Sham Democracy

April 12, 2013 NYTIMES

When Shareholder Democracy Is Sham Democracy

By JAMES B. STEWART

Two weeks ago, I argued that it was hard to imagine a more compelling case for ousting directors than the one posed by Hewlett-Packard.

It turns out there are many stronger cases — 41.

That’s the number of publicly traded companies where directors actually lost their elections last year, meaning that more than 50 percent of the shareholders withheld their votes of approval. Yet despite these resounding votes of no confidence, they remained in their posts.

At least at H.P., all the directors got a majority of the votes cast, and even then, two resigned and a third gave up his post as chairman. But at Cablevision Systems, the New York cable and media company controlled by the Dolan family, three directors lost shareholder elections twice in the last three years — in 2010 and 2012 — and received only tepid support in 2011. Nonetheless, the three remain on the board.

“As fiduciaries, we can’t sit by and let the board make a mockery of our fundamental right to elect directors,” said New York City’s comptroller, John Liu, who oversees the city’s pension funds, which own more than 532,000 Cablevision shares. “Share owners need accountable directors who will ensure the company isn’t being run for the benefit of insiders at our expense.”

Mr. Liu sent the company a letter earlier this month urging it not to nominate the three again and threatening a proxy fight. “The fact that all three directors remain on the board suggests that one of the few rights” afforded shareholders is “illusory,” he wrote. Mr. Liu warned that he’d oppose their election and that “my office will also encourage other shareholders to join us.”

Mr. Liu didn’t get a response, but a Cablevision spokesman told me this week, without being specific, that Mr. Liu’s letter was “woefully misinformed, inaccurate and political.” In proxy materials released by Cablevision this week, all three directors — Thomas V. Reifenheiser, John R. Ryan and Vincent S. Tese — were renominated for new terms.

Even directors who resign after losing votes don’t necessarily leave. Two directors of Chesapeake Energy in Oklahoma, V. Burns Hargis, president of Oklahoma State University, and Richard K. Davidson, the former chief executive of Union Pacific, were opposed by more than 70 percent of the shareholders in 2012. Chesapeake requires directors receiving less than majority support to tender their resignations, which they did. The company said it would “review the resignations in due course.”

It later said that the board declined to accept Mr. Hargis’s resignation, a decision made with the 

“input” of the activist shareholder Carl Icahn and another large shareholder who had voted against Mr. Hargis. (Mr. Davidson left a month after the vote, but Mr. Hargis left only last month.)

At Iris International, a medical diagnostics company based in Chatsworth, Calif., shareholders rejected all nine directors in May 2011. In keeping with the company’s policy, they submitted their resignations. And then they voted not to accept them. The nine stayed on the board. (The company was acquired in late 2012 by the Danaher Corporation.)

A list of companies retaining directors who were rejected by shareholders in 2012 — so-called zombie directors — was compiled by the Council of Institutional Investors, which represents pension funds, endowments and other large investors. The list includes not just smaller, family-controlled companies, where disdain for shareholder views may be more ingrained, but also Loral Space and Communications, Mentor Graphics, Boston Beer Company and Vornado Realty Trust.

“It’s appalling,” Nell Minow, a co-founder of GMI Ratings, which rates companies based on risk to shareholders, including corporate governance issues, told me this week. “It’s the No. 1 issue in corporate governance.” She noted that the reason such a thing was possible was that many companies operate under a “plurality” voting system, in which directors run unopposed and just one vote is enough to be elected. And even companies that require a majority vote may decline to accept a director’s resignation.

That an electoral system unworthy of Soviet-era sham democracies is flourishing today in corporate America is largely thanks to the management- and director-friendly policies of Delaware, where more than half of United States companies are incorporated and where the corporate franchise tax contributes disproportionately to the state’s revenue. State law controls board governance, and Delaware has long tolerated plurality voting. The Delaware Supreme Court has also affirmed the power of boards to reject the resignations of directors who fail to gain a majority of votes.

“We’ve had lengthy correspondence suggesting they change this,” Amy Borrus, deputy director of the Council of Institutional Investors, told me. ”We’ve even provided the wording to make it easier. Nothing happens.”

Ms. Minow agreed. “Delaware is a race to the bottom,” she said. “There’s no benefit to doing anything friendly to shareholders.“ The only state, she said, that bars plurality voting is North Dakota — and it’s no coincidence that no major company is incorporated there.

A spokesman for the Delaware secretary of state’s office, which oversees the division of corporations, didn’t have any comment.

Defenders of plurality voting have typically argued that majority voting or elections that would be binding might be destabilizing or disrupt continuity. But “that’s simply to say that democracy is destabilizing,” Ms. Minow said. “Continuity is exactly what shareholders voting against directors do not want. That’s why they’re withholding their votes.”

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http://www.nytimes.com/2013/04/13/business/sham-shareholder-democracy.html?pagewanted=all&_r=0

First and foremost fee for service (FFS), the primary payment arrangement for doctors in the U.S., should be abolished.

Doctor Feelbad
 
By JM Hamilton (3-31-12)

“Of course I’m respectable, I’m old.  Politicians, ugly buildings, and whores all get respectable if they last long enough.”  - John Huston (aka Noah Cross) from the movie Chinatown

It would appear that Mr. Huston left doctors off the list of items that become more respectable with time.  After all, the practice of medicine must be the second oldest profession (think about that – but only for a second).  As my readers know this blog is fond of taking on both the sacred and the profane; and this week we lance that most sacred of boils, the medical profession. Aside from the almighty herself – there is perhaps no group of individuals or body of professionals, we hold in higher regard than doctors and the industries that support same.  Perhaps it is because Americans place such a high value on life, and in particular our own, that we have a special fondness – call it near pagan idolatry – for the men and women wearing white coats.

How else can we explain why we would allow this industry/profession to run with double digit cost increases, perennially?  There’s no other industry like it.  Medical inflation is destroying our Federal and State budgets, and my guess is probably the single biggest reason why corporations and business are reluctant to hire Americans.

And as much as JMH is a fan of President Obama and his administration, replete with it’s many successes, one of its two greatest failures was the Democratic Party’s complete waste of 111th Congress, with the passage of the Patient Care and Affordable Protection Act, otherwise known as the healthcare reform.

Why my disdain for this legislation?   After all before it was derisively known as “Obamacare,” it was called “Romneycare” and was originally thought up by a right-wing think tank, the Heritage Foundation.  No, the goal of healthcare reform was perfectly acceptable: universal care via the private sector coupled with REFORM (read: cost containment).  But the appalling outcome was the complete lack of reform.  That is to say, in order to get this dog passed the Democratic leadership had to “suck up” to nearly every medical special interest known to man – but primarily Big Pharma, major corporate hospitals chains, and of course, doctors.  Meanwhile, Rome burned, unemployment soared, and the banking industry (the architect of our destruction) grew bigger and more powerful.

Had the 111th passed true health care cost containment, the Democratic Party very well might have addressed the unemployment issue, simultaneously; because employers would not then be confronted with this run away inflationary train.

Next time you look at your ever shrinking paycheck with it’s every shrinking purchasing power, don’t blame your employer — blame ever escalating healthcare costs (and several other predatory monopolies and cartels I enjoy writing about).  That’s where your annual pay raise has gone: to pay for double-digit medical care increases.  As we know real U.S. wages have been stagnant since the 90’s.

What might true reform have looked like then, so that you might actually enjoy a future payroll increase going forward, that is if both political parties weren’t so slavishly devoted to special interests and had the guts to take on same?

First and foremost fee for service (FFS), the primary payment arrangement for doctors in the U.S., should be abolished.  Doctors should be placed on a salary – based upon what the market will afford, and incentivized based upon outcome, cost containment, and preventive care.  In exchange for going to a salary, and committing to providing care within the U.S., doctors might be made immune from medical malpractice litigation and some percentage of their medical education paid for; in exchange for foregoing medical malpractice insurance, professional lapses/problems might be reviewed by a board made up of professional peers, and patients.

By placing doctors on salary, and eliminating medical malpractice costs for same, America would take one large step forward in controlling double digit medical cost increases, since doctors would no longer be incentivized to order superfluous tests and exams.  And not to get nasty, but if doctors become like any other class of worker in America, we would expect their wages to “flat line.”  For as we learned in the last couple of years some captains of industry collude to contain payroll expense, prevent the bidding up of worker income, and eliminate employee poaching  (witness the Justice Department settlement with Silicon Valley).  Hey if nearly every other industry or business class in America colludes, directly or indirectly, to set the wages of their labor- why should doctors be exempt?

But controlling FFS and doctor wages is just the first step.  America is probably the only Western Democracy that does not negotiate the price of medicine and drugs with major pharmaceutical companies (otherwise known as Big Pharma).  As a consequence, American labor is uncompetitive, and the drug cartel makes obscene profits.  The world, in turn, rides our coattails and benefits from the subsidy America pays Big Pharma.  The Washington Post estimates the mark up maybe as high as 20%; and we have all read about contrived shortages of key medicines daily, which further hike profit margins.  Right out of the monopoly play book.  Big Pharma – with its seemingly never ending patented medicines – is just another monopoly preying upon ordinary Americans and the system; as such it presents an enormous economic drag (i.e. tax).

Profits in America, in turn, finance Big Pharms’ dividends, stock buy backs, mergers and acquisition, with only a small percentage of Big Pharma profits going to finance R&D.  As a result, America is going broke, and Big Pharma has grown larger, less efficient and more politically powerful.

America then has one of two solutions:  either present a bill to the other Western democracies to pay their fair share of Big Pharma’s mark up (not a likely scenario); or two, negotiate – annually – lower drug costs and margins, like every other country.  As this Cartel has shown less productivity in recent years (with a slow down in new medicines), and diseconomies of scale, strong consideration should also be given to breaking up these companies to make them more competitive and more attuned to the free market principles the executives of Big Pharma subscribe to.

Finally, it appears that an absurd and disproportionate amount of annual medical costs are spent prolonging terminal patients last few months of life…. this clearly needs to change.  That is, here’s your morphine drip, go home, our prayers are with you, and we’ll see you in heaven.  Sound cruel?  No, what’s cruel is spending criminal amounts of money to keep Uncle Benny alive for the last three months of his existence, when that money could be spent on preventive care, or even education for our youth.  Perish the thought.

Perhaps the one positive that came out of healthcare reform was data collection, and the mandate for electronic records, which could ultimately lead to Artificial Intelligence within the medical field.  How many times in the last five years, have you logged onto Web MD and diagnosed your own health problem in advance of your doctor visit?  And how often were you, or rather WebMD, found to be correct?  Digital medical records, and the accumulation and analysis of medical data, may eventually solve escalating medical costs, w/out reform.  The advent of digital medical records and computer diagnostics and diagnosis … may make doctors obsolete, if nothing else certainly general practitioners. 


Let’s hope that arrival of medical AI appears before Big Pharma and our white coated friends bankrupt our country and make U.S. employment untenable.

P.S.

Until that day arrives… I just want to go on record as stating that I love my doctor.  She’s a wonderful person.

As for politicians who sit in judgment on this law within the Supreme Court (as flawed as it maybe)… I can think of no greater reasons to re-elect our sitting President than to replace these conservative judges, as they retire or shuffle off their mortal coil.  Republican governor Rick Perry of Texas did have at least one great idea, while on the campaign trail this year and last…. and that is Americans should not be held hostage by the political beliefs of the judges on the bench in perpetuity.  As Noah Cross might have said, some of the older judges on the court have earned our respect, and like any good politician/”jurist,” we wish them well in retirement.

 Copyright JM Hamilton Publishing 2013

Chairman Bernanke and Trickle Down Monetary Policy

Chairman Bernanke & Trickle Down Monetary Policy

“It’s pretty clear that the stock market is the most important transmission mechanism of monetary policy right now,” said Peter Hooper, chief economist at Deutsche Bank AG in New York. 

Bloomberg (10-3-12), Bernanke Seeks Gain for Stocks in Push for Jobs: Economy

By J.M. Hamilton (10-14-12)

How bad is it when, within the last sixty days, nearly every central bank in the world has added monetary stimulus to the global economy, or intimated that they are about to pop the clutch on the printing presses once again?  Answer: Pretty bad.

We are into year four of this crisis, and the politicians have largely abdicated responsibility, and instead relied upon central bankers to lead the way.  As J.M.H. has written before, monetary policy is a crude instrument to conduct the affairs of state; and some would argue, myself included, that central banks have only aggravated the situation, with economic contagion spreading.  Those European governments that are acting to address fiscal policy and structural reform are doing so under duress, at the expense of those citizens who can least afford the hardship.  Moreover, these states are addressing these problems at the point of a financial gun; that is, the threat of having the next ECB or IMF subsidy/bailout withheld.  Even left of center governments, elected because the populace it tired of choking on bank mandated austerity, find that once they are in power – they still have to answer to the banks (granted many southern periphery nations are already under bank management).

Meanwhile the 99% suffer, and the one percent prosper.

Any reasonable leader would suggest that it is in Greece’s or Spain’s best interest to let the banks go under, and reboot their sovereign pre-euro currency.  Iceland defaulted, let their banks fail, and today they are economically as right as rain.  German politicians, opposed to bailing out their southern neighbors, are beginning to advocate that the PIIGS leave the euro.  Apparently, not all Germans are enthralled with Ms. Merkel’s commitment to the banks, I mean Euro, and bailing out their neighboring states.  But its not that simple, and no leader, even left of center politicians, wants to be responsible for breaking clear of the Euro, or declaring bankruptcy; because to do so would constitute a credit event, and more than likely set off economic Armageddon, via a web of credit default swaps (CDS).

CDS, of course, are insurance products issued by banks that are used to insure government bonds against default, and are also speculative instruments used to bet upon sovereign debt and against sovereign nations.  It is these instruments that caused the global crisis in 2008, and it is these very instruments that prevent the world from clearing the decks, and breaking free from the economic malaise that binds most Western democracies to the banking cartel.  And as of this date, reform of these CDS instruments, including clearing houses, putting up collateral to back these instruments (an impossibility because who has tens of trillion in security to support a gambling addiction), and transparency, has yet to transpire.  It is these instruments that prohibit governments from restructuring, or rebooting old or creating new currencies.  Why?  Because the banks call the shots and the banks own the governments and the politicians, and again, nobody wants to responsible for setting off a global doomsday scenario.

The symbiotic relationship between banks and governments works like this:  the banks screw up in another speculative frenzy; tapped out governments bailout the banks at taxpayer expense; governments borrow to bailout the banks harming their credit rating; interest rates rise; and central and national banks invest in what is by now rapidly becoming junk sovereign debt (witness Spain’s credit rating).  Hence, creating another bubble, a very un-virtuous cycle, indeed.  The politicians fail to rein in the banks, because politicians are owned by them.  Meanwhile, the banks and the right-wingers say the problem is not the bank bailouts, but social policies and social spending of the various governments – which leads to calls for austerity.  However, in many countries the social spending is but a fraction of the money and welfare spent on the banking cartel.

The great enabler in all this are the central banks.  The Fed’s stated mandate of course, is maximum employment and price stability, but their real master is the banking cartel, who is calling the shots.

Take the U.S. housing market for instance, which has laid like a dead dog in the street for four to fives years now.  The engine of economic growth, the arbiter of Main Street health, and the storehouse of the public’s wealth – I write of course of the residential housing market – has languished, losing in some markets as much as thirty percent of it’s value.  Why?  Because nobody has untangled the mess that the bank created: MBS and CDO products, and the MERS registry system.

The banks, of course, don’t want engage in traditional lending (preferring instead speculation in securities, commodities, private equity/hedge funds, and public debt), and so have held the economy and the nation’s housing market hostage, by insisting that the collateralized mortgage market – or debt securitization – be reinvigorated, so that they can generate huge fees, w/out maintaining any underwriting responsibility for their loans or tying up bank capital. 

Whew!

Entre Fed and Chairmen Bernanke, once again: and rather than announce QE4, QE5, etc, etc, etc… the Fed has said it will continue to purchase MBS from the banks in perpetuity to the tune of 40 billion per month, at taxpayer expense.

Gee, do you see another housing bubble on the horizon, with the taxpayer holding the bag yet again?  Instead, however, when this blows, the banks will be able to point their collective fingers at the Fed, and blame the public sector once again.  Much of the MBS undoubtedly ends up with the GSEs, Freddie and Fannie, which is a favorite whipping boy of the GOP.

With the Fed buying MBS, this frees the banks to pump up a stock market that no rational or sane adult will invest in, because the stock market is now about as safe as a crack den in a very bad part of town.

Mr. Jamie Dimon, on the heals of Chairmen Bernanke’s announcement of unlimited MBS purchases, states that the housing recovery is now underway.  His bank and the cartel got their way, a reinvigorated collateralized debt market, and now the taxpayer sponsored lending can begin in earnest.  There’s just two problems: one in five mortgage owners is underwater, and there are still millions of unsold homes in the inventory, many of which are kept conveniently on the sidelines so that home prices can begin to reflate.

Meanwhile, the consumer – the engine of economic growth – is tapped out, mired in debt, and in many instances upside down or underwater on their home loan.  The banks refuse to write down the home loans, and do not have to because of the Fed’s easy money policies and interest rate suppression.  The consumers only means of getting out from under their debt is wage inflation, but wages in this country are suppressed by unemployment and free trade and globalization -which SURPRISE benefit the one percent and the banks.  As evidenced by Japan, both the banks and the politicians are willing to wait a generation or more until a real recovery ensues, and home prices reflate; as they control the Fed and global central banks, and as they are wrapped in a cocoon of liquidity – the cartel feels little pain.

In short, Keynesian policy is working very well for the one percent, and has shielded the banks from their responsibility in this crisis.  However, Keynesian policy is doing very little for the rest of the nation, because the Cartel is not lending the money out, and it is having little stimulative impact upon the economy.

They say the definition of insanity is doing the same thing over repeatedly, and getting the same negative outcome; but nobody has the cojones to call Fed policy insane.  The savers in this country are being robbed, via interest rate suppression, so that the folks who put this nation into the tank can prosper in the stock market and with alternative speculative investments, like commodities and fuel (which again, give the 99% the shaft).

Having failed in their endeavor to rescue the American economy, the Fed’s monetary policy now appears to be trickle down, at best.  That is, the reflation of asset prices, like stocks and commodities, in the hopes that the rich and the elites will spend more, and the breadcrumbs will come floating down to the 99%.  This is the very policy that Democrats decry, when Republican reverse engineer taxation in favor of the wealthy.  There’s just two problems with trickle down policies, whether they be tax or monetary policy:  wealth has become increasingly concentrated into too few hands, and the consumer is tapped out… both of which leads to a decreased economic demand.

In short, trickle down monetary policy does not work.  And QE3, et al., only prolongs the very painful deleveraging process.

An alternative path?  Having failed in its endeavor, and because Keynesian monetary policy is now facing the roadblock of a very nasty cartel, the Fed could consider an alternative solution, which is to raise interest rates, like Mr. Volker did in the late seventies and early eighties.  This will force banks to write down asset prices, and offer to restructure or forgive debt on home loans.  This will allow housing to bottom and recover.  Higher interest rates would stop commodity inflation.  It will put interest income back into the hands of savers and the consumer who have fled the stock market for good reason, and spread the wealth of monetary policy throughout all saving classes of society – instead of into the hands of a few.  And it would help get this country on its feet again, as savers began to spend.  This in turn will generate growth and opportunity, and an expand the tax base and reinvigorate the economy. Higher interest rates would also force politicians to finally put their fiscal house in order, as well as reform the stock market, since capital would flow to bonds and money market funds. Outlawing CDS until this crisis is over, and unwinding these bets, means that the bank’s financial gun held to our collective head simply disappears.  It’s one thing to ask taxpayers to bailout a nation, it’s another thing, entirely, for the public support those who bet and gambled against a nation and her people, in the first place.  Telling FHFA director DeMarco to move forward and compete against the cartel is also the appropriate thing to do, since lending rates have not fallen as rapidly as the banks borrowing costs.

Of course, there could be short-term side affects to increasing interest rates… some banks might fail, some governments might default, and some of the one percent might get burned betting against nation states and their economies.  In the short run, there would undoubtedly be economic hardship and dislocation, but for a finite period of time.  The alternative, however, and the path we are presently on, is a stagnant economy, sub par growth, a more polarized society, higher headline inflation, and a Federal Reserve/GSEs loaded up with MBS and CDOs.  Not to a mention the ticking time bomb of a disorderly default scenario.

And yet, another housing bubble on the horizon, instigated by the Fed.

Isn’t it time for the Fed to reconsider its bank-centric economic policies, and failed trickle down monetary policy?

Copyright JM Hamilton Publishing 2013

In some cases, we have favored more radical proposals, including debt restructuring...

April 25, 2013 NYTIMES

Debt, Growth and the Austerity Debate

By CARMEN M. REINHART and KENNETH S. ROGOFF

CAMBRIDGE, Mass.

IN May 2010, we published an academic paper, “Growth in a Time of Debt.” Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with notably lower rates of growth.

Given debates occurring across the industrialized world, from Washington to London to Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along with other research we have published, has frequently been cited — and, often, exaggerated or misrepresented — by politicians, commentators and activists across the political spectrum.

Last week, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. But they also accused us of “serious errors” stemming from “selective exclusion” of relevant data and “unconventional weighting” of statistics — charges that we vehemently dispute. (In an online-only appendix accompanying this essay, we explain the methodological and technical issues that are in dispute.)

Our research, and even our credentials and integrity, have been furiously attacked in newspapers and on television. Each of us has received hate-filled, even threatening, e-mail messages, some of them blaming us for layoffs of public employees, cutbacks in government services and tax increases. As career academic economists (our only senior public service has been in the research department at the International Monetary Fund) we find these attacks a sad commentary on the politicization of social science research. But our feelings are not what’s important here.

The authors of the paper released last week — Thomas Herndon, Michael Ash and Robert Pollin — say our “findings have served as an intellectual bulwark in support of austerity politics” and urge policy makers to “reassess the austerity agenda itself in both Europe and the United States.”

A sober reassessment of austerity is the responsible course for policy makers, but not for the reasons these authors suggest. Their conclusions are less dramatic than they would have you believe. Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon.

The academic literature on debt and growth has for some time been focused on identifying causality. Does high debt merely reflect weaker tax revenues and slower growth? Or does high debt undermine growth?

Our view has always been that causality runs in both directions, and that there is no rule that applies across all times and places. In a paper published last year with Vincent R. Reinhart, we looked at virtually all episodes of sustained high debt in the advanced economies since 1800. Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested.

We did find that episodes of high debt (90 percent or more) were rare, long and costly. There were just 26 cases where the ratio of debt to G.D.P. exceeded 90 percent for five years or more; the average high-debt spell was 23 years. In 23 of the 26 cases, average growth was slower during the high-debt period than in periods of lower debt levels. Indeed, economies grew at an average annual rate of roughly 3.5 percent, when the ratio was under 90 percent, but at only a 2.3 percent rate, on average, at higher relative debt levels.

(In 2012, the ratio of debt to gross domestic product was 106 percent in the United States, 82 percent in Germany and 90 percent in Britain — in Japan, the figure is 238 percent, but Japan is somewhat exceptional because its debt is held almost entirely by domestic residents and it is a creditor to the rest of the world.)

The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.

In “This Time Is Different,” our 2009 history of financial crises over eight centuries, we found that when sovereign debt reached unsustainable levels, so did the cost of borrowing, if it was even possible at all. The current situation confronting Italy and Greece, whose debts date from the early 1990s, long before the 2007-8 global financial crisis, support this view.

http://www.nytimes.com/2013/04/26/opinion/debt-growth-and-the-austerity-debate.html?nl=todaysheadlines&emc=edit_th_20130426

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April 25, 2013/NYTIMES

The 1 Percent’s Solution

By PAUL KRUGMAN

Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close — at least in the world of ideas. At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.

Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?

On the first question: the dominance of austerians in influential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence. After all, the two main studies providing the alleged intellectual justification for austerity — Alberto Alesina and Silvia Ardagna on “expansionary austerity” and Carmen Reinhart and Kenneth Rogoff on the dangerous debt “threshold” at 90 percent of G.D.P. — faced withering criticism almost as soon as they came out.

And the studies did not hold up under scrutiny. By late 2010, the International Monetary Fund had reworked Alesina-Ardagna with better data and reversed their findings, while many economists raised fundamental questions about Reinhart-Rogoff long before we knew about the famous Excel error. Meanwhile, real-world events — stagnation in Ireland, the original poster child for austerity, falling interest rates in the United States, which was supposed to be facing an imminent fiscal crisis — quickly made nonsense of austerian predictions.

Yet austerity maintained and even strengthened its grip on elite opinion. Why?

Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price. Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering — and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.

But it’s not just a matter of emotion versus logic. You can’t understand the influence of austerity 

doctrine without talking about class and inequality.

What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask — a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do. 

http://www.nytimes.com/2013/04/26/opinion/krugman-the-one-percents-solution.html?nl=todaysheadlines&emc=edit_th_20130426&_r=0

Monopolies & Double Standards….

  The BP Gulf Oil Disaster (aka Deepwater Horizon oil spill): 4-20-2010

 

Monopolies & Double Standards…

By  J.M. Hamilton  6-19-2010

A little over thirty years ago, Jeane Kirkpatrick, the first woman U.S. ambassador to the U.N., wrote her master work, Dictatorships and Double Standards.   The work was brilliant, and she soon became a key member of the Reagan foreign policy establishment, and her analysis from Dictatorships and Double Standards became a cornerstone in Reagan’s foreign policy.   In it, Doctor Kirkpatrick posited that the Carter administration, and indeed members of the Democratic establishment, were prone to coddle leftist dictatorships (who were anti-American), while castigating right-wing dictatorships (who were often neutral to American interests).   Ms. Kirkpatrick went on to argue that left wing dictatorships were prone to, marching towards, or already socialist in nature, and therefore, far more oppressive to their citizens, than most right wing dictatorships.  Remember this was written during the crucible on the cold war, when it was feared that Communism’s stated goal of global hegemony, still might be achieved.

Republicans and the political right rallied around Mr. Reagan, and his new found apostle, Doctor Kirkpatrick, and the rest is history. Republicans were right to oppose both communism and left wing dictatorship, and history would seem to support their assertions that private enterprise and freedom produce greater amounts of prosperity, per capita, than the economic misery created under, say a socialist regime.  Even China, the last of the communist hold outs, appears on board with this notion.

This begs the question:  Why then have Republicans turned their back on their march against socialism, by embracing democracy’s equivalent, or the private sector equivalent to socialism, monopoly?

Anyone who has taken Econ 101 knows the inherent evils of socialism and monopoly, and indeed, if we review what those evils are, they are not dissimilar:  they include, but are not limited to, inefficiencies in production and the utilization of scarce resources; services and products tend to be shoddy, as there is no competition; and creativity, innovation and merit are not rewarded and are stifled, as there is only one game in town.  Consumers, employees, and society suffer under both socialism and monopoly.  Socialism by definition, and its cousin monopoly, also lead to, or are a product of, outsized political control over the citizens of the state.

Therefore, Americans, correctly enough, has been taught to abhor socialism; but on monopoly, rarely discussed, the conversation in democracies goes rather quiet.

During the Reagan, and Thatcher revolutions, and over the last thirty years, we have been fed an ideological diet expressing the virtues of the free market, private enterprise and laissez faire doctrine.  Rightfully so, but again, little is said against the evils of monopoly.

If we look closely at the writings of Adam Smith, we discover that he abhorred monopolies, probably for the very reason Mr. Smith would have disdained socialism.  Even Mr. Hayek, founder of the Austrian and Chicago school’s of economics (and a Free Market deity), had his concerns and issues with laissez faire capitalism.

Why(?), because laissez faire unchecked leads to the jungle, and the elimination of competition, and hence, monopoly.

In a nation governed under the rule of law, and as we do not operate in the jungle, monopolies do not occur naturally.   The referee of the private sector, government, allows monopolies to occur and allows them to operate.  And there are legitimate/societal reasons for monopolies to exist.   The classic example is utility services and power companies, because of the massive infrastructure involved, there is merit and societal value in monopoly, in this instance.  But what about other sectors of the economy where monopolies operate for no good societal reason?  What we find is that combination has been allowed to occur for the enrichment of a few,  the ruling class, and the private citizens in whose hands the grant of monopoly has been placed, all to the detriment of society.

So if socialism is bad, and monopoly is bad, why have the last thirty years seen an increase in the concentration of economic power, and a record number of mergers and acquisition, all granted and authorized by the U.S. and Western European governments?

One rationalization for the combinations authorized by democracies is economies of scale, efficiencies in production, and synergies in supporting departments and management.  However, we also know that too much concentration leads to diseconomies of scale, that is the organization is so big that management loses control, risk management falls apart, and chaos ensues.

But this is rarely discussed, or written about, and that is because in this country anyone who speaks out against corporate combination is immediately branded a communist, socialist or worse.  The reality, however, is one can be pro- capitalist, pro- democracy, and pro-free enterprise and have a complete disdain for monopoly and oligopoly for the very same reasons one would oppose socialism.

If we look very closely at the situation, we discover that monopoly is socialism by private proxy.

Corporate endeavor has become synonymous with free enterprise, and in many instances, it is an absolute truism; but when corporations pass the Rubicon, and by government sanction, become monopolies or oligopolies, it is then that citizens of a democracy should exercise their duties, query their elected leaders, and vote accordingly – as it is those elected leaders who are trusted to protect society from the deprivations of socialism and monopoly.

Americans witnessed both the subservience to untrammeled economic power, and the inefficiencies of combination this week, as the drama between Representative Barton and B.P. continues to unfold.   By now, nearly all Americans, and indeed much of the world, are well aware of the total lack of risk management and corporate control executive management (to hear the CEO tell it) exerted over B.P.  B.P. is the classic example of a corporation growing so big that it no longer operates in the interest of society, or itself, but rather, to the complete and absolute detriment of society, its shareholders and partners.  Rep. Barton is tragically confused, apparently, between allegiance to the citizens he serves, free enterprise that benefits his constituents, and absolute subservience to the B.P. corporation.  The latter is not alligned with the former!

As we witness diseconomies of scale play out in the gulf, and the abdication of responsibility – and the failure of sound risk management principles – by B.P.’s management, it’s important to remember the systematic risk and catastrophe imposed on the citizens of the world by another oligopoly, and that would be the Wall Street banks.  The economies of the world are still reeling from the total lack of accountability by the biggest concentration of power known in the Western world, and that is by the banking sector.  Unfortunately, democracies have done little to rein in the worst tendencies of the banking cartels they have created; and if a government does attempt to do something, say in the case of the Obama administration, said government is immediately branded as socialist or anti-business.

Let’s be clear on this issue: monopolies, cartels and oligopolies are not pro-business or even capitalist structures, but are the antithesis of the same.  They are by their very natures anti-competitive, predatory and government authorized or created.  Monopolies play out the economic double standard by wrapping themselves in the cloak of the free market, while doing everything in their power to eliminate competition and obtain extraordinary profits.

Corporations are but one of many vehicles/organizations for democracies to achieve their economic hopes and dreams, and great good can come from corporations (for society, management, stockholders, governments and employees); but blind subservience to the worst tendencies of corporations (e.g. combination for the elimination of competition) are something that prudent and responsible governments must hold in check, manage, supervise, and guard against.   And if government does allow monopolies and oligopolies to exist, the price that those entities should pay for economic concentration is government oversight, regulation, and vigilance, all the better to guard against socialism by private proxy!

Jeane Kirkpatrick, on the international stage, was noted to have said, “Russia is playing chess, while we are playing Monopoly. The only question is whether they will checkmate us before we bankrupt them.”

Such irony that multi-national monopolies, in the form of too big to fail banks, and the oil industry (through its diseconomies of scale playing out it the Gulf), may do what the Soviets never could do, and that is bankrupt the great Western democracies.  Both oligopolies operate behind the facade of the free market.

 Copyright JM Hamilton Publishing 2013

 

Thatcher

Thatcher

"There is no week, nor day, nor hour, when tyranny may not enter upon this country, if the people lose their supreme confidence in themselves, and lose their roughness and spirit of defiance.  Tyranny may always enter - there is no charm or bar against it."  - 1984 - P.M. Margaret Thatcher

"I'm not pro-business.  I'm pro-free enterprise."  --  Representative Hensarling (Republican, Texas) - W.S.J.

By J.M. Hamilton   4-13-13

What ovaries!  She was Tea Party before there was a Tea Party.  Making most of her peers look like indecisive castrati, say what one will about her policies, P.M. Thatcher's will was indomitable.  Mrs. Thatcher died this week, and her legacy is with us to this very day.  This lady talked the talk, and walked the walk.  And like many iconoclasts she thrived on adversity and bruising debate.  There are few politicians who can achieve what P.M. Thatcher achieved, not even in war time let alone peace time, and that is bending a nation by shear force of will.

The best way to illustrate both Mrs. Thatcher's defiance of the established order, and her iron will, is to compare Mrs. Thatcher to her political peer and soul mate, President Reagan.  Where Reagan and Thatcher both talked a great neo-classical economics game, our President often moderated, where she rigidly stayed the course.  Deploying classic Keynesian economics (all rhetoric aside), the debt to GDP ratio soared under Reagan, who pushed both guns and butter in order to defeat the former Soviet Union.   Whereas, the U.K.'s debt to GDP ratio went into dramatic decline, under P.M. Thatcher, dropping enviably to approximately 25% by 1990.

Mrs. Thatcher was austerity unchained.

Both leaders talked down government and the welfare state, but Reagan did not have the heart to cut entitlements, like social security.   Mrs. Thatcher took out the axe on social spending and government owned enterprise, even cutting off milk to grade school children in need.  Both leaders cut taxes, and yet, Mr. Reagan raised taxes no fewer than eleven times.

Reagan, like Thatcher, was capable of breaking unions, like PATCO; but as noted by the ultra-conservative institute, CATO, Reagan was actually one of the greatest protectionist Presidents of the 20th Century, saving countless American jobs (jobs that both Democrats and Republicans would rush to send offshore in the 90s and 2000s, via the doctrine Reagan had endorsed, free trade).

By comparison, Mrs. Thatcher dined on unions.

P.M. Thatcher deployed the foreign policy classic "wag the dog" strategy, before anyone knew what it was, when she reclaimed the Falkland Islands from an Argentinian invasion.  Hence, the P.M. bucked up national pride, invoked patriotism, and the war provided a convenient distraction from England's domestic woes - all of which allowed her to secure a second term.  Mr. Reagan would deploy P.M. Thatcher's same strategy a year and a few months later with the invasion of Grenada, to liberate a hand full of second-string American medical students from Cuba's communist invasion, which also helped to secure his second term.

Years from now what both leaders will be remembered for is: uniting their respective nation's will in crushing an evil empire, bashing their respective governments, and unleashing - what Lord Keynes referred to as - "animal spirits."  A move towards laissez faire economics (LFE) may have been the right call for the early eighties, but some thirty odd years later, LFE has corrupted into the extreme -  in the mistaken belief that whatever business wants it should have without question.  In short, LFE has metastasized into crony capitalism; an overarching dependence upon the banking sector - and speculation - for jobs and GDP (and the deployment of trickle down economics and monetary policy); and monopoly and cartels.  As we are all keenly aware, today,  crony capitalism, the Wall Street and London banking cartel, and monopolies in various sectors of the economy, have all but eviscerated the middle class, from which both Mrs. Thatcher and Mr. Reagan came and both dedicated their professional careers attempting to protect.  The most virulent form of LFE, Private Equity (which was just beginning to take off during the Thatcher/Reagan era), has been highly instrumental in gutting businesses for financial gain, responsible for a large number of bankruptcies, outsourcing jobs overseas, stripping the tax base, and engineering profits through financial chicanery and by making a perfidious hash out of the tax code.

Mrs. Thatcher, in the quote above, spoke of the evil tyranny of unions... today,
the Republican Party might be finally waking up to a similar tyranny imposed upon the economy and our country, by the international banking cartel, and the economic oppression imposed upon our citizens and the economy by monopolies and crony capitalism.  The classic example being the tax imposed upon the citizenry, in the form of monopolistic profits, which are sanctioned, authorized, and encouraged by the federal government.

Large banks, in the name of capitalism, have been bailed out repeatedly at the expense of fiscal and monetary sanity, and the middle class.  Government, politicians, regulators, and the tax code are often captured and owned by these risk management nightmares.   And one could argue that the LFE takeover of the Republican Party was complete with Mr. Romney's nomination.

In America, however, there are signs that the GOP maybe changing and pulling away from the excesses conducted in the names of Thatcher and Reagan, and most importantly, may be coming to realize that government has a role to play in the economy.   Senate Republicans recently passed a non-binding resolution decrying too big to fail banks.... can a break up of the cartel be too far behind?  And Representative Hensarling (R.), the new head of the Financial Services Committee, has correctly drawn a line between monopoly, and free enterprise.  Seems that not all Republicans pander to the cartel or will Mr. Hensarling cave?

This blog has said it before and it bears repeating, the moral imperative of capitalism is to provide quality goods and services at a competitive price, offer opportunity and employment, and provide a tax base so that essential government services can provide a back stop and support for a capitalist economy.  And clearly there is nothing wrong with profit taking in a competitive market.   Adam Smith, of course, pointed out that capitalism’s natural tendency is towards the elimination of competition and monopoly.   Therefore, in order to protect the moral imperative and the middle class, both political parties must say "no" to business when warranted (particularly M&A activity that leads to market domination and is anti-consumer and anti-free market), break up monopolies and cartels, and guarantee competition throughout the economy, or heavily regulate, cap, and contain the profits of those sectors that are dominated by monopoly.

This is what government should do: establish the rules of the road of capitalism, protect the economy and the middle class from the plutocracy's excess, and repeat, as necessary.  Ultimately, our government should be just as vigilant in protecting the market, and the consumer, as it historically, proclaimed to be in protecting freedom and democracy.

As the GOP does not want to fade into oblivion some senate and house members, like Messrs. Paul and Hensarling, have taken on a renewed interest in the middle-class.  That's something both Mrs. Thatcher, and Mr. Reagan would applaud and support.  The future of the GOP is libertarian on social issues, anti-theocracy, fiscally prudent, and pro- free market and anti-cartel.  This is the path back to the White House; and this is what will appeal to the youth vote.  Mr.Santorum need not apply.

Just as it took an iron lady to stand up to both unions and the Soviet Union, it will take an iron will to stand up to crony capitalist and monopolist, who would ruin our nation for their personal enrichment.

A renewed commitment to the middle class, with the preeminent goal of maximum employment, by both political parties - and the Federal Reserve - would do a great deal to revive the country and the economy; and fear not, the rich will still make money.  In my mind, one simple measure/mandate is called for today by our government:  if you sell in America, you hire American labor in direct proportion, whether your company is foreign or domestic based.  How painfully simple!

Ironically, if Mrs. Thatcher and Mr. Reagan were to run for the top job in America today, based upon their respective records, it is Mrs. Thatcher who would triumph over Mr. Reagan for the Republican nomination, such was her unshakable will --- no matter how misguided some of her policies.  We often forget that Mr. Reagan was a democrat before he became a republican, which might explain why his heart was slightly bigger than his will.

P.S.

On a final note, Mrs. Thatcher eschewed the precursors to the European Union or Monetary Federation, and the Euro.  Given the state of the E.U., it would appear that she led wisely.

 Copyright JM Hamilton Publishing 2013