Pseudo-keynesian winter: a tale from the end of civilization

I am a great fan of shoebox economics - done by amateurs at the feet of the policymakers, smelling their stinky toes, Das Kapital in hand.

Which is why, yesterday, I suddenly thought of a way of explaining to myself the governing class's economic policies for the last thirty to forty years.

The policy has three legs. But calling them legs doesn't quite give one the picture of how they are inter-related; metaphors always have their shortcomings. But bear with me, ladies and germs.

The first leg - let's call it the bond trader's threat - is the moral pressure on governments to cut their deficits. This pressure is asymmetrical: it does not call for governments to return to the tax policies of the immediate post-war years of last century, when corporate and wealth taxes went up. It instead calls for those deficit-driven cuts to be made in "entitlements" - in other words, in public goods and services: education, healthcare, retirement, the environment, and the whole regulatory structure of government.

The second leg - which is dynamically connected to the second one - is for deregulation and privatization. This is a tricky leg. Although it might seem, on the surface, that this is a demand for a return to pre-keynesian economics, it is really caught in the whole Keynesian paradigm of managing demand. Privatization means that public goods, like higher education, increasingly reflect the price system controlled by private entities. De-regulation means, among other things, that not only are markets deregulated, but that the consumer's access to credit is also de-regulated. The total effect of this is to shift public deficits onto individual households. In other words, bondholders who get 2 percent, say, on U.S. bonds are now looking at a market in which mass individual debts can be pooled, with the debts paying anywhere from 5 percent to whatever. Since tax cuts to the wealthy in order to encourage investment usually just result in vast cash reservoirs swirling around, here's the perfect place to put that cash. Thus, the financial sector experiences really incredible growth. From another viewpoint, this growth is cancerous. Just like any good or service, the prices of financial goods should be going vertiginously down: due to the internet and software such as, say, excel spreadsheets, the real cost of financial transactions has deflated over the last thirty years. But the cost of stocks and the various species of shadow finance financial instruments - derivatives and such - keeps booming (before they bust). This is due partly to direct class pressures - the lifting of usury limits, wage stagnation, and the massive increase in laws to administer a punitive regime of debtor surveillance - and partly to the massive influx of money from the state, in terms of tax cuts.

The third leg is cheap goods. This is the analgesic that keeps the working class from feeling the full extent of its pain. As the public goods disappear, a direct hit to the lifestyles and wealth of the working class household, and debt becomes seemingly more available, filling the gap between lifestyle and wage stagnation, the massive trade deficits of those countries that have adhered most closely to the deficit scold-tax break- deregulate and privatize paradigm - become noticeable. They are treated by economists as unexpected outcomes, but of course they are really the results of a policy choice. That choice freezes the inflation of consumer goods, even as life-cycle goods - education, healthcare, housing (and I would add here environmental "goods") inflate wildly.

Interestingly, these three legs are inevitable as long as the paradigm is in place. There's no reform that would make this more bearable. At the same time, the original justification for the Keynesian regime - that it moderates business cycles - becomes a parody. It actually speeds up and aggravates the severity of business cycles, but it removes the hurt of those cycles from the governing classes and Capital and puts it squarely on the working class.

Inevitably, the keynesian compact was eventually going to devolve into a weapon in the class war. And that is what the Great Moderation is all about. So when my child asks me, where were you in the Great Moderation, Daddy, I can at least have the satisfaction of saying, I was being screwed by shitheads, my child. That's about it, cause otherwise, what I have done, and what the working class has done collectively, is hide.