Everything You Need To Know About The Greek Problem In Europe

This article, by an economist from the Booth school at the University of Chicago, does a nice job of describing the debt problems in Greece and the implications for the eurozone.  The situation was not well handled by the IMF or by European leaders.  Greece had not managed its economy very well and it did not have the resources to service its debt.  Much of its debt was held by large banks in Germany and France.  A decision was made to bail out these banks in 2010.  Things might have been different if those funds would have been used differently.  The IMF made a loan to Greece 2010 that has now become due.  Greece does not have the funds to service that debt but the IMF is not in a position to  accept a loss on its loan.  What happens next is anyone's guess.

The US Chamber Of Commerce As A Global Pro-Cancer Organization

The US Chamber of Commerce has subsidiaries across the globe.  It is the largest lobby organization in the world.  This article describes the role that chamber is playing to protect the interests of the tobacco industry.  It is working directly against the efforts of the World Health Organization to protect the health of children.  Tobacco smoking a major cause of cancer and other health problems.  The US Chamber of Commerce is using legal tactics to block national government efforts to reduce smoking in their countries.  For example, under pressure from the US chamber's subsidiary in Ukraine, the government sued Australia's government which mandated changes in cigarette packaging that made them less attractive to consumers.  This was possible under an international trade treaty which prevents national governments from taking actions which are harmful to business interests.  Ukraine does not export tobacco products to Australia; it has no economic interest in the action that it took against Australia.  It was acting as an agent of the US Chamber of Commerce.  Subsidiaries of the US Chamber are active across the globe in blocking government efforts to protect the health of their citizens.  Some of these efforts are described in this article.

The US Chamber of Commerce has also been a major lobbyist for the fossil industries which have fought against the efforts of the Environmental Protection Agency reduce carbon emissions in the US.  Not surprisingly, it has been a major supporter of the Republican Party in the US. Several major corporations have withdrawn from the chamber because of its support for regressive policies.  The US Chamber of Commerce is a national disgrace.  Unfortunately, it is a multinational lobby organization that has no moral principles in its global operations.

How The GOP Supports Predation In Education

Predatory animals prey on the weak and the unprotected.  The target market for predatory educational institutions are poor students who are not well informed.  They are encouraged to take out loans to purchase training programs and/or degree granting programs that promise them high paying jobs upon completion.  The loans are typically supported by the federal government.  Most of these educational institutions lie about the employment opportunities for their graduates.  Students either fail to complete the programs or they fail to find the promised jobs upon completion.  What they get for their efforts are loans that have to be repaid.

The government has established new rules that the educational institutions must satisfy in order to be eligible for federally supported loans.  The intent is to limit predation and to husband the funds available to support needy students.  The predators don't like the new rules so they have lobbied Republicans in Congress to prevent the government from enforcing the rules.  The Republicans can't be obviously against predation, so they have invented a rationale for blocking government enforcement.  In this case they claim that they want to reduce the role of government in higher education.  This argument complements another claim that often accompanies efforts to "get government off of our backs".  That is, consumers make better choices than government can make for them.  Predators should be free to attack their prey. This is how they misuse the concept of liberty when its suits their purpose.  They oppose liberty when government interferes in the market to support their friends.

Why Small Booms Can Produce Outsized Economic Downturns

Brad DeLong argues that over investment in housing during the real estate boom was small relative to the size of the global economy.  He attempts to explain the slow recovery from the consequent slump by arguing that credit cycles fail to operate subsequent to the collapse of the housing bubble.  Every dollar of over investment in housing produced a $120 drop in output when the bubble collapsed because credit stopped flowing to fund new investments.  Moreover, political resistance to government investment, financed by deficits, blocked one of the four remedies for restoring growth.  That, along with a 2% inflation rate target, limited the impact of monetary policy.  Real interest rates could not fall far enough to stimulate private investment when the expected return on investment was depressed.

The comments that follow DeLong's post raise some issues that DeLong did not consider.  I have listed some examples below:

*  As the value of real estate inflated during the boom households took out home equity loans to fund consumption.  That source of spending dried up after the collapse;  households were forced to rebuild their balance sheets.  Consumer spending was hit with a double whammy.  Households were forced to pay down debt during a period of high unemployment, slow growth in wages, and elevated job insecurity.

*  Wall Street banks were in the business of producing mortgage based derivatives.  They borrowed against the assumed value of the derivatives that they held to purchase a stream of new mortgages  to produce the new derivatives that they manufactured.  Many banks became illiquid when they were unable to borrow against derivatives that had lost their value.  Many banks also became insolvent when the derivatives that they held lost value.  The financial system would have collapsed if the Fed had not resorted to extraordinary measures, including placing the toxic derivatives on their balance sheet.  This was not a typical slow down in the credit and investment cycle.  Highly leveraged borrowing, to produce derivatives that declined in value, exceeded the value of the real estate purchased during the boom.

*  The customers of the banks who purchased the toxic derivatives were also damaged.  That included pension funds,  endowments, insurance companies as well as international banks.  Banks in Europe were prime customers for the toxic derivatives.  Since they had a AAA rating they could invest in them without a requirement to place capital in reserve as a cushion against loss.  Their balance sheets were in serious trouble when they had to write down the value of the derivatives that they held.  That, along with investments in AAA rated sovereign debt that turned out poorly, had a major impact on the credit cycle in Europe. 

*  Central banks have kept interest rates extremely low for an extended period of time.  Low mortgage interest rates have certainly been good for the damaged real estate market.  They have also been good for the stock market in a number of ways.  They have encouraged a rise in asset prices but they have not stimulated investment in productive assets.  Large corporations are taking advantage of low interest rates to buy back their own stock and to pay out dividends.  That is a quick way to increase stock values without making risky investments in new productive capital.

How Climate Change Denialists Attempted To Block Pope's Encyclical On Climate Change

Conservatives within, and outside of the church, were defeated in their efforts to influence the Pope's encyclical on climate change.  This article describes some of the efforts made by conservatives.  None were more active than the Heartland Institute which is a free market "think tank" based in Chicago.  Heartland has a long history of supporting ultra conservative causes.  It supports efforts to privatize almost everything, including public education,  and it defended the tobacco industry's efforts to deny that smoking was a cause of cancer despite evidence which showed the lung cancer was almost non-existent prior to the dramatic rise in cigarette consumption following  the first world war.  Cigarettes were distributed without charge to soldiers because they had a "calming effect" in the battlefield. 

Why Do Conservative Politicians Pretend To Be Business Leaders?

Paul Krugman picks on Jeb Bush (who wants to called Jeb) to make a good point.  Jeb is trying to sell himself to the electorate by claiming that he was responsible for Florida's economic growth.  If he is elected president he claims that he will grow the economy at a 4% rate.  Krugman looks at the record and it shows that Bush had little to do with Florida's growth rate; it was entirely the result of the Florida housing bubble.  Secondly, his claim that he will grow the economy at a 4% rate is a pipe dream; one can't find a single economist who believes that this can be done.  On the other hand, part of the electorate, which believes in miracles, will rally around his boast.  That brings us to the real reasons for Bush's false claims about his economic prowess.  Voodoo economics is a well honored tradition in conservative politics for good reasons.

The more general reason is that conservative parties distinguish themselves from liberal parties by claiming that they will be better economic stewards of the economy.  They associate themselves with the business class, and they successfully portray liberal parties as poor stewards of the economy. They overtax those who are successful, and they over regulate the economy so that they can spend excessively on social welfare programs.  The Tory Party in Britain and the Republican Party in the US follow the same marketing strategy.  Its hard to imagine a conservative party that does not follow this strategy.  It works some of the time, and they get a chance to reduce tax rates for the rich when they get in office.  Its very difficult to undo the damage when liberal parties win elections.  Cutting taxes is much easier than raising taxes.  The deregulation story is often easy to sell because the public admires entrepreneurs who are free spirits who overcome obstacles to build a business.  Conservative parties are good at generalizing that story to those who run large businesses that were built up by their predecessors.  They often provide the major obstacles for entrepreneurs who attempt to destabilize their markets.  Moreover, they often use government regulations to raise the hurdles for new business entry.  Government regulation of the economy is a double edged sword.  The important issue is not regulation per se, but who benefits from a particular regulation.  Its easier to sell the deregulation story to the public than it is to educate the public about the complexity of the regulation story.

The Pope's Encyclical On Climate Change

The quote below is the final comment in the New York Times summary of the Pope's encyclical on climate change.

“All is not lost,” he writes. “Human beings, while capable of the worst, are also capable of rising above themselves, choosing again what is good, and making a new start.”

The Pope believes that the scientific community has made the right conclusion about the human contribution to climate change.  He has also seen much of the damage from climate change in his travels around the globe.  At a fundamental level, the Pope shows his respect for the ability of the scientific community to deepen its understanding of natural phenomena.  This may be one of the positive virtues that we possess as human beings.  He is concerned, however, about our moral and ethical development.  We are better at science than we are at moral and ethical development.  Our pursuit of material gain, without regard for the health our planet, and the well being of future generations, is the root cause of the damage that we are doing to our planet.  We are capable of realizing our human potential but it has been often been difficult for us.  He is hopeful that we can rise above our human frailties and do the right thing.  His encyclical is intended  to push us in that direction.

This editorial in the New York Times praises the Pope's encyclical but it is not as hopeful as the Pope's message.  We all struggle to live up to the moral and ethical values that we hold.  Our politicians don't seem to care much about that kind of struggle.  The senate majority leader opposes any efforts made by the government which might affect the interests of the coal mining industry in his state.  More generally, the Republican Party has used climate change denial as an attribute that distinguishes itself from its "liberal opponents" in the Democratic Party.  It is not likely to give up its war against liberalism which has been well received by its electoral base.  However, we should be hopeful that the Pope's message will have a positive impact on public opinion.  Politicians place a high value on swings in public opinion.  It can determine whether they remain in office. This is something in which they all believe.  They have to balance the loss of campaign contributions from the affected industries versus the impact of changes in public opinion.