ECONOMICS+POLITICS+FINANCE A CITIZEN’S SURVIVAL GUIDE by MICHAEL HARRINGTON, MBA, PhD Copyright © 2011, 2014 Michael Harrington RSBS Productions 1210 Stearns Drive Los Angeles, CA 90035 All Rights Reserved. 2011 2nd EDITION 2014 ISBN-10: 1499738153 ISBN-13: 978-1499738155 Printed by CreateSpace, An Amazon.com Company 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 Google+ Page Authors Guild: www.michaelharrington.info [email protected] www.amazon.com/author/michaelharrington http://casinocap.wordpress.com/ Author’s Facebook Fan Page This book is also available on Amazon.com as a fully hyper-linked navigable eBook. Thank you for your help and cooperation in maintaining the integrity of this work. "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 [THIS PAGE INTENTIONALLY LEFT BLANK] CONTENTS Acknowledgments ........................................................................................................... i Author's Note ................................................................................................................ iii Executive Summary .................................................................................................... viii Introduction .................................................................................................................... x Chapter One - A Simple Model ................................................................................... 1 1.1 Let's Eat! Now or Later?* .................................................................................. 2 1.2 I Like What You Have - Let's Trade* .............................................................. 3 1.3 I Need Some $Money$** ................................................................................... 3 1.4 Debt and Credit** ............................................................................................... 4 1.5 Capital vs. Labor: Friends or Foes?** .............................................................. 7 1.6 Risk, Return and Uncertainty** ........................................................................ 9 Chapter Two - The Macroeconomy .......................................................................... 14 2.1 Market Failures** .............................................................................................. 16 2.2 The Mystique of Money*** ............................................................................. 18 2.3 Financial Alchemy*** ....................................................................................... 21 2.4 Capital and Financial Markets*** ................................................................... 24 2.5 Labor and the Problem of Unemployment** .............................................. 27 2.6 Competing Macroeconomic Theories** ....................................................... 29 2.7 Distributional Failures* .................................................................................... 32 2.8 Globalization: National vs. International Economy** ................................ 33 2.9 Risk, Uncertainty, and Insurance** ................................................................ 35 Chapter Three -The Politics of Policy ....................................................................... 42 3.1 Democracy and the Two-Party System* ....................................................... 43 3.2 Federalism* ........................................................................................................ 45 3.3 Politics and Policy* ........................................................................................... 45 3.4 The Media* ........................................................................................................ 47 3.5 Red vs. Blue?* .................................................................................................... 48 3.6 Elites, Oligarchies, and Plutocracies* ............................................................ 50 Chapter Four - Applying the Model to Policy ......................................................... 52 4.1 The Great Moderation, The Credit Bubble and Financial Crises** .......... 52 4.1.1 A House is Not Just a Home?* .............................................................. 56 4.2 The Policy Agenda ............................................................................................ 61 4.2.1 Private and Social Insurance** ............................................................... 65 4.2.2 Distributional Issues** ............................................................................. 68 4.2.3 Capitalism For All** ................................................................................. 70 Chapter Five - The Main Policy Challenges ............................................................. 73 5.1 Federal Reserve Policy*** ................................................................................ 73 5.2 Fiscal Reform** ................................................................................................. 79 5.3 Tax Reform** .................................................................................................... 80 5.4 Risk, Insurance, and Entitlements** .............................................................. 85 5.5 The Principal-Agent Problem** ...................................................................... 88 Conclusion ..................................................................................................................... 94 The Curse of the Market** .................................................................................... 98 Appendix A -A Gross Over-Simplification of Economics*** ........................... 106 Appendix B - What's Wrong with Economics?*** .............................................. 110 Appendix C - The Credit-Debt Machine*** ......................................................... 112 About the Author ...................................................................................................... 116 Reading List ................................................................................................................ 117 Glossary ....................................................................................................................... 119 Notes ........................................................................................................................... 127 Difficulty Factor: * = easy ** = moderate *** = challenging ACKNOWLEDGMENTS I would like to express my gratitude for those who have helped add invaluable clarity and comprehension to this presentation. Without such generous assistance I’m sure the ideas expressed here would be understood fully by the author alone, if I may be so presumptuous. The list will grow as the book circulates, but I will mention here David Magee, Jon Fitzsimmons, and Todd Mittleman. I’ve had many fine teachers in economics, finance, political science, and public policy. I will spare them unsolicited publicity, but no blame can be laid at their feet. As always, my inestimable gratitude is reserved for my wife, unpaid editor, and best friend, Tushara Bindu Gude, who, as an art historian, labored over these pages to make sense of, and correct, my convoluted thoughts. I dedicate this book to her and hope she is never embarrassed for it. All errors are mine alone. i [THIS PAGE INTENTIONALLY LEFT BLANK] ii 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