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Sunday, January 22, 2012

Apple's Foreign Suppliers Demonstrate Widespread Scamming and Horrific Abuse of Employees

AlterNet.org


ECONOMY
Apple's bombshell report on its suppliers shows anti-employee practices as common as iPods. White collar criminologist William K. Black investigates.

Photo Credit: deejayres on Flickr

Apple has released a report on working conditions in its suppliers’ factories, highlighting a form of control fraud (fraud in which the head of a company subverts it for personal gain) that criminology has identified but rarely discussed. I write overwhelmingly about accounting control fraud because it drives our recurrent, intensifying financial crises. The primary intended victims of accounting control frauds are the shareholders and the creditors. Other private sector control frauds target customers (e.g., George Akerlof’s 1970 article on “lemons”), and the public (e.g., the unlawful disposal of toxic waste, illegal logging, and tax fraud).

Anti-employee control frauds most commonly fall into four broad, but not mutually exclusive, categories – illegal work conditions due to violation of safety rules, violation of child labor laws, failure to pay employees’ wages and benefits, and frauds based on goods and loans provided by the employer to the employee that lock the employee into quasi-slavery. Apple has just released a report on its suppliers that shows that anti-employee control fraud is the norm. Remember, fraud is hidden and is often not discovered and Apple did not have an incentive to make an exhaustive investigation. Apple calls its inquiries “audits” and it is apparent that most of its information comes from reviewing written and electronic records at its suppliers. That is exceptionally revealing. The suppliers know that they can defraud their employees with such impunity that they don’t even bother to get rid of records that prove their frauds. Apple has resisted making public its suppliers and the report refused to identify which suppliers committed which violations – often for years despite repeated, false promises to end their anti-employee control frauds. Two other facts are evident (but not reported). First, Apple rarely terminates suppliers for defrauding their employees – even when the frauds endanger the lives and health of the workers and the community – and even where Apple knows that the supplier repeatedly lies to Apple about these fraudulent and lethal practices. Second, it appears unlikely in the extreme that Apple makes criminal referrals on its suppliers even when they commit anti-employee control frauds as a routine practice, even when the frauds endanger the worker’s and the public’s health, and even when the supplier repeatedly lies to Apple about the frauds. Apple’s report, therefore, understates substantially the actual incidence of fraud by the 156 suppliers (accounting for 97% of its payments to suppliers). From the New York Times:

The company said audits revealed that 93 supplier facilities had records indicating that more than half of their workers exceed a 60-hour weekly working limit. Apple said 108 facilities did not pay proper overtime as required by law. In 15 facilities, Apple found foreign contract workers who had paid excessive recruitment fees to labor agencies.

And though Apple said it mandated changes at those suppliers, and some facilities showed improvements, in aggregate, many types of lapses remained at levels that have persisted for years.

The New York Times, the Wall Street Journal, and the Washington Post articles on the Apple report are all lengthy, but none of them has any input from a criminologist and each of the articles misses most of the significance of the report. The most fundamental flaws have to do with why anti-employee control fraud is the norm at Apple’s suppliers and why the suppliers typically don’t even take the inexpensive efforts necessary to avoid holding a paper trail that makes the frauds obvious even to a not terribly vigorous audit that they know is coming.

If there is one single thing that drives us white-collar criminologists around the bend it is the implicit assumption that fraud cannot be common. There is, of course, no logical (or experiential) reason for this belief. Nevertheless, it is a common belief and among economists it is a virtually universal dogma. Economists have a tribal taboo against even using the word “fraud” to describe individual frauds. The surest way to be considered an un-serious economist is to use the “f” word to describe frauds by elite economic actors. Economists’ taboo is particularly bizarre because it is economic theory, developed by a Nobel Laureate that explains why fraud can become endemic. George Akerlof, in his famous article on markets for “lemons” (largely describing anti-customer control fraud), explained the perverse “Gresham’s” dynamic in 1970: "[D]ishonest dealings tend to drive honest dealings out of the market. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”

Anti-employee control fraud creates real economic profits for the firm and can massively increase the controlling officers’ wealth. Honest firm normally cannot compete with anti-employee control frauds, so bad ethics drives good ethics out of the markets. Companies like Apple and its counterparts create this criminogenic environment by selecting least-cost – criminal – suppliers who offer components at prices that honest firms cannot match. Effectively, they hang out a sign – only the fraudulent need apply to be suppliers. But the sign is, of course, invisible and cannot be introduced in court so Apple and its peers also get deniability. They are shocked, shocked that its suppliers are frauds that cheat their employees and put them and the public’s health at risk in order to make a few extra yuan or dong for the senior officers.

Fraudulent suppliers, therefore, have compelling incentives to locate in nations and regions in which they can commit fraud with impunity. The best way to evaluate the fraudulent CEOs’ view as to the risk of prosecution for their frauds is to observe whether they take cheap means of hiding their frauds. When the CEOs do not even bother to avoid creating a paper trail documenting their frauds one knows that they view the risk of prosecution as trivial. Nations that are corrupt, have weak rule of law, weak or non-existent unions, poor protections for workers, a reserve army of the impoverished, and have few resources devoted to prosecuting elite white-collar crime provide an ideal criminogenic environment for firms engaged in anti-employee control fraud. The ubiquitous nature of anti-employee control fraud (and tax fraud) in many nations explains why U.S. industries have been so eager to “outsource” U.S. jobs to fraud-friendly nations. Companies like Apple also discovered long ago that Americans often made poor senior managers in these nations because they objected to defrauding workers. Not a problem – there are plenty of managers from other nations that have no such ethical restraints. Foreign suppliers run by Asian managers are increasingly dominant.

The endemic nature of anti-employee control fraud also demonstrates an important technical point. The wages reported in the most fraud-friendly nations are substantially overstated because workers work far longer hours without receiving the compensation to which they are entitled. Their hourly rate is much lower than reported, which means that the wage gap between U.S. and the most fraud-friendly nations is significantly greater than reported. U.S. firms that have foreign suppliers in these nations are well aware of this data bias and make their outsourcing decisions based on the real (much larger) wage gap.

The Harm to Employee and Consumer Health is Grave

The NYT article notes that it was bad publicity in the U.S. that finally forced Apple to make greater disclosures about its suppliers’ frauds:

The calls for Apple to disclose suppliers became particularly acute after a series of deaths and accidents in recent years. In the last two years at firms supplying services to Apple, 137 employees were seriously injured after cleaning iPad screens with n-hexane, a toxic chemical that can cause nerve damage and paralysis; over a dozen workers have committed suicide or fell or jumped from buildings in a manner that suggests a suicide attempt; and in two separate blasts caused by dust from polishing iPad cases, four were killed and 77 injured.

The Washington Post article noted:

Apple found that 62 percent of the 229 facilities it inspected were not in compliance with the company’s maximum 60-hour work policy; 13 percent did not have adequate protections for juvenile workers; and 32 percent had problems with the management of hazardous waste.

One supplier was caught dumping wastewater at a nearby farm. Another had a total lack of safety measures, creating “unsafe working conditions,” the report found. Five facilities employed underage workers.

The company in the past had refused to divulge its full supplier list even as it became standard practice for multinational corporations to do so after the public outcry in the 1990s over labor problems at Nike factories in developing countries.

Apple’s change of heart follows a highly publicized string of factory worker suicides in 2010 and deadly explosions in two Chinese factories in 2011.

The WSJ emphasized this chilling finding:

The report also found 24 facilities conducted pregnancy tests and 56 didn't have procedures to prevent discrimination against pregnant workers. Apple said that at its direction, the suppliers have stopped discriminatory screenings for medical conditions or pregnancy.

The article does not make this point explicitly, but these firms conduct these tests in order to unlawfully coerce their pregnant employees to have undesired abortions in order to obtain and keep their jobs.

Foreign Anti-employee Control Fraud harms U.S. Workers

These frauds take place abroad, but they harm employees at home. Mitt Romney explains that Bain had to slash wages and pensions to save firms located in the U.S. who had to meet competition from foreign anti-employee control frauds. The damage from foreign anti-employee control frauds drives the domestic attack on U.S. manufacturing wages. Bad ethics increasingly drive good ethics out of the markets and manufacturing jobs out of the U.S. and into more fraud-friendly nations.

A final caution is in order because each of the major articles on the Apple report failed to mention it. CEOs who are willing to routinely defraud their workers and expose them to grave threats to their health are exceptionally likely to commit other forms of control fraud.

Bill Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC). He is a white-collar criminologist, and he was the Executive Director of the Institute for Fraud Prevention from 2005-2007.

Friday, January 20, 2012

Eight Reasons Why the US Needs to Make Work Pay

Dissident Voice: a radical newsletter in the struggle for peace and social justice


Working and Poor in the USA

Our nation, so richly endowed with natural resources and with a capable and industrious population, should be able to devise ways and means of insuring to all our able-bodied men and women, a fair day’s pay for a fair day’s work.

– Franklin Delano Roosevelt, 1937

Millions of people in the US work and are still poor. Here are eight points that show why the US needs to dedicate itself to making work pay.

One. How many people work and are still poor?

In 2011, the US Department of Labor reported at least 10 million people worked and were still below the unrealistic official US poverty line, an increase of 1.5 million more than the last time they checked. The US poverty line is $18,530 for a mom and two kids. Since 2007 the numbers of working poor have been increasing. About 7 percent of all workers and 4 percent of all full-time workers earn wages that leave them below the poverty line.

Two. What kinds of jobs do the working poor have?

One third of the working poor, over 3 million people, work in the service industry. Workers in other occupations are also poor: 16 percent of those in farming; 11 percent in construction; and 11 percent in sales.

Three. Which workers are most likely to be working and still poor?

Women workers are more likely to be poor than men. African American and Hispanic workers are about twice as likely to be poor as whites. College graduates have a 2 percent poverty rate while workers without a high school diploma have a poverty rate 10 times higher at 20 percent.

Four. What about benefits for low wage workers?

Ten percent of US workers earn $8.50 an hour or less according to the US Department of Labor. About 12 percent have health care and about 12 percent have retirement benefits. Nearly one in four get paid sick leave and less than half get paid vacation leave.

Five. What rights do the working poor have?

Most workers have a right to earn at least the federal minimum wage of $7.50 an hour. Tipped employees are supposed to get at least $2.13 each hour from their employer and if the worker does not earn enough in tips to make the $7.50 minimum wage, the employer must make up the difference. People who work more than 40 hours in a workweek are entitled to one and one-half of their regular pay for each hour of overtime.

Six. What about wage theft from the working poor?

Many low wage workers have part of their earnings stolen by their employers. Examples include not paying people the full minimum wage, not paying required overtime, stealing from tipped employees, or fraudulently classifying workers as independent contractors. A survey of over 4000 low wage workers in Chicago, Los Angeles and New York conducted by university and non-profit researchers found: 26 percent of the workers were paid less than the minimum wage in the previous week, a majority were underpaid by more than $1 an hour; a significant number worked overtime the previous week and were not paid the legally required overtime; many were required to come early or stay late and work “off the clock” and were not paid for it; almost a third of the tipped workers were not paid the minimum wage and more than 1 in 10 tipped workers had some of their money stolen by their employer or supervisor.

Seven. What is a living wage in the US?

Dr. Amy Glasmeier of Penn State University has created a Living Wage Calculator that estimates the hourly wage needed to pay the cost of living for low wage families in the US. It breaks down the cost of living by state and locality across the nation. In New Orleans, a mom with one child needs to earn $17.52 to make ends meet. In New York, the mom with one child should earn $19.66 to make it. If we now realistically calculate the number of people who work and do not earn a living wage, the numbers of working poor in the US skyrocket to several tens of millions.

Eight. What about jobs for the unemployed and underemployed?

The US Labor Department estimated recently that 13 million people were unemployed. Another 8 million people were working part-time but wanted full-time work. Even more millions who are not working are not counted in those numbers because they have been unemployed so long.

A study by Northeastern University found that in the poorest families, unemployment is nearly 31 percent. Underemployment is also much more of a problem in poor homes, with over 20 percent of those workers reporting they are working part-time but seeking full-time work.

Our nation can do so much more. We say our country values work. It is time to do something about it.

If the US truly values work, we need to support the millions of our sisters and brothers who are low wage workers. Steps needed include: raising the minimum wage to a living wage; protecting workers from getting ripped off; making it easier for workers to organize together if they choose to; and creating jobs, public jobs if necessary, so that everyone who wants to work can do so. Many are already working on these justice issues.

For those interested in learning more about this, see the websites of Interfaith Worker Justice, the National Employment Law Project, and the National Jobs for All Coalition.

Bill Quigley is a professor of law at Loyola University New Orleans and Associate Legal Director at the Center for Constitutional Rights. He can be reached at: quigley77@gmail.com. Read other articles by Bill.

Tuesday, January 17, 2012

The 5 Most Outrageous Examples of Hidden Charges Companies Pass Off on Consumers -- And How to Fight Back

AlterNet.org

Americans pay hundreds of dollars each year in hidden fees. Here are the most egregious examples that every consumer should be aware of, plus ideas for fighting back.

Photo Credit: meddygarnet on Flickr
It seems like consumers are being squeezed from every angle these days. Our grocery bills are getting larger and other expenses going through the roof at the same time that many of us are losing jobs and having to downsize.

The Occupy Wall Street movement has helped spur a national dialogue about the financial sector’s role in the erosion of the U.S. middle class. But Wall Street mega banks aren’t the only corporations that have swindled American citizens; many of the companies we rely on for our food, transportation, and communication needs are also treating consumers unfairly by saddling them with a plethora of hidden fees and surcharges.

The average U.S. adult pays at least $942 each year in hidden fees, according to research conducted by the Ponemon Institute in 2006. Six years later, it’s unlikely that this number has gone down. If anything, industries that took a financial hit during the recession are passing more fees onto consumers than ever, regardless of whether they’ve recovered.

A comprehensive list of the sneaky fees companies palm off on consumers could go on forever, but here are five particularly egregious examples that every consumer should be aware of – followed by a list of ideas for fighting back.

1. Banks and credit card companies

The financial industry is infamous for its shady fees, and with good reason. You’re probably familiar with many of the charges banks and credit card companies impose, for things like account overdrafts, cash advances, stop-payment services, balance transfers, purchases made outside the U.S., late payments, payments made over the phone, lost card replacements, account minimums, and even the “privilege” of speaking to a bank teller.

Credit card and bank fees have become both more common and more expensive in recent years, even as new regulations have sought to keep institutions from taking advantage of consumers. In fact, some of the newest – and sneakiest – charges are in direct response to government regulation. For instance, after rules were passed in 2010 limiting banks’ use of overdraft fees, banks responded by quietly increasing maintenance, wire transfer, and other fees and implementing new charges on services like mobile phone deposits. Banks have responded to consumer outrage in a similar fashion; after consumers revolted against Bank of America’s plan to introduce a $5 monthly charge for some debit card users (a plan other big banks intended to implement as well), the banks instead turned to ATM surcharge increases to pad their bottom lines.

The fees are bad, but even worse is the fact that many of the charges are not disclosed to consumers. According to a recent report from the Pew Charitable Trusts’ Safe Checking in the Electronic Age project, the ten biggest banks disclose an average of 49 fees on their websites – but there are many fees that are hidden, most commonly regarding account overdrafts. The report recommends that the new Consumer Financial Protection Bureau require banks to offer customers a one-page fee disclose box, as credit card companies are now required to do. (Although it is an imperfect system, it's at least a start.)

2. Cell phone companies

According to one estimate, most American pay $300 a year more than they should for cell phone service. For anyone with a cell phone, that is not hard to believe. In recent years, carriers have greatly increased charges for directory assistance, text message overages, Internet access, and “early termination” of one’s contract, especially for smartphones and other hot devices.

Consumer Reports says that one of the biggest ways cell phone companies rip consumers off is by encouraging them to sign up for plans that leave them with large quantities of unused minutes.

Cell phone companies have also been known to charge customers for services that they do not yet offer and allow third-party companies to attach mystery costs to customers’ bills – a practice called “cramming” that has cost consumers at least $2 billion since the 1990s, according to a 2011 investigation by the Senate Commerce Committee. An accompanying report concluded that often “customers do not know these [third-party] services have been set up for them and mobile providers are reluctant to clarify the process because they make money from the extra charges.”

3. The “grocery shrink ray”

If you have the vague sense that you’re paying more but getting less at the grocery store these days, you aren’t imagining things. The Consumerist, a watchdog blog published by Consumer Reports, has been keeping an eye on the so-called “grocery shrink ray” effect since 2008. On the site, you can find page after page of blog posts documenting products that corporate food companies have quietly shrunk in size while charging consumers the same amount. Salad dressing, laundry detergent, breakfast cereal, shaving cream – it seems that no product has been spared from the shady shrink ray effect.

At the beginning of last year, Consumer Reports magazine took an in-depth look at this trend and found that companies have reduced package sizes by as much as 20 percent. (Ivory dish detergent, which used to come in a 30-ouce bottle, now comes in a 24-ounce size; Haagen Dazs ice cream containers used to hold 16 ounces, but now hold 14.) The magazine noted that most consumers are not aware of these tricks. “Manufactures make subtle changes to the packages but generally keep the price the same because when prices rise, buyers often seek cheaper alternatives,” noted a blog post discussing the findings. “And the bottom line is that consumers are more attuned to changes in price than packaging.” The magazine’s advice? Pay attention to the per-unit price, and buy in bulk whenever possible.

4. Cable companies

If you’re anything like me, you have a pretty dysfunctional relationship with your cable subscription. It costs a ton, and you don’t really understand what you’re paying for, but every time you think about sticking it to the evil cable company and quitting, the conversation comes back to “...but Mad Men comes back on in just a few months.” Netflix and Hulu are great, but for many of us they haven’t been able to replace that infuriatingly pricey cable box in our living rooms.

Why the fury? Because the whole cable (and satellite) TV enterprise is just so darn anti-consumer. There are the awful cable plans, which force customers to pay for a-million-and-one channels they don’t care about in order to watch the three they actually want. And in many markets, such companies are near monopolies, allowing them to pack customers’ bills full of hidden charges for cable boxes, DVR services, early termination, and repair services, even if the company’s products are to blame. Often companies will lure customers in with proclamations like, “Pay only $20!” Of course, they hide the real details of the deal ($20 a month for the first three months, then $80 a month, with fees X, Y, and Z) in the small print.

5. Airlines

I saved the big daddy of hidden fees for last. Perhaps you’ve seen the commercials on TV lately that promise “perks” like a free checked bag if you sign up for a pricey membership club. The airlines are trying to pass off free checked bags – something that was a basic service just a few short years ago – as an exclusive “deal” that customers should feel lucky to get.

Hidden airline fees were always obnoxious, but airlines became much more flagrant about them after the recent financial crisis wreaked havoc on the industry. Fees for things like rebooking a flight have gone up, and it’s become more common not only to charge for checked bags but also for in-flight snacks. (As anyone who’s flown in recent years knows, long gone are the days on in-flight meals, except on the longest excursions.)

However, there is some good news to report on this front: it was just announced that the government is forcing airlines to disclose more of the taxes and fees that go along with each ticket, so customers will get a clearly idea upfront of what they’ll have to pay to fly.

Now that your blood is probably boiling over all these fees, here are a few practical ways that consumers can fight back.

1. Lobby for more consumer-friendly legislation. Anytime you hear about policy groups that are pushing legislation to hold companies accountable and protect consumers, call or write your local and federal lawmakers and support that legislation. Without strong regulation, corporations will continue to do what they want – and what they want to do is make money, consumers be damned.

2. Start a petition. I’m of the mind that to see real progress, we have to push for system-wide change. But sometimes, a petition targeting one bad practice at one company can be extremely effective. Take for instance the Change.org petition that recent college graduate Molly Katchpole launched this past fall targeting Bank of America’s proposed $5 monthly debit card fee. The petition garnered more than 300,000 signatures in mere weeks, and the effort is widely cited as having influenced Bank of America’s decision to drop the fee. (Full disclosure: this author is a former freelance writer for Change.org.)

3. Harness the power of user-review websites. The rise of user-review websites like Yelp has been great for consumers, because such sites democratize consumer information. Maybe you noticed that the value of your favorite local service has gone down the toilet; you can now let others in your community know, and find out similar information yourself. A business’s marketing strategy can only take it so far if it has a one-star Yelp rating, so companies have more of an incentive now to do right by customers.

4. Join a protest. If you haven’t already, consider lending your voice to the Occupy Wall Street movement, which has sparked an invaluable national dialogue on corporate greed and the rights of the 99%. Help that conversation continue to grow.

Lauren Kelley is an associate editor at AlterNet and a freelance writer and editor who has contributed to Change.org, The L Magazine and Time Out New York. She lives in Brooklyn. Follow her on Twitter here.

Greenspan's Laissez Fairy Tale: How Flawed Economic Theories Fail to Account for Financial Fraudsters

AlterNet.org
ECONOMY

Greenspan's Laissez Fairy Tale: How Flawed Economic Theo
ries Fail to Account for Financial Fraudsters

Alan Greenspan touted 'reputation' as the characteristic that made possible trust and free markets. He was dead wrong.

We continue to witness remarkable developments in the intersection of the related fields of economics, finance, ethics, law, and regulation. Each of these five fields ignores a sixth related field – white-collar criminology. The six fields share a renewed interest in trust.

The key questions are why we trust (some) others, when that trust is well-placed, and when that trust is harmful. Only white-collar criminologists study and write extensively about the last question. The primary answer that the five fields give to the first question is reputation. The five fields almost invariably see reputation as positive and singular. This is dangerously naïve. Criminals often find it desirable to develop multiple, complex reputations and the best way for many CEOs to develop a sterling reputation is to lead a control fraud. Those are subjects for future columns.

This column focuses on theoclassical economics' use of reputation as “trump” to overcome what would otherwise be fatal flaws in their theories and policies. Frank Easterbrook and Daniel Fischel, the leading theoclassical “law and economics” theorists in corporate law, use reputation in this manner to explain why senior corporate officers' conflicts of interest pose no material problem. The most dangerous believer in the trump, however, was Alan Greenspan. His standard commencement speech while Fed Chairman was an ode to reputation as the characteristic that made possible trust and free markets. I've drawn on excerpts from one example: his May 15, 2005 talk at Wharton. I find Greenspan's odes to reputation as the antidote to fraud to be historically inaccurate and internally inconsistent in their logic. Here, I ignore his factual errors and focus on his logical consistency.

“The principles governing business behavior are an essential support to voluntary exchange, the defining characteristic of free markets. Voluntary exchange, in turn, implies trust in the word of those with whom we do business.

Trust as the necessary condition for commerce was particularly evident in freewheeling nineteenth-century America, where reputation became a valued asset. Throughout much of that century, laissez-faire reigned in the United States as elsewhere, and caveat emptor was the prevailing prescription for guarding against wide-open trading practices. In such an environment, a reputation for honest dealing, which many feared was in short supply, was particularly valued. Even those inclined to be less than scrupulous in their personal dealings had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.

To be sure, the history of world business, then and now, is strewn with Fisks, Goulds, Ponzis and numerous others treading on, or over, the edge of legality. But, despite their prominence, they were a distinct minority. If the situation had been otherwise, late nineteenth- and early twentieth-century America would never have realized so high a standard of living."

* * *

"Over the past half-century, societies have chosen to embrace the protections of myriad government financial regulations and implied certifications of integrity as a supplement to, if not a substitute for, business reputation. Most observers believe that the world is better off as a consequence of these governmental protections.

Accordingly, the market value of trust, so prominent in the 1800s, seemed by the 1990s to have become less necessary. But recent corporate scandals in the United States and elsewhere have clearly shown that the plethora of laws and regulations of the past century have not eliminated the less-savory side of human behavior. We should not be surprised then to see a re-emergence of the value placed by markets on trust and personal reputation in business practice.

After the revelations of recent corporate malfeasance, the market punished the stock and bond prices of those corporations whose behaviors had cast doubt on the reliability of their reputations. There may be no better antidote for business and financial transgression. But in the wake of the scandals, the Congress clearly signaled that more was needed.

The Sarbanes-Oxley Act of 2002 appropriately places the explicit responsibility for certification of the soundness of accounting and disclosure procedures on the chief executive officer, who holds most of the decision-making power in the modern corporation. Merely certifying that generally accepted accounting principles were being followed is no longer enough. Even full adherence to those principles, given some of the imaginative accounting of recent years, has proved inadequate. I am surprised that the Sarbanes-Oxley Act, so rapidly developed and enacted, has functioned as well as it has. It will doubtless be fine-tuned as experience with the act's details points the way.

It seems clear that, if the CEO chooses, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave ethically. Companies run by people with high ethical standards arguably do not need detailed rules on how to act in the long-run interest of shareholders and, presumably, themselves. But, regrettably, human beings come as we are--some with enviable standards, and others who continually seek to cut corners.

I do not deny that many appear to have succeeded in a material way by cutting corners and manipulating associates, both in their professional and in their personal lives. But material success is possible in this world, and far more satisfying, when it comes without exploiting others. The true measure of a career is to be able to be content, even proud, that you succeeded through your own endeavors without leaving a trail of casualties in your wake."

* * *

"Our system works fundamentally on trust and individual fair dealing. We need only look around today's world to realize how valuable these traits are and the consequences of their absence. While we have achieved much as a nation in this regard, more remains to be done.”

Greenspan appears to have relied on the trump of reputation as the basis for causing the Fed to oppose financial regulation generally and at least five specific examples of proposed or existing regulation designed to deal with conflicts of interest. He supported the repeal of the Glass-Steagall Act despite the conflict of interest inherent in combining commercial and investment banking. He supported the passage of the Commodities Futures Modernization Act of 2000 despite agency conflicts between managers and owners of firms purchasing and selling credit default swaps (CDS).

He opposed using the Fed's unique statutory authority under HOEPA (1994) to regulate ban fraudulent liar's loans by entities not regulated by the Federal government. He opposed efforts to clean up outside auditors' conflict of interest in serving as auditor and consultant to clients. He opposed efforts to clean up the acute agency conflicts of interest caused by modern executive compensation. He opposed taking an effective response to the large banks acting on their perverse conflicts of interest to aid and abet Enron's SPV frauds.

Greenspan's Hypothesis: Reputation Trumps Perverse Incentives

Greenspan's overall anti-regulatory hypothesis seems to be that laissez faire led to substantial control fraud, which gave business actors a strong incentive to avoid being defrauded. This caused them to care a great deal about reputation, which successfully prevented fraud. Indeed, the frauds “had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.”

The most obvious logic problem with this hypothesis is why laissez faire led to substantial control fraud. Here is his key sentence, discussing business life under laissez faire: “In such an environment, a reputation for honest dealing, which many feared was in short supply, was particularly valued.” How could “many” American business people operating under laissez faire fear that reputations for honest dealing were “in short supply” among their counterparts?

Under Greenspan's logic reputations for honest dealing should have been omnipresent among American business people during laissez faire. Greenspan assures us that under laissez faire even frauds “had to adhere to a more ethical standard in their market transactions, or they risked being driven out of business.” If this is true, then the “many” who “fear[ed]” that “a reputation for honest dealing “was in short supply” must have been irrational. Reputations for honest dealing should have been virtually universal under Greenspan's logic.

Markets Make the Mensch Greenspan asserted that unethical CEOs who act like scum in their personal lives engaged in a daily “Road to Damascus” conversion whenever they worked. Greenspan concedes that CEOs dominate corporations and that a honest CEO will prevent any material corporate fraud (“if the CEO chooses, he or she can, by example and through oversight, induce corporate colleagues and outside auditors to behave ethically”). In short, Greenspan asserts (contrary to Adam Smith's warnings) that there is no serious “agency” problem caused by the separation of ownership and control in corporations. Markets force CEOs to act as if they were honest because a good reputation is essential to the CEO.

The CEO, in turn, is able to ensure that subordinates act ethically. But Greenspan then contradicts his logic again, despairing that: “regrettably, human beings come as we are--some with enviable standards, and others who continually seek to cut corners.” Greenspan has just asserted that humans do not “come as we are” to business. Markets force us to behave as if we are moral regardless of our actual morality. When we are in our business mode we are at our patriarchal Grandfather's house on our best behavior in constant fear of arousing his ire. Greenspan Claimed That We Were in the Midst of a Renewal of CEO Honesty – In 2005.

In September 2004, the FBI warned that there was an “epidemic” of mortgage fraud and predicted that it would cause a financial “crisis” if it were not contained. The fraud epidemic grew massively, and I have shown why we know that it was overwhelmingly lenders who put the lies in liar's loans – at a rate of roughly a million fraudulent mortgages annually at the time that Greenspan gave his talk at Wharton in mid-2005.

“We should not be surprised then to see a re-emergence of the value placed by markets on trust and personal reputation in business practice. After the revelations of recent corporate malfeasance, the market punished the stock and bond prices of those corporations whose behaviors had cast doubt on the reliability of their reputations. There may be no better antidote for business and financial transgression.”

Again, my emphasis here is on Greenspan's logic. It does not follow that because “the market punished the stock and bond prices of those corporations” that collapsed because they were looted by their CEOs this served as the best “antidote” to prevent future accounting control frauds. George Akerlof and Paul Romer published their famous article in 1993 (“Looting: the Economic Underworld of Bankruptcy for Profit”). Indeed, George Akerlof received the Nobel Prize in economics in 2001. Greenspan was Charles Keating's principal economic expert and had seen him loot Lincoln Savings in the late 1980s.

Accounting control frauds are funded by stock and bond sales. The markets fund accounting control frauds, and they do so massively even when the CEO is looting the firm and causing losses principally to the shareholders and creditors. The CEO walks away wealthy from the husk of the failed corporation. Almost everyone agrees that leverage is one of the great causes of losses in our recurrent, intensifying financial crises here and abroad. Debt drives leverage.

Debt is supposed to provide the “private market discipline” that prevents accounting control fraud, and reputation is supposed to be the piston that adds immense power to this great brake. But accounting control fraud, as Akerlof & Romer (and we criminologists) emphasize is a “sure thing” – it produces record (albeit fictional) profits in the near-term. When there are epidemics of accounting control fraud, bubbles hyper-inflate.

The combined result is that loss recognition is hidden by refinancing. Reporting record profits and minor losses via accounting control fraud is the surest means for a CEO to grow wealthy and develop a strong reputation. Creditors rush to lend to corporations reporting stellar results, which is what produces the extraordinary leverage. Far from acting as an “antidote” to accounting control fraud, reputation helps explain why private market discipline becomes an oxymoron. Reputation is the great booster shot aiding and encouraging accounting control fraud.

In any analogous context we would consider Greenspan's “antidote” claim to be facially insane. If the head of the public health service announced proudly that the service had triumphed because, while one million Americans had died of an epidemic of cholera, the death rate had been so severe and rapid that the epidemic had burned out, we would consider him to be delusional and heartless. The death of the pathogen's host (us) does not constitute a triumph over cholera. It also does not leave the survivors who were not exposed to the pathogen with additional antibodies that will prevent future epidemics.

“Texas Triumphs”

In an article I wrote in 2003 during the unfolding Enron-era frauds I called similar claims by prominent Texas politicians that Enron's failure represented a triumph of capitalism “Texas triumphs.”

I distinguished Texas triumphs from Pyrrhic victories. The origin of that phrase comes from King Pyrrhus' (of Epirus in Greece) victory over the Romans in 279 BC at the battle of Asculum in Apulia (on the Eastern side of the Italian peninsula). The Roman legions were elite and outnumbered Pyrrhus' forces (which had many mercenaries).

Nevertheless, he twice defeated the Roman forces, inflicting significantly greater casualties on their forces. After the battle of Asculum he responded to congratulations by remarking that one more such victory would undo him. He was a great commander who defeated highly competent opponents defending their own lands.

Only theoclassical economists could call the failure of our most elite firms that were looted by their CEOs a triumph of capitalism. I wrote: “Martin Wolf repeated the well-worn claim that Enron's failure demonstrates capitalism's virtues in 2003. It is a view most famously stated by Larry Lindsey, a member of George W. Bush's first (failed) economic team, when he said in January 2002 that Enron's failure was “a tribute to American capitalism.” The then treasury secretary, Paul O'Neill, wasn't to be outdone. He insisted Enron's failure proved “the genius of capitalism.””

Our family's rule that it is impossible to compete with unintentional self-parody remains intact. A discipline (economics) that counts massive looting by the CEOs of elite control frauds as its greatest triumphs desperately needs an intervention. None of these control fraud failures (and that includes Fannie and Freddie) involves valiant efforts by economists to prevent the looting.

The theoclassical failures to prevent control fraud did not occur because the economists strove to prevent the looting but were defeated by impossible odds. Theoclassical economists were the anti-regulatory architects of the criminogenic environments that produce our epidemics of control fraud. They are the elite frauds' most valuable allies.



Bill Black is an Associate Professor of Economics and Law at the University of Missouri – Kansas City (UMKC). He is a white-collar criminologist, and he was the Executive Director of the Institute for Fraud Prevention from 2005-2007.

Monday, January 16, 2012

Who Knew There Was So Much Poverty? The Poor, That's Who



January 15, 2012 at 21:57:19

Who Knew There Was So Much Poverty? The Poor, That's Who

By (about the author)

Last evening, Tavis Smiley hosted a program that was broadcast live on C-SPAN live and that focused for two-and-a-half hours on the issue of poverty in America . It was terrific. The energy and commitment of the experts assembled to investigate and help alleviate poverty made the conversation rich beyond anything I've seen in ages. Each panelist came at the topic from a different perspective. That added to the richness of the discussion about being poor in America.

Good stuff, Michael Moore, Cornell West, Barbara Ehrenreich, Suze Orman, Majora Carter, Roger A. Clay, Jr, and all who participated as panelists or who helped pull this together. If you didn't see this show, Remaking America, from Poverty to Prosperity, you can watch it in C-SPAN's archives. And you can find out more at Smiley's website.

Even though I've been through the slide from middle-income to poor and now am fighting the unwinnable fight to climb back out, I still need the affirmation these sorts of discussions can give to remember that it still isn't my fault. The system crushed me, and the system will crush me again unless I stay intensely vigilant -- and maybe it will crush me again even if I do. But I do not want to stay vigilant about the wrong things.

I want a life without the terror of poverty. I hate fearing what I cannot control. It's worse than any horror movie could ever be. I do not want a lot of stuff. I do want some peace.

I especially appreciated Michael Moore and Barbara Ehrenreich last night as both have given much of their life work to telling the realities for people like me -- because very few people let me tell my own story. We don't suffer fools in this nation, and we still often see as fools those who do not achieve financial success. Last night I didn't feel like a fool during most of that program.

I also adored Cornell West's call to moral action by all of us to show the empathy and compassion for the poor that most of us were raised to show instead of admiring the greedy for their accomplishments. The poverty of spirit in our nation has reached crisis proportions too. The stain of shame should not be on me. Yet we've spent a generation celebrating cruelty as if it were the calling of those strong enough to achieve wealth and flaunt their superiority over people like me.

The showed uplifted me. The only thing I thought might have made it stronger was to include one more expert on poverty on the panel -- a poor person. It would have been interesting to hear someone challenge the notion that the poor simply bought into what the rich dished out -- easy mortgages, credit cards with high interest rates, payday loans, etc. Most of the poor folks I know -- including me -- bought into survival. And the only way to survive was often to use the terrible and abusive financial instruments offered to poor people. The alternative was sometimes to just die.

Instead of just dying when the for-profit healthcare system stripped from me every thing and most of the good intentions I had for my own economic health, I borrowed in whatever way I could to keep myself and my husband alive. I knew it was not the best financial practice, but when death is the alternative, a payday loan can be a lot more attractive and a high-interest credit card can seem like a gift. Until the day when we have a progressively financed, single standard of high quality care for all without financial barrier, people like me will likely keep doing whatever it takes to stay alive.

"Poor people have poor ways" because that is often the only way to hang on to anything. No one on the panel was exactly or directly blaming the poor at all, but in listening to Orman say that we ought to have debit cards contribute to our credit ratings and do away with most credit cards, payday loans, and other high interest financial products all together, I wondered a bit. There was an inference that people make poor choices when in fact there may be no other choice out there sometimes. Is she thinking that parents without the cash up front to buy a child's medicine, go to the doctor, buy food, or other needs should either pay cash, rely on the kindness of strangers to offer help, or let their children go without? She missed the reason many families get into trouble. And it really wouldn't have fit in well to the program, but no one on the panel really challenged her position too much.

Until we let poor people be the experts on being poor, we are going to continue to see the issue as something the intellectually worthy people know about while the people experiencing the problem sit in the audience or watch on TV. A poor person could have asked her straight up what should be done when the paycheck is gone and someone needs medicine or care.

This is part of why I like organic movements so much, like the Occupy movement. Mic check. Reality check. Let's keep talking with each other about poverty and learn as much as we can from those who have lived it and are still living it. And let's try to make sure a poor person's voice is heard as loudly as Suze Orman's. Then we'll have the revolution the panel was imagining in our society and our thinking. Poor people have some pretty great ways too. They are often strong and imaginative and forgiving. What's so wrong with that?


flickr image by Iheartfishtown

Healthcare reform activist; Appeared in Michael Moore's SiCKO; Founder, American Patients United; National Co-chair, PDA (Progressive Democrats of America)Healthcare Not Warfare campaign; Community organizer, California Nurses Association/National (more...)

The views expressed in this article are the sole responsibility of the author
and do not necessarily reflect those of this website or its editors.

7 Things Poor Voters Want Rich Candidates to Know

loop21

7 Things Poor Voters Want Rich Candidates to Know


What wealthy candidates like Mitt Romney could learn from Dr. King

By Keli Goff
1:06 PM Jan 16th, 2012





When Mitt Romney offered a struggling campaign volunteer all of the money he had on him to help her with an electric bill, the moment stood in stark contrast to the man who dismissed those who have the audacity to raise the issue of economic inequality as champions of class warfare fueled by “envy.” I know there are plenty of cynics who consider the moment the height of campaign trail performance art-cum-pandering. (After all, the incident likely did more to humanize him than millions of dollars worth of campaign ads.)

Call me a sucker, but I consider the moment sincere yet sad. Not just sad for the woman in need but for Romney himself. See I believe that Romney was sincere in his sympathy for the woman’s situation, and in his desire to help her. What’s sad is that he’s so out of touch that he believes that all Americans in her economic situation have a Mitt Romney they can turn to for help, and that those who don’t must be that way through some fault of their own. Furthermore, he’s naïve enough to believe that all wealthy people share the commitment to philanthropy and service that his family does, thereby making additional taxes on people in his income bracket unnecessary to help women like his campaign volunteer.

With that in mind I thought that as we celebrate the life of Dr. Martin Luther King, Jr., a man who once said, “The curse of poverty has no justification in our age,” today would be a good day to correct some of the misconceptions that Mitt Romney and other wealthy candidates seem to hold about economic inequality in America. (Click here to see a list of the wealthiest presidents and presidential candidates.)


1) If you were born wealthy, you have not earned everything you have through “hard work.”

According to a Federal Reserve Study 2 in 5 members of the “1%” inherited money. This is not to say that if you were born into wealth you haven’t worked hard and that you may not have earned some of your possessions, property and money. But you didn’t earn all of it, and in fact probably not most of it. Think of it this way. You ask an investor to give you the seed money to finance your startup. The company may have your name on it and be based on your idea, but that investor deserves a great deal of the credit and share of the profit if your company makes it big. So if you used your parent’s wealth to finance those first real estate successes (Donald Trump) or their connections to land you your first film role (Gwyneth Paltrow), or to ease your first entry into business (Mitt Romney) along with helping to open doors for your foray into politics, (anyone named Kennedy, Bush, and yes Romney), then please don’t try to convince the rest of us that you are “self-made.” You’re not. That’s not your fault. Just like it’s not my fault that I wasn’t born with a silver spoon, fork or any other utensil from Tiffany’s in my mouth. But trying to give the rest of us tips on how to make it and how we can become more financially solvent like you makes you sound—for lack of a better term—like a jackass; an out of touch jackass. Statistically speaking, the two primary ways someone like me is likely to have the greatest shot at joining Mitt Romney’s tax bracket is if I a) win the lottery or B) marry one of Mitt Romney’s sons. And from what I’ve read about the history of blacks in the Mormon faith that’s not likely, but brings me to number 2.

2) If you have married into wealth, you have not earned everything you have through “hard work.”*

See number 1.

(*I acknowledge there may be some truth to the saying “those who marry for money end up paying the rest of their lives,” but I think we can all agree that despite Kobe Bryant’s foibles his wife did not “earn” her riches in the same way that Oprah did.)

3) America is not an “equal playing field.”

I know pronouncements like this drive my conservative friends nuts. Sorry. But don’t take my word for it, just look at the numbers. Startling new data recently confirmed what many of us already knew: that America is one of the least economically mobile countries in the first world. One recently published study (there are several) found that 62 percent of Americans raised in the top fifth of incomes stay in the top two-fifths, while 65 percent born in the bottom fifth remained in the bottom two-fifths. The studies also found that parental education is a disturbingly accurate predictor of one’s lifetime class status. Translation: If your mom and dad are doctors and lawyers with Ivy league degrees and your grandparents are too, your likelihood for remaining in a similar class bracket is high, and the likelihood of those born to grandparents who are sharecroppers remaining in a similar class bracket is equally high.

So a word of advice to conservative candidates and legislators: you’d earn a lot more credibility if you prefaced any brilliant ideas you have for those struggling to make it with, “I know many of you started out without many of the advantages many of us take for granted and I’ll never know what it’s like to walk in your shoes, BUT…”

4) Besides being born rich, or marrying rich, the only other way to really have a shot at significantly improving your class status in America is to be genetically or intellectually extraordinary…and most of us aren’t.

As the studies cited above confirm, hard work is rarely enough to improve upon the financial situation you were born into in America in a truly meaningful way. If you are not born upper middle class, odds are not in your favor that you will end up upper middle class, unless you marry well, win the lottery or hit the genetic lottery. What is the “genetic lottery?” Well if you’re born 7 feet tall and are reasonably coordinated, then you may have a shot at improving your class status in the NBA, or if you are a scientific genius you may become a groundbreaking neurosurgeon like Dr. Ben Carson or if you have the charisma and innate interview capabilities of Oprah you may be given your own talk show. But if you are just a nice person, who works hard and plays by the rules, you may not spend your entire life in abject poverty, but you will most likely spend a lifetime being one medical crisis away from asking Mitt Romney for a handout to keep your lights on.

5) If you are wealthy and have called in a favor, or made a “donation” to get your already wealthy son or daughter a job they don’t need and didn’t earn, or a college admissions slot they didn’t earn, congratulations, you have increased the number of poor Americans.

I know this is hard for some wealthy people to believe, but while you may think your son or daughter getting into Princeton, Harvard, Brown, University of Texas, or whatever alma mater you always dreamed that they would attend, is a matter of life or death—it’s not. Because I’m going to go out on a limb here and speculate that Donald Trump, Jr. and Ivanka Trump probably could have gotten a job working for their father (where they both currently work) whether they attended his alma mater of UPENN or whether they didn’t. (No I’m not alleging that Donald Trump bought his children’s way into UPENN, but let’s not pretend that bearing the name of one of the school’s most famous alums didn’t greatly improve their admission chances.) But you know for whom college admissions and entry-level jobs can be a matter of life or death? Poor people, that’s who. So the next time an elected official says that it is easy for anyone who wants a job to get one—I want him or her to know that’s true. It is easy to get a job--when your dad or mom are elected officials, or wealthy and powerful people who have wealthy and powerful friends who are willing to give out jobs to the relatives of their friends.

6) Most poor people are lazy. WRONG.

This is a tough one for people hell-bent on preaching the “In America anything is possible for those willing to work hard and pull themselves up by their bootstraps” mantra to accept, but it’s the truth. Yes some poor people are lazy. Just like some rich people are lazy. (Reality tv is filled with them or else there would be no “Real Housewives” franchise.) But the majority of bankruptcies are caused by medical bills, not by people sitting around buying flat screens and plotting ways to con the government out of benefits. (It’s worth noting that Ruth Williams, the campaign volunteer Romney helped was plunged into debt by her son’s health problems.)

7) But you are very RIGHT about one thing.

Those of us who aren’t wealthy are envious. VERY envious. We should be. Most wealthy people who are miles ahead of the rest of us started miles ahead the day they were born. Why shouldn’t the rest of us be envious? That doesn’t mean we dislike the wealthy. In fact, some of my best friends are wealthy—and I say that without a trace of sarcasm. But, they are willing to acknowledge that they began their journey miles ahead of most and therefore while some of them may balk at their tax rate, they are extremely generous to those who have less than they do, because they realize, as the saying goes, “But for the grace of God go I.”

It would be nice if more of the privileged demonstrated this level of self-awareness—and not just when a poor person supporting them for president reminds them on the campaign trail that poor people who are doing the right thing, but still struggling to pay their light bills, exist.

Keli Goff is Loop 21's Senior Contributor. Learn more about her at KeliGoff.com

Sunday, January 15, 2012

America’s Real Occupiers

IN THESE TIMES


Denver Public School Superintendent Tom Boasberg. (Image from ednewscolorado.org)

America’s Real Occupiers

Public officials who remove themselves and their families from the community they govern.

BY David Sirota

There really are "Two Americas," as the saying goes—and that's no accident.

Last week, my local twittersphere momentarily erupted with allegations that Denver’s public school superintendent, Tom Boasberg, is sending his kids to a private school that eschews high-stakes testing. Boasberg, an icon of the national movement pushing high-stakes testing and undermining traditional public education, eventually defended himself by insisting that his kids attended that special school only during pre-school and that they now attend a public school. Yet his spokesman admitted that the school is not in Denver but in Boulder, Colo., one of America’s wealthiest enclaves.

Boasberg, you see, refuses to live in the district that he governs. Though having no background in education administration, this longtime telecom executive used his connections to get appointed Denver superintendent, and he now acts like a king. From the confines of his distant castle in Boulder, he issues edicts to his low-income fiefdom–decrees demonizing teachers’ unions, shutting down neighborhood schools over community objections and promoting privately administered charter schools. Meanwhile, he makes sure his own royal family is insulated in a wealthy district that doesn’t experience his destructive policies.

No doubt this is but a microcosmic story in a country whose patrician overlords are regularly conjuring the feudalism of Europe circa the Middle Ages. Today, our mayors deploy police against homeless people and protestors; our governors demand crushing budget cuts from the confines of their taxpayer-funded mansions; our Congress exempts itself from insider-trading laws and provides itself health care benefits denied to others; and our nation’s capital has become one of the world’s wealthiest cities, despite the recession.

Taken together, we see that there really are “Two Americas,” as the saying goes–and that’s no accident. It’s the result of a permanent elite that is removing itself from the rest of the nation. Nowhere is this more obvious than in education–a realm in which this elite physically separates itself from us mere serfs. As the head of one of the country’s largest urban school districts, Boasberg is a perfect example of this–but he is only one example.

The Washington Post, for instance, notes that it has become an unquestioned “tradition among Washington’s power elite”–read: elected officials–to send their kids to the ultra-expensive private school Sidwell Friends. At the same time, many of these officials have backed budget policies that weaken public education.

Outside of Washington, it’s often same story; as just two recent examples, both New Jersey Gov. Chris Christie (R) and Chicago Mayor Rahm Emanuel have championed massive cuts to public education while sending their kids to private school.

In many cases, these aristocrats aren’t even required to publicly explain themselves. (Boasberg, for example, is never hounded by local media about why he refuses to live in Denver.) Worse, on the rare occasions that questions are posed, privacy is the oft-used excuse to not answer, whether it’s Obama defenders dismissing queries about their Sidwell decision, Christie telling a voter his school choices are “none of your business” or Emanuel storming out of a television interview and then citing his “private life” when asked about the issue.

This might be a convincing argument about ordinary citizens’ personal education choices, but it’s an insult coming from public officials. When they remove themselves and their families from a community–but still retain power over that community–they end up acting as foreign occupiers, subjecting us to policies they would never subject their own kin to.

Pretending this is acceptable or just a “private” decision, then, is to tolerate ancient, ruling-class notions that are no longer sustainable in the 21st century. Indeed, if this nation is going to remain a modern republic, it can’t also be a medieval oligarchy–no matter how much America’s elite wants to keep governing from behind the palace walls.

David Sirota, an In These Times senior editor and syndicated columnist, is a bestselling author whose book Back to Our Future: How the 1980s Explain the World We Live In Now—Our Culture, Our Politics, Our Everything was released in March of 2011. Sirota, whose previous books include The Uprising and Hostile Takeover, hosts the morning show on AM760 in Denver. E-mail him at ds@davidsirota.com or follow him on Twitter @davidsirota.

More information about David Sirota

Paul Krugman Marginalizes Modern Monetary Theory (MMT)


Paul Krugman Marginalizes MMT



Paul Krugman does a great job of destroying a strawman and revealing his ignorance of MMT in Deficits and the Printing Press (Somewhat Wonkish) as many commentators point out to him. (It's only "wonkish" because Prof. Krugman doesn't get it.)

Cullen Roche responds with a post at Pragmatic Capitalism that sums it up nicely.


The good news is that Krugman mentions Modern Monetary Theory by name on the #1 economics blog on the net, and it is a truism of public relations and marketing that all publicity is good publicity — and it is even better when it is unsolicited and free. Thank you for the shout out, Prof. Krugman.

For the wonks:

The crux of Krugman's hit piece is this: "I could go on, but you get the point: once we’re no longer in a liquidity trap, running large deficits without access to bond markets is a recipe for very high inflation, perhaps even hyperinflation. And no amount of talk about actual financial flows, about who buys what from whom, can make that point disappear: if you’re going to finance deficits by creating monetary base, someone has to be persuaded to hold the additional base."

Prof. Krugman presupposes "no IOR (interest on reserves)." But the Fed is already paying interest on reserves. Why suppose that if there are excess reserves that the Fed would not pay a support rate (IOR) consistent with the interest rate it targets (FFR), especially if no Treasury securities are draining the excess reserves?

As Anon points out in a comment at The Center of the Universe in this thread:

"IOR is not an option – its mandatory – if there are excess reserves and if the Fed runs a positive fed funds target – i.e. if the Fed wants to tighten at some point in the future. And he’s talking about excess reserves as a result of what he calls “monetizing” the deficit.

"That makes the difference between excess reserves and t-bills immaterial in terms of the interest rate and economic effect.

"He [Krugman] doesn’t seem to understand this.

"The failure to differentiate reserves and currency as distinct monetary components is quite foolish. That’s a trap that all economists who don’t understand the monetary system fall into."

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UPDATE: Prof. Scott Fullwiler tweets:


Another for @NYTkrugman & anyone else interested: Do Not Confuse Solvency with Sustainability

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Warren Mosler responds to Krugman 1 here.

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Prof Bill Mitchell responds to Krugman 1 here and here.

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Rob Parteneau responds to Krugman 1 here.

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Marshall Auerback responds to Krugman 1 here

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ses responds to Krugman 1 here with citations.

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William Allen (traditional economist, convert to MMT) responds to Krugman 1 here.

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hbl responds to Krugman 1 here.

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Canadian BD responds to Krugman 1 here.

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Adam responds to Krugman 1 here. (Ouch)

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Andy Harless respondes to Krugman 1 here.

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Charles Jurcich responds to Krugman 1 here and brings in the job guarantee.

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Here Steve Sherman thinks that Krugman may be responding to a post by Dean Baker, Krugman Is Wrong: The United States Could Not End Up Like Greece.

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obsvr-1 responds to Krugman 1 here. (Proposal for reform)

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Letsgetitdone (Joe Firestone) posts on Krugman 1 at DailyKos:


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Prof. Krugman reacts with another post, dragging Prof. James K. Galbraith into the fray and claiming that deficits can lead to federal insolvency.


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Tom Hickey responds to Krugman 2 here.

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JKH responds to Krugman 2 here.

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beowulf responds to Krugman 2 here.

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Prof. James K. Galbraith comments on Krugman 2 here.

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Marshal Auerback responds to Krugman 2 here.

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Andy Harless responds to Krugman 2 here.

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Ron T. responds to Krugman 2 here.

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Tschaff Reisberg responds to Krugman 2 here.

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John K responds to Krugman 2 here.

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rpiert responds to Krugman 2 here.

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Roger Erickson responds to Krugman 2 here.

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Cullen Roche posts at Pragmatic Capitalism on Krugman 2:


CR: "Unfortunately, his argument is the logical equivalent of debating with someone about the potential decline in oxygen levels in the atmosphere and concluding with the absurd statement that “if the oxygen runs out tomorrow we will all die”. Of course this is true, but one must first explain what will lead to the lack of oxygen and the specific sequence of events. If you fail to do so you have failed to prove a point in the first place….Professor Krugman fails to connect the dots in a rational and logical sequence of events and it entirely discredits his conclusions."

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Letsgetitdone (Joe Firestone) posts on Krugman 2 at DailyKos:


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Steve Randy Waldman posts on Krugman 1 and 2 at Interfluidity. (See the comments there, too)


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BTW, I have tried to select a representative cross-section of the best comments and haven't included every relevant comment, so please don't be disappointed if yours doesn't appear. If Prof. Krugman reads only a few of these comments, I don't see how he can continue to hold his basically monetarist position.

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There's A Difference Between Economic Theory & Fact



THERE’S A DIFFERENCE BETWEEN THEORY & FACT

11 January 2012 by Cullen Roche

* This originally appeared as a comment on Mike Norman’s website regarding this silly Job Guarantee (JG) disagreement among the MMT crowd as a response to questions raised by Tom Hickey.

Tom, you said:

“If Cullen doesn’t write it up as a professional paper fleshing out his argument, no professional economist is going to take his blog comments seriously.”

I’m not in this to validate or invalidate “theories”. I am not an economist and I have zero interest in winning awards or taking credit for MMT (as some MMT economists are clearly self motivated in this regard based on their reactions to my receiving publicity at times).

I am here to offer the public a way to understand modern money and the world we live in. That was the ONLY reason I started pragcap. In 2008 I saw a world in total disarray and entirely misunderstood. Meeting Warren Mosler changed that perspective and the message here at Pragcap to an even greater degree than before as he gave me a unique understanding of inside operations within our monetary system (and I am eternally thankful to him for everything he’s taught me). My goal has always been the same though. To help educate, provide a better understanding and provoke ideas and discussion. I am not trying to solve the world’s problems or fix the politics involved. My only goal is to provide people with a better understanding of the world they live in so they can make better decisions. If they want job guarantees or no government or an end to the Fed or anything else then that’s their right as private citizens to decide. That’s the beauty of this country. You get to decide. My only goal is to help provide people with the understanding that is required to digest information and make better decisions. That’s all.

It is my opinion that the JG is not an essential component of understanding modern money, the economy or anything really. It is not my responsibility to prove MMT wrong and I am not interested in trying to discredit MMT because it would be a self inflicted wound. It is also not my responsibility to publish papers validating positions (though I do so at times). It is my responsibility to stick to what my message has always been and that is offering readers a clear understanding of the world we live in. There are parts of MMT that do that and there are parts that are slapped on as nothing more than policy fixes. The latter is a clear theoretical part. And yes, the JG is ENTIRELY theoretical (which could be ENTIRELY right – I don’t know).

If the MMT economists want to sell MMT and “modern money” as part of a massive government labor program then that’s fine. It’s my opinion that no one in the world needs to understand large government labor programs in order to understand modern money. Instead, I think we should focus on giving the world a better understanding of modern money by focusing on the proven factual pieces of MMT (monetary operations, monopoly supplier function, etc). If we offer policy proposals then that’s fine, but that’s secondary. I would expect the MMT economists to do that and it should be encouraged that they use their expertise in doing so! But the JG is a very clear case of embedding a policy proposal on top of operational aspects of MM(t) – JKH has rightly noted this on several occasions. In this regard, it really is entirely theoretical and I appreciate and understand that the economists have built it this way. But there’s a difference between reality and theory and educators have a responsibility to very specifically differentiate between the two so as to avoid misleading those they are teaching.

I had long been under the impression that there were two components to MMT – the descriptive and the prescriptive. Readers had always been perplexed by the name “Modern Monetary Theory” because what I taught them (by removing the JG) did not appear so theoretical at all. MMT has always been described to me as having a descriptive and the prescriptive component, but it is clear that this is not the case. There is only the “theoretical” under the MMT umbrella. And that’s great. I think it’s a fantastic theory (even though I disagree with parts of it). But there’s a big big difference between the theory and the truth. Parts of MMT are entirely factual (the operational aspects, monopoly supplier, etc) and then there are parts that are entirely theoretical (like the JG). I guess the name alone makes that clear enough (though it never occurred to this idiot)….

In my writing I like to stick to the facts even though I am guilty of veering from that goal at times. What you want to do with those facts is entirely up to you. It is not my job to force you to use that understanding in a certain way even though I might, at times, interject my opinion on policy. But what we need to be very clear about in the future is that MMT is in fact theoretical in its current form. I won’t spend my time shooting down MMT because I respect those involved in it far too much. But I won’t be spending my time selling it to readers as though it’s fact. It is in fact theoretical and I hope to use the parts of it that are factual to further the public’s education.