The permanent adolescence of the CATO institute

I'm responding to this ridiculous post by a CATO institute guy, which tries to sum up the problems of Keynesianism. Of course it is also making the rounds on the usual blogs and lists (like the Austrians). And as I watch it, I can't help but ask: Does he really believe that the reason we are saying government spending should increase it to "improve growth?" I'm all for improved growth, but in the present moment I think the belief is that it will stave off a collapse. On the other hand, in the long run it could be useful for the average worker to have more money--you know, just something more than the 450:1 ratio of the average CEO pay to the average worker pay. But I doubt a plan as radical as that would find many backers there.

Then he makes this fantastic ploy to prove the "logical fallacy" Keynesianism: "The government can't put money into the economy without taking money out of it." The money, as in Keynes' time is first of all raise through the same sorts of loans we've already been taking out--mostly from abroad. I'm always puzzled by how reactionary these tracts can get when they want to: it's a global economy when we're shipping jobs overseas but the inflow of capital from abroad is completely impossible when it's funding government spending.

Then he acts as if "slicing the pie differently" would be, in itself, a bad idea--as if having no pie at all would be a better alternative.

In addressing Keynes argument about the division between savings and investment, he basically denies facts on the ground: money *does* sit idle. What this basically advocates is letting rich people keep their earnings sheltered during a time of crisis--where they neither have an inclination to expose it to the "gales" of creative destruction through investment or are asked to pitch in to help at least keep the rest of the country alive during the crisis. This is where Keynes' chapter on "long run prospects" seems most pertinent: the "animal spirits" of investors are dulled and, if we are to be dependent on them for all forms of social production, these spirits must be lifted. How is this supposed to happen? Consumers have no money to spend and potential business customers (the "dept II" he conveniently leaves out of his equation) see the lack of confidence and spending. He gets uppity because Keynesian wants to get money out of banks and into the economy--but, he says, if you give it to consumers they will probably just save it anyway--as if people would, in large numbers, rather sock away their income than pay for food and--especially today--shelter.

The whole point of making the economy a national issue is getting money into the hands of the average person so that they can meet their basic needs through cash-based commodity consumption. "The Economy" is not separate from that (as his nifty graphic shows). This is essential to the economy: you can't have businesses produce things without workers or consumers, however much these titans would wish they could (or try to get around it by outsourcing.)

Throughout the video this is the real anxiety. We may ask, "Why are we supposed to give all our money to the capitalists instead of the government?" Our good CATO interlocutor promises, "Because they will rationally invest it--not like those irrational investors who, anyway, were only led astray by tiny government programs." And if they don't? If none of these magical small businesses that are supposed to replace the industrial economy of yore crop up? If all of them that do are ridiculous dot.com pyramid schemes that workers invest time and energy only to have their future employment and pensions evaporate with the shell companies that were set up? Well just sit and wait: the capitalists will eventually get around to it: they're busy helping build up the Chinese economy. When the US population has been properly disciplined (to accept third world wages, benefits, and labor rights) they'll be back to exploit the people who haven't died off. Hold your horses...geez.

His final argument about why Keynesianism is so popular is classic: he says it is used only because politicians like to spend other people's money. Is this guy trying to parody himself? Obviously there are actual academics who believe in this policy: they have data too. More than that, there is this pretention that all these decisions are being taken by elite members of society rather than resulting from popular pressures. It is a strange kind of populism that acts as popular pressure doesn't exist. I'll agree that it is being decided by elite members of society--but so is neo-liberalism.

And, far from it being something Marxists or even radical leftists would see as a step forward, those who are paying attention know exactly who this will benefit in the long run. Capitalism is prone to terrible crises. It is an inherently unstable system--a quality that people on this site seem to see as generally laudable. If only it wasn't so often paired with the pesky pressure of democracy--of all the rabble wanting to "eat" and "live" while obviously serving no purpose in society since they aren't being paid (enough) by capitalists--well then it would likely work out fine. The little nugget this video fails to mention were the forces pushing for outright fascism (then seen in very different light) or full communism. Roosevelt was not just working with fancy abstractions that tailored, tenured CATO baffoons can scrape out of the (Keynesian inspired) data: he was trying to stave off a popular revolt to right totalitarianism or left wing radicalism. Businesses and the US government realized this as well hence, as Staughton Lynd chronciles, legislation was sponsored to recognize unions and collective bargaining:

It was the hope of those sponsoring this legislation that strikes would decrease. In the short run, strikes increased and took the more militant form of sit-downs. But the national government stuck to its strategy of benevolent neutrality. It is as if the government consciously took its chances on militancy in order to be sure of forestalling radicalism. At some point (whether before or after the governmental initiative seems still unclear), a part of the American business community endorsed this cooptive strategy and independently implemented it. (37)

He gives the example of United States Steel, which recognized their unions even before the US government mandated it as they realized this was the best way to stifle the revolt. For Lynd, this is exactly what it did, mostly killing off the radicalism that threatened American business.

If we were to look at Keynesianism in truth, it would be in the post-war economy, which, even then was largely based on an impressive set of new, imperial strategies. Still, it is a more reasonable place to look for when Keynesianism was succeeding--and when workers wages were far better than they are today in real terms. For many radicals--such as the economist and former editor of the Monthly Review, Harry Magdoff--this represented not a challenge to capitalism, but it's saving grace. On the whole, nothing was changed in terms of the class structure of production, just its distribution. And even that only looks desireable in retrospect. It certainly isn't the best we can do. More importantly, for the entire post war period--and more so today--the bulk of government spending (aside from payments on the debt itself and social security obligations) goes towards military spending.

As John Stewart wondered last week, why do libertarian minded folks “trust government with tanks and nuclear weapons, but not to pass out cheese to poor people." It doesn't seem to make sense but judging from the frenzy of activity on the topic of the great depression (as opposed to the hangover we still have from much larger build up of the "military industrial complex" there is little principle involved other than making sure people who have the bulk of the money today come out on the other side of this crisis with their wealth intact. How that happens is a mystery, but they seem to be banking on bailouts with no takebacks--once again confirming the permanent adolescence of the capitalist consciousness.

Investors flock to zero percent treasury bills (and what Keynes would say about it)

I saw this story this AM and thought it an interesting example of what's going on at the moment.

NY Times, December 10, 2008
Investors Buy U.S. Debt at Zero Yield
By VIKAS BAJAJ and MICHAEL M. GRYNBAUM

When was the last time you invested in something that you knew wouldn't make money?

In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world's safest investment, United States government debt, that they agreed to accept a zero percent rate of return.

This got me thinking DeLong's essay earlier this week. People parking assets in zero percent treasury bonds is a good example of what DeLong says of the major hang up in the
world economy at the moment:

[Default Discount] and [Liquidity Discount] together can only account for [$3 trillion of the $20 trillion] decrease in market value. The rest of that decline in the value of global capital — all $17 trillion of it — thus comes by arithmetic from (5): a rise in the risk discount. There has been a massive crash in the risk tolerance of the globe's investors.

Thus we have an impulse — a $2 trillion increase in the default discount from the problems in the mortgage market — but the thing deserving attention is the extraordinary financial accelerator that amplified $2 trillion in actual on-the-ground losses in terms of mortgage payments that will not be made into an extra $17 trillion of lost value because global investors now want to hold less risky portfolios than they wanted two years ago.

[. . . .]

Our models predict that in normal times, with the ability to diversify portfolios that exists today, the risk discount on assets like corporate equities should be around 1% per year. It is more like 5% per year in normal times — and more like 10% per year today. And our models for why the
risk discount has taken such a huge upward leap in the past year and a half are little better than simple handwaving and just-so stories. Our current financial crisis remains largely a mystery: a $2 trillion impulse in lost value of securitized mortgages has set in motion a financial accelerator that we do not understand at any deep level but that has led to ten times the total losses in financial wealth of the impulse.

In reading this I was reminded of John Maynard Keynes' discussion of the role of investors in the economy--and of relying on investors for the economy to prosper. In Chapter 12 of his General Theory of Employment, Interest and Money he speaks about the need for "spontaneous optimism" which he terms "animal spirits" for anything to get done. This is akin to the "irrational exuberance" that Greenspan spoke of in the late 1990s. I don't know if this is similar to what Friedman, in his new book, discusses in terms of a "green bubble" to restart investment. In the latter case, I think there would have to be some role for the federal government--and in any case, it is funny to think that all the talk about rationality in markets is overlooking their most important characteristic: irrationality. I thought this passage from Keynes was useful so I'll leave off with it.

Section VII

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits—of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South
Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;—though fears of loss may have a basis no more reasonable than hopes of profit had before.

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death. This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively
dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent;—it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.

We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back
for our motive on whim or sentiment or chance

.

PS: if anyone is interested in doing a little reading, there is a reading group on Keynes _General Theory_ going on at both DeLong's blog and at Marginal Revolutions, the blog of a GMU econ professor: http://www.marginalrevolution.com/marginalrevolution/2008/12/general-theory.html

Bolivia, lithium

BBC had a story about the largest known lithium deposits in the world. They are found in Bolivia, where environmental and world historical concerns are keeping the supply from being exploited. If only the writers of the latest Bond movie had known this they could have focused on a real set of future concerns rather than rehashing an old scenario through what was basically an imperialist lens (i.e. British agent necessary to help the poor Bolivians). More here.

FCC spectrum changes: Cell Phone Companies vs. free public WiFi

Over the Thanksgiving holiday, I had the opportunity to use one of these fancy new iPhones--two of them, actually. They really are amazing little pieces of technology--though I confess that, when holding one, my first question was what I should do with it. I didn't need to call anyone and I had little inclination to look something up on the web. Being with other people, surfing the web or watching videos seemed a little anti-social--though during the holidays, being anti-social is a very practical defense mechanism. Since I was mostly in homes that had upwards of 2 different internet connected computers--usually closer to 3 or 4--or well within a few hundred yards of a terminal I could access if really necessary, the idea that it was imperative to have this gadget to get something done was mostly the result of advertising hype and the experience of the technological sublime--only instead of being horrified, you're just smitten. I know I could do it on that computer over there, but it is so much cooooler to do it on this one. In any case, after handling the thing for a few minutes, I could understand why the apps are so popular (and why Apple likes to highlight them in its commercials): it gives you something, anything, to do with the thing. It makes it a use value, one, according to my wife, that you MUST have.

We'll be putting off that kind of purchase for a while. We could probably afford to buy the phone--it is, after all, the holidays--but getting service for it (or one of the similar devices like the Sprint network's Instinct) would double our monthly cellular bill for the indeterminate future. Within a year the $300 phone would have cost us an additional $600 in phone bills. I suppose that is an expense we are really supposed to be able to overlook for the tremendous power we are given by the AT&T or Sprint networks. Recent advertisements have highlighted this--both competing to claim they have "The Nation's Fastest 3G network."

This is important because, it seems, anyway, the network is somewhat separate from the devices themselves. Yes they are phones, so having a phone service is useful. But they are basically handheld computers that are being plugged into the already computer-saturated lifeworld of the contemporary, North/Western bourgeoisie. I noticed this as I was trying to search using the iPhone, in one of these computer hotspots, and it offered to connect me to two of the local WiFi networks. I confess I don't know exactly how this works or what degree of functionality the device would have using only this kind of connection--I suppose that's why I'm encouraged by ads to think mostly about the 3G network speed. Still, it seems feasible that you could buy the device--which is still less than even the cheapest laptop--and not connect it to Sprint, AT&T or whoever was the proprietary owner of the network service for that device (a problem in itself, as far as I'm concerned.)

This got me thinking about these devices in relation to another big story in the news--the switch to digital TV, which will leave wide swaths of public airwaves open for future use, determined in part by the rules the FCC will decide later this month. The future of communications networks, especially in relation to the role the current incumbents will play, will likely be determined by rules made before Christmas.

The current proposal, which is championed by Republican (!) chairman Kevin Martin (who will be replaced when Obama takes office) is similar to the plan advocated by a venture capital firm M2Z, which includes CEOs of Google. It would require whoever wins the spectrum auction to provide free WiFi access at a speed of at least 768 kbps downstream. According to ars technica, over ten years it would provide service to 95% of the US population. On the downside, the proposal says it would also have to include some sort of filtering mechanism to keep out the pron, an almost unworkable feature, which, of course, will likely the be death knell of the whole proposal as it is implemented. Still, The Washington Post overplays the resistance of the plan for this reason, citing Ben Scott from the communication activist org Free Press as if he is an opponent of the plan on free speech grounds (I don't have any word from Scott on this either way, but the Free Press statement of support for the plan says nothing about these issues.)

The real opponents are some current incumbents (which the Post says "question whether investors are willing to create the needed infrastructure for free Internet access in the recession-hit economy) as well as T-Mobile, which claims free WiFi will interfere with its ability to use the spectrum it just bought in 2006.

Google, on the other hand, is a very vocal advocate of the plan--and for good reason. In 2006 it launched a free WiFi service in San Francisco and later filed three patents related to the provision of free, but advertiser supported, WiFi (the patents related to being able to subsidize the service using geo-specific, user-oriented advertising on a dynamic browser platform that would change based on the above specifications. It has long been building a network of not only WiFi but wired capacity, as reported in 2005:

For the past year, it has quietly been shopping for miles and miles of "dark," or unused, fiber-optic cable across the country from wholesalers such as New York's AboveNet. It's also acquiring superfast connections from Cogent Communications and WilTel, among others, between East Coast cities including Atlanta, Miami, and New York. Such large-scale purchases are unprecedented for an Internet company, but Google's timing is impeccable. The rash of telecom bankruptcies has freed up a ton of bargain-priced capacity, which Google needs as it prepares to unleash a flood of new, bandwidth-hungry applications.

I don't know the status of this infrastructure, but I do know that Verizon's chairman got pissed off about it shortly afterwards, though he phrased it as if the problem was Google using existing lines. Here the issue was basically one of net-neutrality--he wanted Google to pay extra to use the internet. At the moment Google seemed poised to create it's own network, bypassing these majors. It's recent patent filing on "Flexible Communication Systems and Methods" seems to confirm that this is eventually its intent, especially with regard to the somewhat fabled (though evidently in existence for almost six weeks now) Google Phone.

Google’s filing describes cellular, WiFi and WiMAX networks as all being potential routes, with the technicalities invisible to the user; their example is a mobile handset that works on home WiFi then seamlessly transitions to a WiFi hotspot or cellular network when outside.

As WIRED put it, this could kill off cell phone contracts as we know them. Interestingly, the GooglePhone is currently supported by T-Mobile, the company rejecting the current FCC proposal.

In relation to the FCC wireless WiFi bid, however, this seems to make sense. If you had a device that could move from cellular network to WiFi hotpot--which, though I admit I'm not exactly clear on the technology, the iPhone seems to be able to do--then using the 3G network would be just one way to use this device. Of course this is not just about internet service: as VOIS services--and even free video chatting via services like Skype--have shown, the internet is more efficient at providing phone service than the phone companies. If this is true of land lines, why not cell phones? Sure, the iPhone is marketed as if the nifty thing about it is that it could provide internet access at your fingertips--the cool thing about Blackberries, etc. as well. But this supposes that it is just a layer of gravy that you pay extra for in your cellular phone bill. What if the device, using free (even if ad supported) WiFi, was able to provide not only Internet capabilities, but phone service? Evidently, this idea is not lost on Google (or T-Mobile) as in NYT's review of what could be called the "Google Phone" they explicitly mention it:

Google insists that its store will be completely open. Unlike Apple, it will not reject software submissions if they don’t serve the mother ship’s commercial interests. For example, Apple rejects programs that would let you make phone calls over the Internet, thereby avoiding using up cellular airtime. Google and T-Mobile swear they would permit such a thing

This would create an incredible devalorization of the investments Sprint, AT&T and others have sunk into building these networks--but it would also erase two of my most significant monthly costs--cell phone and Internet service (I no longer pay for a land line). This is especially significant since it would likely reduce my costs while giving me more services. I know that is the promise of modernity and the supposed productivity revolution technology is claimed to catalyze, but neither of these are usually the goal of capitalist organizations.

Google is certainly one of these organizations, but it seems more able to look at the long term as a space of new possibilities rather than simply amortizing investments and raking in profits. I keep waiting for the other shoe to drop--for Google to announce that, from here on out, they will begin to "do evil." As for who would pick up the tab on this public WiFi or its infrastructure, especially, as the Post speculates, "in a recession-hit economy:" Nancy Pelosi, the Representative of California's 8th district, where Google has had much trouble getting a proposed free-wifi system launched, has proposed that building this infrastructure be part of the bailout plan. If this sounds socialistic, it should be noted that, as NPR reported earlier this week, the US is well behind most countries in Europe, where WiFi provision is much cheaper and infrastructure publicly subsidized.

In any case, the possibility of this framework for communication is there and the devices are probably well within reach. A big piece of the puzzle about the future of wireless communication in the US is the way the legislation is written to allow Google and its venture capitalist pals to use this area of the spectrum for broadband--oh and whether the legislation favors incumbent providers or not.

Interestingly, AT&T--which could have much to lose--favors the Martin proposal, as does Verizon, which famously tried to scuttle a public WiFi system in Phili a few years back; while Google phone partner T-Mobile opposes it. So much for seeing clearly where these lines of interest are drawn (I'm sure someone with more information on the background relationships could help me understand it). In the meantime, I'm most taken by the fact that the two most established industries of spectrum use--TV and radio--seem only as involved in resisting the plan as Broadway theatres. Again, the supposed reason for this is that the use of the white space for anything else would cause potential interference. I'm more partial to Martin's claim that the real interference they fear is with their business model:

“We’re being very cautious about protecting the broadcasters, but at the same time making sure the technology allows us to make greater use of this invaluable resource,” Mr. Martin said. He added that he thought some opponents, like the broadcasters, were fighting the proposal because they were unnerved by the rise of interactive tools that offered a less passive media experience. “The empowerment of consumers is threatening,” he said

On this point, I am forced to recall Michael Power, the former FCC chair, and to say that I too hastily judged him. He was in charge of trying to push through the ownership changes that led to a broad public backlash in 2003--an event which formed the backbone of Free Press' advocacy and sits as a central event in Robert McChesney's The Problem of the Media. At the time, I thought Powell was being cavalier and somewhat utopian when he claimed that the FCC had little Constitutional right to regulate spectrum because,

Moreover, unique scarcity as a justification for lesser constitutional protection for broadcasters is demonstrably unsupportable. Technology makes ever more efficient use of spectrum. Broadcast channels are continually increasing. Cable, internet, and VCRs provide an untold number of outlets for speech. We must admit to these realities and quit subverting the Constitution in order for the government to be free to impose its speech preferences on the public. [. . . .] The fact is that spectrum is not really scarce. It may actually be infinite, dependent only on advances in technology that can make ever-increasing efficient use of it.... Perhaps, it is uniquely abundant rather than uniquely scarce.

At the time I didn't doubt the technological possibilities--and still don't--but the institutional possibilities within the current media oligopoly. Here I think the major difference between the way principled libertarians and principled leftists see the relationship between the state and the market is that "freedom" in libertarian terms is always mediated by the immense power of control over monetary resources. I still basically believe that as well (and the proposed changes could just as easily lead to the kind of concentrated, media monopoly, Google(dis)topia that all of us should fear), but I suppose Powell is sort of being proven right in the sense that these changes are taking place so rapidly it is hard to retain a monopoly. So increases in technology may, indeed, allow for more space for competition--and that could have undermined the concentration that would have followed the 2003 changes he advocated. 2003 is ages ago in terms of the media (there was no bittorrent, at least in widespread use; no flash video; etc.). It is hard to imagine what would have happened had the public protest not prevented those changes taking place. Still, in so far as the new changes might make that more efficient spectrum available for other uses, Powell has been vindicated in what appears, in retrospect, as a principled stand. Only time--and the Dec. 18 FCC meetings--will tell just how true this is. Like the iPhones and Google Phones that will likely pop up if the changes are approved, after that it will be up to the rest of us to figure out what we're going to do with it.