Ready, Steady-state, Go!

Tonight's journey started with a read of Norm's post, "The Implications Of A Zero Growth Society," which was more intriguing than I originally though it would be. He recaps some arguements and concepts having to do with creating a no growth, zero growth, or solid state economy. These movements and concepts are in reaction to the radical discovery that we live in a bubble which contains finite amounts of resources and fragile organic ecosystems with limited carrying capacities both for extraction of materials and for absorption of wastes. Norm notes that, "our global consumer culture, and the nature of our economic system is predicated on constant economic growth.  In order to address the problem of global warming we will need a different culture and a different economic system." Which is to say both that the need for a different economic system is great and that it would require a very radical change. 
Further down the rabit hole we go. Norm linked to a very interesting paper by Ted Trainer called, "The radical implications of a zero growth economy." Trainer's paper is very interesting as I have to admit liking the idea of a steady state economy, but also not really knowing much about what that would entail. As is implied by the title of his paper, this kind of economy would not look like ours with the simple adjustment of no growth, but would need to be radically different. He states, "It is not just a matter of getting to an economy that does not grow any further; the imperative is to reach a steady state economy in which production, consumption, investment, trade and GDP are very small fractions of their present quantities."
I would love to go into the deeper mechanics of a steady state economy at some other time, yet for now will instead point out some very interesting issues that come along with it. Inequality is a fond topic of mine. In this economic system we accept a large amount of economic inequality as legitimate or necessary or inevitable. Part of how we do that is because of the mythology that says anyone can be rich and live the American Dream if they just work hard enough. The other way we do it is through the mythology that economic growth is the way to eliminate economic inequality as it becomes the "tide which raises all boats." Trainer points out that economic growth is actually the concept and mechanism by which economic inequality is created and perpetuated. In a steady state economy everyone understand and finally acknowledges that the economic pie cannot simply grow forever, but instead is a fixed size. If this were the case then, "inequality would have to be addressed and dealt with consciously and deliberately, involving social decisions regarding distribution and fair shares...which again would involve a very different kind of society" notes Trainer. So in addition to being a solution to or a necessity of global climate change, the steady state economy might be a place where we all have to get serious about equity and finally have no greed inducing mythologies to hold us back. 
Another interesting tid bit about life in a steady state economy relates to what the purposes of social structures and the meaning of life really are. In our current system the meaning of our existence is tied to consumption and accumulation of wealth and material goods, and the social structures are for the purpose of facilitating those goals for a few, supported and made possible by the many. In a steady state economy, the purpose of social structures is to facilitate a meaningful and quality life. Trainer explicates that, "People would have to be concerned to produce and acquire only that stable quantity of goods and services that is sufficient for a satisfactory quality of life, and to seek no increase whatsoever in savings, wealth, possessions etc. It would be difficult to exaggerate the magnitude of this cultural transition."
Speaking of the cultural transition, I found this amazing speech by Christine Milne, a senator from the state of Tasmania in Australia. She is speaking about the kind of economy they need to build in Australia in order to create the world in which they wish to live. She asserts, “Surely it’s time that those who advocate economic growth derived from resource extraction and pollution as the major path be the ones labeled wacky, loopy, irresponsible, divorced from reality or connected to the CIA.” I wonder how long it will be before top elected officials are saying things such as this, and getting re-elected after doing something about it? I do not ask this rhetorically either. We must move not only beyond our false mythologies and conveiniently forgotten history of the evolution of these human created social structures brought about by power and those who wield it--not simply by "good" ideas benevolently implimented and with unintended consequences--but also beyond alternatives which leave the core structure of this system intact. We must create a system which facilitates true human happiness and harmony with our natural ecosystem. 

The Global Economy and You

We learned this week about how the global economy functions and is structured. This was again a frustrating experience for me. Much of economics the religion seems to be about rationalizing what those at the top of western societies want to do for their benefit. The creation of economics and its increasing rationalization and rootedness in abstract mathematical formulas and "laws" was perhaps the most useful intellectual innovation for the wealthy. This allowed the changes to society needed for their pursuit of more and more wealth to be justified and legitimated by a "science."
 
Globalization and the international financial institutions (IFI's) were the most interesting concepts in this weeks lesson, and also the most contentious. Just as Western society has been conquered by the fairly new capitalist way, backed by the science and rationality of economics, Globalization is the new frontier of imperialism which allows the western countries and corporations to conquer the third world nations. We learned about the methods used by the IFI's to spread the "Washington Consensus" far and wide. More and more international trade agreements were pursued by the developed nations after World War II. With the creation of the IFI's such as the World Trade Organization, these sorts of trade agreements came to be institutionalized, normalized, and almost necessary for all countries to be part of.
 
For developing nations this new global trade regime came at a great cost. They were bombarded with the gospel of comparative advantage so that they would both "open" their nations to trade as well as restructure their entire economies in the hopes of one day being as wealthy as the developed nations. Opening your economy also meant you would become eligible for international investment. Investors and experts from the IFI's would bring in large amounts of loans to be used for infrastructure. The developing nations would take on the debt, but western multinational corporations would most often do the work recommended. Whole industries would be re-structured so that nations could better maximize their competitive advantage. As we did learn from our text, this also had a downside; vulnerability and volatility. Changes in the weather or the market could violently disrupt a whole nation's exports, leaving them in a bind. Many of these nation's took on large debt burdens, paid western companies large sums for infrastructure, and then found themselves unable to pay their debts. Then the IFI's would swoop in and forcefully make "structural adjustments" to their economies. This usually took the form of cutting as much government spending as possible, reducing as many tariffs and taxes as possible, and deregulating as many industries as possible.
 
I called this the new frontier of imperialism for a reason. The western multinational corporations, and in turn the wealthy from the western nations, were able to get paid to extract the natural resources, establish dependencies on our products and companies, create new markets, access dramatically lower cost labor forces and therefore maximize their profits, all without firing a shot or swinging a sword. The same goals of imperialism were accomplished, but this time by a new type of missionary and military. That of the global economy.
 
This effects us in the U.S. as well, especially in regards to the recent presidential election and the looming "fiscal cliff." Norm wrote recently, "The super rich and Obama also share a common view of the global economy.  It is providing huge rewards to those who benefit from globalization and it is punishing the middle class in rich countries as wages, and standards of living converge across nations." This was all in response to an interview of Chrystia Freeland by Ezra Klein in her Washington Post blog, about how "Romney is Wall Street’s worst bet since the bet on subprime." In this interview, Freeland speaks about her insights from numerous interviews with members of what we would call the "super rich." One insight was that the wealthy mainly backed Romney in the election because they viewed him as their best shot at more deregulation and lower taxes; the "Washington Consensus" on home territory.
 
In a recent New York Times article called, "How the Tax Burden has Changed," we can see why the wealthy would want to at least keep the tax system the way it is, if not improve it further for themselves at the detriment of everyone else. This article presents research on taxes from 1980 to 2010. Key findings are that all taxes have actually decreased in the last 30 years. Also, the share of local and state taxes paid by the bottom third of income earners has increased versus that paid by the top income earners; mainly in response to declining municipal revenues and reduced federal support. And the kicker, the distribution of benefits from our tax system as a whole benefits those in the top income brackets much more than those in the bottom half of income brackets.
 
This is all to say that the global economy and our very own economy are structured to benefit the same small group of people. Yet, we all now worship the god of neoclassical economics which was created to make the unjust seem logical. The wealthy in our society are regarded as hero's, job creators, innovators, and intellectuals; a regard that they perhaps deserve since they have been able to create and perpetuate a system which maximizes their wealth and power at the expense of the majority of the world's people and ecosystems.

What to do about the Fiscal Cliff?

What is so interesting about fiscal policy? This week I learned how the federal government's fiscal
policies effect the macroeconomic model I talked about last week. This is the model that describes
the total output of the economy equaling the incomes of households, which is then "leaked"
through savings and taxes (adding the Government into the picture). The taxes are reinjected
through government spending, and the savings are used as investment by businesses, all of which is
added to consumption by households to equal aggregate demand.

So, in Norm's post this week on the looming "fiscal cliff" I think we can apply this new fiscal policy
lens. Norm is talking about an article from the New York Times by Paul Krugman which explore's
the upcoming automatic reduction in government spending and tax cuts which was agreed upon in
2011 in response to the debt ceiling discussion. In the article, Krugman argues that President
Obama should not allow the tax cuts for the wealthy to be exempted from the bill as the
Republican Party is pushing for. Norm notes that this will be hard to accomplish as Obama wants to
exempt the middle class tax cuts from the bill, which is what is allowing the Republicans to bid for
the wealthy tax cuts exemption. Krugman says that if Obama cannot exempt the middle class tax
cuts, then he should let the bill move forward and take effect as planned. Many argue that this would
throw us back into further recession.

So this change in fiscal policy would increase taxes and decrease government spending to reduce
the government debt. In our macroeconomic model, this would decrease aggregate demand overall,
thus slowing the recovery through a decrease in consumption of output which then decreases total
income to households. I would argue, after reading Richard Coo's comments on Japan's failed and
successful efforts to end their very similar recession of the late 90's, that we need to increase
government spending right now as the most effective means of increasing aggregate demand. We are
experiencing a "balance sheet recession" according to Koo, which means that even with interest
rates from the FED of 0%, companies are not able to create new jobs because they are stuck paying
down their debts (as their liabilities currently exceed their assets, this is a must). Also, because
government spending is much more direct and effective at increasing aggregate demand than is
cutting taxes, and has a higher economic multiplier effect, government spending is what we need.
We also learned that even increasing taxes while increasing government spending, increases
aggregate demand.

The most effective way out of this recession then, is to increase government spending both on
social programs to help the multitude currently in need, and on direct job creation programs. I
would also keep some attention paid to our issue of government debt by partially financing all of
this increased spending with the elimination of tax cuts on the wealthy and on capital gains. It was
the very wealthy which maneuvered the financial sector into the role of grand casino in the housing
boom which caused this recession in the first place, and made them large sums of money, which
were then taxed at a much lower than fair rate. Thus, financing the recovery with increased taxes
on those at the top, is the the least our country could do to even be allowed to speak the word
"justice" with any kind of authority again. This method would also be very effective since, as I
discussed last week, tax cuts for the wealthy really have not led to faster or better economic
growth ever in our history.

I want to end by throwing in another little snip-it of reality which complicates our economic
models and is painfully absent from mainstream discourse. I was just reading a report from the New
Economics Foundation called, "The Economics of Oil Dependence: A Glass Ceiling to Recovery."
This report discusses the link between the rapidly decreasing stock of the finite resource we are so
heavily dependent on in the U.S. and the global recession. They define Economic Peak Oil as, "The
point at which the cost of incremental supply exceeds the price economies can pay without
significantly disrupting economic activity at a given point in time." This concept is very important as
all data point to us reaching Economic Peak Oil around 2014-2015. This is due to the complete lack
of new sources of crude oil in general, and in terms of low cost sources--as is evident by the recent
scaling up of oil extraction from the Alberta Tar Sands and subsequent need for the new Keystone
pipeline, which is a highly inefficient and costly source of oil. Technology only increases our usage
efficiency of oil products by 2-3% per year, a snails pace compared to the speed at which global
consumption of oil is increasing.

I bring this into the discussion not just because it is not being talked about, but also because we
have an opportunity to make a significant and lasting recovery effort. If we did increase government
spending, financed in part by allowing tax cuts on the wealthy to expire, and directed it all to a
Citizen Conservation Corps style jobs program focused entirely on the creation and
implementation of green energy projects, then we would be doing something more impactful and
worthwhile for future generations than simply reducing government debt.

Taxes and a Healthy Economy

The relation of tax rates to the health of our economy is and has long been contentious. I was interested to see a recent post by Norm Becker which contained the summary remarks of the Congressional Research Service report on tax policy. A key finding was that, “the real GDP growth rate averaged 4.2% and real per capita GDP increased annually by 2.4% in the 1950s. In the 2000s, the average real GDP growth rate was 1.7% and real per capita GDP increased annually by less than 1%.” They compare these rates of GDP growth to the income tax rates from those two periods to make the point that, “analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.” This is important because the income tax rates from 1945 through 1970 were significantly higher than they have been in the last 40 years, and yet real GDP growth, and particularly GDP growth per capita, have slowed with the decreasing tax rates on the top income earners in this country. Why is this and why all of the heated debate about income tax rates in recent years?

I have several proposed reasons which, oddly enough, come from a study of neo-classical macroeconomics, or the very school of thought that those in the U.S. who argue for reduced tax rates for the wealthy are supposed to be champions of. First, let me sketch out the basic model: the production of goods and services by firms (output) creates payments to households (income). This income is put towards either consumption or Savings. Savings create the capital stock which firms can use as investment in their production operations (intended investment). Total consumption by households and intended investment by firms equals spending or aggregate demand. If there is full employment and if all savings are efficiently used as investment by firms, then the aggregate demand should equal output, where we started.

One very important thing to understand about all economic models and schools of thought is that they are theoretical. That is to say, not necessarily representative of what really ends up happening in an economy. For instance, taxes and government spending are not represented in this model. So, proponents of lowering taxes in general argue that taxes just reduce the income of households which then decreases the overall level of spending which can result from consumption and investment. This would be unhealthy for the economy because then aggregate demand would not be sufficient to meet the total output of producers, which would then ripple through the whole cycle causing unemployment, recession, and reduced or negative growth. The other argument used for lowering taxes specifically for the top income earners in society is that the savings of those top earners becomes the investment stock of firms and is also directly invested to create jobs and increase spending, thus increasing the health of the economy.

To respond firstly to the issue of government taxes in general, we must realize that if taxes and government spending were properly represented in this theory, all monies diverted to the government from incomes, also end up both as incomes for government employees and as consumption and investment in the economy through government services and programs. Thus, taxes still work through the cycle to increase aggregate demand. In fact, all taxes get spent in the economy unlike some of household income which is diverted to savings (called a leakage in the model).

More importantly, when we look at the incomes of top earners in the U.S. we find several reasons why the argument for diverting less and less of their income to taxes as a policy for a healthy economy, holds no water. Leakages as savings from the incomes of the wealthy can create the investment stock for business expansion, operation or creation. However, this does not happen when a large share of their income is stored in off-shore bank accounts for the purposes of avoiding taxes. The money in those accounts is not accessable as the capital stock for investment in job creation or expansion in our economy and it is not available to be spent by the government if it had been taxed. Also, when the untaxed incomes of top earners is used extractively through investment in venture capital endeavors which require rapid growth of industries through measures of austerity and reckless abandon (low paid employees, turning quick profits through risky activities, tax avoidance) the long-term health of the economy is decreased. As we saw in the lead up to the recent crash and recession, much of the untaxed incomes of the wealthy were invested in derivatives and other clever financial instruments which do not play any part in aggregate demand or the actual production of goods and services. Often now the excess wealth of top income earners is invested in private equity firms spurring mergers and acquisitions which succeed through rapid and extensive off-shoring of more expensive U.S. jobs and outsourcing company functions to the lowest bidder globally.

John Maynard Keynes had a slightly different, but still limited take on the classical macroeconomic model. In his line of thought, households do not just automatically direct all of their incomes to savings and the rest to consumption. They automatically consume at a level called “autonomous consumption” which would account for basic necessities regardless of their income. Then they also have a “marginal propensity to consume” which changes with their income level and confidence in the health of the economy. In line with this theory I would argue that we could more effectively stimulate aggregate demand by raising the incomes of the majority of folks who cannot even meet their required autonomous consumption levels (ie. a living wage) let alone a very significant marginal propensity to consume. Plus the majority of households in our economy which have low to moderate incomes, spend all of their income, contributing directly to aggregate demand thus increasing aggregate demand. So, it would be much more effective to tax a larger share of the incomes from top income earning households in the U.S. in order to stimulate aggregate demand. The decrease in their excess income which would would have been put towards the detrimental activities described above, would instead be spent in the economy by the government.

Even if my argument and logic make sense, you may then wonder why this argument to lower taxes overall and specifically those of the top income earners seems so loud. In an Economist article called “The Rich and the Rest,” they state that, “one analysis suggests that 80% of the total [campaign spending] comes from fewer than 200 donors.” They also point out that 90% of the income gains since the recession have gone to households in the top 1% of income earners. This paints a very clear picture of where power in our society lies. If there are 200 people at the top that control 80% of the financial sway in elections, and are part of the small group which not only caused the recession, but now are the only ones recovering from it, then it would be in their direct but narrow self-interest to reduce taxes on the wealthy.

Banking Oligopoly

The topic this week is Markets. This is a tricky economics topic because the terms "market", "markets", and "market economy" are used so often in the mainstream without any real critical discussion on what these terms really mean. When we learn about markets in economics, we are often only taught the abstract, theoretical meaning from the school of thought called neo-classical economics. In this theoretical world, markets are magical places where there are no barriers to entry for producers, all involved have perfect information, and there is perfect competition. This means that there are many small buyers and sellers, all of which wield no power over the structure of the market. Only in this setting can a market truly facilitate the laws of supply and demand and move towards an equilibrium position which is equally beneficial to both buyers and sellers.

Lets look at the banking industry in the US through the lens of markets. First off, let me state that no market in the real world functions without power, with perfect information, and with no barriers to exit or entry. If you read this post by the Institute for Local Self-Reliance on the banking system, you find immediately that this industry market is not one of perfect competition. First, they note that, "the top banks now control 60 percent of U.S. bank assets, but provide only 27 percent of small business loans." The market for banks in the US operates more like an Oligoply, defined as a market which is dominated by a small group of producers/sellers where entry is difficult. Why is this important? Well, both sides of the political system constantly legitimate everything they do and stand for in terms of how much their policies support small and family businesses. Small businesses after all do create the largest share of jobs in the economy, and they operate more as a model perfect competition market than any other sector. I imagine that early economists were modeling their theories for how markets work based on their experience with thriving local economies filled with many small businesses competing with each other.

Is the American Dream actually about inequality?

The American Dream is a complex phenomenon. I think that it is a great dream in many respects and perhaps can be boiled down to, "everyone deserves a good life." However, there is also a dark underbelly to our concept of the American Dream. This dark underbelly is composed of both the mental models held at large in our society concerning the American Dream and the actual structure of our economic system.

Lets start with a discussion of the structure of our system. In one of Norm's posts yesterday he talked about the role our financial sector is supposed to play; that of allocating capital to its most productive uses. So, this sector of our economic system is really supposed to act more as a secondary level sector. What I mean by that is its role is secondary to, or to facilitate the activity of, the productive parts of the economy. However, Norm notes that, "financial assets grew from 81% to 137% of GDP between 1990 and 2005." This is indicative of a financial sector which has started to use its wealth and power to generate its own product, more wealth and power, instead of facilitate the growth of industries which produce real goods and services that people need. If the products produced by financiers, banks, and Wall Street are equal to 137% the value of GDP (which is supposed to measure the market value of all real goods and services), then this sector is using wealth to produce wealth for the wealthy. We are all currently experiencing the results of this development in our economic system as we struggle through what is being called The Great Recession which was caused by the highly risky activities of the financial sector. The events which led up to the Great Recession can be most aptly described by what a former BGI student called, a "profit tornado." 

Introduction to Joelw99

Hello. My name is Joel Williamson. I grew up in Spokane Washington and also currently live there. My interest in studying sustainable business at BGI stems from a life unfulfilled by the current structure of our society. My great grandfather came to the US in the early 1900's trained as a master gardener. He ended up settling down in Spokane and founding a flower growing greenhouse business called Jacobson's Greenhouses in 1917. The business was passed through the generations and my brother and I were born on the family land with my father and mother the primary partners. It was a fantastic childhood! We had a wonderful place to live and play with family members and life-long employees always watching out for us.

Then, in the early 1990's times really started to get tough. I saw my father become more and more stressed as he tried everything to keep our entire livelihood together. By 1998, on the brink of bankruptcy, we had to close the family business and lay off all of our employees. This destroyed our family in many ways which I still deal with today.

It was not until much later in life that I realized the larger economic context within which our struggle played out. I began to learn about the conglomeration of various firms in all industries. Grocery stores were the ones that had an effect on us. As they got bigger and out-competed the local stores, they also stopped buying local products. This really effected our business as our biggest buyers vanished from our community. Then in 1994 and 1995, NAFTA and CAFTA hit, changing the game completely. Now the rose industry in the US could not compete with the tariff free imports, and four years later, we were out of business.

Through all of this continuous conglomeration of industries and outsourcing of jobs, the wealthy make more money and the rest of us make less and less, if we have a job at all. So, I have enrolled at BGI to learn as much as I can so that I can build a local, resilient and equitable economy in Spokane.

 Rob Krassowski, 13, and Andy Loomer, 12, members of Boy Scout Troop 333, help clean up greenhouse glass broken during a severe hail storm at Jacobsen’s in July 1995 in the Moran Prarie area of Spokane.