The Role Of The US In A Globalized Financial System

This IMF report on the global financial system suggests that the US plays the role of a venture capitalist, and also as an insurer in the global system.  In normal times the US has run trade deficits which is financed with short term dollar denominated debt at low interest rates.   It then takes a long position by investing in foreign fixed assets and equities that are primarily denominated in foreign currencies.  The value of the dollar falls in relation to its trade deficit, but the value of its foreign assets rise through capital gains, and with the rise in the value of the foreign currency denominated assets.  In this sense the US functions like a bank or a venture capital firm by borrowing short term at low interest rates and by making leveraged investments in foreign assets. 

During the financial crisis the US operated like an insurer.  It used its fixed investment positions in foreign nations to reverse the flow of funds to assist nations that were harmed by the problems in the financial system.  The US collects premiums from the rest of the world in good times and uses those premiums to pay claims in bad times.

The IMF report also suggests that the international financial system is inherently risky.   Moreover, it is hard to measure the benefits from the system.  It favors the use of macroprudential policies which can reduce the risks that are inherent in a highly leveraged system.

What Can We Learn About Free Competitive Markets From Corporate America

Most Americans work for corporations.  Corporations don't operate the way that free market advocates believe that all organizations should operate.  They are essentially command and control systems which look a lot like government bureaucracies.  In particular, corporate labor markets look nothing like commodity markets are supposed to operate.  Some labor markets do look like commodity markets but they are outliers.  In fact, most Americans are repelled by them.  Perhaps that is because people who are managed like commodities are less productive.  Moreover, investor behavior provides a similar message about competitive markets.  Investors vote with their dollars.  They invest in businesses which have been successful in limiting price competition in their markets.  Warren Buffet, for example, invests in firms which have succeeded in "building a moat" around their enterprise.  They are less subject to competitors who attempt to capture their customers through price competition.  Building moats around one's business is the primary topic of the business strategy courses that are taught to MBA students.  Of course, it is always a good idea to be cost competitive, but corporations often use government to limit price competition.  The most important asset in many corporations is their intellectual property.  Without government enforcement of intellectual property rights most corporations would be subject to intense price competition.  In fact, our current form of capitalism, which is based upon the ways in which corporations function, is totally dependent upon the services provided by government bureaucracies.  Even the social welfare programs provided by governments are beneficial to corporations.  For example,  government subsidies to low wage earners enables corporations to more easily retain low wage earners.  Taxpayers are supplementing the wages provided by low wage paying industries.  Free competitive markets are a utopian ideal that provide a very distorted picture of the ways in which markets and governments operate in the real world. 

Spanish Elections Send Message To EZ Leadership

Eurozone leaders have been using Spain as an example to the rest of Europe.  They claim that structural reforms in Spain have restored its economy.  Apparently, the public thinks otherwise.  The ruling party that pushed structural reforms and austerity was punished at the polls.  The electorate does not believe that a 25% unemployment rate, and high levels of political corruption, should be rewarded.  The two major political parties in Spain lost ground to protest parties in Spain's major cities.  Protest parties in Spain, and in the recent English elections, have altered the political maps in Europe.  The two party system in those countries is being threatened by protest parties that are not pleased with either of them.  The elections in Spain offer a glimpse of the political future in the EZ.  Its poster child for successful structural reform has lost electoral support in Spain.

Why We Need A New Approach To Carbon Emissions Reduction

The path that we have taken to reduce the risk of catastrophic changes to our way of life is not working.  Between 1960 and 2000 the global economy grew at a 3.7% rate and CO2 emissions grew at 2.4%.  Unfortunately, the gap between global GDP growth and carbon emissions growth has fallen from 1.3% in the previous period to 0.7% since 2000.  The effect of international treaties since 2000 has been negligible.  Unless we take a new approach to reducing carbon emissions we will be leaving ourselves open to a catastrophe that all of us would like to avoid.

The reason why we have not done what is necessary to reduce carbon emissions is easy to understand.  The current cost of producing a ton of carbon emissions is around $1.  The cost of a ton of carbon needs to rise to $40 in order to insure ourselves against catastrophic risk.  We have been unable to bring to cost of carbon to $40 because of the free rider problem.  Reducing carbon emissions is a global public good but nations make the decisions about carbon pricing from local perspective.  They are willing to let other nations bear the cost of a higher carbon price. 

One novel approach to solving the free rider problem is to create a climate club.  The members of the club would agree to a $40 per ton price for carbon.  They would share in the cost and the benefits from membership in the club.  Nations that decided to free ride by not joining the club would be penalized.  The penalties would have to be severe enough to encourage free riders to join the club.

Republican Ideologies Cannot Be Modified By Experience

Paul Krugman is critical of Jeb Bush who hopes to be the third president from the Bush family.  In particular, he criticized him for refusing to admit that his brother made a serious mistake about the invasion of Iraq.  Moreover, he reported that Jeb's foreign policy advisers include several of his brother's advisers who do not admit that they were wrong about Iraq.  Jeb Bush's economic advisers are similar to his foreign policy advisers.  They adhere to same set of economic ideologies that never change in face of contradictory evidence.  In fact, all of the GOP candidates for the presidential nomination share the same set of economic ideologies.  Krugman refers to the foreign policy and economic advisers as a "fraternity of failure".  They share a similar ideology that is impervious to failure.  If they admit to mistakes they are raising questions about the ideology and they will be expelled from the fraternity.

It is in the nature of political parties to have a common set of values.  If one looks at the Democratic Party its values differ from those of the Republican Party.  There would be no point in having political parties if this were not the case.  On the other hand, the Democratic Party has moved much closer to the center over the last 40 years.  The Republican Party has moved further to the right over the same period.  In general, the political and economic ideas of liberals are more subject to disconfirming evidence.  In fact, it is very hard to build a consensus on most issues within the Democratic Party.

Why Has The Revenue From Art Sales Grown 500% Over Five Years?

A lot of attention has been given to the sale of a Picasso painting for close to $180 million at a recent auction.  This article offers a simple explanation for the 500% growth rate in fine art sales in the last five years.  There are many more very wealthy individuals competing for a limited number of prestigious works of art.  As the number of super rich investors compete for a limited supply of art the prices will continue to rise.  Fine art is a better investment than many assets without a finite supply.  There is no bubble in this market. 

How Should We Understand The Slow Recovery From Recession In The UK Economy?

The Conservative Party was successful in convincing the electorate that fiscal austerity has been good for the economy.  Many economists have argued that fiscal stimulus would have been better for the economy.  Noah Smith looks at some of the data and he concludes that neither fiscal austerity or a Keynesian stimulus are the appropriate responses to slow economic growth in the UK.  He points his finger at the low level of productivity which is holding back economic growth in the UK.  A larger share of the workforce is employed but the level of output has not grown in proportion to the rise in employment.  In other words, potential GDP is lower than it was prior to the financial crisis.  He suggests that the financial sector in the UK may have grown rapidly without benefiting other sectors in the economy. 

Brad DeLong, who generally agrees with Noah Smith, looks at the data and scratches his head.  He finds no reason to argue that a shortfall in aggregate demand is not responsible for the slow recovery from recession in the UK.  He does not offer an explanation for the low level of productivity in the UK but we do know it is much easier to increase productivity in the manufacturing sector than it is in the services sector.  As services replace manufacturing as a source of employment in advanced economies it may be more difficult to stimulate economic growth through increased productivity.