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The Prosperity Agenda

“Everything that can be invented has been invented.”

Contrary to a common misconception, it was not Charles Duell, the Commissioner of the US patent office, who said this back in 1899. According to PatentlyO.com, and a host of other debunking sources online, this line was actually part of a parody that appeared in an 1899 edition of Punch Magazine. But it was a common sentiment of that era.

Over a century later, with innovations in recent years that were entirely unimaginable back in the great age of steel and steam, we might be hesitant to think everything that can be invented has been invented. But reputable economists are on hand to diminish the potential of information technology to continue to yield advances in productivity – Robert Gordon of Northwestern University, for example, “downplays the role of computer technology in the economic growth of the latter 20th century and questions the actual productivity of such technological developments.”

While such overt skepticism regarding the potential of information technology to stimulate economic growth is rare, equally rare is unbridled optimism. And accompanying today’s tepid assessment of technology’s transformative promise is, thanks to an overbuilt environmental movement, a Malthusian pessimism that has become conventional wisdom. Technology cannot save us. Resources are running out. Add to this organized labor’s propensity to oppose automation and innovation because they allegedly cost jobs and hurt the economy, and you have a trifecta of gloom.

These are the core sentiments that prevent the leaps of faith that are necessary to reignite global economic growth. It is the opposite values – that technology will continue to deliver astonishing leaps in productivity and create entire new industries employing millions of people, that resource depletion will never even come close to outrunning humanity’s ability to innovate and adapt, that creative destruction of entire sectors of the economy will only be to make way for far bigger, better, more lucrative economic opportunities for everyone – that will enable robust, sustained economic growth. Only through widespread acceptance of these optimistic values can humanity overcome the challenges of unsustainable debt and an aging global population.

One of the themes we have tried to emphasize in our commentary on the proper role of unions in 21st century America is that it’s not enough to reduce the levels of total compensation paid to unionized public sector employees. That is a necessary austerity measure, an essential step California’s cities and counties must take to avoid bankruptcy, but it offers no hope to those employees affected by these cuts. And by itself, it’s not enough to resolve the economic challenges facing America and the world.

The solution is not to simply lower the compensation of overcompensated government employees. The solution is to pursue economic policies that encourage competition, break up monopolies (corporate, union, and financial), in order to lower the cost-of-living for everyone.

In the fourth installment of a five part report on Bloomberg entitled “The Benefits of Chronic Deflation,” economist Gary Shilling makes the distinction between “good deflation” and “bad deflation.” Shilling writes:

“Good deflation is the result of new technologies that power productivity and output as the economy grows rapidly and as supply outpaces demand. The bad kind stems from financial crises and deep recessions, which increase unemployment and depress demand below the level of supply.”

When Shilling talks about deflation, he is evokes an economic monster that emerges whenever society has indulged in a prolonged period of cheap credit, and the levels of accumulated debt have grown beyond the ability of debtors to pay interest, much less borrow more. Another economist, David Stockman, writing in the New York Times on March 30th, issued a dire assessment of America’s debt saturated economy in an article entitled “State-Wrecked: The Corruption of Capitalism in America.”

Stockman and Shilling are talking about the same thing: America’s bipartisan descent, three decades in the making, from productive, competitive capitalism to a capricious and unproductive financially driven economy, dominated by big banks and big government – and their willing and well-compensated accomplices, public sector unions.

The way out of this is to understand how “good deflation” can counter the impact of the inevitable bad deflation. Good deflation is the product of innovation. It is exemplified in what used to be the mantra of the Silicon Valley, “better, faster, cheaper.” Good deflation was present in every wave of technological innovation that ever was, from the transportation revolution and the industrial revolution to the more recent information revolution. Good deflation resulted from the automation of agriculture a hundred years ago, and is a result of the automation of manufacturing today. Good deflation lowers the cost of living; it enables a higher standard of living for everyone.

Everything that can be invented has not been invented. But to more quickly realize the many spin-offs that accrue to the ongoing information revolution, we have to change our attitudes. There is abundant land in California, and abundant energy resources. California should have the most affordable housing and the cheapest electricity in the U.S., instead of the most expensive. Making this shift, recognizing and realizing this opportunity, will lower the cost of living, releasing capital to eliminate debt and invest in entirely new industries.

The only way an austerity agenda can be persuasive, much less implemented, is if it is accompanied by a prosperity agenda. And since additional debt formation is unsustainable, the austerity agenda is inevitable. The challenge of our time is to overcome, with reasoned optimism and facts, the pessimism of Malthusians and Luddites whose beliefs, if not their words, condemn us to statist austerity and nothing more. The spin-off industries that are being ushered in by the information revolution are inspiring and wondrous; curing disease, extending life, restoring ecosystems, exploiting the resources of the asteroids, creating independent city-states on the open ocean; things we cannot imagine. This is the prosperity agenda.

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UnionWatch is edited by Ed Ring, who can be reached at editor@unionwatch.org

David Stockman: The Triumph of Crony Capitalism

David Stockman former budget director for President Reagan, appeared on Bill Moyers and presented his message about money, Wall Street financiers, and crony capitalism.

Link: David Stockman on Crony Capitalism

Money dominates politics, distorting free markets and endangering democracy. “As a result,” Stockman says, “we have neither capitalism nor democracy. We have crony capitalism.”

Stockman shares details on how the courtship of politics and high finance have turned our economy into a private club that rewards the super-rich and corporations, leaving average Americans wondering how it could happen and who’s really in charge.

“We now have an entitled class of Wall Street financiers and of corporate CEOs who believe the government is there to do… whatever it takes in order to keep the game going and their stock price moving upward,” Stockman tells Moyers.

Click on the above link for a full transcript. Here are a few select quotes.

DAVID STOCKMAN: A massive amount of resources are being devoted, being allocated or being channeled into pure financial speculation that has no gain to society as a whole, has no real economic contribution to the process by which GNP is created, GDP is created and growth occurs.

By 2007 40 percent of all the profits in the American economy were coming from finance companies. 40 percent. Historically it was 15 percent.

So the financialization means that as we attracted more and more resources and capital, and we made speculation easier and easier, and we funded it with almost free overnight money, managed and manipulated by the Fed, that’s how the economy got financialized. But that is a casino. Casinos — they’re, you know, places for people to go if they want to speculate and wager. But they’re not part of a healthy, constructive economy.

BILL MOYERS: What do you mean by the free money that banks are using overnight?

Well, by that we mean when the Fed, the Federal Reserve sets the so-called federal funds rate at ten basis points, where it is today, that more or less guarantees banks can go into the Fed window, the discount window, and borrow at ten basis points.

And then you take that money and you buy a government bond that is yielding two percent or three percent. Or buy some corporate bonds that are yielding five percent. Or if you want to really get aggressive, buy some Australian dollars that have been going up. Or buy some cotton futures. And this is really what has been going on in our markets.

The cheap funding, which is guaranteed by the Fed, the investment of that cheap funding into speculative assets and then pocketing the spread. And you can make huge amounts of money as long as the music doesn’t stop. And when the music stops then all of a sudden, the cheap, overnight money dries up. This is what’s happening in Europe today. This is what happened in 2008.

And then people are stuck with all these risky assets, and they can’t fund them. They owe cash to the people they borrowed overnight from or on a weekly basis. That’s what creates the so-called contagion. That’s what creates the downward spiral. Now, unless we let those burn out, it’ll be done over and over. In other words, if, you know, if a lesson isn’t learned, then the error will be repeated over and over.

BILL MOYERS: The Bush administration came to the rescue of some of the county’s largest financial institutions, to the tune of 700 billion tax-payer dollars.

DAVID STOCKMAN
: We elect a new government because the public said, you know, “We’re scared. We want a change.” And who did we get? We got Larry Summers. We got the same guy who had been one of the original architects of the policy in the 1990s, the financialization policy, the too big to fail policy.

Who else did we get? We got Geithner as Secretary of the Treasury. He had been at the Fed in New York in October 2008 bailing out everybody in sight. General Electric got bailed out. Morgan Stanley, Goldman Sachs, all of the banks got bailed out, and the architect of that bailout then becomes the Secretary of the Treasury. So it’s another signal to the financial markets that nothing ever changes. The cronies of capitalism are in charge of policy.

….

The Congress is owned lock, stock and barrel by one after another, after another special interest. And they logically say how can we expect, you know, anything good to come out of this kind of process that seems to be getting worse. So how do we turn that around? I think it’s going to take, unfortunately a real crisis before maybe the decks can be cleared.

BILL MOYERS: But on the basis of the record, the lessons of the past. The experience you have just recounted and are writing about. Do you see any early signs that we might turn the ship from the iceberg?

DAVID STOCKMAN: No. I think we’ve learned no lessons. We really have not restructured our financial system. The big banks that existed then that were too big to fail are even bigger now. The top six banks then had seven trillion of assets, now they have nine or ten trillion.

Rather than go to the fundamentals which have been totally neglected– we’ve simply kind of papered over the current system and continued the game of having the Federal Reserve and the Treasury if necessary prop up all of this leverage and speculation, which isn’t helping the economy.

And when we talk about zero interest rates. That’s not helping Main Street. Our problem in this economy is not our interest rates are too high. The zero interest rates are just more fuel for leverage speculation for what’s called the carry trade and that is causing windfall benefits to the few but it’s leaving the fundamental problems of our economy in worse shape than they’ve ever been.

In 1985 Stockman wrote The Triumph of Politics: The Inside Story of the Reagan Revolution. 30 years later Stockman laments…

“I was in the middle of being very disgusted with what my own Republican Party had done and what Bush had done and the Paulson Treasury. And then when I saw this, I got the title for my book, “The Triumph of Crony Capitalism.”

It’s so disappointing to see that the Obama administration, which in theory should’ve had more perspective on this than a Republican administration under Bush, to see that one, they appointed in the key positions the same people who brought the problem in: Geithner and Summers and all of those, and secondly, that Obama did nothing about it.”

Stockman’s new book, The Triumph of Crony Capitalism, rates to be a good one.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.