Do Corporations Need A Tax Cut?

Robert Reich shows that corporations don't need a tax cut and that their share of the tax burden has fallen dramatically over the years. When the corporate share of the tax burden falls, it means that the burden shifts elsewhere, but that does not seem to bother many people. Reich believes that Obama's plan to reduce the corporate tax rate and close some of the loopholes is a missed opportunity. He argues that Obama lost a chance to draw a bright line between his priorities and those of the GOP. On the other hand, it also took away one of the GOP talking points about Obama as an anti-business president.

John Cassidy Explains Why Romney's Tax Plan Is Irrational But Useful In Campaigning

This article in the New Yorker provides some details and a critique of the tax policies advocated by Mitt Romney.

Sustainable Capitalism Is The Way To Preserve Capitalism

This article describes some of work on defining sustainable capitalism. Private businesses invest at a much higher rate than publicly held companies. They take a longer view than the managers of public companies for reasons that are well described. If effect, their short term focus is bad for capitalism and bad for society. The article provides lots of references to research on how to alter the short term focus of management by changes in the accounting system, and by including the measurement of social performance goals.

Adam Smith On The Limits Of Self Interest

Adam Smith is revered by conservatives who view him as an advocate for selfishness. They ignore the limits that Smith placed on the role of self interest in motivating behavior. This article provides some quotes from Smith on the limits to self interest. Smith was a moral philosopher and he believed that empathy for others placed a limit on self interest. He also recognized that we care about how others will react to our behavior. This makes us reluctant to take actions in which we benefit from harm to others. Most of us care deeply about our reputations and Smith believed that managing our reputations is an important limit on purely selfish behavior.

I think that J.K. Galbraith explained perfectly why conservatives have emphasized Smith's ideas on the social benefits derived from self interest, and have ignored the limits that he placed on selfishness, in the quote below:

" The modern conservative is engaged in one of mankind's oldest exercises in moral philosophy; that is, the search for a moral justification for selfishness." This is how Ayn Rand described herself, and it reflects the justification for conservative economic policies. There is no public interest other than that accomplished by the invisible hand of self interest.

Larry Summers Makes The Case For Tax Reform

Larry Summers argues that tax reform is an essential element of deficit reduction. There has been a lot attention given to entitlements, and some things will need to be done to sustain social security, but they are minor compared to healthcare costs. The problem with containing healthcare costs is that it will be difficult to overcome resistance from private healthcare providers. I'm sure that his experience with healthcare reform while he was in the Obama Administration is reflected in that observation.

He believes that it is politically difficult to raise revenue by raising the top marginal taxes rates beyond what they were in the Clinton Administration. His focus is on tax expenditure reforms. The Simpson Bowles Committee recommended that they be eliminated from the tax code and that marginal tax rates should be reduced. Many of these tax expenditures encourage unfair gaming of the tax system. For example, US corporations reported profits in Bermuda that were more that six times Bermuda's GDP. Ireland and Luxembourg have also been used as tax havens by US corporations.

The goal of tax reform is not only to raise revenues that are needed to reduce budget deficits. The system needs to be fairer and more progressive. Public concerns about the fairness of the tax system, and rising income inequality, are a major reason for the lack of confidence in government.

Social Darwinism For Business Is Good

This article reviews a claim made by researcher from the Booth School of Business at the University of Chicago. They claim that corporate debt is good for the economy. Weak businesses will fail because of debt while the strong survive and the sooner they fail, the faster resources can be shifted to more productive activities. In other words, Social Darwinism is great for the economy. We should have let the US auto industry fail according to this ideology.

Milken Institute Promotes A Plan For Fixing Housing Market

The Milken Institute is promoting a book on fixing the housing market. There is a link to the video promotion of the book in this post. The authors of the book make several points about what is needed. The argue that securitization of mortgages, with proper underwriting, expands the funds needed to provide mortgages. That will require that we find jobs for those who are unemployed so that they qualify for mortgages. We should also build smaller homes that are energy efficient so that home ownership is more affordable. We went in the opposite direction in the housing bubble. The average square footage of new homes increased from 1700 to 2400 in this period. That added $85,000 to the average cost of home ownership.

How The Supreme Court Has Put Super Pacs In Charge Of Political Campaigns

This articleshows how the Supreme Court ruling on Citizens United has made it possible for super Pacs to control the GOP nomination process. It also contrasts the logic of that ruling, with a ruling by a previous court that took the position that the influence of money should be limited in order to protect democracy.

Auto Manufacturers Can't Keep Up With Demand

Not too long ago, the US economy was dependent upon on auto sales. That is no longer true for economy as a whole, but it makes a real difference in Michigan and other states that make the parts for GM, Ford and Chrysler. Auto sales declined sharply in the recession and the pent up demand is now being released as the economy recovers. The increased demand is also putting pressure on non-domestic auto companies to increase production capacity. Most of them have expanded their US operations in response to higher demand. People, across the globe love the automobile. Hopefully, we will find a way to satisfy their demand with newer products in the near future that are less harmful to the environment.

The Historical Importance Of Contraception

This post (via Brad DeLong) offers an explanation for the resistance that many have against birth control. Sara Robinson believes that contraception has released women from the control of men who view women as their property which exists to provide them with children whose parentage cannot be disputed. She also claims that contraception, along with the integrated circuit and the landing of man on the moon are the events that historians will attribute to our age 500 years from now. I'm not sure about what people will consider important 500 years in the future, but the resistance to contraception by many religions, which place men above women, speaks louder than words. Moreover, it is influencing demographics in ways that already have a profound affect on society and the economy.

Rick Santorum Attacks JFK On Separation Of Church And State

Rick Santorum has identified and targeted his constituency in the GOP base. They should be represented in government. I hope that he starts a third party if he does not win the GOP nomination. Perhaps the GOP can then do what it has done well historically, and focus exclusively on the needs of its wealthy supporters who have a need for lower taxes.

Republicans With College Degrees Are More Likely To Deny Global Warming Than Republicans With No Degree

People believe what they want to believe, but republican's are even less susceptible to data that challenges their beliefs than democrats. This article presents data on global warming denial that shows that republicans who graduated from college are more committed to denial than less educated republicans. The opposite is true for democrats. Those who graduated from college align themselves with the scientific community on global warming more often than those who did not attend college.

Since I have a belief that education opens the mind, I am surprised to learn that education has the opposite effect on republicans. I am still surprised when I have discussions with highly educated republicans who share many of the beliefs held by Tea Party members who are less well educated. Global warming denial is a classic example, but it is not hard to find problems in data that point to problems well in the future. I was more surprised by discussions with friends, that have PhD's, who believe that Obama is not a US citizen, and who believe much of the right wing nonsense that floats around the Internet. For example, one of my friends argues that the budget surpluses in the Clinton administration were the result of reforms made by the Reagan administration. On the other hand, he does not believe that the Bush administration had any responsibility for the budget deficits in the Obama administration. He does not see any inconsistency in his positions. He also has a very smart son who is beginning his search for colleges. The family has ruled out Harvard and several other prestigious colleges that they regard as "too liberal". I must admit, however, that I was pleased that my son chose a college that had a reputation for being liberal. I would not have been displeased, however, if he had selected another college that offered him admission with a reputation for being more conservative. Both of these colleges provide an excellent education. Perhaps the difference between my friend and myself is that he feels that it is necessary to protect his son from exposure to those who have do not share his belief system.

More On Eurozone Crisis And The Wrong Solutions

Paul Krugman provides some charts that explain how the eurozone crisis developed. He argues that eurozone leaders don't understand the cause, and that is why the medicine is lethal. Of course, the GOP has only one reason for every economic problem. The governments did it by overspending on social welfare programs. The only problem with its explanation is that it is inconsistent with the data. Of course, data is not important to its base that holds firmly to its articles of faith on every issue.

GOP Budget Proposals Increase Deficits

This article sets the record straight. The GOP budget proposals will increase budget deficits. It is not the fiscally responsible party that it pretends to be. It is a party with a single purpose. Their proposals don't work because they are riddled with tax cuts.

Romney Argues That It Was Wrong To Save The Auto Industry And Over One Million Jobs

The US Government became the lender of last resort to the auto industry when it was unable to secure private investments. Today there are 1.45 million Americans who have jobs and GM is again the largest auto company in the world. The antigovernment furor of the GOP forces Romney and other candidates to tell its base that this was the wrong thing to do. Allowing the auto industry to fail, even if it ruined the economy, is part of an outdated ideology that has infected American society. Even smart people like Mitt Romney are forced to act dumb in order to placate the demands of its supporters who are true believers in Social Darwinism. His message has little appeal in Detroit, but the GOP's base is in rural Michigan where anti-union sentiment is just another part of its fundamentalism.

One More Stake In Heart Of The Reagan Myth

This article takes a critical look at the Reagan myth. The data do not support the myth, beloved by conservatives, that deregulation, tax cuts etc. enabled to US to win the per capita GDP battle with the rest of the world. The data show that the Reagan era is better described in terms of brief decline which was followed by a reversion to the long term trend line. Other economies did even better than the US during this period.

A Critique of Consumerism With An Unusual Flavor

This article (via the NY Fed) provides an analysis of consumerism that contrasts with the more familiar claim that advertising traps us into unsatisfying lifestyles. We are trapped into consumerism instead by the structural factors in the economy.

Economic theory suggests that we make choices as individuals to work more hours or to work fewer hours in order to have more leisure (the famous backward bending labor supply curve). Employers, however, set the number of work hours in a day. They prefer to have fewer employees who work more hours than a larger number who work part time. Therefore, employer decisions cause us to work more hours, and their preferences determines the trade off between work and leisure. Our consumption levels are determined by the hours worked which produce our income. Many families experience a "time squeeze" in which there are not enough hours in the day to perform our jobs and to engage in other activities such as taking care of the family and having more time for leisure.

Society is also blind to the problem of ecological sustainability. We don't price in the cost of capital depletion and pollution when we make production and consumption decisions. Therefore, we consume more than would otherwise consume if we priced in the externalities.

The third structural factor is status competition. We want to display more wealth than our perceived rivals and we want to defend against the perceived wealth of our rivals by matching their consumption. Moreover, we no longer restrict our status competition to our neighbors. Instead we are aware of the lifestyles of the rich and the famous as well. It is not possible to satiate our consumption. It ratchets up as we move from one level to the next step on the ladder. It is difficult to deny status via consumption to ourselves when others refuse to do so. The goal of getting rich and consuming even more has become built into our status competition.

The best way to reduce overconsumption is to build communities which place a higher value on ecological sustainability and refuse to engage in consumption as the means to status. I guess it takes a village. I would add that many occupations create their own villages which demand increasing levels of consumption. Hedge funds have their own system of status competition. The forms of consumption become increasingly sophisticated as one rises up the ladder. The $500 bottle of wine along with the consumption of art and other scarce commodities creates the need to work even more hours in order to match the status of others who participate in that community.

Conservatives And Liberals Agree On The Value Of Hard Work

Noah Smith is a smart young PhD who has learned to think like an economist and he also thinks about important topics. He does a couple of thought experiments in this article and concludes that libertarians and conservatives have something in common with liberals. They both believe that society ought to provide rewards to those who work hard. Conservatives believe that those who work hard will get rewarded. Liberals believe that hard work is not as rewarded as it once was and that is why income mobility has declined in America.

It is pretty clear from the comments that follow his post that his thought experiments over simplified the problem of income mobility. On the other hand, his post encouraged others to address variables that he had not considered. That represents much of what happens in economics. He learned something about the identity of values between conservatives and liberals about hard work by building a simple model. He also encouraged others to explore the problem of income mobility more deeply. There must be a pony in there for someone to discover.

This Is What A Balance Sheet Recession Looks Like

There has been a lot of debate around the causes of the slow economic recovery in the US. Some have argued that the loss of housing wealth affected consumption, and others have put the blame on debt leverage. They argue that deleveraging amplified the wealth effect. This graph shows that employment growth has been slowest in counties with higher levels of debt to income. In other words, we have a balance sheet recession. It is more important for policy to focus on debt reduction than on reflating housing prices. The administration is coming around to this view and may begin to attack the recession differently.

Corporatism is Our Problem. We Need To Restore Pure Capitalism

Two leaders from Columbia University's Center For Capitalism And Society argue that criticisms of capitalism are misplaced. They claim that capitalism has been eroded by the steady growth of mixed economies in which government has played a larger role in determining the directions of the economy. They call this corporatism. They would like to restore a purer form of capitalism in which government does not play a large role.

They raise a point that is made by many on the left. Some call it crony capitalism, and others refer to it as corporatism as well. On the other hand, they make the case for an idealized form of capitalism that has never existed and only works well in theory. We are still trying to find a way to resolve the tensions between capitalism and democracy. It seemed to work a lot better 40 years ago than it does now. Making that work better is more realistic than wishing for a system of capitalism that only exists in the imagination of some economists.

We Need A World Bank That Does The Job For Which It Was Created

Jeff Sachs argues that the World Bank has the potential to achieve its missions, which would benefit most of the world. Unfortunately, it has served the commercial interests of the US which appointed the last 11 World Bank Presidents. Most of them have been recruited from Wall Street banks. Some of the leaders from emerging market countries are pushing back and are asking for more influence in determining the bank's policies.

Private Employment Is Up And State and Local Employment Is Down

This graph illustrates one of the problems in reducing the unemployment rate. Private employment has been growing while state and local employment has been falling. This also reduces economic growth in the near term, and perhaps in the long term since spending on education and infrastructure may have an impact on the performance of the private sector.

Degree Of Conservatism Map By State In US

This article contains a map of the US that measures the degree of conservatism in each state as determined by a Gallop poll. The author has a hard time understanding why the states with the lowest levels of income and educational achievement are also the most conservative. That is hardly surprising. The messages used in the GOP primary campaign by all of the candidates shows that they understand who votes for them and why. They own those states, and the general election is primarily dependent upon a battle for the moderately conservative states. People vary widely in their exposure to broader ideas and in their need for cognitive closure. Education tends to open minds and it can expose people to a wider range of ideas. That is one of the reasons why many conservatives prefer home schooling over the use of the public schools which have the potential to expand horizons.

Krugman Claims That European Economic Thinking Is Based On Microeconomics And Ignores Macroeconomics

Krugman makes two excellent points in this article. The first point is that European leaders support two policies, deregulation and trade liberalization, to stimulate growth in Europe, and that this is irrelevant. It does nothing to deal with urgent problem of low aggregate demand that being depressed by the deleveraging of public and private debt. He also argues that European policies are based upon microeconomic theory and not on macroeconomics. He should have reminded us as well that the subordination of macroeconomics to microeconomics has a long tradition. It started when Samuelson popularized Keynes in a way that led to a view of Keynesian theory as microeconomic with sticky prices.

Industrial Production In US Has Decoupled From That In Europe

There is one chart in this article which shows that US industrial production has decoupled from that of Europe. They had been following the same track until August 2011. Since then US industrial production has moved upwards, while industrial production in Europe has plunged. If industrial production in Europe continues in that direction it will have implications for the global economy. Expansionary austerity in Europe has been contractionary.

Billionaire Donors To 2012 Campaign Made Public

This articlelists some the billionaire donors to the election campaigns. They are now able to give unlimited sums of money to PAC's and they are doing so. 25% of the campaign contributions going to PAC's in the GOP primary campaign in recent months came from only 5 billionaire donors. Many gave large sums to multiple candidates. They are less interested in any specific GOP candidate than they are in defeating Obama. Given the background of these donors, I have a higher regard for Obama than I had in the past. If they are against him, I am for him.

One Chart That Describes Our Unequal Tax System

A chart in the President's Report On The Economy has attracted the attention of those familiar with the tax system. They point out that the chart shows that US tax policy violates two rules that are used to evaluate tax policy. US tax policy violates the rule of equity which has been used since Adam Smith which is based upon the ability to pay theory. That is, those with higher incomes should have a higher tax rate. It also violates the rule of horizontal equity. That is, that those with equal income should be taxed at the same rate.

The US Treasury Corrects An Article On Regulation In The Economist

This letter from the US Treasury to The Economist argues that the evidence that it used in an article on the cost of regulation was inconsistent with the evidentiary quality that one has come to expect from The Economist. A careful use of the evidence in the study cited by the article in The Economist would show that the Obama Administration has not placed a regulatory burden on business.

This is the second memo from the Treasury in the last week which makes an effort to defend Administration policy. It appears that the Administration has learned how to use some of the weapons available to the President. The Bush Administration took full advantage of its control over federal agencies.

Obama Administration Will Propose Reduction In Corporate Tax Rate

The administration will propose a reduction in the corporate tax rate from 35% to 28$. It will set the top rate for manufacturing companies that face global competition at 25%. It claims that the tax cuts can be paid for by eliminating loopholes in the corporate tax system. This will be difficult since a government study showed that eliminated all of the loopholes would be required to pay for a reduction of the tax rate to 28%. Corporations that benefit from loopholes will lobby against closing those that affect them.

Its hard not to disassociate this proposal from the 2012 election. The GOP has been campaigning on reducing the top tax rate to 25%. This proposal takes one of their planks away from them and it shifts the discussion to the loopholes. The GOP argues that the US has the highest corporate tax rate and that it makes US firms less competitive. Few corporations pay the top tax rate. They use a variety of methods to reduce their effective tax rate. Corporate share of total of total tax revenues has fallen considerably over the last 35 years. What they don't pay has to be made up elsewhere to keep total tax revenues as a share of GDP constant.

Greek Economic Sustainability Report

This is a copy of the report on the Greek sustainability analysis. The assumptions that it makes about GDP growth are not realistic.

The Political Dialogue Has Shifted To A Debate Between The Far Right And The Center Right

I remember when William F. Buckley was a lonely voice for conservatism. He complained that the political debate was between the far left and the center left. Conservatives were excluded from the dialogue that defined the late 60's and early 70's. This article is about how the dialogue has shifted since then in the UK. Government proposals for dealing with unemployment via a weak tax cut is viewed as an inadequate response by an economist. The response by labor, however, is also very weak. The dialogue is between the far right and the center right. Any stronger response would be regarded as too radical and impractical. Conservatives have been successful in reversing the situation that Buckley described. That appears to be true in the UK but it also describes what has happened in the US and parts of Europe as well. The Obama administration passed a healthcare reform bill that was very close to a plan proposed by the conservative Heritage Foundation, and implemented by a republican governor in Massachusetts. The times have changed, however, the Obama healthcare bill was described as socialism. The governor who passed the bill in Massachusetts, and who is a leading candidate for the GOP presidential nomination, has been forced to defend himself against attacks by his opponents for passing a conservative reform bill that is now regarded as socialism. The Obama administration has also been accused of class warfare for proposing the the temporary tax cuts made in Bush administration should be allowed to expire. If they are allowed to expire, taxes on the wealthiest Americans would return to what they were during the center right Clinton administration. That is a far cry from class warfare, but that is how the dialogue has shifted in the US.

Sustainable Capitalism And Why Inequality Matters

This article uses the recent settlement between banks, which were guilty of fraud, agreed to a civil settlement and fines. Some argue that criminal charges should have been made and that the banks will not comply with the behavior changes forced upon them in the settlement. This is interpreted as an example of unsustainable capitalism. It is made possible by income inequality which provides resources which can be used to influence government behavior. The result is a a two tier system of law enforcement which makes capitalism in its pure form unsustainable. We are left with crony capitalism which undermines confidence in government. The obstacles to reform increase along with inequality.

Two Graphs That Tell An Important Story About The Recovery and Causes Of Projected Budget Deficits

This post contains two graphs that tell a story. The first graph shows that price markups over unit labor costs have risen dramatically since 2000. The margin fell briefly at the onset of recession but it has risen during the recovery. Corporations are doing much better during this period than labor. That is reflected in the rise in stock prices. The other graph shows the contributions of various sources to projected budget deficits. One factor stands out above all of the rest. The Bush tax cuts, if extended, are the largest single source of projected deficits. Most of the deficit hawks favor the extension of the largest factor in the determination of the deficits. They are not really concerned about deficit reduction. They want to pay for the tax cuts by reductions in government spending on social services.

We Live In A Brave New World That Depends Upon Talent

David Brooks recites some data on marriage and concludes that we live in a brave new world of rugged individualism. It is a world in which the talented can thrive, but also one in which those without talent would have been better off in the old world of more stable relationships. In other words, talent is rewarded and the lack of talent is punished. It is not a world that favors the 1% against the 99%. Brooks never makes that point, but it is implied by his portrait of the brave new world. The talented are able to thrive in one bedroom apartments so wealth does not matter. They have obtained exactly what they wanted working in their information age jobs. The losers in this world are those without the talent to survive without social support.

Europe and Greece Agree To Debt Deal

Europe and Greece agreed to a bailout which will provide the funds needed to pay down its maturing bonds. In return, the Greek government pledged to reduce its debt to GDP ratio to 120% by 2020. The funds provided will go into a segregated account that can only be used for debt payments. The banks holding the Greek debt took a greater than expected loss on the debt. The principal was reduced by 53.5% which represents a net loss of 75% in value. Several of the details on the Greek commitment to improve tax collection and reduce the prices paid to healthcare providers, as well as defense procurements, were also provided.

US Treasury Defends The Administration's Budget Proposal

This article on the US Treasury's website, provides an analysis and a defense of the Obama budget proposal. It argues that the GOP and the administration have proposed budgets which differ primarily on who should pay for the budget cuts. The Obama budget includes an increase in tax revenues while the GOP budget has no increase in tax revenues. Both propose cuts in spending but the GOP budget cuts spending on programs that benefit those most in need. The Obama budget cuts discretionary federal spending to its lowest levels since the Eisenhower administration.

Problems With The Integration Of Market Capitalism And Social Democracy

This articleprovides a good background for the more detailed post that follows.

The Democratic Malaise In The US, Europe And Japan

This article in Foreign Affairs makes a good effort to describe the broad events that are reshaping the global economy. It argues that the economic challenges faced by the US, Europe and Japan are leading to a crisis in Democracy itself. Some suggestions are made about what might be done in response to the tensions between capitalism and democracy that have been exacerbated by the forces of globalization, but fixing the problem is not as easy as describing it.

Globalization has been led by the relatively independent decisions made by large multinational corporations to take advantage of technologies that have enabled them to become more productive in manufacturing. They can produce products and services more efficiently with modern technologies, and they have exploited the international labor market to their advantage. This combination has led to lower demand for labor in most western nations, and falling wages for the middle class that was built upon a base of manufacturing. The problems of a shrinking middle class and rising inequality in western nations have led to a crisis in democracy. Governments are better at distributing benefits than they are at distributing sacrifices. They have not responded well to problems of a shrinking middle class and the high cost of providing social safety nets. Partisanship is on the rise, and the media provokes partisanship rather than informing the public. The economic stimulus package in the US was passed without a single vote from republicans in the US House. The poor response by western governments to their problems, and the rising economic performance in Asian countries, which have different forms of government, has raised additional questions about the viability of liberal democracies.

Western nations have been able to manage business cycles by employing fiscal and monetary policy to moderate the business cycle. One of the problems today is that decisions that are made elsewhere also impact national economies. China has managed it currency in ways that effect economies in Europe as well as the US economy. Investors and rating agencies have made decisions which affect sovereign debt and interest rates and Europe's sluggish response it its crisis has an impact on the US and the rest of the world. Even the performance Hyundai, which has improved quality and has increased its market share, has led to changes that cannot be dealt with by national governments.

It has also been more difficult for western nations to work together cooperatively to deal with international problems. Dealing with global warming and the isolation of Iran requires the use of a broader network of nations than it has in the past. The G7 has given away to the G20.

Europe's crisis of governability has led to a renewed nationalism in many countries. There is increased opposition to European integration and globalization. This has been fueled by economic problems and other factors. Globalization has led to shrinking middle class even in Germany. Its middle class shrunk by 13% between 2000 and 2008, and its social safety net has been weakened as well. Spain has a 23% unemployment rate and its youth unemployment rate is above 40%. The youth unemployment rate is high throughout Europe. The younger generation does not share the memories of the older generations in Europe of the devastation brought on by wars, and they are less responsive to need for the integration. There has also been a negative response to the immigration policies that were necessitated by an aging population in Europe. The rise of right wing political groups in Europe has been in response to the economic problems and the poor integration of immigrants into the nation states.

Japan also has problems with globalization. In 1989 its per capita GDP was the fourth highest in the world. Today it is 24th in the world. Jobs and investment have increasingly moved to the " Asian Tigers". It has a shrinking middle class and higher levels of inequality similar to that of the West. The effectiveness of government has eroded in response to its failures to deal with economic decline. Japan has had 6 Prime Ministers in the last 5 years, and only 18% of the public has a favorable of the party in control of the government. There are major divisions within the two political parties and the dissension between the two parties has increased as well.

The article concludes with the challenge to provide a 21st century solution to the tensions between capitalism, democracy and globalization. It warns against protectionism, but it only offers a vague indication about what the 21st century solution should look like. The nation states should engage in strategic planning to improve competitiveness, and they should encourage a progressive populism instead of the reactionary populism that we see on the right. The focus should be on improving their control over the political economy, and its ability to deal with globalization and the demands of society for a more equitable distribution of rewards and sacrifices. Its hard to see how this can be done when those are precisely the issues that divide our nations politically. The nation states have the authority to deal with these problems, but there is a question about whether they can take charge of the process of globalization that has been driven by the corporations which make the most important decisions. They are driven to make decisions which improve their financial performance, and they are made independent of the domestic problems in the states in which they are domiciled. They have to power to influence government to assist them in achieving their individual goals. The question is whether governments will use their authority to manage the political economy in the public interest.

US Auto Industry Recovering After Rescue By Government

US auto sales up sharply from trough of recession. Things would be worse if we had not rescued the industry,

Research on Impact of Offshoring Manufacturing By US Firms

This NBER paper describes the relationship between the loss of manufacturing jobs in the US and the impact on income inequality. There were 27 million employed in manufacturing in 1982 and only 17 million in 2002. Most of the the job losses were due to offshoring of manufacturing by US multinationals to low wage countries. Economic theory suggests that jobs lost in one sector will migrate to more competitive sectors without loss of income. Many of those who lost low skill manufacturing jobs had to shift occupations to lower paying service jobs. They conclude that we need some form of industrial policy that would provide higher paying jobs for those whose manufacturing jobs are offshored. I wonder what those would be.

Most Economists In IGM Poll Believe That Fiscal Stimulus Was Positive

A large majority of economists at prestigious universities were asked whether the Obama stimulus was effective in keeping the recession from getting worse, and whether the long term benefits would be greater than the cost. Their response was overwhelmingly in agreement on the short and long term benefits of the stimulus. This is good news since even economists from the University of Chicago were positive about the effect of fiscal stimulus.

Christina Romer Interview On Lessons From The Great Depression and The Great Recession

This interview with Christina Romer is about the lessons learned from the Great Depression. She ranks the 5 best things that she has read about the Great Depression and the lessons from each. Its longer than the typical reference in a blog but it is extremely informative. She was a top economic advisor to the Obama administration and she argues that fiscal policy and monetary policy kept us from experiencing a downturn that would have been worse than the Great Depression without those policies. She also discusses some of the things that might have been done better and why they were not done.

She ranks the book by Milton Friedman and Anna Schwartz as number one on her list. She liked it best because it used historical evidence to support their conclusion that the banking crisis and the decline in the US money supply was largely responsible for the Great Depression in the US. She contrasts the use of historical data with our current focus on running regression equations to estimate the effects of policy on outcomes and explains why the good use of historical data was superior.

The second book on here list was also by an economic historian who explained the role of the gold standard in turning the US Depression into a global Depression. Foreign governments were concerned about the flow of gold from their countries to the US. They responded by raising interest rates to reverse the flow of gold. That caused their economies to lapse into Depression. The countries that went off of the gold standard were the first to recover from the Depression. She argues that the current problems in the eurozone are like those under the gold standard.

The third book is another book on the history of the Great Depression. It shows that our Great Recession was potentially deeper than the Great Depression and that we should have used even more aggressive policies to counter it than we did. The book also shows that our ignorance of how economies work in the 1930's was part of our problem. We kept experimenting with stop and go measures to turn things around and many were counterproductive. For example, Hoover raised taxes when increases in government spending led to a budget deficit. Roosevelt did similar things with fiscal policy. Monetary policy was also counterproductive.

She also cites numerous papers by Ben Bernanke who was a scholar of the Great Depression. His research showed that monetary policy could go beyond cutting short term interest rates and do much more to head off price deflation.

Her experiences in the Obama administration were also instructive. She argues that federal fiscal policy offset the decline in government spending at the state and local level, but it would have necessary to make it even larger in order for it to have had a more positive impact. It helped to keep the recession from getting worse but it was small relative to the size of the economy. She also argues that the Fed helped to keep us out of depression by rescuing the banking system from collapse. Bernanke understood the role of credit contraction in the Great Depression and he did what was needed to maintain credit. Monetary policy is also effective when we at the zero bound as we are today. A more aggressive response is needed. She believes that the Fed should have a nominal GDP target as well as an inflation target and act accordingly. The Fed, and most central banks, have a bias towards inflation control. She thinks that its policies can set inflation expectations that would stimulate consumer and business spending. Deflation expectations have the opposite affect. She concludes by explaining some of the political problems that arise in setting appropriate policies. The use of expansionary austerity as a response to budget deficits is contractionary but it is political popular.

Electoral Politics and Market Failure

This editorial describes a better way to purchase politicians. It reminds us that our electoral system is similar to the market system that determines how products are purchased. Markets are limited to consumers who have the funds to purchase products or services that maximize their utility. Politicians are in the business of providing utility to those who can afford their services. Those who can afford their services are able to extract benefits that far exceed the price on offer. The solution described in this article is an attempt to deal with some aspects of market failure. It simply changes the characteristics of the market.

We have tried numerous ways to limit the role of money in our electoral system. They have not worked. The money always finds a way into the market. After all, what good is money if one can't purchase whatever one wants with it? The problem with campaign finance gets worse each year as the cost of running campaigns escalates. The most straight forward way of dealing with the problem is for government to set limits on the amount that can be spent in total on campaigns. We would need to define the forms of campaign communication that would be accounted for, and set limits depending upon the level of office under contention. This may be impractical if we expect those in office, who are advantaged in raising funds, to make these changes. It would also be opposed by those who benefit from the market. It would require sufficient public interest in preserving Democracy to force the needed changes on our elected officials or by pushing for a constitutional amendment that would have the desired effect. If we do nothing we risk total disinterest among citizens in the electoral system. That only helps those who only like a form of Democracy that serves their interests. They have no real interest in a well functioning democracy that serves the public interest.

How Government Helped Boeing At Delta's Expense

This article describes how the US government provides support to Boeing so that it can sell airplanes to foreign governments or to foreign airlines. It provides an example where selling airplanes to Air India was enhanced by granting Air India a non-stop flight from the US to Mumbai to which Delta Airlines had exclusive rights. Government had to choose between Delta and Boeing. The article poses this as a problem in which government picks winners and losers. Free marketers don't like the idea of government being in that role. On the other hand, GOP politicians who claim that view, were lobbied by Delta and argued on its behalf.

The real issue in this article is not about whether government should have this role. It has that role in countless ways. The real battle is not between Delta and Boeing. It is between Boeing and Airbus for the Air India deal. This is one of the affects of globalization. The nations states support domestic firms in international competition and their customers expect them to make concessions to win contracts. Emerging market economies like India and China have learned how to play this game to their advantage. Boeing versus Airbus is only part of what happens all of the time.

Why Many Americans In Need Oppose Government Welfare Programs

James Kwak provides a gracious explanation for the question raised by Paul Krugman in the following post. He argues that we have been programmed to believe that we are self reliant. Therefore, we do not want to believe that we may need support from government. We reluctantly admit to need, and we hate to pay taxes to pay for programs that we should not need.

Why Those Who Receive Government Benefits Object To Government Programs

Paul Krugman points out that the poor states in the US, which are primarily "Red States" that vote for those who favor a smaller government, receive a larger share of government benefits that the Blue States. That is to be expected since the federal government redistributes income from the rich states to the poor states in many ways. He also shows that many of these voters who receive benefits from Social Security, and Medicare also believe that they are not beneficiaries of government programs. He thinks that they should be the strongest advocates for government, and he wonders why they are not. He also knows the answer to this question, but he has decided not to address it in this op-ed. They believe that tax dollars should not be wasted on people who are not deserving of government benefits. Status is important to most of us. For many Americans their status depends upon feelings of superiority over those less fortunate than themselves. The less fortunate, and the less worthy, are often members of another race or from another part of the world.

A Description of The American Population Voting In GOP Primaries

This articleprovides data on the GOP primary campaign. Those who are participating in selecting the GOP nominee are not representative of the nation demographically, or by their position on some of our most salient issues. Most Americans have a hard time believing that the GOP candidates are among our best and brightest potential leaders. On the other hand, they reflect the views of a segment of our nation that has been organized and funded by the most reactionary and least democratic organizations in America. They are also fed a diet of misinformation by a media system dominated by, what may be graciously described as yellow journalism.

This article provides a good introduction to the post that follows on the state of Democracy in America.

A Chinese Venture Capitalist Defends Its Form Of Government Versus His Perception Of Democracy

A Chinese venture capitalist explains the difference between Western ideology and China's method of government. He gives his views on Democracy, and how it has evolved in the US, and raises questions about it effectiveness as a form of government, and as an expression of the will of the people. He describes the Chinese system as more pragmatic and more effective. He acknowledges some of its problems, but he stresses its economic achievements relative to the West.

Churchill recognized that Democracy was not perfect, but he argued that it was better than the alternatives. Democracy is practiced differently across the globe, and it changes over time. I think that most of us cherish the ideal of Democracy but there are times when it deviates substantially from its ideal. Demagoguery is one of those deviations from the ideal. It is a lot easier to win elections by giving people what they want. Governments have a tendency to promise benefits that are not pad for by taxes, and election campaigns have become so expensive that candidates are beholden to those who have the means to finance them. It has also become more difficult to distinguish political campaigns from the marketing of soap. Even worse, some of those who run for election are more expert at electioneering than they are in the art of governing. Too many decisions are based upon how they might effect the next election, and politicians are more than willing to turn themselves into the most popular brand of soap if that is what people are buying. It has become more difficult to defend the ideal of Democracy as it is currently practiced. The real question is whether it can be brought back closer to its ideal, or whether that is an impossible, or impractical, task.

Jobless Claims Down, Unemployment Rate Should Fall

This graph provides good news for further reductions in the unemployment rate. New claims for unemployment benefits is correlated with the level of unemployment. The trend in new jobless claims is downward. Hopefully, a lower unemployment rate will follow.

Small Business Organization That Has A Unique Vision Of Success

This link is to the website of an organization of small businesses that have a mission of using business to solve social and environmental problems. Their goal is to redefine the meaning of business success. They currently have over 600 member companies that have a combined revenue of over $2 billion.

Class Warfare Within the GOP

Harold Meyerson reports that the battle between Rick Santorum and Mitt Romney reflects class differences. Santorum appeals to those with low income and Romney draws most of his support from those with incomes above $100,000. Their policies are not that different, and neither of their policies will benefit GOP voters with low incomes, Santorum puts more focus on cultural and religious values than Romney and he evokes a greater emotional response than Romney.

Meyerson believes that the GOP has become more like the Democratic party which has had a similar bifurcation in its base. Upper middle class professionals have moved from the GOP to the Democratic party over the last few decades and they respond to candidates like Obama more than they do to Hillary Clinton who appealed to those with lower incomes and education in the Democratic base. That, perhaps is why Obama chose Biden as his running mate. He presented himself as the working class guy from Scranton, Pennsylvania.

If Meyerson is correct, it shows why the GOP has become more dependent upon its low income base that is primarily motivated by social values. This base must grow in order to replaced defecting professionals. Its also pretty clear that low income Americans that used to vote Democrat have been targeted by the GOP by appeals to values rather than economics.

Is Portugal The Next Greece?

This is another article on the problems with the emphasis on fiscal contraction as the weapon of choice in Europe. The focus is on Portugal which faces a debt deflation problem, Indebted households have been forced to increase saving. If the government increases savings at the same time, the economy is bound to tank. Government spending should increase to absorb the excess savings in the private economy. The problem, however, is that Portugal is faced with a burden of high interest rates for its public borrowing.

Private Debt Is the Problem in Portugal

This article is about Portugal but it applies to other countries as well. It argues that Portugal has been consuming beyond its means by relying upon private debt to fund consumption. Investors are concerned that this will create problems for Spanish and domestic banks that have done the lending. They assume that public debt will rise to assist the banks who face defaults. It concludes by arguing that it is the total of public and private debt that we should be concerned about. It is misleading to focus only on public debt. One of the problems with this argument is that consumption must be reduced in Portugal by 10%. That will cause the economy and tax revenues to shrink. This will exacerbate the debt to GDP ratio and it will also lead to problems of social unrest and political problems for government.

Economic Theory And The Distribution Of Income

Mark Thoma does a nice job in this article in describing the problems that economists have in determining whether income distribution is fair. Marx, and early economists, including Smith and Ricardo, had a labor theory of value. In fact, Marx's theory of class conflict was based upon his understanding of Smith and Ricardo. Keynes was aware of this, and that is one of the reasons why he found fault in Ricardo and other proponents of classical economics.

The labor theory of value takes the position that consumption goods and capital goods require labor in their production. Those who extract value from the sale of goods and services through the ownership of capital are necessarily in conflict with labor that produces the value. That, of course, leads to a conflict between labor and the owners of capital.

An alternative description a value is based upon another theory of value determination. In this theory, the value of a good or a service is determined by the price that one is willing to pay for the utility received from a purchase. Therefore, the value of a good or service cannot be determined by the quantity of labor required for its production. Value becomes more subjective. Owners of capital, landlords, managers and labor all make a contribution to the value or utility of goods and services. The subjective assumption is then made that all receive a share of the value that is equal to their contribution to the output of goods and services. The result is assumed to be fair, and the basis for class conflict disappears.

The problem with this more harmonious theory of value is that it is based upon the assumption of perfect competition. If this assumption does not hold, and there are few perfectly competitive markets, it is more difficult to argue that income is distributed in accordance with ones contribution to output. Profits, which go to the ownership class, will be greater under conditions of monopolistic competition or monopoly. This sets up the conditions that support a progressive tax system that redistributes income from those who benefit from imperfect markets to those who do not.

This analysis leads us to some of the issues that we are debating today. For example, increases in productivity used to be shared between labor and capital more equally. In recent years, the benefits from productivity growth have been less equally shared. Moreover, the tax system has been made less progressive as well. That is how we have gotten into the conflict is described as the battle between the top 1% and the 99%. We are back to the difficult problem of determining fairness.

The Demographics Of The Baby Bust

Its hard to predict the future but demographics are fairly predictable and they have a huge affect on how we live. This article provides some demographic data for developed and less developed parts of the world. It then describes some of the implications on demographics on how family life will change as the ratio between the young and the elderly shifts in the direction of the elderly. We should expect that consumption patterns will also change but this article does not get into many of the changes that may occur as a result of the demographic patterns that are likely to occur.

Q4 Recession In Eurozone Was Slightly Below Expectations

The eurozone finished last year in recession. The recession was slightly less than expected and some expect that the worse part of the recession may be over. The German economy is expected to resume growth this year. Its economy has been boosted by very low interest rates for the last 3 years.

Portugal Debt to GDP Worsens As It Reduces Budget Deficit

Portugal has done exactly what the IMF, ECB and EU ordered. It has been an example to other countries on how to reduce budget deficits. The only problem is that GDP is shrinking as a result of fiscal austerity. Its hard to reduce the ratio when GDP keeps falling. Some argue that in the long run the medicine will work and the economy will resume growth. I guess we will have to wait to find whether the medicine is therapeutic or life threatening. It may turn out, as Keynes suggested during the Great Depression that the medicine will work in the long run, but he responded by telling us that in the long run we will be dead.

David Brooks Has Set Himself Up For Lots of Criticism

I posted below on David Brooks rhetoric and logic. His argument is based upon facts that he presumes to be correct. This article, shows how much respect David Brooks has for facts. It points out that our high school dropout rate in the US has improved from 28.3% in 1973 to 8.4% today. Dean Baker asks what has changed in the last 5 years that would make the 2 million who worked in factories unemployable today. Did their moral fiber decline over this period? If so, we should be doing more about reducing long term unemployment that makes folks less employable.

James Bullard Defends His Definition Of The Output Gap

This article by Bullard is a response to a critique by Tim Duy which I posted yesterday. The article gets quite technical but, at the risk of oversimplification, Bullard argues that we should not use the GDP that we observed during the rise in housing prices as our measure of potential GDP that is used to determine our current output gap. Potential GDP was inflated by spending in this period in excess of what it have been without the housing bubble which distorted behavior. If we lower our estimate of potential GDP, to correct for the distortion in spending due to housing bubble, our current output gap would be much lower. His point is that Fed policy should not be based upon an inflated value of potential GDP.

Bullard makes a good point that may get lost in economic jargon. GDP would have been much lower than it was if it had not been fueled by real estate development, and by household spending that was derived by refinancing mortgages and taking out home equity loans. This is not good news, however, it suggests that our economic growth rate will be much lower without future asset bubbles that stimulate consumption.

The GOP Budget Is Terrible But The Obama Budget Is Not What We Need Either

Jeff Sachs looks at the Obama budget and concludes that it is better than what the GOP would offer, but it is not what we need. The Obama budget includes cuts to discretionary spending that will make us less well off in the future. He contrasts the Obama budget with the budgets of Northern European countries to point out the real comparison that we should make. Its not between the awful GOP budget and the Obama budget. It should be between our budget and what more socially responsible countries do.

Sachs makes the argument that our electoral politics are locked into a battle for the median voter and dependent upon campaign contributions from wealth donors who expect payment in return. The political battleground is between the center left and the far right in the US. This drive our politics to the center right.

Analyzing David Brooks And His Theory Of Moral Decay

I decided to post this article by David Brooks to provide a lesson on how to read David Brooks. He has been provided a platform by the NYT, and he has been given a weekly platform by Public Television to tell us how to think about current issues. Consequently, it is important to examine his ideas and his style of rhetoric. That is what this post is about.

I usually read the last paragraph or two to find the conclusion that Brooks is working toward, and then I go back and examine how he reaches his conclusion. He concludes this article by stating that public debate is dominated by people who stopped thinking in 1975. This reference is to liberal economists who are guilty of "economic determinism" in his eyes. It is also a reference to the period of history deplored by conservatives. That is, the period dominated by the Vietnam war protests and a counterculture which rejected the dominant social values revered by conservatives.

Now that I understand what the article is about, I go back to see how he reaches his conclusions. His opening two paragraphs lays out his premises. His first premise is a sweeping description of the history between 1912 and 1962. This period included two world wars and the Great Depression. Despite this tumult we had high marriage rates and community groups connected across class. In one sentence Brooks concludes that we had social cohesion prior to 1962. He probably never read The Grapes of Wrath, or the social commentary on that period, but lets grant him his point. Things were great until 1962.

In his next paragraph he describes the period between 1962 and 2012. He describes this period as one of prosperity, peace (despite Vietnam and wars in the Mid-East) and fairness. We are better off in this period but our social fabric deteriorated. Social trust declined, society became more segmented and a larger number of children were born out of wedlock. In other words, the economy was much better than it was between 1912 and 1962 but things went to hell starting with the 1960's. This reinforces the conclusion that Brooks reaches in his last paragraph. Our thinking today is dominated by those rebels who developed their liberal values in the 60's and early 70's. They are "economic determinists" who don't understand that we were better off socially when we were less prosperous. Moreover, it was their crazy ideas that destroyed the social fabric of society.

The premises in the first two paragraphs are enough to enable Brooks to reach his conclusion, but he always fills in the middle of his articles with references to articles or books that demonstrate his scholarship. In this case he describes research from sociology and psychology which paint a picture of social deterioration that is self reinforcing. Once it got started in the 1960's it has built upon itself and young people are not able to acquire the "social capital" and cognitive skills that are necessary for success. He makes the point that we could not find enough skilled workers to take the jobs that have been lost even if they were to come back. Those liberal economists, who stopped thinking in 1975, have ignored 25 years of sociology and psychology that tell us that money and jobs do not matter. We have a problem of social decay that started in the 1960's when we had shared prosperity.

Almost all of the op-eds that I read by David Brooks have a similar structure. He provides all the material that a teacher would need to provide lessons in the art of rhetoric.

Apple Asks Independent Group It Inspect Asian Factories

A little bit of sunshine goes a long way. Following the NYT article on Apple production facilities in Asia, Apple has commissioned an outside group to inspect its factories. Results will be published online in March.

China-Centric Globalization

I often felt that textbook treatments of international trade failed to reflect the reality of what was actually taking place. It was important to show how trade imbalances might be moderated by currency exchange rates, but international trade is no longer based upon an exchange of goods and services between nations. This article describes a new system of trade that is based upon a new system of global production networks. That system requires mobility in the means of production, including capital, technology and organizational know-how. Moreover, China is at the center of this system. It has become the manufacturing center for the global economy. Its economy is based upon exports but 50% of its exports are from multinational corporations to other markets. If joint ventures with multinationals are included, over 75% of its exports are from multinational corporations. This article describes how this movement to a China-Centric system of trade has had a profound impact on the rest of the world.

One of the impacts is on manufacturing and economic security. Economic growth is dependent upon increases in productivity and manufacturing is the source of much of a nations productivity growth. In 2007 US imports from China amounted to 20% of manufacturing output produced domestically. Moreover, 600 R&D centers have been established in China by multinational corporations. This represents as important transfer of knowledge and know-how to China. Some of the implications of this trend are outlined in the article.

China's trade surplus with the US has made China the owner of 41% of foreign official holdings of US treasuries. The value of China's holdings in 2011 was $1.279 trillion. While it is easy to over-emphasize the dangers of China's position, it does give China considerable influence because of its creditor relationship to the US. It has a similar position with Europe which is its largest export market.

China's geo-political influence has also been increased substantially. It is the largest export market for East Asian countries which export parts to China for final assembly. It has been the source of growth for many East Asian economies. It imports large quantities of commodities from Australia and Latin America which has contributed to their growth as well. China pays for these imports by exporting manufactured products to them. That has also happened in Africa which exports commodities to China in exchange for manufactured products. Increases in China's geo-political influence means a reduction in the influence of the US and Europe.

So far, multinational corporations have been the beneficiaries from this arrangement with China. It has reduced their cost of production and expanded demand. It has also opened up new markets for their products. The implications of this trend are being felt however in many parts of the world as manufacturing jobs have been lost and economic growth has stagnated. Its hard to determine what the future holds for this new form of international trade.

Is Fed Policy Based Upon A Faulty Estimate Of Potential GDP?

This article goes into detail on the recent speech by the President of the St. Louis Fed, James Bullard. I posted responses to his speech previously, but this is a more detailed description of his speech and its implications. Bullard does not like the current Fed policy of maintaining interest rates close to zero until 2014. The policy is based on the notion that GDP is tracking below a trend line extending from 2007. The difference between actual GDP, and the level of GDP on the trend line, is called the output gap. Bullard gives his reasons for believing that the trend line over-estimates the level of GDP that would exist if all of our resources were used. Therefore, Fed policy is based upon an exaggerated estimate of the output gap. We over-estimate the output gap because it does not reflect the loss of housing wealth that has occurred. That shock should permanently lower our estimate of potential GDP. He would rather have Fed policy based upon achieving the target inflation rate of 2%. That target is at risk as long as the Fed believes that the risk of inflation is low when we have a large output gap. He also argues that Fed policy may have a negative affect on aggregate demand. Current Fed policy reduces the level of interest income that would otherwise be available to savers for consumption.

This article provides an excellent summary of the reasons why Bullard's claim that we have suffered a permanent reduction in potential GDP is faulty. In fact, the data show that savings are in excess of investment demand at current interest rates. They would have to be even lower to absorb the excess savings. He is also criticized for using the decline in real estate values in his argument for permanent reduction in potential GDP. Housing is not regarded as productive capital in the construction of potential GDP. The loss of housing wealth has had an effect on aggregate demand and policy is correctly focused on increasing aggregate demand.

Corporate PAC That Is Funding Radical Changes At State Level

This article describes the role of a political action group that is funding legislative changes in the states. The American Legislative Exchange Council (ALEC) was founded in 1973 by a far right conservative. This was a period in which conservatives organized themselves in reaction to the protest movements in the 1960's. The rightward shift in the US is partially the result of right wing groups that were formed to restore the US culture to the good old days of the 1950's. Its funding comes from the usual suspects. Many are from the natural resource extraction industries. The environmental protection agency is one of its primary targets. It is no accident that the Tea Party has been a strong advocate of state's rights. ALEC has been promoting legislation at the state level that would enable the states to resist federally sponsored initiatives. This article describes many of its initiatives in Virginia.

Tom Friedman Argues That We Need A Reformed GOP To Deal With Our Major Challenges

Tom Friedman recently argued that we need a third political party. In this article he changed his mind and argued that we need to replace the GOP, which has become a radical party, with a true conservative party like we had under Eisenhower, Reagan and the elder Bush. That party is the one that conservatives today call the RINO party. That is, conservative in name only.

Friedman provides a devastating description of the current GOP which has been made apparent by their current nomination battle. They have cultivated a hard core of supporters as a result of the "southern strategy" initiated by Richard Nixon that has helped them to capture the southern states and much of rural America. In order to win the primary campaign the candidates are forced to appeal to the prejudices of this base which they have carefully cultivated. In the general election the nominee will tone down the rhetoric and attempt to broaden its support. It will be well funded by the real elite of the party which views this base as pawns in its battle to capture the power of government to serve their own economic needs. In a sense, it is much like what we see in third world countries where an economic elite employs similar tactics to achieve a similar goal.

The political base that Friedman describes has always been with us. It used to vote democrats into office who represented the Dixiecrat wing of the party. The solid democratic south has been transformed into the solid GOP south that stands for the same values. The GOP is not likely to abandon their strategy, so it will be with us for some time in some form or another. Moreover, we already have a third party. We call them independents. They don't identify with the social values used by the GOP to capture its "no nothing" base, but they don't support many democratic initiatives either. They are essentially apolitical, and they like things pretty much as they are. They wish that both parties would tone down their rhetoric. The independent party holds the key to power. Neither party can win a general election without capturing their vote.

Friedman is absolutely correct in his assessment of the GOP, and he understands that we face challenges that will be difficult to deal with given its ability block whatever proposals that the democrats come up with. His view of our challenges have not changed either. He accepts globalization along with the challenges and opportunities that it presents. He acts as cheerleader and tells us that we can win the globalization battle by being better educated and more imaginative. This is a gross simplification of the problems presented by globalization. The corporations than win in competition with other corporations have no nationality. The nation states have not figured out a way to assist their domestic corporations in the battle while protecting their own domestic interests. Globalization has, and will continue to cause dislocations and changes that nation states are not prepared to deal with.

The other challenges that Friedman presents are very real and important but he offers no new solutions. He pretends that a GOP that is more like the GOP in the good old days will provide competition with the democrats on solutions to the challenges of providing for our energy needs sustainably. This is an international issue that will require international cooperation and leadership. An enlightened GOP is not the solution. He also plays lip service to the problems that we face in funding entitlements. He suggests that a solution must include changes to entitlements along with tax increases. He wont find many who object to that except for the current leaders in the GOP who want to cut taxes further. The real problem is in the details, and any solution must contain the means for reducing the prices that we pay to the providers of healthcare services. No political party has come up with a way to deal with healthcare price inflation which is our biggest entitlement cost issue.

Business Week Pits Krugman Against The World

Business Week pits Paul Krugman against all of the conservative economists whose ideas he has criticized. Krugman has argued that he is not alone in his criticism of the models used by conservatives to support their case against the use of stimulus. He also contends that his arguments are attacks against their models and are not ad hominen attacks. I think that Krugman has been signaled out because he has an influential platform on the NYT. He has plenty of support from other economists. I don't know why Business Week believes that this battle is new. It has been going on for years.

Workers Should Accept Lower Wages But The Wealthy Won't Work If Taxes Reduce Net Income

Charles Murray's new book reinforces conservative narratives about unemployment. Murray believes that we have unemployment because workers will not accept lower paying jobs. On the other hand, since Ronald Reagan, conservatives have argued that the wealthy will not work as hard if their net wages are reduced by high taxes. If we expect low income workers to accept lower wages and work just as hard, why shouldn't we expect those with high incomes to work harder in order to increase their incomes to replace the income lost to taxes?

Has There Been A Permanent Shock To Potential GDP In The US?

Jim Bullard, the President of the St. Louis Fed, wrote an article that suggested that we may have to lower the level of potential GDP that has been at the root of our growth models for years. Therefore, it does not make sense to use policies designed to cut an output gap that is based upon a higher value of potential GDP. This article, and the comments that follow, are an attempt to understand the mechanism behind Bullard's argument for a permanent reduction in US growth models. Some accept the idea that aggregate demand may be reduced because of the lost wealth in housing. Others suggest the the loss of paper wealth may also have an affect of investment in aggregate supply. Banks have not recognized their full loses and they are limiting lending. Businesses may also anticipate lower demand and limit their investments which reflects their uncertainty of future returns on investment.

Romney's Promises To Balance The Budget And Maintain Bush Tax Cuts For The Wealthy

This is a review of Mitt Romney's budget plan. He has invoked Ronald Reagan by promising to balance the budget. He does this cutting federal spending, that primarily benefits less well off Americans, in order to pay for tax cuts that go primarily to the wealthy. His plan is totally opposite from the budget described below that has been proposed by Obama. He eliminates the Bush tax cuts for those with incomes over $250,000 and his budget reflects cost savings in Medicare that may or may not be realized. American's will have a real choice to make in 2012 if Romney is nominated. Of course, any Republican who is nominated would have a similar plan. They will all be based upon some version of Paul Ryan's roadmap to reduce budget deficits

The 2012 Elections Will Pit The Deficit Hawks Against Invest In America's Future

The White House budget plan will reinforce his messages in his State Of The Union address. The 2012 election campaign will pit Obama's message of investment, that will be funded by invoking the "Buffet Plan" that insures that those who earn over $1 million per year pay at least 30% in taxes, against Paul Ryan's austerity plan that focuses on deficit reduction. For those who don't believe that economics and politics are intertwined, this should convince you otherwise. In one corner we have Obama making the tax system more progressive, and investing in infrastructure to strengthen the economy, and in the other corner we will probably have Mitt Romney preaching the virtues of Paul Ryan's roadmap to smaller deficits. Romney will have support from the numerous right wing think tanks that will reinforce the austerity message through Rupert Murdoch's Fox News and the Wall Street Journal, as well as the preachers on talk radio. Obama's message will be supported by Paul Krugman and eggheads like me who are over educated and live close to one of the oceans on our East and West Coasts. He will lose the votes of those in the Southwest who want to rename the Gulf Of Mexico to The Gulf Of America.

Krugman Attacks The Conservative Effort to Deflect Attention Away From Income Inequality

Paul Krugman responds to the conservative movement to deflect attention from growing income inequality in the US. Conservatives have jumped on the bandwagon of explaining our problems in terms of declining moral values. Charles Murray and David Brooks have led this charge.

We also have a growing education gap in the US. The article posted below describes that gap an offers a critique of the conservative effort to deflect the attention away from income inequality to argue that cultural problems and moral decay are the cause of income income inequality. I was disappointed to see the NYT report the research and to look to conservative propagandists (that is the mission of American Enterprise Institute) for an explanation.

Research Shows A Powerful Relationship Between Income An Education But We Are Told That Income Does Not Matter

This article describes the growing education gap between the affluent and the poor. The academic performance gap between the affluent and the poor is up 40% since the 1960's. The college completion gap between the affluent and the poor is also up by 50%. These studies on the education gap come during a time of growing concern about the increase in income inequality during this period. The reporter then turns to a conservative economist from the University of Chicago, and to Charles Murray who is employed by the conservative American Enterprise Institute for their advise on how to solve the problem. They tell us that income inequality is not the problem. It would be a mistake to have another war on poverty. We have a culture gap and not an income inequality problem. Income inequality is the symptom of the culture gap. This leaves us with the problem of how to reduce the culture gap if it really is the problem.

One problem with the conservative perspective is that the education gap between the affluent and the poor fell dramatically during the post war period simultaneous with the reduction in income inequality during that period. It would appear that growing prosperity within the middle class had a lot to do with improving educational outcomes for those less well off. Its quite possible that the education gap is a function of the growth in income inequality. Housing patterns in the US have become increasingly segregated by income, and the growth in income inequality has increased the number of low income communities. Schooling in the US depends upon the local community for funding. Segregation by income also reduces cultural interactions between the poor and the affluent that has the potential to encourage academic interests among the poor. The only explanation made for the growth in the cultural gap between the affluent and the poor was a weak attempt by Murray to blame it on government policies in the 1960's that discouraged marriage. His view of whatever cultural gap has occurred is related to a decline in family values that was induced by government policy. That explanation will play well within the Tea Party but it falls far short of an explanation for the education gap.

I find it hard to imagine why the NYT which reported the growing gap in education in relation to income could only find two conservative commentators to respond the questions raised by the research. They are more concerned with denying the role of income as a source cultural or education problems. Government is the cause of all of our problems.

The Harsh Deal With Greece Was Set To Reduce Threat of Contagion

This article describes the current agreement with Greece from the perspective of the troika. Greek tax revenues would be held in escrow and supervised by an external authority. The first demand of the tax revenues would be used to pay interest on the debt. Whats left over would be available for other purposes. One of the goals of the agreement is reduce the threat of contagion. Letting Greece of the hook easily might have encouraged other states to take an easier path in dealing with its debt obligations.

Frankly, its hard to see how Greece will be able to meet its debt/GDP obligations under the current plan. Tax revenues are bound to fall as the economy continues to contract.

Greek Unions Take To The Streets To Protest Agreement

The reaction of those affected by the imposition of austerity that will force Greek citizens to accept a lower standard of living, is not surprising. Its government is also in a bind. Supporters of the recent agreement with the troika that controls the funds needed in March to deal with $19 million of maturing debt will have a hard time winning the looming election. On the other hand, Greece's creditors want some assurance that the country will be able to manage its debt. Greece is caught between a rock and a hard place. Leaving the eurozone would have terrible consequences, but having a lower standard of living imposed by outside forces also has bad consequences. There are no easy answers. My concern is that it will be difficult in any country for a democratic process to take strong measures that may be needed to resolve economic problems.

The Great China Debate

This article in Foreign Affairs presents two views on China. One view is that China's economic growth rate will continue to exceed that of the US. China will grow at 7.5% , which is 40% below its torrid growth rate in the last decade, but the US economy will only grow at 2.5%. At that rate China's economy will double in size in less than 10 years. It will take the US economy almost 29 years to double. One factor in China's growth rate is its low cost of labor. That makes China more competitive in the global economy. Its cost of labor is low because its citizens have a lower standard of living than the US and other Western nations. Nations with a higher standard of living are bound to be less competitive. That is one of the reasons why the US encourages China to expand consumption at the expense of internal investment. A higher standard of living in China would erode its cost of labor advantage, and it would provide markets for US exports. Consequently, the main reason for China's global dominance will be the size of its economy which extends its influence over suppliers and customers. Its status as the largest supplier of credit also increases its influence.

The argument against China's future dominance is based upon internal factors within China that are assumed to limit its growth and its role as the global creditor nation. China's economy is large but its per capita GDP is much lower than that of the US. That means that China has a wealth deficit versus the US and that much of its investment has been generated by the state. It also lacks the capacity to innovate that is an essential element for growth. It absorbs innovation supplied by others. The dominance of the communist party is also seen as a limiting factor. Whats good for the party may not be good for China.

Those who attempt to predict the future have a bad reputation. The future is usually full of surprises. On the other hand, it seems rather certain that China will have more influence in the future than it has had in the past. It also appears that US influence has been in decline. Slower economic growth will contribute to the loss of influence, and it will also present social and political problems that will be difficult to overcome. The polarization of politics in the US is likely to worsen, and the ability of government to respond to economic and political challenges will be impeded. The dominance of the communist party in China may be a problem, but the paralysis of democracy in the US has its problems as well. A disinterested observer of the GOP nomination debates would find it hard to believe in the future of a nation that cannot produce better leaders. The level of debate required to excite its base speaks loudly, as well, about the level of knowledge available to a large share of the public. For that matter, the opposition party, is constrained by the need to raise large sums of money to fund political campaigns. A substantial portion of its political base believes that it is less responsive to its needs than it was in the past. The same is true about a substantial portion of the base that supports the GOP. Many would like their party to move further to the right than it can do without losing the center. This is not a good environment for a properly functioning democracy.

A Chart That Explains The Dodd-Frank Financial Reform Bill

The chart on this pagee (via Manan Shukla) describes the Dodd-Frank bill that was designed to prevent further financial crises like the the last one. It does a good job of showing the intent of each section of the bill and the groups that are affected. One of the problems with the bill is that the details of each piece of the bill was left up to the appropriate federal agencies to define. That has not been completed and the lobbying has been intense.

Did Dodd-Frank Kill Wall Street Bonuses?

This article (via Manan Shukla) criticizes an article claiming that Dodd-Frank and the Obama administration is changing Wall Street forever. The article quotes several bankers who claim that their bonuses have been reduced because of these changes made in Washington. It then goes on to report that the CEO's from the top banks blame falling revenue on worries about Europe and a slowly recovering US economy. No mention is made of Dodd-Frank. The article reminds us that the good old days on Wall Street were not good for the global economy.

Fiscal Stimulus Is Wrong No Matter How The Economy Responds

John Taylor puts a wet blanket on the recent pick up in GDP. He feeds the GOP criticism about the failure of the "Keynesian stimulus". He compares the more rapid recovery from the 1981 recession with our current recovery and shows that GDP is still well below trend. Other conservative economists, e.g. Barro have made similar comparisons with more recent recoveries. They conclude that it proves that fiscal stimulus does not work. The other possibility is that this recession is really different. We have a balance sheet recession as a result of the bursting housing bubble, and we had a financial crisis on top of the recession. Long recovery periods are common under those conditions. Curiously, I earlier posted a critique of another attack on Keynesian theory by another conservative economist (Tyler Cowen) who argued that our recent growth in GDP proved that Keynesian theory has been disproven. Poor Keynes, he loses no matter what happens in the economy.

An interesting debate is also also going on about the long term trend in GDP growth. Our current output is still well below the long term trend. Policy is directed toward reducing the "output gap" between current output and the trend. Some argue that the long term trend may have to be reduced. They argue that the trend was inflated by the housing bubble and that the loss of wealth from the collapse in housing will have a permanent effect on the GDP growth trend. Therefore, it is a mistake to base policy on reducing the output gap. We should be more concerned about the potential for inflation that might result from Fed policy than about reducing unemployment. Bernanke believes that inflation and unemployment should be equally weighted. Others argue that unemployment should have a larger weight.

Terrible Transportation Bill From GOP House

The transportation bill written by the GOP House is bad for the environment and it is bad for public transportation. It is good for their campaign contributors in the energy sector, however, and that is their constituency.

Greek Politicians Agree To Austerity Package

It looks like a deal has been struck between Greece and the troika. The austerity package will include pension cuts and reduction in the minimum wage to 586 euro's/month. That will reduce all wages in Greece that are geared to the minimum wage. While all of the details are not clear, it appears that creditors will take a 70% haircut on the debt that they hold when the bond swaps are done. The Greek economy has been in recession for 5 years. The austerity measures are bound to depress the economy further in the short run. In the long run, it assumed that the structural reforms will make the economy more competitive. Public reaction, however, may make the reforms difficult to implement.

Two Views On The Ability of The Eurozone To Respond To Its Crisis

This article provides two points of view on the ability of the eurozone to deal with its crisis. One view is positive and the other is negative. I found the negative view more compelling because the eurozone is heading into recession and it has limited means to deal with its problems as the economy worsens.

Spain May Be A Greater Threat Than Italy To Eurozone

This article argues that Spain represents a greater threat to the eurozone than Italy. Spain was running budget surpluses prior to the crisis and household debt increased by a factor of three during the real estate bubble. The bursting of the real estate bubble led to an unemployment rate exceeding 20% and rising. Youth unemployment is even worse. 50% of Spain's youth under age 25 are unemployed. This will make its workforce less productive the longer that they remain unemployed. Government austerity measures are making matters worse. Raising taxes, and cutting government spending at the same time that consumption is falling, has led to a drop in GDP. The debt/GDP ratio has worsened as a result.

To make matters worse, Spain has only had a democracy since Franco died in 1975. If the economy continues on its current path it may present a social and political threat that will be difficult to contain. Spanish democracy may be at risk as well.

Moral Decay In The White Middle Class Is The Cause Of Our Economic Problems

David Brooks recently wrote an op-ed in praise a book by Charles Murray that I decided not to criticize in a post because I was tired of wasting my time showing how wrong David Brooks is about most everything. This article provides a critique of Murray's book and has caused me to to pay more attention to it because its message is being widely distributed by the conservative media. That should not be surprising because Murray is on the payroll of the conservative American Enterprise Institute. The essence of this critique is that Murray's book is another screed on blaming the victim. Since the decadent 1960's we have seen a decay in the moral values of the white middle class and the erosion of family values. That is why we have unemployment, lower social mobility and a rise in inequality in America. This critique provides a strong argument against that view and it also shows how Murray distorts the data that he used to support his argument.

An Interpretation of Germany's Support For Fiscal Austerity In The Eurozone

This is a description of one person's view of the prevailing wisdom within Germany that have led to its predisposition towards the imposition of fiscal austerity as the solution to problems in the eurozone. Among other things, Germany imposed austerity on itself and it worked. They are now reaping the benefits of their painful restructuring. They also fear hyperinflation more than deflation. They believe that the US and the Uk are setting themselves up for rampant inflation because of policies designed to curb deflation. Moreover, it has been politically difficult to redistribute money from the wealthy parts of Germany to the less wealthy northern and eastern parts of Germany. There is no way that Germany will use taxpayer money to bailout the irresponsible nations that are in financial trouble. They can do what Germany did successfully if they have the will.

One of the implications is that restructuring the eurozone by paving the way for a less disruptive exit for some countries is on the horizon. There is no easy way to fix things in the eurozone without making austerity work. The author of this article has the view that the global economy is troubled by a lack of demand that can employ the excess of labor and capital that exists. He is predisposed to dealing the problems of inadequate demand rather than structural changes.