I note the cover article in this weeks Time Magazine discussing 5 myths about the economy, and add one of my own not given in the article because it is written at the hub of the last myth, which is, "Economics is a Science". Most economists were predicting 3% growth now, within the last nine months, whereas the real result was somwhat under 2%, and the esence of the article's message was something that we really knew for some time, that the growth in the economy, the nightly report of stock market ups and downs, and of corporate profits has been largely disconnected from the foutunes of a large majority of Americans, which have been flat or down, and that the political spectrum here offers little effective solutions, from the Right's misguided emphesis on cutting public spending, or the Democratic party's emphesis on the money supply, "easing" as it is euphemisticaly called. The Fed since before Obama came to power has had less and less power to affect the economy with its policy. The political solutions have less relevance and the nub of the problem seems to be a failure inherit in economics as a worthy pursuit to be able to predict the future with any confidence at all.
The reasons for the disconnect, which the article rightly states, is that the U. S. financial system is now a world financial system and it has no aligence at all to the economic interests of Americans, and the public policy has in fact worked as if there was some conspiracy dead set against America's wealth. I am lothe to believe in a conscious scheme against us, because that would give too much intelligence to collective wisdom which I honestly believe doesn't deserve such credit at all. It could be argued that the political economy of the sucession of administrations from either major party since 1980 follows a law of unintended consequences where often the stated or intended results have largely backfired and continue to do so, and that people reacting to this by voting for politicians of one or other party are largely wasting their time, and that their embracing any of the political economic ideologies in play is largely irrelalent and ineffective whether it is to blame the Federal Reserve for easing the money supply, or to clamour for public spending to "live within its means". All this misleads the mind to one undeniable fact: There isn't enough investment in this country to sustain its needs for its standard of living, and that economists havn't addressed this need at all. The cause of this is not that major players aren't making money, they are, they are just not spending it here, as the above article points out.
History may judge Ronald Reagan much more harshly than it does now when the consequences of his tax policy plays out more. It may even judge him more sternly than George W. Bush, who was perhaps one of the most stupid persons to hold the office, for Reagan may have had much more of a plan in cutting the capital gains tax ceiling and helping to create a wealth concentration in the hands of a very few that is undermining American Democracy. Again, the law of unintended consequences comes in play, and maybe he thought that a stimulus to the rich class would really benefit all. It clearly did not.
The idea that the most enabling labor-saving, promotor of world-wide free speech, not to mention Open Source, could be the source of much of the problems in the economy, may seem incredible to any who don't look a bit beneath the surface. It may be a basic reason for the lopsided wealth distribution in the country, and living in Silicon Valley makes one rub shoulders with the very Plutocracy an imbalance is creating and Ronald Reagan helped.
I applaud Richard Stallman and Steve Jobs, and praise the way that the Internet has made the cost of distribution of anything that can be coded in bits practically zero, but that all has a dark side economically which has nothing to do with Open Source or copyrights. It has to do with a fundemental rigging of markets through the unintended effect of speed of electronic transactions in the markets, for stock, for commodities, and of some of the uncertainties created.
A couple of weeks ago 60 Minutes did a story on huge server farms hidden away in non-descript secured locations run by institutions whose sole purpose is to get a milisecond jump on the competition to do very large numbers of transactions in markets at a time. They do this in order to make a few cents in each instance by buying and selling within a short time. In aggergate Billions of dollars change hands, all driven by mathematical models built by engineers and mathematicians, who used to work in science for NASA or the DOD contractors, now for financial institutions as"Quants".
Critics claim that the speed and volume of these activities are unfair and that they can create disruptions to markets when something goes aray. They also claim that these large players. in getting the jump on everybody else, rigges the markets. This is in fact the old problem of the 300 lb. gorilla in the room. Markets are rarely fair; they are certiantly not egalitrian. The myth is that inviduduals prticipate and have good information and a fair chance to make rational decisions. In fact there is usually at least one participant who has much more money than all the rest and has some advantage of speed or influience, inside knowledge, over all of the rest. This is how the housing and trading markets have always worked. This is why we have to kill the Quants. Maybe the SEC should enfornce a 30 second grace period for all electonic trades.
This effect is part of a larger problem that is as simple as doing calculations with a spread sheet. The invention of Visu-Calc and later of Excel was a revolution for accountants. It put lots of bookkeepers out of work, but it opened the way for something truely sinister as the techniques scaled up. It allowed for financial people to get hold of accounting information in an abstract way. It encouraged management to judge every aspect of the preformance of their business strictly by the numbers. This abstraction of the work of an organization into purely numerical values is "financialization". It ignores two very important critical steps: 1) How the value of a product or process was determined, and 2) What the utility of the goods and services produced for customers is, how it is given value, especially how it is given value to society. The second item is much more important as companies diversify. It means that upper management may not have good information on the tangible value of what different business units do and so make bad or disruptive decisions whih may even threaten parts of the outside economy.
The finacial collapse of 2008 was caused in part by financialization and the Quants. To lose $15 Trillion in equity is not the misdeeds of a few bad apples, but the fault of everybody, from the banks who believed that the financialized assets really existed, to the government who believed they could inject risky mortgages into the bond market, to be home buyers who bought all the marketing hype that they could buy a house when they knew that they might not have a job in a year. In 2005 I got a cold call from a salesman in New Youk City who worked for HSBC Bank which had bought Household Finance, a long time domestic mortgage company. Out of curiosity I asked him what HSBC stood for, do you know who they are? They are a Hong Cong Bank. The salesman obviously wanted to sell me a loan, and it was obvious he had no good information about me. This was a time when everybody especialy people who didn't own property or had bad credit were getting mail and calls from banks trying to lure them into getting over-extended. I told the salesman that I thought it was evil what he was doing. He laughed at me and said "Its Business!", and I hung up. I feel totally vindicated by history. I also feel that the gotcha of the Regan-Era boosters of Capitalism, and the Conservatives who followed, especialy the Tea Parties and Libertarians, financed as they are by Billionaires, is the wisdom and foresight of investors, who are if we judge the events just transpired, not collectively very smart. And, by the way, it isn't demand that drives market economics, it is investment. There is demand for jobs right now that isn't being met by investment. Investors aren't buying because they have a different set of interests and the boosters of Capitalism and the American-Way aren't telling us that it doens't involve us. We have been used to having investors immediatly meet demand we create, well, no more. Capitalism isn't necessarily our friend, and it isn't an American invention or monopoly.
The biggest failing of Obama is that as a former community organizer who found solutions in compromise that he gave into the Republican demand that he not roll back the Bush Era tax cuts for the wealthy without too much of a fight. That is looking like the most dangerous mistake he has made so far for the imbalanced income distribution is now the biggest single threat to the future of American democracy. At least it means that the super Rich, like the Koch Brothers in Iowa, get to fund groups like the Tea Paries who are skewing the political dialogue to protect the wealthy from a fair tax burden and causing the underfunding of scholls and infrastructure. At the most is means a return of the kind of Crony Capitalism of a Century or more ago, and opens the way for the type of disruption more typical of Greece or Egypt to eventually occur here.
The lopsided wealth distribution has turned the kind of business oriented and wealthy Americans who join the Republican party against the interest of the U.S. If you define that not as the interests of Wall Steet or Multinational Corporations, but as the interests of a majority of citizens in this country, the dissonance of Conservative politics generally, and the interests of a majority hasn't really materialized, yet. But it might as it dawns on people that both parties, but especially the Right, does not have their economic future at heart. The Union Busting of Gov. Walker in Wisconsin, and the so-called Mdicare reformes proposed by Paul Ryan may wake up some people to the GOP and Conservative agenda of protecting the wealthy which brings class war to America. The meme of the duopoly may be too strong to trigger a true revolt, but if Republicans get turned out in 2012, that would be a desired result. It could be a measure of the power of the new plutocracy if their money is able to buy more political power for the Right. It might signal the beginning of unrest in this country as well.
The gang culture that plagues the poorest neighborhoods of this country is about people who have little fighting over nothing or the crumbs left them by an oligarchy. This is true in most of the third world including Mexico whose financial disaster of 20 years ago has promoted a huge rise of organized crime that has spilled into this country. In the 1930's the Great Depression caused a spike of crime against Prohibition, but also against the wealthy and the banks. These forces were held in check not so much as by an economic recovery which didn't really begin until 1937, as much as by a faith in the future and a trust in the government. Fortune might not smile as fondly on us this time around.