Ten Common Sense Economic Truths

Ten Common Sense Economic Truths

The more closely I look, the more obvious it is that the Old Economy fails because it is based on false values, assumptions, and logic. Those who are working to create a New Economy from the bottom-up intuitively recognize and act on 10 common sense truths foundational to a sound economy.   

Photo by Jo Christian Oterhals

1. The proper purpose of an economy is to secure just, sustainable, and joyful livelihoods for all. This may come as something of a shock to Wall Street financiers who profit from financial bubbles, securities fraud, low wages, unemployment, foreign sweatshops, tax evasion, public subsidies, and monopoly pricing. 
2. GDP is a measure of the economic cost of producing a given level of human well-being and happiness. In the economy, as in any well-run business, the goal should be to minimize cost, not maximize it. 
3. A rational reallocation of real resources can reduce the human burden on the Earth’s biosphere and simultaneously improve the health and happiness of all. The Wall Street economy wastes enormous resources on things that actually reduce the quality of our lives—for example war, automobile dependence, suburban sprawl, energy-inefficient buildings, financial speculation, advertising, and incarceration for minor, victimless crimes. The most important step toward bringing ourselves into balance with the biosphere is to eliminate the things that are bad for our health and happiness.
   The proper purpose of an economy is to secure just, sustainable, and joyful livelihoods for all.
4. Markets allocate efficiently only within a framework of appropriate rules to maintain competition, cost internalization, balanced trade, domestic investment, and equality. These are essential conditions for efficient market function. Without rules, a market economy quickly morphs into a system of corporate monopolies engaged in suppressing wages, exporting jobs, collecting public subsidies, poisoning air, land, and water, expropriating resources, corrupting democracy, and a host of other activities that represent an egregiously inefficient and unjust allocation of resources.
5. A proper money system roots the power to create and allocate money in people and communities in order to facilitate the creation of livelihoods and ecologically balanced community wealth. Money properly serves life, not the reverse. Wall Street uses money to consolidate its power to expropriate the real wealth of the rest of the society. Main Street uses money to connect underutilized resources with unmet needs. Public policy properly favors Main Street.
6. Money, which is easily created with a simple accounting entry, should never be the deciding constraint in making public resource allocation decisions. This is particularly obvious in the case of economic recessions or depressions, which occur when money fails to flow to where it is needed to put people to work producing essential goods and services. If money is the only lack, then make the accounting entry and get on with it.
7. Speculation, the inflation of financial bubbles, risk externalization, the extraction of usury, and the use of creative accounting to create money from nothing, unrelated to the creation of anything of real value, serve no valid social purpose. The Wall Street corporations that engage in these activities are not in the business of contributing to the creation of real community wealth. They are in the business of expropriating it, a polite term for theft. They should be regulated or taxed out of existence.
8. Greed is not a virtue; sharing is not a sin. If your primary business purpose is not to serve the community, you have no business being in business.
9. The only legitimate reason for government to issue a corporate charter extending special privileges favoring a particular enterprise is to serve a clearly defined public purpose. That purpose should be clearly stated in the corporate charter and be subject to periodic review.
10. Public policy properly favors local investors and businesses dedicated to creating community wealth over investors and businesses that come only to extract it. The former are most likely to be investors and businesses with strong roots in the communities in which they do business. We properly favor them. 

Adapted from "10 Common Sense Principles for a New Economy" 
originally posted as a YES! blog August 6, 2010

What Is Democratic Socialism?

What Is Democratic Socialism?

Editors  November 14, 2015

Bernie Sanders speaking at a rally in Portland, Oregon, August 9, 2015 (Benjamin Kerensa / Flickr)

Recently, there has been a lot of discussion—and debate—over what democratic socialism is. During the first Democratic primary debate of the 2016 election season, Bernie Sanders became the first major presidential candidate in decades to openly defend it, if in limited terms. Democratic socialism, Sanders said, “is about saying that it is immoral and wrong that the top one-tenth of 1 percent in this country own almost as much wealth as the bottom 90 percent. . . .  I think we should look to countries like Denmark, like Sweden and Norway, and learn from what they have accomplished for their working people.”

Sanders’s prime-time defense of democratic socialism was refreshing for many leftists in a country where the “S word” has too long been associated with tyranny. Yet his deferral to Scandinavian social democracy brushed aside a rich tradition of American democratic socialist thought.

Since our founding in 1954, Dissent has played an important role in defining this tradition.  Here, we present a selection of key essays on democratic socialism from our archives.

 

Lewis Coser and Irving Howe, “Images of Socialism” (1954)

“At so late and unhappy a moment, can one still specify what the vision of socialism means or should mean? Is the idea of utopia itself still a tolerable one?

When we live in the shadow of defeat, to retain, to will the image of socialism is a constant struggle for definition, almost an act of pain. But it is the kind of pain that makes creation possible.”

 

Michael Harrington, “What Socialists Would Do in America—If They Could” (1978)

“What would happen in America if we were able to make it come to pass? How would we move beyond the welfare state? What measures would be taken on the far side of liberal reform, yet well short of utopia?” Michael Harrington offers a program for American socialists.

Robert L. Heilbroner, “What is Socialism?” (with responses from Lewis Coser, Bogdan Denitch, Michael Harrington, and Michael Walzer, 1981)

Robert Heilbroner: “What is important, in trying to think about socialism, is to resist the delusion that history is so soft and indeterminate that we can have a socialist cake with bourgeois icing.”

From Lewis Coser’s response: “The society of which Tawney dreamed, and of which I dream, does not force people to be good, it simply removes some of the impediments that previously did not permit them to be good. It provides incentives for autonomous individuals, no longer driven by the compulsions of an acquisitive society, to choose paths of self-realization that do not conflict with the collective well-being. Solidarity and fraternity do not contradict the need for self-realization; they make it possible.”

From Bogdan Denitch’s response: “Can socialism be democratic? Yes; otherwise, of course, it will not be worth its name or worth supporting. But more to the point, yes—provided socialists do not permit their imaginations to be crippled by the limits of liberal democracy under capitalism.”

From Michael Walzer’s response: “Extensive participation is . . . the core of socialism. The moral culture of socialism is rooted in a shared citizenship, the fellowship of the forum. We seek a remedy for passivity and privatization in a radical democracy, opening new opportunities for collective decision-making, so that the beliefs of ordinary citizens become important.”

 

Anne Phillips, “Sexual Equality and Socialism” (1997)

What has socialism to do with sexual equality? Can equality be achieved simply through recognition of the equal worth of all individuals, regardless of their sex? Or is socialism—and if so, what kind of socialism—a necessary condition for true equality between the sexes? Differences and inequalities must be detached from the accident of being born male or female. And while the liberal tradition first gave voice to this ideal, Anne Phillips argues that only socialism can make it reality.

 

Michael Walzer, “Which Socialism?” (2010)

“The work is steady, the benefits come mostly in spurts. But the goodness is in the work as much as in the benefits—so it doesn’t matter if the work goes on and on, as it does. It is important and worthwhile work because of its mutuality, because of the talents and capacities it calls forth, and because of the moral value it embodies. That work is socialism-in-the-making, and that is the only socialism we will ever know.

“No theory of the end of history fits our political experience. The idea of historical determinism, like the idea of divine predestination, is lost on us. We have no certainty about the future. Instead, we have learned the wisdom of Kafka’s comment on the biblical story of the death of Moses: ‘Not because his life was too short does Moses not reach [the promised land], but because it was a human life.’”

Project Syndicate 

The World’s Opinion Page

OCT 29, 2015 6

Resurrecting Glass-Steagall

WASHINGTON, DC – A major shift in American politics has taken place. All three of the remaining mainstream Democratic presidential candidates now agree that the existing state of the financial sector is not satisfactory and that more change is needed. President Barack Obama has long regarded the 2010 Dodd-Frank financial-reform legislation as bringing about sufficient change. Former Secretary of State Hillary Clinton, Senator Bernie Sanders, and former Governor Martin O’Malley want to do even more.

The three leading Democratic candidates disagree, however, on whether there should be legislation to re-erect a wall between the rather dull business of ordinary commercial banking and other kinds of finance (such as issuing and trading securities, commonly known as investment banking).

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This issue is sometimes referred to as “reinstating Glass-Steagall,” a reference to the Depression-era legislation – the Banking Act of 1933 – that separated commercial and investment banking. This is a slight misnomer: the most credible bipartisan proposal on the table takes a much-modernized approach to distinguishing and making more transparent different kinds of finance activities. Sanders and O’Malley are in favor of this general idea; Clinton is not (yet).

There are three main arguments against a modern version of Glass-Steagall. None is convincing.

First, some prominent former officials argue that not all of the financial firms that got into trouble in 2008 were integrated commercial-investment banking operations. For example, Lehman Brothers was a standalone investment bank, and AIG was an insurance company.

This argument is, at best, irrelevant. What happened “last time” is rarely a good guide to fighting wars or anticipating future financial crises. The world moves on, in terms of technology and risks. We must adjust our thinking accordingly.

At worst, the argument is just plain wrong. Some of the greatest threats in 2008 were posed by banks – such as Citigroup – built on the premise that integrating commercial and investment banking would bring stability and better service. Sandy Weill, the primary architect of the modern Citigroup, regrets that construction – and regrets lobbying for the repeal of Glass-Steagall. (As James Kwak and I argued in our book 13 Bankers, what really mattered was the decades-long bipartisan process of deregulation, for which the end of Glass-Steagall was a prominent symbol.)

Second, leading representatives of big banks argue that much has changed since 2008 – and that big banks have become significantly safer. Unfortunately, this is a great exaggeration.

Ensuring a financial system’s stability is a multifaceted endeavor – complex enough to keep many diligent people fully employed. But it also comes down to this: how much loss-absorbing shareholder equity is on the balance sheets of the largest financial firms?

In the run-up to the 2008 crisis, the largest US banks had around 4% equity relative to their assets. This was not enough to withstand the storm. (Here I’m using tangible equity relative to tangible assets, as recommended by Tom Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation, and a beacon of clarity on these issues.)

Now, under the most generous possible calculation, the surviving megabanks have on average about 5% equity relative to total assets – that is, they are 95% financed with debt. Is this the major and profound change that will prove sufficient as we head through the credit cycle? No, it is not.

Finally, some observers – although relatively few at this point – argue that the biggest banks have greatly improved their control and compliance systems, and that the mismanagement of risk on a systemically significant scale is no longer possible.

This view is simply implausible. Consider all the instances of money laundering and sanctions busting (with evidence against Credit Agricole last week, Deutsche Bank this week, and almost every major international bank in the past few years).

This is the equivalent of near misses in aviation. If the US had the equivalent of the National Transportation Safety Board for finance, we would receive detailed public reports on what exactly is – still, after all these years – going wrong. Sadly, what we actually get is plea bargains in which all relevant details are kept secret. The regulators and law-enforcement officials are letting us down – and jeopardizing the safety of the financial system – on a regular basis.

The best argument for a modern Glass-Steagall act is the simplest. We should want a lot more loss-absorbing shareholder equity. And, to reinforce this, we should want to make the largest banks simpler and more transparent, with “strong structural firewalls” as Dennis Kelleher, of Better Markets, puts it. Of course, in that context, we should ensure that various activities by “shadow banks” (structures that operate with bank-like features, as Lehman Brothers did) are properly regulated.

Building support for legislation to simplify the biggest banks would greatly strengthen the hand of those regulators who want to require more shareholder equity and better regulation for the shadows. These policies are complements, not substitutes.

Read more at https://www.project-syndicate.org/commentary/unconvincing-arguments-against-glass-steagall-by-simon-johnson-2015-10#l1ytWgudlIGW5TMy.99

Simon Johnson

Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.