Week-end Wrap – Political Economy – June 28, 2020

[Der Spiegel, via Naked Capitalism 6-25-20] An interview with Angus Deaton and Anne Case.

Deaton: The man who first compared the health-care industry to a tapeworm was Warren Buffett, the famous investor. There are many ways of figuring out what the health-care industry ought to cost and what it delivers. Take, for example, the comparison with Switzerland, the country with the second highest health care expenditures as a share of GDP: They spend 12 percent of GDP, but they live six years longer on average than Americans! If a fairy godmother were somehow to reduce the share spent on health care in America to the Swiss level, a lot of money would be available for other things. It would free up a trillion dollars….

DER SPIEGEL: They fall into poverty?

Case: Not necessarily. It’s more a disintegration of a way of life. One of the consequences is that, in those areas, there is a reduction of social integration. There are fewer marriages in the white working class, fewer people going to church, fewer people with stable home lives and a lessened sense of community. That puts these people at great risk.

DER SPIEGEL: And it contributes to those deaths of despair, as you have called them. What is behind this phenomenon?

Case: We were puzzled by the discovery that mortality rates are no longer sinking, but accelerating in the group of middle-aged whites with low education. They are dying from drug overdoses, alcoholic liver disease and suicide – all deaths by their own hand. And they have all risen dramatically since the early 1990s.

DER SPIEGEL: Why? What about the opioid epidemic?

Deaton: If despair due to the hollowing out of the white working class wasn’t there, the drug epidemic would be much smaller. The despair is smoldering in society, and this created an opportunity for the pharmaceutical industry, an industry that is not appropriately regulated, which made the situation with opioids much worse. At the height of it, there were enough prescriptions for every American to have a month’s supply. It was essentially legalized heroin.

Corporations are our new citizens. And you? If you’re lucky, you get to make a choice: consumer, warrior or prisoner.

Economic Armageddon: The COVID Collapsed Economy

Nearly 40 percent of low-wage workers lost their jobs in March. More than 40 million people lost their jobs in March, April, or May…. Economists expect that 42 percent of people recently let go will not return to their former employers….

….the PPP did not include much aid for businesses with significant nonpayroll overhead costs, such as restaurants in high-cost cities. This means that many businesses will fail, if customers fail to return. Already, an estimated 100,000 small companies have shut permanently….

A third factor behind a possible second Great Depression is the budget crisis facing states and cities. The federal government does not have to balance its ledger year to year, and perpetually spends more than it takes in. Yet every state but Vermont and most cities and towns are required to remain in the black. Right now, sales taxes, real-estate-transfer taxes, income taxes, fines and fees—they are all collapsing, leaving local governments with a budget gap expected to total $1 trillion next year. Without help from Washington, this will necessarily mean massive service cuts and job losses: namely, an estimated 5.3 million job losses….

But the last element is the true alpha and omega of our worst-case scenario: the catastrophe of the American government’s management of the novel-coronavirus pandemic.

Like many of its peer nations, the United States imposed shelter-in-place and social-distancing measures to curtail the spread of the virus. But it did so late, leading to the unnecessary deaths of tens of thousands of people. And it wasted the time these extreme measures bought, because the government failed to set up a strong test-and-trace regime. Countries including South Korea and New Zealand crushed the coronavirus. The United States merely patted it down. The country is reopening with the disease still spreading and maiming and killing, as several states experience a dramatic surge in caseloads.

Prod the Federal Reserve to save state and local governments

[Tony Wikrent, Real Economics, June 26, 2020]

Letter to Federal Reserve Chairman Jerome Powell, with contact information.

Fed’s Stress Tests Results Based on GDP Decline of 8.5 Percent; Atlanta Fed’s GDPNow Forecast Says GDP Will Decline by 46.6 Percent
Pam Martens and Russ Martens, June 26, 2020 [Wall Street on Parade]

We looked at where those projected losses were concentrated and, sure enough, they were concentrated at the biggest Wall Street banks. The breakdown was as follows: JPMorgan Chase, hypothetical losses of $64.4 billion; Citigroup, $47.7 billion; Wells Fargo, $47.4 billion; and Bank of America, $47.2 billion. In other words, the tally for just those four banks comes to $206.7 billion or 37 percent of the losses for all 33 banks.

The Fed really lost credibility, however, with these loss estimates for Goldman Sachs and Morgan Stanley, showing hypothetical losses of $9.8 billion and $5.3 billion, respectively, in the hypothetical “severely adverse scenario.” During the last financial crisis, one trader alone at Morgan Stanley, Howie Hubler, racked up $9 billion in losses.

Disrupting mainstream economics – Modern Monetary Theory

The Dangerous Myth of ‘Taxpayer Money’
Raúl Carrillo and Jesse Myerson [splinternews.com, via Mike Norman Economics 6-22-20]

…. venture capital had been America’s financial engine of innovation for years, and I wanted to see if that was still true. Many stats suggested it was: the number of venture capital firms in the US had risen from 946 in 2007 to 1,328 in 2019, and the amount of money they were managing had swollen from $170.6 billion in 2005 to $444 billion in 2019.

Not all the numbers were so positive, however. This largely white, largely male corner of finance has backed software companies that grow fast and generate large amounts of money for a shrinking number of Americans—companies like Google, Facebook, Uber, and Airbnb. But they don’t create many jobs for ordinary people, especially compared with the companies or industries they disrupt. And things have been slowing down. Recently, venture capitalists have found fewer and fewer ideas that fit their preferred pattern. By the end of 2019, the industry had $121 billion in “dry powder,” money in search of an entrepreneur or idea to invest in….

The image, however, doesn’t strictly match the history of the Valley, because it was “the system” that got everything started. After Sputnik launched the space race, the federal government poured money into silicon chip companies. Historian Margaret O’Mara documents this well in her book The Code: In the early 1960s, the US government spent more on R and D than the rest of the world combined. While that fire hose of cash flowed, the first venture capitalists found many winners to bankroll.

The link to government is still very much there in today’s technology companies. Google’s early work came out of the Clinton-era Digital Libraries project at Stanford, and the CIA was Palantir’s first customer in 2003—and its only one until 2008.

O’Mara says there isn’t anything wrong with tech companies’ being built through US research dollars. In fact, she argues, the most important decision of that era was for the government to pour money in without exerting too much control. But, she adds, a mythology has grown up that focuses on lone heroes and rule breakers rather than the underlying reasons for a company’s or technology’s success. “Hooray for the internet that it’s still cranking,” she says. “But you did not do this by yourself.”

…. Only just over 2% of VC money in the US went to female founders in 2017 and 2018.

…. it was hard not to think about the advantages wealth and connections offer. These benefits have been quantified by researchers who studied 1 million US patent holders and looked at their parents’ income. Low-income students who scored in the top 5% in math were no more likely to become inventors than below-average math students from affluent families, they found. Meanwhile, if women, minorities, and children from low-income families were to invent at the same rate as white men from families with incomes in the top 20%, the rate of innovation in America would quadruple….

In the United States, she says, 75% of venture capital goes to software. Some 5 to 10% goes to biotech: a tiny handful of venture capitalists have mastered the longer art of building a biotech company. The other sliver goes to everything else—“transportation, sanitation, health care.” To fund a complete system of innovation, we need to think about “not only the downstream invention itself, but what preceded it,” Dahl says. “Not only inspiring people who want to invent, but thinking about the way products reach us through companies.”

…. So how can that change? The government could turn on the fire hose again, restoring that huge spray of investment that got Silicon Valley started in the first place. In his book Jump-Starting America, MIT professor Jonathan Gruber found that although total US spending on R and D remains at 2.5% of GDP, the share coming from the private sector has increased to 70%, up from less than half in the early 1950s through the 1970s. Federal funding for R and D as a share of GDP is now below where it was in 1957, according to the Information Technology and Innovation Foundation (ITIF), a think tank. In government funding for university research as a share of GDP, the US is 28th of 39 nations, and 12 of those nations invest more than twice the proportion the US does.

In other words, the private sector, with its focus on fast profits and familiar patterns, now dominates America’s innovation spending. That, Dahl and others argue, means the biggest innovations cannot find their long paths to widespread adoption.

These numbers show how the financial system causes morbid illness in the rest of  the USA economy.  Venyure capital is hailed as the great driver of innovation (which this article makes clear is a myth or a lie — take your pick of words). So, compare a $270 billion increase in venture capital over 14 years (“$170.6 billion in 2005 to $444 billion in 2019”) to the “$230 billion of performance fees in 10 years” sucked out of the economy by private equity firms (mentioned by David Sirota in the article below). And that $230 billion does not include the management fees grabbed by private equity. And then there is the added hundreds of billions hoovered up by the Wall Street bankster racketeers. So, what venture capital can stake is a mere shadow of the immense looting by the rest of the financial system. 

The Supreme Court Has Given the Green Light to Bosses and Financial Managers to Steal From Workers

“Private Equity Abuzz Over Access to $6 Trillion 401(k) Market”

“The Trump administration has cracked open the door for private equity funds to get into 401(k) workplace retirement plans. There’s roughly $5.6 trillion in such accounts, and the prospect of capturing even a sliver of it has the industry abuzz…. Lurking behind all this is a broader policy fight. Regulators in the Trump era have argued that retail investors should have broader access to a lot of investments previously limited to wealthy individuals and institutions. Democrats have generally sought more regulation of financial products, and some have been critical of private equity, blaming it for loading up companies with debt and causing layoffs and bankruptcies. The government’s approach could soon change with the presidential election less than five months away. As a harbinger, six Democratic senators and Bernie Sanders, the independent from Vermont, sent a letter to [Secretary of Labor Eugene Scalia] urging him to reconsider his decision.”

As Goldman Sachs and JPMorgan Face Criminal Probes, Barr Fires Top Prosecutor; Tries to Replace Him with Banks’ Former Lawyer, Jay Clayton
Pam Martens and Russ Martens, June 25, 2020 [Wall Street on Parade]

Shortly after 9 p.m. last evening, the U.S. Attorney General, William Barr, stunned prosecutors in the Southern District of New York with the announcement that their boss, Geoffrey Berman, was stepping down as U.S. Attorney in that District and would be replaced with the sitting Chairman of the Securities and Exchange Commission, Jay Clayton, who lacks even a shred of criminal prosecution experience. What Clayton does have is a lot of experience representing Wall Street’s largest banks, like Goldman Sachs and JPMorgan Chase, both of whom are currently under intense criminal investigations by the Justice Department. Clayton was a former partner at Wall Street’s go-to law firm, Sullivan and Cromwell, which is currently representing Goldman in the criminal case and representing JPMorgan in various matters….

Even more problematic, Clayton’s family has ties to an opaque company called WMB Holdings, described by David Dayen in The Nation magazine like this:

“This company and its affiliated partners (Delaware Trust Co and CSC) are conduits for creating shell corporations and other sketchy vehicles used in tax evasion and money laundering. Public Citizen found apparent links between these companies and Mossack Fonseca, the notorious Panamanian law firm at the center of the Panama Papers scandal.”

How McKinsey Helps Companies Avoid Responsibility: The “best available advice” is usually what’s best for the C-suite.