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The Gadfly
Bytes -- October, 2002
IN DEEP VOODOO
Ernest Partridge
The Online Gadfly
www.igc.org/gadfly
Published in
The
Online Journal, October 16, 2002,
and
Smirking Chimp, October 17,
2002.
For The Gadfly's more thorough critique of
neo-classical economics,
see Chapters
Eight,
Nine and
Ten
of Conscience of a Progressive.
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The theory is beautiful. It’s reality that’s got me baffled.
(Source unknown)
Markets cannot exist without shared conceptions of how individuals should behave... In a word, market societies depend on morality, not as some automatic emanation of the market, but as a socially constructed set of rules that are ultimately enforced by government.
Fred Block, "The Right's Moral Trouble"
The Nation , Sept. 30, 2002
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In late June of this year, I instructed my broker to sell all my stocks and to put the proceeds into municipal bonds. Since then, the DOW has lost 19% of its value and the NASDAQ has lost 22%.
My broker thinks I am something of a financial genius. No way! But I might have accepted that compliment had I followed my gut hunches in the Spring of 2000 and bailed out of the stock market. At the time, the DOW was over 11,000 and the NASDAQ over 5,000. Alas, my broker and PBS’s
Wall Street Week persuaded me then to “stay the course.”
Since then, I have decided to let my gut instinct trump Lou Dobbs, Louis Rukeyser and the
Wall Street Journal. All this notwithstanding the fact that my broker, a certifiably honorable fellow, works for a reputable firm untouched by the recent scandals, and reports to me the advice of an army of ivy-league PhDs in economics and
finance and more than a few Nobel Laureates. Moreover, I have never
taken a formal course in finance, and in the only economics course I
ever took (as a freshman) resulted in one of my very rare C-s.
And yet today I am inclined to discount the pronouncements of mainstream economists. How do I justify this hubris? Simply this: I choose to live in and deal with the real world. On the other hand, most of the neo-classical economists that dominate Economics Departments in the universities, and that define the “conventional wisdom” of the securities industry and conservative politics, have elected to dwell in a Wonderland of theory and dogma that is blissfully detached from the inconvenience of dealing with stubborn natural facts. They fail to appreciate that, as Gaylord Nelson put it, the economy is a wholly owned subsidiary of the natural environment. (An elaborated defense of these outrageous pontifications may be found in
“The New Alchemy,”
“Flunking Econ. 101,”
“Perilous Optimism” and
“With Liberty for Some,”
this
site). Honorably excluded from this criticism are the so-called “ecological economists” such as Herman Daly, Kenneth Boulding and Robert Costanza, to name a few, and a few economists with a surviving and operative social conscience, such as Paul Krugman and Amartya Sen.
All of these estimable economists have a healthy appreciation of the limitations of their discipline.
The chattering media economists, along with my broker, reassure me that the stock market must soon find a “hard bottom,” from which it will recover from the recent “setback” and resume a steady ascent. A good time to “get back in,” they say.
From my philosophically and ecologically informed, and my economically uninformed, perspective, I beg to differ. I fear that there is much worse ahead. And this is why:
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The accounting scandals now in the news (Merrill-Lynch, Anderson, Enron, Global Crossing, Sunbeam, ImClone) are the tip of the iceberg, with much more to follow. Through "creative accounting," stock prices have been artificially inflated as anticipated earnings have been put on the plus side and negative figures hidden. All this puts off the inevitable day of reckoning long enough for the executives to cash in on their stock options, feed their foreign accounts and then bail out. Now that day of reckoning is fast approaching. Enron, Global Crossing and WorldCom are just the beginning.
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In this era of enthusiastic de-regulation, the "regulatory" agencies (e.g., the Securities and Exchange Commission and the Federal Energy Regulatory Commission) have failed to regulate. Instead, their lapdog commissioners have been paid off for their inaction with cushy corporate Board appointments. For example, Sen. Phil Gramm’s wife, Wendy, formerly a FERC commissioner, moved on to the board of Enron. And the revolving door goes both ways, as Harvey Pitt, a corporate fox (previously a lawyer for Anderson), is appointed to the SEC to watch the hen house. Even so, unbiased regulation remains an indispensable function which only the government (in our behalf) is qualified to perform. The game is not possible without an umpire. So when the umpires leave the field, the “game” deteriorates into anarchic chaos. (See
“Kill the Umpire”).
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The dirty secret is now out: the securities market is rigged. Insider trading laws are a joke because they are unenforceable. (Do you really believe that a couple of high-finance types don’t trade insider stock tips when they are alone teeing up on the back nine?) Only after the low-hanging fruit has been picked by the insiders are the rest of us allowed into the orchard. Though “smart money” types are privately convinced that ethics should be confined to
commencement speeches and that morality is for Sunday School, in fact flourishing markets are founded upon a moral virtue:
trust. That trust has been conspicuously violated. Accordingly,
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It is finally beginning to dawn on small-time investors like you and me that we have been taken for suckers, and so we are getting out. In addition, because the Bush regime has managed to piss-off most of the rest of the world (with broken treaties, visions of empire, and arrogant bullying), a flood of foreign investors are also pulling out of the US economy. Efforts to restore trust, such as the legal harassment of Martha Stewart, are recognized as superficial window-dressing.
Major culprits such as Ken Lay, Thomas White and Dick Cheney remain
untouchable.
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"Reverse Robin-Hoodism" (taking from the poor and giving to the rich) is the essence of Bush's economic policy. It is exemplified in Bush's tax "reforms" (half the refunds to the top 1%) and the now-deferred but eventual abolition of the estate ("death") tax, the return of federal deficits, the raid on social security, the exporting of US jobs overseas, etc. ad nauseam -- all this is increasing the "top-heaviness" of the economy. Those who produce the wealth (i.e., the "bottom 98%) are being fleeced by those who own and control the wealth (the top 2%). Today a Fortune 500 CEO earns in half a day what his average worker earns in a year -- up ten-fold from twenty years ago. (See
“The Deserving Rich?”) And it still isn't enough -- the CEO's want more. Result: a coming loss of demand as disposable income in the general public continues to shrink.
"No sales without buyers" is a bit of economic wisdom that is
apparently beyond the comprehension of the geniuses in Washington
who draw up economic policy.
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In standard conservative economic policy there is no tomorrow – not in the long-term, anyway. It’s basic freshman economics. When values are measured in cash (i.e., “monetized”), the future is “discounted.” For example, at a discount rate of 5%, present value is halved in fourteen years. At the same rate, the “value” of the remote future decreases to virtually nothing. Thus a modest short-term return on an investment in nuclear power offsets, by this arithmetic, the death of thousands of innocents
by radiation poisoning in the remote future. (For an elaboration, see the section “The Pricing Argument” in
“Perilous Optimism.” and the first section of
“In Search of Sustainable
Values”).
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Bush administration and congressional policy-makers, along with many of their economic advisors, are ignorant of fundamental ecological and scientific principles, and moreover they are proud of it. When physicists at MIT determine that missile defense is a chimera, the Bushistas respond by threatening to cut federal funding of MIT research. Although global warming is the consensus opinion of atmospheric scientists throughout the world, Christy Whitman’s reply is to keep global warming out of the annual EPA report. And when government social scientists come up with the “wrong” conclusions about crime, poverty and teen-age pregnancy, the Bush brigades fire the scientists and/or “de-fund” the agencies. In short, the message of the Bush administration to the scientists is “don’t come to us unless you have the answers we want.” (See
“The President of Fantasyland”).
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Science, which is so despised by the Bush bunch, projects that global oil production will peak some time this
decade (see
Hubbert's
Peak and our "The Oil
Trap"). No scientific projection bears more gruesome implications for the world economy, and perhaps for the civilized condition itself. With a worldwide "Manhattan Project" devoted to a transition to a post-petroleum economy, we mighty dodge that bullet. But don't expect any concern about this coming crisis from the oil men at the head of our government. They've got it made for the rest of their lives. Posterity? What has posterity ever done for
Dubya?
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In other words, the governing economic theory is a dogma, without what Freud called a “reality principle” – a cognitive device whereby “the real world” can significantly impact and correct the dogma.
(For the content of this dogma, see.
"The
State Religion"). Case in point: the doctrines of “supply side” and “trickle down,” whereby a cut in taxes and
a diversion of still more wealth to the wealthy “must” result in economic growth, enhanced revenues, and improved standard of living for all. It was tried in the Reagan administration and, as we well know, failed
spectacularly as the national debt tripled. But never mind that, say the true believers. When the Clinton administration rejected “supply side” theory and raised taxes, two ex-Professors of Economics, Dr. Phil Gramm and Dr. Dick Armey, predicted economic catastrophe.
Their official dogma so stipulated. Instead, the federal budget once again showed a surplus, and the United States enjoyed a decade of unprecedented prosperity. Unfazed by this compelling evidence, the Bush economists reinstated “supply side” economics (what Poppy Bush called “Voodoo economics” before he joined the Reagan team) and, well, you know the rest. As true dogmatists, conservative “supply side” economists prefer not to be “confused by the facts.” Instead, they believe their own propaganda and adhere faithfully to their doctrines. When reality is found to be inconvenient, they proceed to “invent” a more congenial “reality.” These are paradigmatic “post-modernists” for whom “reality” is simply what they want it to be. Scientific evidence, history, practical experience, even common sense, be damned.
An economy run by people like this is not an ideal environment for one’s investments.
And so, in sum, the reason we are heading straight for disaster is that our country and its economy are in the hands of individuals who are (a) ignorant, (b) dogmatic, and (c) arrogant.
And (b) and (c) foreclose remedies for (a). As Walter Mondale used to say (uselessly) about the Reagan administration, "they know all the answers, and what they know is wrong."
The good news is that this dreadful situation is not hopeless. The bad news is that a remedy is bloody unlikely so long as the present crowd is in power.
Here are some remedies (with links to elaborations of these principles):
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The public sector
must be revived, reversing four decades of disparagement and neglect. The notion that a flourishing economy can somehow emerge (“as if by an invisible hand”) out of a population composed entirely of private, self-serving egoists, is a pernicious and dangerous myth. Public service must once again be recognized and properly compensated. “9-11" reminded us all of the dedication and heroism of the police and firefighters. There are numerous other individuals on the public payroll upon whom our society and economy depend: air traffic controllers, food inspectors, forest rangers, weather forecasters, researchers and teachers – the list is endless. We must no longer treat these as “loser professions” for “bureaucrats” who can’t cut it in the “the real world” of the private sector. On the contrary, we depend on them and they deserve our gratitude and support.
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The regulatory regime must be restored to full and effective function. We must bring back
the “umpires.” Every governmental regulatory agency emerged out of a perceived public necessity: the Food and Drug Administration was established to deal with the scourges of tainted meat and untested drugs; the FCC was established at the insistence of the broadcast industry; the SEC and the FDIC emerged in response to the abuses of the securities industry which led to the crash of 1929 and great depression that followed. The recent enthusiasm for “deregulation” was founded on dogma and driven by special interests, and in disregard of the compelling practical historical experience which initiated these agencies.
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Spread the word, through the schools and the media, that
Science is not just another dogma.
And then, apply scientific expertise and principles to public policy. Acknowledge, through scientific awareness, the physical and environmental limits and implications of public policy. Whitehead said it well: “In the conditions of modern life, ... the race that does not value trained intelligence is doomed."
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Supplement “trickle down theory” (wealth generated by the investments of the rich) with “percolate-up theory” (wealth generated by the expertise and labor of the workers). Recognize that national wealth and civic tranquility are best accomplished through
the cooperative effort of all segments of
society, not through “class warfare.”
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We must invest in both physical infrastructure (roads, rails, utilities, public buildings) and “human infrastructure” (productive skills, civic responsibility, historical consciousness, political engagement), which means, once again, a renewed dedication to and investment in public education. We have, of late, paid dearly for the neglect of these infrastructures during this heyday of “the private society.” Unless they are restored, we will be ill-prepared to deal with the crises ahead.
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We must recognize that
a
society is more than its economy.
A healthy and vigorous economy rests upon a foundation of non-economic values – the affirmation of family and community, the cultivation of the arts and humanities -- and these values in turn issue from a system of education dedicated to more than the production of workers and customers for the corporations, and with media dedicated to more than the engineering of consumer demand and the generation of profits.
There is scant evidence that the Bush administration has the slightest interest in effecting these remedies. And so we are unlikely to escape the dreadful economic costs of their folly unless and until they somehow gain economic and moral enlightenment. Alas, this is unlikely since such a conversion could only follow a repudiation of their cherished dogmas. Thus the compelling task before us is to replace these short-sighted and self-serving ignoramuses with new leaders.
Until that happy day, I will continue to keep my savings in municipal bonds, T-bills, and other such securities. And if I buy stocks again, they will likely be in enterprises that cultivate a flourishing community of investors, managers and workers, that earn one’s trust through clear manifestations of integrity and civic responsibility , that maintain a healthy respect for science, and that deal with the real world. For the present, it appears that such enterprises are more likely to be found beyond our shores.
Copyright 2002 by Ernest Partridge
PostScript. August 2007. It appears that the much-dreaded "day of
reckoning" is close at hand, as an epidemic of junk bond defaults and
sub-prime mortgage foreclosures are leading to a collapse in the credit
market, to be followed by "economic Armageddon.". (See Mike
Whitney,
"The Grim Reaper Pays a Visit to Wall Street".)
A year ago, against the advice of my "expert" friends, my wife and I
cashed in our T-Bills, and paid the balance on our mortgage.
Unlike most households, we now have no debts, as we await the financial
calamity directly ahead.
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