, I am talking about money for specific visits and procedures that one has to reach into one’s pocket and pay out here and now. That’s the kind of ‘cost’ that gets people’s attention – abstract system-wide costs, not so much.

Getting people onboard for reform

Given this array of forces bearing down on average Americans, healthcare reform must have increasing economic security for the insured as as the principal rallying call. We need to allay people’s sense of fear and anxiety by demonstrating that change will make them more secure economically. This is what insurance is all about: reducing economic risk. And right now, given other money problems, most people feel the risk reduction they are receiving is not adequate.

So, reduction of out-of-pocket expenses for those already insured must be the principal selling point of any reform. Mind you, I believe universal coverage is the most pressing need.  But, quite frankly, telling people we need to give something to other people in a time of economic distress is not the sort of thing that makes one want to jump up and shout.

Beyond just reducing the risk associated with out-of-pocket expenses, there are other issues of insecurity – the risk of losing coverage or paying more money when losing or changing a job, the risk of dropped coverage due to pre-existing health conditions, and the risk of exceeding yearly or lifetime caps.  If the healthcare plan that the President and Congress present to the American people can credibly claim to reduce these risks to those already insured, we would be more likely to accept reform on other issues which I am about to address.

To recap, most Americans like their health care, but feel there are significant gaps in their health insurance.  Obama has made a savvy move in switching the debate of late from care to insurance. In reforming American health insurance, four issues will gain widespread support:

1. Capping per visit and yearly co-payments fees.
2. Allowing every worker to remain with the same health insurance provider and paying largely the same premium had they remained with the same employer regardless of employment situation.
3. Preventing health insurance companies from dropping coverage for pre-existing conditions.
4. Providing all employees with a health insurance policy option without annual or lifetime caps and making the caps explicit for other options.

Two other reform issues to be addressed

With the issues established that will get most Americans onboard, reform can turn to other agenda items.  The first issue is clearly the lack of insurance for tens of millions.  This is an issue which is easy to demagogue due to stereotypes about just who has no insurance in the United States (illegals, Blacks, Latinos, the extraordinarily sick, or the young and healthy).  But the true purpose of health care reform has to be insuring all those working in America and their families against large and unexpected healthcare expenses and to promote universal basic preventive care.  If we pass a health care bill without substantially all Americans being covered against catastrophic healthcare loss, you can deem the legislation a failure.

However, there is one other issue of importance as well. James Pethokoukis had a good blog post yesterday “A healthcare plan to save Obama’s presidency” which encapsulated this idea. First he agrees that universal coverage is necessary.  But, he also adds an important bit regarding our employer-based system.

Make health insurance mandatory and subsidize those who can’t afford it. (That’s the blue part.) But at the same time dismantle employer-based health plans, which prevent consumers from understanding the true costs of their healthcare decisions. In any case, employer plans are just an accident of history. (That’s the red part.)

The simplest way of dismantling them, according to an analysis by McKinsey, would be to make the money spent on health insurance by employers available as cash, tax free, to employees. "Insurers would then compete for customers with policies that offer better value for the money," according to McKinsey. "The combination of invigorated supply and demand is the only healthcare reform plan that will avert the economic disaster that otherwise awaits us."

A Purple Plan for the centrist – or purple — president many Americans thought they were voting for. It would bolster the president’s popularity, lift American spirits and help restore the economy.

If I run a business in the United States in competition globally, why should I be forced to provide healthcare to my employees unlike businesses in no other country.  This clearly puts American businesses at a disadvantage and is a legacy of a system that needs to end.

What’s more is dismantling the employer-based health insurance system would have a huge stimulative effect on the economy and financial assets.  Every listed company in the United States would instantly be worth more and have more money available to provide for investment.  But, of course, the devil is in the details because this measure would effective be a tax cut for business.  Where is the revenue to support this cut?  If the President and Congress could find a legitimate way to recoup this revenue that makes the health care initiative relatively deficit neutral, there would be bipartisan support for such a provision.

Recap

The healthcare debate has been a fiasco.  It was begun without any input from the American people. Obama and many in Congress even attempted to pass legislation before the summer recess when serious debate could happen.  We saw this tactic under Bush when Hank Paulson tried to fast track the TARP legislation.

As a result, the debates have often not been very substantive and have degenerated into an emotional demagoguing of this key issue. Better messaging would be nice as well.  What’s in it for me?  And what are your goals in passing this legislation?  These are two questions neither Obama or many in Congress can answer.

Below are twenty articles I found informative. They run the gamut from very conservative to very liberal (Patrick Buchanan to Robert Reich, if that gives you a better flavour). I am adding them here for your attention as well.  Comments are appreciated.

1. Why We Need Health Care Reform – Barack Obama, NYTimes.com
2. Obama Goes Postal, Lands in Dead-Letter Office: Caroline Baum – Bloomberg.com
3. Economist’s View: Swiftboating Health Care Reform
4. Robert Reich’s Blog: How Tough is Our President?
5. Populist Right Rising – Patrick Buchanan
6. The inevitable socialisation of health care financing – Willem Buiter 
7. Economist’s View: "Public Option versus Co-ops: The Market Test"
8. Clive Crook – Obama took wrong turn on health
9. The Swiss Menace – Paul Krugman
10. Ara Darzi and Tom Kibasi – In Defense of Britain’s Health System – washingtonpost.com
11. Fareed Zakaria – When Only a Crisis Brings Reforms – washingtonpost.com
12. Obama’s teflon melting as outrage over healthcare heats up – Marshall Auerback
13. Economist’s View: "A Public Option Isn’t a Curse or a Cure"
14. On why I can’t get in to see my doctor – James Fallows
15. You Do Not Have Health Insurance – James Kwak
16. A Canadian doctor diagnoses U.S. healthcare – Los Angeles Times
17. Unconscionable Math – Taunter Media
18. Hospital Savings – Salaries for Doctors, Not Fees – Series – NYTimes.com
19. Charles Krauthammer – Why Obamacare Is Sinking – washingtonpost.com
20. My whopping $32 emergency room visit in the land of socialized medicine

Submitted by Edward Harrison of Credit Writedowns.

Below is a post I recently wrote at Credit Writedowns. I hope you find this in line with Marshall Auerback’s recent post on the same issue. Here I am looking at things from a purely political standpoint – not necessarily a defense of one position or another on health insurance reform.  Feel free to comment.

Barack Obama’s health insurance reform initiative is clearly foundering. So, his administration has pulled out the big guns. Health and Human Services Secretary Sebelius on the Sunday morning talk shows. Obama himself had a prime time press conference on the issue. He has hosted a number of town hall meetings. The President has even written an opinion piece in the New York Times.

Yet, most pundits are still acting as if his healthcare efforts are on life support. I have read any number of posts from pundits of all political stripes asking why Obama is not having success on healthcare.  The answer is simple: Barack Obama needs to learn when to be the conciliator-in-chief and when to be an asshole.

Wasting political capital on banks

Let’s rewind a bit to explain. Back in July, I wrote that Obama had wasted a lot of political capital by caving in to the financial services lobby. In my view, this goes to the core of the issue. The US and global economy were poised on the precipice.  Obama rightly put economic issues first as he entered office in January, dealing with economic stimulus and financial sector reform. However, his crisis solution has been a massive giveaway to big banks, effectively transferring money from taxpayers to the banks in order to shore up their bottom lines and keep them solvent.

Team Obama thinks this was a necessary evil to prevent economic collapse.  But the average guy on the street of any political stripe sees this as galling.  You have a trader at Citigroup, a ward of the state for all intents and purposes, poised to make $100 million. JPMorgan recorded record revenue and $2.7 billion in profit last quarter. And Goldman is poised to pay record bonuses this year.  For Wall Street, the crisis seems to be over and it is business as usual. The response for many is rage, anger, at the way banks have been gifted a new lease on life while ordinary Americans are displaced.  Much of this bile is directed at Wall Street, but the true anger should be reserved for Washington.

Populism is rising

And now we are getting that anger on health care. People are angry that the economy has suffered for so long and they are angry that the economic elite are prospering again but they are not. The realization that this did not have to be is sinking in.

Barack Obama campaigned for President as a change agent.  In effect, he was promising to change Washington, so that ordinary citizens benefitted as much as, if not more than, special interests. However, it seems that Washington has changed him. You have the banks getting bailed out, GM and Chrysler, a stimulus bill which many see as laden with pork-barrel spending, the secret deal with the drug lobby, and on and on.

These are not ordinary times, folks. This is a depression.  People are afraid – afraid of losing their jobs and their homes, afraid their standard of living will fall, afraid they will be the first American generation ever to be permanently worse off than their parents. Most of all, Americans are afraid of America’s standing in the world. This economic period is shattering a world view that the American dream is attainable for everyone.

Enter the demagogues. In times of acute economic stress, demagogues, political bullies, fear merchants, and war mongers of all stripes come out of the woodwork.  These individuals are willing to point the finger and assign blame. They are willing to tell people what they want to hear. And their message is just fact-based enough to pass muster for anyone looking to channel their anger and disappointment about the sorry state of the economy.

Why do you think the birthers movement, challenging the American bona fides of Obama, is popular despite the evidence? Why do you think the idea of government ‘death panels’ is gaining currency in the healthcare debate?  It’s not because these ideas are accurate and I don’t think it’s because people are dumb. It’s because the people making these claims are pointing fingers and naming names.  They give us a target at which to vent our anger.

This is a major reason why the Austrian economics solution to depression is ill-conceived.

It is the same wrong-headed prescription given to the Asians in 1998 and to Argentina in 2001.  We squandered an opportunity for fiscal prudence when the economy was on more solid footing.  With depression on our doorstep, is now the right time to start cutting back?

This would mean liquidating General Motors, bankrupting Royal Bank of Scotland and Citigroup or allowing Iceland, Hungary and Pakistan to fend for themselves.  In theory, each of these measures seem prudent.  But, in practice, these measures would result in huge job loses, would induce further deleveraging and asset price declines, would deplete capital from an already fragile global baking system, and would lead to a probable depression of unimaginable severity.  It is in such a bleak environment that dangerous despots and dictators like Hitler and Mussolini rose to power, taking advantage of the natural human need for ’strong’ leader in a time of chaos and uncertainty.  Could we expect any different today?

The answer to that question is no. And we should remember this as we debate policy responses. The rise of extreme populist fervour on all sides is troubling and could lead to much worse if the economy does not show a robust recovery.

Obama needs to be an asshole

I have said before that Barack Obama is in a political and economic position more akin to Herbert Hoover than Franklin Roosevelt. Hoover dealt with a sick economy that was still falling.  Roosevelt entered the White House after a large percentage of the economic damage had been done. I believe the economic situation for Obama is certainly less severe than it was for Hoover, but still precarious.  I do not mean to say that Obama is the ‘black Herbert Hoover’ as my friend Yves keeps pointing out. I do mean to say that he needs to be thinking of himself as Hoover and not Roosevelt to have the right mental predisposition of what’s at stake.

So, from a purely Machiavellian perspective, Obama needs to jettison the professorial above-the-fray coolness and get down in the trenches and fight for what he believes in.  And that means he is going to have to run roughshod over his enemies.  Mark Thoma pointed me to a quote that gets the essence of this argument:

A lot of what our job is about is understanding the point of view of others, even when we disagree with them. A lot of our job is explaining to students a wide variety of viewpoints, and allowing them to choose from among them.

I don’t think FDR worried so much about the point of view of others–Doris Kearns Goodwin said he "gloried in his enemies."

FDR also largely got what he wanted.

So, when pundits debate where Obama is losing hearts and minds, it has as much to do with style as substance.  For instance, Patrick Buchanan says Obama is losing the center because he’s running left. He would say that. Robert Kuttner says Obama is losing the left because he is running center. He would say that too.

But Nate Silver’s critique in his Grand Unified Obama Critique is more on the mark.

If liberals are convinced that the President is too conservative and conservatives are convinced that he’s too liberal then either the President must be doing everything right or everything wrong. Lately, granted, it has seemed more like the latter…

What I think people were hoping for is that Obama would, somehow or another, be able to overcome the institutional barriers to change, probably through a hands-on approach involving a lot of public persuasion.

Put bluntly, Obama needs to be an asshole. Right now it looks like he is willing to compromise on any and every issue. Yes, compromise is an integral part of leadership and governance. But, there is a time for compromise and a time to fight.

For which specific issues is Obama really willing to fight and lose? He is not saying, “Give me Liberty, or give me Death!” Americans still have no clue what his core beliefs are. And, they are losing respect. That gives demagogues an opening and is the main reason Obama’s grass roots support has evaporated when he needs it most.

Look, if the economy regains solid footing by mid-2010, these issues will go away and Obama’s political party will benefit in the mid-term elections. He might even get the Roosevelt treatment for bringing us out of a deep economic contraction. However, if the economy remains fragile, as I believe it will, this lack of fight will become a true liability for the President.

Unquoted related articles

Where’s Mr. Transformer? – Eugene Robinson

Palin’s Red Menace – Richard Cohen

As the economy limps along, with jobs still falling (despite keen efforts to call a turn, and with the figures a bit more dodgy if you look under the hood), more and more overindebted and underemployed citizens are out on the street.

Reports of tent encampments or parking lots with cars that serve as shelter have been an occasional and sad sighting for more than a year. What is new is that some cities, with their shelters at their limits, have decided it is better to provide limited services to these colonies than try to send the occupants away.

From the Wall Street Journal:

Last summer, police responding to complaints about campfires under a highway overpass found dozens of homeless people living on public land along the Cumberland River.

Eviction notices went up — and then were suspended by Nashville Mayor Karl Dean, a Democrat, who said housing for the homeless should be found first.

A year later, little has been found — and Nashville, with help from local nonprofits, is now servicing a tent city, arranging for portable toilets, trash pickup, a mobile medical van and visits from social workers. Volunteers bring in firewood for the camp’s 60 or so dwellers.

Nashville is one of several U.S. cities that these days are accommodating the homeless and their encampments, instead of dispersing them…

In Florida, Hillsborough County plans to consider a proposal Tuesday by Catholic Charities to run an emergency tent city in Tampa for more than 200 people. Dave Rogoff, the county health and services director, said he preferred to see a “hard roof over people’s heads.” But that takes real money, he said: “We’re trying to cut $110 million out of next year’s budget.”

Ontario, a city of 175,000 residents about 40 miles east of Los Angeles, provides guards and basic city services for a tent city on public land.

A church in Lacey, Wash., near the state capital of Olympia, recently started a homeless camp in its parking lot after the city changed local ordinances to permit it. The City Council in Ventura, Calif., last month revised its laws to permit sleeping in cars overnight in some areas. City Manager Rick Cole said most of the car campers are temporarily unemployed, “and in this economy, temporary can go on a long time.”…

Municipal leniency isn’t universal. New York City officials last month shut down a tent city on a vacant lot in East Harlem….

Some homeless are battling mental illness or addictions, or both. Municipal officials in the U.S. acknowledge the tent cities can breed crime and unsanitary conditions, but with public shelter scarce, they say they have to weigh whether to spend police time to break up encampments that are likely to resurface elsewhere.

Pastors in Champaign, Ill., last week asked the City Council to allow people to live in organized tent communities of as many as 50 people. Legalizing the camps is more compassionate and cost-effective than forcing “poor people who are camping because they have a lack of better choices to constantly have to fear being rousted and cited by police,” says Joan Burke, advocacy director for Sacramento Loaves & Fishes, a homeless-assistance agency.

In Nashville, Mr. Harris, director of the city’s homeless commission, said tent cities have existed for years, but he has seen the numbers surge. He now knows of 30 encampments. While some people are chronically homeless, he said, foreclosures have forced others into the streets, as has Tennessee’s 10.8% unemployment rate, the highest in 25 years…

The city and local nonprofits have found permanent housing for about 25 people from the tent city.

Many haven’t been so lucky. David Olson, 47 years old, said last week he and his wife wound up under the Nashville overpass after he lost a job making cement pipes in Iowa four months ago. The couple came to Nashville for a remodeling job that turned out to be a scam. “I’ve got five years’ experience in carpentry and 10 years’ roofing and I can’t find a job,” he said.

Mr. Olson, his arms and shirt caked with dirt, said life is hard in the swampy woods. The couple woke up to mud after a night of rain. His wife said she is frightened by the dogs that roam around the encampment.

As mosquitoes buzzed, they tried to set up camp on higher ground. They struggled to secure a tarpaulin over their tent to keep out the rain. Mr. Olson’s wife, holding onto a pole to prop up the tarp, cried. “I’m not used to living like this.”

Is the leopard changing its spots? First we have the Wall Street Journal, of all places, lambasting Goldman, while incredibly, the Washington Post springs to its defense. If that isn’t bizarre enough, today we have the Wall Street Journal, which along with just about every mainstream media outlet, likes to inveigh about coming Social Security deficits, points out something quite underappreciated: that the combo plate of ceilings on payroll taxes and more income flowing to the top echelon of society (some in the form of compensation that comes via tax advantage capital gains) means there is a lot of labor-related income that is not subject to Social Security taxes.

A dose of Koyaanisqatsi is in order.

As an aside, the hysteria about Social Security is way overdone. Yes, it needs to be fixed, but on the one to ten degree of difficulty, this one is not hard. Social Security was created when the average lifespan was 69. We need to do some combination of raising the age at which workers can receive payment, eliminate the ceiling on payroll taxes, and end the tax breaks (at a minimum) for the upper middle income and wealthy (85% of Social Security payments are exempt from taxes). Eliminating the ceiling alone would mean Social Security was adequately funded for the next 75 years.

Back to the Journal. 1/3 of all pay goes to “highly compensated employees,” meaning those who earn more than the Social Security ceiling, and their pay has been rising faster than for the rest of the workers. And that exclude stock-based pay.

From the Journal:

Executives and other highly compensated employees now receive more than one-third of all pay in the U.S.,…
Highly paid employees received nearly $2.1 trillion of the $6.4 trillion in total U.S. pay in 2007, the latest figures available. The compensation numbers don’t include incentive stock options, unexercised stock options, unvested restricted stock units and certain benefits.

The pay of employees who receive more than the Social Security wage base — now $106,800 — increased by 78%, or nearly $1 trillion, over the past decade, exceeding the 61% increase for other workers, according to the analysis. In the five years ending in 2007, earnings for American workers rose 24%, half the 48% gain for the top-paid. The result: The top-paid represent 33% of the total, up from 28% in 2002.

The growing portion of pay that exceeds the maximum amount subject to payroll taxes has contributed to the weakening of the Social Security trust fund…

The data suggest that the payroll tax ceiling hasn’t kept up with the growth in executive pay. As executive pay has increased, the percentage of wages subject to payroll taxes has shrunk, to 83% from 90% in 1982. Compensation that isn’t subject to the portion of payroll tax that funds old-age benefits now represents foregone revenue of $115 billion a year.

The magnitude of executive pay has been difficult to measure, even as policy makers grapple with ways to rein in compensation at companies receiving taxpayer bailouts…But payroll taxes provide an indirect way to calculate amounts executives receive…

Social Security data show that 6% of wage earners have pay that exceeds the taxable earnings base, and that their “covered earnings” above the taxable maximum totaled $1.1 trillion in 2007. Adding the portion of their pay below the taxable wage base, $991 billion, totals $2.1 trillion.

The $2.1 trillion figure understates executive pay, however, because it includes just salary and vested deferred compensation, including bonuses. It doesn’t include unvested employer contributions and unvested interest credited to deferred-pay accounts. Nor does it include unexercised stock options (options aren’t subject to payroll tax until exercised), and unvested restricted stock (which isn’t subject to payroll tax until vested; the subsequent appreciation is taxed as a capital gain).

Also not included in the total compensation figures is executive pay never subject to payroll tax. This category includes incentive stock options (which are generally taxed as capital gains), “carried interest” income received by hedge-fund and private-equity fund partners (also taxed as capital gains), and compensation characterized as a benefit (benefits generally aren’t subject to any taxes).

Benefits, a category that includes employer-provided health care and contributions employers make to rank-and-file pension plans, totaled nearly $1 trillion in 2007; it isn’t possible to tell what portion represents benefits for executives, such as life insurance.

The ability to delay paying payroll taxes on compensation, something that generally is available only to highly paid employees, is in itself an economic benefit that ultimately boosts paychecks…

Social Security Administration actuaries estimate removing the earnings ceiling could eliminate the trust fund’s deficit altogether for the next 75 years, or nearly eliminate it if credit toward benefits was provided for the additional taxable earnings.

Nicholas Nassim Taleb and Mark Spitznagel have a provocative comment up at the Financial Time today, In some ways, it is isn’t surprising for those familiar with his work on risk and uncertainty. On the other hand, it is an eye opener to see what an internally consistent, reasonably comprehensive solution to our mess looks like,

Taleb and Spitznagel, unlike most others, include real economy fragility in their calculus. The dependence on sophisticated computers networks and advanced communications creates more points of failure. Integrates supply chains and interdependence due to trade also creates more complexity. For the life of me, I never understood the vogue for outsourcing and offshoring, Every study ever done says the majority of companies are disappointed with the results. It seems to represent hope over experience. And from what little I have seen in the way of hard numbers says it does not yield impressive results. One IBM project, to send some work to China, showed that the labor cost savings were substantial, something like a 75% to 80% reducution. Yet the all-in cost savings projected were a mere 15% to 20%. And most projects do not live up to expectations. The gap between the two figures says the additonal coordination costs and delays were considerable.

That is a tremendous amount of rigidity and risk to introduce into one’s operations for not much gain. Yet everyone went merrily down that path because it was what all right-minded modern companies were supposed to do.

The other big message of this piece is trying to prop up asset prices via more debt is a bad idea. He recommends restructuring via large-scale debt to equity conversions, plus arrangements that allow for partial equity conversions if borrowers go into arrears. A clever concept, but too hard to administer.

As much as Taleb and Spitznagel’s message about the dangers of debt, and the need for a surgical remedy is clear, the odds of the right sort of action are zero unless things get much worse in short order.

From the Financial Times:

The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s….government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity….

First, debt and leverage cause fragility; they leave less room for errors as the economic system loses its ability to withstand extreme variations in the prices of securities and goods. Equity, by contrast, is robust: the collapse of the technology bubble in 2000 did not have significant consequences because internet companies, while able to raise large amounts of equity, had no access to credit markets.

Second, the complexity created by globalisation and the internet causes economic and business values (such as company revenues, commodity prices or unemployment) to experience more extreme variations than ever before. Add to that the proliferation of systems that run more smoothly than before, but experience rare, but violent blow-ups.

Our ability to forecast suffers due to this complexity and the occurrence of the occasional extreme event, or “black swan”. Such degradation in predictability should have made companies more conservative in their capital structure, not more aggressive – yet private equity, homeowners and others have been recklessly amassing debt. Such non-linearity makes the mathematics used by economists rather useless. Our research shows that economic papers that rely on mathematics are not scientifically valid. Not only do they underestimate the possibility of “black swans” but they are unaware that we do not have any ability to deal with the mathematics of extreme events. The same flaw found in risk models that helped cause the financial meltdown is present in economic models invoked by “experts”. Anyone relying on these models for conclusions is deluded.

Third, debt has a nasty property: it is highly treacherous. A loan hides volatility as it does not vary outside of default, while an equity investment has volatility but its risks are visible. Yet both have similar risks. Thus debt is the province of both the overconfident borrower who underestimates large deviations, and of the investor who wants to be deluded by hiding risks. Then there are products such as complex derivatives, which in the name of “modern finance” make the system even more fragile.

Against this background, we have two options. The first is to deflate debt, the other is to inflate assets (or counter their deflation with a collection of stimulus packages.)

We believe that stimulus packages, in all their forms, make the same mistakes that got us here. They will lead to extreme overshooting or extreme undershooting. They lead to more borrowing, by socialising private debt. But running a government deficit is dangerous, as it is vulnerable to errors in projections of economic growth. These errors will be larger in the future, so central bank money creation will lead not to inflation but to hyper-inflation, as the system is set for bigger deviations than ever before.

Relying on standard models to build policies makes us all fragile and overconfident. Asking the economics establishment for guidance (particularly after its failure to see the risk in the economy) is akin to asking to be led by the blind – instead we need to rebuild the world to make it resistant to the economist’s mystifications.

Invoking the pre-internet Great Depression as guidance for current events is irresponsible: errors in fiscal policy will be magnified by this kind of thinking. Monetary policy has always been dangerous…. Bubbles and fads are part of cultural life. We need to do the opposite to what Mr Greenspan did: make the economy’s structure more robust to bubbles.

The only solution is to transform debt into equity across all sectors, in an organised and systematic way. Instead of sending hate mail to near-insolvent homeowners, banks should reach out to borrowers and offer lower interest payments in exchange for equity. Instead of debt becoming “binary” – in default or not – it could take smoothly-varying prices and banks would not need to wait for foreclosures to take action. Banks would turn from “hopers”, hiding risks from themselves, into agents more engaged in economic activity. Hidden risks become visible; hopers become doers.

It is sad to see that those who failed to spot the problem (or helped to cause it) are now in charge of the remedy. Just as the impending crisis was obvious to those of us who specialise in complexity and extreme deviations, the solution is plain to see. We need an aggressive, systematic debt-for-equity conversion. We cannot afford to wait a day.