—–The US political scene is awash with deficit hawks issuing the clarion call of inflation. The rising price of food and oil is admittedly eating away at the living standards of the lower classes, also known as the majority of Americans, while other prices are more stable. The republicans and much of the economic elite are pointing a finger squarely at the federal government, claiming that the deficit and the Federal Reserve’s loose monetary policy is increasing the money supply in the US economy to hyperinflation levels. The logical extension of this argument is, of course, that the US government must cut spending, and the federal reserve must raise interest rates, halting attempts by the government to fix the economy and let it renew its “natural course”. This argument might seem persuasive at first: the government is printing more money, so the value of that money goes down, there causing prices to go up. A look at the actual data, however, shows that this argument is nothing more than a veil for another talking point against the government social security net, a distortion of the truth for political gain.

—–It is certainly true that the prices of some key goods in the US have risen. Headline inflation has risen to nearly 3% as of April, and food prices, if they continue at current rates, would increase almost 8% to as much as 20%, depending on who you ask, by this time next year. This is grim news for many Americans, particularly since the poorest 20% of us spend 44.1% of their income on food. However, the 3% number is what economists call headline inflation – presumably because it looks more shocking on newspaper headlines. The US government has a second number, known as core inflation – and that was only at 1.2% in March of this year! This low level of inflation is considered by some to be too low, in fact – many economist would like it to be higher. Once food and gasoline is excluded, the inflation disappears.

—–At this point the objection many quite fairly give is “so, who cares?” Food and gas are some of the most bought goods by middle and low income Americans, if they are going up in price it doesn’t matter if computer prices are going down. “I cant eat a iPad”, as it was said. Of course, rising food prices is horrible – but it isn’t inflation. Inflation is not the rising price of goods – its the falling price of the dollar. Think of the US dollar as a commodity just like any other. If the quantity of cars in the world doubled overnight, their price would go down – not just relative to the dollar, but also to other goods! Before I could get 10 computers for one car, now I could only get 5. Inflation is the same process happening to the dollar. If the dollars is actually suffering inflation, its price relative to all goods has to go down, meaning the price of all goods has to rise more or less equally. Today, given that only food and gas are increasing, that isn’t a problem with the US dollar – its a problem with gas and food. And the evidence bears this out. If the US dollar was weakening, why has gas in Europe, where they use the Euro, increased from €30 in 2008 to nearly €90 euros today? If the US dollar was weakening, why would food prices in England, which uses the pound, be increasingby 4.5% a month, an annual rate of over 50%? Once all the evidence is in the picture, its obvious – there is something wrong with the supply of food and oil, not the supply of US dollars. The sources of these problems are also obvious, with so much instability in the middle east and massive droughts in China and elsewhere. And until someone can explain to me how the US cutting spending on healthcare for the poor will lower the price of food in the United Kingdom, or how the Federal Reserve raising interest rates will somehow boost oil production in Saudi Arabia, any argument to change fiscal or monetary policy on the basis of these price increases is simply asinine.

—–There is one error in thinking that I believe many Americans may be making – given that we know the federal government’s deficit has increased so much, and the federal reserve is printing so much money, why hasn’t there been more inflation? If the supply of money is growing so fast, shouldn’t its value be collapsing, just like the value of cars? The answer is essentially “maybe”, because inflation is not simply the supply of money. Inflation is determined by what is often called the velocity of money. What that means is inflation is not caused by more money existing on a given day, it is caused by more money being spent on a given day on goods. If the government doubled the amount of US dollars in one day, but took that money and put in a vault underground, would it cause inflation? Of course not – as far as prices for food are concerned, that money doesn’t even exist! It isn’t being spent.

—–That is essentially what is happening today. All the money being printing by the government? Its going into treasury bonds, bought up by corporations, banks, and hedge funds, who we all know aren’t spending a dime. All this new money is going into financial products and saving accounts. It isn’t buying goods in the real world. While there are ways for investments like these to affect consumer goods prices – I wont say that government policy has had no affect at all on food prices – overall little of this money is entering the consumer markets. Which suggests that the government, far from decreasing spending, should be increasing spending massively, since our economy is still reeling, with no jobs and little growth, while inflation is not a concern at all.

—–The key thing about all this is that, honestly, this is common knowledge to those who study economics. Of course the average American does not and will not know this, but reporters and politicians, if they have any ounce of intelligence, should know this is how inflation works! Therefore, the calls by republicans and their elite allies to reign in “inflation” are either made out of idiocy or intentional duplicity. Honestly, I don’t see why a whole lot of both cant be the reason.


—–There has been a “fashion” of late on the blogosphere, both left and right, to re-evaluate US economic growth in the 21st century with the “new” insights on how much the American consumer was in the red. Both the Exiled and Zero Hedge have picked up this idea. Essentially, the logic is follows: GDP is not a measure of production, but of spending (which is true, its C+I+G+{EX-IM} – here the C is spending). In the US from 2000 to 2008, huge percentages of consumer spending, some of the highest levels in history, came not from income, but from loans taken to finance the spending. As such, if you are trying to discover the growth of the US economy (as opposed to growth in spending), then you need to discount debt-financed consumer spending. Once you do that, you discover that US GDP has not grown since 1998! People often talk about Japan’s lost decade in the 1990’s – from this perspective it looks like US decided to follow Japan’s lead.

—–This analysis is not bad, by any stretch. Its a very valid point to make, that debt financed consumer spending has really gone out of control and is distorting our economic figures. This analysis, however, does not prove what people think it proves. Ironically, proponents of this view are making the same exact mistake they accuse the “official” statistics of making – forgetting what GDP measures. Most people use GDP as a shorthand for “economy”, but it isn’t that, its a shorthand for spending. This shorthand works because people have to spend money on something, on making people produce something. Spending money allows people to fulfill a need. And honestly, it doesn’t much matter where that money comes from. Sure, debt-financed spending might not be sustainable – but it still boosts production. If a million people took out loans to buy a pickup truck each in a year, it would be a woefully bad use of loans, but the US would still have to produce one million pickup trucks to meet the demand. As such, by the standard of what people want to evaluate when they say economy – how much a country produces – the debt-financed spending still boosts output. Now, a lot of this debt went into the housing bubble, which is wasteful, since it was paying twice as much as people used to for the same good – but good GDP estimates take that into account. GDP adjusted for inflation (since the rise in the price of goods would be inflation) is one such way, but the Bureau of Economic Analysis, which does the official GDP statistics, re-evaluates GDP figures form the past when changes like this occur.

—–All of this does have a larger point. All of this debt-financed spending is resulting in economic growth – its fulfilling real needs. The problem isn’t, therefore, debt-financed spending. The problem is that people lack the income to fulfill their needs. If wages, which have been hopelessly stagnant compared to productivity, were to be increased, this previously “unsustainable” level of spending would suddenly become natural. From an economic standpoint, we want people to spend (at least to a certain point) and we should be working to allow that, not working to reduce spending back to 1998 levels. Phrased another way, our economic output has grown, but us median income has not.

—–As a final note – don’t construe this article to say that A: all debt financed spending is good or B: that GDP is a great measure of economics. A lot of debt financed spending was wasteful and foolish, while GDP as a measure has more inconsistencies than the Bible – and is worshiped about as fiercely. Im just rebutting a particular critique from a particular angle.

—–If you are hunting for an amalgamation of every stereotype and myth purported as true by the privileged, The Economist is pretty much your intellectual Walmart – all of your needs satisfied at one local! Recently they had a blog post, responding to an asinine propaganda stunt by some budding libertarian, who asked college students if they should “redistribute grades”. Of course, he waited for them to say “of course not” before slamming them with his gotcha moment and murdering the very concept of appropriate analogies at the same time by claiming they must therefore oppose income distribution. The metaphor is too silly to even discuss, but a buried assumption in The Economist’s response is much more interesting, “In the very worst schools in America, some students have 3.0 GPAs, even though the students who earn a 3.0 GPA in those schools would be hard pressed to maintain a 1.0 GPA in America’s best schools. Work for which students receive B’s in poor schools would earn failing grades in top schools.”

—–The implicit assumption here is quite spectacular – you can tell the author did no research of any capacity, this was simply assumed true, “common knowledge”. Of course, its real truth value resides somewhere around birther conspiracies and the idea that anyone loves you. One, the statistical evidence doesn’t bear this out. While its really hard to analyze the results of education,tests show that for all colleges in the US, very few learn any demonstrative knowledge improvements. From another perspective, Ivy League schools in most cases don’t give one a noticeable income improvement – if you were smart enough beforehand to be accepted into the school, but choose not to go. Finally, a quick look at the actual grades in these schools shows how silly an idea this is – at Harvard in 2002, 50% of all grades were an A (not an A-, an A), and 80% graduate with honours – compared to a 50% at Yale. Honestly, though, this exercise is a bit useless – anyone who has actually been in college knows how silly this claim is. Your grades in college are impacted so much more by things like professors you choose, the major you choose, the lab partners you choose, and dozens of other factors. While of course individual schools vary, individual professors and programs and college experiences vary so much more.

—–The obvious fact that the quality of education at Harvard is no greater than at most state universities isnt the point, though – its the buried assumption here. Its ties into the whole ideology of market capitalism, of meritocracy. The education at the Ivy League has to be better than the education at other schools, otherwise the free market is utterly failing – since people pay large sums of money for that “better” education. And if, as it turned out, people weren’t paying for knowledge, but for a status marker that showed them worthy of high paying jobs, then the entire idea of meritocracy dies too – why do so many job applications list “Ivy league only need apply”if there is no qualitative difference in the education? The entire edifice of the Anglo-American economic order needs this fact to be true, so badly, as from it comes the pixie dust for the magic spell that lets them wave their wands and silence anyone who suggests that people being paid 500 times the average salary of their worker don’t deserve it.

——Curses, this post was going to be beautiful, masterful I tell you. The cornucopia of graphs and charts I had prepared was a visual feast fit only for the gods – till the intricacies of the WordPress blog interface cut short my hubris of reaching for graphical divinity. The WordPress dark arts have conspired to prevent me from posting images of any kind. This is but the opening salvo in a long, merciless war, I can promise you (“you” being the aether of the internets), but for now I will truncate my post into a text-only form, as those ancient philosophers who wrote articles before Google Images once did.

——Anyway, I read an old detritus of academia, linked on Brad Delong’s blog, about the Soviet economy  and the (very real) foibles and follies of their system. it was written in 1991, before the collapse, and has the structure of an “advice” piece, recommending certain reforms. Like all good essays, it has a quote, summarizing the inherent problems of the centralized, command economy: “The vast range of negative externalities induced by these decisions are as inherent to the Soviet-type system as the ability to mobilize and focus resources. These externalities include damage to the capability of users to produce, unusable output forced on others in the system, destruction of the resource base due to improper exploitation (…) and more.” I’m a touch sad that the author didn’t write this in 2010, since the irony is only available in hindsight – but really, “Damage to the capability of users to produce”? “ unusable output forced on others in the system”? “destruction of the resource base due to improper exploitation”? I hope Im not a bad person for laughing at how accurate a statement that is about the current economic crisis in the United States. A massive surge in houses that people cannot even afford to live in, let alone want, a large decline in output because of cyclical collapses in demand, and the environmental issue is too obvious to even comment on.

——I’m not actually saying the author’s conclusions are at all incorrect – the communist system of the USSR was definitely overburdened with bad allocations of resources and an inability to control the negative externalities associated with industrial production, such as environmental protection, as well as a systemic inability to obtain information on why such problems were occurring due to their price systems. I’m too lazy to look up links, but if I recall my readings correctly, there is a lot of evidence to suggest that, in the 1980’s, the USSR had to import food not because its agricultural sector couldn’t produce the wheat, but because the price of meat, particularly beef, was undervalued relative to wheat and other agricultural products. So everyone produced cow feed instead of human feed, to exploit the arbitrage. A massive price failure with dire consequences. However, as we have clearly seen, these kinds of problems are also endemic to capitalism, maybe not to the same extent, but certainly on a massive scale. These problems are a consequence of people being people. Its a part of human civilization, the classic problems of imperfection. This is a mistake very often made, a kind of correlation equals causation attribution error. People see a system, and see problems in the system, and attribute those problems as being caused by the system. Sometimes that is true – but very often people don’t realize how widespread those problems are, how they were around before the system, and in places with different systems. The connection just isn’t there.

Of course, if we had a truly free market, none of these problems would occur, right? …Right?

——Today’s post is a quicker entry, since by the gods  I am horrible at sticking to a schedule. The “doing anything is better than nothing at all” school of thought is being adapted out of necessity here. Anyway, two weeks ago the state congress of Florida, led by far right darling Rick Scott, passed a reform of the employment and compensation for teaching in the state. The bill is quite focused, only accomplishing two main changes. First, every teacher now serves on a one year contract, as a contingent worker – no more tenure, no more benefits via seniority, etc. The second change relates to teacher’s pay and rehiring. The bill requires that all teachers be given one of four ratings – Highly Effective, Effective, Needs Improvement, and Unsatisfactory – and these ratings must be at least 50% determined by student performances on standardized tests. If teachers place in the bottom two categories, they have a set amount of time to improve their “performance” or they are let go. You can read the bill here if you wish

——Now, the internet is replete with descriptions of how this is utterly unfair, of how it will drive talented teachers out of Florida, of how it holds teachers to impossible standards, and of how it ensures that the teaching profession is slowly reduced to near minimum wage labour. I just want to touch on how the dynamics of this bill will play out in Florida at large. There is a very important note to make – the bill does not peg teachers pay to changes in their students performance on tests, but on absolute performance. Teachers are paid more if students do well, not if students do better than students from last year’s class. While not necessarily the wrong choice, this decision will have very important consequences. Rick Scott and his cohorts, drawing from the deep well of experience they have from their zero years of teaching in Florida’s school system, believe that teachers are primarily responsible for student outcomes, and by making teachers compete with each other for their survival, they will teach their students better. A small segment of society known as people who study education outcomes, however, disagree with this assessment. The mainstream consensus is pretty clear that factors outside of the control of the school account for either a large amount or an outright majority of a students performance. Most important is the involvement of the family in caring about the child’s education, setting expectations for their children to do well in school, and providing appropriate nutrition, study spaces, aid for problem subjects, and so on. It is, of course, no surprise to anyone anywhere that one of the most significant indicators of student performance on standardized tests, therefore, is wealth. The survey I linked is one of many showing this correlation, but this study has the added benefit of showing that the correlation between wealth and test scores held true in 1966, 1972, and 2009. Its obvious if you think about it – a poor family where both parents must work twelve hours a day does not have the time or the energy to spend helping their children with school work, and people at the margins of society tend not to preach to their kids about how getting straight A’s is the only path to happiness. Regardless of the reason, wealth is a larger determinant of school performance than the school itself – let alone teachers. In fact, in Florida, it is an even worse problem than in other states – the Florida Comprehensive Assessment Test is so biased towards skills favoured by wealthy households that the worst performing school out of every upper-class district still did better than the best school out of any lower-class district.

——So what does this mean for Florida teachers? Its pretty obvious to figure out at this point: the new school reform bill ensures that people who teach and poorer schools, in poorer neighborhoods, will be paid less, while people who teach in rich neighborhoods will be paid more. Beneath all the propaganda, this bill is simply another wealth re-distributor, one distributing from the poor to the rich. Teaching jobs normally are some of the higher paying jobs in poorer neighborhoods, kind of a form of wealth equalization by the government, in order to ensure that good teachers would teach at poorer schools. This bill reverses that. Furthermore, given that the pay for teaching in the US is barely enough to raise a family, even the most idealistic teachers must make decisions about their life based on marginal profit – as such, any good teacher will make the decision to leave poorer neighborhoods and head for richer suburban pastures. People complained that the bill would cause a brain drain of teachers from Florida – but the reality is it will be a drain from Florida’s low income areas, towards the high income ones. Undoubtedly, this will cause the performance of lower income schools to suffer even more – which I’m sure the Republicans will blame on unions and public management, and prompt attempts to get rid of them entirely. Works out for them – not so much for the students or teachers though.

——The Hobbit began filming recently in New Zealand, an event barely noticed in the larger world – who cares until it is in theatres? For the nation of New Zealand, however, this was met with a massive sigh of relief, as it was a seemingly happy ending to a divisive and intense battle between the MEAA, an Australian-based actors and film workers union, and Warner Brothers, the producers of the movie via director Peter Jackson’s WingNut Films Limited. While it may seem odd to outside observers, what began as a workers strike eventually escalated into citizens taking to the streets of Wellington, backing WingNut Films stance, and the Parliament of New Zealand passing emergency laws to resolve the “crisis” – over a pair of fantasy movies. While the outline of events is confusing, I think it reveals something very important about how globalization really functions, and how reality clashes with the myths.

——Anyway, to start, at the beginning of October 2010, as WingNut began finalizing the filming process, New Zealand Actors Equity, a branch of the MEAA, approached WingNut about negotiating a collectively bargained contract for the around 200 workers on the project they represented (only a small portion of the total workers – MEAA is not the largest union in New Zealand by any stretch). Peter Jackson replied that it was, in fact, illegal for him to negotiate with the MEAA – as they were not registered in New Zealand, having been de-registered in the past few years due to some legal disputes. The MEAA, disagreeing with this interpretation of the law, took a fairly drastic step, and called upon the Screen Actor’s Guild, the US actor’s union and the largest actors union in the world, to issue a boycott of the production, stating it was not a unionized work. At this point, as production shut down, things got heated fast, when WingNut threatened to leave New Zealand entirely, and shoot the film elsewhere – Eastern Europe was the commonly named alternative. Given that for The Hobbit, a two-movie production, WingNut was expected to spend $500 million in New Zealand producing the movies and bring thousands of jobs, public opinion quickly turned against the MEAA, who dropped their demand within two weeks and lifted the boycott. Citing “inability to do business” in the country, however, WingNut and Warner Brothers continued to threaten to leave the country – at the end of October, the NZ Parliament passed a bill, approving a $27.5 million hand out to the company, in the form of tax rebates and shared marketing costs, and WingNut agreed to continue filming in New Zealand.

——Now, whether or not the MEAA was right or wrong is, in fact, not the issue here. Its true that WingNut pays its workers very generously – $5000 per week in NZ compared to $3800 in the United States, and for The Hobbit they had agreed to even share a small amount of the total profits with the workers. By the same token, the MEAA had not even demanded increased wages, just the very right to bargain collectively – as one actor put it, “we hadn’t even discussed coffee breaks” before things exploded, and it appears that while WingNut was correct on the legal front, the MEAA was unaware of the illegality of negotiations. Whats more important here is the final outcome – that a labour dispute between a union and a film company eventually resulted in action by the central government and a massive tax handout to the company. Any increase in labour costs from unionized workers demands being met would never have totaled that amount, not nearly – Peter Jackson himself labeled the costs of wages for workers as being “miniscule” compared to, for example, shooting the films in 3D. Furthermore, a fact that got lost in the debate, is that New Zealand already gives film makers a large tax rebate for working in the country – 15% of the total cost of the film. The crux of Warner Brother’s argument, however, was that many countries give a higher rebate. England, for example, gives a 20% rebate, while Canada gives an incredible 33% discount. As such, Warner Brothers had already pocketed 15% of $500 million, or $75 million, from the NZ government. Furthermore, the central government also passed a new labour law, applicable to all films made henceforth in New Zealand, stating that film companies can define their workers as contractors, instead of employees, and therefore deny them the benefits employees are entitled to and giving them further reductions in labour costs.

——I want to look at the end result of this little tale from the perspective of globalization. The proponents of globalization always point to one thing – lower costs. Yes, outsourcing costs some people jobs, but it leads to lower prices for goods or services for all people! As labour costs are lowered, the price of the good itself falls too. Some lose, but the majority gain. I will well admit that when talking about steel and Monopoly boards, this is true. Yet this just isn’t true in the movie industry – at a movie theatre, ticket prices are fixed – every movie costs the same to see, for reasons too complex to discuss now (if you think its so movies can compete on quality and to be fair to consumers, try again). In fact, because the movie is being shot in 3D, a god-forsaken waste of resources if there ever was one, ticket prices are actually going up. These tax breaks, therefore, are nothing but a direct transfer of money from the government, and therefore the people, of New Zealand, to the shareholders of Warner Brothers. Its not like The Hobbit movies are in any danger of losing money – the first Lord of the Rings movie, The Fellowship of the Ring, made $870 million globally, while the last, Return of the King, made $1.1 billion. The two Hobbit films, each costing $250 million, will probably make more due to the hike in prices for 3D, giving them obscene profit margins. It isn’t like they needed the tax breaks to stay in business. Most people portray this is just a part of “international competition”, but its a fundamentally unequal competition – its about power. Warner Brothers is international – they can film anywhere, while the government of New Zealand is purely national – it cant collect taxes anywhere outside of its borders. Its the same with England and Canada. On the face of it, the idea of tax breaks for films to make movies is laughable – if no country had them, then the film industry would have no choice but to pay the taxes. The optimal solution for every government is to have no handouts at all. As soon as one country gives the incentive, though, then everyone must follow suit. Its the textbook definition of beggar-thy-neighbor, race to the bottom policies – everyone loses but the company involved. The worst part, sadly, is that the media of New Zealand refused to portray it as such – the central government was congratulated for being extorted, for “saving the country’s film industry”. The power of ideology at work I suppose.

Sourcing if you care