Two Futures

Revelation 18:11-13New International Version (NIV):
11 “The merchants of the earth will weep and mourn over her because no one buys their cargoes anymore— 12 cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble; 13 cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and human beings sold as slaves.

A lot of people have been prompted to ask “what’s wrong with capitalism?”

This includes not just its traditional critics, but also its biggest boosters. Any number of prominent economists, ones whom one might think would never admit a flaw in the system, have been contemplating what went wrong. This ranges from prominent economists, to conservative think tanks, to institutions like the IMF and the Federal Reserve.

No one seems to be able to figure it out. For the financial insiders, the cause is always some sort of economic hiccup that can theoretically be cured by an interest rate hike here and there, or some sort of government program. In other words, just fiddling around the edges, or better technocratic management. Dare I suggest that this is a classical case of “cargo-cult thinking” by the high-priests of our capitalist age?

There are a few currently fashionable theories about what’s wrong:

Secular Stagnation. First postulated by Alvin Hansen, and newly championed by Larry Summers, This includes things like lowered population growth causing less demand for goods and services, with low interest rates unable to coax forth more investments.

Innovation Slowdown. Associated with Robert Gordon, this postulates that the “low hanging fruits” of innovation that have transformed the economy have been harvested, and that future innovations will provide lower marginal growth, and that the utility value of future innovations will be harder to monetize.

Resource Bottlenecks. This would include the Peak Oil ideas; that the resources underpinning our economy are simply not available or too costly. Shortages of water or other effects from climate change could be included here.

Debt Overhang. This means that high levels of debt need to written off before growth will resume.

All of the Above?

All of these are seen as just temporary hiccups in the 250 year trajectory of permanently higher growth and living standards by mainstream economists.

But what if the whole system is doomed? What if it’s simply not viable anymore? What if there are no marginal fixes at all? What if there is no cure besides a totally new approach to society, starting from the ground up?

And what if we’re incapable of making that transition?

I thought of this while reading the following passage about the origins of feudalism in the West:

Barbarization was but part of the rapid changes in Roman society, culture, and government that took place during the third and fourth centuries. Partially spurred by such internal problems as plague, a falling birthrate, constitutional instability, and the failure of the Roman world to develop from a labor-intensive system based largely on slavery to a more efficient mercantile or protoindustrial system, and partially by the increased creased external pressures on its overextended frontiers, the Empire had to seek a new equilibrium. (kl 205)

Origins of Feudalism in the West (Understanding Society)

These words struck me in particular: “the failure of the Roman world to develop from a labor-intensive system based largely on slavery to a more efficient mercantile or protoindustrial system.” What if we’re in a similar situation today? What if we face a choice between breaking through and falling back?

I’ve read a lot of discussion concerning our current predicament, from joblessness to automation to economic malaise. Such discussions usually end up in an acknowledgment, sometimes grudging, sometimes not, that capitalism as a system has outlived its usefulness. Or that capitalism is holding us back.

What do I mean by this? I mean the system where more and more people are rendered useless to the economic order. Where ownership is confined to a narrow circle of elites. One in which we pay out of own pocket to make ourselves viable for careers that may or may not exist by the time we’re done training, leaving us jobless AND in debt, unless we come from wealthy families. One where most of our salaries go to pay for the roof over our head, and we’re in debt from birth to death. One where much of new employment consists of providing low-wage on-demand services to a tiny clique of urban corporate technocrats. One where we are turned into economic migrants never able to put down roots. One where vast swaths of the country are dead zones devoid of opportunities besides low-wage service work, government jobs, nursing or drug sales.

I mean corporations peddling identical products designed to quickly wear out or become unfashionable, and flogging them incessantly with advertising. Centrally-planned oligopolies masquerading as “free” markets (cable monopolies etc.). People sitting in air-conditioned cubicles pushing paper all day in socially-useless “bullshit jobs” just so they can earn an income. The “nuisance economy,” where ads are shoved down our throat in order to fund our internet infrastructure. Part-time and temporary jobs with no benefits. Colleges as toll-booths to employment. Hospitals as a hostage racket. Draconian copyright laws. Artificial scarcity of software. And on and on.

We were told that the sequence of economic development is essentially the following:

Agricultural
Manufacturing
Service
???

Manufacturing has already been offshored and automated away. Consider:

Nike is to tackle rising labour costs at its Asian factories by “engineering the labour out” of its shoe and clothing production as it seeks to defend its profits. Don Blair, Nike’s chief financial officer, said its objective was to reduce the number of people making its products as he highlighted the impact of a sharp increase in wages in Indonesia.

The Future of Manufacturing Jobs in Developing Nations (Marginal Revolution)

More than 20 years after Adidas ceased production activities in Germany and moved them to Asia, chief executive Herbert Hainer unveiled to the press the group’s new prototype “Speedfactory” in Ansbach, southern Germany. The 4,600-square-metre plant is still being built but Adidas opened it to the press, pledging to automate shoe production – which is currently done mostly by hand in Asia – and enable the shoes to be made more quickly and closer to its sales outlets…Large-scale production will begin in 2017 and Adidas was planning a second “Speed Factory” in the United States in the same year, said Hainer.

Reboot: Adidas to make shoes in Germany again – but using robots (Guardian)

A Chinese government official told the South China Morning Post that a Foxconn factory has “reduced employee strength from 110,000 to 50,000 thanks to the introduction of robots. It has tasted success in reduction of labour costs. More companies are likely to follow suit.”

Smartphone maker Foxconn replaces 60,000 workers with robots (BoingBoing)

The “replacement” for these jobs was supposed to be service sector jobs. We’ve been simultaneously told that these jobs would replace the lost manufacturing jobs, and then when the low salaries are questioned, we are told that these jobs are only for teenagers or people living with their parents, despite these businesses being open year-round and during school hours, not to mention being the plurality of the newly-created jobs. Any attempt to raise salaries in this sector, we are told, would spur automation and joblessness, yet we are simultaneously told that “automation does not kill jobs,” and the “the amount of work to do is unlimited.” Left unsaid is that, by this logic, only by paying salaries that are so ultra-low that they are competitive with machines can we have sufficient jobs for people.

When you point out that once upon a time, people were paid enough to support a family on one income back when America was a manufacturing power, you are dismissively told that “those days are gone forever.”

Consider that all the calls for “more schooling” and “worker retraining” have been for naught. People dutifully marched off to get more education, but it has not saved the economy, nor the people themselves. The people who would have gone off to higher education years ago still do today, but now a college diploma is a “work chit” for any job at all. Many secondary schools are now nothing more than pre-prison holding cells. As for a path to a viable job, you are on your own. Good luck. Meanwhile, politicians like Hillary Clinton promise to make paying the onerous costs for college easier. Does anyone think that will solve anything?

In the 50 years from 1960 to 2010, the global labor force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education.

How much richer should these countries have expected to become? In 1965, France had a labor force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.

The Education Myth (Project Syndicate)

Since 1991, we have done precisely what the education-focused poverty people said to do. Between 1991 and 2014, we steadily reduced the share of adults in the “less than high school” and “high school” bins and increased the share of adults in every other bin…By 2014, the share of adults in the “less than high school” bin declined 9 points from 20.6% to 11.6%. The share of adults in the “high school” bin declined 6.5 points from 36% to 29.5%. Meanwhile, the share of adults with an Associate degree went up 3.9 points, the share with a Bachelor’s degree went up 8.3 points, and the share with a post-Bachelor’s degree went up 4.8 points.

If the poverty rates for each educational bin remained the same, then the upward redistribution of adults from the lower bins to the higher bins would have led to lower overall poverty. But that’s not what happened. Instead, the poverty rate for each educational bin went up over this time and overall poverty didn’t decline at all. In fact it went up.

Why Education Does Not Fix Poverty (Demos)

Is it any wonder people are angry and getting angrier?

Consider that huge areas of the West are post-industrial “sacrifice zones” filled with people who have lost everything, and ready to embrace radical solutions. This includes everything from small towns to inner-cities.

Over the past 35 years the working class has been devalued, the result of an economic version of the Hunger Games. It has pitted everyone against each other, regardless of where they started…The consequences can be seen in nearly every town and rural county and aren’t confined to the industrial north or the hills of Kentucky either. My home town in Florida, a small town built around two orange juice factories, lost its first factory in 1985 and its last in 2005.

In the South Buffalo neighborhood of Lackawanna, homes have yet to recover from the closing of an old steel mill that looms over them. The plant, once one of many, provided the community with jobs and stability. The parts that haven’t been torn down are now used mainly for storage.

In Utica, New York, a boarded-up GE plant that’s been closed for more than 20 years sits behind Mr Nostalgia’s, a boarded-up bar where workers once spent nights. Jobs moved out of state and out of the country. The new jobs don’t pay as well and don’t offer the same benefits, so folks now go to the casino outside of town to try to supplement their income.

Mocked and forgotten: who will speak for the American white working class? (Guardian)

Meanwhile, it’s the same in Europe, where industrialism started, but has long since departed. Cities like Birmingham, Glasgow, Manchester, Belfast, Amsterdam, and many others that once had thriving manufacturing economies have been dealing with blight ever since the 1970s. It’s notable that the radical Jihadists targeting Europe are living in the blighted and abandoned neighborhoods cleared out by deindustrialization:

The sociologists tell us that the distribution of wealth in Brussels follows a pattern that is more commonly found in American cities — wealthy suburbs surrounding a hollowed-out center of poverty and blight. The European norm, exemplified by London and Paris, would have the most expensive and chic areas in the center. Molenbeek fits the American pattern in that it is an area blighted by derelict industrial buildings and is on “the wrong side of the tracks,” which in this case means the wrong side of the canal that splits Brussels into east and west.

Belgium is a failed state (Politico)

And it is a global problem. The capitalist economic model, the ongoing destruction of the agrarian way of life and sending the refugees fleeing to the overcrowded slums and chawls, is no longer viable. The deracinated rural people were assumed to get jobs in sweatshops where they would be producing cheap goods for rich western consumers (the twenty percent who aren’t just trying to get by, that is). We were told how much more fortunate these people were working their sixteen hour days in factories and sleeping in cinderblock dormitories than in their ancestral villages working outdoors and surrounded by their families. But now, the factories aren’t there anymore. Yet, agriculture is still no longer viable for them any more than is manufacturing, for a number of factors. What are these people supposed to do? How much is this contributing to collapse?

Global unemployment is expected to surpass 200 million people for the first time on record by the end of 2017, according a recent ILO study, and limitations of official statistics suggest that the problem is much larger . As conventional measures increasingly fail to produce tight labor markets and jobless recoveries become the norm, economists grapple with this new reality by calling it secular stagnation and by adjusting upwards the rates of unemployment deemed ‘natural’ — but the human, social and economic costs of this growing problem are rarely considered in economic modeling.

A Global Marshall Plan for Joblessness? (Naked Capitalism)

The thing is, we have no viable alternative for a deindustrialized (post-Fordist) economy. Dare I say that our current economic model is failing, and has been for over forty years? We have been in a concealed depression since approximately 1972. The responses to cover this up are running out of steam. And alternatives are being brutally suppressed by elites.

What if we are incapable of moving beyond the current economic model? Clearly, something else is desperately needed.

An alternative economic history

Even though technology is supposed to have no effect on employment, my own view is that we’ve lurched from overproduction crisis to overproduction crisis, with no real alternative. The two things that have saved us were 1.) World War Two, and 2.) Globalism. But now those have run their course.

I believe the Great Depression was caused by a massive labor shock, and this has covered up by economists ever since in the interests of preserving capitalism’s legitimacy. It was claimed that things like “financial panic” or “tariffs” or “not enough money” were the cause. But these were results of overproduction–of putting millions of people out of work and not having enough salaries to shore up the debt-driven economy. They were not the cause.

There was more production, but he salaries were not there to absorb it. The increase in output could not be absorbed at the time.

At the time, the economy was undergoing a great expansion, and new techniques were coming to the fore. The greatest of these were 1.) The electrification of the assembly line, and 2.) The mechanization of agriculture.

If you read the literature from the now long-forgotten Technocracy Movement, you will see statistics pointing out how much production had increased in various industries. I did this as part of a book project a while ago (sadly, abandoned) on the movement. I found some of their old books in the archive of the public library. Their arguments are remarkably familiar if you’ve read any of the current literature concerning automation and the workforce.

But what if they weren’t wrong? What if overproduction really was the cause?

Keep in mind, the Depression dragged on for an entire decade, despite the responses of politicians. This caused a tremendous amount of suffering and political chaos. Government programs ameliorated the worst of the suffering, but didn’t really put the economy on a firm footing, or put things back to the way they were.

For example, you always hear this mic-drop: “ninety percent of us used to work on farms (or whatever number they pull out of their ass), and now just two percent do, and yet we have plenty of jobs, hurr durr!” But that washes away a hell of a lot of history.

Of course, World War Two changed all that. But then again, World War Two was mostly a response to the economic conditions of the Great Depression. During the interwar years, governments took an active role in rebuilding their shattered economies in a way that is unimaginable today.

What really ended the Depression was, let’s not mince words here, government takeover of the economy from 1941-1950. There’s another word for that–socialism. Specifically, War Socialism. The economy under government management and control had eliminated unemployment virtually overnight. Everyone who wanted a job had one.

During this time, the government learned to control and manage large economies. This scared the shit out of the powerful industrialists, who feared they would not be needed anymore.

When the war ended, the industrialists cut a deal. “Give us back control of the economy,” they said, “and well make sure there are plenty of jobs to around, with good benefits.” For the next thirty years was what is called the “Long Boom” or “The Golden Age of Capitalism.” There was plenty of work to go around rebuilding the world, and the people who survived the war did not have to work very hard to ensure their survival. Unions were powerful, government took an active role, and the wealthy and the industrialists grudgingly accepted this state of affairs (while secretly working to undermine it)

The United States was the only industrial power whose industrial base survived the war intact. Work was plentiful. The U.S was the world’s factory floor. Even though manufacturing was never the majority of jobs in the economy, rising wages and unions had spillover effects in the wider economy. African-Americans were automated out of their farming jobs and headed north in the Great Migration. I told that story here.

After the war ended, we invented “The Gospel of Consumption.” People would be encouraged to form nuclear families and consume as much as possible to absorb all the new production. Their appetite for novelty and status would be stoked to keep them buying all of the economic output that was being produced. The television set injected advertising into peoples’ homes and manipulated their desires and insecurities. Big business would create the wants it sought to satisfy.

The government’s creation of the Interstate Highway System and the subsequent buildout of the suburbs, along with the expansion of the internal combustion engine and all its attendant satellite industries (truck drivers, mechanics, drive-in and fast-food restaurants, auto-parts stores, towing, insurance etc.) contributed to a boom in employment from 1950-1970. This would be repeated to some extent with the creation of the “information superhighway” in the 1990’s-2000, which again created a variety of jobs (despite the comical insistence of libertarians that government is always a hindrance to economic growth and development).

The wheels started coming off from ’68-’72. Much of the world’s industrial base had been rebuilt. The Germans and Japanese were able to rebuild using the latest methods and techniques, while American industry had become sclerotic. We were once again facing a crisis of overproduction.

The spike in the cost of oil led to the stagflation of the 1970’s, which allowed the alternative economic theories of the Chicago School to come the fore. These generally fall under the rubric of Neoliberalism. To deal with the “excess of democracy” workers would need to be “disciplined.” To shore up profits, production was offshored to the third world, which would also crush unions. An “new enclosure movement” would sell off the commons to rentier investors. Citizens were relabeled as consumers, pensions were swapped for stock plans, and the market would rule all.

To distract from falling living standards, two tactics were used. In Europe a generous welfare state was provided. In the United States, racial enmity, appeals to religion, and issues of social and cultural affiliation were used to distract the working classes from their falling living standards.

Beginning in the 1970’s Women entered the workforce as men exited. Two incomes were needed where one used to suffice. Later, millions of impoverished workers from the hollowed out third world failed states fled to the Western industrial economies, further depressing wages, wages needed to buy up the overproduction.

After the 1980’s, financialization was another tactic used to deal with the faltering economy. Manipulation of money replaced actual productive growth. Companies were strip-mined for profits. Corporations consolidated to cope with this phenomenon, eliminating tens of thousands of “redundant” employees in the process. restrictions on monopolies were abandoned. Pensions were raided. Shady financial products like “junk-bonds” and “derivatives” created wealth out of nothing. A series of bubbles were inflated and popped. Boom-and-bust cycles became more pronounced. This had the effect of hollowing out the real productive economy and turning financiers into modern-day aristocrats for doing unproductive, socially useless labor which actually subtracted value from the economy as a whole.

In the 1990’s and beyond, globalism rode to the rescue, i.e. the colonization of foreign markets. And the biggest star was Communist China. But after becoming the World’s Factory Floor 2.0, and hollowing out the West in the process, it seems to be faltering:

The main engine of global growth since 2000 has been the rapid industrialization of China. By channeling the vast savings of its population into capital investment, and by rapidly absorbing technology from advanced countries, China was able to carry out the most stupendous modernization in history, moving hundreds of millions of farmers from rural areas to cities. That in turn powered the growth of resource-exporting countries such as Brazil, Russia and many developing nations that sold their oil, metals and other resources to the new workshop of the world.

The problem is that China’s recent slowdown from 10 percent annual growth to about 7 percent is only the beginning. The recent drops in housing and stock prices are harbingers of a further economic moderation. That is inevitable, since no country can grow at a breakneck pace forever. And with the slowing of China, Brazil and Russia have been slowing as well — the heyday of the BRICs (Brazil, Russia, India and China) is over.

There is really only one time-tested way for a country to get rich. It moves farmers to factories and imports foreign manufacturing technology. When you move surplus farmers to cities, their productivity soars — this is the so-called dual-sector model of economic development pioneered by economist W. Arthur Lewis. So far, no country has reached high levels of income by moving farmers to service jobs en masse. Which leads us to conclude that there is something unique about manufacturing.

But here’s the problem: manufacturing is shrinking. Although the total amount of physical stuff that humans make keeps expanding, the percent of our economic activity that we put into making physical goods keeps going down. This is happening all across the globe, even in China. This may partly be because manufacturing has been a victim of its own success — the sector has grown so productive that it’s now pretty cheap to make all the stuff we need. That is exactly what happened in agriculture, after all.

Will the World Ever Boom Again? (Bloomberg)

We now have a consumer society where the consumers are too poor to pay for much of anything. As more retail is disappearing thanks to the internet, those service sector jobs in retail are disappearing too. We’ve seen malls dying all over the country. The age of mall shopping is coming to an end. Good riddance.The retail sector is crumbling thanks to online retailers. Globalism has made goods so abundant that they are virtually free. People are doing their own services online (travel, law) for hardly any cost.

Now both manufacturing and retail are gone.

On the face of it, the economic superpower that is the American consumer should be having a party. Low interest rates and unemployment rates, low oil prices, a high stock market, healthy property prices – nothing it would seem, to put off doing what comes most naturally to them – shopping.

Yet they’re stubbornly refusing to do it – or at least refusing to do it in predictable ways – leaving consumer experts to wonder, as fashion bible Women’s Wear Daily recently did, if the consumer psyche, “bombarded by digital messages, stressed financially and overwrought emotionally”, has “finally exploded”.

Low sales even in healthy economy signal ‘complete shift in shopping’ (Guardian)

What’s killing us fixed costs. Education. Health care. Housing. The internet is not a solution to those, and the “free” market cannot fix the problems it caused in the first place. As those fixed costs head inexorably upward, it is squeezing out consumer spending. All of the wage gains are heading to the top due to superabundance of labor. The job market it broken – all incentives are to automate and create as few jobs as possible, and to poach workers from competitors rather than pay for necessary training. Employers hide behind online job search platforms and sit around refusing to hire anyone besides a “purple squirrel” candidate. Employers couldn’t care less about unemployment individually, but collectively, its reducing their margins. The comments to the above article get it:

So many companies thought they were super smart after keeping the wages so low… too bad that everybody had the same idea, and now they notice they have not enough clients.

A key economic principle is to supply the workforce with enough income to afford the products you want them to buy. Check these companies. I bet the work force is all part time minimum wage. You have to give money to the consumer in order for them to give it back.

Maybe it’s because much of what is being offered for sale in the shops is badly-designed, skimpily-made, short life-span, mainly Chinese-manufactured crap – stuff that 30 years ago would have been considered to be “counterfeit”. We have an entire system of production, distribution and exchange based on taking stuff out of the ground, turning it into junk in police-state China, and then, after a short, credit-financed interval, shoving it all into another hole in the ground. Who really benefits from this?

Its the internet. You can buy what you want, when you want, see reviews and most importantly you have breathing space between looking and buying. This space allows you think “do i actually need this?” Sometimes the answer is no. So many people are buying less stuff.

When people have high rents and mortgages to pay,or when they have to save up for years for a deposit then they don’t have much money for consumer spending. New properties have tiny rooms so there isn’t the space for all that consumer junk. Most of the stuff in shops is either junk or too expensive for most people.

If you live in a medium-sized town that’s not a tourist destination, you will see the same boring chain stores that you see in every other town. Shopping is boring if it’s just the same stores in every town and every mall, all selling the same stuff. Maybe in huge cities like New York there is some imagination to products and window displays but in most places shopping has gotten dull. Yes, I’d rather have an experience like seeing a National Park than seeing another chain store.

Informed consumers making rational choices – the marketing industry’s nightmare.

Yet our genius economists and politicians appear not to care. After all, they’re getting richer. They appear much like the clueless aristocrats of Ancien Régime France. Morris Berman:

The truth is that no system lasts forever; change is the only constant we find in the historical record. As one social critic argued a few years ago (Peter Frase), “humanity has never before managed to craft an eternal social system…and capitalism is a notably more precarious and volatile order than most of those that preceded it.” Wolfgang Streeck, in an article he published in 2014 in the New Left Review, wrote that “What we are seeing today…appears in retrospect to be a continuous process of gradual decay, protracted but apparently all the more inexorable.” Whatever stability capitalism had in the past, he goes on to say, was dependent on the presence of countervailing forces (e.g., labor unions). Today, no force is on hand to check capitalist expansion, balance it out; which suggests that it may undermine itself by being too successful. Everyone in these societies is mesmerized by consumerism, and thus dysfunctions in the system continue to accumulate, because there is not enough structural variety to cope with change. In a word, he concludes, “victorious capitalism has become its own worst enemy”; it is “dying…from an overdose of itself.”

As an example of this, Streeck points out that consumerist culture is absolutely vital for the reproduction of contemporary capitalism. The problem is that producers and consumers tend to be the same people. So when consumers hunt for the best bargain, they defeat themselves as producers, because they drive their own jobs abroad. In addition, corruption is now inherent in the system; it’s hardly a case of a few bad apples…

Dual Process: The Only Game in Town (Dark Ages America)

And automation has clearly presented a challenge to future expansion of the consumer:

The huge rise in automation in agriculture that drove so many people off the land created waves of discontent and dislocation, but eventually — during the Great Depression here in the US — that surplus agricultural labor was absorbed into the then burgeoning industrial sector. So not only did the economy benefit from rising productivity on its farms, but it produced higher paying jobs that enabled the newer working class to become upwardly mobile and aspire to something we have became to call the new middle class. The new jobs paid well enough to compensate for the dislocation of the prior automation. The economy took a step upwards.

Mind you the entire process of absorption took a full one hundred years if we go back and start the clock running at the start of industrialization. Not only this: along the way there were enormous political and social changes that made the end result — a generally higher level of prosperity — possible. This brighter future was not, contrary to the sunny arguments of the libertarian economists, a result of the magic of the marketplace, but was, rather, the result of generations of activism and social protest that eventually put in place truly democratic institutions to mitigate that more dire consequences of capitalism. It is no accident that modern democracy is a much newer arrival on the scene than is modern capitalism.

The advent of a new age of machines enabled the launching of what we know as modern capitalism. And its first notable consequence was to benefit a rise in returns on capital. It was this early history of industrialization that Kuznets so famously captured in his eponymous curve. But since Kuznets we have observed an enormous shift backwards. Not only has inequality risen to near historic levels, but there has been a decided bias towards returns to capital once more.

Here’s the issue: the service sector covers a very wide range of activities, from those remaining laundry washers to brain surgeons. Along the way it includes the hairdressers and bartenders that the Deloitte study highlights. It also includes the engineers, designers, and sundry bloggers…The problem is that many of theses jobs produce lower income than the manufacturing or industrial jobs being displaced by automation. So the new history is radically different from the older history.

Whereas the old displacement eventually created a more prosperous and plentiful middle class, this new displacement may not. Indeed if we take the studies of people like David Autor and his co-authors at MIT seriously, it certainly will not. At least any time soon. Worse as the pace of innovation accelerates automation seems to be working its way up the income scale. Not only are traditional blue collar jobs being automated, but many previously secure white collar jobs are going under also. The result is that we are experiencing a huge bifurcation in society unlike that of the last wave of automation. That last wave consolidated society around a fairly prosperous median. This wave is dividing society into two very different levels. The bulk of people are finding themselves compressed between stagnant wages and rising costs, with automation a major factor in the wage compression. Whilst, at the same time, a much smaller group benefit from the wages flowing to their skills.

Automation and History (Real World Economic Review)

Clearly our current economic model is failing. What will replace it?

What Next?

Karl Marx apparently thought that there were only two options available after the breakdown of capitalism: forward to socialism or backwards to barbarism. After reviewing the above, I’m inclined to agree. I would label these two futures as:

1.) Post Capitalism

2.) Neo-Feudalism

What would postcapitalism look like? Well, it might look a lot like what Paul Mason has written about in his book of the same name. Postcapitalism is not socialism, but it has certain socialistic aspects.

Mason looks at the inequality and unemployment situation. He also agrees that changes in technology call for a transformation of the economy, but he argues that the natural changes that should come about are being suppressed.

Mason argues that capitalism goes through Kondratieff waves of approximately fifty years, during which new inventions bring forth changes in the system. He argues that the needed changes right now are being suppressed and stagnated to maintain the status quo.

  • 1790-1848: the factory system, steam and canals. Turning point the late 1820s depression. Collapse with the 1848-51 revolutions in Europe, Mexican War and Missouri compromise.
  • 1848-mid-1890s: railways, the telegraph, steamers, stable currencies. Peaked in the mid-1870s with financial crises leading to the Long Depression of 1873-96.
  • 1890s-1945: electrical engineering, the telephone, scientific management and mass production. Turning point at the end of the First World War, ending with the Great Depression.
  • Late 1940s-2008: transistors, synthetics, factory automation, nuclear power and automatic calculation. Peaked with the 1973 oil shock, followed by extended instability but no major depression.
  • In the late 1990s, overlapping the previous cycle, the initial elements of the fifth wave appear: the internet, mobile phones and information goods.

But it has stalled. And the reason it has stalled has something to do with Neoliberalism and something to do with the technology itself.

Mason argues that the fundamental shift to information technologies:

Postcapitalism is possible because of three major changes information technology has brought about in the past 25 years. First, it has reduced the need for work, blurred the edges between work and free time and loosened the relationship between work and wages. The coming wave of automation, currently stalled because our social infrastructure cannot bear the consequences, will hugely diminish the amount of work needed – not just to subsist but to provide a decent life for all.

Second, information is corroding the market’s ability to form prices correctly. That is because markets are based on scarcity while information is abundant. The system’s defence mechanism is to form monopolies – the giant tech companies – on a scale not seen in the past 200 years, yet they cannot last. By building business models and share valuations based on the capture and privatisation of all socially produced information, such firms are constructing a fragile corporate edifice at odds with the most basic need of humanity, which is to use ideas freely.

Third, we’re seeing the spontaneous rise of collaborative production: goods, services and organisations are appearing that no longer respond to the dictates of the market and the managerial hierarchy. The biggest information product in the world – Wikipedia – is made by volunteers for free, abolishing the encyclopedia business and depriving the advertising industry of an estimated $3bn a year in revenue.

Almost unnoticed, in the niches and hollows of the market system, whole swaths of economic life are beginning to move to a different rhythm. Parallel currencies, time banks, cooperatives and self-managed spaces have proliferated, barely noticed by the economics profession, and often as a direct result of the shattering of the old structures in the post-2008 crisis.

And he argues that Neoliberalism is way of holding back change:

Neoliberalism…has morphed into a system programmed to inflict recurrent catastrophic failures. Worse than that, it has broken the 200-year pattern of industrial capitalism wherein an economic crisis spurs new forms of technological innovation that benefit everybody.

That is because neoliberalism was the first economic model in 200 years the upswing of which was premised on the suppression of wages and smashing the social power and resilience of the working class. If we review the take-off periods studied by long-cycle theorists – the 1850s in Europe, the 1900s and 1950s across the globe – it was the strength of organised labour that forced entrepreneurs and corporations to stop trying to revive outdated business models through wage cuts, and to innovate their way to a new form of capitalism.

The result is that, in each upswing, we find a synthesis of automation, higher wages and higher-value consumption. Today there is no pressure from the workforce, and the technology at the centre of this innovation wave does not demand the creation of higher-consumer spending, or the re‑employment of the old workforce in new jobs. Information is a machine for grinding the price of things lower and slashing the work time needed to support life on the planet.

As a result, large parts of the business class have become neo-luddites. Faced with the possibility of creating gene-sequencing labs, they instead start coffee shops, nail bars and contract cleaning firms: the banking system, the planning system and late neoliberal culture reward above all the creator of low-value, long-hours jobs.

The end of capitalism has begun (Guardian)

This article makes a similar point, our addiction to capitalism, our insistence that private ownership is good, social ownership is bad, everyone must work to live, and let the market decide, are actually holding back progress. We’re creating work for it’s own sake, and hobbling true innovation to preserve the status quo:

Here lies the greatest obstacle to human progress — the longstanding connection between work and income. As long as everything is owned and the only way to obtain access to that which is owned is through money, and the only way to obtain money is to be born with it or through doing the bidding of someone who owns enough to do the ordering around — what humans call a “job” — then jobs can’t be eliminated. As a worker, any attempt to eliminate jobs must be fought and as a business owner, the elimination of jobs must involve walking a fine line between greater efficiency and public outcry. The elimination of vast swathes of jobs must be avoided unless seen as absolutely necessary so as to avoid angering too many people who may also be customers.

…Google wants to advance technology but at the same time, it doesn’t want to answer the questions those advancements will raise. This appears to be a clear example of a major obstacle for human progress. It’s the same likely reason companies like McDonald’s haven’t dived in with both feet to greatly automate their operations and vastly reduce their labor forces. The technology exists, but they aren’t doing it. Why?

Perhaps it’s because as long as people need jobs as their sole source of income, companies have the potential of stepping onto a public relations landmine by automating their jobs out of existence, or being seen as responsible for others doing so. Eliminating jobs also means not only cutting employees, but demand itself.

Putting humans out of work should be a public relations win, not a loss, and so mankind needs to make sure no one left without a job, for any amount of time, is ever unable to meet their most basic needs. Everyone needs a non-negotiable guarantee of income security, so that the elimination of jobs breeds not fear, but excitement. The loss of a job should be seen as an opportunity for new real choices. And so some amount of basic income should be guaranteed to everyone — universally — as a starting point upon which all can earn additional income.

Humanity Needs Universal Basic Income in Order to Stop Impeding Progress (Huffington Post)

What does barbarism look like? Well, pretty much like today.

Is there any doubt that we live under increasing barbarism? Inner-city ghettos. Shuttered factories. Abandoned small towns. Opiate addiction. Social dysfunction. Child poverty. Mass shootings. Lowered rural life expectancies. Medical debt. Permanent wars in the Middle East. Terrorist attacks. Suspension of civil liberties. Militarized police. Mass surveillance. Austerity in Europe. Bailouts. Mass unemployment. Overcrowded prisons. For-profit prisons. Tent cities. Police shakedowns. Criminalization of poverty. Debtors prisons. Offshore tax havens. Empty apartments as safe deposit boxes for absentee wealthy in major cities while ordinary workers are priced out.The race to the bottom. Four hundred Americans having as much wealth as half the workforce. Sixty-five people owning as much as the world’s poorest 3.5 billion people. And a complaint media that tells us to ignore all of it – things have never been better!

I’ve called this concept Neofeudalism. This is the alternative, where a tiny slice of people own everything, and the rest of us are rendered largely redundant in the economic order and left to fend for ourselves. The strategy boils down to this: transfer the rest of ownership of everything important to the aristocrats/oligarchs. This has been the historic norm for thousands of years, and it’s time tested and proven. Almost everyone is poor and has no important prospects or say in society. Recall Cullen Murphy’s definition of Feudalism: “a dispersal of political authority amongst a hierarchy of persons who exercise in their own interest powers normally attributed to the state.” He adds:

My worry now is that we’re moving away from this great sense of government as a public calling—if you’re thinking benignly, in the interest of efficiency, or if you’re thinking malignly, in the interest of greed—and toward something very different, something market driven. In the end it amounts to getting the government that you pay for. Not just that you’ve paid for as a people, but that you’ve paid for as individuals. It’s happening all around us, usually in the guise of some deal that’s just too good to walk away from, and it’s happening in virtually every sector of public endeavor. Even if one can make the case that privatization makes sense in this instance or that instance—or even in every instance—the effect over time is going to be that there’s no government left, that all power of one sort or another is in private hands. Ultimately the result is to bring back feudalism. And we’re well on the way to it.

In this interview with Michael Hudson, he makes a similar point:

Michael Hudson: “Well, try reading books about how England was in the thirteenth century. We’re moving, essentially, [to] Neofeudalism to make a long story short. People are going to find that instead of free government services as before, now they have to pay for them. And if they pay for these essential services–and most public services are essential, that’s why they’re in the public sector to begin with; to keep them out of the hands of monopolies—now all of the sudden the public services that were provided on a subsidized basis or freely are going to be privatized without any price regulation for it, and all of the sudden people are going to have to pay market prices that include interest charges, Wall Street underwriting charges, the cost of dividends, exorbitant management fees, bonuses for management, political contributions, buying off judges, buying off the courts, buying off the politicians to make sure that the people are not able to stop your gouging them. That’s how the system is developing.”

And Paul Craig Roberts says that We Have Entered The Looting Stage Of Capitalism (actually, we entered it back in the 1980’s in the West, and the 1970’s in Latin America):

The banks don’t want Greece to be able to service its debt, because the banks intend to use Greece’s inability to service the debt in order to loot Greece of its assets and resources and in order to roll back the social safety net put in place during the 20th century. Neoliberalism intends to reestablish feudalism—a few robber barons and many serfs: the One Percent and the 99 percent.

The way Germany sees it, the IMF is supposed to lend Greece the money with which to repay the private German banks. Then the IMF is to be repaid by forcing Greece to reduce or abolish old age pensions, reduce public services and employment, and use the revenues saved to repay the IMF.

As these amounts will be insufficient, additional austerity measures are imposed that require Greece to sell its national assets, such as public water companies and ports and protected Greek islands to foreign investors, principally the banks themselves or their major clients.

So far the so-called “creditors” have only pledged to some form of debt relief, not yet decided, beginning in 2 years. By then the younger part of the Greek population will have emigrated and will have been replaced by immigrants fleeing Washington’s Middle Eastern and African wars who will have loaded up Greece’s unfunded welfare system.

In other words, Greece is being destroyed by the EU that it so foolishly joined and trusted. The same thing is happening to Portugal and is also underway in Spain and Italy. The looting has already devoured Ireland and Latvia (and a number of Latin American countries) and is underway in Ukraine.

We’re already seeing the fallout: Dynastic wealth being essential for a decent life. No class mobility. Poverty. People consigned to a huge “precariat” and “unecessariat.” School-to-prison pipelines. Militarized police forces. Eliminationism. It’s what we’re seeing right now in inner-cities, the Rust Belt, and Appalachia. Even non-poisoned water is a luxury while the elite retreat to cities and gated communities, and much of the country is transformed into an open-air prison, where desperation drives people to addiction, murder and suicide.

Barbarism indeed.

A society that condemns huge swaths of its members to penury is a failed society. A society where all the benefits of labor accrue to a tiny elite while things get harsher for the majority is a failed society.

A comment to this Marginal Revolution article about people not moving around like economic flotsam to seek “opportunity” made this salient point:

If a permanent feature of your civilization is that a large fraction of the population must leave their communities, families, etc. in order to have a chance at the basics of life, a family, home, some measure of security, it is evidence that YOUR CIVILIZATION DOESN’T WORK!

A lot of people have looked at increasing rates of automation and unemployment/underemployment and seen that, barring a change, this is where we’re headed. The ones not affected, such as engineers and other assorted STEM graduates, will adopt a “first they came for…” mentality, as they currently have, until it is far enough along, and by then no one will be left to be able to speak out for them.

So I believe we’re at a turning point, similar to the fall of Rome and the end of feudalism. Like then, we face a collective choice: break through to the new and better system which provides technological sophistication, lowered work hours, more leisure time, self actualization, and more democracy; or the alternative leading to social unrest, lower living standards, reactionary politics, desperation, authoritarianism, and environmental collapse.

Marx believed that a socialist society could only be realized out of the superabundance created by capitalism. The superabundance would bring about contradictions that would bring about its own demise. That’s exactly what we’re seeing. It is the the abundance of capitalism that is causing its demise. Automation naturally leads to the logical conclusion that the means of production should be collectively owned, rather than owned by a small circle of elites while the rest of humanity is excluded from meaningful participating in the economy.

In any case, the last time a change of this magnitude, i.e. a civilizational shift, occurred in the West was during the fourteenth and fifteenth centuries, during which time the medieval world began to come apart and be replaced by the modern one. In his classic study of the period, The Waning of the Middle Ages, the Dutch historian Johan Huizinga depicted the time as one of depression and cultural exhaustion—like our own age, not much fun to live through. One reason for this is that the world was literally perched over an abyss, something that emerges very clearly at the end of The Tempest, by Shakespeare, written as late as 1610. What lay ahead was largely unknown, and to have to hover over an abyss for a long time is, to put it mildly, a bit of a drag. The same thing was true of the collapse of the Roman Empire, on the ruins of which the feudal system slowly arose. It is also true of our situation today, which is why the “solutions” proposed by political figures are little more than bad jokes. These people have no vision because they can’t grasp what is happening, and therefore what is required.

So it seems we will either break through to postcapitalsm the way capitalism emerged from feudalism – a resource based society, with a much more equitable distribution, worker ownership, peer-to-peer transactions, participatory economics, much less work/worksharing, non-carbonized fuel sources, and a steady state economy centered around wellness.

Or, we will fail to make a transition clinging desperately to the old system as the living standards for the majority of the world’s workers converge at a third-world poverty level while individual people control more wealth than nation-states and distribute it by whim. Where hollow states exist solely to protect wealthy interests, including a digital panopticon enforcing the status-quo, while the former middle-class is left to fend for itself in violence-wracked economic dead zones. Where the absentee owners live in seasteads and vacation in outer space while formerly-prosperous citizens live in tent cities, shantytowns, or overcrowded prisons.

The choice is ours. I’m not optimistic, although the rising tide of opposition to Neoliberalism around the world (whether voters recognize it as such or not) indicates that the future is still in flux. Marx famously said that history repeats itself, first as tragedy then as farce. Can there be any better confirmation of this than the Donald Trump candidacy?

The Impossibility of Debt-Free Money

A few additional notes on the previous post.

One issue that always arises is that of “debt-free money.” I myself have raised this issue in the past. But, as we saw in the previous post, money is debt, therefore there can be no such a thing as debt free money. Money by definition is an IOU. As we saw, money is always a credit-debt relationship, recorded on government balance sheets. That’s simply a consequence our medieval double-entry bookkeeping system. If there were no debt, then there would be no money. Since money is debt, as we saw previously, it is even possible to say there is such a thing as debt free money?

Randall Wray, one of the leading economists working in this field, says “no way.” Debt-free money is an impossibility, like a one-sided coin. He writes: “…Money is always and everywhere else an IOU…All money… is debt. It is on the liability side of issuer and asset side of holder. You cannot change that through confusing semantics.”

Wray calls proponents of debt-free money “cranks” and wrote a series of posts last year pointing out the impossibility of debt-free money. I suppose proponents of debt-free money are just as misguided as those who claim that “the debt” will mean entire nations will all be living in abject poverty in the future due to paying off all their debts (to who, Martians?)

Randy Wray: Debt-Free Money and Banana Republics (Naked Capitalism)

Randy Wray: Debt-Free Money and Banana Republics, Part II (Naked Capitalism)

Randy Wray: The Value of Redemption (Debt Free Money, Part 3) (Naked Capitalism)

Randy Wray: American Colonial Currency (Debt Free Money, Part 4) (Naked Capitalism)

Some people wonder, can we not spend money into the economy without it being somehow recorded as a government debt?

The problem is simple – adding money into the economy under the current system adds to the “national debt” which as we saw, are only interest-bearing assets recorded by the Fed. Paying off the debt merely consists of exchanging securities for dollars by transferring between accounts. Nevertheless, “fiscal conservatives” can easily handicap any government measures by demagoguery over “the debt we’ll leave to our grandchildren!!!” It’s a powerful message to the average Joe Sixpack, and its hard to counter, especially with the eye-popping numbers used in the modern U.S. economy.

In other words, can the government spend on a bunch of stuff without it being a corresponding liability somewhere on the books that gets “fiscal conservatives” all hot and bothered?

The answer appears to be no.

Wray argues that we cannot suspend the rules of accounting, and have any validity to calling what would be issued under such a system “money.” He argues that redeemability is an essential feature of money. Issuing “stuff” as wealth with no corresponding relationship to pay it back, either as a loan or thorough taxes, is not issuing money. Sure, you can use a commodity, like gold or plastic or paper, but is is not money unless it is recorded on a balance sheet somewhere, and can be used to extinguish the tax liability. For example, if you hand your jacket to a coatroom clerk and receive a token in return, it is money. Why would you just get a coatroom token with a claim on nothing? That’s not money. What use is it? Wray argues that redeemability is a key feature of any money. If we did not record this debt against the government balance sheets, there would be no tax liability to “redeem” as money.

Imagine a cloakroom that issues “debt-free” cloakroom tokens. These look just like the normal token issued by a cloakroom, but they are not debts. You can return them to the cloakroom, but you don’t get a coat. The cloakroom attendant refuses to recognize the tokens as debt. They are your assets, but not cloakroom debts.

What is a “debt-free” cloakroom token? It is a piece of plastic, a piece of cardboard, a piece of paper. It is “wealth-based”, not “debt-based”. Its value is determined by the value of the plastic, cardboard, or paper.
Imagine a sovereign that issues “debt-free” coins. They look like normal coins, but when you take them back to the exchequer, your taxes are not paid. The exchequer does not recognize them as a debt—as a promise to redeem yourself in tax payment–but rather as a bit of base metal.

Why would you want the debt-free cloakroom token? Why would you want the debt-free coin? Only for its wealth-value (whatever that might be). It is not money.

As MMT says, “taxes drive money”. If you cannot use the sovereign’s token to pay your taxes, it is nothing but a piece of paper, hazelwood stick, or metal. If you cannot redeem the token for your coat, or for the taxes you owe, why would you want it?

A “debt-free money” would not be evidence of a debt. What would it be?

Wray goes on to argue that issuing a bunch of “stuff” with no credit-debt relationship is not money. They might just as well issue bananas:

…Maybe a banana? I like bananas. If the sovereign or cloakroom attendant offered me a token banana, I’d take it. I wouldn’t worry whether I could redeem it. I’d eat it. If I weren’t hungry, I might exchange it for a newspaper at the kiosk. Maybe the news agent is hungry for a banana.

But I don’t find it useful to call bananas money. Even if I can trade them for newspapers. Bananas are not “issued”. They are cultivated, harvested, transported, marketed. They’ve got value. But they are not money. Calling bananas money is a perversion of the language.

Instead of bananas, he might have better have used cacao beans as an example. Cacao beans were commonly used as money in the Aztec Empire. Potatoes are another great example. Stable and long-lasting, potatoes have been used as medium of exchange in peasant villages. One Russian farmer even tried to create potato-backed money.

None of these are likely to help us, though. I know in Life Inc., Douglas Rushkoff describes money being created by slips issued for grain delivered to a central repository and used as money. He argues against the idea of “centralized money.”

Towns that had been in shambles since the fall of the Roman Empire and had lived under strict feudalism were finally coming into their own. This all hinged on the use of local currencies — grain receipts — through which people transacted. They were what we would now call “demurrage” currencies that were earned into existence. Towns ended up creating more value than they knew what to do with! They started investing in their infrastructure and their windmills and their water wheels; and also in their future in the form of cathedrals and other tourist attractions…The Vatican and central Rome did NOT build the cathedrals. The funds came from local currency, which was very different than money as we use it now. It was based on grain, which lost value over time. The grain would slowly rot or get eaten by rats or cost money to store, so the money needed to be spent as quickly as possible before it became devalued. And when people spend and spend and spend a lot of money, you end up with an economy that grows very quickly.

Beyond Life Inc: Talking with Douglas Rushkoff (Reality Sandwich)

As much as I enjoy Rushkoff’s work, this is one area where I think he’s way off base.

I think people are still getting hung up on the “medium of exchange” aspect. They still see dollars as being like gold coins that we use to grease exchange operations and solve the famous “double coincidence of wants” problem. As such, they can be anything, including slips of paper. But as we’ve seen, money is more than that.

Imagine if we had a “super counterfeiting” machine. It somehow defeats all the checks put in place to verify the veracity of a dollar bill, from the inks to the serial numbers to the paper. We could then issue this “money” with no corresponding debt. We would, in effect, have “debt-free money.”

I think we can see why this is wrong. Sure, we can present this at a store, and the clerk might even take it, being none the wiser. But, by just being able to crank out this “debt free” money at will, we will almost certainly cause inflation, and if we run the “super counterfeiting” machine fast enough, we would probably cause a lot of inflation. All this new “money” would be floating around, but with no limit on its creation. There is no record of it on the books. That’s why it is illegal.

Imagine if some of these bills got back to the government. How would they account for all this new money? They would probably shred it. Or, if they were so impressed by the accuracy of our new machine that they decided our new money press was worth continuing to use (essentially turning us into a mint), they would record every dollar we printed on their spreadsheets, meaning we could use them to pay our taxes as well as pay for stuff. Thus, the system would be in balance again. But we would not have “debt-free” money.

So “debt free” money is sort of like counterfeiting as far as I can tell.

[The debt-free money cranks] argue that the irrational fear of government debt is what constrains our government spending; we cannot spend enough to get the economy growing because the outstanding stock of federal government debt prevents Congress from allocating more funding…Hence the conceit is that if we found another way—printing debt-free money—to finance spending without issuing more debt, Congress would jump at the chance to spend more.

And if government would spend more, then we wouldn’t need so much private debt to keep the economy afloat. While I’m somewhat sympathetic to this view of political realities (although I do not believe Congress would start up the printing presses), the operational realities are quite different from what is imagined.

Our debt-free money folks…believe that government first receives taxes, or asks banks for loans, and then it spends. They want to avoid sending government to banks to borrow bank money, for which banks charge interest. Government then supposedly spends the bank deposits created through the bank loans, and then has to either tax or borrow more bank money to pay the interest.

But that is not true. Government cannot spend “bank money”; it can only write checks on its deposit account at its central bank. What it spends is central bank reserves. Central bank reserves are the liability of the central bank—which is a branch of government.

When Treasury sells bonds to banks, it is not borrowing bank money. Again, it cannot spend bank money so there would be no purpose in borrowing it. Banks that buy bonds must use central bank reserves to purchase them; the central bank debits bank reserves and credits the Treasury’s deposit at the central bank. The Treasury spends central bank money, the liability of the central bank. As the central bank is a branch of government, it is the government’s own IOU that the Treasury is spending.

Indeed, the only way the Treasury can spend is by writing a check on its account at its central bank. All Treasury spending takes the form of spending central bank IOUs. It is always “debt-financed” spending, using government debt.

Telling the Treasury to stop selling bonds will not stop the government from going into debt…

Wray argues that what people are really upset about is having to pay interest to the bankers on the money we issue. He argues that since debt-free money is impossible, we just need to adopt a zero interest rate policy (ZIRP) forever to solve that problem:

Debt-free stimulus, or more generally a debt-free government finance spending proposal, actually requires interest payment on debt, unless the central bank adopts a permanent policy of ZIRP. Either the Fed or the Treasury must pay interest on debt to avoid ZIRP. We can have the Fed issue the debt rather than the Treasury, but it is still debt and it still pays interest. Or we have permanent ZIRP. This is why I made the claim that all debt-free money proposals reduce to permanent ZIRP.

Wray concludes:

My point is that we use double entry book-keeping, and if “money” (however defined) is someone’s financial asset then it is another’s liability. Call it a “credit” (from the point of the view of one holding it), or a “debit” from the other’s point of view; or a debt; or a liability. What debt-free monetary cranks insist is that the money they want the government to create will show up only on the holder’s balance sheet as an asset, with no liability on anyone’s balance sheet. That is what I object to. Some argue that the Treasury, itself, treats coins as “equity”, not “debt”. Fine. Equity is on the liability side of the balance sheet. Twist and mangle the language all you want. But at least do the balance sheets correctly.

Wray argues that a lot of the proposals about “debt free” money on the table rely upon a debt-for-equity swap at some point. The debt is merely relabeled as equity–voila, no more debt! After all, if we hold “equity” in something, that sounds a lot better than holding “debt.” Wray considers this as simply a matter of semantics, and not a serious “debt free” money proposal.

Changing the terminology from “debt money” to “liability money” is of course possible. By the same token we could instead invent a definition of “debt” that excludes Treasury liabilities, too. Treasury liabilities such as bills and bonds are much like the Fed’s liabilities: both are presumably backed by the full faith and credit of the Congress and both pay interest. We could invent a new term to cover all such liabilities, replacing the usual term, which is debt. I’m open to suggestions from our wordsmiths.

Yves Smith adds:

…any financial asset is someone’s else’s financial liability. This is ever and always true…Some readers sought to depict “equity” as a way to square the circle, that they could have an asset that is not a liability to some other party or entity.

The stock you hold (if you do [own] shares) is most assuredly a liability. Go look at any corporate balance sheet. It is not on the asset side of the ledger. Equity is a residual claim on a company’s assets and the cash flows they generate. They are the most junior. Equity is an extraordinarily ambiguous legal claim, to the degree that [entrepreneurship] expert, Professor Amar Bhide at Fletcher, has long argued that it is not appropriate to be traded on an anonymous basis…

Another issue, which seems to pervade discussions about “money” is that people want “money” to be a stable store of value over time. Na ga happen, ever. Any financial asset, and money is a financial asset, is subject to all sorts of vagaries. Physical assets are no safer. That prime [coastal] real estate may be under water in 20 years. Gold has been volatile (just look at its price chart in any currency from 2008 till now) and also has different values in different settings…The desire to have money be concrete seems to be linked in many cases to the enthusiasm for gold or gold-currencies. But gold’s value isn’t enduring or fixed in any way; it’s value depends on the structure of social relations…

Like anything else, “value” is what others are willing to pay for it. After 2008, that $500,000 house was now “worth” something more like $150,000. Where did that $350,000 go? And don’t forget entropy!

Another hang-up I always hear is that money can be created “out of nothing!” But as we see, money is not a “thing,” it is a social relation, and thus has always been created out of nothing, just like a new vocabulary word (“that word was created out of nothing!”), or points on a scoreboard. The U.S. government was created “out of nothing” too–essentially pieces of paper (the Declaration of Independence, the Constitution). The corporation was created “out of nothing” as well–it’s just a legal construct with an existence on paper.

If money were not created “out of nothing,” how else could it be created? Digging stuff out of the ground? It makes a bit more sense to index it to something like fossil fuels, which provide the energy that underpins our economy. The problem is, not everything in the economy is “stuff” made from energy; some of it is services, or ideas. If you pay me for busking on the subway or cutting your hair, we really didn’t use that much more energy. And if I invent a new type of engine, that knowledge is worth at least as much as the fuel poured into it. Just the name “Coca-Cola” and the recipe is worth more than all the bottling plants and office buildings of the company all over the world. The knowledge of how to build a fire is “worth” as much as the sticks or the kindling; the labor to build a house as valuable as the materials. We need enough money for the things we wish to transact with in money, not just for the amount of concrete durable goods we can produce. Don’t forget things like insurance and futures contracts.

Besides, the banks don’t create money out of nothing; they draw on their reserve accounts (checking accounts) at the Federal Reserve. Fractional reserve banking does create more money from deposits, on the idea that not everyone will want their deposits at once. The issue here, however, is what fraction can be lent out as deposits. It currently stands at 10%. If we were to up the reserve requirements, money creation would go down. Would that be a good thing?

The interest paid to the banks is the real issue. As we saw, we cannot spend money into the economy without creating debt. But is it necessary for students to go heavily into debt to fund their education, or homeowners to go broke paying for inflated real estate prices? Do borrowers have to pay usurious credit card rates to make up for their lost incomes? As Michael Hudson has argued, the interest money paid to the banks is a net loss from the productive economy, even though we register enormous bank profits as a net gain.

By the way, that’s another thing to consider the next time you hear about how the rich got there though “hard work.” As we saw, bondholders receive additional money for holding bonds through mere keystrokes. How are they getting rich through “superior talent and hard work?” In fact, financial instruments like this are the main way people get rich over time. Keep in mind that bonds can be passed own through generations tax-free.

Another issue might be actually offering negative interest rates. This would essentially be, as I understand it, demurrage currency as mentioned above–money that loses value over time unless it is spent. Demurrage currency was another popular proposal to deal with money shortages (the “Miracle of Wörgl”). Of course, this would apply only to money kept in bank accounts, not to pieces of paper, and such a proposal might invite hoarding. This is why it’s linked to ideas to get rid of cash entirely. But is seems to me that people would just flee to some commodity not controlled by government interest rates, such as gold and silver (where there really would be a huge spike in prices).

Fear of government is the hangup here. People don’t trust governments. No cash means a record of every transaction, and governments are now pushing this to make us “safer.”

A final issue involves the issuance of bonds. As I pointed out, future generations will not only be the debtors, but also the creditors, otherwise, who would we all the money to? But I conveniently glossed over the issue of who gets the money in the future. The redistributional effects are the real concern here, not the debt per se. Wikipedia has a good summary:

  • For every dollar of debt held by the public, there is a government obligation (generally marketable Treasury securities) counted as an asset by investors. Future generations benefit to the extent these assets are passed on to them.
  • As of 2010, approximately 72% of the financial assets were held by the wealthiest 5% of the population. This presents a wealth and income distribution question, as only a fraction of the people in future generations will receive principal or interest from investments related to the debt incurred today.
  • To the extent the U.S. debt is owed to foreign investors (approximately half the “debt held by the public” during 2012), principal and interest are not directly received by U.S. heirs.
  • Higher debt levels imply higher interest payments, which create costs for future taxpayers (e.g., higher taxes, lower government benefits, higher inflation, or increased risk of fiscal crisis).
  • To the extent the borrowed funds are invested today to improve the long-term productivity of the economy and its workers, such as via useful infrastructure projects or education, future generations may benefit.
  • For every dollar of intragovernmental debt, there is an obligation to specific program recipients, generally non-marketable securities such as those held in the Social Security Trust Fund. Adjustments that reduce future deficits in these programs may also apply costs to future generations, via higher taxes or lower program spending.

National Debt of the United States (Wikipedia)

Finally, we ought to wonder where the opposition to these ideas come from. After all, if the government injects more money into the economy, won’t most of that money end up in the pockets of wealthy people–the people who own all the companies and the businesses and so forth. Won’t they be the prime beneficiaries of increased private sector spending? Why are they so diametrically opposed to these ideas, then?

This is doubly disingenuous, since there can be no doubt that the wealthy have some conception about how the money system works, otherwise they would not be wealthy. Surely they know that government funds are unlimited, or that bonds are merely savings accounts at the Fed.

I think part of it is that fact that many businesspeople need to “balance their books,” so they naturally assume the government should too. This is especially true of small business owners who have to especially worry about servicing their debts. Trying to explain to them that the government does not operate under the same rules as they do is nearly impossible. From what I’ve seen, small business owners tend to fall into a distinct personality type. They don’t like to change their minds, are type-A workaholics, see themselves as martyrs and Atlases balancing the world on their backs, have chips on their shoulders, and are overwhelmingly Republican.

The other reason is simpler, and more cynical. They are willing to sacrifice the economic well-being of the country to achieve certain goals. What goals are those? Keeping workers in fear. Pushing down wages. Abusing workers and demanding more and and more from them for less pay. Keeping unemployment high to keep workers terrified of losing their jobs.

By claiming “the government can’t crate jobs,” and portraying government spending as “waste” and government-funded activities as somehow illegitimate, they increase their own power. If we realize that the government can buy and procure whatever it needs from the private sector on our behalf, so long as those resources are on offer, including unused labor, it reduces our dependence on the plutocrats. That’s why they fundamentally hate democracy:

I have often suggested here that a key characteristic of mainstream economics is its fundamental distaste for democracy. We read it in the way in which economics pours scorn on government – even democratic government – as an automatic and inevitable problem in the achievement of efficiency, whatever that is. The anti-social bias is palpable.

Why Trump? (Real World Economics Review)

Another reason is that they hate the social safety net. They hate Social Security, hate Medicare, hate welfare. They simply hate anything that makes the lives of working people a little bit less brutal and uncertain. Simply put, they are pure sociopaths.

So they are willing to suffer, so long as we suffer more! One is reminded of the old joke about the genie who promises his rescuer one wish, but with the caveat that his wish will be granted to his enemy twice over. He asks to be beaten half to death.

As I like to point out, the people who know how the money system operates have no qualms about using it for their own benefit. Want proof? Did anyone ask how we were going to pay for the Gulf War 2? Did anyone ask how we’re going to pay for the F-35 jet fighter? I didn’t hear that on the news. Yet they constantly proclaim that the government is “broke” and we need to raise the Social Security retirement age. Were there any qualms about using the power of money creation to make bankers and investors whole? That was deemed “necessary.” Yet making our crumbling and hurting communities whole leads to outcries of “we can’t afford it!!!”

Finally, why do the rich pay more in taxes if we do not need taxes to fund spending? This is simply because of the marginal worth of money. The wealthy will not notice the money removed from their accounts to the same extent people living closer to subsistence will.

In fact, much of their “wealth” is sitting idle and unproductive, doing nothing more than increasing the prices for housing and rare artwork. Recall that taxes are to remove purchasing power so that there is room for government spending. It makes sense to remove “unproductive” wealth. Salaries are almost all spent on necessities. On the other hand “unearned” wealth sits idle most of the time. Despite the propaganda that all of this money fuels investments that put us all to work, it is clear that this is not happening, and that there is far more money than is needed to invest in real productive activities. That’s should be removed as taxes to make room for government activity which really would invest in productive things, like a smart grid, new school buildings, or intercontinental high-speed rail.

Since we do not to tax to raise the funds we need, it is our choice what to tax. In our system, we tax earned wealth higher than unearned wealth! This is crazy!

Evidence from the social sciences demonstrates that beyond a certain income threshold, people’s sense of well-being depends much more on their relative purchasing power than on how much they spend in absolute terms. If top tax rates were a little higher, all homes would be a little smaller, all cars a little less expensive, all diamonds a little more modest and all celebrations a little less costly. The standards that define “special” would adjust accordingly, leaving most successful people quite satisfied.

Are You Successful? If So, You’ve Already Won the Lottery (New York Times)

Explain Like I’m Five: Functional Finance

A while ago, I came across a comment from someone on r/collapse describing Functional Finance (MMT) concepts to someone droning on with the usual misinformed “we’re borrowing from the future” rhetoric. I thought those comments did a very good, succinct job of explaining some of the concepts, so I thought about posting them here.

Then I thought, in that same spirit of brevity and simplicity, what if I fleshed out those comments a bit more?

As some of you may know, Reddit has a section entitled “Explain Like I’m Five.” I wondered if there was one about MMT. There was, but it wasn’t very fleshed out.

So, I thought, here was a challenge. What you see below is the result. It’s far more wordy than I wanted, and necessarily a bit more complicated than I would have liked (maybe more “Explain Like I’m Fifteen”). I wanted it to to be no longer then a (long) Reddit comment, but I couldn’t quite do the concepts justice in that space, although, with a bit of clever cutting and pasting, it could form the basis of a suitable Reddit comment. I actually did that myself to respond to a particularly idiotic posting, and that in return helped flesh it out. Nevertheless, brevity and simplicity were the key goals here. I used more examples than I would have liked, but I really think they help in explaining the concepts.

*Plagarism alert!* A lot of this is lifted from other sources. I tried to avoid copying text word-for-word as much as possible, but there are some instances where I fell back on that because it was clearer and more accurate. I took a lot from Warren Mosler’s definitive work on the topic– “Seven Deadly Innocent Frauds of Economic Policy,” rephrasing and simplifying along the way, as well at the “Introduction to MMT” at New Economic Perspectives. I also stole a bit from David Graeber about the nature of money, along with some other authors. So don’t accuse me of plagiarism, because I admit it! Still, I hope this collection and simplification of their ideas will be of some merit.  In that spirit, I hope  the original authors will not object.

Of course, if anyone spots any severe inaccuracies or errors (bearing in mind that this is a simplified explanation), please be sure and point them out. I’m not an economist, nor do I even play one on TV, I’m just someone sick of all the misinformation and scaremongering I see out there.

Without further ado:

Introduction

Functional Finance describes the way the monetary system works for sovereign governments who control the issuance of their own currencies. It is sometimes referred to as Chartalism, or, less accurately, as Modern Monetary theory (MMT); however there is nothing essentially “modern” about it, nor is it merely a “theory.” It simply describes how our international monetary system actually works and what the ramifications of that are.

The great virtue of modern, fiat money is that it can be managed flexibly enough to prevent *both* deflation and also any truly damaging level of inflation – that is, a situation where prices are rising faster than wages, or where both are rising so fast they distort a country’s internal or external markets. The trick is for the government to spend enough to ensure full employment, but no so much, or in such a way as to cause shortages or bottlenecks in the real economy. These shortages or bottlenecks are the actual cause of most episodes of excessive inflation. If the mere existence of fiat monetary systems caused runaway inflation, the low, stable rates of consumer-price inflation we have seen over the past thirty-plus years would be pretty difficult to explain.

The government has no money! It can only take money from the private sector by force!!!

The government has no money? The government neither has nor does not have money. It spends by changing numbers up in our bank accounts and taxes by changing numbers down in our bank accounts. And raising taxes serves to lower our spending power, not to give the government anything to spend. Taxes do not finance government spending. As a sovereign currency issuer, the government does not need to “get something” from the private sector first in order to spend. If the private sector has to “earn” dollars, where are they to get the dollars that they must earn?

Imagine if we had a brand new country with a brand new currency. No one has any. Then the government proclaims that there will be a property tax. How can it be paid since no one has any money? It can’t, until the government starts spending. Only after the government starts spending the currency does the population have the money to pay the tax. The funds to pay the taxes, from inception, come from government spending (or lending). We need the federal government’s spending to get the funds we need to pay our taxes.

As another example, imagine if parents wanted their children to do certain household chores, so they printed up a series of coupons and gave them to their children coupons for each task completed–mowing the lawn, taking out the trash, and so on. To create a demand for the coupons, they require each child to pay them 10 coupons at the end of the week to avoid punishment. The children can trade the coupons among themselves if they wish; thus Suzy can have Jimmy clean her room by “paying” him with one of the coupons “earned” from mom and dad.

This creates a demand for these coupons. These coupons now function as the household’s “money.”

Do the parents have to somehow get the coupons from their children before they can issue them to the children for doing their chores? Of course not! In fact, the parents need to “spend” the coupons by paying the children to do the household chores if they want to collect the coupons at the end of the week. How else can the children get the coupons that they need?

If government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid.

If you went to the local tax office and wrote a check for $1,000 to pay your taxes, the government would deduct that $1,000 from your checking account and hand you a receipt, extinguishing your tax liability. The government did not “get” anything from you–it just transferred sums in various bank accounts. If you were to pay your taxes with all one-dollar bills, the government would also extinguish your tax liability, hand you a receipt, and toss the dollar bills into the furnace. The dollar bills in this case function like a $1,000 concert ticket – once the ticket taker takes the ticket from you, she tears it up and throws it away because it is no longer needed.

Thus, the government does not need to “get” money from somewhere to give to someone else that they can then use to “spend.” The people at the U.S. Treasury who actually spend the money (by changing the numbers of bank accounts up) work in different offices than, and do not even have the telephone numbers of, the people at the IRS who collect the taxes (who change the numbers down), or the people at the U.S. Treasury who do the borrowing (by issuing Treasury securities).

Similarly, if the government owed you a tax refund of $1,000, it would simply add an additional $1,000 credit to your bank account.  It doesn’t take a gold coin or a dollar bill and stick in into a computer somewhere. All it does is change the number in your bank account by making data entries on its own spreadsheet, which is linked to other spreadsheets in the banking system. Government spending is all done by data entry on its own spreadsheet called “The U.S Dollar Monetary System.”

This is often referred to as “printing” money, although hardly any money exists in physical form such as cash or coins. Most of it exists in the various accounts through which money transferred from one account to the other via keystrokes, and the government can never “run out” of keystrokes. They are adjusting the numbers in various bank accounts either up or down.

In other words, the sovereign government that issues its own currency has unlimited spending power; it owns the currency. These credits/debits are recorded in various spreadsheets, so, the government can never “run out” of money, any more than a sporting event can run out of points, or a construction site can run out of inches. If the New York Yankees score twelve runs against the Boston Red Sox, and twelve runs get added to the scoreboard, they did not “steal” those points from the Red Sox. That is, the government is not “revenue constrained” (but does face other constraints)

If taxes are not used to raise the money the government needs to function, then what are they used for? Taxes create the demand for the government’s currency. Liabilities issued by the state will be considered ‘money’ if those are also the only thing you can use to satisfy tax obligations. The government can levy a general tax obligation on all citizens, and declare what it is payable in. That is sufficient to create a demand for their IOUs as money, and will basically drive its use even in most private transactions within the country.

To prevent the government’s spending from causing inflation, the government must also take away spending power via taxation not to pay for anything, but so that their spending won’t cause inflation. “Unprinting money” via taxation makes it more scarce and valuable, and leaves enough room for governments to spend without causing inflation.

Taxes can also regulate aggregate demand, and we can use taxation to modify market behaviors by taxing what we wish to discourage (like smoking and carbon emissions), and subsidizing what we wish to encourage (like health care and clean energy).  The amount of tax revenue has no effect on the spending power of the government. As previously stated, taxes function to regulate our spending power and the economy in general, and not to get the money for Congress to spend.

This is not to say that the government should just spend, spend, spend, without limit, but that the government’s budget constraint is the wrong constraint. The correct constraint is whether or not a particular budget position will raise inflation beyond an official target rate  (say, 2%, which seems to be the choice of most central bankers). The objective of the government should be to provide full employment while controlling inflation. This is done by investing (to increase employment) and taxing (to control inflation).  An inflation constraint provides more fiscal space than a budget constraint, but in no way does it provide unlimited fiscal space. Therefore, the government should not have deficits or surpluses as their primary objective. Rather, the conditions in the actual economy will dictate policy.

If the current economy has a lot of unemployment, than the government should invest to try and create jobs while taxing in a clever way to avoid inflation. In such a case, the government would possibly end up running a deficit. If, on the other hand, there is high employment and lost of revenue from the sales of goods abroad, then the government should tax a lot; it wouldn’t need to spend as much and might possibly run a surplus. In either case, the conditions of the actual economy determine the actions to take, not an artificial budget constraint.

The same goes for the overall amount of debt. When people say “future generations are going to pay for our debt,” they are really saying that in the future the government will be constrained and have less spending power because of the debts we run up today. This is not true; the government owns the currency and so the amount of overall debt has no impact on the government’s ability to spend. The government can always issue the money it needs to pay its liabilities.

But the National Debt is XXX TRILLION DOLLARS!!!!

The term “national debt” is deceptive, the “debt” is actually assets on the balance sheets of private entities. In the above example, are the parents, by issuing slips of paper to get their children to do their chores, in any sense “in debt” to their children by doing so? Of course not!

Similarly, in the property tax example, is the government now in “debt” as a result of issuing the coins needed to pay the property tax? Is the government how in hock to some third-party due to its “deficit spending?” Does it have to redeem those coins for wheat or pigs or anything else at some point in the future? Of course not. There’s just a bunch of money circulating out there that people can use for transactions. The treasury has made no promise to redeem those coins for anything. There’s really no reason to call those coins, or any other financial instrument the government chooses to manufacture out of thin air and swap for those coins, “national debt.” A debt that will never be paid off is a very questionable “liability.”

That’s essentially the situation with the U.S. national “debt.” The U.S. issues money by deficit spending. It puts more money into private accounts than it takes out via taxes. The private sector has more balance-sheet assets (but no more liabilities, so it has more “net worth,” the balancing item on the right-hand side of its balance sheet). The Treasury has made no promises to redeem that new money for anything (except maybe…different government-issued assets). It’s just out there. They, are only “liabilities” to the government in the most pettifogging accounting sense. If you “owed” some money that you would never, ever have to repay, would you put that on your balance sheet as a liability? Would it be anything beyond a pro forma entry designed to satisfy some obsessive impulse for accounting closure?

When government spends without taxing, all it does is change the numbers up in the appropriate checking account (reserve account) at the Fed. This means that when the government makes a $1,000 Social Security payment to you, for example, it changes the number up in your bank’s checking account at the Fed by $1,000, which also automatically changes the number up in your account at your bank by $1,000.

The U.S. and other sovereign currency issuers operate under a purely self-imposed accounting rule: their treasuries are required to issue bonds equal to that deficit spending. This is a straightforward asset swap: the private sector gives checking-account deposits (back) to the government, and the government gives bonds in return. Private sector assets and net worth are unaffected by that accounting swap; it just changes the private-sector portfolio mix — more bonds, less “cash.” In any case, issuance of these instruments represent a desire to save on the part of the private sector, otherwise they would not find willing buyers.

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It’s commonly said that the private sector is “holding government debt,” since the private sector is holding treasury bonds, but this is a misnomer. The private sector is holding assets on its balance sheet, whether they consist of bonds, “cash,” or reserves. But the “debt,” such as it is, only exists as an offsetting accounting liability on the right-hand side of the government balance sheet. It is not accurate to call these a “liability” since they will never be redeemed for anything. A better term to describe the things that we tally up on the left-hand side of our private-sector balance sheets might be “government-issued assets,” as opposed to ” government debt.” The private sector holds (owns) government-issued assets, not liabilities. And even the offsetting liabilities themselves are rather dodgy and iffy accounting entries. The government issues those assets as a public good.

The government has committed itself to issuing bonds for archaic reasons, and so it needs to roll over its “debt.” When old bonds mature, the government pays them off and issues new ones to replace them. The stock of government-issued assets grows over time, as it should and must in a growing economy. As the economy expands, the government issues more assets as a necessary lubricant, and to avoid transactional lockups for the operation of the private-sector economy (i.e. to avoid a ‘liquidity trap’). The “debt” grows over time as the economy expands. The U.S. and U.K. have been issuing debt for more than two centuries, and it has never been paid back. It cannot be, because otherwise there wold be no money. (see below)

The government should be run “like a household!!” If I ran my household budget the way that the Federal Government runs its budget, I’d go broke!!! We have to live “within our means,” so the government should too!!!!

A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency.

Government debt does not have to be paid back. It almost never is. To pay back government debt, you have to run a budget surplus, and while there may be modest surpluses from time to time, they don’t add up to more than a minuscule fraction of all the accumulated debt. Governments that issue their own money don’t have to pay off their debts. They actually can’t. In fact,as we saw above, they issue money — the money that’s necessary for a growing economy to operate — by deficit spending.

We have seen that money is a credit/debit relationship, and the relationship between various sectors of the economy (public, private and foreign) must always sum to zero due to an accounting identity. If the government reduces its debt, everyone else has to go into debt in exactly that proportion in order to balance their own budgets. Debt consists of issuing liabilities that others are willing to hold as financial assets.  If there were no debt, there would be no money!

You can think of this as series of interlocking balance sheets between the the major sectors of the economy: public (the government), private (business in aggregate), and foreign (balance of payments), where the total assets = liabilities. The numbers are zero sum; a surplus in one sector necessarily means a deficit in another sector due to accounting identities.

Since income has to equal expenditure for the economy as a whole (which is the same things as saying that saving equals investment), the sums of the difference between income and expenditures of each of the sectors of the economy must also be zero; a rise in the deficit of one sector must be matched by an offsetting change in the others. These differences can also be described as “sectoral balances.” Thus, if a sector is spending less than its income it must be accumulating (net) claims on other sectors. When broken into sectors, government deficits are non-government surpluses, to the penny.

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If the government declares “we must act responsibly and pay off the national debt” and runs a budget surplus, then it (the public sector) is taking more money in taxes out of the private sector than it’s paying back in. That money has to come from somewhere. So if the government runs a surplus, the private sector goes into deficit. If the government reduces its debt, everyone else has to go into debt in exactly that same proportion in order to balance their own budgets.  People just assume that the government running a surplus will somehow make it easier for all of us to do so too. But the reality is precisely the opposite: the less the government is in debt, the more everybody else is.

Why does anybody have to be in debt at all? Why can’t everybody just balance their budgets? Governments, households, and corporations; everyone lives within their means and nobody ends up owing anything. Why can’t we just do that?

Because if there were no debt, then there wouldn’t be any money. Money is debt. An individual household or business needs to get dollars to pay it’s debts, that’s true. The same is not true of the economy as a whole. Your spending is my income. Your debt is my asset. Banknotes are just so many circulating IOUs. (take out a dollar bill and read what it says: “This note is legal tender for all debts, public and private”). Dollars are either circulating government debt, or they’re created by banks by making loans. That’s where money comes from. Obviously if nobody took out any loans at all, there wouldn’t be any money. The economy would collapse.

They money that we use are liabilities issued by the central government that others are willing to hold as financial assets. For most people and firms, others are only willing to value and accept our IOUs if they promise to pay something (redeemability in say, an equivalent amount of government currency) and that the extent that our promise to pay is credible (which the banks are in the business of keeping track of).

On the other hand, almost everyone is willing to value and accept the government’s IOUs, because everyone needs to collect government IOUs to pay taxes. That valuation is so ubiquitous, we’re willing to hold far more of the government IOUs than we even need to pay taxes, because they’re a safe bet for holding value for the foreseeable future. So the government can issue more IOUs (cash, coins, reserve accounts, treasury security accounts) than they require back in taxes, and end up perpetually running deficits to satisfy private savings desires. Our money is the government’s liabilities; if there were no debt, there would be no money!

There is going to be a cascading hierarchy of money based on the government IOUs, such as bank IOUs (checking/savings account balances) that promise to pay government IOUs, and personal IOUs (checks, etc.) that promise to pay bank IOUs, etc. And those will all tend to be denominated in the main unit of account made up by the government (dollar, yen, pound, whatever).

So there has to be debt. And debt has to be owed to someone. Let us refer to this group collectively as “the one percent.” If the government runs up a lot of debt, that means the one percent hold a lot of government bonds, which pay quite low rates of interest; the government taxes you to pay them off.

If the government pays off its debt, what it’s basically doing is transferring that debt directly to the public sector as mortgage debt, credit card debt, student loan debt, and so on. Of course the money is still owed to the one percent, but now they can collect much higher rates of interest. And this debt is accumulated by those least able to pay. There were three times in recent decades when the government ran a surplus, each surplus was followed, within a number of years, by an equal and opposite recession. Every depression in our nation’s history was preceded by a big decline in nominal Federal debt.

The government can always print the money it needs via keystrokes to pay its obligations as we saw above. Private levels of indebtedness are a much greater concern, and a greater drag on the economy. Private borrowers (and non-sovereign-currency states like Greece and Alabama) do have to pay off their debts (or default). That’s why the level of private debt, not sovereign debt, is the big management problem.

Government deficit spending creates nongovernment sector saving in the form of domestic currency (cash, reserves, Treasuries). This is because government deficits necessarily mean the government has credited more accounts through its spending than it debited through its taxes.

Austerity through government surplus means taxing/extinguishing more money than is created and injected through government spending. That either means increased private sector debt or reduced private sector savings.

The government has a monopoly on the currency!!

The government really has no need for legal tender laws, and many countries don’t use them. Neither do they need to criminalize issuing alternative currencies. Once have paid you taxes, you are free to hold your money in dollars, Euros, Yen, gold coins, Bitcoins, local currencies, or exchange value directly through time banking. No jack-booted government thug will take  your money away from you. However, it is unlikely the corner grocery store will accept your Yen or gold coins; most domestic transactions are denominated in U.S. dollars because it is easier, and because dollars are needed to pay the tax obligation. In fact, people trade currencies all the time and these values tend to “float” against one another. Only the Federal Reserve can issue U.S. dollars however; if anyone could “print” dollars in their basement in whatever quantity they desire, a dollar wouldn’t be worth very much, and inflation would very quickly be out of control.

We are stealing from our children!! Future generations will have to pay it all back with interest!!!

The amount of debt incurred today will not stop future generations from producing and consuming all the goods and services they desire and are capable of producing. In the future, just like today, whoever is alive will be able to go to work and produce and consume their real output of goods and services, no matter how many U.S.Treasury securities are outstanding. We will not have to send real goods and services “back in time” to pay off the debt. All things being equal, and if we do not mismanage the economy, the economy will be larger in the future than it is today. Our children will change numbers on what will be their spreadsheet, just as seamlessly as we do today. Also, future generations are not just the debtors, but also the creditors. Otherwise, who would we owe all that money to?

Currently, the U.S. economy is still running well below potential output. When we operate at less than our potential – at less than full employment – then we are depriving our children of the real goods and services we could be producing on their behalf. Likewise, when we cut back on our support of higher education, we are depriving our children of the knowledge they’ll need to be the very best they can be in their future. When we cut back on basic research and space exploration, we are depriving our children of all the fruits of that labor that instead we are transferring to the unemployment lines. This is the real “stealing from our children!”

When the cost to borrow is low, it makes sense to invest in things that will pay a greater return down the line. Every business does this, and any CEO who does not know this would be fired. Like individuals, a government can increase its means in the long run by borrowing to invest in things that will make the economy more productive, and thus increase the tax revenue. If a government invests in improving the transport system, it will make the country’s logistics industry more efficient. Or if it invests in healthcare and education, that will make the workers more productive.

More importantly, unlike individuals, a government has the ability to spend “money it does not have”, only to find later that it had the money after all. The point is that deficit spending in a stagnant economy will increase demand in the economy, stimulating business and making consumers more optimistic.  If nominal interest rates are below long-run trend real GDP growth, a dollar of debt more than pays for itself in the long-run.

As we saw above, “austerity” means reducing the amount of money available and driving up the level of private indebtedness. The irony is that in order to somehow “save” public funds for the future, what we do is cut back on expenditures today, which does nothing but set our economy back and cause the growth of output and employment to decline. Currently, the misplaced fear of leaving the national debt to our children continues to drive policy, and keeps us from optimizing current output and employment.

The debt burden depends on the ratio of debt to GDP as well as the interest cost in servicing it. The way to reduce this burden is to have a combination of real economic growth, inflation and modest interest rates. If you want to show your concern for the well-being of future generations, demand macroeconomic policies that will boost demand and raise inflation a bit, consistent with continued low interest rates.

When Congress first imposed a debt limit in 1917, its intent was to limit the amount the Treasury could spend to finance America’s entry into World War I, not to control overall government spending. The basic structure of the debt limit hasn’t changed since 1940, and as a result, the debt limit is both arbitrary and static. It doesn’t take into account inflation or economic growth, and it has no relevance to the nation’s economic output or circumstances.

The Chinese “own” us thanks to deficits!!!

As a sovereign currency issuer, we do not need the Chinese to “fund” our deficits. A sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent! Functional Finance sees the sale of government bonds as something quite different from borrowing. As we saw above, the “debt” is nothing more than government-issued assets held at the Fed.  Whether they consist of bonds, “cash,” or reserves, it is unrealistic to call the money originally spent into private accounts a “debt.”

As we have seen, government deficit spending creates equivalent nongovernment savings (dollar for dollar). Some of the savings created will accumulate in the hands of foreigners. For many years (during the Clinton and Bush II presidencies) the domestic private sector was also running budget deficits—so foreigners also accumulated net claims on American households and firms. The US current account deficit guarantees—by accounting identity—that dollar claims on government will be accumulated by foreigners.

Net savings of financial assets is held as some combination of actual cash, Treasury securities and member bank deposits at the Federal Reserve. Normally, the nongovernment sector prefers to hold savings in government IOUs that promise interest, rather than in nonearning IOUs like cash.

The commercial banks we use for our banking all have bank accounts at the Federal Reserve called reserve accounts. This is where they acquire the money they use for loans – they borrow it. Lowering the interest rate at which banks must borrow from the Fed lowers the “cost” of money and makes loans easier to get, theoretically stimulating the economy. A reserve account is nothing more than a fancy name for a checking account. It’s the Federal Reserve Bank so they call it a reserve account instead of a checking account.

Foreign governments have reserve accounts at the Fed also. Foreigners earn US dollars from selling us real goods and services. What do they do with those accumulated dollars? Just like you do with your dollars, they either hold them as cash IOU’s (reserve accounts), or stick them in a savings account (by buying U.S. Treasury securities).

Treasury bonds are sort of like savings accounts at the Fed. Just like your checking and savings accounts at your local bank, your checking account probably offers a very low rate of interest, but you can draw against it any any time (it is “liquid”). Savings accounts are typically held for a longer period of time and pay higher rates of interest. They key thing to understand is that both are methods of saving.

A U.S. Treasury security is nothing more than a savings account at the Fed. When you buy a Treasury security, you send your saved dollars to the Fed, and then some at point in the future (maturity), they pay back the dollars plus interest. It is just like a savings account at any bank–you deposit dollars and get them back plus interest.

When government sells bonds, banks buy them by offering reserves they hold at the central bank. The central bank debits the buying bank’s reserve deposits and credits the bank’s account with treasury securities. Rather than seeing this as borrowing by treasury, it is more akin to shifting deposits out of a checking account and into a saving account in order to earn more interest. And, indeed, treasury securities really are nothing more than a saving account at the Fed that pay more interest than do reserve deposits (bank “checking accounts”) at the Fed. The government simply changes numbers on its own spreadsheet – one number gets changed down and another gets changed up. It is much like a transfer from a “checking account” (reserves) to a “savings account” (bonds). This is a straightforward asset swap: the private sector gives checking-account deposits (back) to the government, and the government gives bonds in return. Private sector assets and net worth are unaffected by that accounting swap; it just changes the private-sector portfolio mix — more bonds, less “cash.” (Treasury “forces” the private sector to make that collective portfolio-adjusting swap through the simple expedient of selling bonds at an attractive price — a point or two below similar deals in the private sector.)

The government bonds take the form of an electronic entry on the books of the central bank of the issuing government. Interest is paid on these “bonds” in the same manner, whether they are held by foreigners or by domestic residents—simply through a “keystroke” electronic entry that adds to the nominal value of the “bond” (itself an electronic entry). The foreign holder portfolio preferences will determine whether they hold bonds or reserves—with higher interest on the bonds. Shifting from reserves to bonds is done electronically, and just like above, it is a transfer from a “checking account” (reserves) to a “savings account” (bonds).

If an individual bondholder needs cash for real-goods transactions or whatever else, the necessary asset-swap transaction happens with a mouse click. Likewise holders of checking-account deposits: if they want physical currency, their bank stands ready to make the swap; it’s called “withdrawing cash.” If the bank runs short on physical currency, the Federal Reserve provides it on demand in exchange for the bank’s reserves, its account deposits at the Fed.

When the U.S. government does what’s called “borrowing money,” either domestically or internationally, all it does is move funds from checking accounts (the reserve accounts held by the banks) at the Fed to savings accounts (Treasury securities) at the Fed. In fact, the entire $13 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed.

What happens when the Treasury securities come due, and that “debt” has to be paid back? The Fed merely shifts the dollar balances from the savings accounts (Treasury securities) at the Fed to the appropriate checking accounts at the Fed (reserve accounts) – that’s it. To pay off the national debt the government changes two entries in its own spreadsheet – a number that says how many securities are owned by the private sector is changed down and another number that says how many U.S. dollars are being kept at the Fed in reserve accounts is changed up. That’s all, debt paid. All creditors have their money back. Paying off the entire U.S. national debt is but a matter of subtracting the value of the maturing securities from one account at the Fed, and adding that value to another account at the Fed. These transfers are non-events for the real economy and not the end of the world, as some fear.

As we saw, foreigners buy government bonds when they are more attractive than reserves, which pay little or no interest. Let us presume that sizable amounts of government bonds are held externally, by foreigners. What if low interest rates mean that foreigners decide they would rather hold reserves than bonds?

If the day ever comes when China demands that the Treasury securities which it holds have to be paid back, the Fed simply changes two numbers on its own spreadsheet. The Fed debits (subtracts from) China’s securities account at the Fed. And then it credits (adds to) China’s reserve (checking) account at the Fed. That’s all – debt paid! It’s essentially an asset swap. Paying off China doesn’t change China’s stated $U.S. wealth. They simply have dollars in a checking account rather than U.S. Treasury securities (a savings account) of equal dollars. China now has its money back. It has a (very large) U.S.-dollar balance in its checking account at the Fed. We will not have to sell off the Statue of Liberty or Mount Rushmore to pay off our “debt” to China.

If China then wants anything else – cars, boats, real estate, other currencies – it has to buy them at market prices from a willing seller who wants dollar deposits in return. And if China does buy something, the Fed will subtract that amount from China’s checking account and add that amount to the checking account of whomever China bought it all from. Refusing to “roll over” maturing bonds simply means that foreign banks will have more reserves (credits at the issuing government’s central bank) and less bonds. Selling bonds that have not yet matured simply shifts reserves about—from the buyer to the seller. Neither of these activities will cause pressure on the government to offer higher interest rates to try to find buyers of its bonds.

From the perspective of government, it is perfectly sensible to let banks hold more reserves while issuing fewer bonds. Or it could offer higher interest rates to sell more bonds (even though there is no need to do so); but this just means that keystrokes are used to credit more interest to the bond holders. Government can always “afford” larger keystrokes, but markets cannot force the government’s hand because it can simply stop selling bonds and, thereby, let markets accumulate reserves instead.

Now the private and foreign sector’s portfolio mix certainly has economic import (and even more so, changes in that portfolio mix). But that mix is secondary and subsequent to the total stock of various government-issued assets in play — be they bonds, checking deposits, whatever. Without a sufficient pool of those lubricatory assets, the financial economy binds up and freezes, as does international trade.

What happens if foreigners decide they do not want to hold either reserves or bonds denominated in dollars, and sell them off?

For the rest of the world to stop accumulating dollar-denominated assets, it must also stop running current account surpluses against the US. Hence, the other side of a Chinese decision to stop accumulating dollars must be a decision to stop net exporting to the US.  This is not going to happen, as China is very much dependent upon exporting to the U.S. for a number of reasons.

Furthermore, trying to run a current account surplus against the U.S. while avoiding the accumulation of dollar-denominated assets would require that the Chinese off-load the dollars they earn by exporting to the US—trading them for other currencies. That, of course, requires that they find enough willing buyers to take their dollars. That is, the dollars earned by China’s export surplus have to go somewhere.

This could—as feared by many commentators—lead to a depreciation of the value of the dollar. That, in turn,would expose the Chinese to a possible devaluation of the value of their US dollar holdings—reserves plus Treasuries that total over $2trillion.

If China’s central bank ceases buying its $200 billion a year of dollar denominated assets, and if nothing shocks the behavior of other central bank or collection of private foreigners, two things will happen: (1) the value of the value of the dollar will fall, and (2) U.S. interest rates will rise. The fall in the value of the dollar will boost U.S. exports and diminish U.S. imports, and the trade deficit will shrink. And–as long as the Federal Reserve is successful in avoiding recession–the rise in interest rates will reduce investment inside the United States and also lower asset values, which will make homeowners and investors feel poorer and increase their savings. It will thus reduce the gap between savings and investment, and so diminish the capital inflow.

What happens if China says, “We don’t want to keep a checking account at the Fed anymore. Pay us in gold or some other means of exchange!” They simply do not have that option under our current “fiat currency” system. Governments do not typically ship pallets of paper money or gold bars across the ocean. If they want something other than dollars, then they have to buy it from a willing seller, just like the rest of us do when we spend our dollars. In this case, they must find holders of other currency-denominated reserve credits willing to exchange these for the bonds offered for sale. It is possible that the potential buyers will purchase bonds only at a lower exchange rate, so it is true that foreign sales of a government’s debt can affect the exchange rate. However, so long as a government is willing to let its exchange rate “float” it need not react to prevent a depreciation.

Depreciation of the dollar would increase the dollar cost of China’s exports, making them more expensive, and lower the value of China’s dollar-denominated assets. US exports would become more competitive globally, which would be a boost to domestic industries, lowering the trade deficit and boosting domestic employment. For these reasons, a sudden run by China out of the dollar is quite unlikely. A slow transition into other currencies is only possible if China can find alternative markets for its exports.

The Job Guarantee

One ramification of the above is that a currency-issuing government can purchase anything that is for sale in its own currency, including the labor of every last unemployed person who is looking for a job. This is known as the “job guarantee.”

The government already creates millions of jobs, from combat soldiers, to IRS accountants, to elevator inspectors, to U.S. Congressmen (who enjoy benefits denied to most citizens). It also purchases goods and engages the labor of numerous private sector entities to accomplish various things that suit the public purpose, from building roads and bridges, to protecting the country, to basic research and development.

One key factor is that the job guarantee would hire “from the bottom,” not from the top to ensure that such programs don’t create real resource bottlenecks by competing with the private sector for highly-skilled or specialized labor. The job guarantee could also put a floor under domestic wages without costly regulations. Whether the job guarantee makes fighter planes or wind turbines makes no economic difference–the workers employed by it will spend their wages on the same things other workers buy. When you hand money over to a convenience store cashier to purchase goods, do they ever squint or turn the dollar bill sideways and ask, “Are you sure this money came from work that was performed in the public sector?” They don’t, because the money governments pay to public employees is the same money everyone else gets paid in.

What matters, economically, is whether there are sufficient real resources and labor available to produce these goods and services in line with the increased demand for them. If there are, no additional government intervention is necessary in order to mobilize them. The same private profit motivation which induces a company to produce one widget can be relied upon to produce the production of another one. If there are enough real resources available to produce the goods and services that are equal in value to the government’s job guarantee spending–if they are not already being used to produce something else–then the increased demand that results from the payment of job guarantee wages will not be inflationary, regardless of what they go to produce.

The only time the American economy ever achieved an extended, years-long period with zero unemployment, low, well-controlled inflation rates and with no significant financial aftershock at the end was the World War II era – broadly defined to include the Lend-Lease buildup of 1940 and 1941. This solution to the problem of mass unemployment worked in the 1940s and it would work today. In the 1940s, of course,the jobs were almost all war-related. But, economically, this makes no difference. Increased government spending is what ended the Great Depression, not the War per se. The former British politician Tony Benn regularly noted that if you can have full employment killing Germans, then there is no reason why can’t you have it doing other socially useful activities.

But Weimar Germany! Greece!! Venezuela!!! Zimbabwe!!!!

It should be noted that the above applies only to sovereign governments with control over the issuance of own currency. A user of the currency who does not control its issuance has no such prerogative; it needs to procure the currency from another source. Greece, as a member of the Eurozone, does not have control over its own currency. Its currency, the Euro, is used by a number of other countries with different economic conditions and is not allowed to “float,” Regulation of the currency is controlled not by the Greek government, but by the European Central Bank.

In Weimar Germany, the government was forced to pay extremely large war reparations in foreign currencies which it didn’t have, so it had to aggressively sell its own currency and buy the foreign currency in the financial markets. This relentless selling continuously drove down the value of its currency, causing prices of goods and services to go ever higher in what became one of the most famous inflations of all time. By 1919, the German budget deficit was equal to half of GDP, and by 1921, war reparation payments represented one third of government spending. On the very day that government stopped paying the war reparations and selling its own currency to buy foreign currency, the hyperinflation stopped.

In Zimbabwe, the conditions for hyperinflation were caused by the destruction of nearly half of the country’s domestic food production via misguided land reforms, plus a civil war which eliminated much of the economy’s productive manufacturing capacity. In response to food shortages, the Bank of Zimbabwe used valuable foreign exchange reserves to buy imported food, leading to a lack of foreign currency to purchase essential raw materials. Manufacturing output collapsed, but the government used much of the remaining foreign exchange to dole out political favors, rather than adding to the country’s productive capacity. The end result was inflation and then hyperinflation.

A sovereign-currency issuer might “have” to pay back their debt if they have committed to redeem their money for something else. For instance Argentina (dollar-denominated debt) and whole host of other countries who were on a gold standard had promised to give gold in return for their money. If they can’t or won’t do so, that is a default on their promise. The U.S. and the U.K. (among others) do not face that situation.

Yes, once the economy gets to full employment, then extra government deficit spending can start driving up prices, but with high unemployment and unused yet functioning factories all across the country, there is plenty of room to cut taxes and/or increase spending to get us to full employment. This is true no matter what the size of the federal deficit. Ultimately, inflation (and then hyperinflation) is about competing distributive claims over real resources, such as oil, gas, water, etc.

It is perfectly true that a poorly managed monetary system, or one which is experiencing something like an oil-price shock, can experience inflation. But people today simply don’t realize how much bigger a problem the opposite condition can be. A little bit of inflation is useful and normal. It discourages people from hoarding money and encourages healthy levels of consumption and investment. It promotes growth, provided that a country’s fiscal and monetary authorities manage it properly. Under the gold standard, and largely because of the gold standard, the capitalist world endured eight different deflationary slumps severe enough to be called “depressions.” Since the gold standard was abolished, there have been none.

The dollar is not “backed” by anything!!! Fiat currency is not “real” money!!!

Many people are unnerved by the thought that money isn’t “backed” by anything anymore – backed by gold, for example. They’re afraid that this makes money a less reliable store of value. Hasn’t money always been gold or silver, or at least backed by it? Nope. In primitive societies, people typically participated in gift exchanges, where the receiver was placed under obligation to the giver, who would then receive something back in return at a later date. Such reciprocity has even been observed in non-human primates. As societies grew larger and more complex, and more interaction was between strangers, this relationship became more formalized. Writing was invented to keep track of these relationships. Historical studies confirm that credit/debit relationships recorded on clay tablets were the earliest known form of “money.”

Coinage was invented much later as a way of raising large armies and paying mercenaries. Governments found the easiest way to provision soldiers was to issue them standard-issue bits of gold or silver and then demand everyone else in the kingdom give them one of those coins back again. Because soldiers have the coins which everyone needs to pay the tax, trade with soldiers becomes a necessity. These coins started circulating as money. Promissory notes, which recorded an obligation on the part of a third party (an IOU), passed from hand to hand in the Middle Ages as an early form of paper money. Tally sticks, upon which were recorded a farmer’s tax obligations to the crown, also circulated as money throughout medieval Europe.

The Bank of England was created when a consortium of forty London and Edinburgh merchants — mostly already creditors to the crown — offered King William III a £1.2 million loan to help finance his war against France. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.

One problem with defining the value of the dollar in terms of gold is that gold’s value fluctuates relative to all other goods and services as the supply or demand for gold changes. When economic growth was not accompanied by an increase in the supply of gold, it put downward pressure on prices. The result was deflation and rising real debt burdens. For example, news in April 1893 that the government was running low on gold was followed by the Panic in May and a severe depression involving widespread commercial and bank failures. As a result of the panic, stock prices declined. 500 banks closed, 15,000 businesses failed, and numerous farms ceased operation. The unemployment rate hit 25% in Pennsylvania, 35% in New York, and 43% in Michigan. Soup kitchens were opened to help feed the destitute. Facing starvation, people chopped wood, broke rocks, and sewed in exchange for food. In some cases, women resorted to prostitution to feed their families.

Functional finance emphasizes the role of money as a”unit of account,” and a “store of value,” rather than as a “medium of exchange.” Money is primarily a credit/debt relationship and always has been. There would scarcely be enough gold bars in the world to run a modern industrial economy. Besides, even though gold and silver have a long history of use as a medium of exchange, it is still a social convention based upon “faith” that gold and silver are valuable–rarely do people need actual gold or silver for anything, any more than they need pieces of paper. In fact, commodities used as a medium of exchange typically do not have very many practical uses, otherwise they would be far too valuable as commodities to be used for money!

Money is primarily a social tool that we use to mobilize real resources to ensure our collective long-term health and prosperity. It is not a “thing” that is inherently scarce like diamonds or gold bullion. It is not something for the rich and powerful to hoard in their bank accounts, or to hide in offshore tax havens. It should be noted that the reverse is also true: no amount of money creation can substitute for actual resources which do not exist in the real world. Used wisely, however, it can allow us to manage our existing resources more carefully, including making the best use of our natural and human capital.

Conclusion

To sum up, sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, nor can they be constrained, by purely financial limits because, as issuers of their respective currencies, they can never “run out” of money. This doesn’t mean that governments can spend without limit, or overspend without causing inflation; or that governments should spend any sum unwisely. The government cannot mobilize resources that do not exist. What it does mean is that no sovereign government needs to tolerate mass unemployment because of the state of its finances–no matter what that state happens to be. Nor does it require foreign entities to finance its deficit. What this further means is that a prolonged slump or depression is, ultimately, a political choice.

Sources:

(I encourage you to read the original texts at the following locations):

https://www.reddit.com/r/collapse/comments/472285/sweden_on_the_brink_an_interview_with_dr_tino/d09ttyp

https://www.reddit.com/r/AskSocialScience/comments/3mhh05/eli5_modern_monetary_policy_mmt_the_economic/cvs1pbz

The 7 Deadly Innocent Frauds of Economic Policy (PDF)

What is Modern Monetary Theory, or “MMT”?

Britain is heading for another 2008 crash: here’s why

‘Living within our means’ makes no economic sense. Labour is right to oppose it

MMT Primer

MMP Blog #24: What if Foreigners Hold Government Bonds?

China and the Trade Deficit

Martin Wolf On Wynne Godley’s Sectoral Financial Balances Approach

Isn’t it Time to Stop Calling it “The National Debt”?

The Meme that Refuses to Die: Government Debt Must Be Paid Back

4 Ways to Fix the Debt Limit – Forever

Crisis Chronicles: Gold, Deflation, and the Panic of 1893

Panic of 1893

Randy Wray: The Value of Redemption (Debt Free Money, Part 3)

The Deficit: Nine Myths We Can’t Afford

Jane Jacobs and America’s Dysfunctional Urban Design

It’s the 100th anniversary of Jane Jacobs birth, even celebrated with a Google doodle, despite Google going against literally everything she believed in and wrote about.

So, it’s time for a quick overview of the urban environment.

Data mining has confirmed what Jacobs knew through observation:

Back in 1961, the gradual decline of many city centers in the U.S. began to puzzle urban planners and activists alike. One of them, the urban sociologist Jane Jacobs, began a widespread and detailed investigation of the causes and published her conclusions in The Death and Life of Great American Cities, a controversial book that proposed four conditions that are essential for vibrant city life.

In her book, Jacobs argues that vibrant activity can only flourish in cities when the physical environment is diverse. This diversity, she says, requires four conditions. The first is that city districts must serve more than two functions so that they attract people with different purposes at different times of the day and night. Second, city blocks must be small with dense intersections that give pedestrians many opportunities to interact.

The third condition is that buildings must be diverse in terms of age and form to support a mix of low-rent and high-rent tenants. By contrast, an area with exclusively new buildings can only attract businesses and tenants wealthy enough to support the cost of new building. Finally, a district must have a sufficient density of people and buildings.

Data Mining Reveals the Four Urban Conditions That Create Vibrant City Life (MIT Technology Review)

Lloyd Alter points out that this contradicts the dictums of the “market urbanists” who claim that building as many tall, dense buildings as we can in urban areas will solve all our house-pricing problems (who can afford them anyway?):

[Jane Jacobs’] words are an anathema to many in the so-called market urbanist school, who see all of this preservation of older buildings as an impediment to development; as Steve Waldman explains, these market urbanists…

…argue that cities should eliminate restrictive zoning and other regulatory barriers to development, then let the free-market create housing supply. In a competitive marketplace, high prices are supposed to be their own cure. Zoning restrictions, urban permitting, and the de facto capacity of existing residents to veto new development are barriers to entry that prevent the magic of competition from taking hold and solving the problem.

Which is where we are today, with economists like Ed Glaeser, Ryan Avent and writers like Matt Yglesias and Alex Steffen persuading many that Jane Jacobs was wrong, and Felix Salmon defending crappy towers filled with rich people by saying “Better we have a living city with a couple of less-than-perfect buildings, than a stifled one governed by nostalgists and Nimbys.” Glaeser has written that “An absolute victory for Jacobs means a city frozen in concrete with prices that are too high and buildings that are too low.”

In fact, in Toronto, the city where Jane Jacobs lived the last 37 years of her life, you can see what happens if you let this happen. Yes, there is a boom in housing, with lots of relatively affordable small units that are full of a monoculture of childless young people, with the ground floor plane filled with a monoculture of chain restaurants, banks and drugstores…

Someone posted this video on Reddit: Most of the problems that we face today in the United States, whether they are cultural, economical, social or environmental are rooted in poor urban design and planning. Due to America’s unique experience of economic growth during the 20th century (2015)

Okay, that’s clearly hyperbole. But despite that, it is a good overview about how badly our built environment contributes to a large number of problems. Every facet of living has become separated by miles and miles of land due to zoning restrictions originally intended to separate people from polluting industries. Here are just a few of the problems the video puts on poor urban design:

  • Corporate control and the loss of small business. Mom-and-pop stores which depend on social connection to the community were eliminated, because there was no more street life or mixed-use communities. Less stores mean less buying options and more power to the large corporations. Barriers to starting businesses are put in place by restrictive zoning and high rents.
  • Obesity  and food deserts As people had to drive everywhere, they relied on drugstores and gas stations for food. Fast food made it easy to get drive-through food. People were unable to walk anywhere, obesity rates increased.
  • Loss of community and civic participation With gas making it too expensive to drive, and unable to walk anywhere, people stayed in their houses, eliminating a sense of community. Children are poorly socialized since they can’t play or bike anywhere, and must be driven around.
  • High crime rates and incarceration. As people moved to sububs, urban areas lost revenue, tax base, and businesses. Those unable to move became trpped in cities. Loss of revenue caused jobs to disappear, leading to desperation and crime. This led to an expanded police presence, overcriminilization and mass incarceration.
  • Fragmentation of society. Americans are becomeing ever more segregated by income, race, and class, leading to more conflict mistrust, and suspicion.

“There is a populist notion that sprawl and suburban setting disperse people in such a way as to make things more peaceful between them. Simply separating people and resources from one another doesn’t make for a more peaceful society. Separating people and destroying the chance for social connection and communities makes people more stressed. Humans are inherently social creatures. If you try to take that away from them it makes for a tumultuous society.”

Let’s not forget other deleterious effects on health too. Maybe this is why our health care spending is so high: Commuting Takes Its Toll (Scientific American)

To the above list, we might add ADD. Boring buildings have a cost as well:

A growing body of research in cognitive science illuminates the physical and mental toll bland cityscapes exact on residents. Generally, these researchers argue that humans are healthier when they live among variety — a cacophony of bars, bodegas, and independent shops — or work in well-designed, unique spaces, rather than unattractive, generic ones. In their book, Cognitive Architecture: Designing for How We Respond to the Built Environment, Tufts urban policy professor Justin Hollander and architect Ann Sussman review scientific data to help architects and urban planners understand how, exactly, we respond to our built surroundings. People, they argue, function best in intricate settings and crave variety, not “big, blank, boxy buildings.”

And studies show that feeling meh can be more than a passing nuisance. For instance, psychologists Colleen Merrifield and James Danckert’s work suggests that even small doses of boredom can generate stress. People in their experiment watched three videos — one boring, one sad, and one interesting – while wearing electrodes to measure their physiological responses. Boredom, surprisingly, increased people’s heart rate and cortisol level more than sadness. Now take their findings and imagine the cumulative effects of living or working in the same oppressively dull environs day after day, said Ellard.

There might even be a potential link between mind-numbing places and attention deficit hyperactivity disorders. In one case, physicians have linked “environmental deprivation” to ADHD in children. Homes without toys, art, or other stimuli were a significant predictor of ADHD symptoms. Meanwhile, the prevalence of U.S. adults treated for attention deficit is rising. And while people may generally be hardwired for variety, Dr. Richard Friedman, director of the pharmacology clinic at Weill Cornell Medical College, makes the case that those with ADHD are especially novelty-seeking. Friedman points to a patient who “treated” his ADHD by changing his workday from one that was highly routine — a standard desk job — to a start-up, which has him “on the road, constantly changing environments.”

The Psychological Cost of Boring Buildings (New York Magazine)

As this Atlantic article points out, our dependence upon automobiles is insane from a practical standpoint:

What are the failings of cars? First and foremost, they are profligate wasters of money and fuel: More than 80 cents of every dollar spent on gasoline is squandered by the inherent inefficiencies of the modern internal combustion engine. No part of daily life wastes more energy and, by extension, more money than the modern automobile. While burning through all that fuel, cars and trucks spew toxins and particulate waste into the atmosphere that induce cancer, lung disease, and asthma. These emissions measurably decrease longevity—not by a matter of days, but years. ..53,000 Americans die prematurely every year from vehicle pollution, losing 10 years of life on average compared to their lifespans in the absence of tailpipe emissions.

There are also the indirect environmental, health, and economic costs of extracting, transporting, and refining oil for vehicle fuels, and the immense national-security costs and risks of being dependent on oil imports for significant amounts of that fuel. As an investment, the car is a massive waste of opportunity—“the world’s most underutilized asset,” the investment firm Morgan Stanley calls it. That’s because the average car sits idle 92 percent of the time. Accounting for all costs, from fuel to insurance to depreciation, the average car owner in the U.S. pays $12,544 a year for a car that puts in a mere 14-hour workweek. Drive an SUV? Tack on another $1,908.14
Then there is the matter of climate. Transportation is a principal cause of the global climate crisis, exacerbated by a stubborn attachment to archaic, wasteful, and inefficient transportation modes and machines…Total passenger miles by air are miniscule compared to cars. In any given year, 60 percent of American adults never set foot on an airplane, and the vast majority who do fly take only one round trip a year. Unfortunately, air travel is not the primary problem, contributing only 8 percent of U.S. transportation-related greenhouse gases. Cars and trucks, by contrast, pump out a combined 83 percent of transportation carbon.

And that’s not even counting cars’ most dramatic cost: They waste lives. They are one of America’s leading causes of avoidable injury and death, especially among the young. Oddly, the most immediately devastating consequence of the modern car—the carnage it leaves in its wake—seems to generate the least public outcry and attention…Car crashes are the leading cause of death for Americans between the ages of 1 and 39. They rank in the top five killers for Americans 65 and under (behind cancer, heart disease, accidental poisoning, and suicide). And the direct economic costs alone—the medical bills and emergency-response costs reflected in taxes and insurance payments—represent a tax of $784 on every man, woman, and child living in the U.S.

The numbers are so huge they are not easily grasped, and so are perhaps best understood by a simple comparison: If U.S. roads were a war zone, they would be the most dangerous battlefield the American military has ever encountered. Seriously: Annual U.S. highway fatalities outnumber the yearly war dead during each Vietnam, Korea, Iraq, Afghanistan, the War of 1812, and the American Revolution. When all of the injuries from car wrecks are also taken into account, one year of American driving is more dangerous than all those wars put together.

The Absurd Primacy of the Automobile in American Life. (The Atlantic) Considering the constant fatalities, rampant pollution, and exorbitant costs of ownership, there is no better word to characterize the car’s dominance than insane. But what isn’t insane about the way we live in America, hmmm?

The freeways clearly facilitated sprawl and cut the heart of America’s formerly-prosperous and glorious cities. So why were they built? A lot of it was intentionally destroying African-American neighborhoods in the interest of “urban renewal”:

State and city politicians accepted these plans for a variety of reasons. In an era when suburbs had just begun to grow, DiMento says, “local politicians saw urban freeways as a way of bringing suburban commuters into city.” Some local businesspeople supported them for similar reasons.

But an unmistakable part of the equation was the federally supported program of “urban renewal,” in which lower-income urban communities — mostly African-American — were targeted for removal.

“The idea was ‘let’s get rid of the blight,'” says DiMento. “And places that we’d now see as interesting, multi-ethnic areas were viewed as blight.” Highways were a tool for justifying the destruction of many of these areas.

Highways gutted American cities. So why did they build them? (Vox). A must-read on the history:

City planners…saw the crowded African American areas as unhealthy organs that needed to be removed. To keep cities healthy, planners said, these areas needed to be cleared and redeveloped, the clogged hearts replaced with something newer and spiffier. But open-heart surgery on a city is expensive. Highway construction could be federally funded. Why not use those federal highway dollars to also tear down blight and rebuild city centers?

The urban planner Robert Moses was one of the first to propose the idea of using highways to “redeem” urban areas. In 1949, the commissioner of the Bureau of Public Roads, Thomas MacDonald, even tried to include the idea of highway construction as a technique for urban renewal in a national housing bill. (He was rebuffed.) But in cities across America, especially those that didn’t want to—or couldn’t—spend their own money for so-called urban renewal, the idea began to take hold. They could have their highways and they could get rid of their slums. With just one surgery, they could put in more arteries, and they could remove the city’s heart.

The Role of Highways in American Poverty (The Atlantic) Syracuse, New York as case study. The fallout from this is what I touched on in my last posts on automation.

Lloyd Alter proposes the bringing back the Euroloaf building concept. I have to admit when I first saw this, I assumed Euroloaf referred to how Europeans spend their typical August.

Back in the 1970s a remarkable housing project was built in Toronto; The St. Lawrence neighbourhood has been described by journalist Dave LeBlanc as the “best example of a mixed-income, mixed-use, pedestrian-friendly, sensitively scaled, densely populated community ever built in the province”. Designed around principles espoused by Jane Jacobs (some even claim she had a hand in designing it; she didn’t), it was a mix of low street facing townhouses and long mid-rise apartment blocks of a relatively consistent height. They looked a lot like buildings from Paris or Scandinavia and were nicknamed “Euroloaf” because they are kind of shaped like loaves of bread.

Coincidentally, I was working on a post about Swedish prefab and looking at all their Euroloaves, still pretty much the standard typology…Right now wood is having a renaissance, and the point man is Vancouver’s Michael Green, with his Tall Wood…But perhaps he is trying to push a square wood peg into a round hole; perhaps it’s the wrong planning model for wood, where the Euroloaf is probably more appropriate…I have been arguing for Euroloaf planning for years without calling it that. I called it the Goldilocks Density,

 …dense enough to support vibrant main streets with retail and services for local needs, but not too high that people can’t take the stairs in a pinch. Dense enough to support bike and transit infrastructure, but not so dense to need subways and huge underground parking garages. Dense enough to build a sense of community, but not so dense as to have everyone slip into anonymity.

That’s what the Euroloaves are. The trouble with them is that developers like to build tall and thin; better views, (especially in Michael Green’s Vancouver) more repetition of elements vertically and cheaper costs per square foot (because of things like one plumbing stack serving more units).

When those Toronto developments were proposed in the seventies, the codes limited wood to three floors and they were built out of concrete. But now, building codes are changing to allow for six storey wood buildings. This changes the economics changes making low rise construction more affordable. Suddenly Euroloaves make a lot more sense.

Instead of Tall Wood, Let’s Bring Back the Euroloaf (Treehugger)

Various other readings:

Deferred in the ‘Burbs (Mike the Mad Biologist)

Finally! Tiny home subdivisions and developments are becoming a reality. (Treehugger)

How Burglars Commit Crime and Take Advantage of Cities by Hacking Architecture (Vice) Hey, I know architecture and programming! Is this my next career move?

Welcome to the Future: Middle-Class Housing Projects (New Yorker)

What Architecture Is Doing to Your Brain (Citylab)

Geography is making America’s uneven economic recovery worse (Quartz) Not geography, but urban planning.

Urban population growth and demand for food could spark global unrest, study shows (Los Angeles Times)

And finally, if you haven’t been reading the excellent series from The Guardian on the history of cities, it’s basically the equivalent of an entire book on urbanism in the proud tradition of Lewis Mumford:

The story of cities (The Guardian) Here’s the Jane Jacobs entry: Story of cities #32: Jane Jacobs v Robert Moses, battle of New York’s urban titans More here: Celebrating Jane Jacobs’ Birthday ’round the net (Treehugger)

The Great Realignment

While the Republican candidates for the presidency in 2012 were still battling in the primaries, Mr Obama singled out front-runner (and eventual nominee) Mitt Romney to compare educations. Two degrees from Harvard instead of one? “Snob” Mr Obama joked.
http://www.bbc.com/news/world-us-canada-36172823

It’s looking more and more like a Trump-Clinton race. What I can’t get over is the fact that of the two parties’ candidates, the one most hostile to the Neoliberal paradigm, and most well-positioned as an outsider candidate threatening the status quo, will be the Republican candidate.Wow.

The populist candidate will be the Republican rather than the Democrat.

Think about how extraordinary that is. The Republicans have historically self-identified as “conservative” and been viewed through the twentieth century as the party of sober, responsible upper-class managerial elites dedicated to holding back the radical leftist tide which would lead to what they perceived as “mob rule.” The Democrats, in contrast, were seen as the party of the working man, the little guy, defending unions and fighting against the powerful insiders for working-class benefits like better pay, better working conditions, and social programs to combat poverty and promote equality. Republicans were the responsible middle-managers, businessmen and CEO’s; the Democrats were the wild-eyed proletarian radicals fighting oppression, sticking flowers in gun barrels and protesting against the “man.” Republicans were white-collar accountants who wanted balanced budgets and leave-it-alone capitalism; Democrats were blue-collar populists who wanted the government to take on injustice.

At least, that’s how it used to be. In fact, many people still think it is that way. Either that, or they spin the narrative that both parties have become “equally extreme” toward divergent ends of an arbitrary political spectrum of opinion (as defined by the opinion-makers themselves).

The Republicans will be fielding the outsider candidate opposed to free trade, globalism, militarism, and loose immigration policies, while the Democrats will be fielding a soundly Neoliberal candidate in favor of all those things, surrounded by Neocon foreign policy advisors, and whose major appeal is feminist identity politics and “experience.”

How did this happen?

It’s a major historical realignment, the third of three that have happened over the postwar period. Hence it’s a very big deal.

In a world of Trumpism and Clintonism, Democrats would become the party of globalist-minded elites, both economic and cultural, while Republicans would become the party of the working class. Democrats would win backing from those who support expanded trade and immigration, while Republicans would win the support of those who prefer less of both. Erstwhile neocons would go over to Democrats (as they are already promising to do), while doves and isolationists would stick with Republicans. Democrats would remain culturally liberal, while Republicans would remain culturally conservative.

The combination of super-rich Democrats and poor Democrats would exacerbate internal party tensions, but the party would probably resort to forms of appeasement that are already in use. To their rich constituents, Democrats offer more trade, more immigration, and general globalism. To their non-rich constituents, they offer the promise of social justice, which critics might call identity politics. That’s one reason why Democrats have devoted so much attention to issues such as transgender rights, sexual assault on campus, racial disparities in criminal justice, and immigration reform. The causes may be worthy—and they attract sincere advocates—but politically they’re also useful. They don’t bother rich people.

Why Democrats are Becoming the Party of the 1 Percent (Vanity Fair)

The first of these realignments I detailed over a recent series of posts. As African-Americans found their sharecropping jobs automated out of existence across the Deep South, they uprooted themselves and migrated en masse to the Industrial cities of the Atlantic Seaboard, Ohio Valley, Great Lakes, and Southern California. Arriving virtually penniless, they sought work in America’s booming industrial economy during the “all hands on deck” phase of postwar capitalism. As the factory jobs were first suburbanized, then automated and offshored out of existence over the succeeding thirty years, this population became a perennial urban underclass, increasingly reliant on government welfare checks and food stamps to survive as work dried up and vanished (and totally ignored by the mainstream media and academics, as I argued in those posts).

This trend coincided with the construction of the Interstate Highway System and the rise of the automobile. Public transportation was de-funded to keep blacks trapped in urban ghettos, while whites got in their cars and fled to white separatist enclaves in the cornfields and marshlands surrounding the cities, forming a parallel society where jobs were still abundant and incomes were still rising. At the same time, as America deindustrialized and air conditioning became standard, many major corporations relocated to the low-tax and low-regulation, non-unionized states of the South and Sunbelt, causing a major population shift away from the older, industrial regions of the country. The migration from the Rust Belt to the Sun Belt caused shrinking populations and declining fortunes in the older, industrial areas of the North and East where most blacks now lived, further exacerbating white/black racial tensions.The political union of fleeing suburban whites with their socially-conservative backwoods rural cousins was animated primarily by a shared hatred of urban blacks and, due to social engineering, the federal government. This became the guiding philosophy of the “new” Republican party. Republicans ran as outsiders spinning a tale of Americans’ own government being some sort of outside, alien force that they promised to “wreak havoc” upon and “make squeal” like a pig.

When they got there, of course, nothing of the sort happened. Legislatively what occurred was a rollback of taxes on the richest Americans and a shredding of the social safety net. Anti-tax fervor translated into big tax cuts for the rich and a lack of oversight for cooperate malfeasance and open season for tax avoidance. Avoiding “inference” meant letting corporations do as they wished to workers. Stripping workers of union protections caused rising profits and out-of-control inequality.

The Democrats, for their part, continued to press for issues of racial equality and justice, further alienating downscale whites. Democrats became the party of “big government” – a government dedicated to large-scale social engineering in the interests of pursuing equality for people most whites regarded as their natural inferiors. Government became a dirty word, and taxes were seen as stealing from industrious white labor to fund the indigence of an urban, black underclass. The Republicans became the “white party” and Democrats the “black party.”

In other words, Southern whites who wanted to keep Jim Crow intact had plenty of reasons to steadily desert the Democratic Party and join the GOP starting around World War II. By the early 60s they were primed and ready to begin a massive exodus from the increasingly black-friendly Democratic Party, and exit they did. Barry Goldwater, the 1964 GOP nominee, refused to support the Civil Rights Act that year, and influential conservative thinkers like William F. Buckley were decidedly unfriendly toward black equality. This made the Republican Party more and more appealing to Southern white racists, and by 1968 Richard Nixon decided to explicitly reach out to them with a campaign based on states’ rights and “law and order.” Over the next two decades, the Democratic Party became ever less tolerant of racist sentiment and the exodus continued. By 1994, when Georgia Republican Newt Gingrich won a landslide victory in the midterm elections, the transition of the white South from solidly Democratic to solidly Republican was basically complete.

Why Did Democrats Lose the White South? (Kevin Drum)

Here’s a good recounting of the history:

…The new middle-­class utopia did, of course, exclude most nonwhite Americans. Although average incomes for nonwhites increased at about the same rate as incomes for whites in the postwar years, in 1959 the black poverty rate was still 56 percent, and blacks on average earned 53 percent what whites did. What could be said for the midcentury middle class, though, is that it generally worked astonishingly well for those who were lucky enough to be part of it — particularly for blue-­collar workers. Probably no one in American history has achieved prosperity with the velocity of the men who grew up destitute in the Depression and, by their 30s, had factory jobs that paid (in 2016 dollars) upward of $50,000 a year.

The white- and blue-­collar middle classes each tended to vote Democratic, which made sense: The new middle class’s good fortune was the combined product of the New Deal, postwar Keynesian economic policy, the G.I. Bill, organized labor and government-­backed mortgages. But in retrospect, the Democrats’ hold on the white middle class was balanced precariously on the racial status quo — which, by the mid-­1960s, was breaking apart. George Wallace, the segregationist Democratic governor of Alabama who ran for president in 1964 in protest of Lyndon B. Johnson’s turn toward civil rights, performed well not just in the South but also in white blue-­collar enclaves in the few Northern states where he was on the primary ballot. When he ran again as an independent in 1968, the members of the United Auto Workers Union local at the General Motors plant in Flint, Mich., voted to endorse him.

By 1984, the extent of the damage to the Democrats’ postwar coalition had become clear. That spring, Ronald Reagan’s campaign aired its “Morning in America” ad, a Vaseline-­lensed montage of overwhelmingly white suburban prosperity. Walter Mondale — the son of a small-­town Minnesota minister whose politics radiated an austere, Scandinavian morality — spent the last days of his campaign unfurling increasingly dire pictures of urban and rural poverty and beseeching people to vote for an “America of fairness.” Speaking bitterly of Reagan’s commercial, he told a crowd at a church in Cleveland: “It’s all picket fences and puppy dogs. No one’s hurting. No one’s alone. No one’s hungry. No one’s unemployed. No one gets old. Everybody’s happy.” But Americans liked the picket fences and puppy dogs. Reagan swept every state in the country save Minnesota and the District of Columbia.

Not long afterward, Stanley Greenberg, a 40-­year-­old Yale political scientist who moonlighted as a political pollster, was contacted by a group of Democratic Party and union officials in Michigan. They asked him to help explain what had happened that November in Macomb County outside Detroit. In 1960, Macomb voted for John F. Kennedy by a larger margin than any suburban county in the country. In 1984, it voted for Reagan by a margin of 33 percentage points. “The sense was that if we could figure out what happened in Macomb County, Democrats would go a long way toward righting the ship,” Rick Wiener, the chairman of the Michigan Democratic Party at the time, told me recently.

In one sense, what had happened was obvious. The postwar suburbs in general had been a racial fortress, their homogeneity enforced by a web of government policies and unofficial restrictions making it difficult for nonwhites to own property in them, and few more so than Detroit’s. The white ex-­Democrats whom Greenberg’s team interviewed, he later wrote, “expressed a profound distaste for black Americans, a sentiment that pervaded almost everything they thought about government and politics. Blacks constituted the explanation for their vulnerability and for almost everything that had gone wrong in their lives; not being black was what constituted being middle class.”

Still, Greenberg noted, Macomb voters had not defected en masse from the Democratic Party until after years of worsening economic circumstances — and until they perceived the Democrats as not only having taken up the banner of the urban poor and nonwhites but also having abandoned the white middle class. “These voters wondered why they weren’t the central drama of the Democratic Party,” Greenberg wrote. Greenberg suggested that Democrats offer a kind of grand bargain to the white middle-­class voters he called “Reagan Democrats”: The Democrats would reinstate the middle class as the gravitational center of the party’s economic policy if those voters accepted an expanded definition of who was included in the middle class.

Among the Democrats who took Greenberg’s advice was Gov. Bill Clinton of Arkansas, who used the Macomb study as the playbook for his 1992 presidential campaign, which he built around the theme of “the forgotten middle class…”

Is the U.S. Ready for Post Middle-Class Politics? (New York Times)

The thing is, Bill Clinton pioneered the tactic of paying lip service to the “forgotten middle class,” while pursuing thoroughly Neoliberal policies that eviscerated said class.

“The era of big government is over” proclaimed Bill Clinton to cheering applause from both parties during his State of the Union address. Instead, we’d all become little J.P. Morgans, investing all the hard-earned cash from our tax cuts because “we know how to spend our own money better than the government.” Rather than guaranteed pensions and Social Security, we would save for our own retirement by investing our money in 401K’s and Roth IRA’s. Instead of the government subsidizing affordable quality education at state colleges, those budgets would be slashed and we’d instead save for our own education with tax-deferred 529 savings plans (too bad if your parents weren’t rich enough to do this), or head to the numerous for-profit colleges springing up everywhere. Instead of universal health care systems like Medicare/VA, we’d save up to fund our own medical procedures using HSA’s–health savings accounts (somehow knowing what our future medical expenses will be). Instead of reliable government services, we’d be offered “public-private partnerships,” with “efficient” private companies awarded exclusive government contracts. Monopolies were now seen as providing value and being the natural reward for efficiency.

With all the money saved from paring back “bloated” government, we’d be able to spend our tax windfalls purchasing only what we needed from the “free” market (except most of the tax cuts went to the wealthiest 10 percent, while the price of everything else went through the roof). In order to ensure that investors were free to get us the greatest returns possible on our wonderful new investment vehicles, Clinton happily abolished many of the “burdensome” regulations on Wall Street (with plenty of Republican help).

To lure back the aggrieved whites who had abandoned the party, Clinton promised much more of a meritocracy, in other words, no more government putting its finger on the scales to help undeserving blacks. No more social engineering – leave it to the Market. Clinton promised to “end welfare as we know it” – music to whites’ ears, for whom welfare had become the primary role of the Federal government and the ultimate source of the monster deficits they were told to fear by Republicans (despite never exceeding 2 percent of overall government expenditures). And “lock em up and throw away the key” became the watchword to deal with urban black poverty, as jails became the de-facto metal health centers and make-work programs for African-American ghettos. Incarceration rates skyrocketed as Democrats promised to “clean up” inner-cities and make them more business-friendly with things such as “three-strikes” laws.

But the biggest change may have been the full-throttled embrace of free trade deals, putting America’s working class in direct, head-to-head competition with the world’s poorest workers, including a Chinese workforce whose size dwarfed that of the entire United States population and who were often less than one generation removed from a pig farm, along with another equally large mass of Indian workers, in this case often well-educated and English-speaking. NAFTA cut twice – sending factories over the border into Mexico to become maquiladoras, and sending millions of economic refugees fleeing the beanfields north to look for unskilled work pitting them directly against downscale whites and blacks. Unions were portrayed as relics of a bygone age – when any job can be sent overseas with a few mouse clicks, it didn’t pay to coddle unions anymore, anyway. The real money was not in workers, but startups; not in unions, but in Wall Street and financial deals. American workers would just have to get ever-more education and get “worker retraining” in order to compete for the “jobs of the future,” or else join the low-paying Wal-Mart economy. It turned out however, that the jobs of the future didn’t exist, except for the children of the already wealthy Ivy-league educated upper 20 percent.

As I described earlier, the previously prosperous suburban and rural whites, who thought they could escape the fate of the black underclass who had been decimated by automation, had a rather rude awakening in the period of 1992-2008. They were hit by NAFTA and other trade deals, China joining the WTO, and the financialization and asset stripping of the productive economy by Wall Street thanks to deregulation. Yet, even as they continued to vote Republican because of racial solidarity and issues like gun control and fetus fetishism, they found themselves getting poorer and poorer and poorer, and more and more in debt. The religious fundamentalists who voted Republican found that a lot of lip service was paid to being a “Christian nation,” but nothing really changed legislatively except maybe the occasional plaque with the Ten Commandments carved on it and the occasional prayer breakfast. Although party leaders felt they could safely rely on hot-button social issues and religion to make the increasingly impoverished white lumpenproletariat support issues like tax cuts for the wealthy and economic deregulation forever, it turned out that the party’s new base consisted of many radical “true believers” who in turn changed the nature of the party to which they now pledged allegiance. The Party increasingly resembled not the original East-Coast managerial elites, but the radically anticommunist John Birch Society and the nationalistic European ultra-right parties. The break had started.

As working-class whites abandoned the Democratic Party due to white racial grievance. The Democratic party in turn abandoned them. Affluent, socially-liberal, educated whites who had access to plenty of social and financial capital, and who didn’t have to compete with blacks or Mexicans for jobs, increasingly became mortified by the Republican party’s pandering to the ignorance and racism of the lower-classes: the coded dog-whistles, the crudeness of language, the intolerant religious fundamentalism, the know-nothingism, the hostility to science such as climate change and Darwinian evolution, the hatred of “intellectuals,” the authoritarianism, the militarism, the simplistic flag-waving jingoism. In reality, this was simply the Republican party reflecting who the members of the party now were – the vast intercoastal peasantry just a few generations removed from driving a tractor for a living whose parents had toiled away in the factories and provided the cannon fodder for Pax Americana. Their racism, xenophobia, chauvinism, ignorance, aggressive militarism, and bellicose religiosity now shaped and animated the party, to the abhorrence of the “cultured” WASP elites and intellectuals who had heretofore made up the party’s high commissars and apparatchiks. The “adults” had seemingly lost control. Where could they go?

Well, increasingly they went to the Democratic party, that’s where. And, as one would expect, they changed the character of that organization as well.

The Democrats increasingly became the party of the” cognitive elite,” the educated bicoastal elites who formed the nation’s white-collar corporate technocrats, scientists and middle managers, as opposed to the “big mule” used-car salesmen of the Heartland with their oversized belt-buckes, bolo ties, church potlucks and NASCAR rallies. These were the people who were the beneficiaries of cheap iPhones from China and cheap nannies from Honduras, but didn’t have to worry about a Chinese or Mexican worker taking their job, since they probably had gotten it through social connections anyway. These were people for whom there was never even a question of getting a master’s degree, only in what field. These were the people for whom their college choices weren’t whether to go, or how they were going to pay for it, but Harvard, Yale, Princeton or Stanford. These people  almost never set foot outside of a cosmopolitan urban area, college town or bedroom community. Their lives are so far removed from those of most Americans as to be beyond comprehension; to them it really IS flyover country. Such people are committed to the idea a society of unremitting competition where the cream naturally rise to the top. They are obsessed with the idea of meritocracy, and see themselves as the natural winners based on their superior intellects and enlightened, cosmopolitan view of the world.

This caused the transformation of the Democratic Party into one increasingly aligned with the Davos crowd, or more accurately, with the twenty percent of affluent corporate technocrats, assorted intellectuals and celebrities, and “creative class” folks with large amounts of dynastic wealth and social and political capital whose jobs were not in the line of fire from immediate offshoring or automation, both urban and suburban:

In the 1980s, voters in the top ranks of the income ladder lined up in favor of Republican presidential candidates by 2-1. In 1988, for example, George H.W. Bush crushed Michael Dukakis among voters making $100,000 or more by an impressive 34 points, 67-33.

Move forward to 2008 and 2012. In 2008, voters from families making $100,000 to $200,000 split their votes 51-48 in favor of John McCain, while those making in excess of $200,000 cast a slight 52-46 majority for Barack Obama.

In other words, Democrats are now competitive among the top 20 percent. This has changed the economic makeup of the Democratic Party and is certain to intensify tensions between the traditional downscale wing and the emergent upscale wing.

The “truly advantaged” wing of the Democratic Party — a phrase coined in this newspaper by Robert Sampson, a sociologist at Harvard — has provided the Democratic Party with crucial margins of victory where its candidates have prevailed. These upscale Democrats have helped fill the gap left by the departure of white working class voters to the Republican Party.

At the same time, the priorities of the truly advantaged wing — voters with annual incomes in the top quintile, who now make up an estimated 26 percent of the Democratic general election vote — are focused on social and environmental issues: the protection and advancement of women’s rights, reproductive rights, gay and transgender rights and climate change, and less on redistributive economic issues.

The tension within the current Democratic coalition is exemplified in, of all places, a 2012 poll of students and faculty at Phillips Exeter Academy in New Hampshire, a prestigious private boarding school founded in 1781. As Democrats have entered the ranks of the top quintile, their children have effectively realigned the student bodies of prep schools in New England and other northeastern states.

The Exeter survey found decisive majority support in the student body for Obama over Mitt Romney, but the more interesting finding was that among Exeter students old enough to vote, nine out of 10 identified themselves as liberal on social issues.

In the case of economic policy, however, these students were split, 30 percent conservative, 33 percent liberal and the rest moderate or unwilling to say.

“Morally, I am a Democrat,” one of the participants commented, “but my wallet says I am a Republican.”

A Democrat whose wallet tells him he is a Republican is unlikely to be a strong ally of less well-off Democrats in pressing for tax hikes on the rich, increased spending on the safety net or a much higher minimum wage.

How the Other Fifth Lives (New York Times)

“Morally, I am a Democrat, but my wallet says I am a Republican.” “The [social] causes may be worthy, but politically they’re also useful; they don’t bother rich people…” And therein you have the change.

Identity politics took the place of actually helping America’s burgeoning poor, because that might inconvenience the salary class who were the beneficiaries of the rising stock market prices, tax-deferred investment vehicles, and globalization. Increasingly, their needs were reflected in the Democratic party’s legislative agenda. If the Republicans were the party of socially-conservative, religious whites, the Democrats would be the party them and of various excluded minorities–racial minorities, gays, transgendered, feminists, etc. The social-justice agenda took the place of economic populism.

We often hear about the political muscle of the ultrarich. Billionaires like the libertarians Charles and David Koch and Tom Steyer, the California environmentalist who’s been waging a one-man jihad against the Keystone XL pipeline, have become bogeymen for the left and right respectively. The influence of these machers is considerable, no doubt. Yet the upper middle class collectively wields far more influence. These are households with enough money to make modest political contributions, enough time to email their elected officials and to sign petitions, and enough influence to sway their neighbors. Upper-middle-class Americans vote at substantially higher rates than those less well-off, and though their turnout levels aren’t quite as high as those even richer than they are, there are far more upper-middle-class people than there are rich people. One can easily turn the Kochs or the Steyers of the world into a big fat political target. It’s harder to do the same to the lawyers, doctors, and management consultants who populate the tonier precincts of our cities and suburbs.

Another thing that separates the upper middle class from the truly wealthy is that even though they’re comfortable, they’re less able to take the threat of tax increases or benefit cuts in stride. Take away the mortgage interest deduction from a Koch brother and he’ll barely notice. Take it away from a two-earner couple living in an expensive suburb and you’ll have a fight on your hands. So the upper middle class often uses its political muscle to foil the fondest wishes of egalitarian liberals. This week offered a particularly vivid reminder of how that works. In the windup to his State of the Union address, Barack Obama released a proposal to curb the tax benefits associated with 529 college savings plans, which primarily benefit upper-middle-class families, to help finance the expansion of a separate tax credit that would primarily benefit lower-middle- and middle-middle-class families. Only 3 percent of households actually make use of these accounts, and 70 percent of the tax benefits go to households earning more than $200,000, so you can see why Obama might have thought no one would get too worked up about the proposal. If anything, he might have thought, and hoped, that his critics would get more exercised about his call for big capital gains tax increases, which would have allowed him to play the part of Robin Hood—a role Obama loves to play.

That’s not quite how things turned out. From the get-go, the 529 plan, like the capital gains tax-hike plan, was totally politically unrealistic, as Republicans in Congress were never going to sign on. But within days of the State of the Union, the Obama administration was forced to reverse course and abandon its plan to make 529 plans less generous. House Minority Leader Nancy Pelosi, who represents San Francisco, and House Budget Committee ranking Democrat Chris Van Hollen, who represents the wealthy Maryland suburbs of Washington, D.C., were the key drivers of the decision, according to a report by Rachael Bade and Allie Grasgreen in Politico. My guess is that both Pelosi and Van Hollen saw firsthand the fury of upper-middle-income voters who sensed that Obama, normally a paragon of upper-middle-class virtues, was daring to mess with one of their precious tax breaks. Paul Waldman, writing for the Washington Post, had it right when he observed that “the 529 proposal was targeted at what may be the single most dangerous constituency to anger: the upper middle class.”

The Upper Middle Class Is Ruining America (Slate)

And in turn, the party lost its commitment to the wage class, and instead decided that “nothing could be done” about globalism; there were just natural winners and losers, and that’s that. They felt bad about losers (“I feel your pain…”), but, “nothing could be done.” Globalism was just a force of nature, like an earthquake or drought. Instead of dealing with economic inequality, Democrats pushed an agenda of social equality which was just about making sure that minorities has just as much of a shot at getting into the upper-class cognitive elite as anyone else, and that insensitivity was banished from the college campuses that the rural white working classes could no longer afford to send their kinds to.

As [Thomas] Frank notes, today some people are living much better than others — and many of those people are not Republicans. Frank delights in skewering the sacred cows of coastal liberalism, including private universities, bike paths, microfinance, the Clinton Foundation, “well-meaning billionaires” and any public policy offering “innovation” or “education” as a solution to inequality. He spends almost an entire chapter mocking the true-blue city of Boston, with its “lab-coat and starched-shirt” economy and its “well-graduated” population of overconfident collegians.

Echoing the historian Lily Geismer, Frank argues that the Democratic Party — once “the Party of the People” — now caters to the interests of a “professional-managerial class” consisting of lawyers, doctors, professors, scientists, programmers, even investment bankers. These affluent city dwellers and suburbanites believe firmly in meritocracy and individual opportunity, but shun the kind of social policies that once gave a real leg up to the working class. In the book, Frank points to the Democrats’ neglect of organized labor and support for Nafta as examples of this sensibility, in which “you get what you deserve, and what you deserve is defined by how you did in school.” In more recent columns, he has linked this neglect to the rise of a figure like Sanders, who says forthrightly what the party leadership might prefer to obscure: Current approaches aren’t working — and unless something dramatic happens, Americans are heading for a society in which a tiny elite controls most of the wealth, ­resources and decision-making power.

The problem, in Frank’s view, is not simply that mainstream Democrats have failed to address growing inequality. Instead, he suggests something more sinister: Today’s leading Democrats actually don’t want to reduce inequality because they believe that inequality is the normal and righteous order of things. As proof, he points to the famously impolitic Larry Summers, whose background as a former president of Harvard, former Treasury secretary and former chief economist of the World Bank embodies all that Frank abhors about modern Democrats. “One of the reasons that inequality has probably gone up in our society is that people are being treated closer to the way that they’re supposed to be treated,” Summers commented early in the Obama administration.

“Remember, as you let that last sentence slide slowly down your throat, that this was a Democrat saying this,” Frank writes. From this mind-set stems everything that the Democrats have done to betray the masses, from Bill Clinton’s crime bill and welfare reform policies to Obama’s failure to rein in Wall Street, according to Frank. No surprise, under the circumstances, that the working class might look elsewhere for satisfying political options.

‘Listen, Liberal’ and ‘The Limousine Liberal’ (New York Times)

This elite is separated by geography as well as class. While previous suburbanization allowed whites to flee from blacks, the new gated exurbs are too exclusive even for white members of the working class, who instead find themselves trapped in “slumburbia” and commuting an hour and a half to work. In the Nineties, elites decided they liked walkable cities and urban amenities since Clinton’s tough crime laws had cleaned up the streets and moved back to the trendy abandoned inner cities. Gentrification soon priced out the working class. Some coastal cities became refuges for a global wealth class who used houses as safe asset storage, driving housing prices to ludicrous heights. It was all part of globalism, about which both parties agreed, as did the economists and media pundits along the Acela corridor and CalTrans route, “nothing could be done:”

For one thing, pundits and politician are unlikely to work in the regions where most Americans live. Cities where prestige industries like media, policy, and tech are centered—New York, Washington DC, San Francisco—have witnessed economic growth along with a skyrocketing cost of living. In fact, the vast majority of American wealth is clustered in a corridor of Northeastern cities stretching from Boston to Washington DC. The rest of the country, particularly most areas of the South and the Midwest, has seen massive job loss, while cost of living remains more affordable. A few southern cities, including Atlanta, Nashville, and Dallas, have boasted post-recession job growth. But even these tend to be are surrounded by rural regions mired in poverty.

In effect, we have two American economies. One is made up of expensive coastal zip codes where the pundits proclaiming “recovery” are surrounded by prosperity. The other is composed of heartland regions where ordinary Americans struggle without jobs. Over 50 million Americans live in what the Economic Innovation Group calls “distressed communities”—zip codes where over 55% of the population is unemployed. Of those distressed communities, over half are in the South, defined generously by the census as the region stretching from Maryland and Delaware to Oklahoma and Texas. The rest tend to live in Midwest rust belt cities that have long suffered from economic decline, like Gary, Indiana and Cleveland, Ohio. It is nearly impossible for Americans of the latter group to move to the cities of the former group—or to work in the industries that shape public perception of how the economy is going.

Geography is Making America’s Uneven Economic Recovery Worse (Quartz)

This affluent twenty percent is increasingly Democratic, and increasingly separated from the rest of the country. For these people–the “salary class,” much of whose wealth comes from investments and who are fully equipped to take advantage of the investment vehicles I named above–the economy truly is doing well. And for those for whom it’s not, the problems is seen as just not getting educated enough, or making poor lifestyle choices:

Too busy attending TED talks and ­vacationing in Martha’s Vineyard, [Thomas] Frank argues, the Democratic elite has abandoned the party’s traditional commitments to the working class. In the process, they have helped to create the political despair and anger at the heart of today’s right-wing insurgencies. They may also have sown the seeds of their own demise. Frank’s recent columns argue that the Bernie Sanders campaign offers not merely a challenge to Hillary Clinton, but a last-ditch chance to save the corrupted soul of the Democratic Party.

[Historian Steve] Fraser agrees with Frank that the Democratic Party can no longer reasonably claim to be the party of the working class or the “little man.” Instead, he argues, the Republican and Democratic parties now represent two different elite constituencies, each with its own culture and interests and modes of thought. Fraser describes today’s Republicans as the party of “family capitalism,” encompassing everyone from the mom-and-pop business owner on up to “entrepreneurial maestros” such as the Koch brothers, Linda McMahon and Donald Trump. The Democrats, by contrast, represent the managerial world spawned by modernity, including the big universities and government bureaucracies as well as “techno frontiersmen” like Mark Zuckerberg and Bill Gates. These are two different ways of relating to the world — one cosmopolitan and interconnected, the other patriarchal and hierarchical. Neither one, however, offers much to working-class voters.

‘Listen, Liberal’ and ‘The Limousine Liberal’ (New York Times)

The poor are increasingly powerless, and lack any influence at all. They form a constituency that’s angry and hurting, and ready to try anything to make the pain go away. Hence the rise of Trump and Sanders:

The lack of leverage of those on the bottom rungs can be seen in a recent Pew survey in which dealing with the problems of the poor and needy ranked 10th on a list of public priorities, well behind terrorism, education, Social Security and the deficit. This 10th place ranking is likely to drop further as the gap widens between the bottom and the top fifth of voters in the country.

It turns out that the United States has a double-edged problem — the parallel isolation of the top and bottom fifths of its population. For the top, the separation from the middle and lower classes means less understanding and sympathy for the majority of the electorate, combined with the comfort of living in a cocoon.

For those at the bottom, especially the families who are concentrated in extremely high poverty neighborhoods, isolation means bad schools, high crime, high unemployment and high government dependency.

This split is reflecting the realignment of the parties. As the Democratic party increasingly reflects affluent bicoastal elites, it further alienates working class Heartland Republicans whose jobs are automated and offshored away, and find themselves in low-paying service work. The Democrats are now alienated both culturally, and in terms of economic interests. Meanwhile, the Republicans have transformed that party into what I have previously described as a “right-wing authoritarian movement.”  And one thing all such movements need is a leader. Hence the rise of Trump.

The animating, guiding force of the post-civil rights era Republican party was hatred of blacks, not love of trickle-down economics or offhshoring. That just came along for the ride. Plutocrats cynically used this hatred to get the working class to vote against their own interests, playing them for rubes. And who could blame them? As Thomas Frank opined, hot-button social issues conveniently distracted the peasantry from being gutted like a fish. But the working classes were not as stupid as they appeared. They clearly saw their communities being decimated by globalism. They clearly saw all of the unskilled jobs being taken by immigrants. They clearly saw their paychecks stagnating and their jobs disappearing, while everything was getting more expensive. And they certainly saw the social fallout from those trends in their own lives. Trump was just the first person to harness white working-class rage and resentment to an economic populist agenda.

The revolt of the Republican masses bears out the thesis of Thomas Frank’s 2004 book What’s the Matter with Kansas? Non-college–educated whites have been suffering from an epidemic of false consciousness that took hold during the Reagan Era. While their self-interest aligned with Democratic policies designed to help insulate the vulnerable from economic transition, Republicans managed to persuade working-class voters to support the very policies that were doing them harm. They accomplished this by diverting the attention of less-educated whites with coded racial appeals, emphasizing cultural issues like abortion and gay rights, and stirring resentment against liberal “elites.”

Working-class Republicans are waking up to the reality that their new party doesn’t represent them any more than the Democrats did. On issue after issue, Trump’s supporters are at odds with GOP dogma. They don’t support free trade and globalization. They don’t favor tax cuts for the wealthy, or bailouts for banks, or financial deregulation, or the rollback of consumer protections. They’re against privatizing Social Security, paring back Medicare, and eliminating other government programs that aid the middle class. While they’ve been encouraged to regard Barack Obama as an extraterrestrial, they’re not demanding the repeal of the Affordable Care Act. Though nationalistic, their families are the ones that paid the human cost for the neoconservative fantasy of bringing democracy to Iraq.

How the GOP is Losing it’s Grip on Working Class Republicans (Slate)

This ideological disintegration has been years in the making. I believe one fundamental cause is that after winning the allegiance of millions of “Reagan Democrats” — mostly white, blue-collar, and Southern or rural — the party stubbornly declined to take their economic interests into account.

Traditional Republican orthodoxy calls for small government, low taxation, tight money, deregulation, free trade and cost-saving reforms to entitlement programs. If I were independently wealthy, that might seem an agreeable set of policies. Ditto if I were one of the “small-business owners” to whom GOP candidates sing hymns of praise.

But most working-class Republicans are, get ready for it, working-class. They are more Sam’s Club than country club. They don’t own the business, they earn wages or a salary; and trickle-down economics has not been kind to them. Their incomes have been stagnant for a good 20 years, they have seen manufacturing jobs move overseas and job security vanish, they have less in retirement savings and home equity than they had hoped, and they see their young-adult children struggling to get a start in life.

This segment includes military families that have borne the awful weight of more than a decade of war. Repeated deployments to Afghanistan and Iraq have caused tremendous strain; “wounded warriors” have returned bearing grievous physical and psychological scars.

What adjustments did the GOP establishment make for these voters? None. Most of the governors, senators and former somebodies who ran for the presidential nomination, and failed, offered nothing but flag-waving pep talks and demagoguery on social issues — along with promises to stick with trickle-down orthodoxy and intervene in trouble spots around the world. Only Rick Santorum and Mike Huckabee, who were dismissed as yesterday’s news, seemed to realize that working-class Republicans even existed.

Did Trump cunningly craft a message for these orphaned voters, or did he stumble across his populist appeal by way of beginner’s luck? At this point, it hardly matters. He offers policies, however far-fetched, that address their wants and needs. He rails against the free-trade pacts that he says robbed the nation of manufacturing jobs. He promises not to cut entitlements and often hints at boldly expanding them. He pledges an “America first” foreign policy that withdraws from entanglements and eschews interventions.

Trump also plays on these voters’ insecurities, resentments and fears. He makes Hispanic immigrants and Muslims his scapegoats. He goes beyond attacking President Obama’s policies to also impugn his identity — in effect, portraying the president as the incarnation of demographic change that many white Americans fear. And Trump delegitimizes establishment Republicans by painting them as cogs in a system that is rigged to favor the rich and powerful. (In this, he’s basically right.)

Trump understood the voters the GOP forgot (Washington Post)

As for the Democratic spit, the Democrats had a change to nominate their own alternative candidate in Bernie Sanders. Bernie Sanders, a populist outsider who would have been a genuine threat to the status quo, was narrowly defeated by the most ultimate of insiders, Hillary Clinton. The good news is that a candidate who on paper looked unelectable – a 72-year-old self-identified socialist born in Brooklyn and serving a tiny east-coast state, has challenged Clinton every step of the way, filling auditoriums to capacity from coast to coast and winning a large number of states outright. Sanders’ successful campaign has presented the most potent challenge to the rightward/Neoliberal drift of the party, and the first serious attempt to realign it to its New Deal roots and reclaim its abandoned working-class populism on economic issues.

Nevertheless, it looks like Sanders will not pass the post, while Trump will. Why? Well, I suspect in part it’s because the obvious frontrunner status of Clinton scared a lot of Democratic challengers off, so it became just a two-person head-to-head race. For the GOP, by contrast, with the sitting vice-president bowing out and no logical successor to Obama, you had the GOP “clown car,” with all sorts of ridiculous candidates splitting the votes multiple ways. Why did Trump emerge victorious? Here’s Paul Krugman:

…why did Mrs. Clinton … go the distance, while the G.O.P. establishment went down to humiliating defeat? … [B]asically it comes down to fundamental differences between the parties and how they serve their supporters.

Both parties make promises to their bases. But while the Democratic establishment more or less tries to make good on those promises, the Republican establishment has essentially been playing bait-and-switch for decades. And voters finally rebelled against the con.

First, about the Democrats: Their party defines itself as the protector of the poor and the middle class, and especially of nonwhite voters. Does it fall short of fulfilling this mission much of the time? Are its leaders sometimes too close to big-money donors? Of course. Still, if you look at the record of the Obama years, you see real action on behalf of the party’s goals…

Things are very different among Republicans. Their party has historically won elections by appealing to racial enmity and cultural anxiety, but its actual policy agenda is dedicated to serving the interests of the 1 percent, above all through tax cuts for the rich — which even Republican voters don’t support, while they truly loathe elite ideas like privatizing Social Security and Medicare.

What Donald Trump has been doing is telling the base that it can order à la carte. He has, in effect, been telling aggrieved white men that they can feed their anger without being forced to swallow supply-side economics, too…

http://economistsview.typepad.com/economistsview/2016/04/paul-krugman-wrath-of-the-conned.html

The problem is, Mr. Krugman is the quintessential “new” Democrat: an educated east-coast liberal former Princeton professor, former economic technocrat in the Reagan administration, and now an opinion maker at the pro-Democratic mouthpiece The New York Times. Somehow, I doubt his opinions are much aligned with unemployed workers in small-town North Dakota. Krugman famously defended free trade as the factories were being offshored (as did the Times in general: the primary platform for Thomas “The World is Flat” Friedman). He tirelessly defends the ACA–a giveaway to health care industry designed to fend off single-payer. And he has authored a number of sloppy hatchet-jobs against Bernie Sanders from his post at the Times all during this election season, dismissing Sanders supporters as an unthinking “cult,” portraying his populist economic proposals as “unrealistic,” and repeatedly calling for him to quit the race.

People like Krugman are the new face of the party. Incrementalism. Make deals. Aim low. It’s what Jacobin Magazine calls “fortress liberalism” – protect what remains, don’t think big. In that sense, the Democrats have now become the true “conservative” party.

The Bernie Sanders model of change has all the subtlety of an index finger raised high above a debate podium. Lay out a bold, unapologetic vision of reform that speaks directly to people’s basic needs. Connect that vision to existing popular struggles, while mobilizing a broad and passionate coalition to support it (#NotMeUs). Ride this wave of democratic energy to overwhelm right-wing opposition and enact major structural reforms.

The Hillary Clinton model of change, on the other hand, begins not with policy or people but with a politician. Choose an experienced, practical leader who explicitly rejects unrealistic goals. Rally around that leader’s personal qualifications, while defending past achievements and stressing the value of party loyalty (#ImWithHer). Draw on the leader’s expertise to grind away at Congress and accumulate incremental victories that add up to significant reform.

For most of the Left, Clinton-style “incrementalism” is just a code word to disguise what is effectively a right-wing retrenchment. Nevertheless many self-identified progressives have backed Clinton’s “theory of politics” as the most realistic path to achieve Sanders’s objectives.

“As a temperamentally moderate figure,” the liberal Boston Globe argued, Clinton is best positioned to “take concrete steps to get relevant legislation enacted.”

Other editorial boards, corporate legal bloggers, and billionaires in the back seats of limousines have likewise endorsed the Clinton model as the only serious form of politics in a polarized republic. But they struggle to identify a major progressive victory that Clinton-style incrementalism has won in the past half-century.

Clinton’s eight-year term in the Senate produced bills to regulate video game violence and flag burning, both of which died in committee.

Bill Clinton’s eight-year term in the White House gave us an expanded Earned Income Tax Credit and a small children’s health insurance program — but also NAFTA, the 1994 crime bill, welfare reform, the Defense of Marriage Act, financial deregulation, and a grand bargain to gut Social Security that was only thwarted by a timely sex scandal.

The pragmatic, piecemeal, and irreproachably moderate achievements of Jimmy Carter are still more dispiriting. Even judged by the charitable standards of American liberalism, the forty-year balance sheet of “incremental progress” is decidedly negative.

Beltway pundits scoff at Sanders’s model of change, meanwhile, as if the Vermont senator thinks he can defeat a Republican Congress by getting a few hundred protestors to yell slogans outside Capitol Hill.

They naturally fail to mention that as a matter of historical record, the Sanders model happened to produce Social Security, the National Labor Relations Act, the Voting Rights Act, Medicare, and Medicaid.

Against Fortress Liberalism (Jacobin)

So you had two Frankenstein coalitions just ready to fracture. The Republicans were the party of robber-baron plutocrats allied with trailer-park retirees in Medicare scooters and white supremacists and other militant radicals of various stripes (Christian reconstructionists, sovereign citizens, oath keepers, militias, etc.). The Democrats united upwardly-mobile, college-educated, socially-liberal urban workers with African-Americans and other assorted minorities terrified by GOP racism. The Republicans scared off socially-liberal businessmen and intellectuals who fled to the Democrats, and the Democrats’ increasingly business-friendly policies led to the revolt of Sanders’ supporters–the working-class core of the party who had not fled to Republicans, but who wanted a more populist agenda that actually helped the working classes rather than just promote a vague concept of “social justice.” The contradictions of The Republican Party’s embrace of downscale flyover-county whites, and the Democratic party’s coddling of wealthy, educated east-coast elites is now completing the transformation begun years ago. All bets are off. Which party repents the working class and which the donor class is no longer clear-cut.

I’ve often described today’s political climate as the Democrats being the pre-Reagan Republican party, and the Republicans as the John Birch Society. It’s worth noting that one of the key differences between the GOP mainstream and the JBS was opposition to globalism, immigration, free trade deals. So Trumpism should not come as such a surprise.

…if Michael Lind is right, Trumpism and Clintonism are America’s future. Lind’s point, which he made last Sunday in The New York Times, is that Trumpism—friendly to entitlements, unfriendly to expanded trade and high immigration—will be the platform of the Republican Party in the years going forward. Clintonism—friendly both to business and to social and racial liberalism—will cobble together numerous interest groups and ditch the white working class. Which might be fair enough, but Lind didn’t mention rich people. Where will they go?

[…]

The Democratic Party has not been a total slouch, offering policies friendly to health-care executives, entertainment moguls, and tech titans. In fact, financial support for Democrats among the 1 percent of the 1 percent has risen dramatically, more than trebling since 1980. Traditionally, though, the Republican Party has been seen as the better friend to the wealthy, offering lower taxes, fewer business regulations, generous defense contracts, increased global trade, high immigration, and resistance to organized labor. It’s been the buddy of homebuilders, oil barons, defense contractors, and other influential business leaders.

Trumpism changes the equation. If homebuilders face workplace crackdowns on illegal hiring, their costs go up. If defense contractors see a reduced U.S. military presence in Asia and Europe, their income goes down. If companies that rely on outsourcing or on intellectual property rights see their business model upended by discontinued trade agreements, they face a crisis. Sure, many rich people hate Obamacare, but how big a deal is it compared to other things they want: more immigration, sustained and expanding trade, continued defense commitments? Clintonism, by comparison, starts to look much more appealing.

All good, say some Democrats. The more people that Trumpism scares away, the broader and more powerful the liberal-left coalition will be. But nobody offers their support without expecting something in return. It’s not dispassionate analysis that causes Chuck Schumer to waffle on the carried-interest tax loophole, Hillary Clinton to argue for raising the cap on H-1B visas, or Maria Cantwell to rally support for the Export-Import Bank. The more rich people that a party attracts, the more that the party must do to stay attractive.

The more that Democrats write off the white working class, which has been experiencing a drastic decline in living standards, the harder it is for them to call themselves a party of the little guy. The more that the rich can frame various business practices as blows to privilege or oppression—predatory lending as a way to expand minority home ownership, outsourcing as a way to uplift the world’s poor, etc.—the more they get a pass from Democrats on practices that hurt poorer Americans. Worst of all, the more that interest groups within the Democratic Party quarrel among themselves, the more they rely upon loathing of a common enemy, Republicans, in order to stay united…

Things get darker still, for, if the G.O.P. becomes ever whiter, failing to peel away working-class voters of other races, then partisan conflict could look more and more like racial conflict. That is the nightmare. Our politics are bad enough when voters are mobilized mainly by culture-war issues, such as abortion, because compromise is often impossible. But when voters are mobilized by issues of identity, something most people can’t change, then nothing works. It’s just war.

Why Democrats are Becoming the Party of the 1 Percent (Vanity Fair)

And another great realignment is on:

The Bernie Sanders voters who would choose Trump over Clinton (Guardian)

Now That Trump Is The Nominee, These Republicans Say They’re Voting For Hillary (Think Progress)

Clinton’s big money supporters are trying to kill single payer in Colorado. Her possible VP pick has “a more nuanced position on abortion than many liberals.” John McCain’s right-hand man declared, literally, “I’m with her.” And the Jewish socialist from Brooklyn just won the Indiana primary.

All the rest is commentary.

What did we learn today? (Corey Robin)