The Wall Street Journal’s most popular article today was an editorial by one Professor Michael J. Boskin entitled, “Get Ready for a 70% Marginal Tax Rate,” and it was a doozy. It hearkened back to bygone days at university, when we carelessly tossed haphazardly written bullshit under the professor’s door a minute after the deadline, filled with neat little tricks and techniques designed to give the appearance of substance to whatever flimsy excuse for an argument we had to present that week.

Maybe it’s because Boskin’s article reads like a sophomore homework assignment. “First, as college students learn in Econ 101, higher marginal rates cause real economic harm,” he tells us. (I guess they don’t teach history students the same thing.) Good, we’ve established an axiom. But Professor Boskin, how can we tell?

The combined marginal rate from all taxes is a vital metric, since it heavily influences incentives in the economy—workers and employers, savers and investors base decisions on after-tax returns.

So, the metric for how much higher marginal tax rates are affecting the economy is… the combined marginal rate? Leaving aside the circular logic for the moment, questions arise: how are these tax rates combined, and what is a marginal tax rate, anyway?

The current top federal rate of 35% is scheduled to rise to 39.6% in 2013 (plus one-to-two points from the phase-out of itemized deductions for singles making above $200,000 and couples earning above $250,000). The payroll tax is 12.4% for Social Security (capped at $106,000), and 2.9% for Medicare (no income cap). While the payroll tax is theoretically split between employers and employees, the employers’ share is ultimately shifted to workers in the form of lower wages.

Later, he gives us a sample question, assuming taxes will be broadly increased across the board:

It would be a huge mistake to imagine that the cumulative, cascading burden of many tax rates on the same income will leave the middle class untouched. Take a teacher in California earning $60,000. A current federal rate of 25%, a 9.5% California rate, and 15.3% payroll tax yield a combined income tax rate of 45%.

How does that work? Well, I got out a calculator (you can, too! it’s interactive!) and checked the professor’s math:

60,000×(1−(.095+(.153÷2)) = 49,710

49,710÷60,000 = 82%, or 18% tax rate before federal taxes

Federal taxes take 25% off the rest, leaving 62% of 60,000;

100-62 = a 38% effective tax rate.

How did he get to 45%, I hear you cry? Well, 60,000×(1-(.095+.153))×.75 ends up being a 43.5% effective rate, which is 45% if you round up to the nearest odd number, for some reason. But that would mean Boskin is counting the full payroll tax, half of which is paid by the employer, entirely as lost income in terms of the total tax bill. Why, by those standards, the teacher is actually making $64,590 a year (instead of $60,000 as stated). Also, our teacher takes no deductions whatsoever.

With failures in math and logic, the bigger problem lies in the fact that nowhere does Boskin say what “marginal” tax rates actually are and how they might differ from the other tax rates he yammers on about throughout the piece. Marginal taxes are those paid on the portion of income above a series of cutoffs. So, for example, California’s citizens face a haunting marginal tax rate (on wages only, not capital gains) of 44.1% including state and federal taxes; but that’s the most anyone can pay in taxes anywhere in the state (barring property, sales and other sin taxes, of course). Now I bet you’re wondering, how many people actually pay that rate? Well, here’s a look at income inequality in the United States:

The bottom 99% receive between 76-79% of the wages (which is what we’re talking about here) and the same source as the graph above says that in “9 out of 10 households — income [is] below $104,696” and that the average income for these bottom 90% is $30,374 (which includes capital gains). By smoothly transitioning from the injustice of taxing the absolute richest people in the country–a.k.a. the “marginal tax rate”–to the inflated woes of a poor beleaguered California public servant (who is making, one might point out, just about twice the average for the bottom-90% bracket) and threatening Wall Street Journal readers with a projected 70% marginal rate on wages, Boskin has all the bluster he needs to distract from the argument’s essential flaws. One that jumps out at me is the following paragraph:

Nobody—rich, middle-income or poor—can afford to have the economy so burdened. Higher tax rates are the major reason why European per-capita income, according to the Organization for Economic Cooperation and Development, is about 30% lower than in the United States—a permanent difference many times the temporary decline in the recent recession and anemic recovery.

Besides the intentionally misleading wording that leaves the reader to decide whether the OECD specifically blames higher tax rates in Europe for the comparative difference in per-capita income with the U.S., or whether they just operate a website that features statistics for the whole of the European Union (or maybe even all of Europe as a continent), the truth is that the rich can be so burdened. Not only can they be so burdened, but the idea that lower taxes on the extremely wealthy somehow translate into economic benefit for the rest of the economy is flat wrong. You can see exactly how flat I mean:

Source: Congressional Budget Office, Average Federal Taxes by Income Group, “Average After-Tax Household Income,” June, 2010.

You see, no matter what the after-tax income of the top marginal earners, since 1979, it hasn’t made one lick of difference in real take-home pay for the rest of us. On the other hand, the wealthiest 5% now make what the wealthiest 1% used to make way back then, and the top 1% themselves are taking in money on what, to the rest of us, looks like a vastly distorted curve.

1979, it turns out, was not only the year Reagan began to return our country to greatness by running for president, but also the year average wages basically stopped growing. Here’s the best part. Baskin acknowledges this problem, and then waves it away as if trying to swat a persistent mosquito:

Some argue the U.S. economy can easily bear higher pre-Reagan tax rates. They point to the 1930s-1950s, when top marginal rates were between 79% and 94%, or the Carter-era 1970s, when the top rate was about 70%. But those rates applied to a much smaller fraction of taxpayers and kicked in at much higher income levels relative to today.

There were also greater opportunities for sheltering income from the income tax. The lower marginal tax rates in the 1980s led to the best quarter-century of economic performance in American history. Large increases in tax rates are a recipe for economic stagnation, socioeconomic ossification, and the loss of American global competitiveness and leadership.

Back to the history books: in the 50′s and 60′s, when we were doing the exact opposite of “economic stagnation, socioeconomic ossification, and the loss of American global competitiveness and leadership,” marginal tax rates were between 94% and 70%. Not to mention the entire article is a long strawman directed at imagined increases in taxation connected to the weight of our deficit, $1 trillion of which were awarded as tax breaks to the wealthy in the last 10 years–and look how well that turned out.

So Boskin fudges the facts and the figures and the history and drips a little Milton Friedman blood on the altar of no-taxes. Who is this guy, anyway? Only last year, Boskin issued a screed on the same WSJ editorial page savaging the totalitarian impulse to destroy the truth with faulty numbers:

Politicians and scientists who don’t like what their data show lately have simply taken to changing the numbers. They believe that their end—socialism, global climate regulation, health-care legislation, repudiating debt commitments, la gloire française—justifies throwing out even minimum standards of accuracy. It appears that no numbers are immune: not GDP, not inflation, not budget, not job or cost estimates, and certainly not temperature. A CEO or CFO issuing such massaged numbers would land in jail.

Well, at least his motives are purely scientific–Boskin is, after all, a humble Stanford economics professor. It’s not like he’s in that rareified top echelon of earners who are actually paying the top marginal tax rate, he’s just a neoclassical economist with a real ideological fervor, right? Wrong.

Boskin happens to be a member of Exxon Mobil’s board of directors and has been for over 15 years. He also sits on the boards of Oracle, Japan’s Shinsei Bank, and European telecom giant Vodafone. He also happens to be the Friedman chair and a fellow at conservative think-tank The Hoover Institution, named after one of America’s favorite presidents (definitely in the top 100). So, this guy knows a thing or two about corporate number-crunching. And, history!

In Argentina, President Néstor Kirchner didn’t like the political and budget hits from high inflation. After a politicized personnel purge in 2002, he changed the inflation measures. Conveniently, the new numbers showed lower inflation and therefore lower interest payments on the government’s inflation-linked bonds. Investor and public confidence in the objectivity of the inflation statistics evaporated. His wife and successor Cristina Kirchner is now trying to grab the central bank’s reserves to pay for the country’s debt.

Most interestingly, Boskin was once head of the Boskin Commission, which convinced the government that… here, I’ll just let Wikipedia explain, it’s easier:

Its final report, titled “Toward A More Accurate Measure Of The Cost Of Living” and issued on December 4, 1996, concluded that the CPI [Consumer Price Index] overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996.

The report was important because inflation, as calculated by the Bureau of Labor Statistics, is used to index the annual payment increases in Social Security and other retirement and compensation programs. This implied that the federal budget had increased by more than it should have, and that projections of future budget deficits were too large. The original report calculated that the overstatement of inflation would add $148 billion to the deficit and $691 billion to the national debt by 2006.

I guess Stanford’s Irony Department is really great.

So the President unveiled his health plan(s) to what I thought was an incredible display of bravery on the Republicans’ part, and I’m jealous. I remember what it felt like to torture the substitute teacher from the back of class, yelling out “you lie!” and holding up signs and so forth. These people are really exploring new boundaries in civil discourse. Talk about exercising their liberties—if Joe Wilson had been Cynthia McKinney, they’d have dragged him out of the Capitol in handcuffs. Often behavior is perceived in ways that have more to do with the perpetrator than the crime.

If the Democrats had been as vehement over the plan to invade Iraq as the Republicans are about health care reform, we’d never have gone to war. But then again, criticizing the President used to be treasonous merely by virtue of the office; now it seems like a lot of plain ol’ folks out there think Obama is committing treason merely by being the President.

So health care reform will be a valiant and pointless struggle, because the Democrats don’t need Republican support to pass the bill. In fact, the President ought to say to those Blue Dogs who think they’ll be vulnerable in the coming elections, “vote against it if you think your constituents won’t like getting health care, run as a maverick and see how far it gets you.”

And so, of course, a conservative Democrat comes out with a plan that does not include the public option, and the left is howling because it doesn’t go far enough while the right howls about the government taking over healthcare. At least we have achieved one great accomplishment already: making sure no one can ever propose a single-payer option ever again. It worked! Hooray! Idiots.

Let’s be clear. This is not about bringing down “costs.” I get sick to my stomach whenever people talk about the need to control healthcare costs, because if the problem were costs, the whole debate would be over already. The crisis is not about healthcare costs. It’s about healthcare prices. Medicare costs aren’t what’s bankrupting Americans, it’s the profit margins collected by for-profit medical care. When the government runs the plan, prices and costs are roughly equivalent—about 2-3% off. When a corporation runs health care, the prices are whatever they can get you to pay and the costs are as little as they can spend. The greater the gap, the more money the corporation and its employees make, typically about 30% (i.e., a gap 10-15 times larger than government-run healthcare).

Obama’s common-sense rules about requiring insurance companies to behave like human beings are great, but it will end up increasing prices unless there is a real public option. Insurers make money by eliminating risks; when it comes to healthcare, that means eliminating people from coverage. “But won’t insurance companies make more money because now they’ll be insuring tens of millions more people?” Not if those are the people who they have very carefully figured out are going to end up costing them money. Healthcare is expensive now and isn’t going to get any cheaper any time soon, no matter how much “cost-cutting” we engage in. If the government’s plans end up offsetting the losses by insurance companies who must now insure unprofitable patients, we’ll be lucky, but we all know that no matter what happens, prices for healthcare consumers will go up.

If you want a glimpse into the minds of the people you trust to run your healthcare, you should be watching the debate play out on CNBC or Fox Business Channel. There, it’s the poor beleagured insurance companies that are the victims, only trying to protect themselves from vicious, lying packs of diseased hustlers who sign up for insurance knowing that they have a preexisting condition. Insurance prices are going to go through the roof (just like they did in Massachussetts, where Romney instituted mandatory coverage) and we’re all going to get screwed, all because Obama wanted to make nice with people whose votes he does not actually need. Inelastic markets don’t work the same way elastic ones do, and nobody shops around for healthcare providers after their heart attack.

Repeat after me: a corporation cannot take the Hippocratic oath. Would you take your healthcare from someone who is barred from taking the Hippocratic oath? I’d rather not, entrez-nous, because it means that by definition they don’t have my best interests at heart. The incentives are misaligned; which is no surprise considering that we are the only Western nation that has an “employer-pays” system. I mean, sure, employer-pays would be a fine idea, if your employers were prohibited from firing you. But they’re not. These health plans were introduced as a substitute for wages in the postwar boom period, but now it’s clear that companies are no longer reaping any benefits from running their workers’ health insurance plans. And now we’ve gotten to the point where one sixth of America’s economy is holding the other five ransom.

If you want to make a meaningful compromise—that is, with the insurance and healthcare companies directly, as opposed to their stooges in Congress—take a page from the President’s playbook when dealing with a real sensitive issue; federally-funded abortions. With characteristic subtlety and nuance, Obama flat out said we weren’t ever going to cover abortions. Well, where does that leave people who need abortions? At the mercy of the market, I suppose, and that’s the idea I want to examine.

If the healthcare industry simply cannot bear to compete with government-run healthcare, it shouldn’t have to. Instead of including a para-governmental “public plan” in addition to the panoply of existing government health plans and having it compete with private health insurance, the government ought to assume control of some parts of healthcare ought right, and let private insurers compete for others as long as they meet federal guidelines.

I say this because as I watched the President chicken out on abortion, it occured to me that I feel the same way about New Age “medicine” as I suspect pro-life conservatives feel about Planned Parenthood. The thought of federal dollars going to fund acupuncture or healing crystal treatments makes me, well, sick. At the same time, if you listen to health care reform opponents, America has the best system in the world because everybody’s getting Lasik^TM surgery nowadays.

So, here’s my proposal: the government should cover all catastrophic illnesses and emergencies (like they do now anyway in ERs across the country), all surgeries and medications. Private insurers, coops, sewing circles, witch doctors and other HMOs would compete to cover doctors visits, wellness, testing and preventative care, but most importantly, all elective surgeries, all ‘non-traditional’ medicine, all vitamin supplements, placebos, palm readings, gender reassignments, urinalyses and tattoo removals. It’s not exactly single-payer, but it is unlike it enough to qualify as “unique,” which is much more important to politicians than whether or not it works.

Usually I talk about politics here, with slight detours into science or arts or things like that, but on the sixth anniversary of Casual Asides, I’ve decided to turn to the foundational element of this blog: technology—specifically, the World Wide Web. Six years is a long time on the Internet, and even longer in the blogosphere. Allow me to quote my first blog post:

I’ve had a homepage since 1995. When I was in high school and the Internet was so new and all, I spent a lot of time on my web page. Eventually, the Internet became my trade, and I stopped updating my web pages in favor of paid work.

But lately, I’ve been clicking around the blogosphere, which has become the most interesting web phenomenon in recent years. It reminds me of the old Internet, which was about interacting with people and greater access to information, rather than the new Internet, which is about figuring out new ways to send you advertisements for toner cartridges and porn.

So, what have I learned in the past 6 years? Lots of things, usually in the extremely laborious researching of almost 290-odd posts. I can’t tell you how many spreadsheets I’ve made or hours spent researching a point which I ultimately had to edit out of the piece because my assertions ended up being unfounded (which is just fancy talk for me almost saying something which was dead wrong). I also have pages and pages of stuff left unfinished, some of it years old. But today’s topic is not me: it’s the Internet.

The phrase “Web 2.0″ was coined in 2004, according to Tim O’Reilly:

The concept of “Web 2.0″ began with a conference brainstorming session between O’Reilly and MediaLive International. Dale Dougherty, web pioneer and O’Reilly VP, noted that far from having “crashed”, the web was more important than ever, with exciting new applications and sites popping up with surprising regularity. What’s more, the companies that had survived the collapse seemed to have some things in common. Could it be that the dot-com collapse marked some kind of turning point for the web, such that a call to action such as “Web 2.0″ might make sense? We agreed that it did, and so the Web 2.0 Conference was born.

So, in the wake of the collapse of the Web 2.0 economy (which was suspiciously like the Web 1.0 economy with slightly less money), I present to you:

Rules for Web 2.1

Information wants to be free. Charging for content is so 2004.

You can’t patent a business model. This is merely a legal reality, but an important point, considering…

Too much venture capital is killing revenues. As a corollary to the above point, the problem is that at the point where you want to monetize a free service and/or the lack of available funding for R & D becomes an issue, there will inevitably arise a competing site on the upside of a financing curve. This is particularly a problem because…

Customers are not generally loyal in the long term. The Web 2.0 model is that you come up with a great idea, turn it into a free site, create a huge following, and then drive your user base away by screwing up the site. The exact way you screw up a site may vary, but it always comes down to asserting ownership of the space you’ve created in a way that lessens the value of the product. Sometimes it’s your users themselves who destroy the service by trying to monetize it by spamming everyone else who uses the site. Which brings up another important point…

Advertising is bullshit. Truly a victim of its own success, the more successful advertising has become, the less successful it is. Continuing the theme of information technology being too powerful for its own commercial good, the web came with revolutionary metrics; the problem is that it exposed exactly how ineffective advertising can be. I watched click-through rates fall from 5% the year the first banner was introduced to 2.5% the next and so forth, arithmetically. In the old days (of the brown-shoes), a company paid an advertising firm to sell the company’s product to the consumer and the advertising campaign to the contracting firm; you could never accurately gauge how effective an ad campaign was. That inefficiency in data gathering meant that it might have been the ad campaign that boosted or cratered sales, but you couldn’t tell with any certainty. Now you know exactly how few people make the full trip from advertisement to virtual cash register.

You don’t make money on data, you make money on relationships. Information may want to be free, but trust can be earned—or bought. It can also be betrayed (see above).

Data is portable, presentation isn’t. Data is becoming platform independent. Many people apparently read this blog via bloglines or rss. All that CSS and graphic design for naught! I shed a tear, I really do, but that’s the trend away from the problems of ownership described above. People want the steak, not the parsley.

Brace yourself for perfecting competition. Have you noticed a theme here? It’s that information technology is perfecting marketplaces too fast for firms to adjust while maintaining their profits. In prefect competition, profits are always driven to near- or at-zero. Profit requires monopolization.

Keep it simple, stupid. That’s why this post is so (relatively) short.

Next time I’ll be talking about Web 2.2; after that, Web 3.0. Stay tuned.

A few years ago, I bet a friend that the Dow Jones Industrial Average, an index of the leading American companies’ stock prices and one of the most celebrated economic indicators on Wall Street, would dip below 10,000 ‘points’ as a result of the oncoming credit crisis. Today I called him at work and said, “I won! Everybody else loses.”

I have steadfastly maintained that the American economy was overdue for a systemic, catastrophic collapse for many years now; and lately I have been fielding a lot of calls asking me what I think about the bailouts and the situation on Wall Street in general. My response, finely honed over the past two weeks, is now this:

It is clearly irresponsible not to pass the bailout. It remains to be seen, however, whether it was responsible to pass the bailout at all.

The bailout, a curious piece of legislation by all accounts, is the focus of the most confused ideological debate in American history. Is it socialism? Is it crony capitalism? Is it necessary? Will it work? The answers to these questions may be found in the answer to a simpler one: where is all this money going?

I bristle when people call the bailout bill socialism, and the reasoning is thus: when the government seizes private assets and then controls the means of production in the name of the people, that’s socialism. When the government seizes private assets and then hands the control of the means of production over to private entities, that’s “national” socialism, otherwise known as fascism. As Mussolini once said, “Fascism should more properly be called corporatism because it is the merger of state and corporate power.” The bailout, with its new provisions for government ownership of companies in exchange for federal purchasing of “toxic assets,” is a step in the right direction, but as any real socialist will tell you, the bailout plan is the furthest thing from populism or economic justice.

For those of you wondering how much further we have to fall, consider that more than three-quarters of subprime borrowers are still paying their mortgages on time. Watch for that number to continue to decline as the economy tanks. As I have mentioned here before, the three major causes of bankruptcy are job loss, medical problems, and divorce—and we’re not even talking about people who can’t make their adjustable mortgage rate payments because of hidden surcharges and “balloon payments.”

The bailout plan, as we have seen today, does not and cannot address the fundamental problems with the international market system. In the shell-game of capitalism where all banks are bankrupt by definition and the world’s largest firms still borrow cash in the short term to make payroll, the vaunted “rescue plan” is really just the equivalent of buying a three-card monte player an extra card. So how did we get here, and where are we going with all of this? And who, exactly, is to blame?

Faced with the collapse of the religion of deregulation, conservatives sought all kinds of villains in order to make sense of the chaos in a way that preserves their core beliefs. Blaming the victim (particularly minorities) has become the order of the day for the lassez-faire capitalist crowd. Ta-Nehisi Coates, blogging at The Atlantic, calls the narrative “blame the Negroes,” and that’s a pretty apt description. As far as I’m concerned, if we’re going to start blaming the victim, I would prefer to look at the 51% of Americans who own stock. But seeking blame is a convenient way to ignore the systemic problems we have created with late capitalism’s latest incarnation. When you look at trillions of dollars of “value” lost in a single trading day on Wall Street, you have to wonder whether any of that money was there in the first place, or whether the value of corporate assets across the board were inflated for the sake of balance sheets (as they were at companies like Enron, WorldCom, GlobalCrossing, Bear Stearns, AIG, Lehman Brothers, Adelphia Communications, Bristol-Myers Squibb, CMS Energy, Duke Energy, Dynegy, El Paso Corp., Homestore.com, KMart, Merck, Mirant, Nicor, Peregrine Systems, Qwest, Reliant,, Xerox, Refco, and the Italian company Parmalat, to name a few who have already been caught).

At the same time, there’s a growing undercurrent in business media which seeks to shift all the blame on lax regulators, like the following missive from Gil Schwartz’s Fortune magazine blog:

No, it’s not the fat cats who profited, or the weasels who sold the same bridge over and over again, or even the realtors who squeezed every last bit of juice out of the blood orange that was offered to them. These are all shallow, self-interested, slightly sleazy, ambitious, avaricious, mendacious forces that are DESIGNED to do what they did: Get away with whatever they could. Make the most money. Figure out rationalizations to make it all sound good. So you can’t blame the intellectual courtesans in academia, the press or the research departments of now defunct institutions who helped them do that either, no matter how tempting it is to do so. It’s the guys who were supposed to watch this sorry bunch and prevent them from taking over the funny farm. They’re the ones to blame. How simple do I have to make it?

(As you regular readers know, people who try to make things simple are the enemy of this blog.)

Nuremburg defenses and financial death-bed conversions aside, the question remains—what the hell is going on in the American marketplace?

We are now seeing the “destruction” of the value contained in stock price rise since the “economic recovery” of 2003. What nobody wants to admit is that none of this illusory value was there in the first place. The reduction in the capital gains tax led, among other things, to skyward-spiralling executive compensation (much of it in illegally back-dated stock-options—e.g., Apple, United Health, Comverse Technologies) and more generally, a single-minded focus on stock price. Even the implementation of Bush-era regulations in the wake of the Enron collapse, namely the Sarbanes-Oxley Act which aimed to curb corporate mismanagement by threatening corporate board memebrs with jail time, ended up doing nothing but increasing their salaries. Focus remained on artificially inflating the stock prices of publicly-held companies.

The financial crisis that has so far characterized the 21st century has its roots in 20th, as one might imagine. There are, in my humbly vindicated opinion, four key interconnected reasons why Wall Street and the international financial system is crumbling (said points are in boldface):

First of all, for the last 15 years, there has been an ongoing vicious class war in America. Guess what—rich people won! Poor people can’t afford mortgages! Congratulations. The underlying assumption of the class war, of course, was that Wall Street had successfully uncoupled itself from Main Street, so that the pains of the working class were good for business, or at least irrelevant to stock prices. The regressive tax system of the Bush administration, the dismantling of public services, the reigning in of non-defense related spending, capital gains tax reductions and so forth were all part of that bipartisan war on the poor. Notice that when poor people are suffering, nobody cares because it’s that class’ systemic role to bear economic pain; when rich people start suffering, you know the system is breaking down. The middle and upper classes succeeded in burying American workers in a deep dark hole. The only problem is, the rich stand on the backs of the poor, so now everybody’s in the hole. You can see a fine graphic representation of this phenomenon in the chart below depicting productivity vs. real wages, which uncouple themselves as soon as George W. Bush took office in 2001. The result of this warfare was the destruction of the ability of working class people to contribute to the economy in a positive way (more about that in a few paragraphs).

(You can also read my August 2007 post “The Rotting Corpse of King Croesus“, where my argument here was in its relative infancy.)

A parallel but much more storied aspect of the ideological battle in Washington, and the second horseman of the financial apocalypse, was the campaign to destroy the legacy of the New Deal, specifically the sixty year war of attrition against the Glass-Steagall Act, which was decisively defeated by Sandy Weill of Travelers’ Group and his pals on both sides of the aisle in 1997. The financial instrument industry, which is at the center of the current collapse, was nurtured and fed by this battle. Rich people have been fighting Roosevelt for years—from their Fascist plot to overthrow the President in the 1930′s (known as the Business Plot) to the rise of the modern lobbying industry.

The class war itself is part of a larger narrative of the end of the Cold War and the triumph of international capitalism. This is the rise of U.S. mandated globalization, a term literally invented by the ‘Third Way’ politicians in the Clinton Administration. The impacts of globalization are legion, but for now I’ll focus on the transition of the America to a service-based economy and the resulting massive trade and federal deficits, unprecendented in sheer size. The “Third Way” was supposed to be an ideological alternative to Republican-style lassez-faire capitalism and New Left-style social democracy. In practice this meant that environmental and labor regulations were considered legitimate market intervention, but systemic regulation regarding the structure of industries was considered off-limits.

Saskia Sassen’s excellent (and fairly unreadable) book “Globalization and its Discontents,” published in the mid 1990′s, identifies the disconnect between “Main Street” and “Wall Street” in fairly obtuse academic terms (and you thought I was bad):

Global cities are the sites for the overvalorization of corporate capital and the further devalorization of disadvantaged economic actors, both firms and workers.

What she means is, globalization isn’t about state-to-state competition the way everyone seems to think, but place-to-place struggles. It’s not about the U.S. versus Japan versus the UK, but about New York City, Tokyo and London versus Kansas, Okinawa and Yorkshire. “Overvalorization” refers to the fact that while the financial industry doesn’t create wealth (just moves it around), the miners, farmers, factory workers and small business owners who create actual value are being systematically crushed. When Bill Clinton was out selling NAFTA to Middle America, he promised factory workers that globalization would help U.S. manufacturing sell their goods to China. Within a decade factories were being closed down all across the country and the equipment was often shipped directly to China or Mexico.

What happened was that the US became an export-substitution economy, where we focused on a single industry to sell products to the rest of the world. Usually when economists talk about this phenomenon they’re talking about very poor countries whose economies are based on a single commodity, like coffee or sugar. In America, we focused on the financial industry, because there was no other sector that approached its profitability. We developed an economy largely dependent on corporate services, from banking to information technology. And while this happened, according to the Alliance for American Manufacturing,

Reaching a high of 53 percent of the economy in 1965, domestic manufacturing accounts for only 9 percent of GDP forty years later. Not since the beginning of the industrial revolution has a lower percentage of Americans worked in American manufacturing as they do today. Tellingly, just since 2000 the manufacturing sector has lost nearly 3 million jobs.

or, in Sassen-speak,

[T]he ascendance and transformation of finance, particularly through the securitization, globalization, and the development of new telecommunications and computer networks technologies; and … the growing service intensity in the organization of the economy generally which has vastly raised demand for services by firms and households.

Sassen talks about a financial industry where money (imported from places like China and Japan) is the raw material; financial “instruments” named things like “asset-backed securities,” “collateralized debt obligations,” and “exchange-traded funds” were the widgets being manufactured; and the ultimate product was more money. As a friend of mine who works in CDOs once told me, the wealth being produced in finance is extractive, because the banks are just shuttling cash from one party to another and skimming a percentage off the top (otherwise known as a “vig”). And because America had all this money lying around, we figured we would just buy products made abroad as long as the financial industry kept making all that dough, which lead to the staggering trade deficits we have today.

Finally, the real 800-pound gorilla in the room: America is a victim of its own success. We lionized a financial industry whose success was to due to good old fashioned virtues like “innovation” and “competition.” I can’t find a better quote on this point than John McCain’s op-ed in the September/October 2008 issue of Contingencies:

Opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products less burdened by the worst excesses of state-based regulation.

The financial industry was just doing its job, and they were damn good at it, too. It’s only when things are bad that we feel it is politically safe to examine that success. After 9/11, increased consumer spending was actually defined as our patriotic duty. And the “democratization of credit” meant that even if you couldn’t actually afford it, you could put your national pride on a credit card at rates which were legally considered usury a generation ago.

And for many years, the divorce between Wall Street and Main Street worked. The economy tanked in ways that only mattered to working people—real wages stagnated or fell, unemployment soared, unions were smashed, private health care costs soared, gas prices rose, college became more expensive, and government assistance dried up. But as long as you had a 401(k) that was heavily invested in the stock market, you were theoretically doing great! Damn the torpedoes, as we used to say.

The American economy became governed by cartoon physics, and we’ve been running flat-out over a cliff for the last few years. When free-marketists finally looked down into thin air, the fake populism began: suddenly it was “greed on Wall Street” which was to blame. Saying there’s greed on Wall Street is like saying there’s pavement on Wall Street. McCain recently decried the “casino culture” in the stock market, but still makes maintaining the capital gains tax at 15% a central part of his platform. As Fortune wrote in a profile of McCain’s Phil-Gramm influenced economic policies all the way back in February of this very year,

Now that the faltering economy has replaced national security as the overriding issue in the presidential campaign, John McCain is portraying himself as a budget-shrinking, flat-tax-embracing, healthcare-privatizing champion of free markets. …economic conservatives should take heart. McCain’s chief economic adviser – and perhaps his closest political friend – is the ultimate pure play in free market faith, former Texas Senator Phil Gramm.

As if all this weren’t enough, the actual lifeblood of America is still petroleum. We’ve had since the oil shocks of the late 1970′s to get off of it (which we did in terms of electricity generation; your car still runs on gas). We built the interstate and an entire suburban way of life based on government-subsidized white flight, cheap oil and profligate consumption of everything else. We dismantled public transit and subsidized the American auto industry so that they could build bigger and badder cars.

I met some well-intentioned folks a party recently and we got to talking about renewable energy. My new friends maintained that we don’t need oil or coal anymore because renewable energy was now abundant enough to replace fossil fuels. I said I wished I could agree, but it’s simply not true yet. The problem isn’t that we can’t produce enough renewable energy; it’s that we consume too much energy in the first place. Americans buy six times as much oil as the world average. Americans consume over 100 quadrillion BTU’s of energy a year, more than Europe and Africa combined. As long as our economic well-being is identified with continued growth, we will have to support growth in a variety of reckless methods, many of which are coming home to roost. For some reason conservatives are now harping about the greatest transfer of wealth in history—from America to oil producing countries. Well, they figured this out just in time not to be able to do anything about it.

It’s not just oil that is becoming scarce, it’s all kinds of natural resources. Even when it comes to nitty-gritty of solar panel manufacturing you see this problem. The world may run out of gallium and other crucial rare-earth semi-conducting metals in a few years:

But now comes word that it isn’t just wildlife that can go extinct. The element gallium is in very short supply and the world may well run out of it in just a few years. Indium is threatened too, says Armin Reller, a materials chemist at Germany’s University of Augsburg. He estimates that our planet’s stock of indium will last no more than another decade. All the hafnium will be gone by 2017 also, and another twenty years will see the extinction of zinc. Even copper is an endangered item, since worldwide demand for it is likely to exceed available supplies by the end of the present century.

So, regardless of how we got here, what should we do now? Good thing I’ve been writing a book about it for the last three years.

The component of the price of oil due to speculation was always kind of an unknown quantity. At the height of the oil bubble this summer, with prices at $150, someone suggested to Congress that up to a third of the price was actually due to market manipulation (a.k.a. “speculation”) by financial institutions, many of whom were looking for some quick cash after the housing bubble had collapsed.

Now oil is below the OPEC target price of $100 a barrel—so it looks like those speculation estimates were right on the money. (As my radio fans know, I called $100 as the baseline for the future, so I wasn’t too far off.) Even the destruction of a Nigerian pipeline and hurricane season aren’t buffetting crude prices, which is how you know there are much more powerful forces at work. The American financial system is in turmoil.

The ‘invisible hand of the market,’ if you will, is punching its way to the top of global financial institutions. And to offset their giant losses and acquisition costs, we’re seeing these banks and brokerage houses and hedge funds liquidate their oil holdings.

What OPEC and those ‘foreign oil’ producing countries fear the most is “demand destruction,” which is what happens when consumers at the top of the consumption curve start buying less. Even though global trends for oil consumption keep increasing, the greatest increases are in developing countries. (Interestingly enough, of the BRIC economies, Brazil and Russia are successfully developing their own domestic energy supplies, Brazil with ethanol and Russia with oil and natural gas. The real future for oil is in countries like India and China.)

The global average oil consumption is about 4 barrels of oil per person per year. But the American average is 24 barrels per person-year. We’re not just on the far side of the curve, we’re near a global maximum. There are other countries which have a greater per-person consumption of gasoline, but most of them achieve the numbers by using gasoline for power consumption, something the U.S. has largely stopped.

What OPEC is afraid of is America becoming more fuel efficient. “Properly-inflated tires,” that old liberal hobgoblin, would, , be the equivalent of finding an oil field bigger than Alaska’s Prudhoe Bay. A 1% decrease in our daily demand would be like canceling out the entire production of Bahrain.

Those who complain about the leverage that OPEC and “foreign oil” have over the American economy don’t seem to realize that it goes both ways—we have plenty of leverage over global oil prices, and most dramatically, when it concerns reducing our disproportionate use. Our economy, and thus the world economy, is based on the assumption that everything will keep expanding. When things contract, the works get gummed up.

Speaking of I-told-you-so’s, McCain’s new running mate is pro-ANWR drilling, so as I predicted previously, Sarah “drill, baby, drill” Palin can be counted on to temper his position against it. The whole phenomenon of off-shore drilling expansion and the politics around make my head hurt.

Polls indicate that a large majority of Americans are for off-shore drilling, if it means lower prices at the pump. Republicans need you to forget the caveat there, because as we all know, it won’t help. Look at, for example, gas prices today, which are at near-record highs even as oil hits a one-year low.

It’s the math, stupid:

America consumes 20.7 million barrels a day.
America produces 8.3 million barrels a day.
How many countries does America need to invade to get off foreign oil?

Likely targets include:

a) Saudi Arabia (10.7 million barrels a day),
b) Russia (9.7 million),
c) Iran (4.1 million),
d) China (3.8 million),
e) Mexico (3.7 million), or
f) Canada (3.3 million).

Pencils down.

Now that News Corp has all purchased the Wall Street Journal and late capitalism is experiencing yet another paroxysm—er, market correction—I think it behooves us all to consider the fate of the lowly Glass-Steagall Act of 1933.

You see, way back in the 1920′s the market was booming—everybody was getting rich speculating in the market or on real estate, it seemed. After a series of bombings, notably one on Wall Street, the government was doing some ‘awareness raising’ of the threat of a small group of radical foreign terrorists to destroy America, but then again, this was before television, so you may not have heard of it.

Everything was going smoothly until the middle of September ’29, when investors started to sell off some of those speculative gains. An alarmed array of prominent tycoons and corporations (some of the very same people who would later try to overthrow President Roosevelt and establish a Fascist dictatorship) tried to stop the hemorrhaging by making very public bids to buy blue chip stock at prices above market. This worked, for about two days, and then on the 29th there was a famous and precipitous crash.

Now, Glass-Steagall was one of the measures instituted to make sure this sort of nonsense didn’t happen again. In addition to establishing the FDIC, the Act separated commercial banks from investment banks and insurance firms, because, to quote PBS’ Frontline, the Act was

seeking to limit the conflicts of interest created when commercial banks are permitted to underwrite stocks or bonds. In the early part of the century, individual investors were seriously hurt by banks whose overriding interest was promoting stocks of interest and benefit to the banks, rather than to individual investors.

The Glass-Steagall Act was repealed in 1999 by a Republican congress and that defender of the poor and downtrodden, Bill Clinton, after a massive grassroots movement whose spirit of civil disobedience echoed the civil rights movement of the 1960′s.

The only problem was that these were the world’s largest financial institutions who were breaking the law en masse, and they’d bought enough elected officials to get them to legalize a slew of illegal mergers after the fact. The Citibank-Travelers Group merger in 1997 will always be noted as “technically illegal,” which is kind of a tip of the hat to the army of corporate lawyers who decided to just be as brazen as possible about it and see what happened.

What happened was that every commercial bank bought an investment bank or vice versa, every single one of which embarked on a massive campaign to do exactly what the act was supposed to prevent, as described above, pumping up stocks in order to screw the small investor out of some dough.

Ultimately, we don’t know exactly how much of this overvaluation occurred, but we do know that the financial industry was doing well enough such that when New York’s attorney general (now Governor) Spitzer caught them, ten major banks decided it would be cheaper to settle the case with the government to the tune of $1.43 billion dollars. And as any businessperson will tell you, if the scheme ended up being profitable with the fine included, you pretty much have a fiduciary obligation to do it again. Which they did and continue to do.

As I’m sure you know, the concept of “conflict of interest” went out with the millennium. Now we have ‘synergy’ instead.

Fast forward to last week. A friend of mine had been recommending buying JPMorganChase (JPM) and Blackstone Group (BX) stock. I countered that the financials are all way overvalued, particularly JPM. We’ve all been seeing the ripple effects of the sub-prime mortgage crisis; layoffs in the lending industry, hedge funds bleeding cash, even bank runs—for nostalgia’s sake, I suppose.

I don’t own stock on principle, but I bet I’d make a fair analyst. The only caveat is that I have no talent for spotting good buys; I can only forsee impending disaster, because those are the signs few people want to find. This brings me, incidentally, back to the News Corp/Dow Jones buyout. As there’s no such thing as a conflict of interest anymore, there’s no longer a problem with the way market information has been commoditized and tailored toward the investor.

Watch any business channel for ten minutes and it’ll become clear that the “news” being presented works in much the same way MTV used to deal with music—continuous advertising for the product broken up by short sustained bursts of commercial interruptions. The anchors are always talking about your portfolio, how to help you—the investor—ford the dangerous currents ahead and so forth. This is not to say that business news doesn’t report bad news, even though they try not to call it that. There’s always an upside to every tragedy, some opportunity to capitalize on one tragedy or another—wars, epidemics, rising gas prices.

All you need to know about financial stocks, I told my friend the other day, is in a little chart you’ll never see on CNBC or the upcoming Fox Business Channel. Here’s Productivity vs. Real Wages for the past decade or so:

Notice how productivity, a measure of total economic output per worker, has become completely uncoupled from the actual value of workers’ take-home pay (adjusted for inflation). But consumer spending has generally followed the same curve as productivity, which begs the question: how are Americans spending more with less money?

The answer is that the average American family is in five digits’ worth of credit card debt, their home is worth less than it was at the top of the housing bubble, and if the family experiences job loss, a medical emergency or divorce, they’re likely headed for a new brand of bankruptcy (courtesy of Joe Biden) where the credit card companies can seize your assets even if you’re dead.

As the chart demonstrates, it’s not like people are ever going to make enough money to pay the balance of these bad loans off. So, investors, here’s a market tip: anyone who has exposure to the financial crisis happening to poor and middle-class people is screwed, including but not limited to people who are exposed to such exposure and so forth fdown the line). You’ll notice that ‘gadget’ stocks, like RIM (the makers of Blackberry PDAs) are doing great. They’re not tied to the people the financial industry has spent so much time and effort screwing over.

By the way, my friend Anya, who writes about debt, beat me to this by linking to a Harvard Magazine piece making similar points. She knows much more about this than I do. 

When I saw that the President was going to hold a press conference on Fox News this morning, I got out my notepad and took some notes:

Smirks	Guffaws

9/26 Bush remarks re: energy supply

Bush looks haggard, like he hasn’t slept or watched professional sports in days. The rumors that he’s started drinking again seem more and more plausible; I don’t remember him stuttering quite as much as he did while he announced his emergency energy policy. I think it’s because oil is one of the few things he actually knows about. Is he reliving his failures in the other family business? And if so, when do we get to see the good ol’ GWB, the rip-roaring party boy who was fun to hang out with, the President who Monday morning quarterbacks across the country thought would be more fun to hang out with than John Kerry?

Tapping the strategic oil reserves again: better get it out of texas while we still can. You’d think he’d be opposed to using the reserve–it’s government interference with the market, no? If he’s serious about addressing the problems, why not let oil prices rise until we lessen “unnecessary trips” by having another energy crisis?

Redefining success: “There’s three of the four major gasoline pipelines — three of the four pipelines in the affected area are major gasoline pipelines that supply the Midwest and the East Coast. The Plantation Pipeline, which is an East Coast pipeline, is at 100 percent capacity. That’s one of the real success stories of this storm. In other words, it didn’t go down at all.”

Probably because it starts in Baton Rouge and wasn’t in the path of the storm, fuckface.

Rolling back environmental legislation for Katrina’s sake:

I’m actually writing a monster article about Katrina and oil, but let’s take the shortcut. If Bush is really serious about our energy problems, why doesn’t he let the market sort it out? Higher gas prices should lead less gas usage, right? (This is a rhetorical question, mind you.)

It reminds me of the Simspons’ spoof of “It’s a Mad Mad Mad Mad World,” where they’re digging a hole:

“Uh, how do we get out of this hole?”

“Dig up, stupid!”

Some of you, and here I’m referring to those who read lefty-type blogs regularly, may have heard the “peak oil” meme, which is rapidly gaining currency.

Bascially, a man named Hubbard predicted in 1955 that the US oil production would peak in the 1970s (which it did) and that the rest of the world would follow (which it didn’t). The basic logic behind the theory isn’t hard to follow–it takes millions of times longer to produce oil than it takes to extract it, so at some point, the exhaustible supply will start being exhausted.

Anyway, while I was trolling the blogosphere for stuff to write about, I came across Eric Grumbles Before the Grave on DadaHead‘s blog, and therein a post about how peak oil is a fallacy. So I wrote a comment which turned out to be pretty long, probably because I spent so much time verifying the numbers on a spreadsheet (make of that what you will, but I’m bad at math and need a calculator to do simple artihmetic). To wit (green indicates those are Eric’s words):

First, the statement that “OPEC nations routinely understate the amount of oil in reserve in a given field” isn’t just false, but diametrically opposed to reality:

“OPEC oil production quotas are based upon the oil reserve figures provided by each member country. After this quota system was implemented in 1985, a sudden leap in world oil reserves occurred – Kuwait’s reserves jumped 41%, Saudi Arabia’s shot up 50%, a 100% jump in Iran, Iraq, and Venezuela, and a 200% jump in Abu Dhabi and Dubai” –http://www.eco-action.org/dt/oilfut.html

Second, “did you know that there is another 2 trillion barrels of oil reserves in just Wyoming, Utah and Colorado? That number’s right. That is oil that is contained within shale in those states. It is more costly to extract than normal oil reserves.”

Thing is, USGS’s estimates aren’t necessarily correct (http://channel4.com/news/2004/10/week_5/26_oil.html), but more importantly, you’re misunderstanding the energy costs of oil extraction; it’s not just about the price but the amount of energy it takes to extract the oil. If a barrel of oil takes a barrel of oil’s worth of energy to produce, the fields must be abandoned. Currently, shale wastes about 40% of its energy being extracted, transported and refined. The hope is that technological refinements will lower this number, which may well be true, but the deeper you mine, the more energy it requires.

“Assuming that the oil companies can get the environmental go ahead, expect to see shale oil production beginning very soon.”

Too late–shale oil has been in production for a long time. Leaving aside the Pennsylvania “rock oil” fields where Rockefeller made his first million, Estonia is the world’s largest producer of shale, followed by Russia, Brazil, Venezuela and China. (http://www.nationmaster.com/encyclopedia/Oil-shale) The problem is that not only is it monetarily expensive and energy intensive to extract, but environmentally dangerous. It combines strip-mining with tons of carcinogenic “waste rock” produced as a by-product.

Third, and most importantly, “peak oil” is about the impact rising prices will have, not that the oil wells will run dry in twenty years. Consider that Americans consume about 24.4 barrels per capita annually, compared with 4.4 barrels per capita in China (with 1.3 billion people) and about 2.1 barrels per capita in India (1.08 billion). When industrialization finally has its way with these countries (China’s oil demands are growing an estimated 12% per year right now, which would put them at about half of our per capita levels [in the next twenty years]), production will likely by outpaced by demand.

Peak oil theorists (not that I am necessarily one) are fully aware of the Athabasca and Orinoco “unconventional oil” deposits–you’re not bringing anything new to their attention. Due dilligence, Eric, due dilligence.

Here’s what I left out: it doesn’t matter if the math or even the amount of unproven reserves is wrong, the larger benefit of memes like “peak oil” is to scare us straight.

Consider the “Y2K” phenomenon. Remember when there was all this hysteria about four-digit years and two-digit years and all this horrible stuff was supposed to happen because of computer foul-ups? And then when 2000 rolled around, it looked like nothing happened and it was so anti-climactic? Well, something did happen–all that talk about impeding doom led to huge investments (and lots of employment) in making sure nothing happened–and it worked! All those lines of COBOL code got fixed,due in no small part to what I can delicately call “awareness raising,” some of it by lunatic survivalists, but much of it from sober computer scientists who figured out that this was a fixable problem if only the people in charge paid attention.

How about the ozone layer? Remember when there was all this talk of ozone depletion and aerosol cans? It prompted an international treaty called the Montreal Protocol in 1987, and lo and behold, after more than ten years of banning aerosol and other measures, the ozone layer is getting healthier and the hole is starting to shrink. I’m sure anti-environmentalists would have said that it proves there was never a problem in the first place, if the “shrinking ozone hole” story had gotten more press.

But we know that judiciously applied scare tactics do, amazingly, make a difference. So even if peak oil isn’t exactly right, we could do a hell of a lot worse than letting it scare us into cleaner energy production. Because one thing that you won’t hear from sand-oil extractors is how much worse for the environment “unconventional oil” is to produce than the “light, sweet crude” bubbling up in Saudi Arabia right now.

Read more about unconventional oil extraction here.