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The markets got a bit spooked today by the unexpected drop in GDP for the final quarter of 2012. But buried in the numbers are signs of a positive transition from a war to a peace economy.

The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses…Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending.

I continue to be very optimistic about the direction of American policy as we emerge from our eight year Interregnum. Imagine if the 11 million undocumented workers emerged from the underground (cash) economy and started paying taxes. What would that do to the actuarial calculations of Social Security and Medicare? Imagine if Lockheed Martin started to manufacture wind turbines instead of fighter jets.

The greatest task of the next ten years will be Economic Conversion, the process of converting from a military economy to a civilian/peace economy. The economist Seymour Melman, who did the most important work on this subject, noted that the task ahead of us will not be easy.

“The problem of conversion from military to civilian work is fundamentally different now from the problem that existed after World War II. At that time, the issue was reconversion; the firms could and did go back to doing the work they had been involved in before the war. They could literally draw the olds sets of blueprints and tools from the shelf and go to work on the old products. At the present time, the bulk of military production is concentrated in industries, firms, or plants that have been specialized for this work, and frequently have no prior history of civilian work”

A larger part of the problem will be that the Military Industrial complex is situated deeply in the Red States, particularly Texas and the Deep South. Alex Bowles has pointed out to me that this could create even more Anti-Obama anger. Any attempt to pacify the South with some sort of Government aid to ease the Conversion, will be met with resistance.

The upshot is the mollifying the GOP will be easier said than done. Their response to the last election (“We’ll just rig the next one”) makes their contempt for both outsiders and democracy explicit. They are becoming, in a very real sense, un-American in that the overarching ideal of Government of, by, and for the people is becoming the focal point for organized rage directed at both the government and the people.

The New York Times is running an amazing series of articles about how corporate America has played city and state governments like a fiddle to extract generous subsidies for locating plants in their areas.

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

Game theory names this a collective action problem. Read more…

A few weeks ago I wrote about the anomie that enveloped me when I attended the Aspen Ideas Festival. The sense that what was taking place in our economy and society was the effect of forces outside our control. The term used for this notion is globalization. So yesterday the New York Times put out a long piece about how through a combination of carrots and sticks we had gotten the Japanese auto manufacturers to put plants in America and hire American workers. The article asked this question.

For years, high-tech executives have argued that the United States cannot compete in making the most popular electronic devices. Companies like Apple, Dell and Hewlett-Packard, which rely on huge Asian factories, assert that many types of manufacturing would be too costly and inefficient in America. Only overseas, they have said, can they find an abundance of educated midlevel engineers, low-wage workers and at-the-ready suppliers.

But the migration of Japanese auto manufacturing to the United States over the last 30 years offers a case study in how the unlikeliest of transformations can unfold. Despite the decline of American car companies, the United States today remains one of the top auto manufacturers and employers in the world. Japanese and other foreign companies account for more than 40 percent of cars built in the United States, employing about 95,000 people directly and hundreds of thousands more among parts suppliers.

I posted the article on my Facebook page and got this rant back from John Papola.

Why should the corrupt crony thugs in DC prevent Americans from trading with other people just because of some stupid line on a map. The “globalization gospel” is called “freedom” and “free exchange” and its the roots of western civilization. Are you seriously proposing mercantilism? The 17th century called. It wants it’s defunct doctrines back.

But my response to John is that his vision of freedom in America is a mirage. In the U.S. those with power use it to insulate themselves from competitive forces by winning favorable tax treatment and other forms of what economists call “rent seeking.” I reject the notion that all of these changes that make it so hard to find jobs for people without college educations, are just the inevitable forces of technological change. Globalization was a choice on the part of capital to weaken the bargaining power of workers by using outsourcing. As the auto “insourcing” model proves, there is no inherent reason why U.S. workers can’t be just as productive as Asian workers. Because the Reagan administration (and every one to follow) made it easy for companies to close down factories and move jobs offshore, the rent seekers triumphed.

The irony of course is that I know John Papola hates rent seeking crony capitalism as much as I do. For a liberal like myself, it is anguishing that both Clinton and Obama have been just as obsequious to the wishes of Wall Street as Reagan, Bush 1 and 2. What we need is a new reform politics that will combine elements of market choice (such as our discussion on school vouchers) with a simple set of regulations that bring the extraordinary power of capital to heel. We will still need a smart government to build the roads, run the police and fire departments and provide a social safety net. My guess is that the Democrats are less in the bag to the 1% than the Republicans and so they are better positioned to be the messengers of reform. As I have said before, cashiering Tim Geithner and hiring Joe Stiglitz would be a good start for Obama’s second term.

We have been talking here for a while about the perils of automation. Yesterday a “rogue computer algorithm” almost crashed the whole stock market.

“The machines have taken over, right?” said Patrick Healy, the chief executive of the Issuer Advisory Group, a capital markets consulting firm. “When events like this happen they just reaffirm that these aren’t investors, these are traders.”

The errant trades began hitting exchanges almost as soon as the opening bell rang and came from a single New Jersey broker that specializes in computer-driven trading, the Knight Capital Group. Shares of more than 100 companies, including big names like Alcoa, Citigroup and Ford suddenly spiked up or down.

One has to ask the question of whether these “robots gone wild” are distorting the whole purpose of the capital markets to such an extent that we have to re-imagine the stock market. The first and most obvious move is to treat short term capital gains (stocks held less than one year) as ordinary income for tax purposes. I believe this would slow down the High Frequency trading, which has turned Wall Street into a casino that is unfriendly for long term investors.

Obviously the implications of “lights out algorithms” in many other fields are equally troubling. I have mentioned how ad networks are using algorithms to place ads on Pirate Networks in a way the advertiser never intended. Of course all of this bad conduct could be stopped. We just need to wake up before the computers start really causing havoc.

When my flight from Los Angeles touched down in Aspen, Colorado I counted 80 private jets parked at the airport. I had come for the annual Aspen Ideas Festival and what follows is a critique written with some affection for the institution but with the full knowledge that I may never be invited to speak there.

Aspen aspires to be an American Davos–a meeting in the mountains of top government policy makers, important pundits, authors and academics; all interacting with the corporate elite. Thus the enormous private jet fleet. It seemed to this first time attendee that the whole program was built on three suppositions.

1. That the economics of globalization are as inevitable as water flowing downhill on Frying Pan River.
2. That technological innovation is the salvation of society.
3. That American politics are so polarized that nothing can be accomplished at a national level.

These assumptions lead to a kind of philosophy of inevitability. Leadership is reduced to management and so problems really can’t be solved, they can just be managed. The pundits, politicians and managers on the stages of Aspen are there to tell us they know how to manage through crisis. This leaves the audience feeling as if there are no choices left other than the personal choice between eating steak or fish, wearing khakis or Levis, buying a Gulfstream or a Bombardier corporate jet. The notion of the political choice of fundamentally changing our society seems to be in the realm of the Higgs Particle. Does such a choice really exist and if so, how would we know?

On the stage the pundit interviewers were obsequiously polite with the politicians. Gillian Tett of the Financial Times never bothered to ask Larry Summers if he regretted eliminating Glass-Steagel at the behest of Citibank’s Sandy Weill. Charlie Rose sat mute as Mitch Daniels poured forth Romney talking points about how government regulation inevitably inhibits growth and how Obamacare was a tax on all Americans. The Atlantic’s David Bradley never challenged Pervez Musharraf’s assertion that military Coups were necessary to save Pakistan’s fragile and corrupt democracy. Tom Friedman allowed Ehud Barak to ramble on for minutes on why Iran’s joining the nuclear club would be different than any other previous nuclear aspirant, despite convincing evidence to the contrary by Kenneth Waltz in this month’s Foreign Affairs. Read more…

I want to call the attention of this community to a wonderful post from David Lowery (of the band Cracker) that has been getting a huge amount of attention in the last few days. It was written to a young music intern at NPR’s All Songs Considered who confessed on the air that she had onlyy purchased 15 songs out of the 11,000 in her music collection. Here is a small piece of the article, but I really hope you will read the whole post.

What the corporate backed Free Culture movement is asking us to do is analogous to changing our morality and principles to allow the equivalent of looting. Say there is a neighborhood in your local big city. Let’s call it The ‘Net. In this neighborhood there are record stores. Because of some antiquated laws, The ‘Net was never assigned a police force. So in this neighborhood people simply loot all the products from the shelves of the record store. People know it’s wrong, but they do it because they know they will rarely be punished for doing so. What the commercial Free Culture movement (see the “hybrid economy”) is saying is that instead of putting a police force in this neighborhood we should simply change our values and morality to accept this behavior. We should change our morality and ethics to accept looting because it is simply possible to get away with it.  And nothing says freedom like getting away with it, right?

But it’s worse than that. It turns out that Verizon, AT&T, Charter etc etc are charging a toll to get into this neighborhood to get the free stuff. Further, companies like Google are selling maps (search results) that tell you where the stuff is that you want to loot. Companies like Megavideo are charging for a high speed looting service (premium accounts for faster downloads). Google is also selling ads in this neighborhood and sharing the revenue with everyone except the people who make the stuff being looted. Further, in order to loot you need to have a $1,000 dollar laptop, a $500 dollar iPhone or $400 Samsumg tablet. It turns out the supposedly “free” stuff really isn’t free. In fact it’s an expensive way to get “free” music. (Like most claimed “disruptive innovations”it turns out expensive subsidies exist elsewhere.) Companies are actually making money from this looting activity. These companies only make money if you change your principles and morality! And none of that money goes to the artists!

I have been debating this issue for the past two months with young digerati like Alexis Ohanian of Reddit and Mike Masnick of Techdirt. Somehow I feel like the conversation is changing and respect for the creative artist’s rights is coming back. Let’s hope so.

As many of you know, David Brooks is one of the few conservative columnists that I regard highly. But occasionally he writes something that is so boneheaded, it makes you wonder. Such a column was his defense of Mitt Romney and the Private Equity Business this week. Here is Brooks.

Forty years ago, corporate America was bloated, sluggish and losing ground to competitors in Japan and beyond. But then something astonishing happened. Financiers, private equity firms and bare-knuckled corporate executives initiated a series of reforms and transformations.

The process was brutal and involved streamlining and layoffs. But, at the end of it, American businesses emerged leaner, quicker and more efficient.

This version of the 1980′s could have been written by one the hundreds of Lobbyists deployed by the Private Equity Industry in Washington. That was probably where Brooks “researched” his story.  The real history of the era is quite different.The 1980′s was the start of the financialization of American business, with it’s wave of complex financial instruments that only a quantum math scholar could decipher. Writing after the Great Depression of the 1930’s, the economist Joseph Schumpeter spoke of “vanishing investment opportunities” by which he meant that the enormous growth of productivity, combined with the oligopolistic pricing structures of American capitalism generated a growing surplus which went beyond the capacity of system to absorb it. As I researched this post I began to wonder if Schumpeter’s concern still applied to the American economy and certainly Ben Bernanke in a 2005 speech called “The Global Saving Glut”, seemed to believe so. American capitalism had always been a boom and bust cycle as an historian of the Panics of 1837, 1857, 1869, 1873, 1893, 1903, 1907, and 1929 would know. However, by the late 1960’s economists had come to believe that fiscal and monetary policy had eliminated the extremes of the business cycle. But by the mid 1970’s, after the Arab oil embargo, the American economy began to fall into a condition known as Stagflation—a brutal combination of business stagnation and unemployment mixed with the inflation brought on by rapidly rising energy prices. Read more…

The unemployment rate clicked down last month while a relatively anemic 150,000 jobs were added. What’s going on? As I have been saying for months, the leading edge of Baby Boomer retirement is kicking in and this is a good thing.

But a number of economists are arguing that the recession is distracting people from the real story — long-run demographic trends that have nothing to do with the current economy. Baby boomers are starting to retire en masse, which means that there are fewer eligible American workers.

Demographics have always played a big role in the rise and fall of the labor force. Between 1960 and 2000, the labor force in the United States surged from 59 percent to a peak of 67.3 percent. That was largely due to the fact that more women were entering the labor force while improvements in health and information technology allowed Americans to work more years.

But since 2000, the labor force rate has been steadily declining as the baby-boom generation has been retiring. Because of this, the Federal Reserve Bank of Chicago expects the labor force participation rate to be lower in 2020 than it is today, regardless of how well the economy does.

In a March report titled “Dispelling an Urban Legend,” Dean Maki, an economist at Barclays Capital, found that demographics accounted for a majority of the drop in the participation rate since 2002.

Every year, for the foreseeable future, 3.5 million boomers will retire. Thus, the 300,000 people who left the workforce last month is about on track with that figure. Mitt Romney can rattle on about how horrible this is, but he’s just wrong. If you have worked a lifetime and have a decent pension, you will retire when you get a chance.

This brings us to the real unemployment crisis. Read more…

You owe it to yourself to watch the new Frontline two part special, Money, Power and Wall Street. It is as fine an understanding of where we are and how we got here as anything in our media system today. Part Two comes on next week, but already the major themes are becoming clear.

• Complexity-No one except the “Quants” (the mathematical geniuses in the Big Investment Banks) who designed the Credit Default Swaps that grew to a $50 Trillion market in 8 years, knew how the securities operated or how risky they really were.
• Transparency-The only reason the spreads were so big on the CDS market was that it was a totally Dark Market. There was no transparency. No one could tell the real values of the securities.
• The Committee to Save the World-Rubin, Summers, Paulson, Blankfein, Dimon and Geithner were all part of a club that was going to make sure that none of their members would have to take a haircut on all the crap they owned. The Democrats are just as guilty as the Republicans that this happened.

If Obama’s second term looks like Teddy Roosevelt’s second term and he turns into the trust buster populist President, then eventually this wrong doing will be punished. Until then, watch this show and get really pissed off.

Sabu

About a year ago I was at the house of my friend David Fanning on the Massachusetts coast when a call came in that messed up our weekend plans. David has been the Executive Producer of PBS’s flagship show Frontline for 25 years. He has fearlessly told truth to power, despite all the possible reverberations in Congress or elsewhere and the fragile funding of PBS. The call came from his webmaster who said that the whole Frontline website had been destroyed by a hacker collective called Lulzsec. Lulzsec and their leader, Sabu had been outraged by a frontline documentary on Julian Assange and had vowed revenge. I had seen the show and found it to be very evenhanded, but Sabu and his friends objected to a passage in which Julian Assange’s tactics were questioned. When Assange first gave the raw intelligence cables from the State Department, all of the names of the local informants in Iraq, Afghanistan and elsewhere were in the docs. The editors of the Guardian and the New York Times insisted on redacting the names of the local informants so they wouldn’t be killed for helping the Americans. Assange insisted the names stay in and started dumping the raw files out on Wikileaks. That anyone should even question Assange was too much for Lulzsec and so they waged cyberwar on Frontline. They didn’t just bring down the website, they destroyed it and all the archives. It took David Fanning weeks and a lot of money to restore the site. Read more…