Why ‘Occupy Wall Street’ Makes Sense: Lessons Economists Could Learn from the 99%

Flattr this!


(guest blog) by Joe Mcivor

Moral Major­i­ty?

Back in May of this year, Austin Mack­ell wrote in The Guardian that the Arab Spring rev­o­lu­tions rep­re­sent­ed “a rebel­lion not just against local dic­ta­tors, but against the glob­al neolib­er­al pro­gramme they were imple­ment­ing with such gus­to in their coun­tries”. He cit­ed Egypt in par­tic­u­lar as an exam­ple of a nation which had tak­en IMF loans and then prompt­ly imple­ment­ed their rec­om­men­da­tions of sub­stan­tial pri­vati­sa­tion and cut­ting of ser­vices, with the usu­al dis­as­trous results for the well-being of the pop­u­la­tion. He went on to write that peo­ple in the West had so far “failed to see the peo­ple of the region as nat­ur­al allies in a com­mon strug­gle”.

Some six weeks ago, thou­sands of peo­ple in New York began to try to cor­rect this over­sight. Draw­ing explic­it inspi­ra­tion from the Arab Spring, a Cana­di­an activist group called Adbusters (self-described ‘cul­ture jam­mers’ involved in expos­ing cor­po­rate wrong­do­ing and high­light­ing the prob­lems of con­sumerism and adver­tis­ing) called on peo­ple in New York to Occu­py Wall Street, in an attempt to high­light what they see as the destruc­tive excess­es of a finan­cial sec­tor not only out of con­trol but propped up by gov­ern­ments who fre­quent­ly grant them dis­pro­por­tion­ate priv­i­leges. The ‘Occu­pa­tion’ (which did­n’t last long on actu­al Wall Street but remains in sur­round­ing areas) drew thou­sands of pro­test­ers using the slo­gan ‘We Are the 99%’, high­light­ing the increas­ing pro­por­tion of wealth going to a small pro­por­tion of the pop­u­la­tion. The ‘Occu­py’ brand has now spread through­out the world, with the now even more invig­o­rat­ed Euro­pean aus­ter­i­ty protests express­ing sol­i­dar­i­ty with their Amer­i­can coun­ter­parts. Even in Aus­tralia, so far most­ly unscathed by the rav­ages of the Glob­al Finan­cial Cri­sis (though this is like­ly to soon change), but nonethe­less suf­fer­ing from over­priced hous­ing, unprece­dent­ed house­hold debt lev­els and increas­ing­ly inse­cure employ­ment prospects, protests using the Occu­py brand are occur­ring (and Steve was nat­u­ral­ly asked to speak at one such protest in Syd­ney). The ‘com­mon strug­gle’, it would seem, has begun.

The pur­pose of this guest blog entry won’t be to detail the exploits of the pro­test­ers since this all began – for this you can check out democracynow.org for their excel­lent cov­er­age. Nor will this blog be as rig­or­ous in dis­cussing the­o­ry as Steve’s blogs often have been: there won’t be a detailed dis­cus­sion of endoge­nous mon­ey, or Min­sky’s ‘finan­cial insta­bil­i­ty hypoth­e­sis’ [1]. How­ev­er, in con­sid­er­ing the sen­ti­ments expressed by the protest move­ment it occurred to me how often peo­ple une­d­u­cat­ed in eco­nom­ic the­o­ry of any kind, when con­front­ed with the real­i­ty of an eco­nom­ic prob­lem, instinc­tive­ly, intu­itive­ly under­stand the prob­lem and its caus­es more or less cor­rect­ly; while econ­o­mists, who pur­port to spe­cialise in the area of eco­nom­ic prob­lems (and, it must be said, seem to go out of their way to be coun­terintu­itive), get it fun­da­men­tal­ly wrong. Below, I out­line why, in a num­ber of areas, econ­o­mists could learn from the intu­itive wis­dom of the 99%.

Les­son #1. Unbri­dled Greed isn’t Good.

The ‘greed is good’ (ie ‘the invis­i­ble hand’) idea – that unreg­u­lat­ed mar­kets would max­imise soci­etal ben­e­fit by the heed­less pur­suit by indi­vid­u­als and cor­po­ra­tions of their own self-inter­ests, while gov­ern­ment should restrict both its reg­u­la­to­ry and fis­cal role in the econ­o­my as much as pos­si­ble – should have died out in the wake of the Great Depres­sion. Unfor­tu­nate­ly for most of us, Mil­ton Fried­man then came along with an expla­na­tion for the depres­sion more palat­able to the neo­clas­si­cal mind­set than what had come pre­vi­ous­ly. Along with Anna Schwartz, he argued that the Great Depres­sion was­n’t caused by unbri­dled greed and spec­u­la­tion: it was caused by the Fed­er­al Reserve (essen­tial­ly) not print­ing enough mon­ey and giv­ing it to Wall Street. Yes, real­ly. If the Fed had print­ed more mon­ey and giv­en it to Wall Street, they argued, this would have restored bank­ing con­fi­dence and Wall Street would have resumed lend­ing and pre­vent­ed the worst of the depres­sion – greed would have saved the day [2]. Unbri­dled greed was now off the hook for what was seen as the worst eco­nom­ic cri­sis in cap­i­tal­is­m’s his­to­ry.

When the high­ly sani­tised and com­pro­mised ver­sion of Key­ne­sian the­o­ry, which neo­clas­si­cal econ­o­mists had ini­tial­ly come to accept as a way of com­ing to grips with the Depres­sion (with­out the rev­o­lu­tion in eco­nom­ic think­ing which Key­ne­sian the­o­ry actu­al­l­ly implied) [3], ulti­mate­ly could­n’t explain stagfla­tion, this allowed Fried­man to step in and suc­cess­ful­ly argue (despite an absence of any actu­al evi­dence) that stagfla­tion was caused by exces­sive gov­ern­ment spend­ing fund­ed by new fiat mon­ey cre­ation. Fried­man emerged as the new eco­nom­ic mes­si­ah, and a new con­sen­sus (which was a lot like the old con­sen­sus from before the depres­sion) emerged in eco­nom­ics. This con­sen­sus had a num­ber of cen­tral tenets:

  1. Greed is good and must be left unhin­dered by reg­u­la­tion which dis­torts the ben­e­fi­cial effects of greed.
  2. The cen­tral bank can and should con­trol infla­tion (or pre­vent defla­tion as the case may be) by means of fiat con­trol of the mon­ey sup­ply, and focus on noth­ing else. The sys­tem is basi­cal­ly sta­ble and as long as the cen­tral bank does its job lit­tle or no harm should come to the econ­o­my as a whole.
  3. Fiat mon­ey cre­ation to pro­vide liq­uid­i­ty to the finan­cial sec­tor is good and pro­duc­tive; while fiat mon­ey cre­ation to pay for fis­cal spend­ing on things like social secu­ri­ty, health care, edu­ca­tion etc is bad, unpro­duc­tive and caus­es unnec­es­sary infla­tion.
  4. Relat­ed to 3, gov­ern­ment should be fru­gal, pri­va­tise more of its func­tions, and cut ser­vices gen­er­al­ly. Pri­vate enter­prise, because it is dri­ven by greed, is always bet­ter at meet­ing peo­ple’s needs than gov­ern­ment, which is woe­ful­ly inef­fi­cient. The gov­ern­ment should also cut tax­es, espe­cial­ly on the rich, who by their greedy actions are the dri­vers of eco­nom­ic pros­per­i­ty for every­one.
  5. Gov­ern­ment debt is a sign of poor eco­nom­ic man­age­ment. Pri­vate enter­prise and indi­vid­u­als on the oth­er hand must spend, spend, spend and pri­vate debt is either unim­por­tant or a sign of progress.
  6. Inequal­i­ty does­n’t mat­ter. The rich may get pro­por­tion­al­ly rich­er, but their pur­suit of wealth lifts every­one up with them.

These the­o­ries have become more or less the state of the art in eco­nom­ic think­ing, and have been adopt­ed to vary­ing degrees as pol­i­cy through­out much of the world – most famous­ly in the U.S. under Rea­gan and the UK under Thatch­er. Even before the GFC, though, the results for the major­i­ty of cit­i­zens were less than stel­lar. Strange­ly enough, the begin­nings of the imple­men­ta­tion of some of Fried­man’s the­o­ries in the 1980s result­ed imme­di­ate­ly in what was then the deep­est reces­sion since the Great Depres­sion in terms of unem­ploy­ment in the U.S., but the agen­da was pressed for­ward with the con­tention that in the long term things would be bet­ter. Even before the GFC, the decades since in the U.S. saw stag­nant real wages [4], a declin­ing real val­ue of the min­i­mum wage, reduced access to health care (and a high­er cost for those with access), increas­ing­ly pre­car­i­ous employ­ment, a dec­i­mat­ed man­u­fac­tur­ing sec­tor, and sky­rock­et­ing lev­els of pri­vate debt. The gains in GDP were not shared – did not ‘trick­le down’ — but were whol­ly appro­pri­at­ed by a small minor­i­ty of the high­ly paid. Econ­o­mists, mean­while, were claim­ing vic­to­ry over the prob­lem of eco­nom­ics and eco­nom­ic sta­bil­i­ty, and spoke of the ‘great mod­er­a­tion’.

Many of this minor­i­ty of the high­ly paid were in the finan­cial sec­tor, which engaged in increas­ing­ly risky cred­it behav­iour in order to reap high­er prof­its, con­fi­dent in the knowl­edge that the Fed would bail them out if they got into trou­ble. Now, as has been dis­cussed many times on this blog, the debt-dri­ven spec­u­la­tive excess­es of the finan­cial sec­tor have result­ed in the worst eco­nom­ic calami­ty since the Great Depres­sion. Their inter­est in prof­it­ing from the pro­lif­er­a­tion of cred­it, and their increas­ing reliance on debt-financed asset price spec­u­la­tion rather than invest­ment in gen­uine­ly pro­duc­tive enter­prise, inevitably (as Steve Keen pre­dict­ed) caused a sys­tem wide col­lapse. So many peo­ple got into so much debt that they could­n’t afford to ser­vice (much less repay) that it reached a sat­u­ra­tion point, asset prices stopped increas­ing, and a process of delever­ag­ing began as peo­ple stopped bor­row­ing or even tried to pay down debt. An econ­o­my depen­dent upon expand­ing debt – as Steve has shown at least the U.S. and Aus­tralia to have become — ulti­mate­ly can’t sur­vive a delever­ag­ing process unscathed (though the delever­ag­ing process has­n’t yet begun in earnest in the lat­ter coun­try). As mon­ey is spent on pay­ing down debt, or even if peo­ple sim­ply don’t con­tin­ue to bor­row ever more, there isn’t enough mon­ey being spent on actu­al goods and ser­vices to keep the econ­o­my afloat. In the U.S., offi­cial unem­ploy­ment (U3) has been hov­er­ing in the 9–10 per­cent range since 2009 or so, with the more inclu­sive (and com­pa­ra­ble to Depres­sion-era fig­ures) U6 mea­sure rough­ly in the 16–17% range for the same peri­od, and this has occurred in spite of Bernanke’s adop­tion of the Fried­man solu­tion through unprece­dent­ed base mon­ey expan­sion and bailouts of the Wall Street firms who helped pre­cip­i­tate the cri­sis. Mean­while, exec­u­tives of firms which took mas­sive gov­ern­ment hand-outs after help­ing to pre­cip­i­tate the cri­sis are still tak­ing bonus­es for their trou­ble.

Accord­ing to eco­nom­ic the­o­ry, none of this should be hap­pen­ing because the sys­tem is basi­cal­ly sta­ble, the finan­cial sec­tor are more or less omni­scient dri­vers of eco­nom­ic progress, pri­vate debt does­n’t mat­ter, and the cen­tral bank can pre­vent eco­nom­ic melt­down with heli­copter drops of mon­ey. Some econ­o­mists are prob­a­bly still bury­ing their heads in the sand and say­ing it’s NOT hap­pen­ing. On the oth­er hand, the 99% are all too aware of what is hap­pen­ing, and have a pret­ty good sense of why. While per­haps not ful­ly under­stand­ing Min­sky’s ‘Finan­cial Insta­bil­i­ty Hypoth­e­sis’ or Steve Keen’s for­mal mod­el­ing of it, they do at least under­stand that too much pri­vate debt is a bad thing, and that the sys­tem is sim­ply not inher­ent­ly sta­ble. They also under­stand that unbri­dled greed is real­ly only good for the greedy.

Les­son # 2. The Prob­lem is not the Solu­tion

There now at least seems to be some under­stand­ing among pol­i­cy­mak­ers that Wall Street’s excess­es played an impor­tant role in cre­at­ing the cri­sis (though Big Gov­ern­ment is still part­ly being made a scape­goat). It seems strange, then (and, once again, coun­ter­in­tu­itive), that the prin­ci­pal means by which pol­i­cy­mak­ers in the U.S. pro­pose to get out of the cri­sis is by try­ing to ‘get banks lend­ing again’. The solu­tion is essen­tial­ly more Wall Street, more pri­vate debt.

Of course, it must be acknowl­edged that this has ‘worked’ – or at least appeared to work – a num­ber of times in the past. Start­ing with the 1987 cri­sis, Alan Greenspan (him­self a staunch Fried­man­ite) respond­ed to suc­ces­sive crises with cheap­er mon­ey and bailouts for the finan­cial sec­tor. At least part­ly, it ‘worked’: lend­ing was restart­ed, and, though fre­quent, the eco­nom­ic crises dur­ing his reign seemed rel­a­tive­ly mild. Nev­er mind that some of the engi­neered recov­er­ies were ‘job­less’: Greenspan was hailed as a hero. His suc­ces­sor Ben Bernanke, again an avowed Fried­man­ite, believed that this pol­i­cy would con­tin­ue to avert major crises indef­i­nite­ly. Even in the wake of the cri­sis, the Oba­ma admin­is­tra­tion has been con­vinced by econ­o­mists that each dol­lar spent on mon­e­tary stim­u­lus for the finan­cial sec­tor will result in many times that in lend­ing for pri­vate con­sump­tion and invest­ment through the mag­ic of the mul­ti­pli­er effect in the frac­tion­al reserve sys­tem.

There are two prob­lems with this. One is that it has prob­a­bly reached a point (at least in the U.S.) where it sim­ply won’t work any more. The premise is that if you expand base mon­ey you’ll get many times that amount in extra lend­ing – the Fed’s con­trol of fiat mon­ey gives it effec­tive con­trol of the broad mon­ey sup­ply because the ratio between the mon­e­tary base and the mon­ey sup­ply is assumed to be rel­a­tive­ly sta­ble. Unfor­tu­nate­ly this ignores the fact that the extra (pri­vate) lend­ing which is sup­posed to make up the bulk of that mon­e­tary stim­u­lus is depen­dent upon the deci­sions of lenders to lend and bor­row­ers to bor­row (the mon­ey sup­ply endo­gene­ity Steve so often empha­sis­es). These deci­sions are depen­dent on a range of fac­tors, of which the avail­abil­i­ty and cost of fiat mon­ey from the cen­tral bank is but one. In the past, cheap mon­ey was enough to get lend­ing hap­pen­ing again. But with debt lev­els hav­ing reached such a high sat­u­ra­tion point, and with eco­nom­ic expec­ta­tions uncer­tain at best, mak­ing mon­ey cheap for the banks and expand­ing the mon­e­tary base (the Friedman/Greenspan/Bernanke solu­tion) sim­ply won’t be enough to restart lend­ing: peo­ple don’t want to bor­row and banks don’t want to lend. Bernanke’s ‘heli­copter drop’ of mon­ey is effec­tive­ly sit­ting in bank vaults doing very lit­tle for the econ­o­my. In the decades lead­ing up to the cri­sis , excess bank reserves rep­re­sent­ed a frac­tion of a per­cent of the mon­ey sup­ply (M2). They now account for around 16% [5].

The sec­ond prob­lem is that restart­ing lend­ing does­n’t actu­al­ly fix the prob­lem: it just defers the con­se­quences while simul­ta­ne­ous­ly facil­i­tat­ing the exac­er­ba­tion of the core cause ( too much pri­vate debt). In fact, it amounts to try­ing to solve a prob­lem of exces­sive debt by encour­ag­ing even more debt. This is what has hap­pened in this case: Greenspan’s recov­er­ies facil­i­tat­ed an accel­er­at­ed rate of growth for the debt to gdp ratio and the con­tin­ued cre­ation of a debt super-bub­ble which only now appears final­ly to be deflat­ing – as Steve point­ed out in “Bail­ing Out the Titan­ic with a Thim­ble”, “each appar­ent recov­ery after a debt-induced cri­sis was real­ly a re-igni­tion of the fun­da­men­tal­ly Ponzi lend­ing that had caused the pre­ced­ing cri­sis” (p. 9). What must be made absolute­ly clear is that the worst pos­si­ble out­come for the glob­al econ­o­my is the suc­cess­ful facil­i­ta­tion of anoth­er recov­ery dri­ven by restart­ing expan­sion­ary lend­ing. If one thinks of how much worse this cri­sis has been than that in the wake of the burst­ing of the ‘dot­com bub­ble’ in the ear­ly 2000s, one should imag­ine that the next cri­sis will be worse by a sim­i­lar order of mag­ni­tude, with an even high­er moun­tain of pri­vate debt still to climb. The pro­por­tion of debt in the econ­o­my sim­ply can’t expand indef­i­nite­ly.

Most of the 99% prob­a­bly don’t ful­ly under­stand endoge­nous mon­ey or the full impli­ca­tions of an econ­o­my depen­dent on pri­vate debt expan­sion. But they do have an under­stand­ing that bail­ing out Wall Street has­n’t solved the prob­lem and prob­a­bly nev­er will. They do under­stand that peo­ple can’t just keep bury­ing them­selves in ever increas­ing amounts of debt, and they do have an under­stand­ing that Wall Street got them into this cri­sis and prob­a­bly isn’t the means of get­ting out of it. And in this, they are ahead of the bulk of the eco­nom­ics pro­fes­sion.

Les­son # 3. Bail out the peo­ple, not the banks.

There was a peri­od in the ini­tial wake of the eco­nom­ic cri­sis where it looked as though Keynes would make a recov­ery in eco­nom­ic ortho­doxy, and the term ‘stim­u­lus pack­age’ became part of every­day ver­nac­u­lar. Giv­en the fail­ure of Bernanke’s pledge to get banks lend­ing with mon­e­tary stim­u­lus, it seems like­ly that the fis­cal stim­u­lus in the U.S., despite imper­fec­tions (and being far from as ambi­tious as it should have been), has had the great­est effect in slow­ing the progress of the cri­sis thus far (giv­en that the lev­el of pri­vate debt to gdp at the begin­ning of the reces­sion was much high­er than at the begin­ning of the Great Depres­sion). Unfor­tu­nate­ly, going back to my point about the alleged virtue of mon­ey cre­ation for Wall Street and the sin of doing so to finance fis­cal spend­ing, Key­ne­sian stim­u­lus has now large­ly been aban­doned through­out much of the world in favour of ‘aus­ter­i­ty’ and deficit reduc­tion. The idea that the mag­ic of the free mar­ket will sud­den­ly spring to life once Big Gov­ern­ment gets out of the way has again per­vad­ed the con­scious­ness of pol­i­cy­mak­ers.

Impos­ing aus­ter­i­ty in an aus­tere eco­nom­ic envi­ron­ment, and cut­ting gov­ern­ment spend­ing when pri­vate demand is retreat­ing, will only serve to wors­en the depth of the cri­sis. The Euro­pean aus­ter­i­ty pro­grams have so far been all pain and no gain: job loss­es, pay cuts and reduc­tions in ser­vices; all for zero improve­ment in the abil­i­ty of gov­ern­ments to bal­ance their bud­gets. Noone has been made bet­ter off by their imple­men­ta­tion: not the EU cred­i­tors who imposed them, and cer­tain­ly not the peo­ple of the coun­tries which have adopt­ed them. Not that this will stop the econ­o­mists from press­ing for­ward: it’s rare for them to let a few facts get in the way of what they see as good the­o­ry.

This is not to say that fis­cal stim­u­lus will get the world all the way out of the cri­sis. As Steve has point­ed out a num­ber of times before, the pri­vate debt hole is too big, and the delever­ag­ing nec­es­sary for a sus­tain­able recov­ery will ulti­mate­ly over­whelm what the gov­ern­ment is able to do. Unfor­tu­nate­ly, the most effec­tive solu­tion to the debt prob­lem is also in many ways polit­i­cal­ly least viable (though I dare say that this is reflec­tive more of the dis­con­nect between the gov­ern­ments of rep­re­sen­ta­tive democ­ra­cies and their con­stituents than the gen­uine will of the peo­ple). It involves not a bailout of the banks paid for by tax pay­ers, but an effec­tive bail out of con­sumers fund­ed by banks, who would nat­u­ral­ly suf­fer pro­fuse­ly in the process. As Steve has pro­posed, a gov­ern­ment man­dat­ed par­tial debt jubilee – involv­ing both inter­est rate rene­go­ti­a­tion and out­right debt for­give­ness – is the only way to turn back the clock on the lev­el of indebt­ed­ness with­out feel­ing the full brunt of a decline in demand caused by mas­sive delever­ag­ing. In his address to the Occu­py Syd­ney ral­ly (see the Octo­ber 23 blog entry for youtube video), he made the point that “dis­hon­ourable debt should not be hon­oured”. Many finan­cial organ­i­sa­tions may go into receiver­ship or have to be nation­alised, but the debt bur­den which oppress­es so many peo­ple would be sub­stan­tial­ly reduced, increas­ing­ly their abil­i­ty to spend their hard earned mon­ey on goods and ser­vices rather than ser­vic­ing or pay­ing down debt.

The 99%’s objec­tions to the idea of bail­ing out Wall Street on the one hand, while cut­ting spend­ing on the poor and allow­ing strug­gling indi­vid­u­als to go bank­rupt and lose their hous­es on the oth­er, are prob­a­bly for the most part based more on a sense of fair­ness, and the knowl­edge that these things aren’t good for them, than on any sense that they know of alter­na­tives which will be more ben­e­fi­cial for ‘the econ­o­my’. How­ev­er, in their objec­tions alone they have for the most part shown an under­stand­ing of the nature of the prob­lem which exceeds that of the eco­nom­ic experts who wish to impose such mea­sures.

If you aren’t an econ­o­mist, you may know more about eco­nom­ics than you think…

Econ­o­mists have gone out of their way to con­vince peo­ple that eco­nom­ics is coun­ter­in­tu­itive and best left to the experts. Greed is good, inequal­i­ty doesn’t mat­ter. We HAVE to bail out Wall Street to save the econ­o­my; we HAVE to cut ser­vices to save the econ­o­my. What the 99% show is that very often, intu­ition and aware­ness of the eco­nom­ic real­i­ty on the ground gives a much bet­ter under­stand­ing of eco­nom­ics than an edu­ca­tion in eco­nom­ics. Per­haps if such con­cerns as they have raised had been heed­ed ear­li­er, rather than been shout­ed down by the ‘experts’, the world would not be in the mess it’s cur­rent­ly in.


[1] For fur­ther dis­cus­sion of these con­cepts, start with blog posts like Time to Read Some Min­sky, The Rov­ing Cav­a­liers of Cred­it, and Bail­ing Out the Titan­ic with a Thim­ble, as well as the var­i­ous lec­tures on behav­iour­al finance. Steve’s “Debunk­ing Eco­nom­ics” and Min­sky’s “Sta­bi­liz­ing an Unsta­ble Econ­o­my” are also obvi­ous­ly worth look­ing at.

[2] See Fried­man and Schwartz, “Mon­e­tary His­to­ry of the Unit­ed States 1867–1960”.

[3] See Steve’s ‘Debunk­ing Eco­nom­ics’ for fur­ther expla­na­tion of how con­ven­tion­al econ­o­mists got Keynes wrong. Min­sky’s ‘John May­nard Keynes’ also dis­cuss­es this in some detail. See both also for a bet­ter analy­sis of stagfla­tion.

[4] Medi­an real house­hold incomes grew, but this is only due to increased incomes for women, pre­sum­ably from greater access to and par­tic­i­pa­tion in the paid work­force: medi­an real incomes for males remained stag­nant as for wages. See ‘Eco­nom­ic Report of the Pres­i­dent’ for real wage data for non­super­vi­so­ry work­ers and U.S. Cen­sus Bureau Table P‑5 for his­tor­i­cal real income data.

[5] See Eco­nom­ic Report of the Pres­i­dent and the H3 and H6 sta­tis­ti­cal releas­es by the Fed­er­al Reserve.

Bookmark the permalink.