Why Educational Reform in The US Never Works

Politicians from both political parties spend a lot of time talking about how to improve education.  It makes sense to propose plans for improving education because the great majority of parents care about the quality of education. However, most of the policy changes that have managed to get through the political maze, have been shortsighted and unproductive.  This is the best article that I have read about public education because it offers no simple solution to a complex problem.  One of the simple solutions, that is always on the political agenda, is to improve teacher effectiveness.  The problem with that solution is that teacher effectiveness cannot be separated from school effectiveness.  A simple thought experiment illustrates the connection between school effectiveness and teacher effectiveness.

Suppose we recruited teachers from Finland, which has a well earned reputation for turning out effective teachers, and did a teacher exchange program between the state of Indiana and Finland.  What results might we expect from that exchange? The most likely outcome after five years would be that the teachers from Finland would have decided to seek an alternative career in the US, and that the US teachers would be very successful and committed to a career in teaching.  It is easier to be an effective teacher in an effective school and it is very difficult to succeed in ineffective schools.

Our little thought experiment shifted our attention from teacher effectiveness to school effectiveness.  That is much more complex problem that goes well beyond the simple problem of teacher effectiveness. This article describes some of the factors that contribute to effective schools, and it explains why it easy to recruit good teachers in Finland and provide them with an opportunity to be successful teachers.  Political leaders in Finland are not any smarter than politicians in the US who care more about winning elections than they do about improving the education system.  Wasting human resources in the US is very expensive in the long run.  We are paying for it in many ways.

The Return Of The Laffer Curve And Dynamic Scoring

The Washington Post published an op-ed, posted below, which celebrates the 40th birthday of the Laffer curve and the restoration of the Reagan Administration myth that his tax cuts increased tax revenues.  I was wondering why the Post bothered to publish the Laffer celebration until I was reminded by this article that the GOP wants to force the Congressional Budget Office to use dynamic scoring.  Paul Ryan was unable to get the CBO to use dynamic scoring, but now that his party controls Congress it intends to find a CBO Director who will use the magic wand of dynamic scoring to show that tax cuts for the wealthy, and for corporations,  will actually increase federal tax revenues.  Dynamic scoring assumes that tax cuts will stimulate economic growth enough to pay for the tax cuts.  

Do Tax Cuts Really Increase Tax Collections?

Stephen Moore is the Chief Economist for the Heritage Foundation which receives its funding from folks who hate to pay taxes and only like government when it does good things for them.  The Washington Post provided Moore with an opportunity to broadcast the Heritage message.  Apparently, it did so without the benefit of editing or fact checking.  There are so many things wrong with this article that it is hard to know where to start.  One would expect, however, that Moore should not contradict himself in his article.  I will simply point out the contradiction and let Paul Krugman and some of the commentators in response to his article address some of the other problems with Moore's article.

Ostensibly, the article is about the durability of the Laffer curve which holds that tax revenues will increase as the tax rate rises up to a maximum point;  they will then begin to fall as the tax rate increases further.  Nobody would argue against that point.  On the other hand, there is a lot of disagreement about the inflection point.  That is, at what tax rate do we see a decline in tax revenue? Ronald Reagan cut the top income tax rate from around 70% to around 28%.  Tax revenues increased during the Reagan administration, and we also had a period of economic growth.  The Heritage Foundation and other think tanks, funded by the same folks who fund Heritage, have been claiming that our experience during the Reagan Administration proved that the Reagan Tax cuts validated the Laffer curve, and more importantly, the superiority of supply side economics to demand side economics which have been destructive of our economy under President Obama.

Moore knows that the Laffer curve has often been called the Laugher curve by economists because the inflection point is undetermined.  He acknowledges that point in his article.  He points out, however, that liberals want to increase taxes on carbon emissions because they understand that you get less of something when you tax it. They seem to agree with Laffer that high tax rates will cause people to work less and also decrease business investment.  Laffer claims that most economists agree that you get less of something when you tax it.  That is often true, but his curve also shows that you get more tax revenue from higher tax rates up to the inflection point.  The Laffer curve does not tell us that lowering the tax rate will always increase tax revenue.  Higher tax rates increase tax revenue until we get to the indeterminate inflection point.

Moore also fails to tell us that Reagan increased taxes during his administration.  He substantially increased the regressive Social Security tax rate which helped to pay for the huge reduction in the top marginal income tax rate.  This shifted the tax burden from the highly paid to lower income citizens because there is a cap on the Social Security tax. The Social Security tax rate falls as one's income increases. Even worse, Moore includes Social Security tax revenues along with income tax revenues when he reports the increase in tax revenues under Reagan.  Federal tax revenues, excluding Social Security taxes, increased by only 20.8% under Reagan.

We expect economists who decide to make a career at think tanks like Heritage to support the mission of their employer.  Its unfortunate, however, that one of our most widely read newspapers would provide an unfiltered platform for Heritage to spread its message to the public without a more critical review by its editors.

A View Of The Second Economy From Silicon Valley

The Harvard Business Review published an article by a Silicon Valley venture capitalist and a journalist who has covered this high tech Mecca for many years.  The article raises a serious question about the second economy that is already under development.  The second economy will take advantage of Moore's Law which has established the rate of speed by which computer chips process and store information, as well as the advances in artificial intelligence which leads to the development of much smarter machines.  As the intelligence of these machines increases, the types of jobs that they will be able to perform will also increase.  Today they are being used to perform routine tasks that are being done by low paid workers.  As the cost of the machines continue to fall even low paid workers in China will be replaced by robots.  As the machines become more intelligent, and achieve an IQ of around 120, they will provide a low cost substitute for highly skilled and high paid labor.  In a sense, the wage rate will be set by increasingly intelligent robots.

The second economy will much different from the industrial revolution which replaced human muscle with mechanical power.  It will replace human intelligence with machine intelligence at a much faster rate than mechanical power replaced human power.  This may seem like science fiction to many of us but it is very real to many in Silicon Valley. 

The good news is that the second economy will be very productive.  New and better products and services will available at lower cost.  The bad news is that we will be able to produce the output with fewer workers.  That will solve the problem of scarcity, which has plagued humankind for centuries, but we will need to figure out how to deal with a world that requires less human labor.  The easy answer to that question has usually made reference to the Luddites who opposed the industrial revolution.  Machines replaced the labor of textile workers and there was a 50 year lag between the advent of the industrial revolution and a better life for the Luddites.  Anyone who raises questions about the implications of technological advancement is reminded of the Luddites who would have blocked the industrial revolution and the advances that followed.  The second economy is rolling out at a faster pace than the industrial revolution which replaced human power with machine power.  It raises a question about the ability of our political leadership, which seems to be stuck in low gear, to manage the rapid changes that are brewing in Silicon Valley.

How To Fight Deflation In The Eurozone

It is likely that the EZ will report in January that prices changes were negative in the EZ.  The ECB has a mandate to maintain price stability, therefore, it must do something about price deflation.  The US Federal Reserve used quantitative easing to stabilize prices in the US but it would not work as well in the EZ for many of the reasons presented in this article.  An alternative to QE is proposed for the ECB in this article along with some of the possible objections which are refuted.

Adair Turner Provides His Big Picture Of The Economy

This video of Adair Turner's speech in London pulls several strands of the economy together into a comprehensible mosaic.  He links rising income and wealth inequality to some of its more obvious causes such as globalization and immigration which expands the labor supply and fosters wage competition, but he also shows how our new economy decreases demand for labor and physical capital.  That contributes in income and wealth inequality and it also contributes to slower economic growth.  Its easy to see that effect when one compares Facebook with the Ford Motor Company.  A relatively small number of software engineers and physical capital was required to bring Facebook public at a value of $170 billion.  Facebook can also add new customers at almost zero marginal cost.  It also becomes more valuable through network effects.  The more customers it attracts, the more valuable it is to every customer and to advertisers.  Henry Ford needed a large labor supply and a huge investment in physical capital to bring his cars to market.  We also had to build the roads and the infrastructure necessary to support auto transport.  A large sales and service network was also required.  Business investment spending and consumer spending expanded as the auto industry developed.  Facebook made a small number of people very rich but it does relatively little to increase business investment and consumer spending.

Turner also destroys some of the myths about our banking system that taught in econ 101.  Banks do act as intermediators between savers and businesses that require those savings for investment.  Only 15% of bank assets are loans to businesses.  65% of the savings are used to fund mortgages,  and a large share of real estate transactions are for the purchase of existing properties.  25% of bank lending is used to support household consumption. 

Given the large amount of savings that are used to fund mortgages it is not surprising to learn that most of our wealth is held in real estate.  Moreover, most of the asset appreciation is in the price of the land.  There is a fixed supply of highly desired real estate locations and a high elasticity of demand for those locations.  Investors have responded by purchasing choice locations to capture the asset appreciation.  Most of that appreciation will go to investors who have surplus income.  That contributes to wealth inequality and it does little to expand aggregate demand.

Turner argues that income inequality has led to the expansion of credit to support aggregate demand.  There has been almost no real wage growth for the bottom 75% of the income distribution in the US.  Consequently,  private credit has been used to fill the income gap. That is what the sub prime mortgage system was all about. The idea was to expand credit to households that would not otherwise have access to credit.  That is unsustainable over the long run.  Consumption spending slows down, the economy contracts, and government debt increases in response to declining tax revenue and increased spending on public welfare programs.  The rise in public debt leads to fiscal austerity, and a reliance on monetary policy to support fiscal austerity programs.

Turner is not a fan of quantitative easing.  He argues that low interest rates have driven up asset prices but they have done little to increase aggregate demand.  He favors policies that put more money into the hands of households that will spend it.  Progressive tax policies would be part of his agenda.

Turner does not have much regard for economists who claim that our basic problem is a skill gap.  It doesn't take much to destroy that argument.  A quick look at job growth projections by the US Bureau of Labor shows that there is very weak demand for computer and network technologists.  Moreover, wage growth in those areas has also been weak.  Most of the job growth is in the service sectors and many of those jobs do not require advanced training.

The History Of The 2% Inflation Rate Target

Most of the world's central banks have a target inflation rate of 2%.  This article provides an overview of the history of that target which may have been set 25 years ago by the central bank of New Zealand, and ultimately became a common central bank target.  More importantly, it discusses the strengths and weaknesses of that common target.  A higher target would provide greater flexibility during serious recessions because central banks would be less likely to hit the zero lower bound when they cut interest rates to stimulate the economy.  If the target rate were 4% they would have more freedom than they do at 2%.  There are also advantages that derive from the lower target because it is easier to make economic plans when the purchasing power of money is more constant. 

Capital In The 21st Century At The Bank of England

Thomas Piketty has done his job.  His book raised enough questions about inequality to bring the issue to one of the pillars of capitalism.  The BOE invited four prominent economists to present their reactions to his book.  They all agreed that Piketty had provided a great service by making the historical data on income inequality widely available.  Most of the comments were about the economic growth theory that Piketty relied upon to reach his policy conclusions.  Piketty responded to the comments by agreeing that his conclusions were open to debate.  The BOE plans to post these discussions on its website after they have been edited.  Let the game begin.

One of the more provocative perspectives presented at the meeting was about the impact of inequality on democracy.  Joseph Stiglitz, among others, has argued that rising inequality has a corrupting effect on democratic governance.  Implicit in this perspective is the assumption that the middle class is an essential pillar of democracy.  One of the presenters rejected that assumption.  He argued that the median voter does not have much of an impact on governance.  He argued that all societies are governed by interests of the top 10%.  He seems to agree with the "Iron Law Of Hierarchy" that has a long history in political science.  Elections are for show.  Their primary purpose is to provide legitimacy for government.  That conclusion makes sense when the political debate in many countries is between the center left and the center right as it is many Western nations.  Political debates in that environment are primarily about fine tuning the system and settling disputes among the powerful.

Economics, Entertainment And The Dr. Oz Effect

Dr. Oz is the star of popular TV program in which he provides advice on medical problems and treatments.  It turns out that he provides bad advice.  More than half of the claims that he makes are wrong.  TV is full of experts like Dr. Oz.  They give investment advice, marital advice and even legal advice.  Of course their advice is worth about what free advice costs.  Paul Krugman compares these experts to some of the economists that he encounters on TV news shows who display a similar lack of competence.  He attempts to explain their popularity and their behavior.

One explanation is that they are all in the entertainment business.  Personality and a simple explanation for complex problems is what builds a large enough audience to attract sponsors.  It also helps if they provide the audience with messages that they want to hear.  Furthermore, most of the Wall Street economists focus on short term problems that interest momentum investors who don't hang on to their investments for very long.  Its not surprising that their opinions about economic policy conform closely with that of their clients.  The good news is that most economists, like most doctors, are more concerned with protecting their reputations than they are with client relationships or with their ability to entertain a popular audience on TV.

The Relationship Between Private Debt And Economic Instability

Lord Adair Turner states that private debt used to be around 50% of GDP and that the ratio is now around 180%.  He argues that economic instability increases when credit grows much faster than GDP.  This led to the financial crises and that the slow recovery is the result of a "debt hangover".  He would prefer to have an economy that is less dependent upon credit growth and more stable as a result.

 The growth in credit has been driven by investment in existing assets such as real estate.  To some extent this has been possible because of changes in the economy.  The fastest growing sector of the economy has been in high tech start ups like Facebook.  They have taken advantage of price deflation in information technologies to build firms that are less capital intensive than manufacturing.  They also decrease the demand for human capital which contributes to income inequality in two ways: wages fall and investors in high tech start ups have become extremely wealthy through stock price appreciation.  Much of this wealth is saved and helps to fund household borrowing for consumer products and residential real estate.

Ordinarily, interest rates could be used to limit credit growth.  That would have a negative effect on the economy.  Turner argues that macro prudential tools could limit credit growth by making credit more difficult to obtain by other means.

The Root Of The Russian Economic Problems

The Financial Times provides us with the data that helps us to understand the basic problem in the Russian economy.  Oil and gas account for around 75% of Russia's exports and around 50% of the government's budget revenues.  The drop in the price of oil to $60 from over $100 not too long ago is a huge barrier to overcome.  It is no wonder that the central bank expects the economy to shrink by over 4% in 2015. 

The problems created by the energy price shock have also led to capital flight which has caused the ruble to decline in value.  The central bank increased interest rates to limit the capital flight but it is not clear that this will be sufficient.  The decline in the value of the ruble will make imports much more expensive and increase the risk of inflation.  Its hard to determine what might happen when large numbers of people expect a decline in the value of the ruble, and consumers anticipate price inflation. 

Japan's Lost Decade and The US Lost Decade

Noah Smith provides an interesting story about lost decades.  In doing so he explodes a myth about Japan and also a myth about the US.  He also helps us to understand the importance of myths.  They are easier to understand than a more complex reality, and perhaps that is why they are so commonly used in societies that often held together by myths.  The reality of what has happened in the US and in Japan is not that hard to understand if one looks at some simple data and a few facts.  Smith does a good job of uncovering the reality and exploding a common myth.  For most people, however, the myth will prevail over reality.

What's Good For Wall Street Is Primarily Good For Wall Street

This article raises questions about the value that we get from Wall Street.  The primary role of the banking system is to allocate capital to its most productive uses.  One would expect that there would be a positive relationship between the growth in the finance sector and growth in the economy.  Instead we find a negative relationship between these two variables.  The finance sector's share of the economy has doubled over the last 50 years; it has grown six times faster than GDP in the last 30 by using computer technology to develop new products.  It would appear, however, that the increase in productivity has not been shared with the greater economy.  Wall Street continues to extract 2% of the transaction value for itself.  Perhaps that is why 20% of the top .01% income earners are in the relatively small financial sector.

Outsized compensation is the financial sector also attracts many of our brightest students to the financial sector.  They are smart enough to follow the money.  We might be better off if our brightest students went into research.  One dollar invested in research produces $5 in economic growth.  The same amount going to finance reduces growth by 60 cents.

This article raises several questions about the value received by the growth in the financial industry.  Perhaps it is a mistake to expect Wall Street to be much different from any other sector in our economy.  The management of most firms have a common goal.  They want to increase shareholder value and executive compensation.  In order to do that in a competitive market they may have to compete on price and product quality.  The finance sector does not sell commodity products and it price competition is less common than it is in the industrial sector.  Two recent examples suggest that Wall Street has some advantages over industrial firms.  During the dotcom boom Wall Street made a lot of money by underwriting high tech firms and taking them public.  They earned fees by taking them public even if the companies that that they promoted eventually failed.  They were supported in this effort by cheer leaders on TV networks designed for that purpose.  They provided the public with a powerful incentive to get rich by investing in businesses that they understood to be very risky.  Each of the Wall Street firms competed in the same game.  They all charge the same fee to the firm that they took public.  The nature of the competition is based upon personal relationships and access to large investors who were in line to purchase the shares.  It was not uncommon for the first investors to make a huge gain after the public offering by selling their shares in the secondary market as soon as they could.

The financial crisis provides another example of Wall Street exceptionalism.  They earned fees by packaging mortgages into securities and selling them to investors who lost millions when the securities that they purchased lost value.  It was not uncommon for them to sell securities to their customers which did meet their own underwriting standards.  We all know what happened, but most of the banks that were playing that game are still in business and their customers continue to buy products and services from them.  Only a handful of banks can provide the services that large investors or multinational corporations require.  Our economic system is based upon the services they provide.   

Russia's Central Bank Raises Interest Rate to 17%

The Russian central bank has been forced to raise interest rates in response to stop the fall in the ruble.  The Russian economy has been hit hard by the drop in oil prices and by Western sanctions in response to Russia's foreign policy decisions.  Falling oil prices, along with the effect of high interest rates on investment and consumption, increase the risk of recession in Russia.  The decline in the value of the ruble also makes it more expensive to service debt denominated in foreign currencies.

The Lima Accord Is A Step In The Right Direction On Climate Policy

The agreement reached in Lima was enabled by the prior agreement between the US and China which indicated the willingness of the two largest carbon emitting nations to take serious steps to limit carbon emissions.  Climate scientists say that further steps are needed to meet their temperature increase target, but it sets the stage for further emission reductions as plans evolve in each nation.  It is clearly a big improvement over the Kyoto accord which was not approved by the US government.

Economic Gains From Shale Oil and Gas In The US

Tim Taylor does a nice job of summarizing the Congressional Budget Office study on the economic benefits derived from shale oil and gas in the US.  In the short run, GDP was increased substantially.  The increased output of these products in 2013 was $195 billion.  That raised GDP by 1.2%.  The increase in investment spending on shale oil and gas added another 0.9% to GDP for a total gain in GDP of 2.1%.  In the longer term, lower energy prices will boost productivity in energy intensive industries which will increase wages and employment in those industries.  That will also increase consumer spending in the long run.  The US will not become a resource dependent economy such as Russia or Venezuela, but these industries will have a substantial impact on the broader economy despite the fact that the US economy has become a services economy with a much lower ratio of energy consumption to output over time.

Taylor is aware of the environmental risks in the use of shale extraction technologies.  He has also been an advocate of carbon taxes which internalize the external costs of carbon emissions.

The House Spending Bill Redux

The GOP dominated House passed a spending bill that will avoid a government shutdown.  This editorial in the NYT suggests that we might be better off if the government did shut down.  It is pretty clear that government works primarily for those who fund political campaigns.  Big money has been going to PACs which work outside of the two major parties.  The bill increases the amount that large contributors can make directly to political parties.  The bill also cuts funding for government agencies such as the EPA and the IRS which enforces tax collection.  Wall Street also got its finger into the pie.  Key areas of the Dodd-Frank bill which required banks to separate risky derivative trading from its government protected banking operations were neutered with the eager participation of both political parties.  We have created an electoral system that is increasingly dependent upon campaign contributions to fund the escalating expense of running for political office.  It should not be surprising to witness the results from that system. 

How The Price Mechanism Can End Recessions If We Let It Work

Jim Grant has been getting a lot publicity about his analysis of the 1921 recession in the US.  Grant argues that the price mechanism was allowed to operate and it ended the recession.  Unemployment benefits were not available in 1921 so the unemployed were forced to take the wages that were on offer.  Lower wages allowed producers to cut prices and get rid of unsold inventory without taking loses.  The economy recovered, according to Grant because the price system was flexible and it was allowed to provide the proper signals to workers and producers.  Grant argues that we should have learned a lesson from the 1921 recession.  Instead, we prevented the price mechanism from operating and we have had an extended recovery. This is market fundamentalism in its strongest version.  It must make a lot of people happy to learn that adherence to the law of supply and demand would have led to a rapid recovery from the financial crisis. 

What Were The Ideas That Justified Rapid Privatization In Russia?

Russia is one of the most unequal nations in the world.  The economic advisers who engineered the transition to private ownership of industrial assets were driven by three ideas which turned out to have been wrong.  They started with the assumption that it was a good idea to strike while the iron is hot.  It was better to move quickly than it was to spend a lot of time developing a good process.  Moreover, they understood that any process would be corrupted by political connections with those in power. 

The second bad idea involved the maldistribution of productive assets.  The advisers knew that the new owners would not be efficient operators of those assets.  They reasoned, however, that market forces would lead to a better distribution of assets as the poorly suited new owners sold their assets to more efficient operators.  The assumption is that markets forces will overcome the problem of maldistribution and lead to an efficient use of industrial resources.  That was a terribly wrong assumption.

The third bad idea was based upon methodological nationalism.  The more efficient new owners would want to protect their property rights.  Therefore, they would demand the rule of law which would protect their ownership interests.  It turned out that there was no need for the rule of law to protect property rights.  Capital can be easily moved to locations which protect property rights with little regard for how those asset were acquired.  Property booms in London, New York, Miami and other locations are being driven by Russian oligarchs who are moving their cash to safe havens. They understand that their assets can be taken away by political leaders and redistributed to their political allies.  They have no need for the rule of law to develop in Russia or in other privatized states that were part of the USSR.

The New Republic Is Dead

The New Republic is one of America's venerable print magazines that made a good effort to provide well written journalism to the small audience that exists for good journalism.  It was purchased by a 28 year old multimillionaire who was lucky enough to have been the room mate of the Facebook founder.  This article describes the process by which the new owner destroyed the New Republic and  lost a handful of his millions in the process.  Its not easy making money with print journalism in the digital era but the demise of print journalism will leave its mark on our society.  We will be less well informed and less literate in the "like generation".

Why The UK Budget Forecast Was Wrong in 2010 and Wrong Today

The UK Treasury announced a growth forecast in 2010, along with spending cuts that would balance the budget by 2014.  The economy was expected to grow by 8.4% compounded but it only grew by 4.1%.  Consequently, the budget is not balanced.  There is a 91.3bn deficit.  Lord Skidelsky explains why the government failed to meet its forecast and why its current forecast is worthless.  It really is quite simple.

Government spending in the UK is around 40% of GDP.  Consequently, the private economy must grow very fast to overcome the large cuts in government spending.  The Treasury reported that the budget deficit was largely determined by a decline in tax receipts.  That, of course, is exactly what happens when the private economy fails to grow fast enough to overcome the large cuts in government spending.  Skidelsky predicted that the government would not hits its growth targets and balance the budget when it announced its 2010 budget.  He claims that the government will fail to meet its deficit reduction target in its current budget for the same reasons that it failed to balance the 2014 budget.  Private sector growth will not overcome the cuts in government spending. 

The conservative government may be willing to accept budget deficits if it succeeds in cutting government spending on programs that it does not like.  Its real goal is to cut government spending,  and it is using deficit reduction targets, that it can't satisfy, as a cover for its real objective.  That seems very similar to what Republicans like to do in the US.  They use deficit reduction as an excuse for cuts in spending on government programs that Democrats seem to like.  They are quite happy with government deficits when Republican Administrations cut taxes for their constituency and spend money on programs that they prefer.

China's Economy Surpasses The US Economy: So What?

Joe Stiglitz puts China's economic growth and power in perspective, and he indicates how the US might work together with China in world that is always changing.  Stiglitz has a perspective that is better informed than that of most Americans, however, it is view that most Americans will reject.  The comments that follow this article reinforce most of the points about US arrogance, and its likely  outcomes, that Stiglitz attempted to make in this article.  Ignorance is bliss.  Few of the suggestions offered by Stiglitz will be on the political agenda in the US.  Politicians who advocated his policies would not get elected to office.

Tyler Cowen Reframes The Inequality Debate Away From Thomas Piketty

Tyler Cowen is an economics professor at George Mason university and a director of the Mercatus Center which is affiliated with George Mason.  Other directors on the Mercatus board include Charles Koch the founder of Koch Industries and Richard Fink who is a senior executive at Koch Industries.  The Mercatus Center  focuses on libertarian solutions to our economic problems.  It is highly critical of government regulation especially when it interferes with the free operation of the energy industry.

In this article, Cowen argues that technology and free market innovations will ultimately reduce income inequality.  Unequal access to technology is partially responsible for inequality today because it has not advanced to the point in which it easy to use by unskilled workers.  Highly skilled workers, such as hedge fund managers, earn high incomes because they are able to use technology to outperform less skilled workers.  That advantage will dissipate over time as artificial intelligence makes it easier for less skilled workers to increase their productivity.  This explanation for inequality fits nicely into classic economic theories which assume that incomes are based upon one's marginal contribution to revenue.

Innovation also plays an important role in reducing income inequality.  According to Cowen, America has been a provider of innovations to consumers which increase their utility.  Apparently, reducing the utility gap between high and low income households is an alternative to reducing income inequality.  Wages have been depressed by the globalization of the labor market, especially for manufacturing workers, but consumer utility has been increased because the prices for many products manufactured in low wage countries have declined.  Even better,  low wage countries like China will become innovation centers over time.  In the long run, they will produce products that also increase consumer utility and reduce utility inequality much like the US has done.

Cowen acknowledges that his ideas about technological innovation are speculative and that they only provide a long term solution to growing income inequality.  The intent of his argument, however, is to reframe the inequality debate which has been popularized by Thomas Piketty who argues that the source of income inequality is the gap between the return on capital and the return on wages.  Since the ownership of capital is highly concentrated, and an important source of income,  it follows that income inequality will continue to grow as long as the return of capital exceeds the return on labor.  According to Piketty tax polices which reduce the net return on capital is the best way to reduce the growth in income inequality.  Cowen claims that this is the wrong approach because it would limit the growth in technical innovation, which according to his analysis, provides the means for the reduction in income inequality.

Piketty's focus on wealth taxation may be futile because it would be opposed by powerful people like those who fund the Mercatus Center at George Mason University.  On the other hand, there is no reason to believe that higher taxes on capital will reduce innovation, or that increases in consumer utility via product innovation, and lower prices, is a good substitute for greater income income equality as Cowen assumes.  Cowen has done his job, however, if he succeeds in reframing the debate the debate on income inequality.  That, of course, is what he is paid to do.  Curiously, his income is not dependent upon the use of advanced technology.  He was gifted with high intelligence which he has been able to sell at a high price to those who can afford to purchase and shape the uses to which intelligence is applied.

Deceptive Marketing in The Internet Age

Millions of people would like to sleep better.  The Internet provides a great opportunity to use deceptive marketing to tap into a potentially huge market opportunity.  The Clever Owl website is operated by HFM Marketing, which is owned by Somnapure Products, that provides the "natural" product that will help millions to sleep better.  Its rather strange to for a firm to do its marketing through a subsidiary that it owns, instead of using an internal marketing division,  but there are probably some legal advantages to this arrangement which also enhances the impression that HFM's website provides legitimate news. 

The Clever Owl website uses some interesting gimmicks to legitimize the Somnapure product.  Everyone is familiar with CVS, GNC and Walmart.  They are legitimate retail brands and the article claims that Somnapure's product selling great at CVS but it provides no data on sales at CVS.  There is a sidebar on the right of the page which provides links to the three retailers that are well known.  If you click on the link to any of the retailers you are not taken to their website. Instead you get a sales pitch on the product which claims that the product is scientifically proven, natural and made in America. The link to the popular retailers is only used to legitimize the product.  No scientific evidence is provided to back up the claims made about the product, but the appeal to a natural product made in America may overcome that minor difficulty.

One might think that the salesperson would conclude her pitch by sending them to one of the three popular retailers that can be found anywhere in America.  Instead she offers a free trial that is only available online.  What she doesn't tell the unfortunate person who would like to sleep better is that Somnapure will ship a months supply of the worthless product, and charge it to the credit card used to pay for the shipping and handling of the free trial, unless the recipient of the "free trail" cancels that part of the deal which is buried in the terms and conditions of the offer.  Somnacare is not interested in securing a satisfied customer who will benefit from its product and continue using it.  It is primarily interested in making a single sale for $70 to millions of customers duped by the free offer.

This is only one example of this new form of predatory marketing that use the "free offer" gimmick and the Internet to sell worthless products to our most vulnerable citizens. This is a link to Clever Owl's sponsored article on Yahoo selling another product that is supposed to enable men with enlarged prostates (which includes almost every male over 50) to sleep through the night.  The link to the free offer is set up so that it can be clicked before the terms and conditions are visible.

Two Nations Divided By Race And Culture

This article describes the new "Solid South" in the US. It turned completely away from the Republican Party after the Civil War.  There were not many new born males named Abraham in the South after the war.  The old confederacy remained culturally and politically conservative after the war, but it was represented by conservative members of the Democratic Party for generations.  That enabled the Democratic Party to exert enough power in Congress to pass the civil rights bill under Lyndon Johnson who rose to power in Texas as a democratic Senator.  Johnson correctly predicted that passing the civil rights bill would put an end to the Solid South represented by the Democratic Party.  The Republican Party now controls almost every state legislature and governorship in the South; it is also likely to replace the remaining democratic Senator in the South with a republican.  The incumbent democratic Senator made the mistake of voting for bills promoted by the national party headed up by a president that is despised by white voters in the South who almost unanimously voted against him in the national election. 

Richard Nixon was the first republican president to exploit religious and cultural issues to begin the republican conquest of the old confederacy.  He publically courted the popular Evangelist  Billy Graham and he capitalized on conservative backlash in the South to the anti-war protests of the Vietnam era and the "Hippie Culture'" that represented a threat to traditional "Family Values".  That formula has been very successful in the old confederacy which has had a strong tradition of militarism, evangelism and traditional values exemplified by the white majority.  It also works in rural states which have historically been represented by the Republican Party.  Unfortunately, the two major political parties in the US have been driven further apart by the exploitation of cultural divisions to gain political power.  The polarization that we see in Washington is not primarily about policy issues that can be debated and resolved by a somewhat rational process as it has been done in the past.  Polarization today represents cultural divisions that are being exploited to win elections.  Its hard to see how a nation so divided can reach agreement on the critical policy issues that we face today.  This does not auger well for the rest of the world that looks to America for leadership.

Why Housing Prices Should Rise In Areas With A Fixed Supply Of Housing

Interest rates are at historically low levels in many parts of the world.  This article looks at two explanations for falling interest rates and concludes that housing prices should rise in areas where the supply of housing is relatively constant.

If the price of capital is falling as the cost of computing and networking technology responds to Moore's law, then business investment will fall.  That will decrease the demand for savings relative to the supply of savings and push interest rates lower.

Similarly if the the ratio of government borrowing to GDP declines the demand for savings will fall and interest rates will fall.

The decline in business and government demand for savings will divert savings into residential real estate in response to lower rates.  That will have two effects: it will dampen the decline in interest rates and it will cause housing prices to rise in areas where the supply of housing is relatively fixed.  That might partially explain the rapid increase in real estate prices in highly desirable locations such as London, NYC and the Bay Area.  The demand for housing is increasing faster than the supply of new housing.  It might also explain the price increases for entry level housing in highly desirable suburbs which have little room for the development of new housing.  Low interest rates increase the affordability of homes in suburbs with good schools and other amenities that would otherwise have been priced out of their market.

Another Lesson For Investors Who Pay High Fees To Investment Advisers

This article in the WSJ (behind paywall),  shows that only 9.3% of actively managed mutual funds beat the S&P 500 index by the end of September.  That is well below the previous low in 1995 of 12.9% that failed to beat the S&P 500 index.  While some funds do beat the S&P index in any given year, most of them fail to consistently beat the index in subsequent years.  It would appear that investors who continue to pour money into actively managed funds are not as rational as we assume.  They prefer to pay high fees in anticipation of hitting the jackpot.  They are much like those who purchase lottery tickets in the hope they can defy the laws of laws of probability which work against them.

How To Promote Economic Growth In The US

The Cato Institute invited a number of economists to present their view on policies that would promote economic growth.  Douglas Holtz-Eakin, who was Mitt Romney's economic adviser in his failed presidential campaign, presented his ideas at the Cato conference.  Brad DeLong read his presentation and gave it a failing grade.  There was nothing new in the presentation; it consisted of the stale nostrums that have always been at the center of Republican economic policy.  That is, cut spending on entitlements, reduce the regulatory burden on business, reduce business taxes and privatize the failing public education system.  DeLong did not give Holtz-Eakin a failing grade for making the wrong recommendations.  He failed him for supporting his recommendations with weak and often faulty data.  Holtz-Eakin probably felt comfortable making his presentation to a supportive audience, but he ruined whatever was left of his reputation as an economist for Brad DeLong who once regarded him as a colleague who would have given a failing grade to any economist who would have displayed a similar disregard for economic literacy.  DeLong's critique of the evidence and data that Holtz-Eakin used to support his economic growth recommendations is withering and it provides a good lesson on the misuse of data by economists who have chosen to become political hacks.

What Is The Logic Behind German Economic Policy Preferences In Eurozone?

Germany is the largest and most successful economy in the eurozone.  It's policy preferences may be one of the factors that have stalled the eurozone economy.  Antonio Fatas offers his explanation for Germany's policy preferences in this article.  Fatas argues that German leaders have a unique opinion about the factors that led up to the economic crisis, and that they prefer structural changes that may be good in the long run, but which are counter-productive in the short run.  German leaders, according to Fatas, also have an attitude about inflation that differs from that of most central banks which have a 2% inflation target.  Germans seem to prefer a zero inflation target.

Fatas sounds a lot like Paul Krugman in his critique of German economic policy preferences.  My guess is that electoral politics in Germany shape the German preferences.  The public has been generally supportive of German economic policy preferences.

Sweden's Center Left Government Can't Pass Its Budget Due To Opposition From Anti-Immigration Party

Sweden's economy and the government's fiscal position is in good shape.  Surprisingly, politics in Sweden are in disarray.  The populist anti-immigration party in Sweden announced that it will not support the budget proposed by the center-left coalition government.  It claims that it will not vote for any budget that encourages immigration.  The coalition government is unable to gather enough votes to pass its budget and it will not operate the government with center-right budget in place.  Public concerns about immigration policy are disrupting electoral politics in much of Europe.  Anti-immigration sentiment in the US, which is a nation built upon immigration, has also become a major political issue.  The US does not have a parliamentary system so the anti-immigration sentiment in the US has been absorbed by the Republican Party. 

How To Make Millions On The Internet

One of the easiest ways to create product demand is to lower the price to zero.  One of the most popular ways to get rich on the Internet is to offer a free trial for a product.  In order to get the free trial the consumer must use a credit card to pay for shipping and handling.  Most consumers will not read the terms and conditions for the free trial.  If they do not cancel the free trial in 14 days their credit card will be hit with a recurrent charge for monthly refills of the product.  The crooks who use this deceptive practice also make it difficult to cancel the order. 

The link that I provided is to just one of many free trial scams that are being used to trick consumers into unwanted purchases.  Most of the scams target potential victims by appealing to very common problems that can be solved by taking a non-prescription pill that is is sold by featuring other consumers who used the pills to lose weight, build a strong body, enjoy great sex, shrink an enlarged prostrate etc.  Most consumers are too smart to pay over $70 per month for the worthless pills.  They get hooked by accepting the free trial, and by not clicking a link to the terms and conditions. 

What really aggravates me about this scam is that it is not illegal to use this deceptive practice to initiate a purchase by default.  Moreover, the ad that I linked to was placed on Yahoo.  You get to the ad by following a link in an article which appears to be a news article about products being used by well known athletes.  Apparently, Yahoo does not worry about accepting money from crooks who pay for the ads on their site.

The Washington Post Rewrites Economic History

Robert Samuelson has a weekly column in The Washington Post that gives him a platform to broadcast his views on economic topics.  His approach is similar to that of David Brooks who writes opinion pieces in the New York Times.  They both rely upon conservative think tanks, and conservative authors, to fuel their imagination about the political economy.  They are both skillful writers with the ability to condense complex economic ideas into short articles that reach millions of readers.  Samuelson follows that tradition in this article.  The libertarian Cato Institute hosted a conference that featured James Grant who wrote a book on the US recession in 1921.  Grant argued that the recovery from the 1921 recession was more rapid and stronger than the recovery from the Great Recession because the government did not intervene in the market.  Prices and wages were allowed to fall.  Lower prices encouraged consumers to spend and lower wages provided businesses with an incentive to hire more workers.  Samuelson, following Grant, concludes that we would have had a faster recovery from the Great Recession if we had allowed the price system to work its magic.  Samuelson takes Grant a step further.  He asserts that the recovery from the 1921 recession destroys the intellectual capital of the economics profession which advocates counter cyclical fiscal policy in response to recessions.

Samuelson's article will misinform millions of readers about the political economy.  The rebuttals to his article will reach a handful of readers.  It is no wonder that the public is generally confused about the political economy and the role of government in the economy.  The new owner of the WP is a libertarian who will be pleased with Samuelson's contribution to the public understanding of the political economy.

Europe Is Paying A Price For The Cost Of Bad Ideas

Paul Krugman rejects the idea that the eurozone is having economic problems because of the irresponsible behavior of some of its member nations.  With the exception of Greece, Krugman does not see a competitiveness problem or fiscal irresponsibility as the root problem in the eurozone.  He argues instead that Germany is exporting deflation to its neighbors, and that it is imposing its bad economic ideas on the rest of the eurozone.  Unfortunately, policy makers in the eurozone have bought into the economic ideas being sold by Germany.  In Krugman's mind, German economic ideology resembles the economic ideology that emanates from the University of Chicago in the US. 

What High Tech Employee Shortage?

Noah Smith looks at the law of supply and demand and explains why there can't be a shortage of high tech workers.   If the demand for high tech employees exceeded the supply, wages for high tech workers would rise and the supply of workers increase in response to higher wages. However, the real wages for high tech workers have not increased since 1999.  This suggests that we have an over-supply of high tech workers.  High tech firms continue to pretend that a shortage exists so that they can bring in lower priced labor from overseas.  They are more interested in growing profits and their stock price than anything else.  The supply shortage that they use to increase the number of green card workers is a fiction.

Its easy to understand the motivation of high tech managers and their interest in increasing profits.  Smith raises a more interesting question, however, about economics.  Economists are trained to place the efficiency of the economy above all other concerns.  In fact, the recent attention that economists are devoting to the distribution of income, is a departure from the traditional focus of the profession on efficiency.  In fact, that assumption that wages are determined by the marginal productivity of labor,  precludes any discussion of income maldistribution.  According to this doctrine, everyone's wages are fairly earned by their contribution to production.  The rising share of income going to a small percent of the population suggests that more attention needs to be given to the institutional changes that have occurred in the rich nations.  The managers of our large corporations have figured out how to increase their share of the income.  This has little to do with their marginal contribution production.

Obama's Environmental Legacy Based Upon 1970 Law

This article describes how President Obama is using the Clean Air Act, which was passed in 1970, to empower the Environment Protection Agency to reshape the production of electricity.  Rules imposed by the EPA will spell the end of coal as the source of energy.  EPA rules will also require the auto industry to produce more energy efficient cars by 2025.

The Clean Air Act was approved by the Senate without a single dissent from the Republicans.  It was also used by two Republican presidents to limit air pollution.  Unfortunately, the Republican Party has been purchased by the most reactionary sectors of the US economy.  It no longer represents the national interest.  It gets the majority of its funding from the energy sector and it has been working hard to link the use of coal and oil to lower energy prices and job creation.  It has also aligned itself with a variety of media outlets to misinform the public about the risk of global warming and the impact of pollutants on the health of US citizens.

Travel Time

I will be on the road for a few days.  Will be back on the air after Thanksgiving.  Enjoy your holiday.

In Praise Of Keynes

Bloomberg Business Week provides a clear and cogent description of the macro economy that was invented by Keynes (with some help) to explain the Great Depression and the problem of restoring full employment.  Keynes viewed the economy in terms of the spending by households, business and government.  Recessions occur when one or more of these sectors decide to spend less and increase their savings.  The "Paradox of Thrift" explains why savings, which is necessary in an economy, and is regarded as a virtue when it applies to individuals,  can lower aggregate demand below the level required for full employment.  Ordinarily, the central bank can use monetary policy to restore spending and increase employment.  Conventional monetary, however, loses its effectiveness when interest rates approach zero.  Keynes explained how fiscal policy can prime the pump and create the conditions for aggregate demand to rise to the level required for full employment.  He also argued that governments should run budget surpluses in good times so that they have the means to run budget deficits during deep recessions.

The success of Keynesian theory in explaining the recovery from the Great Depression led to wide acceptance of his theory.  Some economists, particularly those at the University of Chicago, objected to Keynesian theory for a variety of reasons.  They favored a view of the economy that did not require an active role by the government.  They also wanted to explain the macro economy in the terms of the micro theories that they knew and loved.  That is, they hoped to reduce macro economic theory to micro theory as one might reduce chemistry to physics.  Over time, they won the debate within the academy and most of the research in macroeconomics was focused on the development of models based upon the key assumptions embedded in microeconomics.  They won the academic debate, but the models founded on micro economic assumptions have been less than useful in forecasting macroeconomic events like recession and inflation.  Nevertheless, economists schooled int this tradition have powerfully resisted the use of fiscal policy to restore aggregate demand.  They favor supply side theories which argue for structural changes in the economy.  Unfortunately, structural changes take a long time to implement.  Moreover, the intent is to make a nation's economy more competitive so that growth can be restored by increasing exports and running current account surpluses.  Keynes argued that this could not restore global economic growth. It is impossible for every country to run trade surpluses because the sum of surpluses and deficits must be equal to zero.

GOP Led House Panel Concludes That Government's Response To Benghazi Attack Was Appropriate

After several year of accusations about the flawed government response to the attack on the Benghazi Embassy, the GOP led House committee concluded that the government agencies and the military  responded heroically to the attack.  Apparently, the GOP and Fox News have decided that they milked that "controversy" for all that it was worth.  They may be gearing up for a rationale to impeach President Obama. In any case, Fox News, which breathlessly reported on the government mistakes at Benghazi for several years needs some fresh material.  Anything that the executive branch of the government does when it is headed by the opposition party is potentially grounds for impeachment.  It is not supposed to function without approval from the party that lost the presidential election.

Wall Street Bankers Testify At Senate Hearing On Unfair Commodity Trading

Wall Street investment banks are essentially gamblers.  They place bets on the price changes in a host of commodities, interest rates, and assets such as stocks and bonds.  Every gambler would like to have better information about the direction of prices than other gamblers.  Regulations which used to prevent banks from owning the commodities that they traded were eliminated in the Clinton Administration with strong support from Republicans.  There was no gridlock in Washington on bank deregulation which enabled investment banks to enter into previously forbidden markets.  This Senate hearing was about the potential for insider information that might enable Wall Street banks to influence the price of commodities that are actively traded on the commodity futures market. 

Three of the Wall Street investment banks acquired ownership positions in some commodity markets in which they trade.  One of the banks was fined for manipulating the energy market through its ownership position in that market.  It has exited that market, and along with one of the other banks, plans to exit other ownership positions that it has in commodity markets.  The exception is Goldman Sachs.  In particular, it was questioned extensively about its ownership of an aluminum warehouse that enabled it to influence the supply of aluminum and therefore the price of aluminum.  Large purchasers of aluminum testified that Goldman's ability to influence the supply of aluminum had an effect on the prices that they paid.  Since Goldman could influence the price of aluminum, its traders also might benefit from insider information in the futures market if they knew what its warehouse might be doing.  Goldman executives were insulted by any insinuation that its traders might have information that was unavailable to its counterparties who traded in the futures market.  They argued that there is a Chinese Wall between its traders and the aluminum warehouse which prevents the passage of information between them.  With the exception of a Senator from Ohio, who defended Goldman, a Republican Senator and the Democratic Chairman of the committee, were skeptical.

The theatrics in the Committee hearing were interesting.  The executives from JP Morgan Chase and Morgan Stanley agreed that it was not a good idea for them to own interests in the commodities that they actively traded.  The executives from Goldman Sachs, which has not agreed to exit the commodities business,  were not contrite.  They fired back at members of the committee who attacked their integrity.  In effect, they acted as if they were superior to members of the Senate who were raising questions about the potential for insider trading.  Perhaps that it is the real order in the hierarchy that exists between government and Wall Street bankers.

Robert Lucas Fails to Understand Understand the Business Cycle

Robert Lucas developed the rational expectations theory that dominated economic thinking in the US, and apparently in Germany as well.  His views are graphically illustrated by a long term trend line that shows the economy sticks close to the trend line over time.  External shocks to the economy may lead to small blips below the trend line but market forces will return the economy back to the trend line without government interference which only distorts the market.  In fact, the rational agents, that are assumed to exist in his theory will any efforts by government to stimulate the economy.  For example,  if the government runs a budget deficit they will expect that taxes must rise in the future to reduce the deficit.  Therefore, they will reduce their spending and save money to pay for the future taxes that they anticipate. 

The US economy is not operating the way Lucas imagines that it should operate.  It experienced a deep recession and it has not returned to the Lucas trend line.  In fact, most projection of future growth are below the Lucas trend line.  The shock from the Great Recession seems to have had a permanent effect on potential growth in the US.  The power of the Lucas theory, and the models of the economy that have been developed to reflect his views, have a force in economic thinking that is resistant to empirical reality. 

German Ideation About Economics And Recession

Economists in the US have very different views about macroeconomics.  The Chicago School belittles Keynesian ideas that place a decline demand as the cause of recession and the use of fiscal policy to stimulate demand.  This article describes the dominant view of economics in Germany.  It argues that the German view precludes the idea that a decline in demand can be responsible for recession.  Consequently, fiscal stimulus will only make things worse.  Apparently, fiscal stimulus violates an underlying moral impulse in German economic thinking. Bad things happen in the economy because people misbehave.  Economic thought in Germany is like the Chicago School in its worship of market efficiency, and economic models that that have been developed to reflect the efficiency of markets.  Again, consistent with the Chicago School, the economic models which are based upon the efficiency of markets, are not subject to empirical test.  It does not matter that the economy is not behaving as it should behave in accordance with the elegant economic model of the economy that idealizes the real world.  This seriously restrains policy options in the eurozone.

Japan Falls Into Recession: What Does This Mean?

One of the differences between economics and most of the physical sciences is that controlled experiments cannot be used to economic theories.  Natural experiments occur, however, that provide some insight into economic theory.  The economic experiment in Japan provides an opportunity to examine economic ideas more closely.  The government has used monetary and fiscal policies to stimulate an ailing economy with limited success. It seemed to work for awhile but the economy contracted by 1.6% in the last quarter. What went wrong?

The government has used an aggressive monetary policy that is similar to that used by the Fed in the US.  It was even more aggressive than US policy given the relative sizes of the two economies.  It was expected that pumping more money into the economy would arrest the price deflation that accompanies deep recessions.  The anticipated increase in price inflation has been less than expected.  This flies in the face of some economic theories which claim that price inflation is a consequence of an excess supply of money.  Inflation would only occur if the money were spent by consumers or by business.  That happened for awhile but consumer spending has unexpectedly declined.

Fiscal policy can be used to stimulate an economy but it is more difficult to use fiscal policy when the ratio between government debt and GDP is very high.  Japan has the highest debt ratio of any advanced economy.  That may have led the government do reduce spending and increase taxes.  Japan tried to increase tax revenue by raising the sales tax.  Consumers responded by reducing their spending and the economy has shrunk.

One interpretation of this experiment is that monetary policy and fiscal policy won't work to restore an economy in recession.  Conservatives, and many business executives,  argue that structural changes in the economy provide the best opportunity for restoring growth.  They generally recommend tax cuts for business and a reduction in government regulations which limit business opportunities.

Another interpretation is that monetary policy, which works well during modest recessions, does not work as well when interest rates have fallen to zero and cannot fall any further.  Deflation makes this worse because it increases the real interest rate which makes borrowing more expensive.  Inflation would lower the real interest rate but Japan and Europe have not been able to bring the inflation rate up to their 2% target.  Fiscal stimulus worked during the Great Depression, but it is politically difficult to use when it increases the government debt to GDP ratio.  Market forces can also limit the use of fiscal policy when investors in government debt demand a high premium to compensate for the risk of default.  Japan has been able to borrow at low interest rates because investors do not expect it to default on its debt.  It shares this advantage with other countries such as the US, England and many countries in the eurozone.  For these countries, the limit on fiscal stimulus is due to political and legal restrictions.  They have not taken advantage of historically low interest rates to invest in their economies.  The focus has been on cuts in government spending which have proven to be contractionary. 

Recession in Japan, along with an increasing risk of recession and deflation in the eurozone have increased concerns about the global economy.  China has been growing at more than 7% but this is much lower than it has grown during its decade of rapid growth.  Slow growth in China has had a profound effect on nations which provide raw materials and intermediate products to China.  The US has had decent growth which has been stimulated to some extent by a rise in military spending which is not resisted by the Republican Party.  This places the US in a familiar position as the "consumer of last resort"

While there has been much concern about the decline in global growth, there has been one bright spot in the economic picture.  Corporate profits in many parts of the world have been very good despite the decline in economic growth.  Stock prices and real estate prices have also increased despite the gloomy economic picture.  Consequently, some people have done well but many have not done as well.  This increases the risk of political uncertainty in many parts of the world.

Mirrow Mirrow On The Wall Which Rich Nation Is The Stingiest Of Them All?

The answer to that question is easy to answer.  America is the most unequal rich nation in the world.  The only income group that did not experience a decline in income between 2000 and 2013 is the top 10%.  The real income of the bottom 90% declined during this period.  The decline was greater for the groups near the bottom of the distribution.  The low income groups were called "moochers" by Mitt Romney during his presidential campaign because they qualify for government programs that supplement their income.  He told a group of wealthy contributors that his political party is their political party and that he would cut their taxes and the government programs which made life a little better for the "moochers".  What he did not tell them was that the federal government collects much less tax revenue than other rich countries, and that it redistributes less money to its less advantaged citizens than any of the countries in OECD.  The distribution of income, including benefits from social programs,  is less equal than the distribution of market income in the US.  It is the least equal among OECD nations in the distribution of total income which includes government subsidies.

It did not help Romney's campaign when his statement was leaked to the public.  Some of the "moochers" may have decided not to vote for him.  He told his wealthy backers what they wanted to hear but his campaign never recovered from the publicity given to his comment which was only intended for his major contributors.  His political party cannot win elections unless it convinces a lot of the "moochers" to vote for its candidates.  Unfortunately, his political party is well funded by its wealthy supporters.  It has been able to convince many of the "moochers" to vote against their economic interest.  Like most people, they hate taxes and they have lost trust in government.  They also don't want their tax dollars to fund programs that help the "wrong kind of people".  They identify more with the rich than they do with the class to which they belong and to which they expect to leave when they get rich. 

The mid-term elections in the US will only increase the level of inequality in America.  The war against the "moochers" will get even worse with Mitt Romney's political party controlling Congress and many of the state houses in our country.  The American Dream was once somewhat connected to reality.  Today it is mostly a dream.  The nation that inspired the rest of the world with the dream of democracy is losing its ability to inspire, and to lead, as the dream of democracy fades during its move into the "New Gilded Age".

The New Machine Age And The Labor Market In Western Economies

One of the explanations for growing income inequality, and high unemployment, is that the labor market has been altered by the advance in technology.  In this view, technology complements labor and it increases the demand for skilled labor faster than the education system can supply skilled labor.  The shortage of skilled labor leads to a skill premium that increases the wage gap between skilled and unskilled labor.  The solution to this problem is to increase the supply of skilled workers by expanding education.

This article looks at the evidence for the skill premium hypothesis and provides an alternative hypothesis about the new machine age and its impact on wages and employment.  It argues that capital is a substitute for skilled labor, rather than a complement, and that most Western nations do not have a shortage of skilled labor.  Therefore, rising income inequality cannot be explained by a skill premium that results from an imbalance between the demand for skilled labor and the supply.

If there were a shortage of skilled labor in Europe one would expect that wages for skilled labor would be increasing.  In fact, the skill premium has been declining in Europe.  This suggests that the supply of skilled labor is growing faster than the demand for skilled labor. Moreover, with the exception of Germany, the education system has been increasing the supply of skilled labor.  The unemployment rate for skilled labor in the UK has doubled between 2000 and 2012 and it has tripled in Spain and Italy.  The unemployment rate for skilled labor in Germany has not increased because its education system has not expanded its output of skilled labor.

Prior to the 1980's the labor share of global income was fairly constant at 70%, and 30% of global income went to capital.  The share of income going to labor has been falling since the 1980"s.  Labor's share of income has dropped to 58%.  That is hard to explain by asserting a shortage of skilled labor.  One study shows that half of the decline in labor's share of income due to the substitution of capital for skilled labor.  We may have an over supply of highly educated workers.  This explanation is supported by the rising numbers of recent college graduates who are unemployed or under employed.  Many college graduates are now taking jobs that were previously filled by less educated workers.  In the US, there was a skill premium during a period of slower growth in skill development by the education system.  The skill premium in the US has been flat since 1999 as the education system increased the number of college graduates.

It would appear that the "New Machine Age" has affected the labor market in a serious manner. However,  the solution to the problems associated with the advance of technology does not suggest that they can be resolved by producing a larger number of college graduates.  Access to higher education is more of an equal opportunity problem than anything else.  College graduates do have better employment opportunities than non-graduates;  the rising costs of higher education in the US, along with a decrease in state funding for higher education, has exacerbated the equal opportunity problem in the US.  It has also increased the debt burden on middle class families whose wages have not kept pace with the increase in the net cost of higher education. 

Unfortunately, the skill premium explanation for rising income inequality is more consistent with neo-liberal economic theory which assumes that we have a meritocracy.  The market is rewarding merit and it would distort the market if we tried to change it.  The solution is to produce more merit.  It is more convenient to shift the debate to problems in the merit production system than it is to examine structural and institutional changes that are reducing labor's share of global income.

Changes In Political Campaign Spending And American Democracy

This Washington Post article provides some interesting data on campaign spending in the last election cycle.  The editorial raises some important issues about the transformation that is taking place in our electoral system.  The spending on 33 Senate races in 2012 was $259 million.  Spending on 33 Senate races in 2014 increased by 32% to $342 million.  The rapid growth in campaign spending increases the influence of outside groups that are providing an increasing share of the spending.

Another of the issues is that outside spending exceeded the campaign spending by the political parties in 25% of the Senate races.  Moreover, "dark spending" by outside groups, which do not have to disclose their donors, provided 71% of the non-campaign spending for the 10 winners of the 11 competitive Senate races.  The 11th race in Louisiana has not been decided.

One of the arguments for the Supreme Court decision that led to the increase in outside spending claimed that it would better inform the public.  More people would be allowed to exercise their right to free speech, by voting with their advertising dollars, and the public would consider the sources of the information provided in the ads.   The rise in "dark money" funding negates that argument.  Transparency has been lost in the funding of political campaigns.

Welcome To Age Of Failure

Adam Davidson likes to come up with "big ideas".  He argues that we are just moving into the age of computers and an increase in the rate of innovation.  An increase in the rate of innovation provides the seeds for an increase in the rate of failure.  He contrasts the era into which we are moving with the era of the corporation which provided more stability.  The goal of the corporation was to get as much revenue and profit out of existing products which would be gradually updated over time.  The stock market also spread the risk of failure among large numbers of investors.  Secure corporations were also able to provide secure jobs.  According to Davidson the era of the secure corporation is giving way to an era of innovation and failure.  Everyone will have to be more innovative and society will have to find ways to reduce the risk of failure.

US Tax Policy And Inequality 1979-2011

The impartial Congressional Budget Office released a report on income inequality and tax policy over a 33 year period.  Tim Taylor does an excellent job of describing the results.  He includes a few graphs, which can be enlarged to view more clearly, that illustrate the changes over 33 years.

His first point provides a dramatic illustration of the importance of understanding the difference between using an average or the median to describe the central tendency in the data.  The average income in the US is $80,600.  That looks great compared to any other nation.  On the other hand, the median income is only $49, 800.  That is because the very high incomes at the top of the distribution have a powerful effect on the average.  For example, if Bill Gates walked into a room, the average income in that room would skyrocket.  The median is a much better measure of the central tendency when the data are dramatically skewed in any direction.  The most frequently used measure  used to compare the well being of nations is per capita income.  That is an average, and it is much better to use median income per capita to get a more accurate measure of central tendency.  Moreover, the difference between the average and the median increases as the data are skewed in any direction.  It is a good way to determine distributional changes over time.

We frequently break distributions down into five quintiles, each of which contains 20% of the distribution.  The bottom four quintiles realized a gain of 16% in income over the 33 year period.  The top quintile had 56% increase in its income.  Taylor is not terribly concerned with that difference because some of it can be explained as a return on skill.  When we look only a the top 1%, however, it is hard to explain the pattern as a return on skill.  The income pattern for the top 1% rises and falls with stock prices.  Obviously, it is not explained by rises and falls in the skill of the top 1%.  Conservative economists, like Greg Mankiw at Harvard, claim that the income gains made by the top 1% are the result of a rising premium that the market places on skill.  Therefore, it would be a mistake to make an effort to alter the natural force of the labor market.  Mankiw is a very smart economist but he would have a very difficult time explaining the pattern that the CBO data describe so well.  The top 1% receives much of its income from stock ownership and that market is much more volatile than the premium that the labor market places on skill.

Tax policy is used by most nations to moderate the unequal distribution of market income.  The US has a moderately progressive federal tax system much like that of other nations.  Over 33 years changes in tax policy have reduced the overall federal tax rate for the top 1% from 33% to 29%.  That group has seen its income rise much more than other groups and its average tax rate has been reduced by 4%.  Each of the other income groups, which have progressively higher tax rates has seen their average tax rate decline by only 1%.  It is pretty clear that the top 1% have had more influence on the federal tax rate than other income groups.  Moreover, cutting taxes for the top 1% has not had much of an effect on the incomes of the remaining income groups.  In fact, cutting the tax rate for the top  may have been a factor in causing the income share of the top 1% to accelerate much faster than all of the groups below the top 1%.  Much of its growth in income has come from gains in capital income which is taxed at lower levels than wage income.  The data illustrate that changes in market income are driving the growth in income inequality.  Tax policy has had only a modest effect on reducing the distribution of after tax income.  Moreover, federal tax income has declined for all income groups over the 33 year period.  That has had a powerful effect on the ability of government to provide public services without borrowing money.  Politicians love to cut taxes and its easier to maintain federal spending by selling US treasuries than by collecting the needed income via taxes.

There are a variety of government programs which redistribute tax income to lower income groups.  All income groups receive some income from government programs.  For example, Medicare provides healthcare benefits to all senior citizens independent of their income.  On of the odd results that we observe is that US citizens in the bottom 20% receive the lowest share of federal income redistribution.  Moreover, total amount of income redistributed by federal programs has been declining.  That is why those with low incomes in most other rich countries are much better off that low income citizens in the US.  They redistribute more income to their citizens than the richest country in the world. 

Paul Krugman Explains Why The Climate Agreement With China Is Really Important

The carbon emission agreement between the US and China is not perfect but it removes an objection that is used by Republicans to defend their friends in the energy industry.  Krugman recites the line of arguments used by the political party, that might be better known as the "Screw the Planet Party".  It is clearly not a conservative party because it does not want to preserve the planet for future generations.  It is more concerned about winning elections and preserving the campaign contributions that it receives from businesses that place the value of the energy reserves on their balance sheets above anything else.  The 2016 elections will be a battle over the future of our planet.

We are more than familiar with the arguments that have put into the mouths of Republican leaders by  the reactionary industries that support them.  Krugman restates the obvious objections to their claims. However, the agreement with China shows that its leaders have a real concern about the damages that are being done to their environment today.  The Republicans can no longer claim that a global policy on carbon emissions is not possible because China will not comply with any agreement.  Krugman also shows how tariffs can be use enforce global agreements.   

US And China Reach Agreement On Carbon Emission Targets

President Obama left his meeting with Chinese leaders with an agreement that both nations will put plans in place to reduce carbon emissions.  China is the largest emitter of carbon and the US is the second largest carbon emitter.  This article describes the agreement as well as reactions to the agreement.  China is motivated to reduce its reliance on coal because it is causing serious air pollution problems today.  It will not be easy for China to shift its rapidly growing economy to cleaner sources of energy.  The US has a different problem.  The Republican Congress will fight every effort that the administration makes to alter its energy sources.

The Demise Of The White Democratic Voter

72% of white voters without a college degree voted for the Republican Party in the mid-term elections.  Those voters used to vote for democrats.  This article describes the GOP plan to increase its share of votes from this group.  The Republican senate candidate won that election by winning more than 80% of the votes from white evangelicals.  That was enough to overcome the wide margin that the democratic incumbent had among the rest of the electorate.  In Maryland it was a different story.  This time it was tax policy.  Maryland, which is traditionally a blue state, elected a Republican Governor.  He told voters that he would not raise their taxes in order to increase spending on social programs. 

Voter turnout for the mid-term elections was at its lowest level since 1942.  Typically low turnouts provide an advantage to the political party that has the most motivated voters.  The most highly motivated voters in mid-term elections have been voting Republican in the most recent mid-term elections.

The GOP Controll Congress And Its Time To Pay Back Their Energy Industry Funding Machine

The GOP controlled Congress is quickly moving to reward its energy industry sponsors.  They have two immediate plans to do so.  The House, which has control over the budget, will move to reduce funding for the Environmental Protection Agency which is using its regulatory authority to reduce carbon emissions.  The head of the House Committee that overseas energy policy is a climate change skeptic who has published a book that is popular in the GOP base, which includes many who also do not believe in the theory of evolution.  The GOP will also push forward proposals to approve the Keystone Pipeline which will move dirty oil from Canada and northern states to New Orleans.

The Great Wage Slowdown For Which Neither Party Has A Plan

The average middle class worker earns less today than when Obama took office.  That is one of the reasons why the Democratic Party was clobbered in the mid-term elections.  Neither party has offered a plan to rectify the situation, but that did not matter to Republicans.  They ran against a president that they have successfully discredited.  Nothing inspires their base more than hatred for the other team.  The Democratic Party has not inspired its traditional base, and it doesn't have George Bush to run against.  Both party's talk about reforming education, which seldom works,  and other solutions which may be useful in the long run, but the public is not interested in the long term.  Some states and localities increased the minimum wage enough to make a difference, but democratic candidates did not capitalize on republican opposition to an increase in the minimum wage.

The Republican Party has traditionally positioned itself as the tax cutting party.  In fact, they have made major changes to the tax code.  Their tax cutting strategy is very simple.  The made major cuts in taxes that benefit business and the super rich, and they threw a few bones to the middle class in the process.  President Obama made some progress in reducing the tax breaks for the super rich, while retaining the middle class tax cuts, but the public still believes that the tax code favors the super rich.  Tax cuts for the middle class,  partially paid for by higher taxes on the super rich, offer a short term solution for middle class households whose wages have not grown.  That would be a winning political strategy for Democrats but it would make it more difficult for the party to raise money for its political campaigns.  The super rich donate to both political parties.  There are a few enlightened billionaires, who believe that they should pay higher taxes, but they are few in number.