For-Profit Higher Education And Income Redistribution

I can recall magazine ads when I  was much younger that offered a test that a young person could take to determine whether the person had artistic ability.  Of course, the test was designed so that everyone who took the test would benefit from the "art school" that designed the test. A high pressure salesperson followed up on each lead produced by the ad.  Eventually, the "art school" disappeared because the family had to come up with cash to attend the "art school".  The federal government has changed that dynamic by providing financial aid to students recruited by for-profit schools that have the same goal as the "art school" that I described.  This article is about ITT which advertises that it can provide an education program that will allow its graduates to obtain high paying jobs.  The students take out government supported loans and most of the students either fail to finish the program or they fail to get the promised jobs when they "graduate".  ITT makes a profit and the students are saddled with a debt that cannot be eliminated under bankruptcy law.  This result is not unanticipated by ITT which estimates a 64% default rate on the student loans.  The taxpayers end up funneling money to our modern version of the "art school" that was unable to benefit from government income redistribution.

ITT is not unique in this redistribution game.  Several other for-profit colleges are under investigation for playing the same game.  They are simply doing what they are supposed to be doing.  That is they maximize profits with the help of government funding.  Under the doctrine of consumer sovereignty the consumer bears the responsibility for making rational decisions.  Republicans tend to support the movement to for-profit schools, and many democrats are reluctant to take on the lobbies that support them. 

Federal Budget Deficit Declines 12.9% Between 2012 and 2013

Deficits rise during recessions for a couple of simple reasons: Tax revenues decline as economic output shrinks.  Mandatory spending on social welfare programs increases.  The consequence of declining revenues and higher spending produces budget deficits.  Deficits can be reduced when the opposite happens.  That is what occurred between 2012 and 2013.  A growing economy and a tax increase led to higher revenue.  A slowdown in federal spending, particularly a decline in spending on healthcare, along with the increase in tax revenue, reduced the federal budget deficit from $1.1 trillion to $680 billion.  We still have to be concerned about future deficits as the baby boom generation ages.  However, the noise that we hear in the media about uncontrolled federal spending and huge budget deficits should be taken with a grain of salt.  Its all about politics.

Does Income Redistribution To Reduce Inequality Reduce Economic Growth?

One of the common criticisms of progressive taxation is that it reduces savings and investment which are essential for growth.  That was the rationalization that the Reagan Administration used to make the the federal tax system less progressive.  Economists on the left argue that progressive taxation fosters the development of human capital which is pro-growth. 

The IMF did some research on this question which is summarized in this article.  The data provides some evidence that progressive taxation is associated with economic growth.  The data are dependent upon cross national analysis of economic growth in countries with varying levels of tax progressiveness.  It is hard to separate out other factors in addition to tax policy that might affect economic growth.  On the other hand, the data do not support the claim that progressive tax policies and income redistribution impede economic growth. 

Armed Soldiers With No Identification Insignia Arrive In Crimea

Events in Crimea are moving at a rapid pace.  The two major airports in the region are being patrolled by military personnel wearing uniforms with no national insignia.  It is believed that they are Russian soldiers and they are being cheered by Pro-Russian factions.  Officials in Crimeria, who believe that the deposed president was corrupt, want more autonomy from the central government in Kiev.  The former president Yanukovych is rumored to be in Russia.  He has few supporters left in Ukraine.  There is also a concern among Tartars in Crimea the they will be a target of Pro-Russian's who do not support the manner in which the corrupt leader was forced out of office.  As one might expect, efforts to determine who is in charge of the government in Kiev are not amenable to normal democratic processes.

Don't Cry For The Failure Of The Trans Pacific Partnership Trade Negotiations

Paul Krugman is a self described free trade economist.  He explains why the breakdown in the TPP is no big deal.  In the first place, there is no need to reduce the impact of tariffs on free trade.  That has already been done.  The impact of any further reductions in tariffs would be minimal.  So what is the TPP all about?  It is primarily about protecting intellectual property rights.  Drug companies and movie producers would be the primary beneficiaries of the legal monopoly provided by patent and copyright protection.  We grant patents and copyrights as temporary monopolies (which are becoming less temporary as we grant extensions) to encourage investment but social welfare would not be greatly improved by TPP. 

There is not a lot of support for TPP even in the Democratic Party.  The party leaders in the House and the Senate have not supported TPP.  Krugman cannot really understand why Obama has invested so much political capital in TPP.  The president has received a lot of support from the movie industry so it may make some political sense.  On the other hand, it is no big deal according to Krugman.

The Ukraine Revolt In The National Capital Leads To A Counter Revolt In Crimea

Ukraine is a large and divided country.  This article describes the reaction in Crimea to the revolt in the national capital. Crimea is ethnically and culturally closer to Russia than the western regions of Ukraine.  It may not be possible the put the country back together again after these recent events. 

Democracy In Arizona

The State Legislature passed a law which allowed businesses to refuse services to gays if doing so violated their religious beliefs.  The Republican legislators put the Republican governor in a tough position. The bill was vigorously opposed by the Arizona business community.  There was even a concern that the NFL might decide to move the Super Bowl, scheduled to be in Arizona next year, to another location.  Nothing could be worse than that, even among supporters of the bill.  Hosting the Super Bowl is worth a lot of money to the state, and hosting the Super Bowl is viewed as a stamp of national approval.  In any case, the Governor vetoed the bill yesterday as expected. In doing so, however, she deepened the split in the Republican Party between establishment Republicans in the business community and Tea Party activists who control the State Legislature.  When push comes to shove, the establishment, which funds the political campaigns, will usually win the battle.  However, the GOP cannot win elections without the votes from the folks who elected the plebes in the state legislature.  What's happening in Arizona is symptomatic of problems faced by the GOP in the rest of the country.  It must maintain a delicate balance between the emotional energy of its social values oriented base and the GOP establishment. 

Inequality And Human Nature

Some people become very rich and others do not.  Scott Fitzgerald attended Princeton and he was familiar with the super rich.  The books that he wrote reflected his experiences with wealthy families.  He once told Ernest Hemingway that the rich are very different from the rest of us.  Hemingway is reported to have replied in very Hemingway fashion.  He said "Yes they have more money".  Fitzgerald was probably more astute that Hemingway in his understanding of the rich.  They may be different from the less well off in other ways.  This leads to an interesting question.  Did the rich become rich because they are different, or are they different because they are rich?  Adam Smith, who is often regarded as the original champion of free market economics, had something to say about this issue that may be surprising:

"The difference of natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came into the world, and for the first six or eight years of their existence, they were perhaps, very much alike"

That is, the experiences that people have, including their education, and occupations, account for the differences that we observe in the rich and the less well off.  They probably were less different from each other when they were young and nature accounted primarily for the differences.  Inequality may not be caused by the natural differences between people.  Instead the differences that we observe may be a consequence of the inequalities that result from different life experiences.  The distribution of income is not representative of the distribution of innate capabilities which are more equally distributed by nature.  A lot of natural talent may be wasted by the divisions of labor and opportunity that exist in society. 

Asset Bubbles As A Natural Ponzi Scheme

Paul Krugman read the transcripts of the Federal Reserve's deliberations in 2008 and was surprised that they did not recognize the scale of the housing bubble.  They could not believe that market prices could deviate so much from fundamentals.  It reminded him of a comment made by Bob Shiller that asset bubbles are natural Ponzi schemes.  That is they are not initiated by a schemer.  Prices begin to rise and more buyers are attracted to the market.  The bubble continues to inflate until no more buyers are able or willing to enter the market.  The bubble then bursts quickly as the number of sellers becomes greater than the number of buyers. The graph below illustrates the housing bubble.

Bob Shiller had been raising flags about the housing bubble beginning in 2004 because housing prices deviated from fundamentals such as price to income levels, and price to rental revenues.  Shiller's critics accused him of "crying wolf" as prices continued to rise until the bubble eventually burst.  No more suckers were available to keep the Ponzi  scheme going.

There is a similar story about Joseph Kennedy's decision to sell his stock holdings just before the market crash in 1929.  He told his friends that he decided to sell when a shoe shine boy told him about a hot tip that he had received about a stock.  Kennedy concluded that if the shoe shine boy was buying stocks there were few suckers left to enter the market and keep the bubble inflating.  Kennedy understood asset bubbles better than most investors who were crushed by the collapse of the market.  He and Bob Shiller are a rare breed.  They understand that assets prices can deviate widely from market fundamentals.

Senate Committee Releases Report On How Credit Suisse Helped US Customers Avoid Taxes

This article describes the system that Switzerland's second largest bank used to help 22,000 US clients set up accounts worth $10-12 billion that were not disclosed to US taxing authorities.  The report is also critical of the US Department Of Justice for weak enforcement of US laws that could have revealed the names of US account holders.  The total amount of tax dollars lost to the government through the use of tax havens would be enough to close the annual US budget deficit of around $450-500 billion.  The report indicates that tens of trillions are hidden in tax havens by wealthy individuals and firms from a variety of countries.  Efforts to close down these tax havens have been watered down since this information became public.  There is a link to the Senate Report for those who are interested in the details uncovered by the Senate investigation.

Ex-President Of Ukraine Accussed of Mass Murder

This article describes events in Ukraine that are moving quickly after an interim government has been put in place after the departure of its former president.  Its still not clear how things will turn out in the divided country.  In particular the response from Russian leaders remains to be seen.

The Mobility Myth And The Real Economic Goal

Social mobility has been part of American mythology for a long time.  In comparison with aristocratic Europe one's parents had less to do with one's social mobility in the US than it did in Europe.  It has been important to protect that myth by singling out individuals who overcame obstacles to rise to the top of the economic pyramid.  In reality, however, social mobility in America, and even in Sweden, is not as strong as one might imagine.  Its really important to be born to the right parents.  More importantly, however, the opportunity to move from rags to riches may not be as important as we think.  By definition the great majority of people will always belong to the middle class and to the working class.  Improving the living standard of the majority of our citizens is more important than than the opportunity for a few to strike it rich. The hallowing out of the middle class is a more important problem than maintaining the Horatio Alger myth.

What Is This Monday's Propaganda From Robert Samuelson?

It's Monday again and Robert Samuelson has written his opinion piece for the Washington Post.  Dean Baker does his usual job of taking apart his arguments.  In this case, Samuelson takes a line out of the CBO report about the impact of the minimum wage and he ignores the qualifications made by the CBO.  If you watch Fox News you probably already know the line that Samuelson quotes.  The CBO report said that as many as 500,000 jobs could be lost by raising the minimum wage.  Dean Baker reports the full statement about potential job loss and he explains what job loss really means.  We have learned to expect this kind of reporting from Robert Samuelson.  He is not the real problem.  The real problem is that the Washington Post has Robert Samuelson instead of Dean Baker writing its opinion articles on the economy. 

Samuelson also claims that the ACA will lead to job loss, and that the XL Pipeline will create jobs.  Dean Baker comments on those claims as well.  He also points out that the XL Pipeline will lead to the burning of more dirty oil products that will contribute to global warming.  Conservatives who claim to care about future generations when it comes to estate taxes, seem to care less about the kind of environment that we will leave to future generations.

New York Times Editorial On The Value Of The Fiscal Stimulus

The non-partisan Congressional Budget Office has evaluated the beneficial effects of the stimulus which kept the recession in the US from deepening.  This editorial documents some of the benefits of the stimulus and argues that it should have been larger.  It is also critical of Republicans who did what they could to block the fiscal stimulus, and lied to the public (with a lot of help from their friends) about the failure of fiscal stimulus.  The Republicans worked hard to convince the public that budget deficits were a bigger problem than unemployment (again with a lot of help from their friends).  What they did not tell the public is that they love fiscal stimulus when a Republican is in the White House. Their patron saint Ronald Reagan ran some of the biggest budget deficits in US history.  His fiscal policies were pure Keynesian.  He cut taxes substantially and he increased federal spending.  George Bush did the same thing.  He even argued that his tax cuts were necessary to stimulate the economy and he spent billions on a war in the Mid East.  We heard nothing from the party of fiscal responsibility during the Reagan and Bush administrations.  Their only concern is political.  They want a strong economy when one of their own is in office and they prefer a weak economy when they do not hold the presidency. 

Ted Nugent's Greatest Hits

Ted Nugent's participation in the Texas primary campaigns has attracted a lot of attention to many of the comments that he has made.  This article provides a sample of Ted Nugent's comments that have made him popular with many Texans.  Several prominent Republicans believe that he has gone too far in his references to the President Of The United States.

Victory For Protesters in Ukraine

The protest movement in Ukraine has succeeded in bringing the government down.  The president has fled to an unknown destination and the protesters have taken control of the capital.  The situation is quite fluid, however, it is not certain how the situation will evolve.  Russia has also withdrawn its $15 billion offer which would have kept the country from defaulting on its debt. 

Robert Reich Describes The New Economy Represented By Facebook's Purchase Of WhatsApp

Facebook's purchase of WhatsApp seems quite high to many people.  It paid $19 billion for a company that employs only 50 people.  Reich argues that these are the kinds of businesses that we are creating in America.  It takes very few people to provide the network services that WhatsApp provides.  The companies value is determined by network effects.  The network of users expands exponentially as each new user makes the network more valuable to all users.  This contrasts with the kinds of companies that we used to create in America that required the services of hundreds of thousands of employees.  Reich is concerned about a future economy that can operate successfully with a very small number of employees.  Its hard to blame the venture capitalists and entrepreneurs who are moving in this direction.  A very small investment can lead to a multibillion dollar payoff. 

Deep In The Heart Of Texas

Gail Collins describes the primary election campaigns underway in Texas.  The values on display in Texas are uniquely Texan, but unfortunately,  they are representative of a "Redneck America" that are not uncommon in this country.  We may laugh at what goes on in Texas, but they think that we are the crazy ones.  Greg Abbott is the Attorney General in Texas.  He is likely to be the next governor of Texas.  Ted Nugent is a popular entertainer in Texas who Abbott has been using in his campaign.  Nugent wrote a popular song called Stranglehold.  A few lines from Stranglehold are quoted below:

You ran the night that you left me
You put me in my place
I got you in a stranglehold, baby
That night I crushed your face

An Interactive Guide To The Transcripts Of The Federal Reserve In 2008

http://www.nytimes.com/interactive/2014/02/21/business/federal-reserve-2008-transcripts.html

This guide provides a history of the discussions at the Fed in 2008.

The Federal Reserve Misread The Seriousness Of The Financial Crisis

New documents were released which provide insights into the deliberations at the Fed at the onset of the financial crisis.  Many at the Fed were more concerned about  inflation, which has been its primary focus, than they were about recession.  The economic indicators that they relied upon failed to inform them about the dynamics that were underway in the economy.  More over, the standard economic model that most central banks use to forecast economic activity did not include changes that were underway in the financial system.  The credit system is regarded as external to the real economy in those models.  Curiously, those at the Fed who believed that the economy was on its way to recovery, have also been most resistant to the aggressive monetary policies pursued by the Fed for the last five years.  Janet Yellen, who replaced Ben Bernanke as chairperson of the Fed, was one of the few exceptions along with the chairmen of the Boston Fed and the Atlanta Fed. 

The Battle For The Conservative Soul

Dana Milbank writes about the meeting at the conservative American Enterprise Institute in which the morality of capitalism was discussed.  Milbank was pleased to see the issue being raised.  He contrasted the positive image of the meeting with some of the attitudes of top GOP politicians.  The GOP needs the votes from a class of people who have a very different view of morality and ethics.

The Rise And Fall Of Cap And Trade To Fight Global Warming

Cap and trade is a market based mechanism that was favored by Republicans as a solution for a market failure.  That is, it provided a way to internalize a cost that producers passed on to society.  The internalization of that cost would raise the price of carbon emissions and reduce the use of high carbon energy.  This article describes the popularity of this market based approach and its demise.  It also argues that is a better approach to the problem than non-market based solutions.  Therefore, it is an approach that may make a come back.  That might be sensible but it would require that politicians, who have based their electoral outcomes on global warming denial, find another way to raise campaign contributions explain their conversion to their political base which has been sold on denial.

Jerry Seinfeld Anticipated Facebook

http://www.youtube.com/watch?feature=player_embedded&v=8UeINnBMFA4

This is a link to a video of Jerry Seinfeld delivering a humorous explanation for the popularity of telephone answering machines.  The answering machines provide one of the psychological benefits that people get from Facebook.

The New Morality Of Capitalism

David Brooks tells us that the leader of the American Enterprise Institute, which is a major GOP think tank, has seen the light.  The GOP war against entitlements is a losing battle.  Its also silly for the GOP to pretend that everyone can be an entrepreneur.  Any form of work is noble as long as people feel that it is worthwhile.  We have to accept capitalism for what it is and imbue it with a more acceptable moral message.  So far so good.  However, the devil is always in the details.

One of the thinkers that Brooks quotes in this article states that the middle class has been proletariatized, and that the uneducated class has been left behind.  The implication is that the benefits of capitalism have primarily gone to the upper class.  But when Brooks discusses what should be done to make capitalism more moral, he asserts that the middle class has received most of the benefits from the government.  We should reduce the benefits that have gone to the proletariatized middle class in order to improve the well being of the uneducated class.  This has been one of David Brooks' favorite versions of class warfare.  That is, it is between the educated middle class and the uneducated class that has been left behind.  Somehow the accumulation of wealth that has been going to the super rich has been left off of the table.  It is David Brooks' reinterpretation of Marx.

One of the virtues of global capitalism, according the the leader of the American Enterprise Institute is that there are fewer people in the world that are extremely poor.  That is true.  We now have a global labor market, and some of the jobs that have been performed in rich countries, at higher wages, have moved to poorer countries at lower wages.  This has raised the living standards of many workers in poor countries, but it has also reduced the number of middle class jobs in rich countries.  It has also increased the profits of multinational corporations, which benefit from lower labor costs, and it has opened up new markets for their products as more workers in less developed countries increase their incomes. 

This takes us back to two of the problems discussed in this article.  That is, the need for more jobs in the US, and the proletarianization of the middle class.  Global capitalism may have redistributed income, and jobs, from the middle class in the US to workers in poorer nations.  In the process it has also redistributed income to the shareholders of multinational corporations who have increased their profits in the process.  Where are the new jobs going to come from in the US?

The problem of fewer jobs available in the US is raised in Brooks' essay but no answer is provided.  In fact, one of the job trends in the US is discussed, but that is more of problem than a solution.  Many of the innovative technology firms that have been formed in the US have become very valuable.  For example, Facebook purchased one of these companies for $19 billion (75% paid for with FB stock).  The problem is that Facebook and the company it purchased have very few workers relative to their market value.  The social media products that they provide are delivered to the public at low cost, but their market value is determined by the access that their products provide to advertisers.  Many of the new technologies in the US are being used to create new ways to sell products.  This has transformed the marketing industry but it has not created enough jobs to replace those that have been lost.  Marketing dollars are just being spent in new ways.

The takeaway from David Brooks' article is that some conservative leaders are aware of the problems that we face, and they are also critical of the simple minded approaches to these problems favored by the "party of the stupid" which is how a Republican governor referred to his party.  That may be a sign of progress.  It is not progress, however, to reframe these problems in a way that leads to the contradictions that are apparent in the new morality presented by David Brooks.

Why Is The Job Finding Rate In The US Still Low?

The job finding rate measures the fraction of unemployed in a given month who find a job in the next month.  It is a good index of how fast employment is recovering from the Great Recession.  The job find rate is still below its pre-recession rate.  This study by the Federal Reserve Board of New York offers an explanation for the persistent low rate of job finding.

There are two factors that might explain the low job finding rate.  One factor is the vacancy to employment ratio.  This is the number of job openings per unemployed worker.  The other factor is matching efficiency.  This is a measure of the ease in which employers and job seekers find a match.  Many believe that this is the most important reason why the job finding rate is low.  They blame the low rate on the fit between job skills and the skills demanded by employers. 

One way to test the importance of these two factors is to ask how the job rate might be affected if the matching efficiency factor were kept the same as it was prior to the Great Recession.  It was found that the job seeking rate would still be well below the predicted rate if the matching efficiency remained constant.  The conclusion is that the major reason for the low job seeking rate is the vacancy to unemployment ratio.  The labor force skill explanation is weak in comparison to the job vacancy explanation. 

Concerns Raised About Risks Of Funding Private Emerging Market Debt With Bonds

The Federal Reserve has been a large purchaser of US treasury securities.  That has kept the price of safe US bonds relatively high, and the yields from those securities relatively low.  Hedge funds, bond funds and private equity funds have looked elsewhere in search of higher yields for the $1.5 trillion flow into bond funds over the last 5 years.  They have been large purchasers of higher yielding, but riskier bonds, issued in emerging markets by private enterprises.  The total outstanding bond debt in emerging markets now totals around $2 trillion.  The funding of emerging market debt has shifted from commercial bank lending to bond issues over this period.  Prior to quantitative easing, commercial bank lending was twice the size of bond funding in emerging markets.  Over the last five years bond issuance has surpassed the use of commercial bank lending to fund private investments in emerging markets.

This article raises two concerns about the shift from commercial bank lending to the use of bonds to fund private projects in emerging market.  The first concern is the risk of a liquidity crunch.  The rush into emerging markets by bond funds has the appearance of herd behavior.  The risk is that they may all attempt to exit the market at the same time.  Commercial banks have a longer term time horizon than bond funds.  The second concern follows from the liquidity concern.  The global economy has become dependent upon growth in the emerging market economies.  A reversal of the flow of funds into emerging market economies would have global implications.

The IRS Wants To Make Campaign Contributions Public

Spending on political campaigns has grown enormously since the Supreme Court ruling which enabled wealthy individuals and groups to make unlimited secret donations to non-profit political organizations.  Many of the donations are tax deductible and kept secret from the public.  In theory these organizations have been determined to be "public welfare" groups by the IRS.  The IRS has decided to impose more stringent standards on these groups that would require them to let the public know where the money came from.  This editorial in the NYT supports this move by the IRS to limit secret donations to tax exempt "public welfare" organizations.  It is a step in the right direction but it is opposed by the affected groups on both sides of the political spectrum.  Hopefully, the IRS will be able to overcome the efforts of these organizations to prevent the IRS from making it more difficult to corrupt our political system.

Robert Gordon Forecasts Much Lower Rate Of Growth For US Economy In Coming Years

This is an abstract of a NBER paper delivered by Robert Gordon which forecasts a much lower rate of economic growth for the US economy.  Gordon had created quite a stir within the economics profession in a previous paper that argued that the pace of innovation would slow down and limit the rate of economic growth.  He argues, in this paper, that the slower rate of growth in the US is not dependent upon a slowdown in the rate of innovation.  The slowdown started four decades ago.  He points out that labor productivity in the eight decades before 1972 grew at an average rate of 0.8 percent faster than it has in the four decades since 1972.  Consequently, the US economy cannot continue to grow at the real rate of 2 percent as it had grown between 1891 and 1972.

Gordon forecasts a future real growth rate for labor productivity in the total US economy of only 1.3 percent.  That includes a 0.9 percent growth in output per capita and 0.4 percent growth in real income per capita.  Moreover,  the growth in productivity will continue to be unequally distributed.  Half of the growth in income per capita will go the the bottom 99 percent of the income distribution and half will go to the top 1% of the distribution.

Gordon supports his gloomy growth forecast by calling attention to four headwinds that are not subject to controversy:

*  A demographic shift will reduce the number of hours worked per capita.  In addition to the increase in the number of elderly workers leaving the workforce, there will be fewer young people in the workforce.  Jobs have already become scarce for the youth in the US as well as it has been in several other advanced economies.

*  Economic growth in the US prior to 1972 was driven by a rise in educational attainment.  Growth in educational attainment since 1972 has stagnated.  Many other nations have passed the US in high school and college graduation rates.  (Its hard to see how this trend can be reversed as the cost of providing educational services continues to increase faster than the willingness of governments at all levels to fund educational services.)

*  Nothing will happen to reduce the growth in income inequality.  Real income growth for the bottom 99% will grow at half the rate of real income growth to top 1%.

*  The increase in the ratio of debt to GDP will continue to grow at all levels of government.  This will lead to higher taxes and/or slower growth in transfer payments during the next decades.  (Slower growth in transfer payments combined with slower growth in disposable income for the bottom 99% is bound to have an impact on growth in aggregate demand)

Gordon's gloomy forecast will not settle well with economists who believe that the "natural" growth rate of the economy is 2 percent and that it is only subject to moderate fluctuations in the business cycle.  Many conservative economists believe that the natural growth rate is only negatively affected by shocks that occur outside of the "real economy" (They often put the blame on government policies).  Most liberal economists believe that monetary policy and fiscal policy can moderate the fluctuations in the business cycle.  The structural problems in the economy suggested by Gordon's analysis imply that efforts to moderate the business cycle will not affect the potential output of the economy.

A Billionaire Starts An Organization To Fund Action On Climate Change

The Koch brothers have been using their billions to prevent government actions to protect the environment.  Since they are among the leading polluters in the US they have a financial interest in a dirty economy.  Tom Steyer is a hedge fund billionaire.  He is starting up an organization of wealthy individuals who share his interest in preventing catastrophic climate change.  The organization will be funded with $50 million of his own money, and he expects to raise an additional $50 million from others who share his concerns.  He will also partner with Next Gen Climate which is one of the most active organizations on environmental issues.  They hope to enlist wealthy individuals from Silicone Valley who also support their cause.  The intent is to shift their focus from philanthropy and education to funding political campaigns.  They have targeted four Republicans who have been leading climate change deniers but they are also attacking a Democratic Senator from Louisiana who has been promoting the Keystone Pipeline.  They recognize that Republicans are aligned with the Koch brothers but they are agnostic about political party membership.  Democrats have been concerned about losing votes from their working class base which has been influenced by propaganda from the Koch brothers and other global warming denialists.

Larry Summers Favors Tax Policies To Deal With Income Inequality

Larry Summers points to all of the evidence about growing income inequality and he does not see much point in policies that would keep the rich from getting richer.  He argues that the super rich also game the tax system.  He believes that we should put an end to the ways in which the super rich avoid taxes.  We could use the additional tax revenue to redistribute benefits to those in need.  He suggests that a failure to rebalance after tax income would lead us in the direction of the Downtown Abby economy which has captivated TV audiences in the US.  It provides a picture of the aristocratic society in England prior to the first world war.  It was a society in which inherited wealth and privilege was the dominant force.  Everyone knew their place in that society but changes were underway which were nipping at the edges.

Greg Mankiw Explains Why The Top !% Deserve What They Are Paid

Classical microeconomics theory assumes that we are paid in accordance with our marginal contribution to output.  That is what Greg Mankiw and most economists teach in Econ 101.  Consequently, it makes sense to assume we cannot overpay most of the individuals who are highly paid.  In some cases it is pretty clear that  some of our super stars are paid in accordance with their contribution to output.  Top athletes, rock stars and movie stars attract a lot of customers willing to pay high prices to watch them perform.  Its hard to disagree with Greg Mankiw when he tells us that they are being rewarded for their rare skills.  In most cases, however, it is not easy to determine the marginal contribution to revenue made by most workers.  Many of our top earners are part of business overhead.  For example, it is difficult to determine the contribution of most corporate executives to marginal revenue.  Greg Mankiw argues that they are rewarded for their performance by corporate boards who able to measure their contribution to output.  There are probably some top executives that are similar to star athletes and rock stars.  On the other hand, just as most athletes and performers are not super stars,  its likely that most of our top executives are not super stars.  Moreover, its not clear that their contribution to a firms success is greater today than it was in the past.  Therefore, its hard to explain why we pay top corporate executives many times more than we paid their peers in the past.  It is also hard to explain why US executives are paid many times more than their peers in other countries.  Something else must explain why executive compensation in US has reached its current levels.

Mankiw also argues that many of our top earners are rewarded for taking risks.  Of course many of them do take risks but they are seldom taking risks with their own money.  Wall Street bankers took excessive risks to earn a high return on equity.  They were highly compensated for that risk but they suffered less from the financial crisis than those who purchased their flawed securities. Its quite possible that the incentive system that they operated under encouraged them to take excessive risks and to sell toxic securities to investors that were not honestly described.

Mankiw also argues that bankers are paid highly because they perform the difficult job of allocating scarce capital to its most productive use.  That, of course, is what our textbooks teach students in Econ 101.  Its hard to support that assumption when one observes our recent history.  The dotcom boom and bust would not have happened if Wall Street banks had adequately allocated capital to its best uses.  They made a ton of money by taking companies public that they would not have underwritten if they bore the cost of failure.  They earned large fees taking them public, but they were not responsible for the losses that were suffered by gullible investors.  Wall Street analysts also helped to misinform investors because they played an important role in recruiting and retaining clients.  The clients were more likely to give their business to the investment bank that promoted their business prospects.

While it is possible to argue, as Mankiw does, that society benefits from the work done by some of our highest income earners.  It is less clear how well that argument applies to many of our most highly paid individuals.  For example, one of the fastest growing industries in America is the lobbying industry.  Top lobbyists are rewarded primarily for the relationships that they have with politicians.  A former member of Congress who joins a lobbying firm is paid a high multiple over their government salary.  Influence peddling is not an uncommon way to earn multimillion dollar incomes.

A Map Of The US That Matches A State's GDP To Sovereign Nations

The Rise Of Alternative Asset Managers

Banks have pulled in their horns and are no longer making risky loans to small business.  That role is being taken over by "alternative asset managers" like private equity firms.  For example, last year Goldman Sachs' return on equity was only 12%.  That is a far cry from the 40% return that it experienced a few years ago.  That contrasts with the 27.4% return by KKR.  Only 25% of Appolo's $160 B portfolio is in private equity.  It has $100 B in corporate loans and bonds.  Blackstone and KKR have only 25% of their portfolio in corporate loans and bonds, but they have been moving in that direction. 

It may be good thing that alternative asset managers are moving into the risky credit business.  Unlike banks, which are dependent upon demand deposits and other short term forms of credit, the alternative asset managers are funded with long term credit.  That makes them less subject to a liquidity crunch.  Our last financial crisis was characterized by a bank run.

Climate Skeptics Have Won But We Should Not Give Up

Martin Wolf, writing in the Financial Times, views the lack of action by governments on climate change as a signal that the skeptics have won.  However, he argues that it is wrong to give up our efforts to confront the growth in carbon emissions.  He offers several things that might be done to reduce carbon emissions and respond to the effects from climate change that are already upon us. 

Frankly, I do not believe that the skeptics have won. Most of our economic and political leaders are not in denial. The real problem is that the required changes in our behavior are substantial. It is difficult to make serious changes in our behavior to deter future harms.  It will probably take a catastrophe to initiate the level of change that is required.  Hopefully, it will not be too late.

The Job Market And The Value Of A College Education

A college education can be valuable for a number of reasons.  Well educated people are better able to adapt to a changing world; they probably become better citizens, and knowledge has intrinsic value.  Increasing access to a college education also has a positive impact on social mobility.  Most high paying jobs require a college education or an advanced degree.  Young people without a college degree do not have access to many higher paying jobs.  Some even argue that we need to produce more college graduates in order to reduce unemployment.  They claim that a large number of  high paying jobs are not being filled because there are not enough high skilled candidates available to satisfy the demand.  This article argues that sending more young people to college is not a solution for the unemployment problem. 

If we look at the employment opportunities for recent college graduates we find that 44% are employed in jobs that do not require a college a college education.  We have a serious under-employment problem.  We also find that wage growth has been stagnant for young college graduates.  One would expect that wages would increase if there was a shortage of college graduates.  The real problem that we have is that we are not creating enough jobs that require a college education.  Most of the projected job growth by the Bureau of Labor Statistics is in low paying occupations.  We need to find ways to create higher paying jobs, and we need to develop paths from lower paying jobs to higher paying jobs.  It is not clear how this can be done.  We shipped a lot of low skill manufacturing jobs to low wage countries but the middle management jobs in our factories went elsewhere as well.  Those jobs required a college education.  We have seen a lot of growth in high technology markets.  They provide good opportunities for talented graduates but they employ relatively few jobs in relationship to market capitalization.  Google and Facebook are good examples.  They do not employ anywhere near the numbers of college graduates that were employed by GM, Ford and GE in their heydays.

GOP Attempts To Block Unionization Of Volkswagen Plant In Tennessee

Management would like to form a worker's council in its Tennessee plant.  It believes that they have been a critical factor in VW's success in the marketplace.  The workers at the plant are preparing to vote to unionization the plant and VW management expressed a desire to work with the union and the work council.  The GOP legislature does not like unions and it has threatened VW with a loss of incentives that the state provides to VW if the plant is unionized. The South has been using its anti-union policies to attract manufacturing to its region.  Politicians are concerned that a successful unionization at VW would spread to other auto plants in the South and neutralize the value of its anti-union policies in attracting businesses to locate in the South.

Janet Yellen's First Meeting With Congress As Our New Chairperson Of The Federal Reserve

Tim Duy reports and analyzes Janet Yellen's testimony.  She was part of the team that developed the Fed's strategy under Ben Bernanke.  She supports the twin mandate of the Fed to manage inflation and the unemployment rate.  There are no current indications of an inflation threat and the details of the employment picture suggest that the Fed is still concerned about the labor market despite a declining unemployment rate.  Yellen indicated that the Fed will continue with its plan to reduce its purchases of financial assets, and more importantly, she suggested that the Fed will continue to keep short term interest rates low until it is more comfortable with the labor market.

How Should We Manage The New Economy?

Everyone knows the story of the industrial revolution.  The rise of the machines increased productivity, and this made it possible for a substantial number of people to have a piece of a much larger economic pie.  Keynes even imagined that more people would have an opportunity to enjoy the kind of life that was common to his class.  They would spend more time engaged in activities that expanded their minds and cultivated the enjoyment of art, music and the humanities.  To some extent that happened.  According to Martin Wolf we are in the midst of a new economic revolution.  New technologies and globalization are transforming the economy and increasing productivity.  How we shape the good things that are happening, and manage the bad things, will determine whether the outcome will be a tiny minority of winners and a large majority of losers from the changes that are underway.  We need to remember that economies are not a natural phenomenon; they are determined by the economic and political decisions that we make.  We have to choose the kind of economy and society that we want.

The Tom Friedman's of the world tell us that every nation is engaged in new arms race.  The nation with the smartest people will win the race.  Martin Wolf correctly argues that education is not a panacea.  Education is a personal and a public good but it will not determine the shape of the new world that we are entering.  We don't know what new skills will be needed 25 years from now, but more importantly, a relatively small number of creative entrepreneurs and skilled technicians will be needed to perform the necessary work.  Education cannot turn us all into the happy few. We will be forced to reconsider how we deal with the opportunity for leisure.  Rising productivity enables us to provide more output with fewer hours worked.  How do we provide a reasonable standard of living to the large numbers of people from whom we require fewer hours worked?  Moreover, as our ability to produce more output increases, how do we expand the demand for the increased output in an economy that requires less labor?

We have tendency to look at our current economic situation as if it is just another downturn in the business cycle.  We have the tools to deal with business cycles.  We may not use the tools that we know how to use but we may also be in the midst of more fundamental changes that are similar to those that we experienced during the industrial revolution.  If that is true, and I agree with much of what Martin Wolf wrote about the changes that have been underway, we will require a level of leadership that has been difficult to find in much of the world.

The Welfare State Is Taking Over The US Government According To Robert Samuelson

Its Monday again and Robert Samuelson has provided another argument for making large reductions in social welfare programs.  More precisely, he has found another way to make the same argument that he and the Washington Post editors have been making for a long time.  He correctly points out that spending on social welfare programs are growing faster than the growth in some other government programs.  He concludes that this will reduce the capacity of government to function, and he mentions a few of the programs that may suffer a loss in funding.  That leads him to argue that the welfare state is taking over government.  He makes an attempt at bipartisanship by claiming that both parties are complicit in this process but he singles out the Democratic Party as the major culprit.  He ends the article by claiming that the pro-government political party has become the anti-government party.  It is the anti-government party because spending on social welfare programs is crowding out spending on more essential government programs.

There is no new information in Samuelson's article and he makes the same mistakes that he makes in the host of other articles that he has written on this subject.  The first mistake is to lump Social Security and healthcare into an entity that he calls social welfare.  Spending in both of these areas is rising because of an aging population.  Social Security differs from healthcare spending, however, in an important way.  It would require only modest adjustments in Social Security because the cost per beneficiary is only affected by the general rate of inflation.  Spending on healthcare is much more difficult problem to correct because the cost per beneficiary has been subject to a higher rate of price inflation.  Healthcare price inflation is a global problem, but it is a bigger problem in the US because of inefficiencies in our healthcare system.  It has been politically difficult to correct the inefficiencies because any corrections would reduce the revenues that flow to insurance companies and healthcare providers.  The Republican Party has been the major opponent of reforms that would lead to a more efficient healthcare system.

The second mistake that Samuelson makes is to single out a few areas of cuts that might be made in discretionary spending that are relatively modest.  The elephant in the discretionary spending budget is defense spending.  The US spends almost as much on defense as the rest of the world combined.  Moreover, much of the spending is on weapons that were more suitable for World War ll than they are for defending the US from terrorism.  In fact, Samuelson uses a potential cut in spending on a fighter plane as one of his reasons for making his claim that are becoming a social welfare state.  The defense budget is sacred but spending on social welfare is only necessary because our politicians are intimidated by the voting power of the elderly.  I was under the impression that government should be responsive to the electorate in a democracy. 

Its Not A Good Idea For US Diplomat To Say F..K The EU And Have It Made Public

The US diplomat responsible for relationships with Europe was having a discussion with a representative from Ukraine about some of the issues that has it has been facing.  She was unhappy with the efforts that EU officials have been making on behalf of Ukraine and uttered the F word.  It was recorded and released by Russia.  Apparently, NSA is not the only organization capable of spying on private communications. 

The major point of this article, however, is not about spying.  The US diplomats undiplomatic comment was not welcomed in Europe.  It comes on top of revelations about NSA spying on government leaders in Europe and it raises questions in Europe about how much it can trust the US.  This decline is trust comes at a bad time.  The US and Europe are in the middle of negotiations about a new trade agreement. 

When Ideas Trump Vested Interests

This is a 20 page article written by Dani Rodrik which has just been published by The Journal Of Economic Perspectives.  It argues that vested interests play an obviously important role in political economy.  Any account of political economy would be vacuous without accounting for the role of vested interests.  However, as important as vested interest groups are in political economy, outcomes are not ultimately determined by vested interests.  Ideas play a very important role in determining outcomes: they can trump invested interests because the choices that vested interests make rely upon a set of ideas.  They have to determine the preferences that they choose to maximize.  In addition to purely economic interests they may to prefer to maximize glory, honor, respect, and good of country among a set of ideas that are socially constructed.  For example elites have different ideas about how the world works.  Some believe that government should respond to recession by stimulating the economy and reducing unemployment.  Others may be concerned about giving the state more power and authority in the economy and they may prefer higher levels of unemployment because it depresses wages and increases profits.  Each group will ignore outcomes that challenge their idea about how the world works.

Rodrik uses ideas from political science and from his experiences as a developmental economist in which he has witnessed the interplay between vested interests which have had to make political choices that might alter the balance of power in their countries.  Ideas and events can alter the preferences held by elites and encourage policy innovation.  Ideas are also important in legitimizing social arrangements.  For example, changes in the regulation of banking could not have occurred in the absence of the neoliberal ideal that deregulation of banking would be good for Main Street as well as for bankers.  The financial crisis raised questions about the neoliberal ideal that legitimized the behavior of bankers.  Defenders of the neoliberal ideal developed an alternative explanation for the causes of the financial crisis.  They argue that government caused the financial crisis by encouraging banks to lower their underwriting requirements in order expand home ownership opportunities to those with low incomes.  This demonstrates the importance of ideas.  Did government deregulation of banking contribute to financial crisis, or was government interference in the banking market the cause of the crisis? Over time the battle over ideas shape our economic and social outcomes.  According to Rodrik human behavior is driven by abstract ideas or loyalties that cannot be reduced economic ends.  His article illustrates how the interplay of ideas can lead to anomalous outcomes. 

Apple Purchases $14 Billion Of Its Shares In Last Two Weeks

Apple has a plan to return a large chunk of its profits to its shareholders.  It latest repurchase of $14 billion of its shares brought the sum of its repurchases this year to $40 billion. It also returned $3 billion to its shareholders in the form of dividends.  This is part of a plan that amounts to $60 billion in repurchases and dividends.  Share repurchases reduce the number of shares outstanding on the market.  A reduction in the shares outstanding increases the value of the shares that remain on the market.  A share repurchase is similar to issuing dividends to shareholders.  That's good news for shareholders who have put pressure on Apple to return some its retained earnings to them.  The implication, however, is that Apple does not see investment opportunities for the capital that it has returned to shareholders. 

Amazing Images From Space

NASA released several photos which provide a picture of our universe.  One photo is an image of a cluster of galaxies that show what they looked like 3.5 billion years ago.  That is how long it took the images to travel to the Hubble space craft traveling at the speed of light. 

CVS Plans To End The Sale Of Tobacco Products By October

CVS is the largest pharmacy chain in the US.  Its annual sales are $123 billion and tobacco products account for $2 billion of its sales.  CVS has concluded that the sale of tobacco products, is inconsistent with its mission of being a provider of healthcare products, and increasingly healthcare services.  It also distinguishes CVS from Walgreen's which is its major competitor.  Walgreen's opposed a proposal by San Francisco to prevent pharmacies from selling tobacco products.  They argued that it was unfair to permit other retail outlets to sell tobacco products while preventing the sale by pharmacies.  CVS has taken a strategic step by positioning itself as a healthcare company.  It is not a retail store. It won't be long before Walgreen's and other retailers take a similar step.

The percent of American's who smoke has declined from 42% to 18% but the rate of decline has decelerated in recent years.  Public health advocates believe that limiting access to tobacco products may help to increase the rate of decline in the smoking population.  For example, steps taken in New York City to limit access and raise prices has reduced the percent of smokers in NYC to 14%.  Close to a half million Americans lose their lives every year as a result of smoking related illnesses.  Most smokers know that smoking is bad for their health.  It is difficult, however, for many people to give up a practice to which they are addicted in order to prevent health problems that are likely to occur in the distant future.  This is a problem similar to fighting climate change.  As long as the most serious impacts of climate change will occur in the future, it is hard to get the public interested in taking the necessary actions today.  I guess this is part of living in the now.

How Democracy Works In The Global Economy

This article provides critical information about the ongoing effort to develop a regional trade agreement called the Transpacific Partnership.  The process, which involves a large number of nations, is necessarily complex but it also suffers from a lack of transparency.  Many members of Congress, including supporters of "free trade", do not believe that they have well informed about the negotiations.  The media, with few exceptions, have done little to keep the public informed about the negotiations.  Senator Warren was told that if the public knew what was being negotiated they would be opposed to the negotiations.  That describes the problem in a nutshell.  The trade negotiators are effectively setting industrial policy for the region.  Congress is not deeply involved in the process and the public is kept in the dark.  The underlying assumption is that everyone benefits from "free trade" and that representatives from multinational corporations are best suited to develop the trade agreement.  In a global economy the purpose of the nation state is to enable multinational corporations to determine industrial policy.  This is a new form of democracy that is best done without public participation.

The 16 Industry Trade Advisory Committee is the most important committee in the negotiations.  There are no labor or environmental members on the committee.  It is composed of executives from the 16 industries.  This committee will determine the critical details of the trade agreement.  Each industrial group has an incentive to limit competition in the industry and to strengthen intellectual property rights which has the effect of discouraging innovation and limiting competition.  They will seek to extend the duration of copyright and patent protection and also enable patent protection for new things like medical procedures which have not been subject to patent protection.

Obama Creates Climate Hubs To Help Farmers To Cope With Climate Change

The Republican Party can be defined as the Anti-Obama Party.  It is against everything that the president proposes.  Two of the president's initiatives have been healthcare reform and limiting global warming.  The GOP's has no real proposals for healthcare reform.  It is the Anti-Obamacare Party.  Similarly, the GOP has no interest in global warming.  It has taught its base that it does not exist, or that it is not caused by human behavior.  Consequently, the president has been forced to take small steps to reduce global warming by using the authority of the EPA to take actions that do not require congressional action.  He is using his executive authority to create a new program that will help farmers deal with consequences of a warming and shifting climate.  Drought and shifting weather patterns have been harmful to the agricultural industry.  The climate hubs that he has authorized will help farmers, who primarily live in Republican states to cope with climate change.  The Republican Party can't help them to solve a problem that they believe to be a fantasy.  Perhaps they will warm up to a president who understands their problems and is willing to help them to deal with climate change.

There are two approaches to dealing with climate change.  One approach is to limit carbon emissions, the other is to limit the impact of changes in the climate that are already underway.  The president is doing what he can on both fronts without support from Congress.

Global Warmings Terrifying New Math

This article by Bill McKibben puts the problem of limiting global warming into a new context.  There are three numbers that tell the story.  There has been a commitment to a 2C degree limit on a global temperature increase. The implies a 565 gigaton limit on carbon emissions.  There are 2,279 gigatons of fossil fuels available in the reserves of energy firms and nations that act as energy firms.  That represents around $27 trillion worth of reserves that are incorporated into the stock prices of the energy firms.  Moreover, firms like Exxon plan to spend $37 billion through 2016 to explore for additional reserves.  We have met the enemy and it the energy industry. There is no other industry in the world that is allowed to dump its wastes without having to pay for it.  According to McKibben it is a rogue industry.

McKibben does not believe that there is enough time to change consumer habits so that consumption can be limited enough by consumer rationing of carbon.  It will be up to governments and energy companies to take the necessary actions.  A carbon tax would be the best way to achieve the goal of a 2C degree limit on warming but energy companies do not want to see the value of their reserves affected by a higher price for carbon emissions. 

We understand the story by using the three numbers that McKibben provided.  The rest of the article is a description of the politics implied by the difference between the 565 gigaton carbon limit and the 2,279 gigaton carbon emissions from known fossil fuel reserves.

Should Apple's CEO Care About Its Stock Price?

Apple's CEO is a large holder of Apple stock.  Accordingly, he should be carefully managing the company to increase its stock price.  This article shows that it would be foolish for the CEO to be overly concerned about fluctuations in Apple's stock price.

Apple's stock price is very volatile. Its reached a high of $705 in 2012 and low of $385, which was a loss of over $300 billion in its market capitalization,  before arriving at its current price of around $500. Its price to earnings ratio is only 12, which is well below the average for F500 stocks.  Moreover, Apple has around $158.8 billion in cash and securities.  The market can't figure out what Apple is worth, so how much attention should the CEO pay to the management of Apple's stock price?

There is another problem with the myth about the need for CEO's to manage shareholder value.  Apple was funded with around $100 million provided by its early investors.  They have been rewarded many times over for funding Apple. Apple benefited more from government investments in DARPA technologies, which have enabled its development of successful products, than it has from  its early investors.  Apple's stock price has been driven by its remarkable growth in profits which has attracted investors who are primarily interested in selling the stock at a higher price than they paid for it.  Apple's CEO should be more concerned about his ability to continue developing highly successful products than he is about rewarding traders.  The stock price will take care of itself as long as Apple continues to roll out successful products.  His ability to do is not closely related to fluctuations in Apple's stock price.

S&P Profits Return To All Time High

The recession is over for corporate profits.

Dean Baker Destroys Robert Samuelson's Defense Of The Top 1%

Robert Samuelson is opinion writer for the Washington Post.  He can be counted upon each Monday to write an article that distorts economic reality.  He is very good at that game because he writes for a general audience.  Dean Baker is an economist who regularly responds to Samuelson's fantasies.  I'm glad that Baker is around because it saves me the trouble.  We can learn at least two things from Baker's post.  Samuelson's defense of the top 1% is consistent with themes that have been used by other defense lawyers for the economic elite, but the fact that even our best newspapers provide a platform for opinion writers like Samuelson is troubling.  The media are required to provide a platform for opinion writers who can explain why the earth is really flat, and that it is at the center of the universe. It would unfair to popular opinion and common sense to do otherwise.

Samuelson uses several popular themes in this article which frequently used to defuse the issue of income inequality.  His major theme in this article is that poor are not poor because the rich are rich.  In other words, if one group's share of economic pie grows faster than another group's share, that has nothing to do with growing inequality.  The growth in income inequality over the last four decades is blamed on the culture of the poor.  Since the growth in income during this period went primarily to the top 5%, the bottom 95% must have a bad culture.  Samuelson avoids comparing the top tier with the the bottom 95% because "everyone knows" that the poor are their own worse enemy.  He can't argue that only those at the top have the right culture.  Furthermore, its hard to explain why incomes were more equal prior to the 1980's.  The culture of the poor has not worse today than it was in the 40 year period following the war than it is now.  Something else must have changed.  Samuelson does not want to discuss those changes but Baker provides a few of them.  The economy is like a game and the game changes when the rules change.  Imagine what basketball would be like if the rules were changed.  Suppose the rim was raised a foot and five points were awarded for a shot beyond the three point line.  The market for tall players would evaporate.  A lot of the rules in the economy have changed.  Clearly, some of those changes are responsible for growing income inequality. 

Message To Retailers: Don't Get Stuck In The Middle

Median income growth in the US has been relatively flat since the end of the recession.  However, owners of stock have profited from rapid growth in stock prices since 2009.  Around 90% of the growth in personal consumption between 2009 and 2012 has been generated by those in the top 20% income bracket.  Most of that growth has been by the top 5%.  In 1992 28% of personal consumption expenditures came from the top 5%.  The top 5% accounted for 38% of PCE in 2012.

 The hollowing out of the middle class has impacted the retail market dramatically.  Chains like Sears and JC Penny which catered to the middle class are struggling.  Upscale retailers like Nordstroms are doing very well and so are chains like The Dollar Store which target consumers in the low income brackets.  One of the problems with this trend in consumption is that spending by the top 5% is dependent upon the performance of the stock market.  That will increase the volatility of consumption which accounts for around 70% of the US economy.

Has The Quality Of Higher Education In The US Eroded?

The American Council Of Trustees and Alumni (ACTA) has released a study on higher education at 29 of the elite colleges in the US.  The Washington Post provides a platform for one of its opinion writers to summarize the ACTA study.  The ACTA believes that our colleges should have a core curriculum that requires students to take courses in US history and economics.  Only a few of the elite colleges have that requirement.  The ACTA also criticizes our elite colleges for a lack of diversity.  It believes that the liberal bias on our campuses is a threat to intellectual freedom.  Its primary mission is more about ending the "liberal bias" on our campuses than it is about the rising price of higher education.  It gives higher grades to our three military academies than it does to our elite colleges.  Apparently, our military colleges encourage its students to "think the unusual" which is absent at our elite colleges according to the ACTA.

Kathleen Parker focuses her attention on price inflation at our elite colleges and she concludes that President Obama should worry more about the relationship between price and value in our higher education system. According to Parker there is no point in sending more students to colleges that do not provide them with a quality education. 

The Washington Post is not alone in providing a platform for the ACTA to tell its story about the lack of quality at our elite colleges.  The Wall Street Journal provided a platform for Michael Poliakoff to summarize the ACTA study, and Fox News has also reported on the ACTA study.  A quick look at the board of the ACTA shows that it is not a non-partisan organization as reported by Parker in her Post article.  Its board is loaded with right wing political operators including Ed Meese who was in the Nixon and Reagan administrations. Its board members are also affiliated with Heritage Foundation and the American Enterprise Institute which are major right wing think tanks.

The Atlanta Fed Interviews Sergio Rebelo About The Eurozone

Sergio Rebelo is an international economist at Northwestern University. 
He answers questions about the causes of the crisis and the impact of monetary policy and fiscal policy on the recovery.  He believes that these policies were largely a failure.  The countries most harmed by the crisis are less solvent now that they were before the fiscal medicine was applied.  If the intent of fiscal policy was to strengthen to fiscal positions of the governments in the periphery it did not work.  He also believes that the stress tests imposed on the banks during the crisis were a failure.  The banks were declared healthy so they did not raise any capital.  They chose to reduce their assets instead to improve their capital ratios.  That led to a credit crises which was not helpful.  There has been a modest recovery in the eurozone as a whole, but there is still a risk that a Japanese style period of low growth and price deflation will occur unless some changes are made in the structure of the eurozone.