Kat's Catches

By John and Kat.

She starts with a few links from Spiegel Online.

Former US Secretary of Labor Robert Reich: 'Obama Failed to Connect the Dots'

The US mid-term elections on Tuesday are shaping up to be a referendum on President Barack Obama's administration. SPIEGEL ONLINE spoke with former US Labor Secretary Robert Reich about demagoguery in US politics, economic inequality and the parallels between 2010 and 1929.

Reich -- First, we have got an unprecedented degree of concentrated income and wealth at the very top of our society. The top one-tenth of one percent of Americans now makes more than the bottom 120 million. Secondly, courtesy of a grotesque opinion by the Supreme Court of the United States, we now have virtually unlimited money flowing from the rich and from corporations through secret devices that make it impossible to know who is contributing what to various campaigns and to advertising for and against various candidates. Such anonymous groups have spent more than $400 million on the latest election, according to estimates. And finally, we have a broad electorate still unemployed or in danger of being unemployed, still in danger of losing their homes or already having lost their homes, still experiencing a major drop in their savings or their net worth. This frustrated and anxious population is easy prey to demagogues who will blame others for their problems rather than explain what needs to be done.

A Superpower in Decline: Is the American Dream Over?
America has long been a country of limitless possibility. But the dream has now become a nightmare for many. The US is now realizing just how fragile its success has become -- and how bitter its reality. Should the superpower not find a way out of crisis, it could spell trouble ahead for the global economy.

A Superpower in Decline: Is the American Dream Over?

 

When looked at from a distance the last two years look pretty bad on the chart.

Photo Gallery: Tough Times in America
Eight compelling images with captions. Number five points out "On average, the US national debt has been growing by $3.2 billion per day since 2006."

Interview in The Straddler
By James Kwak

The Straddler, an online interdisciplinary publication, has an extended interview  [Advancing Oligarcy: a conversation with James Kwak] with me, of all people, so you can see what I talk like.

This is one section I�m proud of:

Middle class wages have been declining for ten years and stagnant for thirty years, and if you have a financial system that allows people making $15,000 a year to take out $400,000 mortgages, I don�t think that�s the fault of the guy making $15,000. I think it�s the fault of the financial system.

But, let�s say I�m a guy who makes $15,000 a year. I realize, wow, I can get a $400,000 mortgage and I can live in this house for a few years, and if housing prices go up, I can flip it and I can actually make a couple hundred thousand dollars. And let�s say I�m really clever, and I say, if housing prices go down, I�ll just walk away and I will have gotten to live in a really nice house for three years at no cost to myself. I mean, that�s the worst, most cynical spin you can put on it, right? But this is exactly what people on Wall Street do. The person who is criticizing the janitor for doing this is the same person who thinks that businesses should exploit every legal opportunity to make profits. So even if you attribute the worst possible state of mind to the guy making $15,000, he�s still just doing what any businessman should do under the circumstances. But our national ideology somehow doesn�t allow us to think about it in those terms.

 

Also from The Baseline Scenario, Phony �Fiscal Conservatives� � In The Midterms And Beyond 
By Simon Johnson

Should we take seriously people who, in the current US political debate, argue that they are �fiscal conservatives�? No.

These self-labeled conservatives are very far from even being willing to discuss the real issues � let alone make proposals that would have significant effects. As Peter Boone and I argue on Bloomberg this morning, US �fiscal hawks� are just pretending. Perhaps this will prove effective in the midterm elections, but then they will face the music � what exactly will they put on the table that will make any difference at all?

Unless and until you are ready to really reform the financial sector, you cannot be taken seriously in the fiscal space. It�s the big banks that blew up the economy, caused a devestating recession, and pushed up debt by 40 (forty) percentage points relative to GDP.

None of today�s �fiscal conservatives� showed up to work hard on constraining global megabanks over the past 18 months. They have repeatedly and explicitly earned the right not to be taken seriously.

Here�s the full Bloomberg link:

Before we move on, here's another bit by James Kwak from Baseline Scenario.

Food and Finance

I just read Michael Pollan�s book, In Defense of Food, and what struck me was the parallels between the evolution of food and the evolution of finance since the 1970s. This will only confirm my critics� belief that I see the same thing everywhere, but bear with me for a minute.

Pollan�s account, grossly simplified, goes something like this. The dominant ideology of food in the United States is nutritionism: the idea that food should be thought of in terms of its component nutrients. Food science is devoted to identifying the nutrients in food that make us healthy or unhealthy, and encouraging us to consume more of the former and less of the latter. This is good for nutritional �science,� since you can write papers about omega-3 fatty acids, while it�s very hard to write papers about broccoli.

It�s especially good for the food industry, because nutritionism justifies even more intensive processing of food. Instead of making bread out of flour, yeast, water, and salt, Sara Lee makes �Soft & Smooth Whole Grain White Bread� out of �enriched bleached flour� (seven ingredients), water, �whole grains� (three ingredients), high fructose corn syrup, whey, wheat gluten, yeast, cellulose, honey, calcium sulfate, vegetable oil, salt, butter, dough conditioners (up to seven ingredients), guar gum, calcium propionate, distilled vinegar, yeast nutrients (three ingredients), corn starch, natural flavor [?], betacarotene, vitamin D3, soy lecithin, and soy flour (pp. 151-52). They add a modest amount of whole grains so they can call it �whole grain� bread, and then they add the sweeteners and the dough conditioners to make it taste more like Wonder Bread. Because processed foods sell at higher margins, we have an enormous food industry pushing highly processed food at us, very cheaply (because it�s mainly made out of highly-subsidized corn and soy), which despite its health claims (or perhaps because of them) is almost certainly bad for us, and bad for the environment as well. This has been abetted by the government, albeit perhaps reluctantly, which now allows labels like this on corn oil (pp. 155-56):

�Very limited and preliminary scientific evidence suggests that eating about one tablespoon (16 grams) of corn oil daily may reduce the risk of heart disease due to the unsaturated fat content in corn oil.�

With this fine print disclaimer:

�FDA concludes that there is little scientific evidence supporting this claim. To achieve this possible benefit, corn oil is to replace a similar amount of saturated fat and not increase the total number of calories you eat in a day.�

Unfortunately, nutritionism is pretty much bogus science. The major claim of nutritionism over the past thirty years�that fat is bad for you�turns out not to have any foundation at all.*

What does this all have to do with finance? Roughly speaking, read academic finance for nutritionism; the financial sector for the food industry; subprime loans, reverse convertibles, and CDOs for highly processed food claiming to improve your health but actually killing you; current disclosure laws for the FDA-approved health claims on corn oil; thirty-year fixed-rate mortgages and index funds for the neglected, unsubsidized, unadvertised fruits and vegetables in the produce section; the OCC and OTS for the FDA; and the long-term increase in obesity and diabetes for the long-term increase in household debt.

In both cases, you have an industry that earns profits by convincing people to do things that are not in their long-term interests; that, in the process, creates negative externalities for the rest of society; and that has cowed regulators into submission, if not outright cheerleading. In both cases, the industry defends itself from critics by saying that it is simply providing what customers want, and hence any new constraints (even, say, accurate organic labeling laws) constitute a paternalistic intrusion into people�s economic freedom. And in both cases, the industry claims that if it isn�t allowed to continue on its current course, the economy as a whole will suffer. (After all, our corn- and soy-based diet is what enables the industry to provide huge numbers of calories at low cost.)

One big difference is that when it comes to the food system, there is a fair amount you can do to protect yourself and your family from its unhealthy effects (if you have the money). With the financial system, it�s a bit harder.

* It�s a bit more complicated than that, so before you take this as advice, read Part I, Chapter 5.

 

?Is there any way to get James Kwak and Elizabeth Warren into more powerful positions? Alan Grayson is now out of work. I think the three of them could do wonders for the administration. 

 

Debt Panel to Meet After Elections - NYTimes.com

The bipartisan debt-reduction commission that President Obama created eight months ago will begin meeting privately soon after Tuesday�s elections, with just three weeks to try to agree on cutbacks to Americans� favorite tax breaks and benefit programs.

The group, which has a Dec. 1 deadline for recommending how to reduce the annual deficits swelling the federal debt, purposely has done little to date beyond five public hearings, and it has decided nothing lest any decisions leak and blow up in the flammable mix of a campaign year with control of Congress in the balance.

Amid that partisan backdrop, people in both parties say they have been surprised that the 18-member National Commission on Fiscal Responsibility and Reform reached an early consensus to put all three major budget parts on the table: taxes, annual spending for domestic and military programs, and the entitlement benefit programs Social Security, Medicare and Medicaid.

Still, given Republicans� opposition to tax increases and Democrats� to changes in benefits, expectations are low that any plan can get the 14-vote supermajority required to send it to Congress for a vote in December. Advocates� best hope seems to be that the co-chairmen � Erskine B. Bowles, president of the University of North Carolina system and a former chief of staff to President Bill Clinton, and Alan K. Simpson, a former Senate Republican leader from Wyoming � can negotiate a package that attracts a sizable minority of the 10 Democrats and 8 Republicans and provides a framework for future bipartisan action.

�We�re going to put a very serious proposal out there that lots of people will find areas to pick at,� Mr. Bowles said. �But in total it will address this deficit problem that we face, and will lay a predicate out there for what the country has to do to get its fiscal house in order.�

Mr. Obama�s executive order establishing the commission set medium and long-term goals. He called for balancing the budget in the 2015 fiscal year, excluding interest payments for the national debt. That would require reducing that year�s nearly $800 billion deficit by more than $250 billion, based on current projections. Because the economy remains fragile, Mr. Bowles said no spending cuts or revenue increases should take effect before 2012.

Commission members say they are more focused on their other charge to �meaningfully improve the long-run fiscal outlook,� by limiting the growth of entitlement programs and closing the gap between spending and taxes.

?Social Security and Medicare are fixed in place according to one simple principle: The working population pays for these programs through payroll taxes in order for the non-working population to be the beneficiaries. That's the way they were set up and they have both been working  okay for decades.  What's not to understand about that?

Both programs are SOCIAL ( NOT INDIVIDUAL) safety nets. Additional safety nets (pensions, IRA's, private insurance plans, both life and health insurance, savings and "net worth") are the INDIVIDUAL safety nets. For those without individual safety nets there is Medicaid which is also funded through payroll taxes. Part of the FICA tax which is deducted from payroll checks is used to fund Medicaid and part of it is used to fund Social Security.

If more revenue is required, then the payroll taxes must increase. or expenditures must be curbed. In the case of Social security tweaking the precentage,  applying a means test, and lifting the cap for hish-wage earners (or removing it altogether, as in the case of Medicare) will fix the problem.

Ever hear the word "countercyclical"? There are several implications but the easiest to grasp is that for Social Security, Medicare and Medicaid, the needs increase at just the wrong time: when the revenue shrinks. The way out is a no-brainer. It's just like buying a car or a house. If you don't have enoough money it is necessary to borrow it and repay it when you do. And yes, with interest. In the case of the federal budget, that's precisely how it is currently being funded in part, because payroll taxes for the last several decades have exceeded the needs of Social Security, and the surplus has been "spent" or "loaned" however you want to think of it, for other purposes, replaced by US Government bonds we call the Social Security Trust Fund.  Current projections are that the fund is sufficient for a couple more decades.

Grousing about Medicare is a red herring when the real challenge is health care inflation -- the rate at which expenses increase -- not how the bills are paid.

Let's hope this next link from Huffpo is wrong.

Richard (RJ) Eskow: The Post-Election Game Plan: Cut Social Security, Soak the Middle-Class, and Keep Taxes Low For the Rich

Yesterday the Deficit Commission used the New York Times as a messenger service to tell politicians -- and you -- exactly what they intend to do if the election goes as expected. It's all there in black and white: They'll cut benefits, increase the financial burden on the middle class, and make sure that wealthy Americans aren't troubled by the kind of sacrifices everyone else will be expected to make.

This isn't guesswork or speculation. The Commissioners just told us. It's all there. In fact, the only thing that isn't there is any mention of Alan Simpson, the many-million-tit man who co-chairs the Committee. If you needed any proof that this article is just a PR blast from the Commission, that's it. Even they know that Simpson has become a public embarrassment. ...

[More and extended links at the source.]

 Deficit Commission Plots to Overhaul Social Security Behind Voters' Backs

That is what the NYT reported today, although it used somewhat different language. It told readers that:

"The group, which has a Dec. 1 deadline for recommending how to reduce the annual deficits swelling the federal debt, purposely has done little to date beyond five public hearings, and it has decided nothing lest any decisions leak and blow up in the flammable mix of a campaign year with control of Congress in the balance."

In a democracy, the purpose of elections is supposed to be to have voters determine issues like the future of Social Security and Medicare. According to this article, the members of this commission conspired to keep these issues outside of the election debate.

The article also tells readers that the co-chairs of the commission apparently misled the public in their prior statements. Both former Senator Alan Simpson and Erskine Bowles had given assurances that benefits would not be cut for current Social Security beneficiaries. According to this article, the commission is now considering changing the annual cost of living adjustment formula in a way that would reduce benefits. This reversal of a public commitment by the co-chairs should have been the main topic of a major news article.

There's more. Tons more.
Our Kat is without peer. But I'm tired and gonna quit here. 
Thanks for reading.