A Citizen’s
SURVIVAL
Guide
Economics+Politics+Finance
by
Michael Harrington, MBA, PhD
© Michael Harrington
RSBS Productions
1210 Stearns Drive
Los Angeles, CA 90035
All Rights Reserved. 2011
Kindle 2nd Edition – May 2014
With the exception of brief excerpts, no part of this manuscript may be transmitted, reproduced, or utilized in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information or storage and retrieval system, without the written permission of the author, who may be contacted by email through the Internet links below:
Michael Harrington
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http://casinocap.wordpress.com/
www.casinocapblog.com
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This eBook is licensed for your personal use only. This eBook version may not be re-sold or given away to other people. If you would like to share this eBook with another person, please purchase an additional copy for each person. Note: There is a FREE pdf copy of this manuscript available by contacting the author directly through the addresses above. The FREE pdf copy can be copied and shared by the author’s permission granted herein. Thank you for your help and cooperation in maintaining the integrity of this work.
Other Works by Michael Harrington
Historical Fiction:
The City of Man
A trilogy based on a true story of the Italian Renaissance, structured on Dante's The Divine Comedy.
Renaissance Florence celebrated its Golden Age during the late 15th century under Lorenzo de’ Medici, the Magnificent. This was the age of artists, philosophers and poets like Leonardo, Michelangelo, Botticelli, Pico della Mirandola, Poliziano, and Machiavelli.
But a societal crisis was imminent by the century’s last decade. The Italian peninsula was surrounded and threatened by imperialist powers, trade declined and poverty increased in the face of obscene wealth. Avaricious popes made a family business of the Church while floods, droughts, famines, and the plague all combined to create an atmosphere of overwhelming fear and anxiety.
As chaos loomed, an obscure Dominican friar arose to restore order. Fra Girolamo Savonarola was a charismatic preacher and prophet who advocated religious and political reform. His mission was to transform his corrupt and decaying society into St. Augustine’s mythical City of God. At the height of his short reign he orchestrated the infamous Bonfire of the Vanities, riding a wave of popular discontent to become the most influential religious, political, and cultural figure of the age. The Savonarolan theocratic republic left its indelible mark on the face of Florence, Italy, and Western history.
The City of Man is the dramatic story of this preacher’s fantastic rise and tragic fall, symbolizing a critical juncture in the conflict between Church and State in the Christian world. More dramatized history than historical fiction, the story integrates the art, religion, and politics of this glorious period.
Young Niccolo Machiavelli provides the counterpoint to Savonarola as he develops his new political philosophy. Their momentous clash illuminates the transition from the Age of Faith to the Age of Reason, heralding the birth of our modern age.
Formatted especially for the Kindle, the digital version of The City of Man incorporates special features to explore the world of Renaissance Florence, including maps, family trees, art images, dozens of internal and external hyperlinks to biographies and historical events on Wikipedia, an extensive glossary and selected scene index.
Saving Mona Lisa
Saving Mona Lisa is an intrigue of art, love, and Renaissance genius. The story is inspired by the nine versions of Leonardo da Vinci’s iconic Mona Lisa depicted on the book cover—the original, plus eight copies of dubious provenance. The mystery over who painted these copies still confounds art historians, as does the fact that Leonardo refused to finish the original or deliver it to its rightful owner, right up until his death more than fifteen years later.
In 2012, conservators at the Prado Museum in Madrid determined that their copy was painted at the same time as the original, but Leonardo did not paint it.
In 2009, another “nude Mona Lisa” surfaced in France, further fueling the titillating question over who painted the nude versions.
Five centuries after his death, Leonardo da Vinci, the most renowned personality, artist, inventor, and temperamental genius in history, continues to reveal his many mysteries…
Based closely on scholarly research, historical evidence and credible speculation, Saving Mona Lisa weaves an intriguing mystery as Leonardo clashes with his two young apprentices over the ultimate fate of a painting that had achieved world renown soon after everyone thought it was finished...everyone, that is, except Leonardo.
"Art is never finished, only abandoned."
--Leonardo da Vinci
In God We Trust
A modern interpretation of The City of Man and a chronicle of our times, In God We Trust is the story of Dante Jefferson Washington, a smart, young, black, religious conservative seeking to make his mark on the Washington D.C. political stage. His lofty ambitions for public service soon become entangled in the web of partisan tribal conflict, religion, and money that defines our national political dysfunction. Dante's journey echoes that of his Italian namesake in The Divine Comedy.
Dante, a social misfit because of his race and political ideals, pursues his Beatrice in a former college classmate, a beautiful immigrant medical student caught between her British Christian and Pakistani Muslim heritage. Their lives and those of their two closest friends are torn apart by the disaster of 9/11 and the war that follows.
Non-Fiction:
Trade and Social Insurance: The Development of National Unemployment Insurance in Advanced Industrial Democracies
A national award-winning study of the political and economic foundations of the modern welfare state. Cross-national statistical and four historical case studies of the UK, Belgium, Switzerland, and the USA show how international trade dependence helped shaped national universal unemployment insurance systems in developed democracies. This challenges the conventional wisdom that these programs were mostly determined by labor organization and Left-Labor governments in power.
The study won the American Political Science Association's Harold D. Lasswell Award for Best Doctoral Research in the Field of Policy Studies completed in 1998-1999 and was first runner-up to the National Academy of Social Insurance's John Heinz Dissertation Award in 2000.
"Change is inevitable. Change is constant."
– Benjamin Disraeli
"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change."
– Charles Darwin
Table of Contents
Author's Note
Revisions to 2nd Edition
Executive Summary
Introduction
Chapter One – A Simple Model
1.1 Let's Eat! Now or Later?*
1.2 I Like What You Have - Let's Trade*
1.3 I Need Some $Money$**
1.4 Debt and Credit**
1.5 Capital versus Labor: Friends or Foes?**
1.6 Risk, Return and Uncertainty**
Chapter Two – The Macroeconomy
2.1 Market Failures**
2.2 The Mystique of Money***
2.3 Financial Alchemy***
2.4 Capital and Financial Markets***
2.5 Labor and the Problem of Unemployment**
2.6 Competing Macroeconomic Theories**
2.7 Distributional Failures*
2.9 Risk, Uncertainty, and Insurance**
Chapter Three – The Politics of Policy
3.1 Democracy and the Two-Party System*
3.2 Federalism*
3.3 Politics and Policy*
3.4 The Media*
3.5 Red vs. Blue?*
3.6 Elites, Oligarchies, and Plutocracies*
Chapter Four – Applying the Model to Policy
4.1 The Great Moderation, The Credit Bubble and Financial Crises**
4.1.1 A House is Not Just a Home?*
4.2 The Policy Agenda
4.2.1 Private and Social Insurance**
4.2.2 Distributional Issues**
4.2.3 Capitalism For All**
Chapter Five – The Main Policy Challenges
5.1 Federal Reserve Policy***
5.2 Fiscal Reform**
5.3 Tax Reform**
5.4 Risk, Insurance, and Entitlements**
5.5 The Principal-Agent Problem**
Conclusion
The Curse of the Market**
Appendix A: A Gross Over-Simplification of Economics***
Appendix B: What's Wrong with Economics?***
Appendix C: The Credit-Debt Machine***
Appendix D: Casino Capitalism and Crapshoot Politics Blog
About the Author
Acknowledgments
Reading List
Glossary
Notes
Difficulty Factor: * = easy; ** = moderate; *** = challenging.
Author's Note
Economics is the fine art of managing change through exchange.
There is an ancient Chinese proverb that says, "May you live in interesting times." (Some may consider this as more of a curse.) The past few years certainly have proven interesting for those of us who study politics and economics, but perhaps have been less appreciated by others who have lived through them. My training is in political science, finance, and economics. I practice my trade through writing, researching, and policy analysis. Since the beginning of this episode we now refer to as The Great Recession (which is probably not really over yet), I've encountered endless questions in casual social gatherings: What happened? What is going to happen now? How did this happen? Who's to blame? Is our politics broken? What can be done? How do I protect myself? Come on, aren’t you a political scientist and economist?!
Each time, I have to humbly confess that I don't have the answers and mumble something about how "it depends." (Economists are great at faking humility.) But, of course, this is not really very helpful. So, I follow up with: "Well, that is a big question." The faint of heart then turn the conversation back to sports, or to the subtleties of a delicate pinot noir.
Okay, not always. For those who persist, I feel compelled to frame these open-ended questions within the larger context of our society and how to understand it. Such attempts are the least we can do as social scientists; non-economists should be engaged in more pleasant activities than wondering what the so-called experts are chatting about. I also believe that the essence of politics and economics can be reduced, essentially, to simple intuition and common sense of the Mark Twain variety. Although the subject of high finance gets more esoteric and it helps to have experience in the field, for the most part our experts have only succeeded in making a complex world even more incomprehensible. Unfortunately, journalists and politicians have often valiantly waded in to explain this world but get their explanations mostly wrong, while sprinkling their politics and ideological opinions into the mix. I have often wished I could point the intellectually curious to a simple exposition of our modern political economy—one that could be easily consumed, with a minimum of indigestion. Thus came the idea to offer A Citizen’s Survival Guide.
I argue that a more comprehensive understanding of our political economy, our economic institutions, and the policies we enact is of the utmost importance to the average citizen today. Momentous changes are unfolding within our world. These changes, coming at an increasing pace, will affect each and every one of us in the years to come. The chosen cure for the financial crisis of 2008, for instance, has been to transfer wealth from savers and taxpayers to banks and other creditors in order to shore up an insolvent banking system. The zero interest rates on current savings accounts are no accident – they are a result of a deliberate policy to re-inflate asset prices (i.e. stocks, bonds and real estate), in order to save the value of collateral on non-performing loans that threaten the financial system. The same banks that are receiving no-interest loans from the Federal Reserve are turning around and buying Treasury bonds at 3% risk-free returns. In plain speak, the Fed is lending banking conglomerates free money so that the government (us!) can then borrow it back from them at 3%! These banks then use the profits to pay out large bonuses and rebuild the capital they lost from the bad loans they made. More alarming, this public-private credit system is also funding government deficit spending at an exploding rate.[1] These are our debts and one wonders when the voters were consulted. Let us put this another way: There is a large entity in the economy that is motivated to create and extend credit (the banking system backed by the Federal Reserve) and an even larger entity interested in borrowing and issuing debt (the government). It just so happens that this symbiotic credit-debt relationship is entirely underwritten and paid for by the US taxpayer.[2] How many of us get to play “heads we win, tails you lose” on a scale of this magnitude?
A conspiracy theorist might conclude this is all a nefarious plot for political and financial elites to accumulate vast amounts of national wealth without ever being held to account by the people who pay. Conspiracy or not, this is a great system if you can keep it under wraps so depositors, taxpayers, and citizens are unaware of what’s really going on.
The Fed’s aforementioned reflation policy is trumpeted by the media and by politicians who claim it is “keeping people in their homes.” But who really wants to keep paying for an overpriced home over the next 20-30 years? Those kinds of investments will make homeowners destitute, not financially secure. In the meantime, people who are prudently saving and living within their means (many of them elderly and on fixed incomes) are paying dearly in foregone interest and higher energy and food prices. Such policies will continue until voter-taxpayers understand and assert their interests at the voting booth without being distracted by the latest scare tactics and white noise generated, usually with a heavy dose of ignorance, by our two political parties.
Access to health care and the security of retirement pensions are two more critical challenges for our current politics. Both issues relate to an important concept addressed in this guide—the gradual shifting of risk in our free society. This trend has fomented growing political tensions over whether governments can provide for the social welfare needs of their citizens, or whether they even need to. Our changing economy is affecting our jobs, careers, incomes, families, wealth, safety, and our society’s future stability and well-being. Similar changes are occurring across the globe, whether we like it or not. Our institutions and policies need to empower us to adapt easily to change. We can argue over the costs and benefits of globalization and fight battles over political ideology, but this all seems beside the point. As a former teacher of political economy, I have found that economics and politics are too malleable and complex to understand clearly from a purely ideological position. One needs an open mind to challenge the conventional wisdom that bombards us from both ends of the political spectrum.
In full disclosure, I will admit that my own preferences are aligned with those principles articulated in America’s Declaration of Independence, that we are endowed…with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. These principles translate into an explicit preference for functioning political democracy and economic freedom, both of which obtain in an open, competitive environment characterized by 1) free markets for economic exchange, and 2) participatory politica
l democracy. These provide the core of political liberalism in the historical sense; they are embraced by classical liberalism on the conservative or libertarian ‘right,’ as well as by democratic liberalism espoused on the populist ‘left.’ I will assert that the ideas I present in this guide can be embraced regardless of ideological faith. Not only do I advocate for free markets, but also for a strong safety-net to protect citizens from vicissitudes of the economy beyond their control. Many of our public debates degenerate into these arguments over free markets, social welfare, and true democracy, but if we believe in the form of political liberalism on which the United States of America was founded, the question we should ask is not whether we have achieved these conditions in perfection, but whether economic and political freedoms provide a useful lodestar to guide our actions and aspirations. I believe they do. My recommendation is to put partisan political ideology aside—it is not helpful to intellectual objectivity. That’s all I believe I need to say on the matter.
This is not an economics text or a thorough critique of recent events – others have offered these in abundance. For the sake of brevity, I will not treat economic issues comprehensively, but will try to provide a practical overview so readers may better understand the "big picture." My appeal is to intuition. I offer here a conceptual approach to economics and politics that does not require technical training, but is nevertheless sufficient to help one make informed judgments about policy choices. It serves in some ways as a citizen or voter's guide, hence the title. In a free society, voting and making our opinions known to political representatives is the most direct way to influence policy choices that affect us all.
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