Two giants in economic thought squared off last night to debate their competing economic theories on Bloomberg TV. On the Right was Congressman Ron Paul, champion of extreme libertarianism, and on the Left, Paul Krugman the most prominent advocate of Keynesian economics. The two argued about the role of the Federal Reserve, whether the debt needs to be cut, and how America can avoid the crisis currently sweeping Europe.

Paul argued that the Federal Reserve was responsible for the country’s economic woes, that debt levels were dangerously high, and that markets should be self regulated rather than controlled by government. Krugman countered that without government intervention, the economy would collapse completely, and contrary to prevailing wisdom, the current debt levels are not  unmanageable.

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Noam Chomsky (Image via RottenTomatoes.com)

By Ben Cohen: When the massive economic crisis hit the US back in 2008, people struggled to understand how everything fell apart so quickly. Up until that point, the American economy was heralded by the media as a miraculous powerhouse embodying the principles of the free market and dynamic entrepreneurialism. The reality was that the economy was incredibly fragile and built on an insane amount of debt, mostly from the fraud ridden real estate bubble. Janitors were sold mortgages on multi million dollar mansions while the same lenders bet against them paying it off -  an illogical and highly irrational consequence of extreme deregulation in the finance industry. When the debt was called in and no one was there to cover the losses, the economy fell apart destroying the myth of American capitalism.

My own understanding of economics at the time was not deep enough to fully comprehend what was going on. I had always understood that the system was rigged in order to preserve wealth for the wealthy, but I had not been aware of the enormity of the corruption and the systemic flaws that led to a such a huge recession and the near collapse of the world economy.  In order to find out more, I got in contact with Professor Noam Chomsky, one of the clearest and most incisive economic thinkers around. As we approach yet another period of serious economic uncertainty – (this time stemming from the Euro Zone), I thought I’d re-post the interview as Chomsky’s analysis of the current economic paradigm and the history behind it is extremely useful in understanding why we continually face such enormous threats:

TDB:  What are your thoughts on the current economic crisis and the bail out bill that passed in the Senate?

NC: The crisis is real, it’s not manufactured. Exactly how serious it is, one doesn’t know. Some of the most credible specialists like Nuriel Rabbini who have a very good record of accurate prediction think it’s an extremely serious crisis and that the system might just freeze up. There is also a good deal of controversy about whether the current proposal will do more than put a band aid on a serious problem. Now there are alternatives, constructive alternatives. And they are being proposed, I mean, you can find them in the literature, but they are not on the agenda. It’s interesting, I mean the public is strongly opposed to the bailout, you can see that in the behavior of Congress, the House of Representatives where the Representatives come up for election in November voted it down, despite the enormous pressure. The Senate, which is kind of a millionaires club, where only a third of them come up for election, they passed it overwhelmingly. So the House did respond to a populist revolt. Superficially that looks like a sign of  a functioning democracy, but that’s only superficial. I mean even a dictatorship, when the public is rioting, the government will respond. In this case, the public’s reaction was resorting to shouting ‘No’.

In a democracy, in a functioning democracy, what would be happening is that popular organizations, unions, political groupings, others would be developing their programs, putting them forth, insisting that their representatives implement those programs. And there are possible programs that might make a difference, but none of this is happening. And the reason this isn’t happening is because there is no functioning democracy. The role of the public is restricted to shouting ‘No’. The bill passed in the House because the alternative was quite dire, but it doesn’t mean it was a good proposal, or by any means the best proposal.

I mean there are serious problems, and they have deep roots. The immediate problems were caused by the housing bubble that Alan Greenspan had permitted to explode. They could have controlled it on the basis of the kind of lunatic belief in free market fundamentalism. So they allowed this bubble to explode and the houses were way beyond their trend line, the actual realistic price. They’ve been collapsing, but they’ve got a long way to go. The Bush economy, which was like the Reagan economy, is very fragile, and is based on debt – lenders from abroad, and also consumer spending which is debt driven. Consumer spending was largely based on inflated house prices, essentially collateral, and as the house prices collapse, so does the basis for consumer spending, then the economy collapses because its not a well functioning real economy.

All this goes back more deeply to the financial liberalization back in the 1970s. Now financial liberalization is just a catastrophe waiting to happen, and there are very well understood reasons for that. Markets have built in inefficiencies, serious inefficiencies which are well known. One of them is that transactions in a market do not take into account what are called ‘externalities’, so if you and I make some sort of a deal , say you sell me a car, we may make an arrangement that is good for us, but we don’t take into account the costs for others. And there are costs, traffic jams, pollution, the price of gas, and so on. They may seem small, but they’re not. They add up and they can be quite large. In the case of financial institutions, they are very large. A financial institution has the task of taking risks, and if it’s a well run institution, say Goldman Sachs, it tries to cover the potential losses to itself, but only to itself. It does not take into account what is called systemic risk, the effects of its failure on the whole system. So that means risk taking is what’s called ‘under priced’ – you are not really taking into account the risks, the real risks when you look after only yourself, and that means there is a lot more risk taking than an efficient system would permit. And that’s bound to lead to crisis, and it has ever since financial liberalization was initiated back in the 70’s. There has been an increase in both the regularity and the scale of financial crises, and now a major one has hit and come home. So it was predicted and predictable, and it’s now serious.

TDB: Does the nationalization of Fannie Mae and Freddy Mac and the enormous bailout on Wall Street represent an end to Laissez Faire capitalism?

NC: It’s not an end to Laissez Faire capitalism because it never existed! The nationalization is very dramatic right now, its all over the front pages, but the fundamental principle that the public takes the risks and pays the costs while profit is privatized, that principle which we are seeing dramatically right now, that’s a basic principle for the whole economy. I mean, the whole advanced economy is based on that principle. The state sector of the economy, which is dynamic and the source of much of the innovation and development that underlies the advanced economy, that is the system in which the public pays the cost and takes the risks, and profits are ultimately privatized. Take say, computers and the internet. They were pretty much in the state system for decades before they were handed over to a private enterprise to make profit from, and virtually everything you look at in the advanced economy and the cutting edge economy works like that. I mean there is now talk in the press, commentators talk about the socialization of risk and cost and privatization of profit, but they are talking about it as if it is something new, and a blow to laissez faire capitalism. It’s not new. That’s the way the system works, and has worked for centuries.

TDB: What did you think of Ron Paul and his brand of old style Repblican libertarianism? Was his philosophy based on mythology?

NC: It’s based on a myth if it assumes there was ever a free enterprise, or market economy that did not have critical state intervention. I mean there are societies that have real market economies. That’s what we call the Third World. They have it rammed down their throats by force. That’s part of the reason why they are the Third World. But the rich developed countries were always based on substantial intervention. I mean the mythology that is circulating now is mind boggling. I mean there is talk about Ronald Reagan the icon of free market capitalism, where on the congressmen said that ‘this bailout is putting a coffin on Reagan’s coffin”. Reagan was the most protectionist president in post war American history! He doubled protectionist barriers. He called on the Pentagon to initiate programs to teach backwards American managers modern Japanese style production techniques. He carried out one of the largest bailouts in American history, Continental Illinois. He may not have even known what the programs were, but his administration was a strong believer in large scale state intervention

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By Ben Cohen: The culture you grow up in usually has a significant effect on the values you hold. If you have moved to another country you become keenly aware of this fact as you are able to contrast the values of your own society against that of your host’s.

When people are brought up in a tolerant, cooperative society that values things like community, education and art, more often than not, they embody a least a good proportion of those values in their everyday lives. If they were brought up in a violent, intolerant society that valued war, misogyny and greed, there’s a good bet they’d instinctively behave in a way that reflected those values. This is of course an extreme comparison – culture is complicated and the more I have traveled, the more I understand that when it comes to assessing whether a culture is ‘good’,  ‘bad’, or ‘better’, it’s usually a matter of taste and opinion.

There are certain aspects of America that I find enormously attractive as a Brit – the openness and friendliness of the people, their generosity, incredible optimism and dynamic entrepreneurialism, and the lack of a stifling European style class system. It’s a great country to live in and in general, I’m very happy here.

However, there is a side to America that I find extremely unsettling – the relentless fixation on money, the deeply corrupt political system, lack of public health care,  and the massive extremes in wealth inequality to name a few. There seems to me to be a very dangerous combination of cultural, political and economic factors that make greed and corruption a staple of American life. And sadly, I think that America is a country so beholden to the interests of the wealthy that I don’t hold a huge amount of hope that anything significant can, or will happen to change the status quo.

The roots of the problem are, I believe, cultural. America was founded on the ethos of rugged individualism – the notion that you could move to the new world, work hard and become whoever you wanted to be. This in itself is no bad thing, but combined with a political system open to the influence of money, it has become positively toxic. The current monetary system, often referred to as ‘selfish capitalism’ is a ruthless economic paradigm designed to concentrate wealth in the hands of the few and keep the rest of the population in a constant state of insecurity so that they often have to work two to three jobs just to stay alive. This system has been sold to the public as the ultimate expression of rugged individualism – the very definition of the American way, and the only option other than communism. Of course it isn’t, but when the corporate media system owned by the same financial interests that control the political system reinforces that notion day in day out, it’s hard for the public to imagine an alternative.

There is an implied notion behind the theory of free market capitalism that human beings are inherently selfish. This has roots in Darwinian biology, and is therefore seen as a logical extension of human nature. Selfish capitalism is natural, and therefore right.

This every man for himself attitude seeps into everything we do – from who we vote for and how we treat our fellow citizens. In many countries around the world, homelessness and severe mental illness is seen as a reflection of their society and therefore unacceptable. In America, there is a disassociation and disregard for the unfortunate – just walk around any major city and you’ll see hundreds, if not thousands of mentally ill and homeless people begging for money on the streets. In the selfish capitalist paradigm, they are as responsible for their own misfortune as the self made millionaire is responsible for his success. Because America is a country of individuals, the poor and mentally ill are separate from us and can be ignored.

However, for every action there is a reaction, and despite America’s brutal treatment of its poor, there is an undercurrent of extreme generosity that I have personally not seen in any other country. Americans give an astonishing amount of their own money to charities, more so as a percentage of GDP than in any other country in the world. On a personal level, there is a culture of kindness and understanding that is not manifested on a societal level – a strange contradiction that could have some interesting outcomes.

Movements like ‘Occupy Wall St’, the explosion of non-profits, and the deep mistrust of the political classes reflect the growing disenchantment with the selfish capitalism model – a sign that culture in America could be changing. And if the roots of America’s problems are cultural, a significant shift in culture could go a long way in changing the political system.

It is in the interests of the wealthy to perpetuate the selfish capitalist model. It works for them, so maintaining the status quo is a primary objective. They will continue to buy politicians, rig legislation to give themselves tax breaks and access to public money. They will continue to ensure the media doesn’t report on anything of value by focusing on ratings and profit over reporting, and they will smear anyone who suggests otherwise. But the funny thing is, the harder they try, the harder the reaction will be.

And we’re seeing it now – a sign that America’s generosity could be more powerful than its greed.

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Image courtesy of 401calculator.org

By Ben Cohen: The field of economics is often referred to as a ‘junk science’, mostly because it tries to explain human behavior in mathematical terms. This is almost impossible – humans are emotional and irrational, thus predicting their behavior accurately is harder than predicting the weather. But there are some basic truths when it comes to mathematically modeling the buying and selling behavior of people, and amazingly, they are ignored by many actual economists.

Let’s take the theory that governments should enact austerity measures to pull a country out of recession. The theory goes something like this: A country is losing jobs, seeing a decline in economic activity, and as a consequence, its debt spiraling out of control.  In order to maintain a good credit rating and borrow money, governments must control debt, otherwise interests rates go up and they lose their ability to borrow. Therefore the government must slash spending in order to reduce debt. Many countries in Europe (Spain, Britain and Greece for example) are enacting these policies in order to cut their debt and increase their credit rating.

The results have been a complete disaster, with dismal projections for economic growth for the foreseeable future, continued unemployment and no ability to borrow money at better rates. And there is a very simple reason: The theory is completely bogus.

When economic activity declines and jobs disappear, economies can collapse quickly. If people’s wages are cut, they are less likely to go shopping and spend money. If shops stop selling products, jobs disappear at the shops themselves and from the industries that supply them. In climates like this, banks do not like to lend money to create new jobs for a very good reason: They fear they won’t get their money back. It’s a vicious cycle and if left unchecked, it can be devastating.

This is why it is absolutely necessary for government to step in and stimulate demand. By injecting money into a paralyzed economy through unemployment benefits, government jobs, low interest business loans etc, it encourages economic activity. When private lending dries up, only government can restore order and create stability and certainty. We saw this during the banking crisis in 2008 when the private banking system collapsed and the public assumed the debt and borrowed its way out of trouble. The bailouts worked and the economy did not disintegrate.

When governments then cut spending, economic problems are compounded, and recessions can drag on for years, sometimes decades (take Japan – a country that implemented austerity measures after its economic implosion in the early 90′s and has still yet to recover).

Why is this basic economic truth ignored by mainstream economists in academia and in government? Europe continues to teeter on the edge of another major financial crisis and the US has had one of the slowest recoveries in post war history.

There is a pretty simple explanation for this: Government austerity measures often help the rich. When economies collapse, the wealthy can consolidate their power by buying up assets on the cheap. Let’s take the US as an example – a country where the political system has been largely bought out by the wealthy, particularly the Republican party. When the economy imploded and the rich lost their money, the Republican party enacted and supported government spending to re-stimulate the economy. Once the danger had passed and the rich were safe, they went back to being deficit hawks and insisting on slashing welfare. After the crisis, government became the enemy again and private capital the answer to every problem – an obvious function of the GOP’s complete subservience to the needs of the wealthy.

We’re seeing this pattern play itself out over and over again with devastating consequences. Spain’s unemployment rate is running at almost 25% with no end in sight, and the UK’s economy is at a standstill, yet the rich keep accumulating wealth.

The results are plain to see, and even the IMF, one of the original sources of  ‘austerity at all costs’ policies, has admitted it isn’t working.

Sadly, it is working for the rich, so we’re stuck with it.

(Image courtesy of 401kcalculator.org)

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Noam Chomsky breaks down the reasons for the US economic decline over the past four decades:

American decline entered a new phase: conscious self-inflicted decline. From the 1970s, there has been a significant change in the US economy, as planners, private and state, shifted it toward financialization and the offshoring of production, driven in part by the declining rate of profit in domestic manufacturing. These decisions initiated a vicious cycle in which wealth became highly concentrated (dramatically so in the top 0.1% of the population), yielding concentration of political power, hence legislation to carry the cycle further: taxation and other fiscal policies, deregulation, changes in the rules of corporate governance allowing huge gains for executives, and so on.Meanwhile, for the majority, real wages largely stagnated, and people were able to get by only by sharply increased workloads (far beyond Europe), unsustainable debt, and repeated bubbles since the Reagan years, creating paper wealth that inevitably disappeared when they burst (and the perpetrators were bailed out by the taxpayer).

I never truly understood economics until I read Chomsky, and I highly recommend reading his work if you want to understand the reality of modern capitalism. His analysis of the global financial system is astonishing to read as it elegantly lays out the structure of a fraudulent system built on inequality, debt and massive instability. Chomsky has a scientists mind, not an economists, so he avoids inside jargon and focuses on explaining core concepts in simple terms. You can go through an archive of his articles here, and I would suggest reading 'Understanding Power', a brilliant collection of interviews and lectures Chomsky has given over the past 20 years or so.

I've moved slightly away from Chomsky's views on foreign policy in recent times as I think his depiction of Western governments as cruel imperialists bent on destroying the third world is overly simplistic (not entirely wrong by any means though), but his writing on economics is unparalleled in my opinion.

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Paul Krugman explains why despite the very encouraging job numbers this month, the US economy is by no means in the clear. Who is to blame for the continued instability? The supply siders obsessed with deficits and small government:

Very early in this slump — basically, as soon as the threat of complete financial collapse began to recede — a significant number of people within the policy community began demanding an early end to efforts to support the economy. Some of their demands focused on the fiscal side, with calls for immediate austerity despite low borrowing costs and high unemployment. But there have also been repeated demands that the Fed and its counterparts abroad tighten money and raise interest rates.

What’s the reasoning behind those demands? Well, it keeps changing. Sometimes it’s about the alleged risk of inflation: every uptick in consumer prices has been met with calls for tighter money now now now. And the inflation hawks at the Fed and elsewhere seem undeterred either by the way the predicted explosion of inflation keeps not happening, or by the disastrous results last April when the European Central Bank actually did raise rates, helping to set off the current European crisis…..Every time we get a bit of good news, the purge-and-liquidate types pop up, saying that it’s time to stop focusing on job creation.

The conservative preoccupation with debt and austerity measures is, in my opinion, nothing to do with wanting to save the economy. The truth is that precious government money is being funelled into job creation at the bottom end – blue collar jobs and cheap labor. The rich are not enemies of the government stimulating the economy (anyone remember the Wall St bailout?), it just has to be at the right end of the spectrum.

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The chart below dispells the myth that America has a strong middle class – it doesn't, and the sooner people realize this the better (via Cesca):

Americans must realize that the 'American Dream' is a now a myth in order to redress the massive inequalities and stagnant social mobility that defines the modern economy. It is a bitter pill to swallow but a necessary one. Free market capitalism has failed and a new model must be implemented if a brighter future is to be had. To me, the 'Occupy Wall St' movement symbolizes a waking up – a possibly defining moment in US history where mass awareness and non violent protest coalesce to bring down corrupt power structures that have outstayed their welcome.

The economic inequality seen in America today is unsustainable. While Americans may not be fully aware of it, the reality will always trump the myth when there isn't enough money to pay the bills. If we continue along the same trajectory, that reality will set in so fast that Americans will have no choice but to overthrow the current monetary system. And that day seems to be approaching fast.

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The dichotomy between the treatment of the 'Occupy Wall St' movement and the previous Tea Party protests is truly astonishing. It just goes to show how corrupt the state has become -  a blunt reminder that the government no longer works for the people but for corporate power and elite interests. One movement seeks to protect the interests of the rich, while the other seeks to redress economic inequality and corporate malfeasance. The state leaves the Tea Party protesters alone and subjects the anti Wall St protesters to random violence and intimidation.

The sad thing is that the policemen responsible for harassing the Wall protesters is that they too are victims of the financial sectors greed and criminality. The financial crisis plunged the economy into a deep recession making state governments slash their policing budgets and attack public pensions.

The US is still suffering from the 60's culture wars, a lingering identity crisis that pits Left vs Right in terms that no longer really exist. While the police may be identified as blue collar workers and the protesters as liberal college dropouts, the truth is that both are at the bottom of a system designed to prevent their social mobility and economic security.

The corporate state fears the public's understanding of these basic truths and is content to pit one side against the other – until we realize that our problems are the same and solidarity trumps division and fear.

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If you want a typical case study in how left leaning leaders are smeared by right wing commentators, look no further than this article in Foreign Policy that slams Hugo Chavez for his economic record in Venezuela. Writes Jose Cardenas:

It may be that his working and lower class base won't care much that their country ranks 129 out of 129 economies in the 2011 International Property Rights Index or that it ranks 172 out of 183 countries in the World Bank's 2011 Doing Business Report (behind Iraq and Afghanistan). But they will care about the shortages of basic goods, the electrical blackouts, the region's highest inflation that is cutting the value of their incomes and savings, and the mortgaging of their children's future that is the result. A reinvigorated Venezuelan opposition promises to focus on those bread-and-butter issues and Chavez will no doubt try every trick in the book to avoid discussing that record.

Cardenas runs through a litany of Chavez's crimes – nationalizing various foreign companies and stripping them of 'incentives to be effective and efficient', pursuing 'anti market' policies that raise borrowing costs, and generally not doing what the business classes want him to do.

The problem is, Chavez has actually presided over a stunning transformation of the economy that has seen the doubling of GDP, poverty and income inquality rates slashed and huge increases in access to education. A major study by the Center For Economic And Policy Research (CEPR) found that:

• The current economic expansion began when the government got control over the national oil company in the first quarter of 2003. Since then, real (inflationadjusted) GDP has nearly doubled, growing by 94.7 percent in 5.25 years, or 13.5 percent annually.
• Most of this growth has been in the nonoil sector of the economy, and the private sector has grown faster than the public sector.
• During the current economic expansion, the poverty rate has been cut by more than half, from 54 percent of households in the first half of 2003 to 26 percent at the end of 2008. Extreme poverty has fallen even more, by 72 percent. These poverty rates measure only cash income, and does take into account increased access to health care or education.
• Over the entire decade, the percentage of households in poverty has been reduced by 39 percent, and extreme poverty by more than half.
• Inequality, as measured by the Gini index, has also fallen substantially. The index has fallen to 41 in 2008, from 48.1 in 2003 and 47 in 1999. This represents a large reduction in inequality.

There is no doubt that Venezuela is a deeply impoverished country with some very serious problems, but Cardenas's article conveniently leaves out what Venezuela was like before Chavez was in power, opting to focus on issues important to the business community and structural problems that have existed for hundreds of years.

The parallels between what is happening in Venezuala and America are numerous: President Obama is being blamed for problems created by extreme Right wing policy, and much of the press dutifully proclaims that socialistic measures aimed to combat the problems are 'not working'. When results are not immediate, the Right jumps in and insists more market driven policies are needed to solve the problems.

The Right tends to shout loudest when it comes to promoting their ideology, and the best way to combat it is with facts.

Hopefully, the facts will have the final word.

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Richard Wolff describes the economic reality facing most people living in post-crash America:

The combination of high unemployment and high home foreclosures assures a deeply depressed economy. The mass of US citizens cannot work more hours – the US already is No 1 in the world in the average number of hours of paid labour done per year per worker. The mass of US citizens cannot borrow much more because of debt levels already teetering on the edge of unsustainability for most consumers. Real wages are going nowhere because of high unemployment enabling employers everywhere to refuse significant wage increases. Job-related benefits (pensions, medical insurance, holidays, etc) are being pared back.

There is thus no discernible basis for a substantial recovery for the mass of Americans.

Of course the banks and super wealthy have not suffered from the mess they created – the government stepped in to ensure their losses were covered and they could borrow cheaply enough to climb back on top. The rest of us however, have had to contend with market forces without the flow of cheap credit or government support. The results have been disastrous for the majority of Americans, the economic divide increasing exponentially and serious poverty becoming an epidemic.

Where does this lead? Societies are too complicated to make accurate predictions, but history tells us that these trends cannot go on forever. There is only so long that the people can be told their country works for them while their earnings go down and savings evaporate. The disconnect is made possible by relentless propaganda emanating from the wealthy, dispersed through their paid for politicians and giant media conglomerates, and swallowed by work weary citizens unable or unwilling to face reality.

Because that reality is so unfair and unjust that only massive action can reverse it – and when couples are working four jobs to put food on the table, there simply isn't the time or energy to face it. 

That is until it gets so bad that people have no choice but to act, and given the alarming acceleration of economic decline, that time may be sooner than we think.

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