On the Contrary

In my consulting travels I spend a lot of time with true conservatives.  I try my best not to say anything because we have a job to do and we should not get distracted into politics that will, quite frankly, takes us nowhere.  But I am always intrigued at how they think.   There are not two sets of facts in the world and contrary to conventional wisdom, both sides don’t equally equivocate.  By and large, progressives pretty much tell it like it is and conservatives twist it mercilessly.

Oh sure, you can find the anecdotal case where some left wing nut job is off the deep end, but take a step back and consider where we are today and what conservatives are telling us.  Global warming?  Doesn’t exist except of course that every respectable scientific body today endorses it.  Evolution?  Oh why go there.  Lower taxes will spur the economy, except as a percentage of GDP they are the lowest in 60 years and where are the jobs?  High tides lift all ships, except the vast majority of us are losing ground while we have the mass transfer of wealth to a small percentage of our population.  We have the best medical care in the world, except we don’t and it costs twice as much as what others pay for better outcomes.  The market place will create jobs if government will just get out of the way, except it got out of the way and the financial Masters of the Universe almost destroyed us. These are all indisputable facts supported by tons of data, and yet conservatives are in denial about it.  Why?

Well a conversation I had recently may shed some light.  Remember with conservatives, pointing out the actual data just gets them frothing at the mouth and does no good.  You have to understand that this is a visceral thing.  It is highly emotional and rationality doesn’t have a chance.  It is all about order and justice.  They believe in it.  It is at the core of their belief system.  It is a the core of their terror.  Many studies have shown that Progressives are more open to change than Conservatives, hence the term conservative.  At some deep psychological level we are either predisposed to handling innovation and change or we are terrified of it.  This has, I think deep roots in our survival as a species.  Being too adventurous in a hostile world could get you killed.  But not trying new things and being open to change, could also destine you to the trash heap of evolution.  Seen any Neanderthals lately?

So conservatives like to keep it simple and we are back to order and justice.  If things are ordered and you follow the rules, justice follows.  It is as simple as that for Conservatives.  It allows them to order anything and understand their place in that order.  That is why Conservatives are so arrogant about their place in life.  They earned it, they deserve it, and those that are less fortunate, well hell, it has nothing to do with fortune, but with discipline and rule following. Paying taxes simply allows government to reward those who don’t deserve it.   It orders the world’s chaos by blaming the victim.  One has to think no farther than looking at Conservatives and their religious beliefs that tend to be dogmatic and rigid, uninformed by the injustice of those beliefs in the real world.  The market place is the ultimate objective decider of fates if you just let it operate without interference.  If things are bad, blame the government as interfering and making it bad.  Never question the basic assumption about the market place, or for that matter, their religious tyrannical beliefs.

Okay back to the conversation.  It was a simple statement, but it embodied all of the above.  “What this economy needs is just to let entrepreneurs operate freely and they will create the jobs and economy that will take off.”  See, that mean old government is keeping us from excelling.  Order is out of whack because government interferes with the natural order of things.  Except, during the Bush years regulations simply weren’t enforced, tax rates were the lowest in 60 years and the middle class tanked.  Or even more salient today, innovate all you want, bring on great products, but if the middle class doesn’t have sufficient income to support a thriving economy, there will be no one to buy it.  It really is the chicken and the egg.  Which comes first, the goods people want to buy (supply), or the pent up money people have to spend (demand).  The answer which Conservative don’t want to hear, is demand.  And demand means first creating jobs so people have disposable income to buy stuff.  That would force you to admit that government has an important role to play and that brings into question the whole justice and order thing.  Could it be that no matter how carefully you follow the rules and regulate your life, shit happens?  If that is the case, is it not government’s role to keep the playing field level?  Oh my God, heresy.

So for Conservatives, chaos reigns if those they perceive as deserving of their fate get a helping hand from government.  It interferes with the natural order and justice in the world.  It terrifies them and allows them to try to reinvent reality to maintain their belief system.  Until shit happens to them, they are oblivious to it, and then it is a special case.  How do you explain the Log Cabin Republicans (gay Republicans)? Because they are Conservatives in that they believe in the order and justice thing, and just see the Conservative denial of their rights as an aberration instead of a logical extension of their belief system.  How do you explain a Conservative who sees the light on gay rights after their own child comes out?  Until it becomes personalized, they can simply shut it out in a whirl of denial or reinventing reality.

My favorite is austerity.  Yes, that was part of the conversation too.  Europe just had to get things back in order and they can’t afford all the entitlements they want.  Austerity is enforcing the natural order of things.  It means that justice will prevail if you follow the rules and the free loaders are put back in their place.  Evil doers must be punished to realign the natural order of things.  Except it doesn’t work.  Every nation that has gone on an austerity kick has seen their GDP not recover, but decline further.  While it violates in a basic way, Conservative ideology about blame the victim, ECON 101 and the data from our experiment with austerity has shown a disastrous outcome.  In order to get out of debt, you have to grow the economy and austerity simply depresses it.  Paul Krugman put a wonder graph out about what happens to countries that forgot everything we learned in the last 80 years or so and decided on punishment as the way forward (Austerity and Growth).  The data is incontrovertible and overwhelming, yet Conservatives will twist themselves into pretzels to try to explain it away because it violates their whole concept of the natural order of things.  Bad things only happen to bad people right?  And if you do bad things, you must be punished.

I guess I can rest my case with watching the Republican Presidential Primary where up is down and down is up, where facts are so distorted that only true believers could accept these people as rational humans, much less as leaders of our country.  It is where this conservative logic has finally taken us to maintain its basic underlying beliefs, into the world of fantasy.  Melissa Harris-Perry, on her new show on MSNBC, made a wonderful point the other day.  Our democracy needs a strong and vibrant two party system to work.  When one party gets out of hand, as power always corrupts, the other side is there to right the balance with new ideas.  But the problem we face with the Republican Party is that they have no new ideas.  They only have the old failed ones that they cling to with all their might, while reinventing reality to make that possible.  They have got theirs and they selfishly don’t want to risk having to share.  Until they actually become a rational and thinking political entity again, we have a real problem in this country.  I only hope the rest of America sees the absolute failure of conservative ideas and puts them out of their misery.

I would comment on the Republican candidates, except they are superfluous.  They, and the political discussions around them, are just more of the problem.  They offer us no solutions and just a continuation of what we have done.  Their whole political approach is based upon feeding anger with outrage, and of course blame.  But when it comes to a new direction, it is just more of the policies or lack thereof that has caused our problems. Here are a couple of examples of our real life experiences that point out our going nowhere.  Sadly, until we personally experience the consequences of our policies, most of us are oblivious.

A few days ago I heard about a young Hispanic man I was acquainted with who was asked to go to a border town to straighten out his papers, and then they deported him. He was two when his parents brought him here.  He was a good student and a smart, hard working contributor to our society.  America is his home and we deported him.  It is so unfair, it is so wasteful, and yet this is what REPUBLICANS have wrought (DREAM Act).  Got to punish those evil doers, right?  Meanwhile I picked up the paper Sunday to read in the Sacramento Bee, “Colleges forced to cut key courses“.  In California our junior colleges have been the route for many who have stumbled in high school or beyond, who have to work and can’t attend college full time, to get on track and get the education they need to become successful.  With the massive cuts in education, we can no longer educate our future.  How dumb is that? Here is some data that Paul Krugman presented on the impact of the cutting of spending from state and local governments:

“But it’s even worse than he says. Why? Because if you look at what’s being cut, it’s heavily focused on investment:”

As Paul said, “That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.“  This austerity is insane, we should know better, and we have been stampeded into fearing the debt by the Republicans with some help from feeble minded Democrats (or just pandering to the mob), and in effect, we are eating our seed crop.  I would sum up with another quote from Paul:

“It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.  What an utter disaster.”

An utter disaster is an understatement.  The way forward is not rocket science,  As I pointed out yesterday, we will all have to pay (no pain, no gain).  That path was laid out by economist (one of many who we are ignoring) Michael Spence, a Nobel Laureate, and professor at NYU:

“I am sure you have heard this, but the great depression came to an end in WWII and two things happened at that point.  One, there was a huge fiscal stimulus because we could not finance a war effort on current income, and then we got rid of it over time, and the second one was that we went to the people and said you know what, it is a war and we are going to have to invest a huge amount of our resources in this and your consumption levels are going to have to go down because we can’t keep them up and make this big investment.  We just don’t have the resources and because it was a war, people said okay.  And so we created this powerful engine that not only took us through the war, but took us into the post period in pretty high gear…If we really wanted to overcome this one fast, then what would happen is a political leader would go and say this isn’t a war, but it is that sort of challenge and create recovery (war) bonds…I mean that is pretty politically unrealistic, but that would really put a jet engine behind this thing over time.”

It isn’t hard.  We need to start investing massively in the future, and making all of us pay for it.  But Republicans offer a free ride saying lets just do austerity, just remove regulation and government interference, and let us all keep our money and it will just magically happen.  Democrats tell you that we just need to tax the rich, and oh yes, austerity for all.  Sorry, they are all lies.  We need to get serious about moving forward and we all will have to pay.  Suppose you could get elected with that message?  Maybe when things get bad enough or we just get tired of standing in one place.  I will tell you this.  Republicans will never get you there.  Democrats have an inkling, but lack the courage.  Maybe the 99% can get their act together.  Remember, just being angry is not enough.

I was watching Up with Chris Hayes this Saturday morning and he had a conservative on his show, Josh Barro, who stated the obvious, but I get ahead of myself.  The current crop of conservatives we have today believe government should just go away.  It is the ultimate case of denial.  They ignore what government has provided them and see all that they have achieved as somehow all their own accomplishment.  Government just gets in the way in their little minds.  Now it is certainly true in the anecdotal sense that Government can be a problem and certainly hinders business.  But they fail to extend their anecdotal case to the general.  Sure there are regulations that make things difficult, and for sure there are many that ought to be retracted.  But many of those pesky rules keep us safe, allow us clean air and water, and keep our neighbors from infringing on our rights even though we resent them wHen they prevent us from infringing on theirs.

Conservatives also believe that there is a thing called flow down, except it does not exist and there is tons of data out there to demonstrate that.  But when you want a tax break, when you want to extend your free ride on the backs of others, you need to believe it exists.  The other option is to just say government isn’t necessary, but then you have to ask yourself who builds the roads and infrastructure, who makes education affordable, and who sees to it that we get affordable medical care?  But then again you can lie to yourself and say that all that is just giving away your hard earned tax dollars to those who are lazy and waste it, but it is a lie.  Again you can find the anecdotal example, but not in the aggregate. The reality is that government made us what we are today and to throw it off now will hurt everyone.

So conservative lie to themselves and to their faithful.  Maybe that is why the current crop of Presidential candidates is so looney.  You have to be looney to believe the stuff they spout, and you have to be in absolute denial to listen to it.  I mean we just went down their road during the Bush years (they lie to themselves saying Bush wasn’t a real Republican, we were not responsible, the Democrats made us do it).  But upon examination it is all a big lie.  They simply want to take up where we left off and hope for a better outcome.  Okay, so the Republicans lie to themselves and to their faithful so money can buy government, and the rich can continue the transfer of wealth to themselves.  So what do Democrats lie about?

That is where Mr. Josh Barro made the obviou and valuable point about the hypocrisy of Democrats.  He pointed out that Progressives believe that government has an important role to play.  Then he pointed out that even if we force equity in our tax code, it does not solve the problem (paying for what we want).  And he is exactly right and that is the BIG LIE that Democrats are telling their faithful.  Don’t worry, we will just take the country back from the wealthy and make them pay their fair share and things will be rosy.  No it won’t.  The reality is we have been on this binge for thirty years and we are all going to have to pay more to make up for our neglect.  Democrats fail to tell the truth about this obvious fact.  When you get right down to it, both parties are promising a free ride, a chicken in every pot, and it is smoke and mirrors.

Republicans tell you that we just cut taxes and reduce regulation and voilà, the economy takes off.  Except it hasn’t, the middle class is missing in action, and our infrastructure is falling apart because we don’t invest in ourselves.  Our competitiveness is creeping downward, we are now 37th in medical outcomes, I can’t remember how far our education system has fallen, and this will all be fixed with state’s rights, lower taxes, and less regulation.  Then we get the Democrats rightly telling us we need to invest in ourselves and government has a big role to play.  So far so good, and then they say, like the Republicans, we don’t have to pay for it, we will get the wealthy who can afford it to.  The only difference is the Republicans have already proved that less government, etc., etc., doesn’t work except for the 1%.  The Democrats have the right solution, just lie about how we can pay for it.

You would think that we Progressives would tell you the truth, that if we want a future then we have to invest in tomorrow, we are going to have to spend big time, and even with all the jobs, we are not going to have as much disposable income, because we are going to have to reinvest that income in all the things we want (See It’s the Conservatives Stupid and economist Michael Spence).  That simply means higher taxes for all of us.  But we don’t hear that.  Maybe the politicians think it is a losing message.  Maybe it is, but it is a true one.  I wonder when we will ever grow up and face our responsibilities like adults?  So one side tells us that if we pay less we get more, and the other side says we need to pay more, but we can get the other guy to do it.  I hate cliches, but the reality is, no pain, no gain.

My guess is that most of you have read the articles in the New York Times about why Apple shipped their manufacturing to China (How the U.S. Lost Out on IPhone Work), and about the horrible conditions in the plants there (In China Human Costs are Built into IPad).  Note I am writing this on an Apple NoteBook, read the articles on my IPad2, and have my trusty IPhone at my side.  But these two articles raise important questions about who we are and where we are going.  And even more important, they raise interesting questions about our conventional wisdom about our problems off shoring jobs and leadership.

Lets start with the first one about why we couldn’t do the work here.  The first article points out a couple of important things.  First the added labor costs are small compared to the total price of the IPad so that was not the driving factor.  What is the driving force is flexibility and speed:

One former executive described how the company relied upon a Chinese factory to revamp iPhone manufacturing just weeks before the device was due on shelves. Apple had redesigned the iPhone’s screen at the last minute, forcing an assembly line overhaul. New screens began arriving at the plant near midnight.

A foreman immediately roused 8,000 workers inside the company’s dormitories, according to the executive. Each employee was given a biscuit and a cup of tea, guided to a workstation and within half an hour started a 12-hour shift fitting glass screens into beveled frames. Within 96 hours, the plant was producing over 10,000 iPhones a day.

“The speed and flexibility is breathtaking,” the executive said. “There’s no American plant that can match that.”

…In part, Asia was attractive because the semiskilled workers there were cheaper. But that wasn’t driving Apple. For technology companies, the cost of labor is minimal compared with the expense of buying parts and managing supply chains that bring together components and services from hundreds of companies.

For Mr. Cook, the focus on Asia “came down to two things,” said one former high-ranking Apple executive. Factories in Asia “can scale up and down faster” and “Asian supply chains have surpassed what’s in the U.S.” The result is that “we can’t compete at this point,” the executive said.

Okay, so it comes down to supply chains, and industrial clustering as it is called in the economics world.  Paul Krugman addresses some of this in one of his blogs, Chinese Manufacturing and the Auto Bailout.  There is no question that this kind of organization of people and resources is highly efficient.  But that misses the whole point raised by the other article, is that really where we want to go?

The second article basically points out the human cost of this kind of organization:

However, the workers assembling iPhones, iPads and other devices often labor in harsh conditions, according to employees inside those plants, worker advocates and documents published by companies themselves. Problems are as varied as onerous work environments and serious — sometimes deadly — safety problems.

Employees work excessive overtime, in some cases seven days a week, and live in crowded dorms. Some say they stand so long that their legs swell until they can hardly walk. Under-age workers have helped build Apple’s products, and the company’s suppliers have improperly disposed of hazardous waste and falsified records, according to company reports and advocacy groups that, within China, are often considered reliable, independent monitors.

Is that where we really want to go?  In fact, should the companies whose products we buy be allowed to tolerate those kinds of conditions.  Apple touts its “ supplier code of conduct that details standards on labor issues, safety protections and other topics. The company has mounted a vigorous auditing campaign, and when abuses are discovered, Apple says, corrections are demanded.”  Yeah right.  As the article points out:

Some former Apple executives say there is an unresolved tension within the company: executives want to improve conditions within factories, but that dedication falters when it conflicts with crucial supplier relationships or the fast delivery of new products. Tuesday, Apple reported one of the most lucrative quarters of any corporation in history, with $13.06 billion in profits on $46.3 billion in sales. Its sales would have been even higher, executives said, if overseas factories had been able to produce more.

Nothing drives the train like greed and profit and if we learned nothing from the BP oil spill, it is that even the best intentions sooner or later get subverted to the bottom line.  Without a government enforcing worker safety and health requirements, they slide.   But my favorite insight is what I have always known starting as a lowly Captain flying in Vietnam.  Generals, Admirals, CEOs, and yes even Presidents rarely really know what is going on even with the best of intentions:

In 2010, Steven P. Jobs discussed the company’s relationships with suppliers at an industry conference.

“I actually think Apple does one of the best jobs of any companies in our industry, and maybe in any industry, of understanding the working conditions in our supply chain,” said Mr. Jobs, who was Apple’s chief executive at the time and who died last October.

“I mean, you go to this place, and, it’s a factory, but, my gosh, I mean, they’ve got restaurants and movie theaters and hospitals and swimming pools, and I mean, for a factory, it’s a pretty nice factory.”

Yeah, for a prison Mr. Jobs.  We see what we want to see when we are successful and we make excuses like this is a better life than they would have had, but then some get killed and don’t have any life at all.  And the question is, if this is the model for success, do we really want that kind of success?  As one current Apple executive said:

“You can either manufacture in comfortable, worker-friendly factories, or you can reinvent the product every year, and make it better and faster and cheaper, which requires factories that seem harsh by American standards.  And right now, customers care more about a new iPhone than working conditions in China”

Somehow I find that troubling.  Is the next new shiny toy worth that cost?

For a guy like me who is a Progressive, it is hard to understand conservatives at all.  That’s okay because I understand that we are all a little blinded by our own preconceptions.  But sometimes I hear things and I wonder what planet the other person is living on.  We see the same event and have two totally different realities (and only one of them is the real reality).  Now yesterday I wrote about how out of touch and ignorant were most of those who attended the Republican debate last Tuesday seemed to be, applauding kill our enemies lines.  And while watching Glee, I almost fell off the couch laughing at the scene where Will Schuster goes to his girl friend’s house to ask the parents for her hand in marriage, and comments about the fact that they still have their Christmas tree up and the father, in all seriousness, comments that he is surprised that comrade Obama still lets them have Christmas.

I mean it was a perfect caricature of Obama paranoia, but it was TV fiction after all.  Then I turned on the TV and watched the interview with Jenny Sanford, the ex-wife of South Carolina Governor Mark Sanford, who went on his walk about in Argentina with his girl friend, about Newt’s ex-wife’s interview on his open marriage proposal and his chances in South Carolina.  Here is what she said after condemning Newt:

SANFORD: I am going to watch the debate tonight very carefully. I’m on my way there in a minute with my youngest son Blake and my second son Landon, and I’m going to watch the race very carefully.

I think this race has been very long on rhetoric and sensation and short on substance. And we have some good candidates running. I think all of them could beat Obama easily. I think the debate in our country is mostly surrounding the fiscal issues. And I’m looking forward to hearing what they have to say tonight.

CHRIS MATTHEWS, HOST: Why do you think people like Newt Gingrich bring up issues like food stamps in these discussions? I haven’t heard that phrase in years and all of a sudden it’s all over the place with Newt talking about President Obama being the best food stamp president in history and how people are going to, let’s take a look at this tape from a Newt Gingrich event yesterday, and I want to get your thoughts on whether race is a factor the way Gingrich is talking in South Carolina. Let’s listen.

(BEGIN VIDEO CLIP)

UNKNOWN SPEAKER: I would like to thank you, Mr. Speaker, for putting Mr. Juan Williams in his place the other night. [Applause] His supposed question was totally ludicrous and we support you.*

NEWT GINGRICH: Thank you very much.

(END VIDEO CLIP)

MATTHEWS: Why do you think, Mrs. Sanford, that the voters of South Carolina, at least those there that were cheering this comment by this woman, this regular woman that Juan Williams of Fox News should be put in his place?

SANFORD: You know, I think that politicians can be known to pander to certain audiences or segments on certain issues. But so can pundits. And I think that the press likes to make issues sometimes about things where there are no issues. I mean, I for one live on the coast. My congressman is an African-American named Tim Scott, a Republican of whom I’m very proud. And my governor is an Indian-American woman named Nikki Haley of whom I’m also very proud. So those — for both people that were elected by the electorate here in South Carolina.  So the notion that we have a racial electorate here in South Carolina is absurd and nonsense and frankly just, you know, stirred up by people in the press. And I think that that’s, you know, I think that people in general are sick of politics as usual and part of that is they are sick of the press stirring thing ups with an angle. And you know what, I think that woman is right. People should be cheering.

MATTHEWS: Who in the press do you know has ever brought up the issue of food stamps, ever brought up the issue of how as Rick Perry said the other day in that debate on Monday that South Carolina is at war with the federal government as is Texas, bringing up these old states’ rights issues. The press doesn’t bring them up, the candidates do.

SANFORD: Oh, I think the press brings up all sorts of things. I mean, I think that this race in particular is one as I said that’s long on rhetoric and short on substance, long on the sensational if you will. So, you know, we have 24/7 news these days where we have just a proliferation of channels each one seeking to find things that they can sensationalize. So, if you look hard enough at all these candidates, you can find all sorts of things to sensationalize.I found these comments almost other worldly.

Could she not see the racism or the class warfare that is being conducted by the Republicans?  She commented how South Carolinians had elected an Indian Governor, you know the one who thinks voter ID for a nonexistent problem, is just fine, and does not see the social and racial implications.  Then I thought, she is an evangelical conservative in the 1%.  Obama terrifies them because he is trying to empower the rest of us.   She thinks “we have some good candidates running. I think all of them could beat Obama easily.”  This is the weakest field in the history of Republican candidates and only one really stands a chance (Mitt).  Their fiscal policies are already out there and as I noted yesterday, they cut taxes further for the wealthy, increase the deficit, and raise taxes on the poor.

So I have to ask myself, what is she seeing that I don’t?  Why does she think more of the same will work?  Why doesn’t she see the racial and class warfare that is being conducted, and why does she not see that it’s based on a visceral hate of President Obama, generally based upon false allegations?  Personally I don’t think her candidates could stand a debate on the real issues if we had any fact checking in that debate instead of he said/she said.  It is a study in how we live on two entirely different planets in two entirely different realities.  Now I am starting to get why a walk about in Argentina was not such a wild idea.  Oh and Jenny, I am glad some of your best friends are of color.  And don’t you worry your head one bit about that Confederate flag you guys fly at the capital.  It says nothing about racial insensitivity.  In your reality everything is just fine, people know their place, and Obama is shaking your universe..

By the way, the transcript that I got for this interview was on a conservative blogger’s site showing how she had held liberal Chris Matthews and the media accountable for their liberal bias.  Once again, do we speak different languages?  What I saw was a woman totally out of touch with the reality of the situation.  I sure hope the 99%, which includes a large black population in the South get out and vote this year.  They certainly have enough reason if the states down there in the South will just issue them IDs.

*  The Fox News contributor had raised criticism that Gingrich’s comments about food stamps and poor children’s work ethic were “intended to belittle the poor and racial minorities.” Gingrich had said that if invited to speak to the NAACP, he would urge black people to demand paychecks instead of food stamps. Williams asked, “Can’t you see that this is viewed at a minimum as insulting to all Americans, but particularly to black Americans?” (TheGrio)

This is not a new post since I have prognosticated on this before.  Europe or the Euro in the peripheral countries is doomed.  This will hurt our economy and by how much is uncertain.  But I think more than many think because so much lending and unrecognized debt is out there (from U.S. banks) that it could send us reeling again.  I can make this really simple and others like Paul Krugman have been outlining this forever.  There are three problems:  Austerity, lack of any stimulative spending or easing of the money supply, and the inability to devalue the Euro country by country.

The first two kind of go together although they are all interconnected.  The belief that austerity, that governments who cut back and raised taxes to deal with their burgeoning debt, would allow confidence to grow in that stewardship and debt costs (the cost of the perceived risk) would go down and business would develop the confidence to start reinvesting in their economies, has not panned out.  Actually it has never panned out and the whole idea that it would work, although conventional wisdom, was not born out by history.  It has never worked and in the near term you can look at U.S. Depression, Japan, England, and of course any country in Europe and you have all the data you need to show that this was an illogical idea.  But as Paul Krugman likes to say, it is what all the really Very Smart People (VSP) were saying would work.

The problem is two-fold and is a function of the belief that supply drives the economy, not demand. First as a government starts to reduce benefits, layoff workers, and raise taxes, demand in terms of people having an income to buy goods and services to stimulate their economy sharply declines.  Businesses aren’t going to supply products because they think the economic state of the state is improving until there are real people with cash to spend on a product (Demand drives supply, not supply drives demand).  So there is no business investment that might grow the economy.  Second, as things worsen, and there is no stimulus spending to help with the constricting economy, this become politically untenable. The economy just gets worse and worse and debt cost continue to rise, while the need for funds (borrowing) in a depressed economy grows as their economy falters further.

This austerity might have had a chance if there was stimulus spending to, in the word of an old Vietnam veteran, provide a light at the end of the tunnel.  If austerity in terms of higher taxes to pay down debt had been coupled with job creation through stimulus spending, the austerity forced by higher taxes and some cuts in programs could be offset somewhat by at least having a job and being able to survive.  Then as the debt was slowly reduced, people could still have work and be able live and see some hope in the future.  But there was none of that and by the way, that is our way forward in the U.S., but Republicans won’t allow it.

Now comes the real sticker in all this, unequal economies with the same currency, the Euro.  This is probably the part that is hardest for most people to understand.  If a country has its own currency, then its value can change in regard to other currencies making its goods and services either cheaper or more expensive than other competing countries.  Everybody loves a strong dollar because when we travel in Europe, we can buy more stuff, but our stuff costs more and depresses our exports.  The other part of this is the cost of borrowing.  If a country on the Euro goes bankrupt, well, kiss your investments goodbye.  If a country has their own currency and printing presses, they simply print more money, albeit devalued.  The prime example of this is Sweden and Denmark.  They have similar economic markers, GDP, debt of GDP ratio etc., but Denmark gets much better borrowing rates because  while they are not on the Euro, they are pegged to it, but could crank up the printing presses if necessary.

So if you are a net importer nation, like the periphery countries, to become an exporter country and create jobs you cannot devalue your currency to make your exports more competitive, you have to deflate your economy.  That means you earn less and your cost of living is lower.  Once again we are reducing demand by decreasing currency in people’s hands and we are are the spiral downward.  Note that Germany likes to think they showed the way with their austerity program after the 2007-2008 recession.  The difference is they were a net exporter, and their economy continued to grow because they were in the favorable position.  They could afford their austerity.

So when you add forced austerity, no stimulus spending, and deflation of the economy because of the common Euro currency, Europe is headed for the rocks.  It is past doing anything about it.  The Euro might have been saved if actions to stimulate along with austerity were put in place a year ago, but we have past the point of no return.  The Euro might survive in the interior countries, but for the poorer countries, their only salvation is to bail out.  Hopefully the Obama administration has a plan for when all this occurs, maybe more shovel ready spending?  Let’s hope they have a little more strategic plan this time.

Anyway that is how a guy who knows nothing about economics but lives on a isolated hill in the middle of a vineyard sees it as he is not inundated with the groupthink of the modern culture.  But what do I know?

That’s the defense of Bain and Mitt we heard this weekend.  Creative destruction (CD) is the concept that as technology progresses and markets advance, businesses have to reinvent themselves and this could be a painful process, but in the end it is a benefit to all of us.  Kodiak comes to mind as a company that did not make the transition from film to data.  CD was used by Fareed Zakaria on his show GPS when interviewing Paul Krugman about what he felt was Paul’s unfair attack on Bain in Paul’s column on Friday.  It was also used by George Will on This Week with George Stephanopoulos.  Each in order.

On Fareed, Paul stood his ground pointing out that “it’s actually wrong to think about Bain as having either created or destroyed jobs. On balance, it led to the destruction of relatively good jobs and replaced them with jobs that are worse.   No different. This is what private equity has done, to a large extent, in the U.S. economy. I don’t – I don’t think Bain stands out as an especially bad member of that industry, but that industry is – is doing stuff that is good for corporate bottom lines, but not terribly good for workers. “  He went on to point out that “the main point is that Romney is saying I should be president because I know how to create jobs, and he actually does know how to make a lot of money in private equity, which is not at all the same thing as creating jobs. It’s not all the same thing as – as what’s involved in – in running macroeconomic policy.”

So in the first use of the CD defense, what is pointed out is the jobs that are left are poorer paying, with less benefits, and in an economy that is screaming for demand, this won’t help.  As Paul points out, this may be a great way to make money, but making money is not the same as creating jobs, and if this happens across the board, i.e. in the macroeconomy, yikes.

On This Week, George Will took up the CD defense:  “And I think the American people understand this. George, the part of our society that has seen the most creative destruction is the intensive industry of agriculture. A hundred years ago, 30 percent of the American people were working in agriculture. Today it’s less than 2 percent. I don’t think the Americans are upset by that. was a reality for our farmers where 30% of our population use to be in the profession and today there is less than 1% (his numbers), and nobody seems to mind.”  I find this rather funny in the sense that in Greece where their austerity has killed their better paying jobs, Greeks are returning to the land to eek out a living (NYT).  George is trying to paint the picture that this is just the healthy process of capitalism.  But I would argue that there is creative destruction, and then their is creative destruction.

Paul Krugman did a good job of drawing this distinction:  “…the fact of the matter is that creative destruction is a great thing when the economy is near full employment and when the issue is clearing away the deadwood and getting new companies, we can make that case.  But that’s not the world we’re living in right now. We’re living in a world that is kind of in a low-key version of the Great Depression, an economy with 13 million people out of work, with 4 million people out of work for more than a year.  What you really need, substantively, is you need something that is about creating demand, about expanding employment. We don’t want ruthlessness.”

Understand what Bain was all about, making money, and it did handsomely from taking over companies, restructure them to be more profitable by reducing wages and benefits, taking out their profits through creating debt in the company, and then if the company survived, an additional profit selling that off.  How does that translate to improving the overall economy, unless we think good employment is everyone with a reduced standard of living.  No, the Mitt rendition of CD is not how we ought to restructure our economy and the lessons Mitt learned from it have nothing to do with running our nation.  If you want to look at an example that worked and saved jobs, look to the restructuring of the auto industry that we bailed out and brought back to profitability.  The point here was to save jobs and keep an industry in the U.S.  Remember who was dead set against that?  Our boy Mitt.

On another note on our economy:  The conventional wisdom seems to be shifting with an understanding that austerity by itself will not help either Europe or us.  The new conservative language is austerity with “smart” investment.  Another no-Duh moment where the stupidity of shovel ready jobs comes back to haunt the Democrats and President Obama when their stingy  stimulus program was not carefully planned for our future.

It is rather interesting to watch the panic in Republican circles to the attack on Mitt Romney’s style of capitalism.  What has so terrified them is that the attack has come from within.  In order to understand this reaction you have to understand that the emperor has no clothes.  You remember this fable about a a couple of tailors who were ripping off the emperor by telling him that the clothes he was wearing were the most elegant in the world, but was invisible to those unfit for their positions, stupid, or incompetent. When the Emperor parades before his subjects in his new clothes, the crowd all complements his wonderful outfit and then a child cries out, “But he isn’t wearing anything at all!”  The point is we are blinded by what we believe, or fearful someone will find out we have doubts, and don’t see reality as it is.

For Republicans, their economic faith in the free market system is like a religion.  Get government out of the way and everything will be better, milk and honey for everyone.  Now they expected attacks from the left or what is today called the left and is really the middle or middle right because the right is so far fight.  Those are just heretics or barbarians at the gate and one does not even have to consider their sadly misguided ideas.  But when questions start to arise within the church of Republicanism, it starts to shake the belief system at its foundations.  To even suggest that some kinds of capitalism and greed just might not be good for the country shakes the very foundations of their belief system.  More importantly it shakes the foundation of the edifice that has allowed them to fool most of the people all of the time, not noticing the emperor has no clothes.

What is interesting and you hear it in their own words, is that they are totally out of touch with progressive politics today because they have closed their minds to examining their own fundamental beliefs for fear of finding faults.  I know this may be shocking to them, but Progressives are also big believers in capitalism.  But what you hear from the right is the language of big government interfering with their sacred market place as haters of competition as they describe Progressives.  But what Newt and Rick (Gingrich and Perry) are raising is a healthy look at whether some forms of capitalism, while creating wealth for a few, may be damaging to the economy as a whole.  It is just the kind of attack they would expect from the Progressive heretics, but not from within where people might just pay attention.  People who they believe are believers are questioning some of the tenants of their faith and the terror is that the whole edifice could come crumbling down like the emperor with no clothes.

When you get right down to it and you actually read Mitt’s economic plan, it is lower taxes for the wealthy, less regulation, and major cuts in government spending (read cuts to programs that help the poor).  It is more of the same that has so effectively transferred wealth to the 1%.  The 99% are starting to question the unfairness of the system which has resulted from these policies.  Progressives are pushing for more fairness and spending to build the infrastructure and invest in our human capital to provide the fertile environment for the growth of business and industry.  Pure capitalism as the Republicans define it, which of course doesn’t exist, and which is now thoroughly tilted in the favor of the 1%, is being threatened.  Republicans represent the 1% and have formed this symbiosis between wealth and politicians to keep things just the way they are.  This has all been under the guise of keeping government out of business and interfering with the market place.  This hides the fact that in reality government has been used to tilt the playing field badly in favor of the 1% and the economy is suffering.

Now the very foundation of what has pulled the wool over the eyes of so many conservative Republicans who have voted against their own best interests, the unquestioning belief in unfettered capitalism, is being attack from within.  Maybe we ought to take a more nuanced look at capitalism.  It is actually a very healthy thing to examine ones beliefs and adjust them for the reality of the outcomes.  But in this case, that examination could threaten the whole edifice because the edifice is founded on unquestioning faith in all of capitalism as they define it.  Oh my god, could Progressives be making sense?  It would be nice to think this was actually a healthy look at their economic philosophy, but of course it isn’t.  It is really a reprisal attack on Mitt where he is weakest.  But if it exposes the flaws in the foundation of their economic faith, if it awakens people to the fact that the emperor has no clothes, it could be the end of the conservative right, at least the economic conservative right.  Could Progressives have a point?  No wonder they are terrified and are putting major pressure on Mitt and Rick to cease and desist.  Somebody might wake up and say, “But he isn’t wearing anything at all!”

Dylan Ratigan, in his new book, Greedy Bastards, distinguishes between two types of “capitalists” in our current era, the capitalists who use money, resources, and human potential to nurture the nation’s health and growth through creating goods and services (aka a capitalist who makes), and the capitalists who drain our capital away into private bank accounts and foreign investment, to use the system to game it for commissions and exorbitant profits (aka a capitalist who takes).  Dylan calls this latter activity extraction and refers to the companies who do this as vampire industries because they are sucking the capital for reinvestment and strengthening our whole economy out of us. He points out the unholy alliance with politicians and these capitalists who take, rigging the system and making the taking possible.

What brings all this to mind today is the attack by other Republican candidates on Mitt Romney’s “job creation” at Bain Capital.  To quote from the NYT’s story (Advisers Work to Put Positive Spin on Romney Career in Corporate Buyouts):

Senator Jim DeMint of South Carolina joined the growing chorus of Republicans who expressed discomfort with the Republican attacks on the buyout practices exercised by Bain when Mr. Romney was there.

Speaking on the Mark Levin radio show immediately after Mr. Romney gave his acceptance speech, Mr. DeMint, who endorsed Mr. Romney in 2008 but has not endorsed anybody this year, said, “He’s hitting a lot of the hot buttons for me about balancing the budget, and frankly, I’m a little concerned about the few Republicans who have criticized some of what I consider the free-market principles here.”

What is so very instructive about this is the symbiosis of DeMint and vampire industries like Bain Capital which is just what Dylan Ratigan was pointing out.  Even more to the point is that DeMint apparently lacks any understanding of the two types of capitalists and how one sucks the life blood out of us and leaves less capital for the other, who creates our vibrant economy.  Then again, people like DeMint are heavily on the payroll of vampire industries.  Isn’t it great to see the 1% in full focused optics?  It would be nice to think that the other candidates including Gingrich, Huntsman, and Paul see this distinction, but in reality I think they are just opportunists, feeding at the same trough as Romney and DeMint.

Thanks Dylan.  It is nice to have a logical framework and a whole new vocabulary to understand how we are being screwed.

Ever since I was an young engineering student, I always wondered what “I get it” really means.  In other words what does it mean to really understand something.  Many times I would come across concepts that I just could not grasp in an intuitive way.  I could do the work, but I did not have a gut feel for why it worked.  Then I began to wonder what the real nature of knowledge was.  I am a left brain person meaning I am more analytical.  I need to understand the workings of the pieces instead of a more holistic approach to understanding something (right brain).  My favorite example of right brain activity is the savant who can do amazing calculations in their head and have no idea how they do it.  The answer just appears and they know it is right.  But then when I started analyzing my own way of knowing something, eventually I would arrive at something I just accepted as true and then built the edifice from there.

So I came to the conclusion that familiarity with a concept is sometimes the basis of our acceptance of it.  More important is that familiarity is the basis of our understanding of the concept. I guess that is why it is so hard to “think outside the box”.  If I study something that was confusing to me long enough, the concept became more acceptable to me because I became familiar with the concepts.  Here is an example:  I struggle sometimes with economic concepts.  Sometimes Professor Krugman says something that I just don’t get.  It is not intuitively obvious to me.  Then I have to work through examples in my mind that demonstrate the concept.  Sometimes I find out that my concept of a term is different from what economists mean, but finally I build a model in my brain of how things work.  Then based upon this model, I can not only understand the concept, I can extend it to other issues.  As Shakespeare once said in Hamlet, “Aye, there’s the rub”.

The rub is that this model in layman terms is an analogy of how things work and how we understand them, and sometimes we apply this model where it doesn’t work so we draw the wrong conclusions.  For our economy this can be disastrous and the critical two areas we are applying the wrong analogy is to government debt, and the idea that government should run like a business (and by extension, best run by a businessman).  On the debt issue I have tried to show how the family model of how to deal with debt, the way most of us understand it, is radically different than government debt (One More Attempt at the False Analogy of the Home Budget).  Paul Krugman did me one better in his op-ed, Nobody Understands Debt.  If you follow these discussions you can see how easy it is to misunderstand how government debt is different than our concept of personal debt and why with this misunderstanding, we are doing all the wrong things.  The idea of austerity and starving the beast is just going to make our government debt worse.

The other false analogy is that government should be run like a business or the extension, the next President should be a CEO.  I might mention Arnold Schwarzenegger’s record in California or Meg Whitman’s trumping at the polls.  It doesn’t say a CEO could not be a good leader, but most are not.  Mitt Romney is touting his business experience as making him eminently qualified to be President.  Now I am not going to use this space to point out that his record as a businessman reflects the raping and pillaging of other businesses to make a buck or that his net record is a destruction of jobs as others have done this nicely (Romney on Jobs).  What I really want to do is to show how our analogy of a well run and profitable business does not necessary transfer to government.  I am not saying that government cannot be more efficiently run, I am saying that the goals of government and business are not the same.

There are probably two real problems with this analogy.  The first is that a business runs to make a profit for the owners.  Governments run to serve all of its citizens.  So a business might want to outsource many tasks to reduce costs to enhance the bottom line.  It might suit them to offload healthcare or severely reduce the benefits.  To make sure they maximize their productivity, they will make sure that they have skimmed off the cream of employees.  Imagine if a government did this for many of the services it provides.

Well, actually that is how the Republicans want government to function.  They want to outsource education to private providers who will skim better performing students to improve their performance.  They want to shift the burden of health care for the elderly more and more to seniors who can’t afford it.  But it does improve the bottom line of government and requires less taxes.  Remember when partnership with businesses on regulation seemed to be the best way to go and then we find that pharmaceuticals were controlling the FDA approval process?  Government has a role to ensure the well being of all of it citizens, business could care less as long as the bottom line keeps growing.

The second problem is that government is responsible for the macroeconomy, the aggregate well being of the whole economy.  Businesses work on a microeconomic level, what is best for them.  It might be very prudent for a business to reduce the workforce and move some work overseas.  If all businesses did this we would have a very weak jobs market and a real problem with balance of payments as more and more of our work goes overseas (our present condition).  Business would like a reduction in regulations to reduce their costs (and certainly some regulations are burdensome), but government is not in the business of the bottom line, but the welfare of all of its citizens so all those burdensome environmental and safety requirements might just protect the general welfare.  So while a “business oriented” president might be good for business, the real lesson here is that what is good for business might not benefit the nation.

In caring about the aggregate health of our business climate, government will need to invest in education, health care, and infrastructure to improve the competitive environment for U.S. businesses.  They need to invest in research and development where the short term interest of a business prevent it from doing so.  There needs to be long term planning in energy and climate change to prepare for our future.  These are major investments in our country for which there is no discernible return on investment except in the welfare of its citizens and future higher tax revenues as businesses thrive in a more competitive environment.  What we have seen from businesses is that these are costs to offload, focusing on the highest rate of return in the short term.  So who is going to do it, and how is a business focused CEO qualified to do this strategic planning, political selling, and leadership?

So the next time you hear someone say, “I know how to balance my budget at home so why can’t the government figure it out”, or “Why can’t government work more like a business”, think about it.  Government debt is not the same as personal debt and even more to the point, governments have to think bigger than businesses.  The people who utter this nonsense haven’t really thought it through and they are living in the echo chambers of their own ideas.

UPDATE 10 JAN:  I would like to think Paul Krugman reads my blogs, but of course I dream.  But he makes my point about running government as a business and the extension, we need a business leader to run government in his blog this morning:  Businessmen and Economics.