Friday, December 31, 2010

A Conservative Economist on the Reagan Tax Myths

link here to article

Bruce Bartlett, an economist who served in Reagan administration, destroys the GOP talking point that tax increases hurt the economy. He provides DATA that shows that this did not occur under Reagan, Clinton and Bush. He also reminds us that GOP leaders in Congress today voted for expanding Medicare and increasing our long term budget deficits when the expansion was proposed by a Republican. They must assume that their base does not pay any attention to data and that truth is whatever is politically expedient. History can be revised at will just as it was done in the USSR.

Massachusetts Joins California and New Mexico in Carbon Reduction

We can't expect Congress to deal properly with an issue that one of our major parties intends to use as a campaign issue that as been successful in ingniting its base. We are seeing some leadership from states that prefer coffee to tea.

Do You Believe in Magic?

The GOP House leadership has adopted budget magic as its formula for success. It belives that the magic will work because it also believes that American voters believe in magic. They will probably believe the GOP when they are told that tax cuts do not have to be paid for with spending cuts because everyone loves tax cuts. On the other hand, everyone hates government spending so spending increases in one area must be paid for by cuts elsewhere.

Monday, December 27, 2010

The Bizzaro World

Seinfeld fans will remember an episode in which Elaine meets a group of characters who are exactly the opposite of Seinfeld's regular cast. The American Enterprise Institute (AEI)is an example of a bizzaro world. In the bizzaro world, government interference in markets is always the reason why markets seem to fail. They would always self correct if government would stay out of the way. They found an economist from the mid-west who makes the bizzaro case for the financial crisis. Most economists agree that the deregulation of the banking system was one of the major reasons for the financial crisis. In the bizzaro world it was government regulation of the financial markets that caused the crisis. In particular, Fannie Mae and Freddie Mac, which are government sponsored entities, were responsible for making the subprime loans that sank the system. This flies in the face of all of the evidence which shows that the Wall Street Banks provided the great majority of the securitized mortgage loans that required the government to take extraordinary steps to save the banking system from collapse.

The AEI is one of many conservative "think tanks", funded by wealthy conservatives, which provide a lot of the content that eventually finds its way to Fox News, The Wall Street Journal, talk radio and other outlets for conservative opinion. If you want to know what GOP politicians will be saying on the Sunday AM TV news shows you can source it at the AEI, The Heritage Foundation, The Cato Institute and numerous other GOP "think tanks" before it makes its way to the mass media.

How Global Warming Shifts Temperature Patterns

I was talking with my cousin about our blizzard and he asked whether this meant that global warming is not happening. I told him that this has been the warmest decade in history because of global warming. This article explains how the Himalayas and the Siberian snow fields are shifting the prevailing winds and contributing to colder winters in previously warmer areas even as the global temperature continues to rise.

Sunday, December 26, 2010

Holiday Break

I will be traveling for the next week. I will post when I have access to a network. Hope to have you back after we get out of this blizzard and arrive in a warm place.


Sustainable Community Development in Kenya

Off grid renewable power and advances in lighting technology improve well being in poor communities. Finance and distribution are current hurdles that need to be overcome.

State and Local Fiscal Problems Will not Help Recovery

The short term problem is the recession. State and local tax revenues are down by 10%. They have cut spending 7% and they have received some help from the federal government but the stimulus runs out this year. Jobs have been lost and programs that serve the most vulnerable have been cut. Some states may have to default on their debt. That would make it more difficult for state and local governments to obtain credit. In any case, government spending is around 15% of GDP. Further cuts in state and local spending will stall the recovery.

Longer term, state and local governments have assumed pension and healthcare obligations that are unfunded. It will be difficult for them to provide current services and fund their future obligations without increasing taxes. This will provide an opportunity for politicians to use the crisis for political gain. Some are paying for tax cuts by refusing to pay into pension plans. Our current political climate of anti-government and anti-tax sentiment will fuel demagoguery on the right and weaken the resolve of democrats in the center.

Saturday, December 25, 2010

EPA Is Target for GOP House

Get ready for the assault on the EPA's enforcement of the clean air act. Its a win-win for the GOP. It keeps the campaign contributions from affected industries flowing and it feeds into its anti government campaign strategy which is being fed raw meat by Fox and company.

Economic Problems in Germany

Germany has been Europe's strongest economy but it still has problems. The economy is based on exporting around 50% of its GDP. Wages have fallen by 5% over the last ten years in order to keep products competitively priced for exports. Falling income is exacerbated by higher prices. Sentiment against the euro and German support for countries in the euro-zone with financial problems is strong.

Friday, December 24, 2010

GOP Propaganda Machine at Work

Krugman link

One of the reasons why so many American's believe that we have out of control spending, and that government jobs have been growing while the private sector has been cutting back, is because GOP politicians say it is true, and their media outlets repeat it. The increase in federal government jobs was due to temporary hiring for the 2010 census, and the increase in government regulators was due entirely to homeland security. Actually total government jobs have decreased because of state and local cutbacks.

Beware of Greeks Bearing Bonds Business:

Beware of Greeks Bearing Bonds Business:

Michael Lewis has done it again. We have all read about the problems in Greece. The government is essentially bankrupt and the IMF and the European Central Bank have come in to restore order in an attempt to save the Euro and the banks that loaned billions to the government. The real story written by Lewis is simply about the total collapse of a society. Nothing is on the level and nobody expects it to be anything else. It might be called libertarianism at its extreme.

Thursday, December 23, 2010

Great Overview of Who Pays Taxes in US

This link is to research on US tax policy. It describes the federal, state and local taxes and it shows the contribution of income groups to each tax, as well as each groups contribution to the total taxes collected by government. There is so much false information about taxes in the media, and especially floating around the internet, that every American should have access to the best available information. Government does at least two very important things: it raises money through taxes and it spends the money. Every citizen should understand tax policy and what government does with the money. This is an excellent primer on tax policy. It's 14 pages in length but it is well written and a couple of tables summarize much of the detail.

The conclusion of the research is that the federal income tax is progressive, but most state and local taxes are regressive. The entire tax system is slightly progressive (actually it is close to a flat tax system) but it would need to be more progressive if we wanted to compensate for increasing income inequality. This study does not compare tax policy in the US with that of other industrialized countries, but there are studies which show that taxes in the US are among the lowest in the world by a wide margin. Although nobody likes to pay taxes, there is less criticism of taxes in many countries with much higher tax rates. This may be explained somewhat by differences in value systems, but people in high tax countries believe that the money is better spent than most Americans believe about government spending. There is also much greater anti-government sentiment in the US than in most industrialized countries. This of course, has been well cultivated in the US.

Wednesday, December 22, 2010

The Great Depression and the Great Recession

"As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth - not of existing wealth, but of wealth as it is currently produced - to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-1930 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped."

This is a quote from Marriner Eccles who was the Fed Chairman 1934-1948. We have a similar problem today. There is not enough buying power in our economy to purchase the potential output of a fully employed economy. The lack of purchasing power is related to the distribution of wages. Middle class incomes have not kept up with increases in productivity and much of our consumption contributes to the purchasing power of offshored labor. Asset bubbles in real estate provided a short term solution to the problem by encouraging households to borrow against the rising values of their homes, and by refinancing their mortgages at lower rates, and taking cash out without increasing their monthly payments. Unless the Fed is successful in reflating housing values its hard to see where the demand will come from to restore full employment. Our large corporations have the capacity to invest in new production but they don't see where the demand will come from either. Many are drawing down their retained earnings by repurchasing their own stock. Some are even borrowing at very low rates to fund stock repurchases. This improves earnings per share, and may increase stock prices faster than capital investments in an uncertain economy.

While the US and European economies have been hard hit by the financial crisis and its aftermath, globalization has led to the development of a growing middle class in many Asian countries. They provide an attractive market opportunity for our multinational corporations, but much of what they might purchase will be exported from the offshore facilities of the multinationals. Growth in international markets may offset stagnant revenues in the US market but that will lead to greater capital investments outside the US. There are no easy answers to these problems and most of the potential solutions would require an enlightened Congress.

The Data on CO2 Growth and Debate on Climate Change

This is a good overview on the growth of C02 in the atmosphere and the implications for climate change. Scientists have been able to measure the concentration change by comparing current measurements with measures of gas trapped in ice bubbles hundreds of thousands of years ago. There is no question that C02 concentration has increased dramatically since the industrial revolution. The great majority of climate scientists believe that the C02 acts as blanket which traps the heat in the atmosphere and that is responsible for the observed increase in average global temperature.

I suppose that everyone who believes that the earth is only 10,000 years old will question the data obtained from air bubbles that are 100,000 years old. The article also includes the comments of a scientist from MIT who questions the conclusions of the great majority of the scientific community on the warming effect of C02.

It was interesting, but rather discouraging, to read the comments by those who read the article. The author intended that the article alert the reader to the potential for catastrophic changes in the earth's climate. Some concluded that the evidence was ambiguous because there is always some dissent in the scientific community about any complex issue. It was very clear, however, that the science of climate change has become primarily an issue of political affiliation for many Americans.

Tuesday, December 21, 2010

The Myth of Growing Government Employment

The Tea Party crowd has complained about the growth in government employment under
Obama The graph shows that government employment as a percent of population increased beginning in the 50's but it has leveled out and then declined in our current downturn. Actually local government, including teachers, fireman and police are by far the largest segment of government employees. State government is next in the number of employees. Federal employees are a distant third.

Krugman provided the facts but he concluded that they probably don't matter. We don't live in country where true believers want to be confused by facts.


Monday, December 20, 2010

Krugman on Why Zombie Ideas Don't Die

I usually agree with Krugman but his analysis of why zombie ideas don't die is superficial. He puts too much of the blame on Obama. The zombie ideas that he dislikes are taught in almost every introductory economics course. They are also included in his textbook for good reason. It is the only way to get an introductory text published or marketed to a wide audience. Economics is like religion. That is, many of the basic ideas are articles of faith and they are not subject to attack by contradicting evidence. Moreover, almost everyone in business would prefer to have a monopoly if it were possible. They will do all that they can do to acquire monopoly power while they sprinkle themselves with the holy water of free markets. I spent several years reviewing business plans from entrepreneurs seeking investment capital. Invariably, the investors were looking for evidence that the business would not be subject to competition because of patent protection or other means to limit competition. It is not really necessary to adhere to zombie ideas in practice. It is only required that one claims to believe in them because they are articles of faith in the dominant culture which legitimizes one's position in the hierarchy. The victors in economic warfare deserve their position because they beat everyone else in a fair fight.

How $400/Gallon Fuel is Turning the Military Green

Necessity is the mother of invention. The high cost of transporting fuel in Afghanistan, in both dollars and lives, has motivated the military to invest in alternative sources of energy. Perhaps if we could transport global warming deniers to Afghanistan for a few months we could have a sensible energy policy in the US. They would stop listening to the bull from those in Congress on the dole from fossil fuel and ethanol interests.

The Unimportance of Science To Most Americans

A Gallup poll released on 12/17 showed that American views on evolution have changed somewhat but only a small percent of Americans believe in secular evolution.

40% today versus 47% in 1999 believe that we were created by God 10,000 years ago. The number drops to 37% for those with a college degree and to 22% for those with post graduate degree.

16% believe in secular evolution today versus 9% in 1982. Only 21% of college grads believe in secular evolution. Those with advanced degrees tended (49%) to believe in evolution assisted by God.

52% of Republicans and 34% of Democrats and Independents believe in creationism.

These data show that strongly held beliefs are difficult to counter with scientific evidence. Perhaps that is why Fox News and talk radio are so powerful. They help to confirm what people already believe. Religious fundamentalism is also related to political and economic fundamentalism. The GOP collects the lion's share of American fundamentalists. There is also a strong correlation between fundamentalism and the authoritarian personality. Perhaps that is why Republicans feel the need to stay firm on fundamental principles and show less interest in compromising. That is what their constituents expect from them.

Celebration of Southern Secession from the Union

Today is the anniversary of the Secession from the union that is being celebrated in South Carolina. The lofty rationale for the secession is that the federal government was usurping the rights of states. This is the common theme of the Tea Party in the south. They claim to be libertarians who are fighting to protect states rights against a socialist federal government. A less lofty view of the rationale is that slaves were private property and that abolitionists in the north were a threat to private property. The linked article shows that the later argument was the primary reason given by several states for support of secession. Most of the Tea Party folks that I have met can't spell libertarian and they would impose their view of American values on the rest of us if they had the opportunity. The civil war is still going on and it isn't for lofty reasons.

Dumb and Dumber in GOP House

Meet the new head of the House committee responsible for environmental policy. He claims that God promised Noah that he would not destroy the earth again after the flood. He also believes that a warming planet could bring lots of benefits.

Sunday, December 19, 2010

US Monthly Trade Deficits With and Without Petroleum

The US Trade Deficit at the end of 2010 will be around $470 billion. The trade deficit will negate most of the impact of additional government spending created to stimulate employment. The graph also shows that petroleum imports account for about half of our monthly trade deficit, which is around $40 billion. Reducing our dependency on imported oil would have a big impact on our trade deficit. It would also lower our federal budget deficits since national dissavings (which includes budget deficits) are equal to our trade deficit.

Our non-oil trade deficit could also be reduced if our multinational corporations reduced their offshoring of production. For example, we used to have a trade surplus in computer and communication technology products and now we have a large trade deficit because US based multinationals make their products overseas and import them for sale in the US and export them from offshore plants to international markets. Its unlikely that US based multinationals would do this on their own since their margins would be reduced by a small percent. It would take action by the US government to make it more expensive for them to import their products back into the US, but the government could also give them an incentive to export their products to international markets from the US. Many countries in Europe provide export incentives by eliminating the value added tax on exported products.

Shifting Patterns in Trade for Knowledge Intensive Products and Services

The above link is to an article on the international development of science and technology and its impact on world trade. There is a worldwide pattern in which every nation is racing to position itself in knowledge intensive industries. One of the patterns is that developing countries are catching up to the US and Europe in producing knowledge workers and they have been expanding their trade surpluses in high technology products.

The US and Europe have been offshoring the production of ICT products (information and computer technology). The US trade deficit in ICT goods reached $126 billion in 2007, while China had a surplus of $129 billion and the Asia 9 had a surplus of $221 billion.

The US had a trade surplus in the export of commercial knowledge products and services of $50 billion in 2007. This includes business and financial services provided by US multinationals. The US also had a trade surplus of $60 billion in payment for intellectual property rights protected by patents, copyrights etc.

The global economy has been evolving into three sectors. The US and Europe represent the two sectors that once dominated the global economy. The Asian sector, with China as the dominant force, has been the fastest growing sector. Japan, while still a very large economy, has lost ground to faster growing economies in Asia.

Saturday, December 18, 2010

Debt as the Engine of Growth

This graph shows the extent to which the US economy has depended on debt to produce economic growth. It rose to levels not seen since prior to Great Depression. There has been some deleveraging recently as households have paid down some their debt with savings or by defaults. The bad news is that the deleveraging has a long way to go. This will slow the recovery considerably.

Goldman Prospers with A Little Help from a Friend

This article describes the previously undisclosed help that Goldman Sachs got from its best friend, the Federal Reserve. Goldman paid back its TARP loans from government so that it could pay out bonuses that would be restricted under TARP. It turns out that Goldman paid back TARP by selling an equal amount of its toxic assets to the Fed. We also learned that the Fed has purchased as much as $100 billion of Goldman's assets that private investors are not willing to purchase at face value.

Friday, December 17, 2010

Article in Slate on GOP Talking Points in Financial Commission Report

Bethany McLean was one of the first business news reporters to suspect that there were real unreported problems at Enron. Her articles in Fortune on Enron got the ball running despite attempts by Enron top management to discredit her. This article on the GOP contribution to the Financial Crisis Inquiry Commission gives a bit more detail on their approach but the conclusions are the same. They simply repeat GOP talking points.

Do We Have a Structural Unemployment Problem?

This graph illustrates how different our current downturn is from previous downturns. The duration of unemployment is 25% longer than any of of our prior downturns since the Great Depression. The real estate boom provided lots of jobs that masked the loss of jobs in the industrial sector. With the end of the boom, the tide has gone out and we can see the underlying structural problem in the economy.

David Brooks Advice to Obama

His advice is that Obama use the State of the Union to outline his compromise with the GOP. Instead of compromising on small things, he should offer to compromise on big things. He should give the progressives in his party a taste of industrial policy, and give the GOP something it wants. What the GOP wants is the privatization of the welfare state. Brooks argues that we can start with privatization of Medicare. He suggests that Obama should support the Ryan plan, which is also supported by a democrat who has worked with Ryan (this makes it bipartisan). The government would provide vouchers to beneficiaries that they can use to purchase health care. The value of the vouchers would not increase as fast as the cost of health care and this would save billions. The savings would come from rationing health care using the price system. Prices would rise faster than the government contribution to the vouchers.

Brooks is not naive enough to believe that Obama would accept his advice. His purpose is to promote Ryan's road map as the alternative to Medicare and then to Social Security. In other words, the end of the democratic version of social welfare. That will be the battle that we face as the GOP takes over the House and prepares for the 2012 campaign with the Ryan road map to supplement "guns and God".

Krugman Picks up the Financial Crisis Commission Whitewash

The conservative explanation for the Great Depression was simple. The government did it. This is their "never ending story" because one of the assumptions of their economic theory is that market economies may be subject to business cycles but equilibrium is at full-employment. When the economy gets stuck below full-employment for extended periods, something must have interfered with the market mechanism, and that something is always government.

If we turn the clock ahead to our Great Recession, the conservative explanation does not vary. The government did it. As Krugman indicates, inconvenient facts are simply ignored. The ideology of "self correcting free markets" must be preserved at all costs.

All four of the GOP members of the committee have demonstrated their allegiance to the ideology. One wonders why we keep forming bipartisan committees to investigate our economic disturbances when the answer is always given in advance of the investigation by the conservative members. In this case, the media will pick up the story and their approach is always the same. They will tell us that some members of the committee claim that the world is round, but that it has not been proven that the world is not flat.

Thursday, December 16, 2010

Why Fed May Not Be Able to Stimulate Economy

There is currently a lot of discussion about the ability of the Fed to stimulate the economy and prevent price deflation. Some argue that this will only produce inflation. Similarly, there is debate about the need for government borrowing and spending to stimulate the economy. The above link is to a presentation by a Japanese economist who compares our current situation with that of Japan. Our situations are remarkably similar and Japan is still trying to deal with price deflation after 10 years of ultra low interest rates.

His basic point is that low interest rates don't work as long as households and businesses are saving and paying down debt. The private economy in Japan created savings that were not being borrowed by the private sector. The public sector must borrow these savings and spend them or the economy will not grow. This can be done without causing interest rates to rise and it does not lead to inflation. Fiscal stimulus worked in Japan but it was politically difficult to sustain the spending since it increased budget deficits beyond the political comfort zone.

If we look carefully at our situation we see the same issues. Major corporations are holding close to $2 trillion in retained earnings (savings) and households are paying down debt and spending less (savings). Banks are sitting on record reserves and they do not have creditworthy customers demanding enough loans to reduce their reserves. Our political focus has shifted from using fiscal policy to compensate for the lack of private spending to dealing with our longer term debt issues. We may be headed down the path that the Japanese have been on.

The presentation may be too technical for some people but the graphs tell the story pretty well.

George Orwell is Alive and Well in the GOP

The 4 republicans appointed to the Financial Crisis Inquiry Committee have decided not to participate in the final report of the bipartisan committee. They wanted to ban the use of certain words from the report. One of the most important words that they wanted to ban was reference to the "shadow" banking system. That was the system that led to the failure of Lehman Bros. and Bear Stearns, and it characterized the nature of the mortgage securitization process that produced the toxic assets held by banks. They also wanted to ban "deregulation" which many believe was responsible for the risky behavior of banks. The overall purpose of the banned words is to put the blame for the crisis on the government as opposed to the private banking system. This is consistent with the GOP talking points that lay the blame on Fannie Mae and Freddie Mac which are government sponsored entities. The "Wall Street" (another banned phrase) banks captured 60% of the mortgage backed securities market but the GOP wants to exclude them from the report.

Big Three Auto Company Analysis

One of the rationales for government investment in GM and Chrysler was to enable them to lead the world in sales of fuel efficient cars. This is not happening so far. Detroit's dependence on SUV's and pick up trucks has not changed and there are other bad signs as well.

GM's car sales are down 6% while sales of SUV's and light trucks are up 16%. 73% of Chrysler's sales are light trucks.

Low margin fleet sales account for 32% of big three sales. Government fleet sales account for 25% of hybrid sales.

Inventories of cars sitting on dealer lots is very high and the use of incentives to move cars off lots is higher than that for foreign brands. This erodes brand value and means that Detroit is hurting future demand by using incentives to draw in future purchases.

Wednesday, December 15, 2010

The Inequality that Matters

An interesting article on income inequality. It argues that most people don't really care much about how much billionaires are making. They tend to compare themselves with their perceived peers. Moreover, the well being of an upper middle class family is not really that different from that of billionaires. They have most of what makes people happy without being billionaires.

The inequality that matters is within the top 1% of incomes. Most of this is centered in financial services. He offers an explanation of why bankers have extremely high incomes and he doesn't think that it serves an useful social purpose, but there is not much that can be done about it.

My problem with the analysis is that the concentration of wealth at the very top of the pyramid has a large impact on democratic institutions. This is apparent when we look at tax policy and how it has become less progressive since the 80's. Most economists also believe that incentives drive behavior. Many of our recent problems with the banking crisis as well as the boom and bust ( along with the Enron's and World Com frauds) had its roots in a simple risk/benefit analysis. The availability of outsized financial rewards for unscrupulous behavior caused otherwise honest people to do dishonest things.

Reagan's Attack on Medicare Revisited

The more things change, the more they stay the same. The same arguments have been raised against social safety nets since the New Deal. One hundred years ago conservatives opposed public education as socialism. Today they want to privatize public education by using public funds to provide vouchers so that "consumers" can pay for privately operated schools.

Big Spike in Retail and Food Service Sales

This graph shows the huge drop in retail and food service sales during the downturn. It also shows the sharp pick up in sales in recent months. Consumers seem to have their credit cards out again.

Washington Post Op-Ed Suggesting Obama Listen to Andy Grove

Harold Meyerson echoes Any Grove. He explains why US tire company CEO's are not in favor of limiting tire imports from China and why the steel union is. He also describes the problems faced by small businesses which are dependent upon the US consumer. He suggests that Obama tell the CEO's that he is meeting with about Any Grove's suggestions. The unanswered question is why should they care about the US economy. They are doing just fine.

Slate's Analysis of What Polls say About Typical American

In an electoral system dominated by focus groups and billion dollar marketing campaigns one has to wonder how anyone can "sell" the typical voter on the directions that our country must take. Its a lot easier to do what the GOP does by telling the voter what to dislike about any plan or any leader, and by associating their party with the few things that they seem to believe in.

Former Intel CEO on How to Create Jobs in US

This is the best article that I have read that describes the problem and suggests a solution for the restoration of jobs in the US. One of Andy Grove's best examples is the ratio of Apple's and Dell's US workforce to the jobs they outsource to China. The ratio is 1 US employee for 10 off-shored workers. He also points out that Germany has been successful in exporting manufactured products while having higher hourly labor costs than the US. One of the motivations for off shoring is that F 500 companies get almost half of their revenues from international sales. The growth of middle class consumers in international markets has encouraged investment by US multinationals in the faster growing markets. Over time the US market will shrink relative to international market opportunities. Its hard to grow the US market with stagnant growth in median household income. We have been doing it with debt but that can't go on forever.

Tuesday, December 14, 2010

An Alternative View On Summers' Legacy from an Economist

This article does a nice job of describing Summers' view on the roles of markets and government in the economy. It is not critical of his role in the Obama administration where he has been a proponent of government spending to compensate for the fall in private spending. The criticism is focused on Summers' willingness to use government to rescue financial markets when they misfire. Summers' believed that this would encourage financial innovation and more risk taking. This attitude may have paved the way for our financial crisis.

Warning on US Debt to Revenue by Moody's

One of the reasons why Moody's criticized the recent tax cut bill is because it will reduce tax income and increase our debt to revenue ratio. The above chart shows why Moody's is concerned. We normally talk about debt as a percentage of GDP. The US does not look much worse than several other nations on that metric. On the other hand we look much worse than almost every other country on debt to revenue. That is because our tax revenues are very much lower than those of other countries in relation to their GDP. We are a low tax nation compared to the rest of the world and our policy direction appears to be toward even lower tax revenues as a percent of GDP and as a percentage of our debt burden.

Larry Summer's Legacy

This description of Larry Summer's last press conference as a key adviser to the president on economic policy may well typify him and his career. He is obviously a brilliant person, but personal humility and the ability to project himself well in public appearances is not one of his strong points.

His conclusion on the performance of the administration's economic policies is that things would have been worse without it. The thing that he will miss least about leaving Washington is a critical press that fails to understand how policy is shaped.

Legal Issue on Constitutionality of Health Care Bill

We have had two decisions in Federal Courts supporting the bill and now we have a decision against the bill. The two judges arguing in behalf of the bill were appointed by Clinton and the judge arguing against the bill was appointed by Bush. It appears that judicial decisions are motivated more by political philosophy than they should be.

The challenge concerns one of the features of the bill that mandates the purchase of health insurance. The dissenting judge argued that the government cannot mandate against inaction. The other judges argued that the inaction was a decision to pay for needed healthcare in the future.

These issues were not raised when the Massachusetts health care bill, which mandates the purchase of insurance, was passed. Perhaps it matters which party proposes a bill rather than whether is bill is constitutional. I also wonder how this affects other federal laws which mandate insurance coverage. For example, homeowners in Florida are required by federal law to purchase insurance on their homes to protect them against damage by weather related causes. This was done to prevent homeowners without insurance coverage from abandoning damaged homes.

More Education is not The Cure for Income Inequality

Tom Friedman, President Obama and now Ben Bernanke (on 60 Minutes), have linked income inequality to differences in educational attainment. While there is a correlation between education level and income, growing income inequality cannot be explained by education level, and it is not the cure for income inequality. Moreover, the focus on education level as the cure distracts us from the real sources of inequality.

In the first place, the relationship between education level and income has been weakening in recent years. College graduates under age 25 have an unemployment rate of 9.2%, which is about equal to the average rate. Median pay for college graduates has stagnated in the last 10 years at $72,000 for men and $52,000 for women. These data indicate that the supply of college graduates is growing faster than the demand for college graduates in the job market. One of our problems is to create more jobs that require a highly educated workforce.

The other problem is to improve the policies and programs that have fostered shared prosperity and broad opportunity in the past. Income inequality was greatly decreased by the policies and programs of government following World War 2. Government policies, particularly tax policy beginning in the 80's, has become less progressive, and a major cause of growing income inequality. This is the result of greater disparity in political power. Today we look more like we did in the "Guilded Age", prior to the Great Depression, when political power was concentrated among a financial elite.

Monday, December 13, 2010

New House Committe Chairs Elected by GOP

This article describes the committee chairs that will be running the House beginning in January.

Sunday, December 12, 2010

GOP Protecting Wall Street Monopoly on Derivative Trading

One of the reasons why Wall Street banks are so profitable is that they have a monopoly on derivative trading. The related reason is that customers who purchase these derivatives have no basis for determining the fees that the banks charge for the derivatives. Attempts to make the fees more transparent to customers and to introduce competition into the market are being blocked by GOP politicians seeking a tribute from the banks in return for protecting their monopoly. Of course, Wall Street bankers and GOP politicians, are among the most enthusiastic supporters of free enterprise. That is, as long as it does not affect them. Perhaps what they really mean by free enterprise is freedom from government limitation of monopoly power.

Overview of Approaches to Lower Healthcare Spending by Government

Healthcare spending is projected to grow at over 7% per year if nothing changes. At that rate spending will double in 10 years. Government contribution to total spending is around 50% and it is the largest and fastest growing segment of the federal budget. Most analysts agree that little can be done to limit the growth in the national debt without changes to the healthcare system. This article provides an overview of the approaches taken by two commissions and it describes some of the approaches in the current healthcare reform law.

Obama's plan caps the growth in Medicare spending per beneficiary at half of the current rate (which would be closer to the general inflation rate). The plan includes a review process by a board which will recommend savings if spending grows faster than plan. It also provides exchanges that will compete with private insurers. The idea is that competition between insurers and government options in the exchanges will provide an incentive to negotiate for better prices from suppliers of healthcare.

The two commissions propose increases in Medicare premiums based upon income that would lower Medicare costs by over $100B between 2012 and 2030. The Simpson/Bowles plan caps government spending on healthcare but it has no plan for dealing with spending above the cap. The other commission would end the tax subsidy that employees get by not having employer payments for insurance premiums count as taxable income. It would also change Medicare substantially by providing vouchers to beneficiaries that can be used to purchase insurance from Medicare or from private insurers. The vouchers would increase in value annually below the current healthcare inflation rate.

In general all these approaches shift some of the cost burden from government to individuals. Currently, the GOP has not agreed upon an alternative plan. They only agree upon repealing the Obama plan.

Saturday, December 11, 2010

2011 GOP House Selects Health Subcommitte Chair

Upton was chosen this week to lead the panel in the new Congress. Upton in turn quickly appointed Rep. Joe Pitts (Pennsylvania) to lead the panel’s Subcommittee on Health. In a statement issued immediately thereafter, Pitts proclaimed, “We need to repeal Obamacare and replace it with something better.” Pitts also pledged to support “market-based solutions” that “won’t bankrupt the treasury.” FEN expects Reps. Upton and Pitts to move on this pledge early in the new Congress. Information on these Representatives can be found on their official websites, available through links.

This appeared on the Free Enterprise Nation website. Apparently, the GOP has staffed this committee to repeal the current healthcare reform bill. Moreover, they will advocate a market based solution to healthcare reform. Kenneth Arrow's research on healthcare economics concluded that healthcare does not conform to our normal understanding of a market for a variety of reasons. Trying to adapt healthcare to a market based systems means only one thing. The attempt to ration healthcare services by use of the price system. That, of course, is how markets work and we ordinarily think of it as a reasonable system. We only buy what we can afford. The application of this idea to healthcare violates most of our views on medical ethics and social equity.

Bachmann: I Don't Think Tax Cuts Should Be Defined As Part Of A Deficit (VIDEO) | TPMDC

Bachmann: I Don't Think Tax Cuts Should Be Defined As Part Of A Deficit (VIDEO) | TPMDC: "- Sent using Google Toolbar"

This video shows Michelle Bachmann, a GOP rep from Minnesota, who has been a leader of the movement within the GOP to align with the Tea Party. In this video she attempts to explain why tax cuts should not be considered as a contributor to budget deficits. She wants to focus on "out of control spending by democrats". This is consistent with the Tea Party concern about non-defense spending (which may help illegal immigrants and people of color). I joked about the Tea Party and the new math in a prior post about their efforts to reform education so that it would be consistent with what they believe. I did not realize that any sane person would actually make such a claim. She must understand her base better than I do. Its possible, however, that we may have to redefine sanity if our definition excludes 20-30% of the population.

Wall Street Journal Editorial by Mama Grizzly

Ruppert Murdoch has provided a platform on Fox News for Sarah Palin to sell her base on political ideas that he supports. He has taken the next step by providing Palin with a platform on his Wall Street Journal's editorial page. While its not clear that her base reads the WSJ, her presence on the WSJ editorial page embellishes her image as a "serious person". In any case, her name and her picture is given to an op-ed in which she opposes the Obama Commission's plan for reducing our long-term debt and offers support for GOP Rep. Paul Ryan's approach to deficit reduction. There are a couple of Mama Grizzly phrases in the op-ed but the most important points are the signal that Murdoch will continue to push the Ryan plan and that he will continue to build up Palin as a spokesperson for his political positions.

The Mama Grizzly part of the op-ed is her reuse of the idea that the healthcare reform bill will ration services to Medicare recipients. She famously calls the entity that will review Medicare expenditures a "death panel". This led some of her base to put signs up at Tea Party events that curiously demand that the government should stay out of Medicare. Whoever wrote the op-ed for her also repeats GOP nonsense that we heard in the past about entitlements and their pending insolvency as well as the potential for the bankruptcy of the US government. The plan that she proposes contains an important sentence. The Obama Commission's plan, which has been strongly criticized by many democrats as too conservative, caps tax revenues as a percent of GDP at 21%. Ryan's plan caps tax revenues at 19% of GDP. In other words, the focus of the Ryan plan is on reduction of government spending on everything but defense and further cuts in taxes. This is the "starve the beast" idea that is favored by many in the GOP. The goal is to force spending cuts on social programs by reducing taxes and screaming about budget deficits. We should remember that under Reagan and the two Bush presidencies they contributed $9 trillion to our national debt by cutting taxes and increasing spending. That is because they funded the tax cuts with debt. The Ryan plan would fund tax cuts with spending cuts on social programs.

The main idea to take out this article is that it forecasts the approach that Murdoch, and therefore his communications empire, will push going forward. Palin is just another puppet whose strings he will pull.

Friday, December 10, 2010

A Conservative's View on the Tax Deal

The Washington Post's leading neo conservative declares Obama the winner. He got the stimulus he would not have otherwise obtained and the GOP showed everyone that they are not serious about fixing the debt burden as long as they can deliver a tax cut to their wealthy base.

The Future of Education in the US?

On the road to the new GOP and preparing our youth for the challenges of the future. Perhaps they want their children to learn the new math which shows how funding tax cuts with debt lowers our budget deficits.

Mortgage Interest Rates Rising,0,1978719.story?track=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+latimes%2Fmostviewed+(L.A.+Times+

This is not good for the economy but it is also a bad sign of future problems. Mortgage interest rates are keyed to the price that investors are willing to pay for long term treasury bonds. The Fed signaled an intention to purchase large amounts of long term treasuries to keep interest rates low. Investors may have reacted against this plan because they fear future inflation and even higher interest rates. That would make bonds that they purchase today less valuable.

Obama and Leadership of Democratic Congress


This article describes some of the issues between Obama and one of his key senators on tax policy. To me that is a petty issue. The real issue is that the Senate put off the tax issue to after the 2010 election and the result was the loss of leverage in negotiating with the GOP. The Republicans decide what is best for them and they vote as a block on almost every issue. Obama does not have that influence over his own party.

Good Overview of Macro Issues and Tax Policy

Politics as usual, like we are seeing with tax policy, is heading us in the wrong direction. We can't keep cutting taxes and lowering interest rates and expect the rest of the world to fund our debt. They are losing faith in our institutions and they wonder whether we can control the potential inflation that will occur when the economy picks up steam.

We are also reminded of the next sub prime lending problem. State and local governments are in terrible fiscal shape and they are only able to borrow at low interest rates because the rating agencies believe that the federal government will not permit them to default. The Fed put $3.3 trillion on its balance sheet to bail out the banks. Will we be able to do the same for states and municipalities?

Krugman Explains Why He Does Not LIke Tax Deal

Krugman opposes the deal because he does not think that the deal will put the economy on the right trend in 2012. Most of the stimulus will occur in 2011 and the economy will flatten out again before the election. The GOP will extend the Bush tax cuts which will worsen our deficits and facilitate the use of the GOP "starve the beast strategy".

The comments that follow are quite interesting reading. I was reminded of what Obama told some of his fellow democrats during the healthcare debate. He said that doing the right thing for the country's longer term future was more important than winning the next election. It seems to me like he is not taking his own advise when it applies to himself.

Quote of the Day

“Politics is the gentle art of getting votes from the poor and
campaign funds from the rich by promising to protect each from the

This one came from my daughter. I'd love to post more good ones like this one. Send them my way.

Thursday, December 9, 2010

Instructions from Fox News Editor to Use GOP Talking Points

In case anyone ever really questioned the linkage between the GOP and the "fair and balanced" news from Faux News. A leaked email from the Fox News Editor instructs Fox newscasters to use the term government option instead of public option when discussing healthcare reform.

The GOP marketing communication strategist, Frank Lutz, employed focus groups to determine public reaction to both phrases. The response to public option was favorable, but it was negative to government option. Its not surprising that with this kind of help the GOP was able to link healthcare reform to the strong anti-government message they and Fox were both promoting. I guess it depends on what one means by "fair and balanced". At Fox it means fair to GOP talking points. They can then criticize the "main stream media" for being biased when they make an effort to be balanced in their coverage. So it goes.

Graphic That Illustrates Recipients Under Tax Versions

This Figure helps one to visualize the beneficiaries of three different tax cut proposals. The current Obama/Republican plan produces, by far, the biggest cut in taxes. Its also pretty clear who the big winners are. They sure as heck aren't small business owners.

A Tour of the Rust Belt by a Californian

I come from Buffalo and I got the same feeling when I visited there last summer. The population is less than half of what it was when I went to high school there. The auto plants and steel plants are gone along with the population. The consequence is that the tax base can no longer support the once great schools, beautiful parks and other public facilities that led the city to call itself "the queen city of the lakes". The high school that I attended, which was once considered among the best in the country, has been converted into a school for cosmetology to train entrepreneurs who want to open up nail salons. This is not unique to Buffalo. The story is the same for Cleveland, Toledo, Detroit and parts of Chicago.

Some economists would call this creative destruction. Get rid of the old and move on to new and better things. I am only able to see the loss of wealth and culture. I have a hard time seeing the new and better things that will replace what has been lost. Our economic system no longer has a nationality. Money and economic activity moves easily to the emerging markets and the best sources of low cost labor. Labor is not as mobile as money, and abandoned plants remain as a reminder of immobile capital that is no longer productive.

A Moderate Liberal View of the Deal

The most worrisome thing about the deal going forward is that it will add to the deficit and the GOP will continue to blame Obama for the deficit. The increase in the deficit will also provide new ammo from the deficit hawks to attack entitlement spending.

Interactive Tool on Tax Cut Effects by Income

Nice tool to visualize how different income groups are affected by the current version of the tax bill.

Obama Needs Idependent Vote in 2012

The basic idea in this article is that the GOP has used healthcare reform and the re-regulation of banks to paint Obama as a socialist. Apparently, the strategy was costing him support among independent voters. Therefore, he needs to move to the center like Clinton to win in 2012.

Since Obama loaded up his administration with former Clinton advisers, it seemed to people like me that he had a centrist strategy all along. On healthcare, he avoided the Clinton mistake by involving Congress in the process and he made deals with insurance companies and healthcare providers in advance so that they would not strongly oppose reform. The GOP propaganda machine did a great job of portraying this as socialism and it worked. The process was also imperfect, like anything that goes through Congress, and the final product left much to be desired but it was a good start on something that no other president had been able to do. What surprised me most about the result was that benefits were extended to 16 million people, insurance companies were forced to extend family coverage to 26 year old dependents and they were prohibited from excluding people for pre-existing conditions. Ordinarily, there is a lot of cheering and support from folks who benefit from government programs. They have been pretty quiet about this program. The GOP did a better job of distorting the program than the administration did in explaining how we would benefit from it.

Going forward we will have to see whether Obama can rebrand himself as a centrist, by moving to the right of center, or whether he will be perceived as a weak and ineffective president who is being controlled by the GOP

Wednesday, December 8, 2010

How the Tax Cut Issue Divided White House Staff,0&passthru=ZGQ2NzhkMTQ3MDlmMTc3ZjFmOTU0OWYyN2I5ODU2Yzc

This article in The New Republic provides some insight into the debates that took place inside the White House. The top political people were trying to avoid having Obama labeled as a "class warrior" on the tax breaks for the ultra rich. They believed that this hurt Gore and others when they took that approach. The staff also used Deval Patrick's campaign as a model. He was regarded as an underdog in his campaign but he pulled off a big win. Of course, the practical problem was the lack of votes in the Senate to overcome a fillibuster.

Rationale for Obama's Decision on Tax Cuts

It appears that the Dem's lost negotiating leverage by not dealing with this issue prior to the recent election. If they let the tax cuts expire now they would have to deal with a GOP House and a more balanced Senate in 2011. The GOP has taken advantage of the loss of negotiating power with the absence of the threat to let the taxes expire.

The deal will add $900 billion to the deficit over the next 2 years. Tax cuts for the wealthy will cost $120 billion, which the GOP insisted upon despite their "concern" for deficit reduction. Tax cuts that both parties wanted will cost $360 billion, and Obama got $450 billion in a back door stimulus that is expected to reduce unemployment by 1.5% by the 2012 election. Obama believes that this will give him a chance for reelection. The tax cuts will expire in 2012 and if Obama wins he has the opportunity to credibly threaten a veto of any continuation of the tax cuts.

The reaction to the compromise has been very negative in Obama's base. He will have to do a lot of fence mending between now and 2012 to get the support that he will need for reelection.

It really galls me to read the comments from the GOP Senate Minority Leader who claims that the Democrats compromise is a recognition of their weaker position after the election. He assumes that the GOP is now in charge even though the Dem's hold the presidency and still have a majority in the Senate. I recall that after the beating that the GOP took in the 2008 elections they dug in and strengthened their position. The Dem's better do the same thing.

Tuesday, December 7, 2010

My Reaction to Obama's Decision on Bush Tax Cuts

I was asked to express my reactions to Obama's decision to compromise with the GOP. Frankly, I do not think that it was a compromise. He gave up on one of the major promises that he made when was campaigning. The GOP gave up very little in return. He lost big time.

I think that the president is a very smart person and I'm sure that he and his advisers looked at this issue very thoroughly, and that he made the best decision that could make given his options. That does not change the way that I feel about the decision. He is the President of the United States, but he has behaved on almost every issue like he is willing to give up on issues in which he believes in order to get whatever Congress and the GOP is willing to give him. I don't even get the feeling that he exerts as much pressure on his own party, as he might, to get what he wants. I had hoped that he would have been a more forceful leader.

I understand that the GOP has formidable weapons that it uses to mold public opinion on issues. After all, it has access to media outlets that are effectively propaganda tools for the GOP. On the other hand, Obama is the president and he could have used his office to do a better job of countering GOP propaganda and developing support for the platform he and his party ran on in 2008 to produce an historic victory. He should have been more like FDR and less like a lawyer who enjoys a good debate. FDR crucified the GOP for getting us into the depression and he accepted responsibility for leading the country out of the depression. Obama let the GOP put the blame on him for the bank bailout (which everyone hated) and seemed more interested in winning debate points than in leading. He also let them shift the debate from fixing the economy to reducing our long-term national debt. I would have pounded them hard for creating the largest deficits in US history under Reagan and Bush, which were the result of GOP tax policy that dramatically reduced the progressiveness of the US tax system. He should have explained to the American people why a progressive tax system was consistent with American values. I would have also attacked the GOP for threatening social security under Bush and defended social security as one of the best programs that government ever produced. Instead he created a commission to deal with our long-term debt problems which should be on the back burner.

I would have done things differently on the tax cut issue but I have the benefit of not worrying about the 2012 elections and other things that the president must be more informed about. My impulse would have been to call the GOP's bluff. If the Democrats and the President did nothing the Bush tax cuts would have expired under existing law. I would have blamed the GOP for letting the middle income tax cuts lapse. This may not have worked for Obama because the GOP would not have believed that he would stick to his guns. They knew that he would blink and they stuck to their guns and gave their real base a big victory. Obama's decision has made him look weaker and the GOP can do a victory lap. He will have a hard time energizing his base in 2012 after his performance and now that Bush is gone.

GOP Hipocracy and American Gullibility on Debt

“Today the debt is $934 billion, and now I’ve been forced to ask for another increase in the debt ceiling…Be­fore we reach the day when we can reduce the debt ceiling, we may in spite of our best efforts see a national debt in excess of a trillion dollars. Now, this is a figure that’s literally beyond our comprehens­ion. …It’s time to recognize that we’ve come to a turning point. We’re threatened with an economic calamity of tremendous proportion­s... Together, we must chart a different course…I shall ask for a 10-percent reduction across the board in personal income tax rates for each of the next 3 years.”
--Ronald Reagan, February 5, 1981

It took 200 years for the national debt to reach $1 trillion by 1981. The debt quadrupled to $4 trillion in the next 12 years under Reagan and Bush Sr. Under Bush Jr. we added another $5 trillion to the national debt. That's a total of $9 trillion of debt added by GOP presidents. How did this happen? They cut taxes substantially, with most of the benefit going to the wealthiest Americans, and they paid for the tax cuts by borrowing.

If you read the above quote from Reagan you may detect the flaw in his rationale for cutting taxes by 30% over 3 years. He believed that huge tax cuts would reduce the debt. That is equivalent to claiming that the best way to save money is by reducing one's income. Unfortunately, gullible Americans applauded the new mathematics developed by the GOP. That is because everyone likes tax cuts, and most people could care less about the national debt. It has been the key to GOP electoral politics since Reagan and that is why he has been elevated to sainthood.

After the 2008 elections when the democrats took over government, the GOP went back to its "old fashioned religion" that it uses when they are out of office. They accuse democrats of being tax and spend liberals and they blame democratic spending for producing our national debt. You may have guessed what their solution is today for reducing the national debt. You guessed it. They insist upon extending the Bush tax cuts which will add $4 trillion to the national debt by the end of the decade since they have no intention of ending them after they take office in 2012. Of course, this will make our debt problem even worse, but they will use the debt problem to their advantage. They will continue their attack on social security, and government funded healthcare, by telling us we can't afford to continue government spending on social problems during a debt emergency. Of course, raising taxes is against their religion unless the taxes are raised on the middle class. That is exactly what they did under Reagan when social security taxes were increased. This is a very regressive tax because only the first $105,000 of income is taxed. That means that the tax rate is lower for those with incomes above the $105,000 cap. Moreover, the tax only applies to wages. It does not apply to capital gains or to dividend income.

Visitors from another planet might wonder how such an illogical political strategy can be sold to the middle class. The answer is that every nation has its myths. Moreover, for the first time in US history a political party has its own news organizations that have effectively linked GOP strategy to several of the myths. In the meantime, their opponents are struggling because they do not know how to effectively counter the propaganda without being accused of questioning the mythology.

Monday, December 6, 2010

What We Can Learn From the Clean Air Act of 1990

This article reviews the issues raised by various interest groups prior to the passage of the 1990 Clean Air Act. Its a familiar story. Questions were raised about the validity of the scientific evidence along with forecasts of huge cost increases that would have to be passed onto consumers in higher prices. The costs of the act would outweigh the benefits as well.

Ten years later we learned that the reduction of acid rain was a big success. The cost of the program was much less that the forecasts made by the interest groups, and were even below the EPA estimate. The public health benefits were 30 times the actual cost. In other words, the program produced substantial social benefits at relatively low cost.

This does not prove that all programs will yield similar results. It does show, however, that the reactions that we usually see from opponents of environmental policies follow a similar pattern and that they cannot be trusted.

Why Large European Countries Need to Encourage Growth

This article was written by the Chancellor of the Exchequer in Britain from 2007-2010. He is worried that the response to the current crisis in Europe has been piecemeal and that the crisis is not going away. He states that this will affect the UK and the US.

One of his concerns is that distressed nations are being forced to cut government spending and to increase taxes as condition for aid. This will deflate their economies and make it more difficult for them to service their debt burden. He believes that they need to grow their economies in order to attract investors. Since internal spending has fallen they must be able to export their way out of trouble. This implies that the larger European countries must expand in order to support imports from their trading partners. This is the opposite of what they are doing. The large countries have also implemented austerity programs in order to deal with budget imbalances. The prospect for growth in Europe is dim if the larger countries continue with their austerity programs. Austerity may a good thing under some situations. But a Europe wide focus on austerity is a doomsday scenario.

Madoff Had Lots of Help in Ponzi Scheme

The Trustee responsible for dealing with the Madoff Ponzi Scheme filed suit against a major UK bank (HSBC) for aiding and abetting the scheme. The Trustee hopes to recover $9B from HSBC for its contributions to Madoff's fraud. This is not good news for HSBC whose reputation has been damaged by its losses from its real estate investments. They may be able to avoid paying the $9B but the discovery process is bound to reveal things that they would rather keep from the public and from the UK government which bailed them out.

Why Wall Street Compensation Is So High

Economic theory indicates that wages reflect labors contribution to revenue. The theory is basically correct. Average compensation on Wall Street is high because labor productivity is high.
This article explains why Wall Street labor is so productive. The short answer is oligopoly. There is little or no price competition, and the prices that Wall Street charges for its services, in relation to the dollar value of its services, seems small to its customers. Pearlstein provides an example in which the average hourly price charged for a deal is $3,000. This should attract a lot of competition from start-ups seeking such high profits but the Wall Street banks have established relationships with its major customers that discourages competition. Consequently, four or five very large banks share the profits of the industry.

Let the Best Poker Players Win

It looks like Wall Street will not have to pretend that next year is this year. Both teams seem to be on their side because only one team is really a team.

Who is This Crazy Guy?

Welcome to the Banana Republic.

Who Cares about Extending Bush Tax Cuts?

Show this to your friends who tell you that the Bush tax cuts are for small business people who provide our jobs.

Sunday, December 5, 2010

Can Moderate Republicans Survive?

This article is about the potential primary struggle that the incumbent senator from Texas may face if she decides to run again. Despite a very conservative voting record she has lost the support of the Texas Tea Party which will run a candidate against her. A similar thing happened in Arizona to John McCain. The incumbent senator, with a strong conservative record, was not conservative enough for the Tea Party and McCain was forced to move much further to the right in order to win the primary. This demonstrates that even if the Tea Party is not successful in putting one of their own into office they can force moderate republicans to veer further to the right and exacerbate the polarization that we are experiencing in our politics.

The GOP has always had a more radical wing in its party. Their impact, historically, has been on the battle for ideas. They have funded conservative think tanks, which have had an influence on how people think about things like deregulation and climate policy, but they have not been that successful at the polls. That is, until now. A lot of money has been contributed to the organization of the Tea Party movement by ultra conservative contributors like the Koch brothers. The movement has also been supported by media outlets such as Fox, and conservative talk radio hosts. The result is the coupling of conservative ideology with a grass roots movement that has created political energy and brought out the vote. In a very real sense, conservatives have been successful in co-opting much of the populist movement which has historically been associated with the Democratic Party. This will force GOP candidates and incumbents to adhere more closely to the dominant ideology in the party. There does not seem to be anything like this in the Democratic Party. More conservative democrats are not likely to face primary challenges and the party may continue to have difficulties in battling a more ideologically disciplined GOP.

Goldman Sachs Forecast for Job Growth

GS forcasts pickup in job growth by the second half of 2011. They are encouraged by pickup in non-durable manufacturing and in the belief that low inflation rates will enable the Fed to be aggressive in its purchase of longer term treasuries which will hold long-term interest rates down.

TheTax Policy Game

This article is one of several that I have read that show how the game may be playing out. Our politicians are playing poker with tax policy and the GOP seems to have played the game better with a weak hand. It would be nice if more of them thought about what was best for the country.

Saturday, December 4, 2010

Democrats Fail to Find 60 Votes In Senate to Pass Tax Bill

The Democrats look like the gang that couldn't shoot straight. They can't find 60 votes in the Senate to beat a GOP filibuster. The GOP voted against the bill in a solid block and several democrats voted against their own bill. The GOP is scurrilous but the democrats are proving to be incompetent even when they have a huge majority in the Senate. They consistently let the GOP get away with lies and incoherent positions on almost every issue. I can't fault the GOP for doing what they do because their policies can only be defended with deception. Perhaps the problem with the Democrats is that they do not have a belief system that unites them. Maybe the problem is that both parties are competing for campaign contributions from those who would be most affected by letting the Bush tax cuts expire.

Employment to Population Ratio

This graph may not be easy to read but the message is clear. The drop in this recession exceeds the drop in prior recessions but it also shows that we are back to where we were 11 months ago. We have lowered interest rates as far as we can and we made a half hearted attempt at fiscal stimulus. This is clearly not a typical recession. There must be structural problems in the economy that are behind the jobless recovery.

Suggestion That Obama Call the GOP Bluff on Balancing the Budget

Not a bad idea from a pretty insightful blogger. This would hoist the GOP on its own pitard. They are not sincere about fiscal responsibility unless it suits their agenda to cut spending on social programs. This would make them squirm.

Krugman on Old Economic Ideas That Refuse to Die

I think that Krugman is correct in raising the question on why economic theories survive the brutal facts that demonstrate their irrelevance to the real world. Many books have been written on this topic since the financial crisis exposed the problems with prevailing theory. I suggest at least two answers. The first is that academics is not always about the real world. We reward smart people who can develop models that are logically consistent. Most real world economic problems can only be made logically consistent, and amenable to mathematics, by the use of simplifying assumptions that often distort reality and the application of the models to real economic problems. The second answer is that many of the dominant theories are reactionary. That is, they are in response to other approaches to economics, for example Keynesian theory, which advocated a powerful role for an enlightened government in a mixed economy. I'd bet that many on Wall Street still believe in a very limited role for government in the economy despite the fact that without government intervention the entire system would have collapsed.