The Role of Government

By James Kwak

Last week Simon gave a talk sponsored by Larry Lessig’s center at Harvard. Afterward there was a dinner and then another question-and-answer session. Jedediah Purdy (another person to write a book while at Yale  Law School; he is now a professor at Duke’s law school) asked a question that I have rephrased as follows (the words are mine, not Purdy’s; I may have also distorted his original question so much that it is also mine):

“You’ve criticized the government for withdrawing from the economic and particularly financial sphere and allowing private sector actors to do whatever they wanted. Do you think the government should simply act so as to correct the imperfections in free markets? Or do you see a positive role for government in determining what kind of an economy we should have?”

I think it’s noteworthy that the people you would probably consider the most outspoken critics of Washington and its capture by free market ideology in recent decades — Joseph Stiglitz, Simon and I, Yves Smith, etc. — take pains to insist that we are all, in fact, in favor of free markets. (It’s a caveat I’ve made in several interviews.) The usual argument is that markets have failings — due to information asymmetries, externalities, the works — and that government policy should correct for those failings, instead of pretending that they don’t exist, à la Alan Greenspan. The conceptual model is that the government policies should exactly correct for those market problems — for example, imposing carbon taxes that exactly account for the externalities of carbon emissions — and then get out of the way.

Dean Baker makes an observation in his book, False Profits: Recovering from the Bubble Economy, in a different context, that I think reflects the same issue. Discussing the political debate over the early 2009 stimulus package, he writes (p. 109):

“President Obama never gave the people of the United States the basic economics lesson they badly needed to understand the rationale for the stimulus. In a country that had been conditioned by both parties and the media to think that deficits are always bad, the idea that the government would deliberately run very large budget deficits didn’t make sense to most people.”

What lessons are we learning from this crisis and recession? So far, the lessons we are learning, if any, are modest, and are ones that many people (just not those in power) already knew, having to do with incentive structures under limited information, the distorting impact of implicit government guarantees, the limits of a disclosure-based regulatory regime, the problem of regulatory capture, etc. The thinking is that we’ll modify the system to take these factors into account, and then the magic economic machine will go on ticking. There don’t seem to be any big lessons.

What would such bigger lessons be? Purdy floated the idea that the government should promote equality of opportunity. “Doesn’t it do that already?” you might ask. It makes a small effort via the public education system, but I believe even the most outspoken advocates of public schools would acknowledge that they currently do little to correct for the massive inequalities in starting points across our society. For the most part, our government does little to level the playing field, we have low levels of social mobility as as result,* and our elected politicians are fine with that.

I spoke to Purdy after the event and he thought the strongest argument against a positive role of government is “the competence issue.” After all, Simon and I just wrote a book about how regulators and politicians became intellectually captured by a single industry; if that’s your basic view of the government, do you really want the government deciding what the economic goals of society should be? So on a practical level, most reformers who favor a more active governmental role usually limit the government to correcting known problems with the free market. That’s the conservative position, in the sense of Edmund Burke, probably my favorite conservative of all time. But it’s not terribly satisfying.

* For example: “By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.”

125 responses to “The Role of Government

  1. I would qualify that just a tad, else I’ll have visions of Diana Moon Glompers, Handicapper General floating in my head.

    “Equal opportunity to develop your potential.” It’s about unlocking human potential to contribute to society.

  2. If tea baggers are so concerned about the deficit, taxes, immigration, Obamacare, CEO bonuses a la AIG and Goldman Sachs, where were these douche bags during the Senate hearings this past week on the greed, excess, hubris, and obnoxiousness of Wall Street?

    http://www.washingtonpost.com/wp-dyn/content/discussion/2010/02/26/DI2010022602928.html

    Recycling here, and worth repeating:

    http://kaufman.senate.gov/issues/issue/?id=D24B4D96-D93F-4D9C-9E08-2122FB2C6FAF

  3. The low social mobility is a direct consequence of information asymmetry. Simply put, education can be considered to be the basic form of information. No matter how much information about the market is provided a person has to have a certain level of education in order to understand and act on that information. Asymmetry at this basic level is far more important than any other. It’s no accident that social mobility is closely related to access to education.

    From a free market perspective, in order to ensure equal access to information, government should be obliged to provide equal access (essentially free) education. Anything less ensures unequal playing field no matter what other steps are taken.

  4. As an engineer, I’ve been thinking of this problem from the viewpoint of control theory. You’ve got a complex system with lots of inputs, outputs, internal and external feedback; so the details of application of the theory are tricky (which is why most useful economic models make many, many approximations), but the generalities of the theory are still useful. A system that responds quickly and efficiently to inputs (in engineering terms, has low energy loss) might be “best” by some metric. However, if that “most efficient” system has outputs that overshoot and “ring” (a term for oscillations that take a relatively long time to die out), then that system may be suboptimal for a certain application.

    When the system is an economy, it might be efficient (low loss) to have capital moving around very rapidly, or have few restrictions on freedom of action of economic actors large and small. However, if the variables of e.g. “price level” or “unemployment” in that economic system tend to overshoot, undershoot, or oscillate, the system might be sub-optimal from a social point of view.

    In a control system, there are various ways to damp out violent responses. They generally involve adding some lossiness into the system, or at least storing some quantity (energy, momentum, etc) for a period of time and releasing it so as to reduce overall variation in some output variable. In an economy, there are various ways of damping the system’s response, such as taxation, limits to freedom of action (regulations), transfer payments, etc.

    There are really only two key questions. (1) What kind of economy do we as a society want? Do we go for efficiency and bear with the high social cost of overshoot and instability, or do we want to deal with potential lossiness for the sake of slower moving variables? (2) Is it even possible to get a handle on the complexity of the system we are dealing with? Do we even know the proper way to damp out the violent behavior? Note that this isn’t exactly the competence question, since that implies we know what would work, but we’re not sure that the people we put in charge would do it right.

    The question about whether government should be the agent or not really becomes irrelevant in this context. If we were to opt for the damped response, then government is one way of applying the brakes, but there are others (what we decide to use as Money, for instance).

    (It is possible to address the question of social mobility in this context, but someone else is going to have to take that on. I have some engineering I have to get to work on….)

  5. David Petraitis

    Interesting point about education. I one was to look into the University level of education in “France, Germany, Sweden, Canada, Finland, Norway and Denmark…” as James quoted, I think they would find that it is close to essentially free.

  6. I don’t agree with the premise (and the evidence of history backs me up) that there can ever be such a thing as “free markets” the way the textbooks claim. That’s because no one actually wants to be a “capitalist” and “compete”.

    On the contrary, the day any capitalist can switch from spending on improving his competitive performance to spending far less to lobby and bribe to bring about corporatism, he’ll make that switch from “capitalist” to rentier oligopolist. I’m unaware of any exception to that rule.

    So to say “the government should only correct for market failures but otherwise stay out of the way” is, by intentional scam or maybe well-meant negligence, to make by omission the choice to leave the road wide open to inevitable corruption and corporatism.

    So there’s no way out – every big economy is, implicitly by omission or explicitly by commission or some combination of the two, a command economy. Corporatism like the Bailout and the for-profit Global War on Terror is every bit as “commanded” as anything the Soviet Union ever did. The only difference (and the economic defintion of “fascism”) is that in this command economy private rent extraction is maintained.

    So the only question is whether the commands are in the public interest or the criminal interest.

    As for the size of the government itself, the only way it can be shrunk is if it uses the public interest command power to shrink the corporate structures. One way or another, depending upon the nature of the commands, the size of each is dictated by the size of the other.

    That’s why anyone who seeks freedom, and who really wants small government, has to agree that first we have to destroy the rackets. We have to break up the big banks, for example.

    Maintain the big rackets in existence, and you guarantee the maintenance of a big, aggressive, increasingly tyrannical government to do their bidding.

  7. The moral sentiment of the government is that age should not be able to force retirement. Historically, here at the university, the moral sentiment was that age 65 was the time for a teacher to leave his guaranteed job (tenure). The government favored the old people. I favor the young.

  8. YES JAMES! You guys finally are get what I have been saying for some time. Remember, Obama hired many of the anti-government people that got us in this mess. So his message out of the gate was as little gov’t intervention as possible. Many of his programs involve using private enterprise, with gov’t assistance (NASA). Obama should have said, look we are the gov’t, we the people, we want our gov’t to lead to produce the best outcomes for all Americans.

    I especially like your point about what lessons we have learned. Again, Obama chose to say mistakes were made, we aren’t gonna say what those mistakes were or whether those people have learned their lessons, just trust us that they have, and now move on. Look forward, don’t look back. So now we all assume that we can continue to rack up debt and not worry about things. There was never a period of true adjustment. I think that is still to come.

  9. Rajeev Upadhyay

    Govt is supposed to provide the right environment for people where any one can live with peace and can grow.

  10. D. Christopher Leonard

    The belied in a “night watchman” role for the state – amended to “correct for market imperfections (or ‘information asymetries’if you like technical theology) has always been a pious fantasy. Markets in the modern sense don’t exist without states in the first place (historically and archeologically). The more important question to ask is ‘what is a good society? do the mechanism/institutions in place serve to foster adequate resources for all its members?
    Currently, the U.S. is fairly awful in comparison with most OECD countries (infant mortality at 3rd world levels, 1 in 5 children living in poverty and 1 in 4 suffering nutritional insult every year, underfunded education from primary through post secondary (with post-secondary returning to being a class commodity), increasing income inequality). This is a comprehensive failure of vision. You all ought to read Tony Judt’s impassioned, “Ill Fares the Land” to realize just how sterile most of what passes for debate about state-market relations is.

  11. Michael Hudson blames global financial crisis on neo-Liberalism and free-market ideology. He calls for a return to “classical economics”.

    I discovered Hudson, perhaps, a month ago. Much of what he says resonates. I’ll need to read up on what he means by “classical economics”.

    Having said this, when you have an economy where 1% of the population owns 80% of the wealth, there is something wrong here.

  12. Great post James.

    As an educator, but not a teacher, I have observed and tried to address unequal educational opportunity (and outcomes). To overgeneralize I would say we (our ed system) don’t know how to do either of those, certainly in the most obvious and persistent areas. I believe (can’t prove) that it may well be an issue beyond the capacity of schools (as currently construed) to effectively address, at least without extraordinary resources (going to kids without political or economic clout- fat chance!). One of the things “we” have done is to starve non academic, non college focused secondary education opportunities to the point where they shriveled and rotted years ago, making secondary ed necessary but irrelevant to those not motivated toward that goal.

    Is education the only thing government can co to increase/ensure more equal opportunity? One thing it did do was affirmative action, though we could argue how much this was opportunity versus outcomes focused. To the economists I would ask- what impact did these programs have on social mobility?

    what other social goals can/should government define/ encourage/regulate/enforce that are not market oriented and therefore not well addressed by private markets?

  13. Ah-ha! But we produce cars in many colors, and we have scientifically segmented the market for laundry detergent. You probably did not factor that into your calculation of standard of living.

  14. & Hooverism is gutting the great public universities, which were great levelers in the past two generations. Going to be less social mobility, even.

    Worth noting, too, that Delong has adopted a non-free-market position on climate change.

  15. Not only are the “reformers” not interested in breaking up the rackets, they in fact want to tilt the game further towards centralization of power and control in their hands while operating under the guise of pursuing a meritocracy and egalitarian socialism. How else can one possibly explain the move towards handing over control of fiscal and monetary policy to a few gnomes in committees operating out of Basel? Meanwhile the US public education system only teaches what the reformist propagandists determine will keep the general public in the dark regarding the despotic nature of their hidden regime.

  16. Speaking as a non-economist here, one of the most interesting concepts I have come across is “economic equilibrium” in a planet with finite resources. The idea that continual economic growth is unsustainable.

    I would argue that (post-industrial?) North America, Western Europe, Australia have achieved and can sustain their societies with an economy based on equilibrium. While “economic growth” is for the vast majority of people living in India, China, Africa etc. But what would be the mechanisms to achieve this?

    If conditions are so bad a government is over thrown, the problem is who and what rushes into the power vacuum. The internet and the “blogosphere” puts an entirely new angle on free speech and how people acquire information.

  17. readerOfTeaLeaves

    Just to add to this comment, I’m convinced that economists need to use a lot more complex visualization software.

    The system as it currently exists is misusing energy terribly, and reminds me of some mapping done of an MS server.

    The mapping is then done on a Linux server, and one can see at a glance how system architecture and design can optimize the processes or functions in any system.

    Comparison images are here:

    http://www.visualcomplexity.com/vc/project.cfm?id=392

  18. The arguments put forward are thus far are surprisingly weak, because Purdy’s question goes to the very heart of political philosophy and what the role of government ought be.

    Let us rephrase the question this way: How does a people decide their economic destiny? Generally, a people comprise a society, and have instituted a government. The question then becomes: can the will of a people be expressed best through market forces? Or by the exercise of government?

    And if the will of a society is expressed through market forces, how is a people’s political will carried into effect, especially when that political will impinges upon market forces? For example, it has been generally accepted by almost everyone that there must be a shift away from dependence on imported fossil fuels. Yet, this has not occurred; in fact, the dependence on imported fossil fuels has worsened. The past three decades comprise an experiment in letting market forces and “investors” determine the direction of the American economy, and on the issue of energy security, this experiment has been a catastrophic failure.

    Market functions may be seen as the most democratic, in that people “vote” by making purchases. But there are a number of problems, beginning with the ones Kwak lists. Even more fundamental, however, is that the question must be faced of how democratic is it to allow society’s decisions to be based on markets, when markets will always be dominated by concentrations of wealth. In fact, in The Federalist Papers Number 10, Madison warns that it is exactly concentrations of wealth and economic interests that give rise to most pernicious political factions. (The majority decision in Citizens United vs FEC turned this argument upside down and obliterated Madison’s intent; so much for “conservatism.”)

    In the history of the United States, economic development has always been the result of market forces being set in a general direction by the “grand strategy” laid down by the federal government. This general framework was firmly established and elucidated in the reports of first Secretary of the Treasury Alexander Hamilton (the Reports on Credit, Banking, Manufactures, and the Constitutionality of the Bank of the United States.) Conservatives have written Hamilton’s reports out of history, because the reports clearly specify an activist role for government. Among the first policies enacted by Congress were measures to encourage the development of manufactures, most especially the manufactures of gunpowder, armaments, and naval stores.

    In fact, the early development of machine-cutting tools is almost entirely the story of the armories in Springfield. Mass, and Harpers Ferry, Va. The machinists and foreman from these armories are the people who have names like Pratt, Whitney, Fellows, Jones, Lamson, etc. This is the nucleus of modern world industry. After the War of 1812, the War Dept. issued a requirement for firearms with interchangeable parts. This is really what launches modern machining, and also, mass assembly.

    A key “grand strategy” of early government was to encourage the settlement of the west, and the development of a transportation system that would bind the nation together. Most significant in this area were the construction of the Erie Canal, and the Illinois-Michigan Canal (the latter created the city of Chicago, 1835 to 1852).

    The application of steam to rail transit beginning in the 1830s included a very important role played by Army Engineers, especially in civil construction. This has been almost entirely written out of history – the origins of modern industrial management are actually the railroad companies, based almost entirely on railroad executives who had been U.S. Army officers, who had developed the skills in provisioning and leading the many Army Topographical Corps of Engineers expeditions following Lewis and Clark, the placing and construction of military outposts on the frontier, and the supplying of those outposts.

    First steamboats down the Ohio to the Mississippi in the 1830s, also. River improvements, including the work of Colonel Henry Shreve. The maritime application of steam propulsion was largely dependent on the 1850s experiments and work carried on by Navy officer Benjamin Franklin Isherwood, who headed the Navy’s Bureau of Steam Power during the Civil War (and whose name is on the engineering building at the Naval Academy today).

    The development of civil aviation was deliberately supported by the federal government through the awarding of airmail contracts.

    The development of commercial applications of radio came as a deliberate policy by Navy officers after the end of World War One. Similarly, the development of commercial applications of computers came as a deliberate policy by the U.S. military after World War Two, especially the support given to Seymour Cray after the war by the U.S. Navy.

    The auto industry was supported by government policy, prodded into action by the “good roads movement” of the 1910s and 1920s, which demanded a massive national network of paved roads. The emergence of the independent gasoline service and station was made possible only by the government (court) ordered dissolution of the Rockefeller monopoly on gas production and distribution. And of course, there is Eisenhower’s Interstate Highway System that completely transformed so much of the U.S. economy in the 1950s and 1960s, including creating the geometry that allowed the growth of suburbs and the housing boom after the War.

    So, in general, the history of American economic development is that of grand national objectives set in place by government policies and actions, creating the environment in which free enterprise and market forces could flourish. The problem today is that we have supposedly brilliant people who argue that market forces should be left alone to determine the direction of society.

  19. “free market” is code word

    it stands for no restrictions,

    it means no government interference

    it is a polemic, argument-inducing term

    there is no such thing as a “free lunch” and there is no such thing as a free market

    “free market” frames the dialogue

    if you accept the free market frame the firs thing you have to do is say that you are for free markets

    the free marketers have no problem with government as a helping hand, protecting capital, they advocate government created monopolies, government subsidies, tax breaks, copyright and patent enforcement, strict bankruptcy rules, and so on

  20. D. Christopher Leonard

    But the issue has never been “free” versus “unfree” markets. Markets are socio-culturally embedded institutions. The ? is free (or ‘unfettered’) to do what to whom by whom (to paraphrase Laski). Can it be persuasively argued that Goldman Sachs synthetic CDOs represented a best use allocation of capital? I think not. The anti-state ideology (hooverism) that has possessed the U.S. (and UK) over the last forty years has invariably led to economic/financial crises while education, infrastructure, and human capital have been squandered and ruined. There is a gigantic opportunity cost to dis-investing in the fabric of society -just as vast spending on armaments squanders resources – and it is future generations who will bear the consequences (and I do not intend here to suggest that the tawdry persiflage offered by the Republican party on ‘debt’by this).
    A more useful approach to thinking about societal telos is that of Amartya Sen vis capabilities approach to thinking about desirable investments (and it is also Sen who reminds us that Smith’s view of the market was predicated on the conception of humans set forth in Theory of Moral Sentiments).

  21. Do you suppose the elegant architecture of Linux has anything to do with the “open” in open source? Einstein said, “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage — to move in the opposite direction.” I think more openness and transparency and less partisanship—and more contributions from other professions (like our own engineer27 and you)—might bring us closer to solutions which are elegant in their simplicity. My personal feeling is that lawyers and lawmakers are not problem solvers by training or by nature.

  22. Valerie gagnon

    You go girl!

  23. The fact is that government already takes a positive role in the economy. Consider the railroads, which were financed by government bonds; the Internet, invented by DARPA; pharmaceutical research, something like half of which is funded by the federal government; the Aerospace industry; etc. etc. It is a moot question about whether the government will play this role. The real questions are who wins and who pays?

  24. Well said:

    “Purdy’s question goes to the very heart of political philosophy and what the role of government ought be.”

  25. The competence of our governments in democracies are probably correlated pretty closely to the competence of our electorates. Unfortunately.

    My personal view of the free market and government’s role in is is that the capitalist free market is a reasonable tool for optimization. I think of it as a kind of economic / sociological simplex method optimizing for profit. It’s government’s role to set up the constraints so that the society’s social goals are optimized inadvertently by the economic system.

    If we think it’s important to have clean air then make it more profitable to run clean factories. If we want higher employment levels then make it cheaper to hire workers (discourage unions, lower minimum wage, loosen unfair dismissal laws).

    Fundamentally the free market is stupider than it is clever. If it was clever then it would have avoided the local maximum of this housing bubble that resulted in this local minimum of the GFC. Or perhaps it’s really smarter than I’m ready to admit.

  26. Valerie Gagnon

    I may break your heart here but I stoped believing in America 25 years ago when I first moved here still a young idealist. …..

    What? Black kids were fighting for pencils and erasers a few miles away form our home in DC?

    You go USofA the greatest democracy in the world….. Not !!!

    Love from Canada

  27. Why is it we have a term for when the market doesn’t work (“market failure”) but we don’t have one for when the government doesn’t work (something like, “government failure”)?

    Well, it is because we really don’t need one – long, bitter experience has taught those willing to learn that “government failure” is more or less the same thing as “government”.

  28. Chris Gay, New York

    There’s an annoying flaw in what Purdy calls the “competence problem,” a phrase that propagates a dangerous and inaccurate view of regulators. Regulators can’t enforce prudential rules that don’t exist, either because they’ve been repealed or because they were never passed in the first place. We’re all familiar with the regulatory retreats of the past 30 years (“13 Bankers” covers them rather nicely), and with the derivative regulations that never existed, thanks to people like Phil Gramm and Alan Greenspan, or whoever pulls their strings. We also know that certain regulators (Chris Cox’s SEC, for one) were put in place to be ineffective (read Thomas Frank’s “One Market Under God”).
    There’s also a built-in problem with regulatory regimes that almost ensures the perception of incompetence: You tend not to notice them when they work. No one thinks much about the disasters that never occurred (like all those bank failures and corporate scandals that took place between 1935 and 1980) because some prudential guideline prevented them. Successful regulation is invisible, almost by definition. If all you know about regulators is their failures, you’re bound to take a dim, if skewed, view of regulation. Of course that’s precisely the view that corporate power, fronted by its congressional and journalistic stooges, want to you take.
    Conservatives like to express their guiding “principle” as something like “the least government possible.” Here’s a better conservative principle, from G.K. Chesterton: “You shouldn’t take down a wall until you find out why it was put there.”

  29. Chris Gay, New York

    There’s an annoying flaw in what Purdy calls the “competence problem,” a phrase that propagates a dangerous and inaccurate view of regulators. Regulators can’t enforce prudential rules that don’t exist, either because they’ve been repealed or because they were never passed in the first place. We’re all familiar with the regulatory retreats of the past 30 years (“13 Bankers” covers them rather nicely), and with the derivative regulations that never existed, thanks to people like Phil Gramm and Alan Greenspan, or whoever pulls their strings. We also know that certain regulators (Chris Cox’s SEC, for one) were put in place to be ineffective (read Thomas Frank’s “One Market Under God”).
    There’s also a built-in problem with regulatory regimes that almost ensures the perception of incompetence: You tend not to notice them when they work. No one thinks much about the disasters that never occurred (like all those bank failures and corporate scandals that took place between 1935 and 1980) because some prudential guideline prevented them. Successful regulation is invisible, almost by definition. If all you know about regulators is their failures, you’re bound to take a dim, if skewed, view of regulation. Of course that’s precisely the view that corporate power, fronted by its congressional and journalistic stooges, wants to you take.
    Conservatives like to express their guiding “principle” as something like “the least government possible.” Here’s a better conservative principle, from G.K. Chesterton: “You shouldn’t take down a wall until you find out why it was put there.”

  30. Over the years,like many, I was often subjected to free market harangues. My first question when the harangue finished was “I take it your base idea constructs derive from Adam Smith?” Almost always, the answer is yes. I then asked, “What do you think about Smith’s precursor book ” Theory of Moral Sentiments”?. The vast majority of times the free marketeer had never even heard of “Theory of Moral Sentiments”.

    Moral Sentiments, the book, is barely known among run of the mill free market ideologues. I see free marketeerism as being plagued by ignorant pastor types who received the call from on high just as the process develops in sectarian religion in the United States.

    Free marketeerism is a religious understanding among the bulk of it’s adherents. The basic social problem of US society is a plethora of irreconcilable differences of belief . These beliefs tend to trump facts no matter how well presented.

  31. Andrei Vyshinsky

    “What would such bigger lessons be?”

    Well, Herr Quack, I suspect that the with the answer you’ve given to this question it’s better asked, what lessons have you and Simon Johnson learned? Given your focus on the naive construct of “intellectal capture” as opposed to the out and out theft of our democracy by a ruling class so corrupt as to be unassailable short of mass demonstrations and strikes, not many I’m afraid. Allow me to submit that any political whore in receipt of hundreds of thousands in contributions from powerful interests – financial, drug, Middle East foreign policy and others – is going to be “intellectually captured”. Consider if you will the 95% approval given to the AIPAC authored Iran bashing resolutions emerging from the United States Senate annually. Think that these folk were “intellectually captured”? Joe Stalin in his finest moment couldn’t have done much better! Instead of collecting book royalties, earning lecture fees, and making TV appearances, organize a general strike. Then watch just how “intellectually captured” these vermin are.

  32. tippygolden: a necessary (but probably not sufficient) condition for your economic equilibrium is zero population growth. That is the only way for total GDP and GDP/capita to both remain constant.

    That requirement runs straight into the problem of funding social spending on workers past their productive usefulness (retirees/disabled/etc). Only with a constantly larger pool of productive workers can benefits for post-productive citizens be maintained (unless sufficiently large gains in productivity per worker can be sustained indefinitely).

    I don’t hear many people espousing the “Logan’s Run” solution (of zapping people when they are no longer productive), but other “solutions” that have been implemented have been equally brutal (for example, in Rwanda).

  33. Legal system and rule of law. This is the single most important role of governing.

  34. Pay no attention to the exact same dudes behind the curtain.

  35. Global trade yes, reasonable tariffs yes. Free trade is greed trade.

  36. Well said Andrei. Well Said

  37. Andrei Vyshinsky

    Barbara,

    Clearly great minds think alike. Barbara. :-)

  38. You would think by now we might have investigating “triggers” in good economic times to ensure this growth isn’t based on fraud and leverage on fraud.

    For example – Countrywide’s stock growing 23,000% in a short time. You think anyone scratched their head and said, “they deal directly with homeowners. How can they grow this fast?”

    We need guardian-style independent regulators who kick into gear in the good times – who’s objective is to double check the root of exceptional growth and emerging products like CDO’s. Our captured framework failed us and the SEC doesn’t really have the role of general supervision minus obvious fraud. The Fed will never do it.

  39. You are talking about GDP per capita. But this is an average. In the United states, 99% of the population owns 20% of the wealth. I believe Hudson would argue that through taxation according to “classical economics” the lives of the 99% could be improved considerably without GDP growth.

    If deregulated-free market ideology prevails, I am not sure further increases in GDP would improve the economic well-being of the 99% of Americans in discussion.

  40. The role of government is to keep the thumb off the scale in the butcher shop, make a fair game on a level playing field, and to bust up monopolies wherever spiders spin and interconnect their webs. The role of government was privatized from Nixon on, but especially since Ronnie/Donnie Reagan/Regan and the Bush/Clinton express.

    The Brainwash continues on Fox Media, and the rest, like reruns of Happy Days, as if Fonzi never jumped the shark (or Bill Clinton, fueled on Coke, never had sex with this or that groupie).

    Lobbyists are the institutional memory of a congress that has not changed in size to keep pace with the growth of population (and unfair migrations) in America since the 1940s. And too many lawyers of counsel while too few are lawyer advocates. Interest groups such as AARP, NRA and AIPAC wage the dog.

    The people are in a straight jacket, they feel it from their light bills to parking meters, to dairy and so on. It won’t last.

    And God help “the smartest guys in the room” when they wake up. It won’t take a weatherman to know which way the wind blows.

  41. Love the Vonnegut reference. Makes me want to read Harrison Bergeron again.

  42. Many thanks to Tony Wikrent!! Highly informative and exceptionally well-written!!

    It’s like being back in grad school (but without required reading, paper writing and grades)!

  43. Our government involves itself in decisions about what kind of country we should have to an extraordinary degree. We have one of the world’s highest levels of home owndership largely as a result of policy. We disallow homosexual marriage in most jurisdictions. We pay a higher than market price for sugar and other organically based sweeteners. We drive at high rates of speed not just because of posted speed limits and enforcement policies, but because of the engineering of our highways. We live in a far more illuminated world than prior generations, and in public places, that is due to government. We execute people who have transgressed certain laws, or who can be made to has seemed to do so to a small group of people selected at something less than random. We sometimes refuse to allow large groups of unincorporated people to live under rules they have agreed upon, while at other times we allow such arrangements without interference. When we disallow those arrangement, we sometimes enforce the decision through violence. We allow people to pay each other for sex if they do so on a semi-exclusive basis, but not on a retail basis, except in some parts of Nevada. We engage in propaganda through government publications, monuments, school books and holidays. Our public officials bloviate against socialism, and then identify as socialistic anything government does which they do not favor, while nodding at anything government does which they do favor.

    We engage in debates about certain economic decisions while pretending not to be aware of any of this. The question is always how government should involve itself in deciding what kind of economy we will have. It is weirdly abstract to ask whether government should involve itself. It has, does, and will. Now, how would you like it to go?

  44. Yes, nicely said…except for the anti-Semitic rant at the end about Israel and Iran. As far as I know, Israel never threatened any Arab nation with “annihilation” as the current president of Iran has with Israel.
    Yes, the virulent anti-Semitism of the Left in the Anglo-American world is a great tragedy.

  45. Nice way to categorize fellow citizens concerned about bloated deficit spending. Somehow I think you were out in front criticizing Bush for the very same thing. FYI, as one of those “douche bags” I have been criticizing Goldman Sachs for their inside the beltway corruption for years. Is it alright with you that Obama pocketed almost one million dollars from Goldman? Or is that being too much of a “douche bag” to ask such a question? I think “hubris” is pocketing money from Goldman and then grandstanding about reform. Like the Democrats are doing right now!

  46. What role the US government plays will be decided today by the beliefs about government of the general populace. This seems evident from the growth of the media and the internet in particular. So much new understanding about manipulation of people now exists among elites that it is no longer a question of controlling elite uses of their newfound knowledge in the last century. There is only a question of which elites control the knowledge. The simpleton beliefs gained by the new masses about modern ideologies and ideas now control the elites because the masses must now concur in accepting the elites. Madison , the founding fathers, Toqueville , Marx and others are really now in the realm of the quaint. Elites have always been mendacious. Now the elites have understandings they did not have before. Even more frightening though is that elites are also themselves just as subject to information manipulation as those they would seek to manipulate.

    How can there be an effective government role today when ” substantially all” to varying degrees think that government is by nature doomed to failure? That anything commenced by government will fail. Yet, effective government must evolve for the existing highly complex technical systems to even survive.

    If government does not work as a concept, the general population also holds to the viewpoint that corporate government would be an even greater failure. This failure is amply demonstrated in advance of an actual corporate state by the repeated crises everywhere the corporate elite gain the upper hand.

    Big business would not a capable governor. Current government is not a capable governor. Both of these beliefs are majority viewpoints. Even worse, these two beliefs are intertwined in many divergent belief systems. Might one say that the society itself is hopelessly confused from data overkill? This is one huge political fix for a society to be in.

    Is the United States simply on the verge of dissolution from inability to develop a long term consensus about government that holds indefinitely?
    All government requires consensus among the governed to survive. When consensus terminates the government fails.

    The first role of government is to create a long term consensus among the ruled. The ruled have a place, however divergent by class, within the state. The US political consensus is dissolving from fear of loss of place by the governed. It is clear that this loss of place is brought about by technology owned and applied by the elites through their control of the corporations.

  47. I think if first you consider that British Petroleum has been involved in the deaths of at least 26 people in the last 7 years counting 15 deaths in the blast at BP’s Texas City refinery in 2005 and 11 deaths in the Gulf of Mexico. Then you consider 29 people died in the Massey Energy Coal Mine explosion (most likely from high levels of methane gas every worker there was aware of for weeks if not months but were afraid to speak out for fear of losing their jobs).

    Only 2 companies, add 26+29 and you have 55 deaths. It shows that LACK of government regulation can and does affect peoples lives, LITERALLY. Companies will not do it of their own volition because private companies view safety as a cost. But I guess we shouldn’t ask these questions as Dick Cheney calls it “big government” and Sarah Palin says “Drill baby Drill”.

    http://seattletimes.nwsource.com/html/localnews/2011518449_safetysunday04m.html

    http://www.businessweek.com/news/2010-04-30/-last-resort-safety-device-failed-in-fatal-drilling-incident.html

    http://emptywheel.firedoglake.com/2010/04/27/bps-procedural-spills/

  48. A bit off topic. What if we limit the size of derivatives?

    The Wall Street Pirates would not get some of benefits of the size of the contract they can offer. The not so great americans who do want to bet against the rest will perhaps actually have to bet on banking insurance instead of failure of the rest of us.

    What if as would have happened 50 years ago the pending failure of a local bank would likely have brought sadness instead of the more probably cheers?
    Do that by allowing a local large for here bank to be American and compete. Not Wall Street Pirating for Profit and compete.

    As for jamie DEMON let him take his bank to Somalia.
    One of will survive without the other.

  49. combine that with the notion that in a democracy/republic, popular discomfort with the results of laissez-faire capitalism means the power and resources of the government will eventually, inevitably be brought to bear to reduce the impact of raw competition in a way that invites moral hazard.

  50. Given the low esteem for government held by most Americans (look at recent gallup poll, for instance), I can’t understand why we aren’t seeing massive runs on retail banks of all sizes. Can it be that people don’t trust government, but they DO trust the FDIC??

    ((Just keep yer stinkin’ government hands off of my FDIC!!))

  51. No need to unlock human potential. The rich will continue to have a great time. It’s about keeping them in check. You keep capital in its place by:

    1.) legislating equal representation for capital, labor and community (aka “sustainable developers”) in corporate governance;
    2.) improving voter turnout by facilitating voter registration and adopting proportional representation;
    3.) demonstating the virtues of effective governance by providing high quality, free education at all levels, pre-school to PhD.

    But Mr Kwak is using just a third of the tools available. He’s thinking: capital. The second one is in his library under M for Marx. The third tool is what he feels when he reads about the spill in the gulf. Get them out and get working with us to lock up the monstrous potential of unfettered free markets.

  52. It’s hard to limit something that doesn’t even have a registered exchange. Which is why the dealers(large banks) and the dealers’ lackeys fight that every inch, and why we’ll be lucky if we can get a registered exchange after the next crisis hits.

  53. Herb Abrams wrote:

    “A bit off topic. What if we limit the size of derivatives?”

    Derivatives Reform Would Cost Goldman Sachs 41% Of Earnings: STUDY

    04-30-10 10:46 AM – Huffington Post – excerpts

    “President Obama has effectively drawn a line in the sand on the issue of reining in Wall Street’s barely regulated derivatives trade, indicating he’d veto any bill that doesn’t address the issue. The question, of course, is just how strict derivatives reform will be.

    Brian Gardner, a research analyst at Keefe, Bruyette and Woods, told The Hill that Wall Street is being caught offguard by the momentum behind reform. “The old rules have been totally reversed,” he said. “The world we’re all used to living with — which is the House overreaches and the Senate cools it down — is not true.””

    http://tinyurl.com/32ftvd3

  54. My sense is, if the FDIC can’t or won’t honor its commitments, what good are the bits of paper that aren’t coming out of the ATM?

  55. My sense is, if the FDIC can’t or won’t honor its commitments, then what good are the bits of paper that aren’t coming out the ATM?

  56. Bankers have defied the Common Sense of U.S. Citizens and now they will pay the price. Any political party that stands with them will pay the same price.

    Hedging among the two parties will also be rooted out. People are on to the game.

    Exposing it to the public meant everything. Goldman didn’t understand that fact because they delude themselves just like their supporters explaining-away fraud on this board.

    Johnson and Kwak have performed a valuable service.

    Blankfein will probably be sacrificed the Board soon.

  57. “Meanwhile the US public education system only teaches what the reformist propagandists determine will keep the general public in the dark regarding the despotic nature of their hidden regime.”

    As someone with a decades-long background in public education…let me congratulate you re: hitting the nail squarely on the head.

  58. edit: “sacrificed by the board of directions soon.”

  59. Compare the FDIC payout and bank closures in the 1990’s S&L crisis to today.

    Today is FAR LESS. Can believe it? Is that possible? Not really. That’s where it gets tricky. It isn’t possible unless you change the meaning of insolvent, how you value assets, and backstop new capital raises into these dangerously unhealthy banks with taxpayer money.

  60. What would happen if we had no derivatives? For that answer you’d have to go back the first 200 years of this republic. What were we missing? Investors hedging all their risk? People gambling on failure?

    We built this country without hedging our risk.

  61. I am willing to BET even money there are 10 people that read this blog that COULD write a fair ‘system limit’ in 10 days.

    To get past Congress I guess we would have to say it exists as the 10 Blogger’s post unless and until you reach a bi-PIRATE

  62. The tea baggers are busy buying Palin pins, stickers, and mugs. Apparently waiting in line for several ours at the bookstore to watch her drive away in a luxury equipped bus with their Palin book unsigned wasn’t enough masochism for her fans to get it up. Now they want to pay over-priced tickets to watch her on a jumbotron in the back of a crowd and pay for premium priced trinkets.

    Palin’s new Tea Party platform?? Ka-ching!! Ka-ching!!

  63. readerOfTeaLeaves

    Thank you for such a thoughtful reaction – you anticipated my line of thinking.

    Engineers have to grapple with ‘what actually works’.
    Not with ‘what do we want in a perfect universe?’
    Not with ‘what if we had infinite resources and endless time?’
    They have to deal with what works.

    What works generally ends up being simpler, rather than overly complex.

    The iPod is a thing of beauty; clearly, Apple refined, refined, refined until they got to simplicity.

    Lawyers and lawmakers tend to require a great deal of verbal-linguistic ability, and the electeds require a lot of social intelligence (as do good lawyers). They get paid for nuance, which in too many cases means that the more nuance and ambiguity, the more money they stand to make.

    One of the finest things that I’ve read about the economic mess we’re dealing with, and the derivatives that underlie the problems, was ‘Demons of Our Own Design’ by Richard Bookstaber. (Evidently, he’s now at the SEC, which I count as very fortunate.) He understands derivatives, having been in the industry many years, and he brings an engineering approach to some of his analysis.

    Bookstaber makes a very good point: the problem with derivatives is too much complexity. (Or, as engr27 might say, too much potential for heat loss and wasted energy.) With something that is badly designed, because it is overly complex, the best solution is to simplify.

    That Linux vs MS server comparison is kind of my mental vision of where we are now (a messy MS server), and where we need to go: simple elegance, like Linux.

    I completely agree with you that lack of transparency tends to result in overly complex messes. Once you set transparency as a goal, then you automatically eliminate some of the ‘loops’ that otherwise trip up your system.

    Again, thanks for your response.
    I hope that this comment is helpful for the thread.

  64. Ban all political donations. Ban all lobbying. It is not free speech. That will take some work at scotus but I see no other way.

    Only that Congress will have the freedom to bust the trusts and ignite the creativity dormant in our economy.

  65. Re: @ Robert____Nice read. May I suggest reaching out,and touching with your ears,too the unnecessary sorrow’s of America’s forsakened. The melodic, punctual – “neo-rap-ghetto” guru singer/songwriter “Eminem”, “The prolific movie “8 Miles” – has a moving, lyrical,and passionate song, “Lose Yourself”! PS. The rhetorical redundancy has lost its ethical balance when it comes to the poor!

  66. Don’t forget
    4) confiscatory inheritance tax.

  67. Re: @ Marvoch___You mean emasculated,I hope? :^)

  68. “The Role of Government”

    Financial Crisis Hearing Puts Former SEC Chiefs in Hot Seat

    APRIL 30, 2010

    “Another week, another congressional hearing into the financial meltdown – and more bankers and regulators in the hot seat.

    Next week, the Financial Crisis Inquiry Commission will hold a two-day hearing in Washington. This time the topic is the emergence of the so-called shadow banking system.

    Leading witnesses will include Christopher Cox and William Donaldson, former chairmen of the Securities and Exchange Commission; Tim Geithner, Treasury secretary and former president of the New York Federal Reserve; former Treasury Secretary Henry Paulson; and top officials of financial firms such as Bear Stearns Cos., PIMCO, GE Capital and State Street.

    The shadow-banking system refers to the rapid growth in recent years of non-bank financing mechanisms such as commercial paper markets, structured investment vehicles, specialized debt instruments, and the investment banks themselves. In total, these alternative financing vehicles came to rival the traditional banking sector in size by 2007.”

    http://tinyurl.com/24jo87x

  69. Maybe not many people, but at least three men espouse the Complete Lives “solution” to limited medical resources.

  70. Why do you even look for government to solve your problems? The constitution provides for Equal Opportunity for everyone. Government creates inequalities by trying to control local public education, allowing illegal immigrants into the country, providing policy/laws that require lenders to make mortgages to people that can not afford the payments. Government does not correct imperfections in a free market, Government creates the imperfections!

  71. To me there seems to be enormous ignorance in that question about the role of government in determining the kind of economy we have. Government intervention has shaped the economic system from the beginning of the Industrial Revolution; the economic system we have is completely the result of government intervention in specific ways, a co-evolutionary event, not a separate evolutionary consequence.

    Government defined and enforced contract law, property rights, intellectual property, corporate and other legal structures, tax laws, and it endorsed Generally Accepted Accounting Principles.

    Government set economic boundaries for imports and exports, favoring local producers over alien ones. Government setup the public transportation system, enforced traffic laws which enabled the flow of traffice and commercial and financial laws which enable the flow of finance.

    Whatever is implied by the question of the government’s role may be something material, but it is a relative blip compared to its historic and current role. The Industrial Revolution was as much a governmental invention (albeit somewhat by accident) as anything else….
    Governments set boundaries which enabled cohesive growths of various scales of resources to tackle large and small challenges.

    The question should be: What range of government activities (structures, education and enforced laws)enables a sustainable flow of finance and commerce to sustain a modern, middle class society? What happens to this flow if government regulations are materially changed? (Parallel question: what role does government take in the smooth flow of mixed traffic on highways and intersections, and what would be the consequence of de-regulating or unenforcing driving laws?)

    So what is the questioner really asking?

    I write about this topic, a recent post being: “Deregulation causes economic collapse”, which can be found by googling the title.

  72. I say we “Purge” them all at the ballot box, every election for at least a generation. Identify the incumbents and vote them out. All this talk of Republicans, Democrats, neoConservatives, and now neoLiberals is nonsense. I agree with another Andrei Vyshinsky, long dead, who accused members the political elite of being the result of breeding foxes with pigs. Truer words were never spoken.

  73. “A quick looking through some of the Greek austerity measures, and you’ll quickly get an insight into why the country is in such an economic pickle.

    “Highlights” include…

    Public sector workers will lose their “13th and 14th month” salaries, paid at Christmas and Easter.

    The average retirement age will be raised from 53 at present to 67.

    Greece’s swollen public sector, which employs about 13 per cent of the workforce, will be gradually reduced through a recruitment freeze, the abolition of short-term contracts and closures of more than 800 out-dated state entities.

    Rather than calling them ‘austerity measures’, a better term would be ‘reality measures’.

    http://tinyurl.com/2fypvmx

  74. It might also help being the only kin on the block in the mideast with “the bomb”….:) Deja-Vu I liked the purge idea as it would probably sit well with the masses who are fed up with business as usual in Washington.

  75. Hopefully these measures are just a start. However, remember that any bail out from the IMF will be coming out of the US tax payers pockets. No wonder the Fed doesn’t want to be audited.

  76. Andrei Vyshinsky

    Ah yes, good friend, Jessica!

    With all respect to you personally, I really wonder if jetisoning the incumbants is really enough. Will their financial, drug and Middle East foreign policy paymasters not simply attach themselves to their replacements? I have absolutely no confidence that that would not happen. In my view we start from scratch with the arrest, interrogation, and public trial of this whole aggregation of filth. Then a second constitutional convention the documents of which are drafted in such a way as to hold the legitimate institutions of democracy harmless from the machinations of the lobbyists and the political whores that sleep with them, indeed outlawing lobbying altogether. Next the embarking upon a Ten Year Plan aimed at the reindustrialization of the United States and the recovery by ordinary working people of the wealth stolen from them over the last thirty-five years through upward transfers. I would leave to your discretion a suitable environment for the public trials aforementioned. Earlier I’ve suggested Yankee Stadium.

    by upward transfer

    over the last thirty

  77. The answer isn’t more or smarter regulators (what is the chance of that with the regulated paying 3x to 4x the salary)? The only realistic response is to restructure the industry and let market forces work. Glass-Steagall II, plus fully transparent derivative markets (why do the big folks not want transparent markets that might save them money? What are they doing in this market to impact their financial statements?), plus investment banks that rely on employee equity and debt securities only, etc., etc. The rest of these proposals rely on regulators to enforce them. Give me a break. When was the last time that happened? I know. I used to be one, but was lucky enough to work on the enforcement side (fraud is nonpartisan, but more frequent in some quarters than others). The rest of this is mental self-abuse (to use an old term used by the clergy that knew abuse first hand much more than the rest of us knew).

  78. That wasn’t intended to be anonymous. I have no problem (and a certain amount of pride) putting my name on it.

  79. Vyshinsky,

    I think you’re just a troll, so I won’t pay any more mind to you.
    But I stand by what I said, the anti-Semitism of the “Left” is a terrible loss or tragedy, I mean that in all seriousness. It’s crippled the “Left” just when we needed it the most. I mean union organizing, demonstrations to protect working people’s living standards, etc. No restoration of the social safety net or New Deal.
    And there’s nothing that can be done about it.

  80. Re: @ Edwin Lee___You have had a classic allegorical, intuitive chiaroscure cognitive epithany. That is your sub-conscience is slowly discerning as I write – awakening your psyche too the revelation you’ve already answered your own question. PS. Does the “De” in regulation really cause collapse?

  81. ” What lessons are we learning from this crisis and recession? ”

    Financial Crisis Inquiry Commission Director to Be Replaced

    APRIL 30, 2010, 7:20 P.M. ET – Wall Street Journal

    http://tinyurl.com/342jwjh

  82. i could be wrong: i ain’t no constitutional lawyer, but i think the Constitution provides for equal protection, but not equal opportunity. That aside, I agree with you wholeheartedly: government does create inequality primarily by manipulating the tax code to favor pals and contributors.

  83. Read my article; the short answer is yes.

  84. Maybe he too is joining the Goldman defense team.

  85. James, what a fascinatingly disjointed post. Ah, what role for government. First I think that it needs to know its place. What I mean is that the role it plays should be nearly beyond notice. I come down on the side of the libertarian, in general, so I believe that it is governments job to assure the oiling of societal gears. Less regulation, vigorously enforced. Fewer laws, vigorously enforced. Enough police to assure personal safety, and enough military to assure national security. Simple taxation which favors no one and gives no tax benefits to one class or individual over another (I have always believed that a flat tax would be fairest, and most estimates put that at between 17% and 20% of income). Simple, though is the key word. We should be spending more on education than the military, and create efficiency in both. We should stress maximization of personal potential for all citizens (and even all countries). Diplomacy based more on outreach and less on protectionism. Full transparency of government functions. No offshore military bases. Equality of rights for all. Legalization and taxation of drugs (remember why alcohol was legalized — the same idea applies to drugs — imagine the amount of money we would save in prisons, enforcement, etc., and how much treatment of people with drug problems could be paid for by taxation of them, how many police would not be corrupted, how many fewer deaths from use and sale, how many people could be saved in other countries). Publicly financed elections would ensure that campaign contributions played no role in elections, and that would include advertising, which is really a campaign contribution. We need a country where the government assures that the best ideas are brought to the table, the most creative and constructive ideas gain supremacy. We need a government which serves us and not itself and its wealthy friends.

  86. Your book, and your subsequent references, by no means demonstrate “regulatory capture” by industry. Once again, capture and agreement are different things, especially in a world in which there is no meaningful disagreement. No matter how many times you insist otherwise.

    Nonetheless, this is the type of post that makes this blog worth reading. Keep thinking about the big questions, and stop trying to play at political propaganda, and you will remain relevant.

  87. Please read the writings of Jaron Lanier.

  88. You sound more progressive than libertarian to me.

  89. “By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.”

    This is one of the reasons why it bothers me when people talk about the “American Dream” as if it were some sort of phenomenon unique to the US, while in reality making this dream happen is much easier in several other countries. It’s more like the “American Myth” to ease the frustrations of the less fortunate members of society and continue to sell the falsehood that anyone can become anything through dedication and hard work, ignoring that the socio-economic class that people are born into is far more likely than not where they will remain.

  90. Well then Jerry J, an appeal to Reason rather than Faith.

    There are aspects to free-market ideology that remind me of religion. For example, the Faith free-markets are perfectly informed and self-correcting. The claim deregulated (lawless) markets are the final arbitrator of the highest goods. (The attribute of highest good once assigned to God.) IIRC Michael Hudson has called neo-Liberalism a religious cult.

  91. readerOfTeaLeaves

    I’m tangentially familiar; not sure why you bring it up for this thread.

  92. With regards social mobility levels in both the USA and UK, the greatest determinate is not only the educational background of parents but the wealth bracket they share.
    Predominately in the UK great wealth purchases the best education and guarantees entry to the best universities – a self fulfilling prophecy in all respects.
    Regardless of one’s educational ability, it is most difficult for those from less wealthy backgrounds to break this impasse, ie, the chips are always stacked against you regardless of the personal efforts you make.
    At the heart of this inequality is an unjust educational system – if you have the money you can buy the best.
    By treating education, as with health care, a consumer choice, rather than based on need, this inequality will always persist.
    Its also strange to note that those countries with the greatest wealth gap are the USA and UK.
    Hence, whilst unfettered capitalism may have benefit the ruling elite, its done much less to mitigate against gross inequality – C Wright Mills wrote of this issue in the 1950’s and Johnson’s ‘Great Society’ was meant to address many of the ills associated with this sytem.
    Suffice to say, the ruling elite won out and with it cam massive deregulation following Nixon’s decision to remove gold from backing the US dollar.
    Its been all downhill since for the average Joe in both the USA and UK.
    Hence, instead of framing ‘gig government’ in the most negative terms, most issues of importance can only ever be overcome with the direct support of government – far from being the problem, it is the misrepresentation of interventionist government and the true intent of positive legislation that is blamed.
    Hence, the US government is blamed for the sub-prime fiasco because the Federal government wished to extend home ownership into those areas hither too ignored by the banks and mortgage lenders – subprime itself being a reference from Roosevelt’s administrations in the 1930’s and the way district comprising more than 50% afro American households were detached from government guarantees.
    Clinton, by wishing to redress this racist and unjust system is blamed for much, however, the fact remains it was the bank and lenders who failed the system, rather than the borrowers – many issued mortgages that even a two year could work out they’d be unable to service once the special incentive offers expired.
    One could go on for ever, but a heavily regulated capitalism is necessary if its evils are to be avoided – deregulation just made the fall worse than it otherwise should have been.
    Throw greed and malfeasance into the equation and you have a potent chemical reaction.
    Prof. William Black is better than myself in summing all this up, but its the denigration of government by vested interest groups that causes the problems and not government itself – unless that government is one with ‘evil intent’ which the US government itself cannot be accused of.

  93. capture or agreement? Agreements happen. Capture is by design. Regulatory capture has clearly been demonstrated beyond any doubt. If you pay a little more, however, we can call it an agreement.

  94. I learned something, didn’t know that study. I would have believed the UK number, having spent time there. The rivalry was pretty clear between old and new money, To The Manor Born. The US number catches me by surprise, as does the evolution of mobility on the continent, but not the UK. It’s not old v. new, as one might think.

  95. trouserman

    That giant sucking sound you hear coming from the Gulf? Palin’s political career going down the drain. Her Tea Party platform has just exploded and sunk.

  96. Brad Thrasher

    Obama blew his opportunity for “Change I can believe in” when he refused to have Bush, Cheney, Rumsfeld and Rice doing the perp walk for war crimes. 1 strike.

    Then HCR, single payer became a warmed over Bob Dole proposal from the 1990’s. Strike 2.

    On financial reform I was promised transparency but my President has done nothing to support auditing the Federal Reserve or n bringing real reform to our financial system. 3rd time is the charm.

    Nothing short of a 2nd American Revolution will save us now. Fact is, even that is likely to end badly.

    I appreciate there are many good people like Simon and James here, Elizabeth Warren and others carrying the fight. Sadly though the Dodd bill, even with consumer protection and Brown-Kaufman doesn’t go nearly far enough.

    Remember your Shakespeare kids? “A rose by any other name would smell as sweet” yeah well just insert derivative for rose and stink for sweet.

    Trillions of dollars lost and nobody, not one person has been arrested. I guess that means nobody lied? Nobody cheated? Nobody stole? Even when with a wink and a nod some products were called liar’s loans.

    And AIG didn’t commit insurance fraud and Geithner didn’t paper it over and cover it up?

    And you tell me limiting the size of banks will prevent this from happening again? Remember your Thrasher, “A bank by any other name is an end run on your reform.”

    We’re not even close on the reform that is desperately needed.

  97. Eric Schlosser used a good phrase in a talk. Paraphrasing, “The free market values efficiency above everything else.” If we value other things, like social mobility, we need to look elsewhere.
    The past three decades have seen the ascendancy of free market fundamentalism, the idea that a “free market” is the best way to promote societies values. There is no evidence that it is true.

  98. Viewing TMS as “precursor” does not give it its due. If anything, Wealth of Nations is a grand case study applying the foundations laid in TMS where Smith posits a role for government as the facilitator of our natural inclinations to be moral and socially accountable beings. In both TMS (and WN as well) his objection to government is when it is in the hands of “projectors” (rather than “statesmen”) and used to deflect our natural moral inclinations. Seems to me that Smith would certainly find many of the proposals for reform advocated by Kwak, Johnson and company to fit that basic Smithian agenda….

  99. There seems to be a rule that at some point in a thread of comments there emerges the intellectually empty rants that have nothing to add but ad hominem attacks and what they regard as “sharp” phrases that are supposed to reflect their firm grasp of (nonexistent) historical connections. These folks are often followed by a chorus of their intellectual peers who, in extending agreement, believe they are fostering truth — when they are in fact proving that thoughtless indignation knows no bounds and its practitioners have no respect for either the forum which they attempt to steal or the cyber-democracy they pretend to engage in.

  100. Not if there are no changes in housing structure. As long as the aged tend to live in 2000 sq. ft. then they need a million for 20 years of old age.

    Mr. Kwak is being suspiciously coy about the role of government in this piece – as though it’s a mysterious undiscovered intellectual territory. All of my previous suggestions exist in some form in European social democracies.

    Happy May 1!!!

  101. peoples of free will from free nations can and should always be reviewing and recalibrating the role of government in their day to day lives…that’s what healthy democracies do or should do…and in a perfect world this will always be a dynamic and fair process reflecting the times and environment the peoples of those societies are currently living in…the laws and statutes that may well have been appropriate 100 years ago may now be totally irrelevant or counter-productive hence needs changing or updating or modifying…as humans evolve and as technology evolve the role of government must also evolve…the U.S. constitution – a brilliant, well thought out and far-sighted (though imperfect of course) original piece of government edict has also, been evolving this past 200 years guided by the collective wisdom, fairness and values of the American people in its entirety…but the mechanics and the machinery of the actual “governance” of the nation is constantly tweaked and is subject to abuse or misinterpretation from time to time depending on whose hands are holding the levers of power at that particular moment…thus the pendulum swings from end to extreme end to right some wrongs and achieve some equilibrium or sense of fairness in the affairs of men…we are at that juncture now with the near collapse of our financial system and has caused irreparable and permanent harm to millions of innocent families and businesses because of the short sightedness, avarice and selfishness of a few in our society (bankers, lobbyists and corrupt politicians) who thru luck, bribery, intimidation or fraud manipulated the whole system for their own benefit…so the role of government must now be carefully re-examined and vigorously recrafted to restore some sort of balance and fairness…

  102. Sorry,…spell check, @ chiaroscuro & epiphany. Now where was I, oh yea – free markets is used very loosely in the literary abstract regarding today’s financial markets. You tighten the choke collar there’s obedience. Now, if you loosen,or take off the choke collar you have (read what you will into it) mayhem? Think of our government as a central nervous system delegating to all the states (every conponent that makes our being) certain hard wired parameters to adhere too, so as not to effect the whole in a quasi adverse way. Currently our central nervous system is in a neurotic flux of ambiguity, and as a nobody, I recommend a short respite.

  103. Re: @ Anonymous.aka.Jim Coffman_____Bravo!

  104. “The thinking is that we’ll modify the system to take these factors into account, and then the magic economic machine will go on ticking. There don’t seem to be any big lessons.

    What would such bigger lessons be? Purdy floated the idea that the government should promote equality of opportunity.”

    You gotta be kidding me. Where do these former students acquire the capital funding to utilize their educations productively in the economy?

    THIS is THE KEY “market failing” that the government needs to direct much, much better if we really want a productive domestic economy.

    Educational inequalities are important, but I think we’re in danger of having the whole bottom fall out. We’re in WORSE shape than we were in the 1960s.

    I think also the environmental example–levy a carbon tax! and get outta the way!–is a good example of an area in which the “get outta the way-free market magic” simply hasn’t worked.

    Detroit could have developed cleaner, less oil dependent vehicles by now, but the intransigence of “free market” ideologists in the auto executive suites–who redefined the term to mean “I am categorically opposed to the government telling me what to do!”–along with destructive oil company interference, doomed business/engineering innovation.

    California tried to make it happen, by giving Detroit its auto emissions specs and challenging the “free market” corporations to meet them, but California was eventually over ridden by an ideologically captured and a pro-oil fedgov.

    So, now we have a giant oil spill off the coast, while Obama chants “drill, baby, drill.”

    You know, just get outta his way.

  105. Long story short:

    You know how we say freedom isn’t free unless we maintain vigilance?

    Well, free markets aren’t really free unless we make them so and maintain vigilance.

    We knew that after the Great Depression but unlearned it every since Reagan told us government is the problem, and the truth is sometimes it is, and sometimes it isn’t.

    Hopefully our government will grow the gonads required to make the markets truly free.

  106. In fact, I’ll go even further: “education as economic cure-all” is a big reason why this country has driven itself into the ground over the past 40 years.

    It’s the precise companion piece to the magic of the free markets, and also a self serving deferral of problem solving–problems we have right now!–to future generations because the adults in the room are too effing lazy to do it themselves.

  107. he Economic Fractalist’s Second Modest Proposal: The IRDC US Political Super Party

    The IRDC Super Party: The Independent Republican Democrat Centrist Super Party

    The global monetary-banking-financial system that forms the basis for possibilities of reasonably fair and socially beneficial economic growth is …. simply … broken.

    The self designated defacto fixers of that broken system are in fact both the principal causal elements of the broken system and the members and beneficiaries of the current broken system.
    With the old system’s failed and bad rules enforced by its current principal beneficiaries, the broken system will never be fixed.

    There will only be more disproportional rewards for the owner of the broken system: the self acknowledged too big to fail financial industry.

    Kindly consider this. The rewards and benefits of the members of the financial cartel are in reality much greater than the often quoted nominal 2009 over 2007 gains. That 2009 purchasing power of the cartel’s members’ earnings is denominated in surviving dollars in an environment of a 20 percent reduction in US citizen net household wealth over the last 30 months and a 5-6 percent increase in unemployment that reduces the demand side cost of wages. Real estate can now be purchased for both 15 percent less and with lower interest rates.

    (The leveraged damage done to US citizens are relatively greater than other world citizens and their fiat currencies… any questions regarding a rising dollar relative to other fiat currencies?)

    Those 2009 dollars earned, but for congressional intervention and tax-payer re bankrolling, by a bankrupted financial industry, can now buy 20 percent more than in 2007 more and likely 30-40 percent more later in 2010.

    The Financial Industry members have made out like the bandits they are.

    Cicero two millennium later speaks: Res ipse loquitor….

    What would be a sine qua non metric target for a successful stable fair real economy? One possibility would be a working citizen benefited monetary financial system where, for example, graduates going into an engineering careers or teaching careers earn more than graduates going into the financial industry.

    With the owners of the monetary system firmly in control of congress, is there any possible hope for remedy?

    Perhaps.

    Perhaps it is time for the establishment of a coalition super party – the IRDC party.

    The IRDC party, the Independent Republican Democrat Centrist party (the C could also represent Constitutionalists) likely already includes the philosophical, if not the I want to be re-elected – majority of US congress people.

    The Centrist IRDC platform is simple. Create a fair economic system that values hard work and economic creation of useful real goods and services and conversely implements effective new rules which restricts private citizen or corporate wealth creation from manipulation of the monetary system.

    Politicians could run either as an IRDC candidate, an independent, a republican, or a democrat supporting the centrist principal platform of restoring real fairness and worth to the economic system. After successful election republicans, democrats and independents who ran on their respective republican, democrat, and independent tickets and who supported the IRDC platform could then join a majority IRDC caucus and be a member of a majority party entitled to chairmanship of key committees.

    Think about it. The IRDC Super Party – a great reckoning for Wall Street and the Wall Street run world.

    The establishment of a Super Party Constitutional and Centrist majority offers the chance to begin anew with new rules and underlying new principles to engender fairness and a rationale allocation of wealth for the 21st century. (A drop in the bucket of time but so good for the world’s grand children.)

  108. The reformists–Johnson, Kwak, Stiglitz et. al.–affirm the capitalist system while claiming to be able to cure the evils of capitalism. This betrays a fundamental misconception of capitalism as a system common to all bourgeois reformists. Capitalism is based upon an insatiable compulsion to accumulate capital, i.e., a compulsion to maximize profitability. When Johnson et. al. affirm this compulsion while pretending to limit it, they are in the position of the alcoholic who enables his continued drinking by claiming that he will limit the ingestion of the object of his compulsion. This works as little for capitalism, which is why Johnson et al. are symbiotically attached to a pathology that knows no cure but the radical one of total withdrawal from the reigning compulsion.

  109. Christian Marks

    The government should require Wall Street to print its own currency for proprietary trading, investment rating, executive compensation and political contribution: the Wall Street Dollar.

    http://www.wallstdollar.com

    http://christianmarks.wordpress.com/2010/04/17/the-wall-street-dollar/

  110. Al Mostonest

    BFlan,

    I agree, as far as you go. But I would like to see those who pocket Goldman money turn around and actually do the right thing for the country. I would like to see the Tea Baggers turn their anger and energy to supporting a reform effort that might, arguably, save our country from a tyrant worse than the feared government. I would also like to see Obama and Dodd just do the right thing, but will they? Even “douche bags” have the resource of behaving well when necessary.

  111. It is pretty obvious that competition is central to concept of Capitalism.

    However, anyone who has been involved in developing and maintaining the strategy of any business knows that the ideal business is one which has a captive supply chain, a captive market, and no regulation. In other words, a monopoly with complete control of all essential performance parameters.

    So this identifies a major role for government in business – business needs to be constrained such that our society as a whole operates as a truly capitalist society.

    Otherwise business becomes a blood sport.

  112. “A quick looking through some of the Greek austerity measures, and you’ll quickly get an insight into why the country is in such an economic pickle.

    “Highlights” include…

    Public sector workers will lose their “13th and 14th month” salaries, paid at Christmas and Easter.

    The average retirement age will be raised from 53 at present to 67.

    Greece’s swollen public sector, which employs about 13 per cent of the workforce, will be gradually reduced through a recruitment freeze, the abolition of short-term contracts and closures of more than 800 out-dated state entities.

    Rather than calling them ‘austerity measures’, a better term would be ‘reality measures’.

    http://tinyurl.com/2fypvmx

    Greece seals massive rescue deal, outlines deep cuts and tax hikes

    Choice was ‘between collapse or salvation,’ Finance Minister says of rescue estimated at 120-billion euros

    The bigger fear behind Greece: contagion

    If Athens defaults on its debt, the fallout would ripple across the global financial system

    Sunday, May. 02, 2010 8:29AM EDT – Globe and Mail – excerpts

    “Why do investors, politicians and central bankers worry about a country as small as Greece?

    In one sense, they don’t. Greece accounts for less than 3 per cent of the European Union’s gross domestic product (GDP). Its disappearance from the map wouldn’t matter, though missing Greek islands would narrow the list of holiday options.

    In another sense, Greece is a monster worry: Contagion.

    If Greece defaults on its debt, or goes through a debt-shredding restructuring exercise, watch out. The first victims would be the European banks that hold Greek debt. They would get clobbered.”

    It appears that keeping the fragile European banking system intact is the main reason behind the bailout being put together, albeit reluctantly, by the European Union, with the International Monetary Fund at its side…

    German Chancellor Angela Merkel may not want to funnel taxpayers’ money to a country that lived beyond its means and fudged its budget deficit figures, but she has Germany’s interests firmly in mind. Altruism isn’t behind her stated willingness to send the cheque; protecting her banks is.”

  113. Repaying Taxpayers With Their Own Cash

    April 30, 2010 – New York Times – excerpt

    “AS we inch closer to a clearer understanding of the products and practices that unleashed the credit crisis of 2008, it’s becoming apparent that those seeking the whole truth are still outnumbered by those aiming to obscure it. This is the case not only on Wall Street but also in Washington.

    Truth seekers the nation over, therefore, are indebted to Senator Charles E. Grassley, Republican of Iowa, who in recent days uncovered what he called a government-enabled “TARP money shuffle.” It relates to General Motors, which on April 21 paid the balance of its $6.7 billion loan under the Troubled Asset Relief Program.

    G.M. trumpeted its escape from the program as evidence that it had turned the corner in its operations. “G.M. is able to repay the taxpayers in full, with interest, ahead of schedule, because more customers are buying vehicles like the Chevrolet Malibu and Buick LaCrosse,” boasted Edward E. Whitacre Jr., its chief executive.

    G.M. also crowed about its loan repayment in a national television ad and the United States Treasury also marked the moment with a press release: “We are encouraged that G.M. has repaid its debt well ahead of schedule and confident that the company is on a strong path to viability,” said Timothy F. Geithner, the Treasury secretary.

    Taxpayers are naturally eager for news about bailout repayments. But what neither G.M. nor the Treasury disclosed was that the company simply used other funds held by the Treasury to pay off its original loan.”

    http://www.nytimes.com/2010/05/02/business/02gret.html

  114. tippygolden

    @EllenD

    Here is Michael Hudson on classical economics and taxation on economic rents (entirely different from rent paid by apartment dwellers).

  115. tippygolden

    Here is Joseph Stiglitz on How to Save Capitalism. (Hat tip to Christian Marks for the link)

    – The role of the financial sector is to manage risk, allocate capital, run the payments mechanism, and all at a low cost

    – Stiglitz skewers the rational markets hypothesis with these words: “The present crisis should lay to rest any belief in ‘rational’ markets. The irrationalities evident in mortgage markets, in securitisation, in derivatives and in banking are mind-boggling; our supposed financial wizards have exhibited behaviour which, to use the vernacular, seemed ‘stupid’ even at the time.”

    tippygolden

  116. eric anderson

    This is silly. Goldman Sachs has no armies, detention cells, unlimited capacity to print money, ability to concoct laws that enforce direct confiscation of the fruits of labor, etc.

    The government is the ultimate tyrant. Big government inevitably trends asymptotically toward corruption because greater power trends asymptotically toward that end point. Big banks are also very powerful, but it is big government bailouts that gave them that power. If we had allowed failed businesses to fail, those businesses would not still be terrorizing the financial sphere.

    I would also like to see the Tea Party out front in the cause of stopping fraudulent activity in the markets that virtually all the major financial institutions have engaged in, directly or indirectly. However, the media has done a poor job of reporting this particular rape of the citizenry in gory detail, whereas they have been fairly adequate at reporting mounting deficits and the great expansion of government power in various spheres, along with the increasing unfunded expense of those powers, departments, and programs.

    If the people who read the financial blogs and are aware of the crimes GS and others have almost certainly committed would inform Tea Party sympathizers instead of insulting them, they might find ready allies. Instead, they follow the path of making them enemies. What’s wrong with this picture?

  117. eric anderson

    People in this country still want more oil that doesn’t come from countries/governments who hate us.

    Also, Palin submitted a plan to the Alaska legislature to bring the state to 50% renewable sources for electricity by 2025.

    Palin recognizes the need to develop resources and also to conserve them by switching as much as possible to alternatives, so that we can get closer to energy independence. This is a winning idea.

  118. eric anderson

    Even if it were possible to adequately model an economy, and provide proper government dampers to minimize extreme or destructive effects, the success of the plan does not depend on the beauty of the model. It depends on the desire and will of regulators to implement the plan as needed.

    As I noted in another post, as government grows in power, it grows toward the asymptote of absolute corruption. This is the “model” of human nature, proven accurate over centuries.

    Even if you are correct, the point is moot. Until we solve the corruption problem, any technical solution is worthless, as the most wealthy in the system will game the regulatory apparatus to preserve the status quo, even if that’s not what is best for the country or the world economy.

    Back to the drawing board, professor.

  119. eric anderson

    This is a perversion of language. It is not, however, an argument against free markets, as most ordinary people who support free markets would define it. Free markets does not mean “law of the jungle” to most of us.

  120. As an educator, I’d like to add my experience that we have human failings, too. I have seen so many educators just simply come to an idiosyncratic judgment of a given student, and that student absolutely cannot overcome that judgment. There is excellent sociological data on teacher expectations for student success, and how those expectations become a self-fulfilling prophecy.

    Glibly, I don’t think there is any more important goal than social and economic justice.

  121. Agoraphobic Kleptomaniac

    Wait, you’re just wrong.

    http://www.opensecrets.org/pres08/contrib.php?cycle=2008&cid=n00009638

    Right up top there, in big red letters, just for political opportunists like you…

    “The organizations themselves did not donate…”

  122. tippygolden

    Oops … It might be 20% of the population owns 80% of the wealth. For some interesting graphs check the baseline post Whose Got the Pitch forks

  123. tippygolden

    Got my stats wrong. For some interesting graphs check the baseline post Whose Got the Pitch forks

  124. Well if “financial de-regulation” that benefits what is perceived as less risky and punishes the more risky is kept in place I am not sure either that further increases in GDP would improve the economic well-being of the 99% of Americans in discussion. http://bit.ly/bniNuD