The Macroecnomics War

  Simon Wren Lewis made an effort to reduce the tensions within the profession, and to defend the macro models that are used by many central banks.  Paul Krugman is not ready for peacemaking.  In this article, he sharpens his attack on economists who have not supported the use of monetary policy or fiscal policy to increase employment.  The war is far from over. 

Should We Worry About The Fall Of The Rupiha In Indonesia?

The currencies in Indonesia and India have fallen dramatically against the dollar.  Paul Krugman explains why we should not be worried about another collapse in Asia.  His real purpose, however, is to expose the underlying problem of unregulated capital markets.  He also took this opportunity to contrast the rapid recovery in Indonesia from the last crisis with the of slow recovery in the eurozone.

The first crisis in Indonesia, and the current crisis in the eurozone, were both fueled by unregulated financial markets.  The crisis in Indonesia was fueled by a rapid flow of capital which created a temporary boom.  The debt was denominated in dollars.  Consequently, the fall in the value of the rupiah increased the burden of their dollar denominated debt. The economy crashed but the decline in the value of the rupiah led to an export based recovery.  Moreover, the IMF relented on its initial imposition of austerity which had been harming the recovery.

The problems in the eurozone were also caused by a flow of capital to private investors which triggered a boom primarily in real estate markets.  The bubble eventually burst but the recovery has been more difficult than the recovery from the crisis in Asia.  The affected countries do not have their own currency to devalue;  they have weakened domestic banks, and they have been required to accept contractionary fiscal policies.  There is no end in sight for the economic problems in Greece and Spain.

Krugman also takes a poke at the legacies of Alan Greenspan, Robert Rubin and Larry Summers who were given credit for engineering the original recovery in Asia.  He thinks that the Asia crisis should have taught them something about the problems of unregulated financial markets.  Instead they led the effort in the US to accelerate the deregulation of the financial markets in the US.  Larry Summers is currently one of the leading contenders for the Chairmanship of the US Federal Reserve.  My guess is that Krugman is not one his supporters.

How European Employers Think About Downsizing In Tough Economic Times

European employers responded to a survey that asked them to choose between several downsizing options in a bad economy.  The results of the survey show how employers in different countries, with different employment laws,  would deal with the difficult decisions offered to them by the survey.

The State Of Black America 50 Years After The March On Washington

Joe Stiglitz describes his experience 50 years ago when he participated in the march on Washington.  He also reminds us that the social injustices that stimulated the protest have not been addressed.  He attended the protest with the son of a Supreme Court Justice who worked hard to deal with the inequalities that existed 50 years ago.  He would be saddened to observe the changes that have taken place in the Supreme Court and in America.  We have gone backwards instead of forward. The economics profession has also been part of the problem.  Some of its Nobel Prize winners have used economic theory to explain away the problems of inequality and social injustice.  Many of their economic ideals have been embedded in our legal system.

The Real Trouble With Economics

Economists did a poor job of predicting the financial crisis.  Many have also done a poor job of providing economic advice to policy makers during the crisis.  Paul Krugman argues that the crisis was not predicted because many of the models used by central banks assume them away.  He also provides his own views on how the sociology of the profession might steer research in the wrong directions. 

Why We Won't Be Able To Avoid The Next Banking Crisis

Most businesses prefer to raise capital by issuing equity.  During a downturn they do not have to worry about servicing debt.  This makes them less vulnerable to failure.  Banks do the opposite.  They would rather borrow money to finance their operations than issue equity.  The executives are rewarded for increasing the return on equity.  Therefore, the decision is simple for them.  That leads them to take on risks, however, that cannot be absorbed.  This will result in a future banking crisis that economists will not be able to predict.  Governments in the US and UK have been willing to accept this risk.  They do so because the banking lobby has excessive influence on government policy.  Efforts made by academicians to increase the use of bank equity have been futile.

Peak Water In The US West

We are familiar with the problem of peak oil.  This article illustrates the problems that we are witnessing with peak water in the western states.  The demand for water exceeds the supply and the problem will only worsen since it will be difficult to increase the supply of water. Some of the proposals for increasing the supply of water are described but little has been done to alter the demand for water in the west.

IBM After Accepting The Goal Of Maximizing Shareholder Value

This article is about the transformation of IBM since 1980.  Everything that the CEO does today is focused on a single metric: earnings per share (EPS).  What has happened at IBM is typical of what has happened in most of our large corporations which have followed the same goal.  The principles laid down by IBM's founder are ancient history.  That transformation at IBM has been good for its executives who receive the bulk of their compensation in the form of stock options.  It has also been good for shareholders.  It has not been good for IBM's employees or the greater community in which IBM operates.  This raises the general question regarding the purpose of our large corporations.  Do they have no other purpose but to grow the stock price?

What To Do About Wage Stagnation

Real wages have not grown over the last decade.  Productivity has grown over this period but the growth in productivity has not been shared with the labor force.  One way to deal with the lack of growth in wages is for government to redistribute income through a variety of programs.  Most of the debate between conservatives and liberals in Washington is about these programs.  Conservatives and liberals assume that nothing should be done to alter the distribution of income that is determined by market forces.  That is not sustainable.  Our social safety net programs are helpful, but there is a limit to the effectiveness and political support for income redistribution programs.  That means that more attention should directed towards the labor market itself.  The labor market does not work well when there is high unemployment.  Wages are depressed when the supply of labor exceeds the demand for labor.  One way to alter that situation is for government to pick up the slack when there is weak demand for labor.  In any case, more attention needs to be paid to altering the market forces that are behind the stagnant growth in wages.

Away From The Office This Weekend

I will not have access to the Internet beginning Friday.  Posts will resume Monday.

Manufacturing Doubt And Denial Of Science

This article was written by a scientist who has witnessed the manufacturing of doubt in our society that has led to a broad based rejection of the use of evidence to support claims.  A "science" of creationism challenges evolutionary theory and the body of evidence that supports it.  Proponents of creationism are actively engaged in setting education policy in our most backward states and towns.  The number of citizens that believe that human behavior is responsible for climate change has dropped over the last 25 years, despite the strong consensus within the scientific community.  Many parents refuse to have their children vaccinated because they have been led to believe that vaccination is responsible for autism.  There is no evidence to support that belief,  and a lot of evidence is available to dispute the false claims about the link, but that has had little effect on the true believers.

One could go well beyond the examples provided in this article but it is very clear that people have a strong tendency to believe what they want to believe, and that it is possible to manufacture doubt about scientific evidence when it is important to do so for some group that is threatened by science.  It is easier to do so in the social sciences because many of the issues are not as easy to disprove with evidence.  The manufacturing of doubt and consent is well funded in the social sciences.  Most of the research that is done in economics, for example, has little bearing on important social issues.  An economist can pursue a career using rigorous methods without attracting much attention. However, when economic concepts are related to social issues,  the game changes dramatically.  Well funded economic "think tanks" are in the business of manufacturing evidence that is favorable to the groups that fund the "think tanks".  Many of these economists  also hold important academic positions.

Why A Little Bit More Of Inflation Is A Good Thing

Noah Smith does a nice job of adding to the understanding that most people have about inflation.  In the process he explains why the 2% inflation target set by most central banks should be a little bit higher.  He has his work cut out for him.  In many countries, inflation is listed as one of the top problems that we face.  That is true even in countries with very low inflation rates.

Median Household Income Has Risen Modestly Since End Of Recession

Median household income, corrected for inflation, has risen modestly since the recession ended in 2009, but it is 6% lower than it was before the start of the recession.  Median household income growth varied by income level, race and geographic region.  The poorest households, and the poorest regions, have been hardest hit by income loss during the recession, and have grown more slowly  since the end of the recession. 

Public Fund Managers Are Looking For Ways To Manage Their Own Money

Sovereign wealth fund managers and public pension fund managers have historical paid high fees to Wall Street hedge funds and private equity firms for money management.  They pay around 6% to these funds in search of higher yields.  Lack luster performance by these funds, and their high fees, have led many of them to find ways to manage their own money.  This article describes some the efforts that are underway to reduce their reliance on Wall Street. 

"Counterterrorism" and Free Speech

British authorities detained the partner of a reporter who has been publishing information about NSA surveillance programs.  The individual had no connection to terrorism but a British counterterrorism law was used to detain and search the individual.  Governments are clearly opposed to free speech that informs the public about secret activities that may violate laws that protect individual privacy.

John Stuart Mill on Freedom Of Thought And Discussion

An excerpt from Mill's argument on behalf of free thought and speech is presented in this post by a Michigan economist.  Most people would accept the arguments made by Mill.  We place a high value on freedom of speech.  Consequently, what Mill has to say about the freedom of speech is not relevant in most developed countries.  The media provides a megaphone to the speech of of those that it selects as relevant.  The real issue is on the distribution of the megaphones.  The media likes nothing better than to frame the issues that are worthy of debate.  Most of the discussions that are provided a platform by the media typically provide opportunities for politicians, or opinion leaders, to present carefully selected talking points.  They frequently know little about the issues under discussion beyond the talking points.  At least they seldom deviate from the talking points.   The audience, of course, loves to see "conservatives" do battle with "liberals".  It is important to give equal time to both sets of talking points, and the more heated the debate the better it is for business.  I doubt that this is what Mill intended when he wrote about the freedom of speech.

Another Government Investigation Into JP Morgan

JP Morgan's legal bills and lobbying expenses must be going out of sight.  The SEC announced another investigation into its business practices.  JP Morgan may be operating in violation of the Corrupt Practices Act in China.  There is a correlation between JP Morgan's business success in China and it hiring practices.  JP Morgan won some large deals after hiring relatives of important officials in China.  The SEC has to prove that JP Morgan's hiring decisions were intended as "bribes" to officials who were in a position to make decisions in favor of JP Morgan.  It is difficult to prove "intent" in a court of law.  That is why fraud charges have been rare in the US.  Government agencies must prove that bankers "intended" to defraud its customers when they sold toxic securities to them.

Its not clear how the investigation into JP Morgan's practices in China will turn out.  Two things are clear, however.  Corruption may be rampant in China, and Wall Street banks have successfully entered the huge market in China.  Globalization has been very good for our large banks.  Their brands are highly regarded in China.  It is prestigious for the relatives of important officials to get a job with one of the Wall Street banks. 

Most Conservatives Are Not Libertarians

Paul Krugman argues that most conservatives are libertarians in a very narrow sense.  They favor deregulation and greater freedom for businesses to do what they please.  On the other hand, they would like to impose their value system on the rest of society.  Its a mistake to view the political debates in America as a battle between conservatism and liberalism.  The real battle is between those who represent the interests of plutocrats and those who favor a more equal distribution of power, which we sometimes call democracy.  What we have been witnessing for the last 40 years is a struggle by conservatives to alter the balance of power that had been established.  Calling it libertarianism is like putting lipstick on a pig.  A good example of conservative hypocrisy is provided in this NYT editorial.  Republicans in the House claim to be against Wall Street banks and crony capitalism.  On the other hand, they work hard to get placed on the House committee which overseas the finance industry.  Their main purpose is to get in line for generous campaign contributions from the financial services industry that go primarily to representatives on the committee.  The return on the investments made by industry lobbyists is spectacular.  This is an area in which bankers make an outstanding allocation of capital to its most productive use. 

What Did We Really Learn From Edward Snowden's Leaks?

A lot of people would like to frame the NSA leaks as a violation of national security by a criminal.  This article suggests the Edward Snowden is a product of our modern concept of the organization.  We have intentionally moved from a system in which employees were loyal to the organization in return for the loyalty of the organization to the employee, to a system in which loyalty to the employee or to the organization no longer exists.  Over 70% of the work done for our national security enterprises is done by contract employees who have no loyalty to NSA, or to the firm that employs them.  In this kind of environment the only form of security that exists is the rigor of employee supervision.  Welcome to the brave new world of the flexible labor force and the liquid organization.  Each is a commodity that can be bought and sold.

Summer Issue Of Journal Of Economic Perspectives Is Online

This is a link to the Summer issue.  It includes a symposium on the issue of income inequality.  It also includes four articles that provide perspectives on the issues in the eurozone.

Perhaps The Airlines Industry Should Be A Regulated Monopoly

I posted an article on potential merger of US Air and American Airlines to show how pricing is done in an oligopolistic industry.  The airline industry has not been a very profitable industry, however, even with little price competition.  Moreover, service and innovation have not improved since the airlines were deregulated and competition was supposed to reduce prices and improve service.  This article suggests that some industries work better as regulated monopolies.  Perhaps a return to that form of organization would work better than depending upon competition to keep prices in line without reducing services. 

Pensioners Stand To Lose 90% Of Benefits In Detroit Bankruptcy

The Wall Street banks will take a 25% discount on interest rate swaps that they sold to naive Detroit officials.  They have already made money on the swaps since Detroit has been paying them $60 million per year for making the wrong bet on interest rates.  Pensioners are another story.  The way the deal stands now they stand to lose 90% of their pensions.  The derivatives that banks sell to less knowledgeable municipalities are protected in bankruptcy by rules set by the banks in the era of bank deregulation.  The officials who represent Detroit were appointed by the Republican governor of Michigan.  We will have to wait to see what the bankruptcy judge decides but the deck is stacked against the pensioners.  Meanwhile, the federal regulatory agencies have done nothing to prevent the Wall Street sharks from preying on less sophisticated municipal officials.  Casino banking is alive and well and the referees in the game favor the sharks.

How Oligopolies Set Prices

The Justice Department filed suit to block the merger of US Air and American Airlines.  The rationale for the suit has been released and some of the salient reasons for the suit are provided in this article.  We can learn a lot about how oligopolies set prices from this article.  The airline industry is like most of the industries in the developed world.  Most of the sales revenue and profits go to a handful of firms.  They have an incentive to avoid price competition which would reduce industry profits.  Consequently, they find ways to coordinate their pricing.  This article shows how it is done in the airline industry. 

The Composition Of Household Debt In The US

This graph shows how household debt has changed over time.  It is below its peak primarily due to a decline in mortgage balances.  Student debt continues to grow and constitutes a rising share of household debt.

Sweden Is Running Out Of Garbage So They Are Getting Waste From Other Nations

Sweden's waste management programs have been so effective that Sweden is running out of garbage.  Sweden uses garbage to provide 20% of its energy needs.  Because of the garbage shortage they are receiving garbage from nations that are not good at waste management.  As a bonus, the nations that send them their garbage pay Sweden to take it from them so that they can continue to use garbage to supply some their energy.

Sweden should be a model for other countries.  In the US 50% of our garbage ends up in landfills.  That would provide a lot of energy and cut down on fossil fuel consumption in the US.  I wonder what EXXON would think about using more of our garbage for fuel.

The Political Aspects Of Full Employment

This is an old article by a Polish economist who argues that it is possible for governments to maintain full employment economies.  He and Keynes were both worried about the political consequences of high unemployment.  Keynes was primarily concerned about saving capitalism from socialism, while Kalecki was concerned about preventing fascism.  He was also critical about the form in which socialism developed in the Soviet Union.

Kalecki was a realist, however, and he understood why the concept of a full employment economy would be unpopular even if it were possible for government intervention into the economy to achieve a full employment economy.  He provides many of the political reasons that would stand in the way of attempts to engineer a full employment economy.  His analysis of the reasons for objecting to a full employment economy will sound pretty similar to the arguments made today by those who oppose the use of fiscal policy or aggressive monetary policy to reduce unemployment.

Jamie Galbraith summed up our current position today in which neo-liberal ideology has become the dominant force across much of the world.  We have accepted the goal of balanced budgets and central banks are unchallenged in the application of monetary policy.  This essentially removes macroeconomics out of the political sphere.  Many central banks are primarily devoted to fighting against inflation.  In the US there has been strong opposition against the Fed's use of monetary policy to reduce unemployment.  In the UK and in the eurozone price stability is the central objective the ECB and British central bank.  Moreover, in the eurozone governments are required to keep the debt to GDP ratio below 3%.  There are penalties associated with deficits above that target.

Paul Krugman posted a link to Kalecki's article to reinforce one of his arguments against those who claim that the economy would be fine if government took the necessary steps to restore business confidence.  Mark Thoma, who is supportive of Krugman, posted a link to Krugman's article but he omitted Krugman's reference to Kalecki in his summary of the article.  Kalecki may be out of bounds even for very liberal economists.

Weather Forcasting And Economic Forcasting

John Kay's article reminds me of an old joke about economic forecasting.  Economic forecasters exist in order to make weather forecasters look good.  In both cases, however, probabilities are assigned to forecasts that have little relationship to what we ordinarily mean when we assign a probability to a random event like 100 doses of a fair coin.  We can be pretty certain that the number of heads that occur will be close to 50.  Weather forecasters assign to probability of rain using a very different method.  They are much better at forecasting the weather than economists are at forecasting economic events because their assumptions about the weather are much better than the assumptions economists make about the economy.

The Recession Ends In The Eurozone But Many Economic Problems Remain

Recessions are technically over when a positive growth quarter replaces a series of negative growth quarters.  German and France had relatively strong growth in the last quarter but many other countries in the eurozone remain in recession.  The overall growth rate in the eurozone, and in the European Union, was only 0.3% but it is better than negative growth.

Demographics, Culture, And Slow Growth In Europe

Demographics are very important and they are very difficult to alter.  This article describes the effect of demographics on the eurozone economies.  Germany has the strongest economy but demographics are working against them.  Other countries in the eurozone have similar problems but they have very resources at their disposal.  The demographic problem is well understood but it is not easy to change fertility rates, and it is not easy in many countries to integrate immigrants into their economies. 

We have seen how Japan's economy has been slowed down by demographics and how some countries are benefiting from favorable demographics.  Slow growth is not necessarily bad but countries that have seen rapid growth, partially the result of favorable demographics, will have a tough time dealing with the political fall out from slow growth.  Expectations of rapid growth have been determined by the experience of rapid growth.

Reporting On Secret Government Activities Is Not Easy

This is a lengthy description of the contacts between the reporters who dealt with the NSA contractor who disclosed NSA's extensive electronic spying operations.  It reads like a spy novel but it is very informative.  The reporters had to take the batteries out of their cell phones because they knew that the government could listen to their conversations even when the cell phones are turned off.  They provide spy agencies with a microphone that can be used to eavesdrop on anyone possessing a cellphone.  It is also necessary for reporters to encrypt their communications with sources because NSA has access to every Internet message sent by reporters.  Even encrypted messages are at risk if the encryption software is not super powerful.  NSA has access to networks of computers that can use brute force to make trillions of guesses to uncover passwords.  The bottom line is that government has powerful tools that threaten the privacy of its citizens.  We can only hope that these tools are not abused by government.  The safe guards against abuse are not very strong.

Why Have Conservative Republican's Abandoned Milton Friedman?

Paul Krugman argues that the conservative economist, who defined conservative economics,  is being ignored by Republicans.  Milton Friedman tried to save free market capitalism by providing a space for the Fed to manage money policy during depressions which threatened capitalism.  Leading Republican's, however, have moved too far to the right for Milton Friedman.  They have been attacking the monetary polices of the Fed by arguing that they will lead to inflation.  They have been making that argument despite the lack of inflation over the last four years, but they have a deaf ear to Milton Friedman or to reality according the Krugman.

There are reasons why Republican's keep raising the threat of inflation that are primarily political.  Krugman does not discuss those reasons.  I will discuss this in another post.

Joe Stiglitz On What We Have Learned From Detroit's Demise

Much of the commentary about Detroit has barely touched the surface of the real problems in Detroit and many other rust belt cities.  Joe Stiglitz points us to the underlying problems that require resolution.  Metropolitan Detroit is doing very well compared to the inner city which has lost half its population and its tax base.  Some of its problems are the result of deindustrialization and the loss of auto manufacturing jobs, but Detroit is also a victim of urban sprawl.  The wealth that was created in the inner city has been allowed to dissipate because it cannot be supported by those who remain in the city.  The suburbs surrounding Detroit are indifferent to the loss of wealth.  They benefit indirectly from Detroit but they are separate tax entities that do not help to pay for the infrastructure that they left behind.  Our cities run the risk of becoming urban ghettos unless we develop policies to deal with white flight and urban sprawl. 

Detroit is also subject bankruptcy proceedings.  This has become a battle between creditors who loaned money to the city and public employees who own pension contracts.  One of the city's largest creditors are those who sold Detroit $300 million derivative contracts.  The bankers usual win in these battles when private firms go into bankruptcy.  Stiglitz believes that those who sold the derivatives should take a back seat to those who have pensions.  They are better protected legally because the bankruptcy laws are different from the laws that govern private bankruptcy.  The process is overseen, however, by a Republican governor and his appointee.  Its not hard to determine whose interests they will try to protect. 

Off To Vermont And Canada For A Vacation

We will be in remote areas without Internet service.  I will miss the blog but it will be refreshing to get away from it for awhile. 

New Construction Decline Is Drag On The Economy

This graph shows the decline in new construction spending since 2003.  It dropped rapidly when the bubble burst and it has not recovered since.

15 Years After Kyota

This is lengthy article that reviews what has happened with carbon emission reduction programs over the last 15 years.  There have been numerous local initiatives that have not been integrated.  There is also a continuing need to develop programs at a global level.  The abstract summarizes the most important observations about where we have come from.  It also indicates some of the next steps that are essential for further progress.

The Great Depression Explained And How It Applies to Current Economic Problems

Bruce Bartlett does a nice job of explaining how a contraction of the money supply contributed to the Great Depression.  He also explains some of destabilizing effects of price deflation on the economy.  Moreover, he explains why fiscal policy becomes the best mechanism for increasing employment when monetary policies become less effective when short term rates have been reduced to zero bound by the central bank.  This is the first of three articles that I have posted that shed some light on our slow recovery from the Great Recession. 

Sticky Prices And Recession

Recessions are periods in which we have under utilized resources such as labor or capital goods.  Classical theory suggests that unemployment could be reduced by cutting wages.  The assumption is that employers would hire more workers at lower prices.  In other words unemployment is caused by high wages in the short term.  In the long term economic growth is determined by supply factors such as new technologies or more productive resources.  This neo-classical synthesis is accepted by most "New Keynesian" economists.  Prices do not adjust quickly enough in recessions.  Therefore, we have short term demand problems that may require the use of monetary or fiscal policy to decrease short term unemployment.

Supply factors do constrain how far we can expand aggregate demand to increase production.  On the other hand, wage and price deflation are also destabilizing.  This article describes some of the channels by which they prevent economies from recovering from recession.  Debtors have to cut spending in order to repay debts that remain constant as incomes fall.  Some of their income goes to creditors who typically spend a smaller share of their income than debtors.  Consumers and businesses, who anticipate falling prices, will also defer spending.  Aggregate demand falls further and businesses will respond by cutting back on production and employment.

The Paradox Of Thrift

There is a lot of misunderstanding about the causes of recessions and what to do about them.  In particular, Keynes developed a theory that explained why it is difficult to escape from a deep recession.  His explanation is poorly understood.  It has been characterized by his critics as an excuse for governments to run deficits.  Classical economists believed that price adjustments would enable market economies to recover from recession.  One of the price adjustments was the interest rate mechanism.  The amount of loanable funds would increase if consumers or businesses cut back on spending and saved more of their income.  Keynes developed the paradox of thrift to explain why the supply of loanable funds would not increase when individual agents decide to spend less and save more.  Consequently, interest rates would not fall far enough to encourage more spending.  An economy in recession would not recover from recession through the interest rate mechanism.

The paradox of thrift is not easy to grasp because many people believe that savings are a virtue and that debt should be avoided.  In doing so they commit the fallacy of composition.  They believe that what is good for the individual is good for the society as a whole.  This article does a good job of explaining the paradox of thrift and the fallacy of composition.