THE BLOG
05/25/2009 05:12 am ET | Updated May 25, 2011

The Voodoo Economist

In good times, Free Enterprise works well for some people. In bad times it doesn't work well for anyone. Believers in the mystic efficacy of the market call this the business cycle. Everyday people, who only awake from our political stupor in times of serious emergency, call this alarming.

Nevertheless, this is what we find.

The Obama administration thinks that raining down money on the financial markets, along with a measure -- or two -- of New Deal, Keynesian style pump priming of the economy will ease liquidity and eventually restore demand to more or less previous levels.

Voodoo economists say, Dream on.

Owing to the insane levels of consumer debt that we, the people had to carry in order "to grow" the now collapsed Ponzi Finance economy, it's highly unlikely that we will able to re-inflate Demand to 1990's or early 21st century levels. If consumption at 2006 levels is what's necessary to re-inflate demand sufficiently to "end the recession," it's not going to happen; not next year, not anytime soon.

In 1933, when FDR came in, the Financial Crisis of 1929-30 had already long before morphed into a Great Depression and it was clear to anyone, including the five or six Capitalists with their heads on straight (and that's being excessively generous), that only massive government intervention in the economy could save Capitalism.

The Obama Administration, on the other hand, is coming in near the beginning of a deep slump: near enough, that many are still not convinced of the slump's severity, and the administration is still concerned with "not spooking the markets."

However the biggest -- and still somewhat hidden -- problem that Obama faces is that it's not clear there is another way forward for Capitalism this time.

The Ponzi finance economy of the Reagan-Clinton-Bush era didn't just happen. It's roots go back to the initial decline of American manufacturing in the late 60's.

By the end of the Seventies, we were flooded with a slew of Marxist jeremiads that saw the crisis of those years as presaging the collapse of the system. What many of these analyses missed, however, was the possibility of further innovation in Capitalism: What they missed was the coming Tech and computer revolution.

Capitalist true believers, of course, like to trumpet Tech as the example of what the Market can do if left to its own devices. This assertion is frankly even dumber than crude Marxist assumptions about the inevitability of Capitalism's collapse. The deep wellspring of state support for the research that underlay the Tech revolution: particularly the development of the Internet by government computer scientists belies the boosterism of the true believers.

The big problem with Capitalist Tech innovation, at least in the Reagan/Clinton/ Bush era of Ponzi Finance Capitalism, was the mixed, muddled, and corrupted way it went about fulfilling its larger, non-financial, promise.

The vast preponderance of email on the internet is spam, and the majority of sites on the web are dedicated to porn. And let's not even talk about Twitter. What drove the so-called Capitalist innovations of Tech were stock market valuations and these typically turned out to have nothing to do with even potential profitability. The entire system was predicated on the assumption that the Market knew, when in fact the Market is an ass, and proud of it.

With the collapse of the Tech bubble at the turn of the century, Wall Street next turned to "financial innovation" as the new salvation of Capitalism and, as can we see now, that didn't work out very well.

It's still quite possible to believe that a next wave of Capitalist innovation could be led by Biotech, Green energy and what have you. However in the absence of a market that can fairly value these emerging technologies, what we are left with is the same, incredibly profligate, inequitable, wasteful and broken, Finance Capitalist model. And it's not clear that the world can survive too much of more of that.

We need a new global economic system, and with the demise of Command Economy Socialism, ironically only two short decades before the collapse of its bete noire, Capitalism, only Voodoo Economics can supply it.

The genius of the American System has always been the controlled competition of checks and balances and that's what the Voodoo Economic Recovery plan builds on. We're talking about Real Competition here, not the fake Japanese monster movie competition between highly leveraged and cannibalistic oligarchies that characterized late Capitalism.

The only entity with enough Capital to compete with the too-big to-fail mega Corporations of the 21st Century is the State itself.

For an idea of how this would work, we need look no farther than the Auto Industry.

The Auto Industry is collapsing before our eyes, and if nothing is done about it, the Midwest and Upper Midwest are going into a depression that will not lift in our lifetimes. We sense now that Obama and his "Temple whore economists," Summers and Geitner, are really gonna blow it here big time, but using the Public-Private Competition model instead, here's what would happen.

The government would first of all bailout both Ford and GM by assuming the health care and legacy costs of the two companies. In exchange, we, the people will receive an equity -- and voting -- stake in the two companies as well as significant public and union representation on their boards.

Chrysler, the least viable of the Big 3, would be bought from Cerberus Capital Management and run by a Public Corporation -- call it US/Chrysler. Over the course of several years it would be converted to a dedicated green car company, whose chief line; the "Green T" would be a stripped down, low cost hybrid or electric car, affordable for every American family and financed by the new US/Chrysler Bank.

In the Voodoo Economic Recovery Plan, this model of the auto industry would be followed throughout the economy.

When most of the big Banks are taken into the receivership, as they surely will be by early 2010, one of the Banks will not be resold to private investors, but will be kept by the people and managed by a Public Entity. Like a private bank, the "Public Bank" will also be responsible to its shareholders: the people of the United States. Profitability would be a goal, but wise public investment in green community building, low cost student loans, affordable mortgages and non-usurious commercial credit would be it's raison d'etre.

The Pharmaceutical Industry has created an empire by utilizing public, government and university research to make obscene profits for itself, and then paying an army of lobbyists to cover its tracks. This is an industry crying out for Public Competition.

Public Power and utility companies would be systematically established in every area of the country to compete with the existing private companies. The goal of public power would the replacement of fossil fuels with renewables as well as fair and reasonable service to its customers.

On it would go throughout the economy: Could Microsoft dominate the software and computer industry if a public tech company, capitalized at the same levels as Microsoft, was pushing open source and Linux software as a competing platform? Could Google continue as a Big Brother like power unto itself if challenged by a well-capitalized, less self-interested, search engine? Maybe yes, maybe no, but a Public Tech company would create thousands of tech jobs and a tech industry more focused on value and function, and less on planned obsolescence and weird nerd fetishisms, either way.

There were many weaknesses of the late Capitalist system, but the most obvious was the structural one. Capital needs to grow, which in turn, means enterprises have to grow larger and larger, until too-big-to fail, the epithet for our times, is the most obvious term that applies to them. But it's not only that they're too big to fail, giant enterprises simply do not work particularly well. This goes for Public Enterprises too. Voodoo Economists do not believe that publicly owned companies would intrinsically operate any more efficiently than private or publicly traded Companies. If we have to hazard a guess, we'd say that they will operate spectacularly better at first based on the go-getter idealism and unflagging energy of the first generation of workers and management . . .
. . . And then fall off in efficiency through succeeding generations, until eventually they more or less resemble the Post Office.

C'est la vie. The Voodoo Economic Recovery program does not pretend to be a panacea for the troubles of the world, it's just a way of leveling the playing field, and pointing needed social investment in the right direction. Parenthetically it should also crack open the door for small and mid level manufacturing to take advantage of the rebirth of Capitalist competition, which became almost an afterthought in the last generation.

Voodoo economics, of course, has gotten a bad rap over the years; especially from Bush I who accused Ronald Reagan of it, but as we say at the Institute, consider the source. And for that matter, don't criticize what you can't understand.

Here at the Institute, we've been reluctant to criticize this administration over their first hundred days simply because they've inherited such a mess. But now, as we've watched the Obama Administration take baby steps in a hundred different policy directions, it's become obvious that addressing the mess directly is not their MO. The Obamaites are going to try and, Clinton-like, politically finesse the mess, and wait for openings to take their shots.

The problem is those openings may never come.

This "Recession" may, or may not, lift a bit over the next year, but it's not going to "end." We're at the beginning of a structural change in the World Economy.

Voodoo Economists expect this realization to kick by the first quarter of 2010, if not before. Of course by then, it may be too late to save Obama's Presidency -- or at least the "change" part of it. Someone will have to take the fall, and we suspect it will be Obama's Machiavellian Chief of Staff, Rahm Emanuel, who's so busy triangulating, it's not clear who he's triangulating with.

In the Jewish religion the current season between Passover and the ancient beginning-of-Summer Festival, Shavuot, or "Festival of Weeks," is called "the counting of the Omer." The Omer lasts seven Shabbats, seven weeks, 49 days.

In the way of Prophecy, we suggest here, that like the Omer, Rahm Emanuel's days (as Chief-of-Staff), are numbered.