Q: How Wisely Do ‘Wealth-Friendly’ Policies Employ Capital? A: Not So Wisely

To say that reaction to my latest post has been ‘mixed’ would be generous.  While grasping the way the Bush-era handouts to the richest 2% reinforce wealth redistribution, it seems that folks may not yet see just how they're like a ‘Death Cult’.  At least in the opaque allegorical form I set out in part one of the newly planned 3-part series.  For most readers, the point still seems a little abstract.   So here I lay down some more explicit exposition.  Today I will demonstrate the difference between ‘Wealth’ and ‘Productivity’.

The Right Wing may be many things, but subtle is not one of them.  Their financial platform is quite clear:  Profit is the ultimate yardstick of economic progress, tax cuts and deregulation of markets allow perpetual increases in the level of profit; ergo continual reductions in tax and regulation guarantee the wisest allocation of resources.  But is this true?

Answer:  Not Unless You Think The Lottery Is A Sound Investment

Far from it.  We’ve already disposed on multiple occasions with the Laffer Curve myth1.  We’ve already demonstrated the relationship between tax cuts for the richest 2% and deterioration of the income for the median tax filer2.  And we’ve even provided an analysis from uncontested data from the Bureau of Economic Analysis and the Federal Reserve showing that the federal government is typically 4,700% times more productive than the financial sector.3  But now take a gander at the chart above. 

Note the difference in the % of the total money supply our ‘wealth-friendly’ policies allocate to each sector and their relative productivity in terms of GDP.  We literally piss away over 34% of our money on a sector (i.e., Corporate Finance) that provides only 0.8% of our productive capacity3.  Not too shrewd now, is it?  That’s more or less like a man in 2008 making the average annual salary of $43,000 spending $14,710 of it on lottery tickets4.  Is that what voters of Wisconsin elected Paul Ryan to do?  Spend over 34% of our national productive capacity on Powerball tickets?

Wasted Money and Wasted Jobs

“But wait,” you say.  “Aren’t there other ways of measuring the inefficiency of this resource allocation?”

Indeed there are.  While it’s not possible within this short space to exhaust all the possibilities or perform  superfine, CBO-quality calculations, it’s still worth performing a rough, back-of-the-envelope calculation to determine the relative magnitude of the inefficiency.  Here are my guesses as to the maximum potential figures for Wasted Money and Wasted Jobs:

• Wasted Money:  Holding all price levels equal to those of 2008, the last year for which fully comparable data was available for all variables, we typically throw away $1.9 TRILLION or $1 out of every $12 in circulation.  Smooth move, X-Lax. 

Now keep in mind that represents the net negative impact Gross Domestic Product or "GDP" of our current, un-optimized resource allocation.  Basically this means to say that by spending $X's in less productive areas of the economy instead of spending that same dollar in the more productive segments of the economy, we lose $1.9 trillion of GDP.

 

Of course the reality is more complex than this because there is the possibility that radical changes in the allocation of resources to a sector can alter its aggregate productivity (e.g., per unit step fixed costs may not vary directly with the scale of operations, and the introduction of too much liquidity in a given market all at once may result in a certain amount of inflation).  But it is still an interesting, thought-provoking exercise to estimate the maximum potential cost of inefficient allocation, even if the assumptions used are pretty basic.

 

If you care to see details of my calculation, look at cell V118 on the tab ‘Velocity of Money by Sector’ within the workbook here.  I can answer more detailed questions upon request.

• Wasted Jobs:  68.7 million jobs sound like a big number to you?  Well, it should—that’s 47.5% of our total employment base of 144.5 million jobs per the October release by the Bureau of Labor Statistics.  “Fuckin’ ape-shit crazy!” you say.  “How the hell can that be right?”

Well, take a look for yourself.  See cell BB118 on the tab ‘Velocity of Money by Sector’ within the workbook here for more details.  That’s the best shorthand calculation available based on data from the Bureau of Labor Statistics and Bureau of Economic Analysis regarding wages and total compensation by sector and their typical percentages of GDP through 2008 and current employment base as of October 2010.

“But WTF could that possibly mean that we have a supply of capital that could fund employment at a level 136.1% of our actual workforce?”  Well, among other things it means that the current “magic-of-the-markets” system of allocating wages ain’t so fair.  But you already knew that based on our analysis of income inequalities from the Bush-era tax regime2, right?

Recommendations

“Goddamn, that’s disgusting!” you may be thinking to yourself.  And so it is.  There is no freakin’ way we should tolerate simpletons like congressman Paul Ryan (R-WI), senator elect Ron Johnson (R-WI) and Right Wing pundit David Frum5 to be pushing yet MORE tax cuts for the wealthiest 2% and stonewalling every effort to regulate the pitifully unproductive financial industry.  Get on the horn or send an email straight away to your  representatives and senators telling them:

• “NO WAY” to renewal of the Bush-era handouts to the richest 2%.
• “Get working NOW on further financial regulatory reform”
• “Stop messin’ around with baloney cuts to high value-add programs like Medicare and Social Security—they actually provide economic benefit, instead of hamstringing the economy like tax cuts do.”6

As a nation we just can’t afford to go on like this.

Footnotes

1    See the inaugural blogpost here decisively discrediting the baloney notion that tax cuts invariably boost the economy.

2    See this blogpost detailing how the Bush-era tax cuts for the richest 2% ended up increasing the average income of the wealthiest Americans by at least 20% while DECREASING average income for Joe Average by 17%.

3    Read here how $1 dollar in the federal government sector typically increases GDP by 9.4 times whereas $1 in the financial sector DECREASES it by 80 cents.

4    Yeah, for real.  See data on average wages on cell F12 on tab ‘Profile of Typ. Ee-2009’ and the % of total money supply within the financial sector within cell AK115 on the ‘Velocity of Money by Sector’ tab all within this workbook.

5    That’s the former speech writer for Bush II.  I’m referring especially to a recent radio commentary on “Marketplace” where he again puked forth another plea to give away more tax cuts to the wealthiest 2%.  Contact them and let them know how much bullshit you think that is.

      But one further thing I’d like to call to your attention:  David Frum maintains dual citizenship with both the U.S. and Canada.  Now does it seem right to you that a guy who doesn’t see fit to commit 100% to a country should have a whole lot of influence on policy?  I’ve got nothing against Canadians—I have lots of friends in Montreal myself.  But they seem to know that if you’re gonna flood the airwaves asking a country to go to war, you’d better be fully committed to said country yourself; they’re all single-country citizens of Canada.

6    And don’t just take my word for it.  Mark Zandi, chief economist at Moody's testified before the Senate in September about the positive fiscal multiplier effects of these programs.  Forward this to  representatives and senators  if they just don’t seem to get it.

[Editorial Note December 2, 2010:  See item #1 regarding revision to calculation of M3 here.]

Would Henry I Have Castrated Goldman Sachs?

Even primitive medieval economies understood the importance of guaranteeing the integrity of currency;  Henry I of England imposed the penalty on castration on counterfeiters.

Bad money drives out the good” – Gresham’s Law

Gresham’s Law is the formal name economists give the common sense notion that counterfeiting is a bad thing and should not be encouraged.   The upshot is that the phony money undermines your confidence in all the money in circulation, even if the bogus bucks are a relatively small portion of the total ‘dollars’ in circulation. 

You need to KNOW for a fact just how much real, tangible value you can expect to receive in exchange for those ‘dollars’, and that’s entirely independent of any action on your part.  At least in the short term that’s entirely dependent on how your fellow market participants perceive the value of that currency.  Even if you accept some shiny beads as payment in a real estate deal, you shouldn’t really be shocked when you’re evicted for offering the same as a rental payment to your new landlord the following month.

Not exactly a super-complimicated egghead theory fresh out of some high powered thinktank.  This is, and has been since time immemorial, just basic, fundamental stuff. Christ, Gresham could see it and he grew up before the invention of toilet paper.

So why can’t Paul Ryan (R-WI) and the other Republican’ts see it?  Why do they seem so oblivious to the Wall Street counterfeiting operation that's hamstringing the economy?

Two Simple Ideas
To truly understand the Ryan-enabled counterfeiting scheme, you have first to understand a little more economic theory.  Just two simple concepts should make this all clear.  Read these carefully, because they'll help you get a whole lot more out of the rest of this piece.

1.  Money isn't just the green stuff you use to pay for your morning coffee.  It's also the stuff in your checking account, your savings account, and money market accounts.  That's basically what egghead economists call "M2".  And "M3", the broadest definition of money even includes some larger deposit and money market fund balances and other longer-term instruments, the valuation of which depend crucially on the creditworthiness of the instituion at which they're held.  The idea is that, in theory, the value of these items is so un-controversial that they are all expected by be accepted on an equal basis with the old fashioned coinage. 

Before you go on to the rest of this article, be sure that you really understand the potential gap between appearance and reality for these two:  M2 is, if not actually printed by the Treasury Department is at least guaranteed by the FDIC up to $250,000; with M3 you're often taking your chances on the strength of some corporation's balance sheet.  Good luck with option #B, there.

2.  Money doesn't do you any good if you don't use it at some point.  An old workmate of mine used to have a colorful turn of phrase to describe the possession of something that is ostensibly praiseworthy but practically useless:  "That's like tits on a boar hog."  Economists have a more formal way to discuss the extent to which nominal money may or may not in actuality be like "tits on a boar hog":  The Velocity of Money.  The Velocity of Money is a measure of just how often a particular dollar gets spent during the year, and the more often the better. 

As a radically simplified illustrative example, let's imagine a small, isolated island where the only recognized medium of exchange is the conch shell.  You can't really print them at will, so at least in the short term there are a finite number of conch shells in circulation.  While that's great from the point of view that there's next to zero possibility of counterfeiting them, the downside is that only 1 person can own any specific conch shell at any given point--implying some real severe limitations on our island economy's ability to expand.  You and I can't both have the conch to spend; either you spend it on a new bamboo cross country bicycle or I spend it on a Starbuck's coconut latte.  Can't have both.

Well, actually, under certain conditions, we CAN have both--just not at precisely the same time.  See, if the material resources and skills of the islanders are broad enough, it's just possible that I am an expert maker of bamboo cross country bicycles and that you are a top notch coconut cafe barrista.  I can accept the conch shell from you in exchange for the bike, and later you can accept the shell back in exchange for the coffee.  We have exchanged this one, single conch shell twice within the day, both doubling the Velocity of Money for our currency and increasing our Gross Domestic Product ("GDP")by one bicycle and one coffee.

Economists have recognized this mutually beneficial relationship between GDP and the Velocity of money that they've come up with a simple equation to describe it:

GDP / Money Supply=The Velocity of Money

So one decent thumbnail statistic you can use to monitor the health of the economy is the Velocity of Money as measured by M2.  The higher the better, because it means that money is going to practical use.  And it correlates fairly well with employmnet--the faster M2 moves, the lower the unemployment level.  For the period that statistics are available, the correlation is about 67% between M2-fueled Velocity and employment, and even greater, 77%, between the change in M2-fueled Velocity and employment.  See details here.

On the other hand, M3 is cearly the bad guy; growth in M3 actually INcreases UNemployment.  See details  here.

And, as if you hadn't already noticed the how the Dow Jones is topping 11,000 once again while unemployment remains flat, here is absolute proof that the Reaganauts' "magic of the markets" actually destroys the economy:  Increases in the Dow strongly correlate with increase in job-icidal M3.  See details here.

Okay, got all that?  We want our money supply to be good; more M2 less M3.  Because the healthier our money supply, the faster it turns, and the lower unemployment is.  Policies that surrender the public's regulatory function over financial markets create more bad M3.  Focus on that, 'cause you're going to need to in order to keep yourself from being fleeced by Paul Ryan's buddies at Goldman Sachs.*

Gresham's Law Redux
Do you see now how Wall Street's loosey-goosey, under-regulated Wild West approach to securities marketing is tantamount to counterfeiting?  By getting the likes of Paul Ryan to stonewall against any and all attempts to regulate financial markets, that leaves walking shitstains like Goldman's Fabrice Tourre to get real hardworking Americans to throw billions and trillions of the good green stuff at him in exchange for bogus "securities" that are supposed to be invested for their retirements.  By preventing the American government from effectively policing its own monetary system, Paul Ryan is enabling Wall Street banksters' efforts to flood the country with bogus M3.

Yeah, maybe the "Fabulous Fab" will get away with a slap on the wrist, a fine to be paid out of some executive malpractice insurance fund.  But even if he does get convicted and does real time**, it'll all be too late.  It couldn't stop him from forging hundreds of millions of dollars in fraudulent M3--and decisively undermining everyone else's confidence in the U.S. monetary system.  Not that Fab's the only one.  Far from it.  Any account of the highlights (or lowlights) of the bankster perp walk, in my opinion, would not be complete without mentioning:

Magnetar:  This Chicago-based financial firm bundled tens of thousands of bad mortgages into M3 securities and fraudulently market them to the public--all the while making a bet with JP Morgan Chase* that the mortgages would default. 

AIG:  Ryan eventually voted (pleaded is more like the word) for the $80+ billion handout to these fumblenuts who bet more on the ponies than they had in the bank in honest, god-fearing M2.

Upshot
There you have it.  Pretty simple.  Ryan's utter failure to address the real villains in this economic story, the under-regulared Finance and Real Estate sectors, has resulted in a perfect illustration of Gresham's Law.  Counterfeit M3 money is contaminating the economy, leading to a panicked sclerosis and seizing up of the nation's financial arteries, making good M2 money unavailable for down-to-earth productive small businesses and driving up unemployment. 

Far from doing anything to actually help the situation, Ryan's actually trying to shove yet MORE money into the corporate sphere by defunding America's popularly-elected government through big corporate tax breaks.  See my inaugural post on that very topic.

So my guess is that yes, Henry I would have castrated the Wall Street banksters and their Right Wing enablers.

A Call to Action
What can you do?  A lot, as it turns out.  Call and write your representatives and senators immediately and often telling them that Ryan's "Roadmap to Ruin" is a horrible mistake and a distraction from the real issue--punishing counterfeiters on Wall Street and introducing for-real regulation.  Don't take any guff.  You know that you know what you’re talking about.  If you have to, send them a link to this blogpost to clear it up if you don't think they're quite smart enough to get it without drawing a picture. 

Footnotes

*During this last election cycle, Paulie boy was a big favorite of the banksters.  His clients included not only Goldman, but CITI, Bank of America, JP Morgan and a host of other F.I.R.E.  (i.e., "Finance, Insurance and Real Estate sector) companies and trade groups.  In fact, he got about $246,000 or 25% of his total PAC money from these guys.  See details here.  Who knows how much else he got INdirectly through Orwellian-ly named PACs or individual contributions?

**Say, can a stay in a country club prison be considered "real time"?  If the worst punishment the state inflicts on criminals here is to limit furloughs to less than one week, stop prostitutes from trolling the grounds and limiting the amount of money perps can spend in the commissary, how bad can it really be?

[December 2, 2010:  See item #1 in Addenda, Updates, Revisions here regarding the updated calculation of M3]