The budget situation today looks hugely worse than it did two years ago. The reason for the deterioration is not that the country has suddenly embarked on a massive new round of social spending, undertaken another major military adventure or even emptied the coffers through tax breaks. The reason that the deficit situation looks hugely worse than it did two years ago is that the $8 trillion housing bubble that had been driving the economy finally collapsed and threw the country into the worst downturn since the Great Depression.

The tragedy in this story is that the collapse of the bubble and its devastating consequences were entirely predictable. Had policymakers recognized the housing bubble and its dangers, they could have easily taken measures to avert this disaster, preventing the surge in unemployment, the flood of foreclosures and the huge budget deficits that characterize this downturn.

Unfortunately, the sociology of the economics profession and economic policy-making is structured so that the voices of those who raised concerns about the housing bubble were largely excluded from public debate. Federal Reserve Board Chairman Alan Greenspan and other leading lights of the economics profession insisted that everything was fine. As a result, nearly all the properly credentialed “experts” marched in lockstep behind their leaders, also insisting that everything was fine.

Remarkably, even after this collapse, nothing has changed in the structure of debates over economic policy. Nearly every day of the week an organization in Washington sponsors a policy session on the budget deficit or some other important economic topic and every last “expert” is among that distinguished group that somehow could not see an $8 trillion housing bubble.

This would be like hosting a session on the future of US military involvement in Iraq in which every participant had confidently predicted in 2003 that the United States would cakewalk to an easy victory. Even the Republicans wouldn’t be foolish enough to host a panel like this. Yet, there seems to be a bipartisan consensus that completely missing the biggest economic calamity in almost 80 years doesn’t call into question your competence as an economic analyst.

This should scare people. There is no reason to believe that people who were incapable if independent analysis before the bubble collapsed are now capable of thinking for themselves. In other words, the vast majority of the so-called experts who pontificate on economic policy are still people who are more accustomed to deferring to authority than doing their own analysis. This means that a great deal of silliness is likely to be perpetuated, just as was the case before the housing bubble collapsed.

The basic story on the budget deficit is very simple: We need badly need large budget deficits in the short term. They are the only force that can sustain demand in the economy after the collapse of housing construction and the loss of the consumption that had been supported by $8 trillion in illusory housing bubble wealth.

In the longer term, we will need to reduce our trade deficit to replace this demand, but this can only be brought about by a reduction in the value of the dollar against the currencies of our trading partners. If our budget experts had been capable of independent thinking before the crash, they would have pointed out the over-valued dollar as a main cause of imbalances in the US economy. Unfortunately, most of them are still incapable of recognizing the obvious.

The other big oversight that the budget experts commit is the failure to recognize the positive role that moderate rates of inflation can play in our economic recovery. Sustained inflation in the range of 3 to 4 percent will be the quickest way to rebuild the balance sheets of households who saw most or all of their wealth disappear with the bursting of the bubble.

Modest inflation will also help to erode the debt burden the government was forced to take on due to the housing crash. For those old enough to remember, inflation was also a major factor in reducing the burden of the huge debt that the country incurred as a result of World War II.

Of course in the long term, if we don’t fix health care then the deficits will be unbearable, but this calls for discussions of health care, not budget deficits. If we don’t fix health care, the economy will be wrecked regardless of what we do with the budget.

But, we won’t get a more serious discussion of these issues until we have budget experts who actually form independent assessments of the economy. As it stands, the debate is dominated by a follow-the-leader crew who could not see an $8 trillion housing bubble.

“The old system of international economic cooperation is over,” announced Gordon Brown at the G20 summit in Pittsburgh. “The new system, as of today, has begun.”

The first part of that statement is partly true. The second is a fantasy.

The G20 is not a system of international economic co-operation, or a board of directors, or a governing council for the global economy, to pick some of the terms that have appeared in the media. It is a forum where the heads of state of 20 economies discuss some important economic issues. It has very little ability to directly implement its decisions.

The institutions that do have economic enforcement capability are the International Monetary Fund (IMF), the World Bank, and World Trade Organization (WTO). These first two are directly controlled by the rich countries, mostly by the US Treasury. The third organisation that actually makes decisions that affect hundreds of millions (or billions) of people, the WTO, is not so completely controlled by a few rich countries as the others are, since it was formed half a century later. Developing countries have a formal veto power in decision-making. However, it is still dominated by the rich countries, and most importantly, its rules are heavily stacked against developing countries and in favour of the rich – and especially corporations from hose rich countries. For example, the WTO’s Trips (Trade related aspects of intellectual property rights) is unequivocally designed to help corporate patent holders such as the big pharmaceutical companies.

These facts help put the G20 announcement into context. First, the expansion from the Group of Eight (G8) to the G20 is mostly symbolic. Since the rich countries control the institutions with actual power – in addition to their own enormous international economic, military, and diplomatic influence – the G20 is still mainly the G7 with the other 13 countries sitting in. (I am counting the G8 member Russia with the other middle-income countries. The rich countries have still not allowed Russia to join the WTO.)

Furthermore, the G7 is not even as much of a decision-making body as it was a quarter of a century ago. For example, in 1985 five of the G7 countries (the US, France, UK, Germany, and Japan) agreed on the “Plaza accord” to bring down the value of the dollar. This was accomplished through coordinated intervention by central banks. The dollar lost more than a third of its value within the next two years. Today, the dollar is even more overvalued and as a result we have the large global imbalances that the G20, in its final statement yesterday, pledged to rectify. However, do not expect its members to do anything about it.

The US government does not even have a logically coherent position on the dollar’s exchange rate. Treasury secretary Tim Geithner says the US wants a “strong dollar.” At the same time, the US government complains that China is keeping its currency undervalued. These two statements are logically contradictory, since an undervalued Chinese currency is the same thing as a “strong dollar”. And without a fall in the value of the dollar – not only against China’s currency but others as well – we cannot expect global trade imbalances to be corrected. (The US trade deficit has fallen by more than half since this recession started, but the effect will be reversed when the economy recovers.).

A solution to this problem would also require the G7 to accept China as an equal partner, something they do not appear willing to do. China’s economy is now the third largest in the world – or second largest, depending on how its currency is converted.

The IMF is the most powerful of the institutions controlled by the US and its rich allies, and it currently has about 50 agreements with low-income and middle-income countries. In the majority of these agreements it has prescribed “pro-cyclical” policies such as budget cuts and monetary tightening that worsen the impact of the world recession. For many years developing countries have demanded a greater voting share in the organisation, but the tiny (1.8%) reallocation in 2006 [PDF] was insignificant. At this week’s summit the leaders pledged to reallocate five per cent of the voting shares from over-represented to under-represented countries. It is not clear that this will actually happen. The European governments were reportedly upset at giving up some of their influence. But even if five per cent is shifted, this will not change the balance of power at the IMF. The United States, with its 16.9% share, will be able to veto important decisions that require 85% and, together with allies, will have a majority for almost anything it wants to achieve.

Most of the other issues that the G20 includes in its final communiqué are either inadequate or would have to be implemented at the level of the individual countries. This includes badly-needed financial reform – the rich countries just can’t seem to say the words “too big to fail is too big” – and economic stimulus. And for the poor countries, where the recession has pushed tens of millions of people closer to the edge of survival, the G7 countries have yet to offer any significant debt relief. Loans are better than nothing, although even these will offer only a small fraction of the capital inflows that poor countries have lost due to the world recession that was caused by the rich countries. But most of the poor countries have too much debt already, and can’t afford to take on more.

Reform at the top of the international economic system is still a long way off.

By Thomas Palley, New America Foundation September 15, 2009

Fiscal conservatives are opportunistically looking to use the recession induced spike in the budget deficit to revive their crusade for fiscal austerity. The case for fiscal austerity is based on flawed economic analysis and it is not supported by thoughtful budget analysis. It was the wrong agenda before the crisis and it is even more wrong now.

Though there is understanding of the need for budget deficits to provide short-term Keynesian fiscal stimulus, there is little understanding of the medium-term need for budget deficits to facilitate the process of private sector deleveraging and to restore growth.

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So, have you enjoyed the debate over health care reform? Have you been impressed by the civility of the discussion and the intellectual honesty of reform opponents?

If so, you’ll love the next big debate: the fight over climate change.

The House has already passed a fairly strong cap-and-trade climate bill, the Waxman-Markey act, which if it becomes law would eventually lead to sharp reductions in greenhouse gas emissions. But on climate change, as on health care, the sticking point will be the Senate. And the usual suspects are doing their best to prevent action.

Some of them still claim that there’s no such thing as global warming, or at least that the evidence isn’t yet conclusive. But that argument is wearing thin — as thin as the Arctic pack ice, which has now diminished to the point that shipping companies are opening up new routes through the formerly impassable seas north of Siberia.

Even corporations are losing patience with the deniers: earlier this week Pacific Gas and Electric canceled its membership in the U.S. Chamber of Commerce in protest over the chamber’s “disingenuous attempts to diminish or distort the reality” of climate change.

So the main argument against climate action probably won’t be the claim that global warming is a myth. It will, instead, be the argument that doing anything to limit global warming would destroy the economy. As the blog Climate Progress puts it, opponents of climate change legislation “keep raising their estimated cost of the clean energy and global warming pollution reduction programs like some out of control auctioneer.”

It’s important, then, to understand that claims of immense economic damage from climate legislation are as bogus, in their own way, as climate-change denial. Saving the planet won’t come free (although the early stages of conservation actually might). But it won’t cost all that much either.

How do we know this? First, the evidence suggests that we’re wasting a lot of energy right now. That is, we’re burning large amounts of coal, oil and gas in ways that don’t actually enhance our standard of living — a phenomenon known in the research literature as the “energy-efficiency gap.” The existence of this gap suggests that policies promoting energy conservation could, up to a point, actually make consumers richer.

Second, the best available economic analyses suggest that even deep cuts in greenhouse gas emissions would impose only modest costs on the average family. Earlier this month, the Congressional Budget Office released an analysis of the effects of Waxman-Markey, concluding that in 2020 the bill would cost the average family only $160 a year, or 0.2 percent of income. That’s roughly the cost of a postage stamp a day.

By 2050, when the emissions limit would be much tighter, the burden would rise to 1.2 percent of income. But the budget office also predicts that real G.D.P. will be about two-and-a-half times larger in 2050 than it is today, so that G.D.P. per person will rise by about 80 percent. The cost of climate protection would barely make a dent in that growth. And all of this, of course, ignores the benefits of limiting global warming.

So where do the apocalyptic warnings about the cost of climate-change policy come from?

Are the opponents of cap-and-trade relying on different studies that reach fundamentally different conclusions? No, not really. It’s true that last spring the Heritage Foundation put out a report claiming that Waxman-Markey would lead to huge job losses, but the study seems to have been so obviously absurd that I’ve hardly seen anyone cite it.

Instead, the campaign against saving the planet rests mainly on lies.

Thus, last week Glenn Beck — who seems to be challenging Rush Limbaugh for the role of de facto leader of the G.O.P. — informed his audience of a “buried” Obama administration study showing that Waxman-Markey would actually cost the average family $1,787 per year. Needless to say, no such study exists.

But we shouldn’t be too hard on Mr. Beck. Similar — and similarly false — claims about the cost of Waxman-Markey have been circulated by many supposed experts.

A year ago I would have been shocked by this behavior. But as we’ve already seen in the health care debate, the polarization of our political discourse has forced self-proclaimed “centrists” to choose sides — and many of them have apparently decided that partisan opposition to President Obama trumps any concerns about intellectual honesty.

So here’s the bottom line: The claim that climate legislation will kill the economy deserves the same disdain as the claim that global warming is a hoax. The truth about the economics of climate change is that it’s relatively easy being green.

The populist anger about Obama’s bank bailouts transcends politics. We need a banking system accountable to the public.

The large number of people who protested against Barack Obama’s healthcare plan in Washington last week drew an enormous amount of media attention. Clearly some of the leaders are certifiably crazy, questioning whether Obama is an American and likening him to Hitler. But many of the protesters had reasonable concerns about how the plan would affect the quality of care that they and their loved ones receive.

It was also striking how often the protesters complained about a government that was out of control and not responsive to ordinary people. One of the items that often came up in the interviews reported in the media was the bank bailout. Clearly this is an enduring and deeply felt cause of resentment.

It would be very hard to tell these people that their concerns on this topic are misplaced. At a time when tens of millions of people are facing unemployment or underemployment, when millions are at immediate risk of losing their homes, the banks seem to be doing better than ever. Goldman Sachs used its government-guaranteed loans to make risky bets that paid off big time. It now plans to distribute $9bn in bonuses to its executives and top traders at the end of the year. Why shouldn’t the protesters be absolutely furious about an administration that used taxpayer dollars to make some of the richest people in the country even richer?

It would be great if the anger of these protesters could be turned in a productive direction. Instead of trying to prevent the government from extending healthcare coverage, how about going after the banks that pillaged the country?

The obvious place to start in this effort is the break-up of the “too big to fail” behemoths. It is now pretty much official policy that financial giants like Citigroup, Bank of America and Goldman Sachs will not be allowed to fail. If their bad investment decisions again bring them to the edge of bankruptcy, the federal government will again rush to the rescue, handing out whatever cash and loans are needed to keep the banks afloat.

This status gives these banks a clear edge in credit markets against their smaller competitors. If everyone knows that the government can be counted on to come to the rescue of these banks, then there is less risk in lending them money. Therefore, they pay lower interest rates than if they had to borrow in a free market.

The Obama administration has proposed to correct this inequity by having higher capital requirements and tighter restrictions on risk-taking that will make it undesirable for banks to be too big to fail. In principle, the government could impose restrictions that are sufficiently onerous to offset the advantages of the government safety net, but no one outside of the Obama administration believes this will happen.

The simpler course is to just break them up. We don’t have to turn Citigroup and Bank of America into hundreds of small community banks, just large regional banks that can be safely put through a bankruptcy/resolution process if they mismanage their assets. My guess is that most of people protesting healthcare reform last weekend would support this idea.

A second issue likely to draw the support of the protesters is the democratisation of the Federal Reserve. There is already a left-right coalition in the House of Representatives behind a bill calling for an audit of the Fed.

This is a case where the centrist elites have shown complete contempt for the American public. In fact, Federal Reserve Board chairman Ben Bernanke had the gall to argue against an audit of the Fed, warning that it would lead to increased instability.

Did Bernanke forget that less than a year ago he told Congress that the policies pursued by him and his predecessor had brought the economy to the brink of a complete collapse? How do you get less stable than that? This is the sort of nonsense that shows the contempt that the elites have for the masses on both the left and right.

This suggests a great opportunity for a joint effort by the left and right to democratise the Fed. It is absurd that the US has a central bank that is more accountable to the financial industry than to the public.

A joint effort has enormous potential. It will be hard for the elites to even understand such a joint effort of the left and right against the centre. As an example, the New York Times actually asserted that the bill to audit the Fed has “250 Republican” co-sponsors in the House, ignoring the fact that the Republicans are a minority in the 435 seat chamber.

But the ignorance of the elite only increases the probability of success. And, if there is one thing this economic crisis demonstrates, the elite can be very very ignorant.

Calls for face-to-face dialogue, without mediation * Coup “betrayed and made a mockery of” the Arias process * Zelaya building public international support and meeting with resistance leaders * Calls for Hondurans from around the country to gather in Tegucigalpa

At midday today, 86 days since the military coup d’etat in Honduras, President Zelaya returned to join the resistance movement in the final stretch of the long fight to restore constitutional order. As a spy helicopter buzzed the demonstrators and police poured into the area, thousands of supporters gather outside the Brazilian embassy to receive the President. (Telesur has continuous coverage here in Spanish.)

In his first comments, Zelaya declared a “day of celebration.” Zelaya called on everyone to gather at the Brazilian Embassy, and reasserted the commitment to non-violence. “I’m not afraid of the judicial process,” he affirmed and added he would face any accusations but that so far all the coup had produced was calumnious statements.

Zelaya is lining up his support and his strategy in these moments. He announced that he was waiting for communication from President Lula, the OAS, the United Nations, the European Union and others in an interview with Telesur. He said his plan is to initiate internal dialogue and that the idea is to demonstrate the support of the international community without involving it in the dialogue. He added that he has not spoken with de facto government and was meeting with his cabinet and resistance groups.

The legitimate president of Honduras called on the Armed Forces to maintain the calm. “The Armed Forces are part of the people, they come from the villages and neighborhoods and should never point their guns at their own people,” he stated. He urged a process to “recover peace and tranquility” in the country.

Although the police are deploying to control the growing crowd, resistance leaders are maintaining control. In a Telesur interview, Juan Barahona, a leader of the National Front Against the Coup, expressed his opinion that the “Army cannot launch an offensive here—there are too any people.”

A visibly shaken Roberto Michelleti appeared before on CNN, denying that the Zelaya was in the country and claiming that the news was an invention of “media terrorism” to stir people up and provoke a huge mobilization. “It’s not true. He (Zelaya) is relaxing in a suite in Managua,” Micheletti told the press with a chuckle. He later added that if the news turned out to be true, Zelaya would be arrested.

By that time, Zelaya’s return had already been confirmed. As the coup chief went into denial, Guatemalan President Alvaro Colom confirmed the news, stating that he hoped this would mean the end of the coup. US State Department spokesperson Ian Kelly confirmed the presence of Zelaya in Honduras in a brief statement calling for all sides to avoid violence, and President Chavez of Venezuela praised Zelaya for what he called his “peaceful and courageous” return. Zelaya is reportedly meeting with resistance leaders at this moment.

By showing up without violent confrontations at the Brazilian Embassy before thousands of cheering supporters, Zelaya plays his strongest cards. As most eyes were on the Obama adminsitration—and with good reason given its power in affecting economic and political sanctions—Brazil has been a low-profile but high-impact actor in the drama. Its power as a regional leader carries clout not only with other nations throughout Latin American but also with the United States, which cannot risk strained relations with the South American giant.

Hondurans are expected to continue to arrive in Tegucigalpa from all over the country. This massive display of support also strengthens Zelaya’s hand. His most important base and chance for restoration has been in the popular mobilizations that have not missed a day since June 28.

Zelaya’s peaceful journey and bloodless return also underline the non-violent character of the resistance movement since the beginning. The president gained the capital without provoking confrontation, thus taking the wind out of the sails of the State Department’s previous reasons for opposing his return. Now he is back in the capital, close to a return to power—a condition of the San Jose Accords. Secretary of State Hillary Clinton has no excuse for not supporting Zelaya’s return and efforts at internal reconciliation.

Welcome World to Pittsburgh: Time For More Than Yak at the G20?

Dear International Leaders and Guests,

From The President’s Welcome:

Michelle and I look forward to welcoming world leaders to the wonderful city of Pittsburgh on September 24th and 25th and we thank the people of Pittsburgh and Pennsylvania for opening their city as a showcase to the world.

The Pittsburgh Summit is an important opportunity to continue the hard work that we have done in confronting the global economic crisis, and renewing prosperity for our people. Together, we will review the progress we have made, assess what more needs to be done, and discuss what we can do together to lay the groundwork for balanced and sustainable economic growth. Pittsburgh stands as a bold example of how to create new jobs and industries while transitioning to a 21st century economy.

From The Dissector’s Response:

Being a welcoming host may not be enough. The summit will be judged by what it does. So far, as the NY Times noted, Obama’s style and desire to change the world’s attitudes towards the US has not been matched by new policies.

Nevertheless, Pittsburgh was carefully chosen as a perfect backdrop for the ‘Every World Leader in Action’ photo op. Did you know: It has 8 Fortune 500 Companies, and less unemployment than many others. Pittsburgh is also the 10th cleanest city according to Forbes. It is also supposedly the most livable, labeled “America’s Most Livable City” by Places Rated Almanac and then in 2009, Pittsburgh named most livable city in the United States and 29th-most-livable city worldwide by The Economist.

Yet the G20 has not assembled to live there-but to talk, and hopefully reach agreements. We can only hope this conclave will be remembered for more than parties at the Andy Warhol museum.

Once America’s steel Mecca known for its 446 bridges, it was an epicenter of industrial strife in the bad old days. Its lead companies, US Steel and Westinghouse are long gone. I remember documenting a factory closing in the once vital Mon Valley with all its manufacturing plants. How depressing!

(Aside: Speaking of PA. I was just honored to write an intro to a new edition of muckraker Ida M. Tarbell’s classic and long out of print two volume History of the Standard Oil Company (Cosimo), one of journalism’s greatest works, an expose of corporate exploitation of, in Billy Joel’s words from his song Allentown, “the Pennsylvania I never found.”)

One writer called the place then “hell with the lid off.” The lid is back on even as the population shrunk down to 312,000. Clearly not everyone is enjoying its livability. It is now only the 61st most dangerous city in America with the Pittsburgh murder rate at 2.61 times the national average.

The town has its own dialect, “Pittsburghese;” locals who speak it are known as “Yinzers.” The cool subculture revolves around an annual Zombie Fest.

Which is just perfect given all the Zombie banks that are still like dead men walking, with their trillions in toxic loans that seem to be impeding a full recovery. This is one of the reasons 20 nations – and many onlookers – are coming to town to pretend that a global consensus can be found to the world’s economic problems.

Two issues on the world’s agenda that go beyond what we have been pussyfooting around about: reining in the power of banks (including fraud, excessive compensation and bonuses), and rising protectionism that undermines international cooperation. President Obama’s contribution to this problem was his slapping tariffs on Chinese made tire imports which has already led to retaliatory measures and threats of law suits. Not a great symbolic step for the host country!

(Of this decision, a betrayal of Washington’s earlier promises to the G20, The Economist writes, “A protectionist move that is bad politics, bad economics, bad diplomacy and hurts America. Did we miss anything?”)

The Campaign for America’s Future asks us to look beneath the surface of Pitsburgh’s economic “recovery”:

Many high-paying jobs in manufacturing were replaced with low-paying jobs as waiters or hotel clerks. Many were never replaced at all.

– America ’s once-robust system of economic production — the invention, design and manufacture of products — has steadily eroded. In its place, an economy based on asset bubbles and foreign borrowing has developed. That strategy was never sustainable and is no longer available.

–Services alone are no path to prosperity. For the past 30 years, the U.S. has been replacing goods-producing jobs (down 54 percent) with service-providing jobs (up 34 percent). But service jobs don’t pay as well. Even in the broad category of “services” — which includes doctors, lawyers, and investment brokers — service jobs pay 75 cents for every dollar paid a production job. Retail jobs pay 50 cents.

So it is to Pittsburgh that activists will also come, as they have and do to all these G20 Yak fests which make officials feel important and usually accomplish nothing much of significance.

After the G8 met in London where one protester was killed by police defending The City against The Rabble, a journalist noted:

G8 leaders were unable to come to any firm agreement on how to combat the financial crisis. Acknowledging the dangers posed by the crisis, the summit issued a statement that declared, ‘The situation remains uncertain and significant risks remain to economic and financial stability…’

Good work guys (and gals.) How decisive! It was the US in the personage of Tim Geithner who actually blocked a more fundamental reform agenda proposed by the Germans and French.

Years earlier, I covered marches in Denver and then later with a diverse and righteous MAKE POVERTY HISTORY crowd in Glasgow at another one of these Gee Whiz affairs where much was postured to, and little was accomplished. You will note that protesters had to go to Court in Pittsburgh, in this era of Obama and in this land of the free, to even obtain permits to rally and protest. Many groups returned empty-handed.

But “they” will be out there with their signs, raucus music and bandanas, even if they get no coverage unless violence erupts-Remember Seattle-as they fight for a fairer world and efforts to stop climate change.

I am also sure no rightwing Teabaggers and 9-12ers will be out supporting this anti-government fight for economic justice which includes more money for AIDS, anti-poverty programs, financial reform, and jobs, jobs, jobs.

Officially, the G20 conclave is being positioned as another upbeat media event and exercise in perception management.

At the same time, we need to be reminded that while the G20 Meets in the City of the Three Rivers, it is a global moment, not just an American issue.

I was recently on the receiving end of an intemperate blast from a reader who did make a valid point that in all of this economic discourse, including some of my own work, we have to focus more attention on the people most in need worldwide who are hurt every day by Western economic policies.

How can we help the vast majority of humankind get visibility for their campaigns to be free from exploitative practices, curable diseases, and economic oppression?

How can we educate people in our own countries about the need to take part in this broader global effort and encourage our media to cover it more than they do?