Piketty Responds To Financial Times Criticisms

Piketty has taken the time to produce a 10 page response to the FT article which raised methodological questions about his research.  The FT time critique is focused on the data in Chapter 10 of his book.  Piketty connects his response to the Appendix in his book which provides details on the choices that he made on data sources.  He also found fault with the data choices made by the FT that were used to raise questions about the growth in wealth inequality in Britain and the US. 

Piketty has provided an excellent response to the FT critique which raised questions about his objectivity as well as his calculations.  His calculations are well defended, and it would appear that the FT is guilty of the sins that it attributes to Piketty.  In particular, it changed the data sources that it used to develop its description of the growth of wealth inequality in Britain so that it countered Piketty's conclusions.  Piketty also cited research on wealth inequality in the US that was not available when he published his book.  The data reinforce the conclusions that he made in his book.

A Review Of How Putting A Price On Carbon Has Been Working In Some States and Nations

Economists like the system of putting a price on carbon in order to reduce carbon emissions.  The easiest method is to put a tax on carbon emissions, but it has been more popular to use the cap and trade system.  This article describes how the cap and trade system is working California and in some Northeastern states.  California spent a lot of time studying the problems that have emerged in the European system before implementing its plan.  California even funds projects in other states.  For example, a dairy farmer in Wisconsin is using funds from California to convert the methane from cow manure into electric energy.  Even though the farmer does not believe that human behavior is the cause of global warming, he was eager to use the funds from California to provide enough electricity to service over a thousand homes. 

This article provides a good primer on the pros and cons of market based approaches to reduce greenhouse gas emissions. 

Why Capitalism Should Not Eat Its Children

Mark Carney, the Governor of the Bank of England, did not mince words in a speech that he delivered at a conference on Inclusive Capitalism in London's version of Wall Street.  It is unlikely that stronger words have been spoken to audience of bankers who came to enjoy the great food and drinks that are traditionally served at these occasions.  I have posted some of the quotes from his speech.  They do not require much comment.

"Unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself."

"Market economies have become market societies."

"Financial capitalism is not an end in itself, but a means to promote private investment, innovation, growth and prosperity"

"Global convergence has occurred along side internal divergence."

The last comment probably refers to the performance of protest parties in the recent European elections.  Globalization has reduced the income gap between rich and poor countries, but it has widened the income gap in rich countries.  That has provided fuel for the protest parties that are sensitive to the concerns that many have in rich countries about the loss of national sovereignty in an increasingly global economy.  Globalization that does not work for them is a threat to global capitalism.

Carney's speech may have made many in the audience uncomfortable.  They probably did not expect the Governor of the BOE to sound like a member of the "Occupy Wall Street" crowd.  Perhaps some of them will reflect on his message.  Its more likely, however, that they will go back to their offices and check on their progress for meeting their financial goals for the current quarter.  They have done their duty by listening to a sermon from a high priest of capitalism who asked them to repent for their sins.  Now its time to go back to work.

The Next Waves Of Automation And The Implications For Society

The global economy is being transformed by technology and the use of those technologies by firms to rationalize the process by which goods and services are produced and delivered to consumers.  Most economists no little about the way firms really work or the transformations that are underway.  Michael Spence is a Nobel economist who is an exception to that rule. This article provides an overview of the transformations that are taking place.  Technology has enabled firms to relocate production to take advantage of low cost labor.  Technology was also used to create supply chains that move intermediate products, from a variety of locations, to the source of final assembly.  That has allowed developing countries to grow by providing the unskilled labor for manufacturing the intermediate products, and the final assembly.  Consequently, developing countries have also become a source for final demand.  Technology is now making it possible to locate production wherever the demand exists.  Moreover, less labor will required to satisfy the demand.  Retail systems will also become more tightly coupled with productions systems.

I spent several years in the computer industry.  Part of that time was devoted to rationalizing the production system.  The production system depended upon forecasts from the marketing organizations.  Since forecasts are an imperfect indication of final demand, the production organization would make its own forecasts for final demand.  That usually led to inventory build up because it was less painful for production to carry excessive inventory than to it was to run short of the products that were sold by the sales force.  The only solution for this problem was to become less dependent upon forecasts.  That required us to cut the lead time required by production to produce the products that were actually sold. That proved to be very difficult. However, it is a mistake to believe that manufacturing is based upon large numbers of unskilled workers.  There are lots of highly skilled workers doing production engineering,  production management, inventory management, plant management etc. etc.  When manufacturing plants relocate, a lot of high skilled jobs are also relocated.

A good example of what is happening today in too look at the publishing industry.  The traditional system requires publishers to forecast demand, and sell their printed books to retailers for resale.  The publishers and the retailers have to bear the cost of inventory,  and the cost of lost sales when the right products are not in stock.  Today it is possible for a customer to go to the Amazon web site and order an electronic copy of the book.  Of course, Amazon also sells print copies of the books but selling electronic copies of books eliminates inventory costs, and no sales are lost because a book is out of stock. Customers get faster deliver, and they pay a lower price for the product.  In the process a lot of jobs are eliminated or transformed by the coupling of demand with production, and by electronic  delivery to any location where demand exists.  Spence argues that new technologies are changing the way in which products are manufactured.  It will be easier to produce the finished product wherever the demand exists and it will require less unskilled labor to do so.  Much of the skilled labor will also be provided by new technologies.  The rationalization of the process will increase productivity and cut the demand for many forms of labor.  New skills will be required to make the system work, but the net result is a lower demand for labor.  Small businesses, as well as large multinationals, are moving in the same direction.

Industry Concentration In The US Is On The Rise

One of the axioms in economics is that competition is the force which causes firms to provide value to its customers.  Of course, competition is not good for profits and it constrains firm growth.  This article describes the growth in industry concentration in the US.  It is especially high in the technology industries for several reasons.  They tend to purchase start ups that might become rivals and they are protected by intellectual property rights.  The result is less value for consumers and a constraint on innovation.   Most industries in the US are oligopolistic.  A small number of firms provide most of the output, and that has been true for many years.  As the economy becomes more centered around technology, however, the degree of industry concentration has increased.  Moreover, other industries, such as healthcare services, are becoming more concentrated.  Hospitals are merging, and they are buying up medical practices that had been run by physicians. 

Governments, of course can restrain the growth in industry concentration.  It would appear, however, that this has not been a priority.  AT&T is attempting to acquire Direct TV, Comcast has acquired Time Warner, and their competitors are looking for acquisitions.  Perhaps there is a relationship between the increase in concentration and the value that US consumers get from their Internet providers.  Consumers in the US pay higher prices per unit of bandwidth than consumers in many other countries.  We deregulated the telecommunication industry in order to encourage more competition.  We now have a less regulated industry and increasing levels of concentration.

Why GDP Per Capita Growth Does Not Improve Well Being In Rich Countries

Ed Dolan raises an old debate and he provides his answer in this article.  The old debate centers around the relationship between GDP growth and well being.  GDP is a crude measure of what is produced in an economy.  Therefore, it makes sense to ask whether growth in per capita GDP correlates with well being.  Dolan compares the growth in per capita GDP with growth in the Social Progress Index (SPI) which is used as a measure of well being.  Growth in per capita GDP is strongly correlated with the growth in SPI in poor nations.  The correlation weakens, however, when per capita GDP reaches $25,000.  The US has a very high per capita GDP score but it ranks very low on the SPI curve.  Dolan concludes that the US should focus on improving the output of the economy instead of focusing on growth in per capita GDP.  He makes some suggestions about how that might be accomplished.  We don't need an economy with zero growth.  An economy with a focus on growth in SPI can be achieved without harm to the environment.  That does not imply that we should do nothing to stimulate growth in a recession.  It is important to keep the economy on its long term trend line.

Most people would agree with Dolan that GDP is poor measure of social well being, and that governments should pay more attention to well being.  Some nations do that better than the US and we could learn from them if we chose to do so.  That, of course, is what politics is all about.  It would also make more sense to focus on median PPI per capita.  The median is less sensitive to extremes than the average as a measure of central tendency. 

Paul Krugman On The EU Reaction To The European Election

Paul Krugman was disturbed by one of the explanations offered for the rise of protest parties in much of Europe.  Krugman believes that it was a mistake to move to a common currency.  One of the EU leaders disagrees. He argues that the current problem in Europe is due to a lack of will.  The troubled states failed to implement austerity measures. The protest vote has nothing to do with the euro. Krugman has his explanation for how the euro led to a misallocation of funds to the southern states which used the money to finance a real estate boom.  The common currency made it impossible for currency devaluation to work its magic.  The imposition of austerity measures on the troubled states were also counterproductive according to Krugman.  He fails to see how other factors may have contributed to the rise of protest parties in Europe.

The UKIP Party in the UK won 28% of the vote in the election.  The UK has its own currency so we need another explanation for the protest vote in the UK.  Krugman might argue that the Cameron government chose to implement austerity measures when it could have used fiscal policies to moderate the recession.  In other words, the protests in the UK are in response to a bad policy decision.  That is wishful thinking, and it is not supported by the facts.  Eurokepticism is one of the platforms of the UKIP Party.  It is a response to a sense that England should not sacrifice its sovereignty.  This is also related to the rise in immigration in the UK.  Some feel that immigrants are negatively affecting the job market and that they are responsible for many social and cultural problems in the UK.  The leader of the UKIP Party stated that the election signaled a rejection by the people of an effort to turn decision making over to technocrats in Brussels.  These themes are consistent with those that boosted votes for protest parties in much of Europe.  The UK may have exported the protest movements to the rest of Europe.

The consequences of this trend in Europe are serious, and they are only partially explained by slow economic growth.  The protest parties in Europe also have a lot in common with the Tea Party in the US.  It opposes the technocrats in Washington; it is strongly nationalistic, and it has a strong anti-immigration bias.  Since the US has a two party system the Tea Party was forced to find a home in the Republican Party.  It has caused the Republican Party to move strongly to the right.  In the UK it will force the Tory Party further to the right, and it may replace the Liberal Democratic Party in a coalition government with the Tories.  This form of populism is always with us.  The inability of governments to solve many social and economic problems has enabled entrepreneurial leaders to build political organizations to tap latent populism to their advantage.  Unfortunately, the Socialist Party in France; the Labour Party in the UK, and the Democratic Party in the US, have abandoned the latent populism in their countries to the far right which has harvested it to their advantage.

Obama Is Preparing To Announce EPA Rules To Limit Carbon From Coal

The world is waiting for the US to announce its plans to limit carbon emissions from 600 electric utilities that burn coal.  This is the largest single source of carbon emissions in the US.  China is the largest emitter of carbon and it is awaiting the US announcement.  If the US plan is aggressive China may follow suit. 

As one might expect the fossil fuel industry is prepared to resist efforts to reduce carbon emissions.  The resistance is expected to come from nations, like Russia and Saudi Arabia, whose economies are based upon fossil fuel production.  It will also be resisted by the Republican Party in the US Congress.  The fossil fuel industry is a major contributor to its political campaigns, and the party has taught its cognitively challenged base to be skeptical about global warming.  Many of them also reject the theory of evolution, and Republican politicians cater to their preferences.

Elections In Europe Provide Bad News For The Established Parties

The results of the elections in Europe demonstrate the level of discontent that exists in a number of nations.  With the exception of Germany,  protest parties won more votes than many anticipated.  The UKIP in England won 28% of the vote.  That was a larger percent than each of the major political parties.  This has not happened in the last 100 years.  The performance of the protest party in France was also unprecedented.  The ruling Socialist Party suffered embarrassing loses in the election.  Poor economic performance, and unhappiness with the effectiveness of the major parties, helped to fuel the performance of protest parties which oppose the European Union and the rise of immigration.

Paul Krugman As The Devil Who Refuses To Accept The "Old Fashioned Religion" Of Conservatives

Conservatives hate Paul Krugman.  One of the reasons for their hatred is that he refuses to accept their religious faith.  They look at economics as a morality play in which virtue is rewarded and vice is punished.  There are good people who work hard, and there are bad people who refuse to work unless they have no other choice.  The good people should be rewarded for their hard work, and the bad people should not be rewarded for being lazy.  Therefore, it is wrong to tax the hard workers.  That will cause them to work less hard and stop creating jobs.  It is especially bad if the taxes obtained from the virtuous are redistributed to the lazy.  Providing hammocks for the lazy is what got Europe in trouble.  That disease is called eurosclerosis.  America should do everything that it can to prevent that disease from being exported to the US.

Krugman has been spending some time in Europe and he has raised some questions about eurosclerosis.  Northern countries in the eurozone seem to be doing quite well despite the taxes that they collect from the virtuous to provide essential services to those in need.  Even France, which is regarded by the religious fundamentalists as one of the most sinful nations in Europe,  has a higher employment rate in the 25-54 year old age group than we have in the US.  Perhaps eurosclerosis is not a disease after all.  It might be possible for Europeans to avoid hell if they can figure out how to solve the problems they created by forming a currency union under the wrong conditions.

Another problem for the religious fundamentalists in the US is that they won the political battle in the US over the extension of unemployment benefits to the long term unemployed.  Government has taken the "hammock" away and the lazy workers, who refused to take the available jobs, should now have jobs.  That has not happened. The hammock has been removed but they are still unemployed.

Krugman does an excellent job as the devil's advocate.  Conservatives will refuse to believe the evidence that he provides because it raises questions about their faith.  Eurosclerosis is an article of faith.  One would hope, however, that they would better understand the law of supply and demand which is another article of their faith. The unemployment rate in the US during the dotcom boom was less than 4%.  There were jobs available for anyone who wanted to work and they were filled by those who chose to work instead of accepting the hammocks that were available.  Taxes on the virtuous were also raised and they still worked hard.  Jobs were also created but that had more to do with the need for labor than it did with the state of mind of management.  

It is easy to poke fun at the fundamentalists who see economics as a moral play.  Unfortunately, they will make it difficult for governments to address the changes that are underway in our economic system.  Technology, and globalization are reducing the demand for manufacturing labor in most advanced economies.  Moreover, many of the innovative "high tech" industries are able to satisfy the demand for their services with a relatively small number of workers.  For example, Facebook provides services to a huge global customer base with a very small workforce relative to its market capitalization.  Amazon has used technology to sell a large variety of products more efficiently than the retail outlets that are no longer needed.  It employs a relatively small number of workers in relation to the value of its sales and its market capitalization.  A large share of household budgets are also spent on cell phone service, Internet service and television service.  Those services are provided by networks which have huge economies of scale.  Increased demand can be satisfied without the need for large increases in the workforce required to satisfy the increase in demand.  The good news is that western economies have become more efficient at satisfying consumer demand.  The bad news is that the demand can be satisfied with fewer domestic workers.

Did The Financial Times Destroy Piketty's Thesis?

The Financial Times used the data that Piketty has made publically available to raise questions about his central thesis.  It argues that the data do not support Piketty's claim that wealth inequality is heading back to where it was in the "Gilded Age".  That, however, is not Piketty's central thesis.  He holds that the ownership of capital is already concentrated and that the return on capital will outpace the growth in wage income.  The FT critique does not have anything to say about this point.

This article makes another contribution for those who want to understand Piketty.  It describes the four interrelated dominoes that ties his thesis together.  The FT critique only touches upon one of the four dominoes and its critique is not conclusive.  However, the FT has shifted the debate in an important way.  It will no longer be about how we should deal with the relative growth in capital income and wage income.  It will degenerate into a debate over minor issues in the data analysis.  It will also become more like the debate over climate change.  Denialists will have an easy answer to those who are concerned about Piketty's central thesis.  They will claim that Piketty fudged the data.  It only took a few dissenting climate scientists to provide ammunition for climate change denialists.

Michael Lewis Reviews Timothy Geithner's "Stress Test"

I just finished reading Stress Test and I was going to write a review of it.  Michael Lewis did it for me.  I will let you read the review by Lewis, without comment, and provide some of my own impressions of the book.  I had a rather negative view of Geithner before I read the book.  I was tempted to read the book because Warren Buffet, who is my favorite billionaire, praised the book. I'm glad that Buffet's praise caused me to read it.  It changed my mind about Geithner.  We were lucky to have had him in a position of power at the onset of the financial crisis.  We were very close to another Great Depression.  We had a 16% decline in household wealth in 2008 compared with only a 3% decline in 1929.  Corporate borrowing costs increased by 2.2% in 2008, while they only increased by 0.3% in 1929.  The government made things worse in the Great Depression;  the economy declined by 26% from peak to trough, and unemployment peaked at 25%.  Thanks to the government programs that kept the financial system from collapsing, and the aggressive use of monetary and fiscal policy in the Great Recession, the economy only declined by 4%, and unemployment peaked at 10%.  Left to its own devices, the economy would have been much worse after 2008 than it was after the shock in 1929. It would have been impossible to deal with the shock to the financial system and our economy after 2008 without a powerful and resourceful government.  Moreover, even though we are still not out of the woods, the US economy has outperformed the major developed economies in Europe during the extended recovery.  The US GDP is 6% higher than it was before the crisis. Germany has seen its GDP increase by 2% during this period. Europe and Japan are still below their 2008 level.

For those of you who do not want to read the whole book, there is an Epilogue that captures much of what Geithner learned about financial crises and the imperfect tools that we have for correcting a global financial collapse.  The rest of the book provides a lot of detail about Geithner's interactions with the team that was patched together to fix the broken system, and its efforts to make it less likely to collapse in the future.  It provides valuable insights into our dysfunctional political system as well. It was not designed to deal well with major economic problems.  Politics trumps everything.  The only good thing that Geithner had to say about our political system is that it is more effective than the system that has been put in place in Europe.  He interacted with most of the European leaders, and he offers his views about them and the system that they have to work with.

In summary, the book provides valuable lessons about our political and economic system and I fully agree with the conclusion in the review by Michael Lewis.  Geithner is much more likeable than one might imagine.  He comes across as a straight shooter who is quite humble about himself and his accomplishments.

Local Elections In England Provide Bad News For The Governing Coalition

The center right and center left parties suffered large loses in local elections.  That is not good news for the coalition government which governs at the national level.  The gains in the local elections by parties on the right, and the left, reflect the political polarization that has been underway in the UK. The poor performance of the economy has made the public more receptive to political ideologies which provide very different solutions for the economic and social problems in the UK.  The right wing party has much in common with the rise of nationalist parties in Europe.  It is opposed to membership in the EU and it has a strong anti-immigration bias.  The Liberal Democratic Party has lost support since it joined with the Conservative Party to form the coalition government.

Tim Duy Analyzes Speech By The President of The Federal Reserve Bank Of New York

Tim Duy (via Mark Thoma) provides his analysis of a speech by William Dudley who is the President of the Federal Reserve Bank Of New York.  The analysis includes Dudley's economic outlook and his views on how the Fed will respond to economic events.  Dudley forecasts moderate economic growth well below what typically occurs as recessions unwind.  Moreover, his forecast is tempered with cautions because of uncertainties about the growth rate.  Our recoveries from previous recessions have usually been led by growth in the housing market.  Dudley describes several of the headwinds that may keep the housing market from accelerating.  He also expects that productivity growth will be slower than usual, and that the labor force growth rate will also be slow.  Therefore, potential GDP will be lower than it has been in the past. 

Given the uncertainties in the economic outlook, Fed policies are also uncertain.  Dudley does his best to describe how the Fed will respond to changes in the economic outlook.  Tim Duy makes an effort to decipher Dudley's remarks, and it is clear that the Fed will stick to its dual mandate.  The Fed is mandated to maintain employment and price stability.  It has two tools at its disposal, asset purchases and interest rates. It will use a combination of both as events unfold.  It would appear that interest rates will not accelerate in the near future but that asset purchases will taper. 

Right Wing Political Parties In Europe Have A Lot In Common With Each Other And With The Tea Party

This article describes the emergence of right wing political parties in Europe.  Opposition to the European Union is a common thread in many of the parties.  They oppose immigration and they are strongly nationalistic.  They view themselves as defenders of traditional values and opponents of moral decadence. They associate homosexuality and consumerism with the totalitarian forces that have been overwhelming Europe.  To some extent those forces are connected with the influence of America in Europe. Many see Russia as an opposing force to the hegemony of America in Europe.  They also admire Putin for standing up to Europe and America, and for his defense of traditional values.  Putin has aligned himself with the Russian Orthodox church and has used religion as a way of uniting the nation.

One of the curious things about the right wing movement in Europe is that words take on very different meanings for them.  We usually associate nationalism with the Fascism that overwhelmed Europe in the 1930's.  Putin calls the Ukraine leaders in Kiev fascists, and the nationalist parties in Europe believe that they are defenders of liberty and opponents of totalitarianism.

The Tea Party movement in the US has many things in common with the nationalist movements in Europe.  They are strongly nationalist when it comes to foreign policy but they are suspicious of the federal government and the elites in Washington who are promoting policies which they oppose.  They also view the United Nations with the contempt that nationalists in Europe have for the European Union. They commonly refer to President Obama with references to Hitler and Stalin.  They view themselves and libertarians who oppose totalitarian forces in Washington.  They also oppose immigration and what they refer to as the decline in traditional morals and family values.  If they were in Europe they would belong to one of the nationalist parties that oppose US hegemony in Europe and they might admire Putin.  Since they are in America their situation is quite different.  They still associate Russia with Communism.  Putin is certainly not one of their favorite political leaders.  Moreover, since the US does not have a parliamentary system they have aligned themselves with the Republican Party.  This has not been an easy marriage. 

Can We Have A Slow Population Growth Rate And A Full Employment Economy?

Paul Krugman is often asked why a slower rate of population growth is a bad thing.  After all, it would put less pressure on scarce resources and it would reduce environmental damage.  His answer to that question is based upon what he calls the "bicycle effect".  In order to keep a bicycle from falling over we need to maintain an essential rate of speed.  Similarly, in order to maintain a full employment economy we need to maintain an essential level of business investment.  We could maintain the necessary level of business investment, under conditions of slower population and economic growth, as long as real interest rates (interest rate minus the inflation rate) were low enough. The problem, as he sees it, is that our efforts to keep the inflation rate low are counter productive.  We need a bit more inflation in order to lower real interest rates to the level needed to keep the bicycle from falling over.

Krugman's argument is based upon the notion that businesses would invest in a slow growth economy as long as real interest rates were low enough.  A lot of people have a problem with that assumption.  Some people just have inflation phobia, but others wonder why businesses would invest in a slow growth economy even at low real interest rates. Krugman's concept of a steady state economy that can maintain full employment is a tough sell.  It will require more than a dependence upon low real interest rates.  Some environmental economists have offered their version of a steady state economy but they have been relegated to the academic fringe in within the academy.

David Brooks Shows Us The Problem With Big Ideas Especially When They Come From Him

One of David Brooks' criticisms of the Obama Administration has been that it proposes small bore ideas to deal with big problems.  In this article, David Brooks offers one his big ideas.  He starts off with the wrong idea and then he recites some of the problems that we see in Washington and he arrives at his favorite place. That is, as an advocate of Republican ideals. In his first paragraph he argues that democracy has weakened because we no longer have the threat of the Soviet Union.  It is more commonly argued that the fall of the Soviet Union has left capitalism with no economic rival and that capitalists have taken advantage of the monopoly.  The welfare state is no longer needed to ward off the threat of communism. He then recites several of the problems with our electoral system, and rather than offering a solution, he recites all of the problems that he sees in our form of democracy.  He ends the article by advocating the privatization of public education (in order to get more diversity?); he argues for consumer directed healthcare, when healthcare has none of the features of commodity markets, and he wants local charities to replace government welfare programs.  If one skipped the rest of the article, and just read the second last paragraph, one might ask why Brooks had to write the rest of the article to get to his conclusions.  He manages to get to the same conclusions by any route that he takes.

US Government Files Criminal Charges Against Credit Suisse

The Justice Department filed criminal charges against Switzerland's largest bank.  It was charged with enabling US citizens to avoid taxes.  The bank was assessed a $2.5 billion dollar fine.  It is not clear how this will affect the bank's ability to operate in the US.

Robert Samuelson Puts His Spin On Geithner's New Book

Robert Samuelson reviews the recent book written by Timothy Geithner which reflects on his experiences during the financial crisis.  Samuelson's op-ed in the Washington Post is not really a review of Geithner's book.  The review provided him with an excuse to reach a conclusion which does not follow from the material he chose to include in his review.  Samuelson used the cover of a book review to confirm one of his philosophical biases.  He tells us that the most important lesson to be learned from the book is that government efforts to moderate short term business cycles always produce bad results.  I was under the impression that the book was about the government's efforts to prevent the collapse of the financial system.  I'm sure that Tim Geithner would be surprised to learn that it was about something else.

Limiting Individual Access To Tax Havens Is Underway. Corporations May Be Next.

Its easy to be skeptical about our ability to get the cooperation needed by limiting tax avoidance.  This article shows that the effort is not futile.  Programs in the US and agreements within OECD nations is making a dent in the use of tax havens by most individuals.  Corporations, however, are a different animal.  US corporations choose to incorporate in Delaware or Wyoming because they have the most corporate friendly governance requirements, which among other things, enable corporations to organize themselves in ways that make it easy for them to legally avoid taxes.  The next big step may be to address the problem presented by states like Delaware which is in the business of selling corporate friendly incorporation rules.

State Legislation Designed To Limit Low Wage Worker Rights And Compensation

This article provides a long list of legislation in Republican controlled states that puts workers at a disadvantage relative to their employers.  This effort is supported by a wide range of conservative lobby groups.  It is also part of the ALEC program which focuses on changes at the state level that support conservative causes.  We often talk about the super rich who own most of our capital and how this affects inequality.  Small business owners are not super rich capitalists, but the legislation that they support enriches them at the expense of low wage workers.  Its not surprising that small business owners are predominantly Republican.  Being pro-business means being anti-labor in the Republican Party. 

Tim Geithner Versus Sheila Bair On Wall Street Versus Main Street

Paul Krugman is critical of Tim Geithner's new book Stress Test on a couple of points.  Geithner was not a fan of fiscal stimulus which he called "sugar".  Instead of fiscal stimulus, the US and Europe got a dose of fiscal austerity.  This was supposed to stimulate the economy by restoring business confidence.  Geithner also argued that government programs to reduce the debt burden of underwater home owners would not stimulate growth.  Krugman provides some evidence which contradicts Geithner's belief.  The data indicate that homeowner relief would have provided an order of magnitude stimulus to economic growth compared to the estimate made by Geithner.  Krugman concludes that the failure to use fiscal stimulus, and homeowner relief programs, kept the economy in recession much longer than necessary. 

Sheila Bair, a Republican, was the head of the Federal Deposit Insurance Corporation (FDIC) during this period.  She wrote Bull By The Horns as her account of the government's response to the financial crisis.  She was highly critical of Geithner's role.  She argues that his priority was to save Wall Street, and that he had less concern about saving Main Street.  The HARP program, designed by Geithner and Larry Summers, was a publicity stunt according to Bair.  It did little to reverse household deleveraging which was raising havoc on Main Street. She was also critical of Geithner's role as Secretary of The Treasury.  Several of the bank regulating agencies reported to Geithner.  According to Bair, the regulators did whatever they could to block initiatives the the FDIC proposed to limit household deleveraging.  They also opposed Bair's recommendations to raise the capital requirements for US and European banks at international meetings on bank regulation and capital requirements.

The above link is to an interview of Sheila Bair about her book.  It provides a good summary of the book.  Stress Test and Bull By The Horns.  Provide two insider interpretations of the US response to the financial crisis.

Medical Doctor Income Is Not The Cause Of Rising Healthcare Costs

This article contrasts the salaries of doctors with the compensation of executives who run hospitals and insurance companies.  The executives earn much more than physicians.  The article does extend its analysis to executives at corporations that provide drugs and devices to the healthcare industry.  Most doctors have been trained to serve their patients.  Business executives have been trained to grow profits, and the scale of their enterprise. They share in the growth of profits and scale.  This increases the non-labor cost of healthcare.  The prices for the use of devices and facilities has risen faster than physician income. 

One can cast this discussion in terms of the Piketty thesis.  Medical doctors are highly skilled employees who earn a decent living.  They do less well, however, than the owners of capital, which includes the executives who manage the healthcare industry as well as other shareholders. 

Technology, Employment And The Rise Of Inequality

Thomas Piketty's explanation for inequality is based upon a review of historical data.  One of the common criticisms of Piketty's thesis is that the future may differ from the past.  Larry Summers, for example, argues that technology and the rise of robotics has already contributed to a rise in unemployment and that this trend will only worsen as technology transforms the way output is produced.  Summers is correct.  Technology has not only played a larger role in the production process, but it has also had a huge impact on where the work will be located.  The Internet has made it possible for software development, and a host of other highly skilled jobs, to be located in low wage countries.  For example, India has become a center for managing the information technology in US corporate data centers.  Container technology has made it easier to ship products made in low wage countries to high wage countries.  That trend is likely to continue but it does not really alter Piketty's thesis.  Piketty makes the point in his book that, at the very extreme, all of the work could be done by robots.  That only supports his central thesis of rising inequality because the owners of capital would receive all of the income and labor's share would drop to zero.  A future determined by the increasing use of technology in manufacturing and in highly skilled employment will only lead to a rise in inequality.  We would also be faced with the problem of maintaining a society in which wages did not provide a livelihood for most our citizens.

Secular Stagnation In The Eurozone

Japan has suffered from secular stagnation for over a decade.  The economy has been stuck on neutral even at ultra low interest rates.  Some argue that the US has a similar problem.  Growth has remained low even at zero short term interest rates.  Growth in the US economy prior to the financial crisis was stimulated by household leverage during the real estate boom.  The leverage from household debt will not be repeated soon.

Paul Krugman, argues that the Eurozone is headed for secular stagnation for similar reasons.  Demographics are part of his explanation.  The growth rate of working age workers in the eurozone is now where Japan was when its economy went to sleep.  There will be less need for capital investment to support the shrinking labor force.   Moreover, growth in the eurozone, prior to the financial crisis, was stimulated by leverage. The leverage in the eurozone came from a huge capital flow to the PGIIS.  That is not likely to repeated soon.

Leaders in the eurozone seem to be more worried about inflation than they are about secular stagnation.  With interest rates close to zero, a little bit of inflation would be good economic growth.  It would bring real interest rates lower.





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Piketty's Critics Within The Democratic Policy Elite

Kathleen Geier is pleased that Piketty's book has raised the level of debate about rising inequality.  She dismisses many of the conservative criticisms of the book which reject the idea that rising inequality is problem.  She turns her attention to critiques made by Larry Summers, and Jason Furman who are part of the neo-liberal elite that influence economic policies in Democratic Administrations.  They agree that inequality is a problem but, according to Geier, they do not support the kind of policies advocated by Piketty.  She devotes most of her criticism to Jason Furman who is an economic adviser to President Obama.

Piketty's thesis is based upon the gap between the return on capital and the rate of growth.  The level of inequality is determined by the size of the gap.  Furman and Summers both question whether the return on capital can remain high as capital accumulates.  Eventually, the return on capital might fall because there is more capital available than profitable investments.  Piketty's thesis would also be undermined if the rate of growth would increase beyond the rate the currently prevails.  Summers and Furman both support democratic policies that would stimulate economic growth. Furman, argues the the Obama Administration's proposed trade treaty's will stimulate economic growth. Moreover, they both support democratic policies that would expand educational opportunities for the poor, and they democratic proposals to raise the minimum wage .  These are all good things but they fall short of what is needed to reduce inequality according to Geier.  Summers, on the other hand does support a more progressive tax policy, and he supports efforts to eliminate tax havens that are used by the wealthy to avoid taxation.  These kinds of reforms may be more easily realized than a tax on wealth according to Summers.

Free Market Priesthood And Healthcare

Noah Smith wants to believe that academic economists are more sophisticated that many suppose.  He makes this point by showing how silly it was for an economist from the University of Chicago to ask David Cameron how purchasing healthcare was any different from purchasing a car.  David Cameron ended his audience with the professor without debating that point with the professor.  He knows that National Healthcare in the UK is not the same as purchasing a car.  Smith concludes that most economists would agree with David Cameron.  They are not married to the concept of completely free markets.

Smith makes a good point.  Most economists are more sophisticated than many imagine.  However, the favored conservative approach to healthcare reform is consumer directed healthcare.  They would like the healthcare market to be more like the market for purchasing a car.  They realize that healthcare is expensive, and that many could not afford adequate healthcare without government support.  On the other hand, they would like to limit the expense of subsidizing healthcare.  They hope to accomplish this by providing vouchers that could be used to purchase healthcare.  The value of the the vouchers would not increase over time at the rate of healthcare price inflation. Consequently, consumers would have to ration their purchase of healthcare services.  The price system is a rationing system.  We don't purchase luxury cars because we can't pay the market price.  Similarly, the value of the vouchers provided by government would determine whether healthcare consumers could purchase the best available healthcare services. 

Republican Hostility to Inconvenient Science

Paul Krugman explains why Republicans have become hostile to science.  They predicted that the Fed's monetary policies were going to create hyperinflation five years ago.  Instead of inflation we are experiencing disinflation.  Disconfirming evidence has not altered their outlook on inflation.  Someday they may be right if they continue to predict inflation.  Even worse, they invented conspiracy theories to counter the evidence.  They claim that the government is doctoring the data.

They continue to do the same thing about global warming.  Marco Rubio, the senator from Florida who hopes to win the presidential nomination from his party, responded to concerns about the risk of rising sea levels due to the sliding ice sheet in Antarctica, by claiming the scientific evidence for global warming is questionable.  Previously, he had refused to question skepticism within the GOP base about the age of the earth and the theory of evolution. 

The hostility of the Republican Party to science has been backed into their cake.  The can't win elections without support from millions of their loyal supporters who have been carefully cultivated to reject scientific evidence that is contrary to their belief system.  This does not auger well for politics in the US.  Senator Rubio, and most of the GOP political leaders, are unable to separate themselves from the ignorance that they have nurtured in their political base.

What Can Be Done About Growing Inequality?

Piketty's book has shifted the debate about growing income inequality.  Critics on the left and the right find his evidence about growing income inequality compelling.  It does not appear that rich states can increase the rate of growth beyond 1.5% over the long run.  Consequently, the rate of return on capital will remain much higher than the growth rate.  Therefore, inequality is inevitable unless something can be done about it.  Piketty, of course, argues for a progressive tax on wealth but that solution presents many problems.  It is politically difficult; It would be hard to implement, and it requires global cooperation.  This leads liberal critics to complain that Piketty's book tells us that capitalism is bad, but that we can't do anything about it. 

Critics on the right have accepted the idea that something should be done about rising inequality and they have begun to offer their solutions.  Ken Rogoff urges us to consider a progressive tax on consumption along with a more progressive payroll tax.  He also suggests a moderate tax on inheritance.  Clive Crook favors a tax on capital income as well as a more progressive inheritance tax.

It would appear that politicians on the left and the right will make an attempt to deal with the concerns that the public has about growing inequality.  Americans tend to admire entrepreneurs like Bill Gates and Steve Jobs.  On the other hand, they don't like the prospect of "patrimonial capitalism" that has been raised by Piketty's book.  That may be a more effective target for politicians to attack.

I would like to correct a couple of misconceptions about Piketty's proposal for a wealth tax in this article.  Piketty believes that a wealth tax in Europe would require cooperation between the nation states in Europe.  However, he believes that America is powerful enough to make changes in its tax system without the need for global cooperation.  Moreover, Piketty is not pessimistic about the prospects for change. There have been many changes in tax policies over the years.  Timing is critical.  Politicians have been able to make dramatic changes under the right conditions.  For example, the tax system was made very progressive in the US following the Great Depression and World War ll.  Beginning in the 1980's the tax system was made less progressive.  If one looks at the combination of federal, state and local tax policies, the US tax system is only slightly progressive. There is a lot of room for an increase in the progressiveness of the tax code.

Climate Change Linked To National Defense Issues

A report from the Center for Naval Analyses Military Advisory Board Board concluded that climate change is already increasing conflict and terrorism and that rising sea levels will affect US naval facilities.  Conflicts in Africa are increasingly related to a decrease in arable land.  The Sahara desert is expanding into areas that once provided food to millions of Africans.  Rising sea levels will also create problems in parts of Asia and coastal cities in America.  Norfolk, Virginia is the home for the largest naval base in the world and it is at risk from rising sea levels.  The Defense Department is taking the threat from climate changes seriously.  It will affects its mission and its readiness to defend American interests.

The Republican Senator from Oklahoma, who is on the Armed Forces Committee, disagrees with the conclusions of the military about the threat from climate change.  Rather than discussing the scientific data which led to the conclusions, he chose to attack the motivations of the military personnel who authored the report.  He claims that retired military officers are always looking for new ways to receive publicity.  The increase in the number and intensity of tornadoes that have hit Oklahoma in recent years have not altered his views about climate change.  His opinion about climate change is shared by the oil industry executives in Oklahoma.

Has America Become Less Economically Dynamic?

It has become rather common to associate the rate of economic growth in a country with the notion of "economic dynamism".  A recent research paper from the Brookings Institute reported that the number of new firms being created has been shrinking relative to the number of firms that are exiting.  This might be mistaken for a lack of economic dynamism.  Noah Smith gives one explanation for why that might be happening which is not related to a decline in dynamism.  Big chains are replacing small retail firms, but that does not mean that our economy is less dynamic.  Frankly, the whole concept of national economic dynamism may be irrelevant in a global economy.  Multinational corporations dominate every industry.  Many of them are American corporations.  They often grow by acquiring start up companies that have developed technologies that may help them to grow.  That will contribute to the increase in firms exiting industries, but it does not imply a decline in economic dynamism.  Moreover, much of the growth in large multinational corporations occurs outside of the nation in which they are incorporated.  Much of that growth is in emerging market economies that are growing more rapidly than large nations. Their growth rate is influenced by the small base from which it started.  It makes no sense to talk about the dynamism of large nation states in a global economy dominated by multinational giants.  Large corporations may, or may not, be dynamic.  There is not much that nation states can do to enhance the dynamism of large corporations.

Climate Science Is Wrong Because Einstein Was Right

Charles Krauthammer is provided with a platform by the Washington Post which he usually uses to attack the foreign policies of the Obama Administration.  Krauthammer has turned his attention to climate policy now that the EPA has become more active in limiting carbon emissions.  He used his platform to explain why it is a fallacy to argue that global warming is real because 97% of the research supports the conclusion that our planet is warming.  He did not have to go far to discover the fallacy.  It is a common argument made by global warming denialists.  They argue that science does not progress by accepting the views of the majority.  For example, Einstein's theory of relativity showed that Newton's concept of gravity was wrong.  It then follows that the small number of cranks, who disagree with the majority of climate scientists,  are Einsteins and that majority of climate scientists must be wrong.  If Krauthammer is looking for a fallacy, he does not have to go much further than the fallacious reasoning that he uses to attack climate science.  Moreover, if he really cared about Einstein's ideas on this subject he should have become more familiar with what Einstein said about his path to the theory of relativity.  Einstein said that "he stood on the shoulders of giants".  He would not have found the way to relativity without Newton and the other great physicists who preceded him.

Marxism And Climate Policy In America

Marx has never been more popular in America.  The GOP has been attacking every idea or policy that offends its paymasters by calling them Marxist.  That is a more effective strategy than dealing with facts because it works.  The facts are against the GOP, but name calling is all that is necessary to convince its cognitively challenged base that an idea or a policy is bad for America.  Paul Krugman reviews some of the applications of name calling by GOP politicians, and their friends in the media who target the same audience.  We have become familiar with the idea that the Affordable Care Act, which is based upon ideas developed by the conservative Heritage Foundation,  is wrong because it is Marxist.  However, now that the Environmental Protection Agency is getting serious about limiting carbon emissions, we are being told that protecting the environment is just another Marxist plot to destroy our freedom.  Unfortunately, that attack is being led by a member of our Supreme Court who refuses to read the Washington Post, which provides a platform for George Will, Robert Samuelson and a host of less prominent conservatives,  because it is too liberal.  Justice Scalia voted against an EPA policy which require coal burning states to compensate states that receive the polluted air from their coal burning plants for damages.  He based his dissent on a line of reasoning that associated the policy with Marxism.  He was joined in his dissent by Justice Thomas who shares many of Scalia's economic views.

Ted Cruz Presents His False List Of Obama Greivances To The Federalist Society

Ted Cruz is a highly educated senator from Texas.  He graduated from Princeton and got his law degree from Harvard.  Perhaps, that is why the conservative Federalist Society invited him to speak at their meeting.  This article describes the extensive list of criminal grievances which he attributes to Obama.  Cruz would get a failing mark on this list if he had presented them to the Harvard faculty when he was in law school. Dan Milbank did an excellent job on grading the list provided by Cruz. The more important question, however, is not about the character of the junior senator from Texas who has an ambition to run the presidency.  We should be more concerned about why the Federalist Society invited Cruz to criminalize the president.  Its members are judges who play an important role in interpreting federal laws.  They did not give Cruz a failing grade on his presentation.  That is a real problem.

Paul Krugman Is Right About The Fiscal Irresponsiblity Myth In The Eurozone

This article was written in response to the Paul Krugman article posted below.  It provides more detail on the fiscal positions of eurozone nations prior to the financial crisis.  Greece was the only country with a sovereign debt problem.  In fact, several of the nations most affected by the downturn, looked better than their peers.  Unfortunately, the deflationary problem in the eurozone has been left in the hands of the ECB.  Fiscal policies continue to be contractionary in the eurozone.

Was Fiscal Irresponsiblity the Cause Of The Economic Crisis In The Eurozone?

There was a crisis in the eurozone banking system.  The central bank did a pretty good job of saving the banking system from collapse. However, it has not solved the problem of high unemployment and slow economic growth.  Some have argued that the adoption of the euro as the common currency encourage governments to be fiscally irresponsible.  Therefore, fiscal irresponsibility is considered to the cause of the economic problems in the eurozone.  Paul Krugman does not accept that conclusion.  He shows that, with the exception of Greece, fiscal irresponsibility was not the cause of the crisis.  The fiscal position of countries, other than Greece, did not change with the introduction of the euro.  The euro may have enabled the free flow of capital within the eurozone. This may have fed the real estate boom in countries like Spain and Ireland, but this was a private malinvestment problem and not the result of government fiscal irresponsibility.

Is Healthcare Reform In America An Assault on Liberty?

Ronald Reagan told us that Medicare was an assault on liberty.  Public support for Medicare shows that it enhanced the liberty of many Americans. They are able to enjoy their remaining years with affordable health insurance.  The next step in healthcare reform might have made Medicare available to all Americans.  That was politically impossible because it would have eliminated private insurers from the healthcare system.  The Affordable Care Act was the conservative alternative.  It made private insurance more affordable for millions of Americans.  Ironically, it has been attacked by the GOP as an assault on personal liberty.  They mistakenly, call this system in which private insurers make payments to private healthcare providers socialism.  Paul Krugman explains how the ACA has enhanced personal liberty in this article.  Medicare was not an assault on personal liberty and neither has the ACA diminished personal freedom.  Apparently, however, the success of ACA after a disastrous roll-out of its computer system, has left the GOP with no choice but to revive the Reagan myth about the destruction of personal liberty. The implication is that the freedom of the uninsured to abstain from medical care enhances personal liberty. 

Was Stanford's Decision To Sell Its Fossil Fuel Industry Stocks Futile?

An economist from the business school at UCLA explains why Standford's divestment decision was futile.  He correctly argued that selling its fossil fuel industry stocks would not reduce the value of the stocks.  Consequently, it would not have any effect on the industry.  Moreover, even if other elite universities followed Standford's example, it would have no effect on the industry.  It would be better to follow the example of financial investors who accumulate stock in order to have a bigger impact on management.  One could argue that Stanford's action might have some value if it sent a moral signal to management that changed its behavior.  However, research that he conducted on apartheid in South Africa showed that moral signals had no influence on the government's decision to end apartheid.

The comments that follow the article reflect the differences of opinion that exist about protest movements.  Some agree with the conclusions of the professor.  Others argue that the behavior of elite universities does more than send a moral signal to the rest of society.  It demonstrates that student protests can influence the behavior of elite institutions.  That alone is a worthwhile objective because it shows that student demonstrations made a difference at Stanford.  That can encourage students at other universities to become more active in support of initiatives that send an important message to society.  It is a message that change is not impossible.

Chicago And The Causes Of The Great Recession

This study of mortgage origination in Chicago during the run up to the Great Recession, shows that the poorest zip codes in Chicago had the highest incidence of new mortgages.  They also had the highest incidence of foreclosures.  Theses zip codes also had the lowest rate of new car auto purchases during the recovery.  The article concludes that over leveraged households provides a better explanation for the Great recession than the collapse of Lehman Brothers.

Its very clear that households took on more debt than they could afford in this period.  Its also clear that highly indebted households are not good prospects for new cars.  Its not clear, however, that the financial sector was not the proximate cause of the Great Recession.  Those mortgages would never have been originated if the investment banks had not packaged them into securities which they sold to investors.  The originators had no skin in the game, since they sold the mortgages to the investment banks.  Investment banks, like Lehman, believed that they could borrow money short term using the securities that they created as collateral.  When the money market funds lost confidence in the value of the collateral provided by Lehman, they demanded a higher interest rate for the short term loans, or they refused the collateral on offer.  Lehman lost its source of short term funding and it was stuck with toxic mortgage backed securities which it could no longer sell.  Lehman was both illiquid and insolvent.

The fall of Lehman signaled the collapse of the system that had been put in place by the investment banks.  The global economy was faced with two huge problems: Lehman was not the only bank in trouble.  Central banks were forced to rescue the failed banks in order to prevent a total collapse of the banking system.   It took years for the banks to recover and credit became scarce for all but the least risky borrowers.  The rapid rise in foreclosures also led to a decline in home prices.  Many households, which were servicing their debt, discovered that their homes were worth less than the value of their mortgages.  This led to an increase in distressed sales which caused home prices to fall even further.  It did not take long for real estate developers to get into trouble.  New home construction, which had been a bright spot in the economy during the boom, collapsed, and many banks which had loaned money to real estate developers discovered that they were at risk.

In short, its too simple to trace the cause of the Great Recession to poor households in Chicago that bought homes that they could not afford.  They would not have been put in that position if the investment banks had not created the system that enabled mortgage originators to make bad loans.

Paul Krugman Lecture on Secular Stagnation At Oxford

Paul Krugman provides three slides in this article which explain why he believes that the US economy will experience periods of secular stagnation.  We have secular stagnation when even zero interest rates are not able to restore full employment.  We have spent the last seven years with real interest rates below zero and we have not restored full employment.  Moreover, real interest rates have declined over the last three business cycles and we did not get much traction from monetary policy even before the 2008 crisis.

The 2001-2007 business cycle recovery was based upon an explosion of household debt as a percent of GDP.  Households have been deleveraging during the current business cycle but even if household debt as a percent of GDP stabilized at the current level, spending would be 4% lower than it was during the 2001-2007 business cycle.

A slowdown in population growth will have a negative impact on GDP growth in the US.  Krugman argues that slower population growth will cause the growth in potential GDP to decline by 1%.  Consequently, if we assume a 3:1 ratio of capital spending to output, a 1% decline in potential GDP growth will lead to a 3% drop in business investment.

If  we add up the effect of a 4% decline in spending due to stabilizing household debt to GDP at the current level, and a 3% drop in business investment in response to a 1% decline in the growth of potential GDP,  the US economy is faced with a 7% anti-stimulus burden to overcome relative to the 2001-2007 business cycle.  Negative real interest rates may not provide the traction necessary to produce full employment.

Miami Named Most Vulnerable US City To Global Warming

Rising sea levels make Miami the US city most threatened by global warming.  Miami is built on a foundation of limestone which is very porous.  Sea water has already begun to seep into Miami's streets even on sunny days.  Politicians in Florida have been put into a difficult situation because the GOP base has been sold on the idea that human behavior has no impact on the weather.  Marco Rubio and Jeb Bush are among the top candidates for the GOP presidential nomination in 2016.  They have both remained silent about the threat from global warming.  They could not be honest with their base and win a GOP primary.  The GOP has become the "party of the stupid".  Perhaps the better description of the GOP base is that it is the party of the misinformed.  The GOP propaganda machine, led by Fox News, and pseudo scientists on talk radio, has systematically misinformed its base about global warming.

GOP Response To White House Climate Change Initiative

This article in the conservative Washington Times shows how difficult it will be to get Republican support on climate change.  The GOP, and its friends in the media, have been telling the public that human induced climate change is a myth.  Even worse, the president's policies are part of effort to get the government to control energy policy in the US.  It is either socialism, fascism or an anti-job, and anti-family conspiracy that will ruin the American way of life.  Its a pity that the leaders in the GOP, who understand the science behind climate change, cannot move the party from its dependence on one of its key campaign differentiations from the Democratic Party.

Right Wing Populism May Be Converging With Left Wing Populism

Robert Reich argues that populists on the left and the right have more in agreement that one might think.  He suggests that worse of all possible worlds for the elite establishment would be a convergence between populists on the left and on the right.  A presidential election that pitted Rand Paul against Elizabeth Warren would create a lot of concern within the elite establishment.

Gary Becker Was Correct. The Financial Crisis Has Not Changed Economics

Gary Becker, a Nobel Laureate who passed away this week, was interviewed about the financial crisis and how it might affect the teaching of economics.  He argued that the financial crisis was not at the same scale as the Great Depression which led to the New Deal and the rise of Keynesian economics.  This article reviews the response of the economics profession to the financial crisis and concludes that some modest changes have taken place but that the teaching of economics has not changed.  Moreover, central banks are using the same models that they used to forecast the economy before the financial crisis, and the German central banks is still using a model that that does include the financial sector.  Old paradigms do not die easily.  They must be replaced by a new paradigm which has not emerged from the financial crisis.

Why Central Banks Will Continue To Keep Interest Rates Low

Martin Wolf, writing in the Financial Times, explains why central banks have kept interest rates low and why they will continue to do so.  Our general economic problem is that demand is below the level required for full employment.  This is the result of inadequate business investment.  Despite high levels of profit, businesses have saving rather than investing.  For a variety or reasons, including distorted managerial incentives, businesses are not investing in the future even at ultra low interest rates.  Savings are too high relative to a huge surplus of savings.

Low interest rates affect groups in different ways.  Some groups, including governments, have been winners in a low interest rate environment.  Other groups have been harmed by low interest rates.  Wolf provides a good analysis of the winners and losers.  He concludes by arguing for the "euthanasia of the rentier".  We need more investors willing to take risks, and fewer investors holding safe assets.

A Leading Republican Admonishes GOP On Climate Change

The GOP has been blocking efforts to address climate change in the US.  They have convinced the Tea Party wing of the party that climate change is a fiction.  A recent poll showed that 79% of Tea Party members are not convinced about the science behind climate change.  In order to support its fossil fuel industry supporters, which provide a lot of the funding for the GOP, and its Tea Party base which provides the votes, the GOP has become the anti-science party.  This article, by an old fashioned conservative, and a former GOP governor of Utah  quotes an opinion by Teddy Roosevelt which shows that protecting the environment is consistent with conservative principles and the history of the Republican Party.  Resisting efforts to address climate change by appealing to faith, and to free market principles,  may doom his party to becoming the "party of the stupid" as the GOP governor of Louisiana also warned party leaders.

Stanford's Endowment Fund Divests Its Coal Industry Holdings

Stanford became the first major university to disinvest in fossil fuel industry stocks.  It chose to disinvest in the coal industry because burning coal emits the most carbon per unit of energy.  Stanford left the door open about disinvestment in other fossil fuel industries.

Stanford's decision was prompted by student activists.  Harvard is also being petitioned by students to take similar actions.  The action by Stanford may put pressure on Harvard to respond to its student activists.  Our elite universities have a moral obligation to display leadership on the issue of global warming. 

The Best Response To Piketty Is "Let Them Eat Cellphones"

The Financial Times is critical of most conservative responses to Piketty's book.  One can't argue with his evidence about the growth in inequality.  The better response is to argue that inequality is not as important as the consumer choices that are available today.  We had less inequality in 1960 than we have today but the choices available to consumers are much richer than they were in 1960.  A more equal society is not necessarily more important than the consumer goods that have become more valuable to modern consumers.  They would choose to live in today's world with their cellphones and other goods that would have been unavailable in 1960.

There is little support in this article, however, for a society dominated by inherited wealth.  It argues that conservatives ought to beat liberals to the punch by promoting a tax on property and a more progressive inheritance tax. 

A Good Year For Top Hedge Fund Managers

The top 25 hedge fund managers earned a total of $21.5 billion last year.  The top manager earned $3.5 billion and the "straggler at the 20th position on the list earned only $360 million.  Best of all, their earnings are only taxed at 15%.  Their big paydays were a reward for producing outsized returns to their investors.  In general, last year was not good year for hedge funds.  Most of them were unable to beat the S&P 500 index fund which returned over 30% last year.

Corporate Social Responsibility Is A Form Of Socialism

Most CEO's today accept the idea that the mission, and the only mission of the corporation, is to increase shareholder value.  Their compensation has also been arranged to satisfy that mission.  Most of their compensation is in the form stock options.  The origin of this idea is contained in a 1970 WSJ op-ed written by Milton Friedman.  Friedman, scolded CEO's for arguing that corporations have a broader responsibility to society.  He argued that the CEO's were enabling and abetting the anti-capitalist sentiments of the culture in 1970.  Accepting the mission of social responsibility, according to Friedman, was an implicit acceptance of socialist doctrines.

Friedman was successful in launching the idea that corporations only exist to grow profits and increase shareholder value.  His 1970 op-ed in the WSJ was also the beginning of a successful effort to transform the culture.  Friedman laid the groundwork for equating free market capitalism with personal liberty and democracy.  Corporations that engage in activities such as pollution control, or support for environmental goals, are engaged in socialism.  The only purpose of the corporation is to increase shareholder value.  Government interference that prevents corporations from satisfying their mission should be strongly resisted.  It should be regarded as an attack against liberty and free market capitalism. 

Should We Eliminate The Corporate Tax And Tax Shareholders Instead?

Pfizer's use of the inversion tactic to avoid US corporate taxes is not a good sign.  Corporations have numerous ways in which they can shift profits to low tax countries.  This proposal from a scholar, at the conservative American Enterprise Institute,  proposes that we end the corporate tax and shift the tax burden to shareholders.  Dividends would be taxed at the ordinary income rate as well as the capital gain on share values each year.  One of the problems with this solution is that total federal taxes would substantially decline.  Congress would than have to find new taxes to plug the gap.

Health In US Depends Upon The State In Which You Reside

This article looks at dental health and mortality rates across US states.  The deep South is not good for your health.  Mississippi is at the bottom of the scale.  It has the least healthy citizens who also have the highest mortality rates.  Its state government has also decided not to take advantage of federal programs that would extend healthcare to its poorest citizens.  Mississippi looks more like a third world country than a state in the world's richest country.  Some of that is by choice.

The Financial Times Provides A Lesson On Corporate Tax Avoidance

Pfizer's recent bid to acquire AstecZeneca an reincorporate in the UK is predicated on avoiding the US corporate income tax.  Ireland has been the most popular location for multinational corporations.  This article provides a primer on the use of tax havens by MNC's.  It also discusses some of the responses to these tax avoidance schemes that are being debated.  Politicians in both parties would like to do something to curtail this practice but they have not been able to agree on the best strategy.  The OECD has also been involved in similar discussions about MNC tax avoidance schemes.  The MNC's are likely to find ways around the roadblocks that nation states produce to limit tax avoidance.  They will do what is in their best interest.  Nation states have a hard time reaching agreement on the national interest.

Pfizer's Bid For UK Drug Company Is Rejected

Pfizer's bid was rejected by AstraZenca's board.  Pfizer may have to up its bid to acquire the firm and reincorporate in the UK.  Pfizer's strategy to reincorporate in the UK is known as inversion.  Many firms are reincorporating in order to take advantage of lower tax rates.  The UK may become a favorite tax haven for US corporations.  Unless nation states take actions to reverse this trend, the competition between nation states may be entering a new phase.  There will be a race to the bottom as multinational corporations make it difficult for nation states to manage their own tax policies.

Why Has Economics Failed?

There has been a lot discussion around the Internet about the failure of economics in the Great Recession.  One of the criticisms is about the profession's failure to predict the financial crisis.  Krugman provides his answers to that question.  He pleads ignorance to the changes that were happening in the financial industry.  The shadow banking system played a huge role in the financial collapse, but it really did exist in the shadows.  Economists were unaware of its size and influence.  

Economists should have known about the moral hazards that existed in the system. Moral hazard is one of the important concepts in the profession.  Moral hazard existed everywhere in the system but Krugman did not discuss the role of moral hazard in the financial crisis. Mortgages were originated and sold to investment banks which packaged them into securities.  The loan originators collected a fee and passed the bad loans to investments banks which sold the securities to unwary clients who depended upon the rating agencies to determine the risk.  The rating agencies obliged the investment banks by putting a AAA rating on securities that did not even conform to the underwriting standards of the investment banks.  Everyone was getting rich producing toxic assets, and few were punished for the harm that was done to everyone else.  While this was happening bank regulators ignored the warning signals.  Alan Greenspan declared that he was shocked that bankers failed to regulate their own behavior because he, and millions of Americans, believed that markets were self regulating.  That belief is one of the cornerstones of the economics profession.  Regulation is assumed to distort markets.  In an ideal world markets, left to their own devices, would produce ideal outcomes.  Unfortunately, we do not live in an ideal world.  We live in a world in which most of the participants are influenced by an incentive system that encourages otherwise honest people to do terrible things.

Krugman is less concerned about the failure of the failure of the economics profession to predict the financial crisis than he is about its failure to deal properly with the recession.  He argues that recessions are due to a lack of demand and that governments should run budget deficits to compensate for the decline in demand by consumers and businesses.  That is especially true when the central bank has reached the zero lower bound and cannot reduce interest rates any further.  He cannot understand why the profession failed to use the knowledge that it has at its disposal.  His favorite model of the economy told him exactly what should have been done.

Krugman's model of the economy is a Keynesian model which assumes that recessions are due to a lack of demand.  Keynes believed full employment should be the goal of a market economy, but that the economy could reach an equilibrium below full employment.  He did not believe that market forces were sufficient to end the Great Depression.  He called for government to end the depression by running budget deficits.  The economics profession has been engaged in a war against Keynesian concepts for the last 60 years.  Many economists prefer a supply side explanation for recessions.  They believe that the economy tends toward equilibrium at full employment and that government policies tend to reduce business confidence.  If government would get out of the way, confidence would be restored and the economy would grow its way out of recession.  Given this split within the economics profession, it is not surprising at all that the profession would not agree upon the best way to end the recession.

Krugman understands this split within the profession, but he cannot understand why the supply side economists did not change their minds about what should be done when their predictions about inflation and rising interest rates in response to government stimulus turned out to be wrong.  He offers some explanations, but they only demonstrate that the economics profession does not share a common theory of the business cycle.  Political ideology and economic ideology are necessarily intertwined.

At a deeper level one can also ask whether there is agreement within the profession that full employment is the appropriate mission for the economy.  Business profits in the US have been at an all time high during the last few years of the recession.  High unemployment keeps wages low and that might be part of the reason for historically high profits.  The stock market reflects the high rate of profits, and shareholders have done very well despite the high rate of unemployment.  Perhaps profit maximization is the real goal of the economy.