Rising Unit Labor Costs Not Responsible For Weak EZ Economy

Stephen Rattner's article, which I posted and commented on two days ago,  argued that anti-business regulations in the EZ, which keep unit labor costs from falling, are the cause of the EZ recession.  Paul Krugman provides us with a picture of rising unit labor costs in the EZ and he argues that they are pretty consistent with what one would expect with a 2% inflation target.  Germany's unit labor costs are an exception on the low side.  They are much lower than those of other EZ nations.  Italy is an exception on the high side.  Furthermore,  the EZ has a trade surplus with the rest of the world.  The EZ recession can't be explained by a lack of global competitiveness.  The basic problem in the EZ is a lack of domestic demand.  Does Rattner believe that wage cuts would increase EZ wide demand?

Stanford Public Opinion Poll On Global Warming

The great majority of Americans, and even 47% of Republicans, believe the scientific evidence about global warming.  Democrats and Independents are more inclined to vote for politicians who support policies to reduce carbon emissions.  Republican voters have a negative response to climate change deniers, but they are not more likely to vote for a candidate who supports policies to address climate change.  Tea Partiers respond favorably to Republicans who avoid taking a position on climate change by stating that they are "not scientists".  Its bad to be on the wrong side of science, but is OK for Tea Partiers to pretend ignorance.

US Economy Grows by 2.6% in Q4

The US economy grew slower than it did in Q3,  but it was not far from the expected growth range.  Business investment and government spending were a drag on the economy, but consumer spending which is 70% of GDP, increased in response to lower oil prices.  Some economists attribute the relatively strong performance of the US economy to structural factors which make US firms cost competitive in international trade.  This is not supported by the data.  Net exports were negative.

Europe's Economic Problems Due To Anti-Business Policies

The US has economy has grown much faster that the eurozone economy since 2000.  This article reflects the views of some in Northern Europe who believe that structural issues in Southern Europe are the root cause of anemic growth in the eurozone.  High unit labor costs have made the eurozone uncompetitive in the global economy.  Even Germany has a competitive problem.  Its unit labor costs are also too high in the competitive global market.

Although, the eurozone may have some structural problems, the evidence used to support the lack of competitiveness hypothesis is faulty.  One of the graphs in this article shows that the eurozone economy was growing rapidly between 2000 and the beginning of the financial crisis in 2008.  GDP growth in the eurozone, and in the US, fell dramatically at the onset of the recession, but growth in the eurozone has been much slower than it has in the US.  I would assume that the structural and competitive issues described in this article existed during the period of rapid growth prior to the recession.  Consequently, its hard to argue that they only became a problem after 2008.  Moreover, much of the trade by members of the eurozone is between other nations in the eurozone.  Northern Europe's competitive advantages over Southern members of the eurozone did not accelerate at the onset of the financial crisis.  The eurozone, as a whole, is still suffering from the damages done to its banking system by the collapse of the real estate market and a huge decline in domestic demand.

The US economy has rebounded faster from the recession than the eurozone.  Is that because the US businesses became more competitive in the global economy than they were prior to the recession?  The modest US recovery has been led by a rise in domestic demand, and not by a rapid increase in exports.

The Shrinking, And Changing, Middle Class In The US

The number of households that satisfy the income definition for middle class has shrunk by 10% since 1967.  The demographics have also changed over time.  Married households with children are no longer the largest segment of the middle class.  Elderly households, with accumulated savings and benefits, is the fastest growing segment of the middle class.  This article provides an excellent description of the changes that have been occurring in the middle class. 

S&P Cuts Russian Sovereign Debt Rating Below Investment Grade

It will become more expensive for the Russian Government to borrow the funds that may be needed to compensate for its loss of oil revenues.  The risk of default, as well as the risk of a further decline in the value of the ruble,  may have been factors in the S&P ratings cut.

The Software Based Economy

Marc Andreesen was one of the developers of the browser (Netscape), which made the Internet useful to ordinary mortals.  Netscape lost out to Microsoft's Explorer when was made part of its operating system and Andreesen moved on to other things.  He is a venture capitalist and has been on the board of Hewlett Packard and other Silicon Valley firms.  In this article, he describes that rapid evolution of the computer industry which has evolved to the point where it is dominated by software.  Companies like Google, Facebook, Twitter etc. are essentially software companies which have taken advantage of the Internet to provide products to billions of users.  Coupling software with the capabilities of the Internet is going to transform the global economy according the Andreesen.  The retail industry has been transformed by Amazon, which is essentially a software company; the music and TV industries are also become software industries.  Eventually the auto industry will become dependent upon software as well as other industries such as education. 

Andreseen is an entrepreneur and a successful VC.  He may envision more "creative destruction" in once stable industries than is likely in the short term but we are long way from tapping into the full potential of the Internet and new applications that are under development today.

The Innovative State

The dominant economic ideology assumes a very narrow role for the state.  The private sector is viewed as the source of wealth and the role of the state is to correct market failures.  This ignores the role that the state has had in providing the basic research that has provided the technologies that underlie many of our innovations.  Unfortunately, government spending on basic research has been cut and we cannot expect the private sector to undertake the high risk investments in basic research that will decrease along with the spending cuts.  Moreover, the venture capital model has a very short term focus.  It looks for a payout within a three year investment horizon.  Large corporations have reduced the R&D spending.  They using 54% of the retained earnings to repurchase their own stock.

This article explains how we can have a more innovative state that not only provides high risk funding for new technologies but rewards taxpayers who funded those investments.  Governments should share in the benefits from the technologies that fund.  Instead they get blamed for the failed investments that they make.  Like VC's they should expect some investments to fail, but unlike VC's taxpayers do not directly benefit from the winners they fund.

An Interview With The Founder Of Skype

Foreign Affairs provides us with an interview of the founder of Skype.  Niklas Zennstrom answers questions about technology entrepreneurship and how and why it is migrating from Silicon Valley to other parts of the world.  He explains why Sweden is the one of the top three nations in the world in technology entrepreneurship and why he believes that technology will increase opportunities for entrepreneurs.  He is pessimistic about the efforts of governments to deal with global warming but he believes that progress in technology will reduce the cost of renewable energy below the cost of high carbon energy.

Where Will The Future Jobs Come From?

Tim Taylor provides an overview of the global jobs outlook provided by the International Labor Organization.  Historically, there has been a progression in most countries from agriculture, to manufacturing and then to a services economy.  Agricultural jobs in undeveloped countries will continue to decline and be replaced by manufacturing jobs.  The number of manufacturing jobs created has peaked, however, below the levels it which they had peaked in developed countries.  In developed countries, manufacturing jobs are declining and the services sectors are expected to provide the bulk of future jobs.  Service sector jobs in government are expected to decline over the next five years as nations attempt to deal with debt problems.  Private sector service jobs are polarized.  A lot of low skill, low pay, service jobs will replace low skill manufacturing jobs that are lost.  High skill service jobs, that depend upon the use of information technologies, will provide job opportunities that pay well.  The problem in most developed countries is that middle skill jobs that provide provide a middle class living standard are not growing very fast.  The hollowing out of the middle class is is consequence of the polarization that is taking place in the services sector.

What Can We Learn By Interviewing 150 CEO's?

Justin Fox is not surprised that very little can be learned by interviewing 150 CEO's.  Two very competent organizations published the CEO Report to coincide with the meeting at Davos.  The report summarizes what was learned by asking 150 CEO's to explain how they cope with uncertainty and change.  Fox is the editor of the Harvard Business Review and he has a lot of contact with top business executives.  They are typically very sophisticated and knowledgeable about the industries in which they operate.  On the other hand, it is almost impossible to synthesize their responses to the questions that they were asked into anything meaningful.  The CEO Report that was published ends up sounding a lot like "consultant speak".  We learn that,  indeed, there is much uncertainty in a rapidly changing world, but that it is very difficult to extract anything meaningful from 150 CEO interviews. Fox proves his point by providing us with excerpts from the CEO Report.  The content of the report is not what sells it to the MBA students who will read it.  The prestige of the CEO's who are interviewed is what sells the report.  MBA students are often expected to derive wisdom from the synthesis that is offered to them.

Inclusive Capitalism As The New Democratic Platform

This article provides an overview of Inclusive Capitalism.  The intent is to change the rules of capitalism that have been modified over the last 35 years to redistribute income and wealth to the top of the income pyramid.  The Republican Party, which now has control of Congress, will not enact any of the changes in the system that they have been instrumental in crafting since the Reagan Administration.  Inclusive Capitalism is directed towards the economic interests of the middle class which has been struggling to maintain its standard of living.  It will become the new platform for the Democratic Party in the 2016 elections.  The Republican Party will have to shift its strategy to deal with very concrete proposals that will be recognized as benefits to middle class voters.  White middle class voters have abandoned the Democratic Party for a variety of reasons.  They have done so, to some extent, by appealing to social issues which have been the key ingredients in its form of populism that is embodied in the Tea Party.  Inclusive Capitalism, may be a more a more successful form of populism.  It clearly differentiates the Democratic Party from the Republican Party on economic issues which are understandable to middle class voters.  At the very least, the Republican Party will find it more difficult to continue with its form of income redistribution to the very rich.

Koch Brothers Conduct First GOP Primary For 2016

This article describes that auditions that GOP presidential hopefuls undergo in order to be blessed by the Koch organizations and similar groups which provide campaign funding for the winner of the primary.

French TV Show Satirizes Fox News

Fox News provides ample opportunities for The Daily Show in the US to satirize Fox New.  A French TV show, which ordinarily draws its material from France,  did a good imitation of The Daily Show in Paris.  It made fun of a Fox News report which promoted one of the popular themes that it feeds to to a segment of its audience.  Fox reported that there were regions in England and in France controlled by Muslims which only Muslims dared to enter.  Since 9/11 Fox has been conducting its own crusade against Islam.  This supports US military intervention in the Mid-East and it appeals to those in its audience who believe that President Obama is a Muslim from Kenya who wants to establish sharia law in the US. (Yes they exist in America.) The French TV show may start a trend in Europe. Fox News, which is essentially a propaganda operation that promotes its owner's economic and political interests,  is a fertile source of satire.

An American Sniper As An American Hero

Clint Eastwood produced a movie that probably "made his day".  The American Sniper has been a been a huge box office hit and it has been nominated for an Academy Award.  This article describes the culture war in the US that has been ignited by the release of the movie and some of the criticisms of the movie.  It also provides some background on the real Chris Kyle that was lionized in the movie.  He claims that he did things that have not been confirmed at home as citizen.  Whether his claims are true or not is not is not really important.  The real issue is that he believed that killing 30 people in New Orleans during the riots following Hurricane Kartina,  along with several other boasts that he made, were heroic.  The extent to which the public regards the real Chris Kyle as a hero says a lot about the cultural divide that exists in this country.

Why Has The Cost Of Weddings Doubled In The US?

Robert Frank provides some interesting insights about income inequality and consumption patterns.  He did so to explain why the cost of weddings in the US have risen much faster than median income.  He found a similar pattern in household spending on housing.  The price of a median home has increased much faster than median income.  He argues that our consumption is driven by our desire to maintain our relative positional status.  High income families are spending more on housing, weddings and other status symbols as their incomes have increased dramatically in recent years.  The median income family has been struggling to maintain its positional status relative to high income households. High income households are not immune from the battle for positional status. 

Frank proposes  a progressive tax on consumption, rather than a more progressive income tax, to reduce the negative effects that derive from increasing income inequality and our efforts to maintain positional status based upon conspicuous consumption.

Below Target Inflation Means That Resources Are Being Wasted

Simon-Wren Lewis, and most economists, understand why deflation is bad for society.  Debtors will cut back on spending because they have to pay down their debt with more valuable currencies.  Creditors will not compensate by increasing their spending and we have end up with a level of aggregate demand that is below the level needed for full employment.  Lewis makes a further point.  he argues that we are also wasting resources when inflation is at 1% and the target is 2%.  There is nothing magic about zero inflation.  We typically have inflation when the demand for our economic output exceeds the supply of goods and services that are being produced.  That is, we are using all of our available resources but unable to satisfy demand.  We have unused and wasted resources as the rate of inflation falls.

Of course there is always a risk of excessive inflation. Wages usually rise when the demand for goods and services increases the demand for labor.  However, wage increases have been stagnant in much of the Western world for several years.  This implies that we have excess capacity, as well as unused labor.  We should be able to expand our economic, output and use our available resources, without the risk of inflation.  We know how to do that but there is much resistance to doing so because policy makers are more concerned about limiting the risk of inflation than they are about dealing with the problem of unused resources.  Lewis argues that their concerns are laughable.  They only justify a point made by Kalecki when he claimed that a full employment economy is not good for some people and that they will always efforts to promote full employment.

Avoiding The Black Hole Of Deflation

Switzerland pegged its franc to the euro in order to avoid deflation.  It was worried about deflation because, like Einstein's black hole, it is very difficult to escape upon entry.  It recently decided to give up on pegging the franc to the euro.  Some believe that Swiss authorities had decided that the euro was going to continue on a downward path and that the Swiss decided not to follow the euro on a downward path.  Krugman does not buy that argument.  He believes that Switzerland has become a safe haven for those who worry about the stability of their own currencies.  There is too much money flowing into Switzerland for the currency peg to work.  The inward flow of funds inflates the franc and makes Swiss exports more expensive.  The Swiss economy may contract as a result and bring with it the risk of price deflation.

The Swiss National Bank also announced that it raised the interest rate that it charges banks for holding their reserves.  This is intended to encourage banks to make loans which might stimulate the economy.  In normal times banks do not need that kind of encouragement.  This suggests that the demand for loans from creditworthy customers is not in balance with the supply of savings pouring into Swiss banks.

It would appear that governments should be doing everything that they can to avoid the deflationary trap which is so hard to escape.  Unfortunately, central banks have been more worried about the problem of price inflation which has been primary source of price instability in an expanding economy.  Moreover,  politicians have using the promise of deficit reduction to win elections.  They have convinced the public that balancing the budget is a virtue even when businesses and households are increasing their levels of savings.  When everyone increases their savings at the same time, spending shrinks along with the threats of recession and price deflation.

Some Reasons For High Drug Prices In US

This article explains why drug prices are much higher in the US than the same drugs in Europe.  Insurance companies in Europe are not bound by the laws in the US which mandate that they make drugs available regardless of price.  We spend $300 billion on prescription drugs in the US.  A few simple changes can cut spending by 10% and make expensive and effective drugs more affordable.

Swiss Central Bank Shocks Market

Switzerland had pegged its currency to euro so that its exports would not be harmed by a rising Swiss franc.  It removed the peg and the franc rapidly increased in value relative to the euro and the dollar.  This article argues that the peg was removed because the SNB believes that euro will continue to depreciate and it does not the franc to follow the euro downward.  It will hurt Swiss exports but it maintains the value of franc.

The Social Cost Of Carbon May Be Underestimated By Common Models

The EPA in the US uses the average cost of three IAM models to estimate the social cost per ton of carbon emissions at $37.  One of the assumptions in the IAM models is that carbon emissions affect the level of economic output, but they do not alter the growth rate of the economy.  When that assumption is relaxed, the social cost of a ton of carbon may be as high as $220.  That would justify more costly mitigation programs using the standard cost/benefit models in use.  It is possible, however, that mitigation costs may also reduce the econometric growth rate. 

Robert Samuelson Rewrites Ecnomic History

The Washington Post provides Robert Samuelson with a weekly platform to explain economic events to his readers.  Yesterday he criticized an article by Paul Krugman who described Paul Volcker's role in disinflating the US economy.  He agrees with Krugman about the importance of Volcker's role, when he was the Chairman of the Fed, but he accuses Krugman of ignoring Ronald Reagan's heroic support of Volcker's policies.  Samuelson rewrote history to make his point.  Brad DeLong was somewhat surprised by Samuelson's historical revisionism.  He provides us with articles from the NY Times which chronicles the Reagan Administration's lukewarm support for Volcker's monetary policy.  Samuelson also forgot to tell his readers that Volcker was appointed by Jimmy Carter who understood that Volcker's policies would make it difficult for him to be reelected.  Carter was right.  The economy contracted and he was not reelected.

Most of us are critical of historical revisionism when it is employed by authoritarian regimes which control the media.  The government does not control the press in the US but it gets accomplished by different means.  We give independent journalists like Robert Samuelson the opportunity to rewrite history. 

The Republican Party No Longer Hates France

The Republican Party didn't have anything good to say about France when its government failed to support the Bush Administration's rationale for invading Iraq.  They exploited all of the stereotypes about France held by the "Ugly Americans"  in their political base. Dana Milbank reminds us of their cultural warfare against France in this article.  They went well beyond suggesting that we rename French Fries.  The Republican Party's hypocrisy about France is on full display in its effort to exploit the unfortunate terrorist attack in Paris.  They are critical of the Obama Administration for not sufficiently demonstrating our solidarity with France.  The GOP political base hates Islam more than it hates French Fries.  The Republican Party has joined forces with right wing political parties in Europe who are also exploiting the tragedy in Paris. One member of the House from Texas even compared Obama to Hitler. The Obama Administration's response to the tragedy shows that it is weak in the war against Islamic terrorism.  Fox News, and many of the potential GOP presidential candidates are more interested in exploiting  the administration's response to the tragedy than they are to tragedy itself.  They seldom waste a political opportunity.

What Lex Stands For

Lex is the investment blog of the Financial Times.  The contributors to the blog are intentionally anonymous but they hold certain ideas about finance in common.  This is a list of the ideas that underlie the ways in which they look at firms and the value that they represent to investors.  Their common ideas are well worth consideration.  They have a healthy irreverence for many orthodoxies in finance.

The Eurozone Trilemma By Dani Rodik

The formation of the eurozone was a bold idea that had never been tried in the past.  According to Dani Rodik, there were two ways of thinking about what might happen when several independent nations adopted a common currency. There was a minimalist view that appealed to market fundamentalists, and had a narrow constituency primarily among technocrats.  In this view the market would operate without intrusive intervention by national governments.  In a sense, national governments would lose much of their sovereignty, but a supranational government would not arise and interfere with the operation of market forces.  There was also a federalist view that was held by pro- euro elites.  Transnational federal institutions would develop over time and there would be a convergence in the social and cultural models that existed at the national levels.  There were so many different views on how that might happen that it could not be openly discussed even by pro-euro elites.

Things worked well in eurozone for awhile without the need for convergence around a supranational model that might be able to deal with some of the problems that have developed.  However, economic stagnation, and voter dissatisfaction, have given rise to political extremist parties in Europe.  There has been a rise in nationalism, in the absence of supranational institutions, that might have developed if it had been possible to discuss and debate the convergence between national institutions that did not happen.

Our New Senate Majority Leader Takes Credit For The US Economic Recovery

The US economy has been doing much better than other Western economies.  Mitch McConnell's speech, in his new role as the Senate Majority Leader,  claims that the economy grew by 5% in the last quarter because the mid-term elections gave the GOP control of Congress.  Apparently, the GOP victory produced the confidence that was needed for the economy to take off.  He cited several of the Obama Administration's mistakes that shattered the confidence of the business community and the respect for government eroded under democratic control.  Curiously, after blaming democrats for all of our problems, he claims that he will promote a return to bipartisanship in Congress.

Has Paul Krugman Replaced Milton Friedman As The Face Of Economcs?

Noah Smith tells us that Milton Friedman who was the voice of free market ideology for many years has been replaced by Paul Krugman, Thomas Piketty, Joseph Siglitz and others as the most publically visible economists.  Moreover, much of the ongoing research in economics is about the implications of market imperfections and market failure.  He suggests that the economic problems that we face today are different than those that prevailed in the Friedman era.  Perhaps that is why the most recent meeting of American Economics Association was dominated by papers on income inequality and other issues that replaced the concerns about trade unions and the cold war that were central during the Friedman era.

Liberals and progressives may be cheered by Smith's description of changes within the economics profession.  On the other hand, free market ideologists are welcomed in the numerous "think tanks" that have a larger impact on public policy than academics in our top universities.  Their views have a way of finding their way into the popular media and they are the primary advisers to republican politicans.

The Gradual Repeal Of Dodd-Frank

The Dodd-Frank bill was passed in response to the financial crisis.  The intent was to reduce the potential for future financial crises.  The Wall Street banks have been chipping away at the bill so that it does not affect their ability to make money.  This article, and many of the comments that follow, describes the sections of Dodd-Frank that the banks have effectively neutered.  The Republican Party led the attack, and they used a familiar form of political blackmail to gain support from democrats.  The changes to Dodd-Frank were included in a budget spending bill which was needed to keep the government from shutting down.  The Obama Administration determined that the spending bill was  better than it would otherwise get from the GOP House.

The public uproar about the financial crisis, and the extensive use of taxpayer funds to bail out the banks that were responsible for the crisis, enabled the passage of Dodd-Frank.  Some of the strongest objections to the bailout came from the Tea Party wing of the Republican Party.  One might expect that the Tea Partiers would object to the GOP efforts to support Wall Street.  They seem to have a short memory.  On the other hand, the Tea Partiers also oppose government regulation.  Consequently, the establishment wing of the GOP has been able to position its opposition to Dodd-Frank as an attack on excessive government regulation.

GOP House Requires CBO To Use Dynamic Scoring On Tax Bills

As predicted, one of the first actions taken by the GOP House was to require the Congressional Budget Office to dynamically score tax policy changes.  The problem with dynamic scoring is that it almost impossible to determine the economic impact of a change in tax policy.  The GOP would like to cut taxes and use dynamic scoring to argue that the tax cut would not increase the federal budget deficit.  The dynamic scoring would show that the tax cuts produced enough economic growth to replace the tax revenue lost by the tax cut.  They will not allow dynamic scoring to be used to show that an increase in federal spending, for example on infrastructure, will pay for itself by stimulating economic growth.  The director of the CBO, who will be appointed by the GOP House, will be the judge in measuring the economic impact of tax cuts.  The fox will be put in charge of defending the hen house.

US Inflation Expectations Measured By Atlanta Fed Surveys

The Atlanta Federal Reserve reviews inflation surveys of professional forecasters, households and firms that actually set prices priced upon their expectations of future costs.  The results are interesting.  The forecasts of professional forecasters are very close to observed inflation rates and there is wide agreement within the group.  Households believe that inflation will be considerably higher than actual inflation, and there is wide variability among households.  For example, 13% of households expect inflation to be above 10%.  If they acted on their expectations, their behavior would be very irrational.  They would be foolish to save at current interest rates, and they would take on as much debt and they could service. A significant share of households are misinformed about inflation and its implications.  The expectations of firms are much closer to the expectations of professionals but there is more variance within the sample.  That may reflect differences between business sectors.

Why Are Yields Lower On German Government Bonds Than US Bonds?

Paul Krugman explains why government bonds in the eurozone pay lower interest rates than US government bonds.  Investors believe that US and German bonds are risk free.  Therefore, something besides the risk of default is needed to explain why German bonds pay lower interest than US government bonds.  Investor expectations about inflation, and the relative values of the euro and the dollar, determine the yield difference.  Investors expect inflation to rise by 1.8% in the US over the next decade.  They anticipate that inflation in Germany and the eurozone will increase by about half of the rise in US inflation.  Therefore, about 60% of the interest differential between the US and Germany is due to inflation expectations.  Inflation expectations are higher in the US because the US economy is stronger.  Investors also expect that the dollar will decrease in value relative to the euro over the next decade.  That explains the rest of the difference between the interest rate on US and German government bonds.  They expect that the dollar, which has risen in value versus the euro in recent months, will fall back to where it was prior to the recent  increase in the value of the dollar.

The bottom line is that investor expectations about inflation and the relative value of currencies explain the difference in interest rates between German and US government bonds.  It also explains why the interest on government bonds in Spain and Italy are also lower than US interest rates.  There is only a small risk premium on Spanish and Italian bonds versus German bonds.

Thomas Piketty Rejects The French Legion Of Honor Award

Thomas Piketty was awarded the Legion of Honor award by the French Government.  He joined a group of other notables who have also refused to accept the Legion Of Honor when it was offered.  Piketty claimed that it is not up to the government to decide who is honorable. Some speculate that he refused because he did not want the unpopular government to capitalize on his celebrity.  The government has done little to improve the French economy or that of the eurozone.  It could not even win an election against the far-right Le Pen party.

The Political Motivation For Republicans To Force Dynamic Scoring On CBO

Paul Ryan is the budget magician in the GOP controlled House.  His budget proposals incorporate dynamic scoring which the non-partisan Congressional Budget Office has refused to use in the past.  The House rejected the appointment of the Obama Administration's nominee who understands the flaws in dynamic scoring.  Now that they control the Congress they intend to put a director in place who will bless Paul Ryan's budgets by using his assumptions about dynamic scoring.  This article explains how dynamic scoring works and why Paul Ryan wants to force the CBO to use dynamic scoring when it looks at the implications of federal tax cuts.

Ryan's budget proposals assume that his tax cuts will be paid for by cuts in government spending. They also assume that reductions in government investment have no impact on economic growth.  Only private sector investments promote economic growth in Ryan's budget proposals.  Since that assumption is false,  Ryan's budget proposals will produce the result that he favors.  Budget deficits will increase and they will be used to justify further cuts in government spending on the social welfare programs that Republicans strongly oppose. Ryan's efforts to transform the non-partisan CBO in a partisan arm of the Republican Party is very clever and very sinister.  The CBO has long understood the problems with dynamic scoring.  The electorate does not understand it.  Conservative think tanks are doing what they can to make it acceptable to the public.  They are connecting it to Ronald Reagan's tax cuts which, they argue, led to the  economic growth that followed.  They do not mention the huge budget deficits that followed the tax cuts during the Reagan era.  They forced his successor to raise taxes in order to cut the deficits and to break his promise that he would not raise taxes if elected.  George H. Bush was not reelected and many believe that his decision to reduce budget deficits by raising taxes contributed to that result.  He was supposed to cut government spending to reduce the budget deficit in accordance with GOP ideology.

What Is Paul Krugman Afraid Of?

At year end we always get some coverage in the media about the celebrities that passed away and the big news events of the last year.  Ezra Klein's interview with Paul Krugman is a bit different.  Klein asked him several questions about important things and Krugman did his best to provide short answers to tough questions.

*  He knows what the Silicon Valley crowd claims about the impact of artificial intelligence on society, but he doesn't agree that artificial intelligence will replace human intelligence, and he is not very impressed by the role of high intelligence in society.

* Our current political system is subject to sabotage and it works.  The legislature is capable of sabotaging whatever policies are proposed by the executive branch when the presidency is held by the other party.  Klein suggests that we are capable of responding to crises, but Krugman suggests that it would be very difficult to get Congress to do another version of TARP to rescue a financial system that expects to be bailed out of trouble when it does whatever it can to increase executive compensation.

* There a lots of environmental issues and fracking is one of them.  He believes that it might be possible to do it right, but that the negative impacts of doing it wrong are usually local and do not reach the national level.  Lower oil prices may do what politics can't do.  It can't be cost justified at $60 per barrel.

* Income inequality and wealth inequality are related and there is a relationship between the rising share that is going to the top .01% and the bottom 70%.  Even new college grads find it difficult to find good jobs.  That is bound to create problems that will be difficult to solve.  The wage compression that took place under FDR, and the decades prior to 1980, required exceptional political leadership that was facilitated by a depression and a world war.  That kind of leadership is not visible in either political party.